A little bit of overview of Insurance

Insurance is an agreement between two parties, in which one party covers the loss of another (insurer), and the other suffers a loss (insured) is known as insurance.
The basic purpose of insurance is to protect the policyholder from financial risks. 

For Example:

If Nora takes health insurance from United Health for $15,00, 000. First of all, she paid the premium (Amount paid by the policyholder to the insurer) In this situation, Nora is the policyholder, and United Health is the insurer. She pays a premium of $10,000. If any mishappen occurs then the insurance company (United Health) will cover all health costs. Many people are insured by Home insurance, Vehicle insurance, Life insurance, and Fire insurance. The agreement between two parties in which all terms and conditions of insurance are mentioned is known as an insurance policy.

Principles of Insurance

Here are the principles of insurance
  • Utmost Good Faith
  • Proximate Cause 
  • Insurable Interest
  • Indemnity
  • Subrogation
  • Contribution
  •  Mitigation

1. Utmost Good Faith

If anyone wants to be insured then a contract takes place between the insurer and the policyholder. Contract relies on utmost good faith. Both parties (insurer and policyholder) should have good faith in each other. The insurer explained all details about the insurance policy which aspects of is insurance policy are covered and which are not covered by the insurance policy. 

On the other hand, the policyholder also gave correct and precise information to the insurer. Both didn't tell a lie to each other if both want to gain good opportunities. If the policyholder fails to disclose the clear facts then if any mishappen arouse then he/she can't avail of the opportunity from the insurance policy. The same thing is for the insurer, they are also eligible to discuss all clear terms and conditions of the insurance policy.

For example:

If anyone takes health insurance and or indulged in narcotics. And didn't tell about drugs to the insurer when the death occurred. The insurer will not help that person and will not cover the loss of his or her death.

2. Proximate Cause

Any loss can be due to two reasons: Insured risks and Uninsured risks. Proximate cause is based on the insurer being only responsible for those losses which are stated in the insurance policy.
 
When an insured suffers a loss that is caused by two or more causes, the most dominant and influential cause is the proximate cause. The insurer is not responsible for any loss caused by an uninsured risk. If the insured suffers a loss due to more than two causes, the insurance company will examine the most recent cause of the subject loss. The company is restricted to repay the insured if the primary cause is according to the insurance policy. 

However, if the immediate cause is against than specified in the insurance policy, no payment will be provided to the policyholder. However, if both insured and uninsured risks include, it becomes difficult for the insurance company to assess the claim.

For example:

  • A truck driver swerves into oncoming traffic and hits another vehicle. There is a proximate cause between drunk driving and the accident.
  • When employees ignore cleaning the floor, the buyer slips. Sprawling on the floor is the proximate cause of the fall.

3. Insurable Interest

A person has an insurable interest in a thing when the damage of that thing causes that personal, financial, or other loss. Insurable interest is based on that the policyholder must have an insurable interest in the subject matter of insurance. If anyone is interested in something then he doesn't want to lose. The same condition is in Insurable interest if anyone is interested in the subject matter of an insurance policy then he/she will take interest in this.   

For example:

  • If the insured took property insurance for his house but not for his relative house. The policyholder does not have an insurable interest in any financial loss arising from the damage to his relative house.
  • You can take out an insurance policy on your own life and whoever you choose as the inheritor. For example, if you want to leave a legacy for your children, you can take out a life insurance policy.

4. Indemnity

The insurance contract of the insured recovers the loss to the limit of the amount covered by the insurance policy. The insurance company will pay the amount to the insured person's loss. In other words, the insurer gives a guarantee to the policyholder to save him from any loss or mishappening. 

However, a life insurance contract is not an indemnity contract as one cannot measure the loss on the death of the insured in terms of money.

For example:

The building suffers any damage caused by fire or natural disaster. In that case, the property owner has the right to a claim. If any insurance policy fails to help at that time can be challenged in a court of law.

5. Subrogation

Subrogation involves the transfer of rights from one party to another party.  The insurance company bears the financial expenses of the insured by seeking repayment from a third party. Suppose you are injured due to an accident caused by a third party. In this case, the insurance company has the legal right to compensation for damages to your car.

For example:

If Helmer took vehicle insurance and after some while his car was stolen. The insurance company will provide assist the policyholder. If Helmer takes the return of his car then the insurance company will not provide any support.

6. Contribution

In words of insurance, Contribution is a rule that two or more insurers must share in paying the loss. The purpose of this principle is to distribute the losses equally among the insurers. 

In other words, the rule states that an insured can take out more than one policy for the same subject matter or property. If the insured gets the full amount of the original loss from one insurer, he cannot get more money from the other insurer.

For example:

If anyone takes property insurance of $40,000. Policyholder will take $10,000 from the first insurer and $10,000 from the 2nd insurer. He/she will face a loss of $80,000 then both insurers bear the loss of the policyholder.

7. Mitigation

The policyholder is obliged to take appropriate steps to minimize the loss to the insured property. The main purpose of mitigation is to assure that the policyholder didn't neglect the insured property after taking out an insurance policy. If the policyholder does not take care of the insured property, he may lose the claim amount from the insurer.

For example:

If anyone takes vehicle insurance then he/she cares about his/her vehicle. And don't be careless about the insured subject matter.

Source: For updated information on insurance visit https://www.investopedia.com/.