What are the 7 principles of insurance?

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1. Principle of Utmost Good Faith (Uberrimae Fidei)

  • Both the insurer and the insured must disclose all material facts honestly.
  • The insurer relies on the truthfulness of the insured to assess risk accurately.
  • Example: If a person hides a pre-existing medical condition while buying health insurance, it could void the policy.

2. Principle of Insurable Interest

  • The insured must have a financial or other beneficial interest in the subject matter of insurance.
  • Loss or damage must result in a personal financial loss to the insured.
  • Example: You can insure your own house, but not your neighbor’s.

3. Principle of Indemnity

  • Insurance is meant to restore the insured to their original financial position, not to profit from a loss.
  • It ensures fair compensation based on the extent of the loss.
  • Example: If your insured car is damaged, the insurer pays for repairs but doesn’t give extra money.

4. Principle of Contribution

  • If the insured has more than one policy for the same risk, they can claim from any, but the total payout cannot exceed the actual loss.
  • All insurers involved share the burden proportionally.
  • Example: If you have fire insurance from two companies, they’ll share the compensation in proportion to their coverage.

5. Principle of Subrogation

  • After compensation, the insurer has the right to recover the loss from a third party responsible for the damage.
  • This prevents the insured from receiving double compensation.
  • Example: If your car is hit and the insurer pays you, they can sue the person who caused the accident.

6. Principle of Proximate Cause

  • Determines the nearest and most direct cause of the loss to decide claim liability.
  • Only losses caused directly by covered risks are compensated.
  • Example: If fire causes a short circuit and that leads to an explosion, the fire is the proximate cause.

7. Principle of Loss Minimization

  • The insured must take all reasonable steps to minimize the loss or damage.
  • They can’t neglect their duty just because they have insurance.
  • Example: If your house catches fire, you must try to extinguish it or call the fire department immediately.

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