UNIT 5 Insurance 5 Principles of Insurance


We mentioned above that the insured cannot make a profit from insurance. This is called the principle of indemnity. We also mentioned utmost good faith when studying the proposal form for insurance. These are just two of five rules or principles which insurance is based on.


Principle 1. Indemnity Explanation and example


The insured person cannot make a profit from insurance.


2. Utmost good faith


The insured person must tell the truth when filling out the proposal form and/ or claim form. They must also update the insurance policy if there are any changes in circumstance.


3. Insurable interest


That's not your car!


The insured person must gain by the existence of the item and suffer financially from its loss.


4. Subrogation


The right of ownership of the insured item passes from the insured to the insurance company once the compensation has been claimed.


Example: Kate’s car is valued at €30,000.


She cannot claim any more than the value of the car.


Example: Kate must let the insurance company know that the accident occurred and all the details around the accident are correct to the best of her knowledge. She must tell the truth.


Example: Kate cannot insure her teacher’s car because she does not benefit from the teacher having the car or lose out financially should something happen to the teacher’s car.


Example: If Kate’s car is stolen and the insurance company pays her compensation but the car is found again, the insurance company now owns the car. This also comes back to the rule of indemnity where Kate cannot make a profit form insurance. She cannot keep the compensation and the car.


5. Contribution


Where the item is insured with more than one insurance company, the two insurance companies will divide the cost of the claim between them (they will each contribute to the compensation).


Example: If Kate insured her car with Coleman Insurance Ltd and 123.ie, the insurance companies


will share the cost of the damage. €10,000 ÷ 2 = €5,000. She could also claim €5,000 from one company.


Know It!


1. Indemnity 2. Utmost good faith 3. Insurable interest 4. Subrogation 5. Contribution


EXAM PREPARATION!


State the five principles of insurance. Explain each one using an example. Apply it to another unit.


P. 71


Go to page 71 in the activity book.


99


STOP! WRITE IT!


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