Principles of Insurance


When a person takes out an insurance policy, both the insurance company and the insured person must follow certain rules. These rules are called the principles of insurance.


Principle Explanation


Utmost Good Faith


All material facts must be disclosed when completing the proposal form when applying for insurance.


The insured person must tell the truth about anything that could affect the cost or decision to provide cover.


Insurable Interest


The insured must have a financial interest in the item being insured.


They must suffer financially if there was damage or loss of the item.


A profit cannot be made from insurance.


Indemnity


Insurance should restore a person to the same financial position as they were in before the loss.


Contribution


A risk can be insured with more than one insurer, so the insurance companies can share the cost of any claim between them.


Subrogation


After paying out on a claim, the insurance company can take legal action against the party responsible for the loss to recover its costs.


Example


A driver must disclose any penalty points or previous accidents when applying for motor insurance.


These would increase the risk to the insurer and would result in a higher premium.


A person can insure their own car but not their neighbour's car, as they have no financial interest in it.


They would not suffer a financial loss if their neighbour’s car was damaged.


If your laptop is stolen, indemnity ensures you receive a replacement of the equivalent value, but you should not receive more than it is worth.


If a house is insured with two companies and a claim is made, each company pays half. The insured receives the full amount once only.


If another driver causes an accident and your insurer pays to repair your car, the insurer can then pursue the driver at fault in an attempt to recover their costs.


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CHAPTER 6: Personal insurance


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