What are the 7 basic principles of insurance?
The seven basic principles of insurance are:
1. Utmost Good Faith (Uberrimae Fidei): Both parties, the insurer and the insured, must act honestly and disclose all relevant information. There's an expectation of full transparency to avoid misunderstandings and potential disputes.
2. Insurable Interest: The insured must have a legitimate interest in the subject matter of the insurance policy. This principle ensures that the policyholder stands to lose financially if the insured risk occurs.
3. Indemnity: The principle of indemnity states that the insured should be restored to the same financial position after a loss, but not be better off. This prevents the insured from profiting from an insurance claim.
4. Subrogation: After compensating the insured for a loss, the insurer has the right to assume the rights of the insured to recover costs from third parties responsible for the loss. This helps prevent the insured from claiming twice.
5. Contributory Causes: This principle involves multiple reasons contributing to a loss. The insurer may evaluate the various causes to determine coverage and resultant compensation.
6. Proximate Cause: This principle establishes that only the direct cause of loss, which sets off a sequence of events, is covered. It helps ascertain liability by tracing the loss back to its origin.
7. Loss Minimization: Insured parties have an obligation to mitigate losses. This means taking reasonable steps to limit damage or loss after an event occurs, demonstrating responsible behavior in managing their risk.
These principles form the foundation of risk management and insurance practice, guiding how policies are created and claims are processed.
