7 Principles of Insurance contract

Insurance is a legally binding agreement between an insurer, which is an insurance company, and the insured, who can be an individual or a business.Having a clear understanding of the fundamental principles of insurance and how they work can be beneficial when determining the necessity of an insurance contract. Moreover, these principles enable you to determine your eligibility for entering into legally binding insurance agreements.In this article, we will look into the 7 fundamental principles that govern insurance contracts.

The 7 principles of insurance contract are as follows:

Principle of Utmost Good Faith (Uberrimae Fides)

Principle of Insurable Interest

Principle of Indemnity

Principle of Subrogation

Principle of Contribution

Principle of Loss Minimization

Principle of Causa Proxima (Proximate Cause)

Understanding Principles of Insurance contract

Understanding the fundamental principles of insurance contract holds significant importance for insurers and insureds alike, as it serves to guarantee the fairness and efficacy of insurance policies. Insurers can ensure the provision of financial protection to their clients by adhering to these principles. Simultaneously, insured individuals can have a sense of assurance that they will receive compensation in case of any loss or damage.There are 7 important principles of insurance and these includes:

The principle of Utmost Good Faith (Uberrimae Fides):

Both the insurer and the policyholder in insurance contracts are obligated to adhere to the principle of utmost good faith. Consequently, all parties are obligated to behave with integrity and openness, revealing all pertinent details on the potential hazard. By providing complete and transparent information, the insurer can precisely evaluate the level of risk and establish suitable insurance premiums.

Principle of Insurable Interest:
In order for an insurance contract to be considered genuine, the policyholder must possess a legitimate financial stake in the object or person being insured. This indicates that the policyholder will have a financial detriment if the insured event takes place. The contract is deemed illegitimate if there is no insurable interest.

Principle of Indemnity:
The notion of indemnification guarantees that the insured party is restored to their original financial state following a loss, without any additional gain or loss. Insurance is designed to provide compensation for the real financial loss experienced, rather than serving as a means of generating profit.

Principle of Subrogation:

Subrogation enables the insurer, following the resolution of a claim, to assume the position of the insured and seek any legal recourse or compensation that the insured may be entitled to from third parties who are responsible for the incurred loss. This approach ensures that the insured does not receive double compensation for the identical damage.

Principle of Contribution:

The principle of contribution assures that when an individual has multiple insurance policies covering the same risk, each insurer contributes proportionally to the settlement of the claim. This measure prevents excessive compensation and guarantees an equitable allocation of the financial responsibility among insurance providers.

Principle of Loss Minimization:

Policyholders are obligated to undertake reasonable measures to minimise damages following an insured incident. Neglecting to do so could impact the insurer’s responsibility. This idea promotes conscientious conduct to minimise the consequences of losses.

Principle of Causa Proxima (Proximate Cause):

The principle of causa proxima identifies the immediate cause that immediately results in the loss. For insurance reasons, the proximate cause, which is the primary factor directly accountable for a loss, is taken into consideration when many causes contribute to the loss.

To summarise, understanding the 7 important principles of insurance contract is critical for both insurers and policyholders. These principles, which include utmost good faith, insurable interest, indemnity, subrogation, contribution, loss minimization, and causa proxima, serve as the foundation for fair and effective insurance arrangements. Insurers benefit from precise risk assessment, while policyholders obtain assurance of recompense in the event of loss. These principles collectively promote openness, legitimacy, justice, and responsibility in the insurance sector, resulting in a stable and balanced system for all parties involved.

Table of Contents