It is important that everyone should understand fundamental principles of insurance examples. As you should never misuse such benefits for your necessity. If you are looking for profits by reporting false information then, you violate insurance terms and conditions. Such breaching can cost you huge legal charges.
If you are an insurance company and drafting policy rules are big risky and a difficult task. You are aware of your health, assets condition but not the insurance company. It became really vital for the insurer to understand to need and requirement of every person while writing policy wordings. A very generic policy may not be suitable for a person who is looking for cover various types of risk. There are 7 principles of insurance which reduces the risk for an insurer company.
Principles of Insurance
These below 7 principles of insurance combined together while creating an insurance agreement. These are basic principles of insurance contract are available in public to understand benefits of insurance. The information provided here is verified by trusted sources like wikipedia. Let us look one by one closely into it.
Principle of Utmost Good Faith
Both the parties in insurance agreement needs to have full faith on each other. Being an insurance company, it is the duty to disclose all the terms and conditions with accuracy to the one insured. Being a customer, it is your responsibility of reveal all the information with utmost accuracy to the insurer company. Any misrepresentation or fraud information might result into cancellation of insurance agreement under this fundamental principles of insurance.
Principle of Utmost Good Faith Example
Maria took a term insurance policy from xyz company but she didn’t reveal the fact that she is a cigarette smoker. Maria died due to cancer tumours. Whereas doctor’s mentioned that this was due to excessive consumption of cigarettes. In such cases, insurance company have full rights to reject claims mentioning that important facts were not reveal by policy holder.
Principle of Insurable Interest
Insurable Interest means a cover mentioned in insurance agreement should provide a financial gain by its existence. It would also lead to a financial loss in-case of damaged or stolen. In simple words, there are no financial gains and losses if you do not have ownership of that assets.
Principle of Insurable Interest Example
In auto insurance, mostly cases are rejected by insurer company just because person driving doesn’t have ownership of that vehicle. Assume that you hit a person with a vehicle which doesn’t belong to you. This means that you do not have any insurable interest associated with your vehicle. This is enough to reject auto insurance claims. It is a straight forward but important point of an insurance agreement to exist.
Principle of Indemnity
Principle of Indemnity means protection or security up to loss or damages or insurance cover, whichever is lower. Such types of principles of insurance says that insurance company can compensate financial loss equivalent up to the limit of damages or losses.
Principle of Indemnity Example
Let us assume that your automobile is actually inured for 50,000. During a claim process, insurance company analyse the damage of the vehicle is up to 10,000. In such cases, insurance company pays you 10,000 for your damages and not 50,000 which is mentioned under insurance coverage agreement. This concludes that compensation amount is directly linked with the amount of loss incurred.
Principle of Contribution
Principle of contribution means, similar asset used by one or more than one businesses under two different types of insurance policies. People usually adopted buying multiple policies when the financial risk of insurer is actually doubtful. This fundamental principles of insurance means that insured are unable to get compensation more than the actual loss as well as insured cannot claim total amount with multiple insurer companies.
Principle of Contribution Example
Assume that Mr. Mike has insured his property worth 500,000 with 3 insurer companies. Assuming that he gets coverage of 300,000 for each insurers. Due to some unforeseen situation, property get damage up to 200,000 of amount. In such case, Mike can easily claim the whole lost for either one of the insurer company or he can claim partially from all 3 of the insurers. In any case, Mike will not be able to claim whole damage amount from all the 3 insurance companies.
Principle of Subrogation
Principle of subrogation means substituting one creditor for another. You should understand the importance of insurance in your life. This is one of the complicated 5 principles of insurance which we have seen above. Once losses incurred against property are compensated to policyholder, the rights of property ownership go to their insurer. In many cases where vehicle or property is completely damaged and even you cannot physically hold that asset. In those circumstances, insurer company takes the ownership to file the lawsuit. In-case of winning, insurer can recover the compensation amount paid to policyholder.
Principle of Subrogation Example
So let us assume that you are in a vehicle wreck caused by a 3rd party and your register a claim at the insurance company to cover that the damages on your medical as well as vehicle expenses. Here insurer might take the ownership of your car as well as medical expenses in order to get claimed by file the lawsuit against individual accountable for the accident.
Principle of Proximate Cause
Principle of proximate cause means either direct cause or nearest cause. This is one of the 6 principles of insurance applicable whenever loss is actually caused due to two or more factors. In such cases, the absolute best reason and most dominant cause for loss is actually considered. This principle is applicable when damages are caused due to lot of factors.
Principle of Proximate Cause Example
Assume that Mr. John keep driving when there is a red signal and hit Mr. Sam which had a green signal. Due to the mistake of other person Mr. Sam got personal injuries. Such incidence is categorized under principle of proximate cause which has caused injuries to Mr. Sam.
Principle of Loss Minimization
Principle of loss minimization means; it is the responsibility of insured towards safeguarding and taking appropriate precautions in order to minimize the losses incurred on insured asset. It is the last of 7 principles of insurance which is quite simple to understand.
Principle of Loss Minimization Example
Imagine, Mrs. Emma’s house has caught fire due to party and celebration event at her home. In this tragic scenario, Mrs. Emma must give her best to stop fire by all the possibilities. She should have called nearest fire department office, using emergency fire extinguishers, etc. She should not be worrying and watching her house burning by thinking that her house is 100% covered for fire insurance.
Principles of Insurance PPT
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Fundamental Principles of Insurance PDF
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