7 Principles of Insurance
The seven principles of insurance form the basis of fair and responsible insurance practices. They ensure a well-functioning system that provides protection and stability to policyholders while maintaining the financial stability of insurance companies. Let’s consider each principle:
1. Extreme good faith: Both the policyholder and the insurance company must act honestly and openly throughout the process, from disclosing all relevant information during the application stage to making claims. This means no misrepresentation or concealment of facts by either party.
2. Insurable interest: The policyholder must have a legal and financial interest in the property or person insured. This ensures that a person does not, for example, take out someone else’s life insurance in the hope of financial gain from their own death.
3. Compensation: The objective of the insurance company is to restore the policyholder to the same financial position they were in before the insured loss occurred. They compensate the actual loss, not more than the sum covered by the policy.
4. Cause of Proximity: Only direct losses due to the peril listed in the policy are eligible for compensation. Indirect or incidental causes will not qualify.
5. Subrogation: Once the insurance company pays the claim, they have the right to take legal action against any third party responsible for the loss to recover their costs. This helps prevent fraud and reduces costs for policyholders.
6. Contribution: If a policyholder has multiple insurance policies covering the same loss, each insurer contributes proportionately to the compensation amount based on its share of coverage. This prevents double recovery.
7. Minimizing Damage: Both the policyholder and the insurance company have a responsibility to take reasonable steps to minimize potential losses. This may include installing security systems, maintaining insured property, and reporting claims promptly.
Understanding these principles empowers you as a policyholder to make informed decisions and navigate the insurance landscape with confidence. It also promotes trust and transparency in the insurance industry.
