Insurance principles and practice
In the world of insurance, there are 7 basic insurance principles and practice must be fulfilled. It’s consists of insurable interest, utmost good faith, proximate cause, indemnity, subrogation, contribution, and loss minimization.
Insurance in this modern era has become one of the needs, especially for the middle class and high class in social strata. Many insurance companies have emerged that provide various insurance product services.
For some people, Insurance has become an important needs like other primary needs. Especially middle-high class people will subscribe to insurance to a particular insurance institution because of the importance of this
Insurance customers indeed have to pay a certain nominal cost every month. But the benefit is that when certain conditions occur that fall into the category of being able to claim insurance. The customer will get a benefit to get compensation from the insurance company.
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Basic principles of insurance
In the first paragraph above I mentioned 7 basic principles of insurance. Let the next we describe the principle one by one.
The principle Insurable interest
Insurable interest is the right to insure because there is a financial relationship between the insured and the insured and is legally recognized.
Definition of Insurable Interest is the right to insure because of the financial interests of the insured attached to the object of insurance that is valid according to applicable law (Recognized at Law).
In other words, the principle of insurable interest is one of the insurance principles say that the insured/policyholder or insurer must have a financial interest attached to the object of insurance coverage and that financial interest must be valid according to applicable law (if a proof is needed available).
Why is there an insurable interest element in the principle of insurance? The reason the important insurable interest principle applies in the insurance world. Because is that if not, insurance will become an arena of gambling or wagering.
Insurable interests must meet several requirements.
- The insured must have an insurable interest in the insurance contract.
- The owner of the insurance subject still has an insurable interest as long as he is the owner and will lose until he is no longer the owner.
For example in car insurance, when the person who drives a vehicle is not the owner, and at that time there was an accident. So even if the car is subject to insurance, but does not meet the requirements, the insurance claim may be rejected.
The principle Utmost good faith
Utmost Good Faith in the principle of insurance is an act to express fully and precisely all material facts about something that will be insured whether requested or not.
The meaning is: the insurer must honestly explain clearly everything about the extent of the terms/conditions of insurance. And the insured must also provide clear and true information on the object of the interest insured.
The principle of Utmost Good Faith contains the understanding of both parties. Namely, the Insured and the Insurer must reciprocally base the insurance agreement in good faith. This means not hiding clear and true information needed by each party.
The principle of Utmost Good Faith tends to be addressed to the Insured, with the following considerations:
- The insured knows everything about the object to be insured.
- The Insurer does not know anything about the Object to be insured.
Indeed the Insurer can survey these risks. But at the time of the survey there was still some very important data information that the Insurer knew, for example:
- Has the object of cover been incurred in a loss event?
- When and how much is the loss?
- Do other insurance policies that have or have covered insurance coverage for the object in question?
All of this information is important for the insurer. Because the comparison between the Insurance Policy and the Coverage Value by the Insurance Company is very different.
In such circumstances, automatically the position between the Insured and the Insurer becomes unbalanced.
The insured knows everything about the object of coverage. And will be moving the risks faced to the Insurer who does not know much about the object concerned. But must accommodate a risk burden that is far heavier than the Insurance policy.
The principle Proximate cause
Definition of Proximate Cause is an active cause that drives a series of events that have consequences without intervention and are the dominant cause.
This principle is used by insurers to measure or assess obligations as an insurer to compensate the insured if the event that caused the loss is guaranteed in an insurance policy.
In practice, it must be considered and decided about the Chain of Events. That is a series of events that are unbroken and whether there are new forces that intervene and weaken the initial cause.
A very strong typhoon knocked down a building. Then the collapsed building caused the power cord electricity to be cut off. The broken power cord electricity causes a short circuit and causes sparks. Then the sparks caused fires in other buildings. Then a blackout is used using water hoses to extinguish the fire and cool the surrounding area.
As a result, the water used to extinguish the fire caused damage to the engine that is still intact (not burning) from inside the building. Because there is not one exception in the policy that caused the fire.
Then the damage from fire is guaranteed by the policy and if it is seen the cause of the damage due to water, is the fire guaranteed by the policy. Therefore, water damage is considered to be a direct cause of the fire and is part of the guaranteed loss due to the fire hazard.
The ship ran aground with rocks in the sea and suffered a leak. For the time being, emergency measures are taken by patching the leak so that the ship can immediately go to the emergency port. In the middle of the road, patches off and the ship sank. Which caused the ship to sink, the ship ran aground by a rock, or because a patch of leakage was released?
In another case, someone with heart disease fell in the bathroom and died. The main cause of death of the person: because of a fall (Accident) or heart disease (Sickness)?
In special circumstances, assistance is often required by experts or related professionals, for example, Professional Claim Surveyor Fire or Visum from Doctors and even the active role of the Forensic Investigation experts.
Sometimes two events occur simultaneously, independently (not related) that cause a loss or damage.
A hurricane coincides with a fire, which is unrelated causing two types of losses, due to fire and due to hurricane.
Problems will arise if one of the two concurrent events is not guaranteed by the Insurance Policy. Let say The Fire Insurance Policy only guarantees damage/losses due to fire, not including hurricanes or riots.
Insurance Solution: If the two events that occur simultaneously are not excluded from the Policy. Or the losses incurred cannot be separated, which is due to fire and which is due to a hurricane, then the damage or loss is guaranteed by Insurance.
If there is one event that is excluded by the relevant policy and the amount of damage or loss cannot be separated. Then the damage or loss is not guaranteed Insurance. But if it can be separated, only those who are not excluded are guaranteed by insurance.
Principle of Indemnity
Principle Indemnity is some funds provided insurance to policyholders (the insured) to paying the financial position in question right before the loss. Indemnity is given insurance after the claim is declared valid according to the policy provisions, then agreed to be compensated.
Therefore the total Indemnity is not greater than the actual loss value. Insurance will not provide Indemnity with greater value or better conditions than before. The maximum indemnity insurance that can be provided is the amount insured in the policy (Sum Insured).
But sometimes the amount of indemnity paid may differ in value from that of the insured.
The factors that cause it are as follows
- The price of an asset that has suffered a depreciation or market value is lower than the value proposed by the insured (policyholder).
- The method of calculating the amount of loss is different between insurance with the insured.
- Assets that suffer losses or damage are not sold freely or are very limited so getting similar items is very difficult.
Also, be aware that after the insurer provides indemnity. Assets that suffer losses or damage will transfer ownership from the insured’s property to insurance.
The insurer is also entitled to hold liability from the party causing the loss for the damage suffered by the insured. If this is fulfilled, the funds received will become the right of the insurance party. This is referred to as Subrogation in principle insurance and practice.
Therefore it is very important to calculate and determine the exact value of the assets. That will be mentioned in the insurance policy because it will affect the value of compensation provided in the event of a claim in the future.
Principle of subrogation
The principle of subrogation in insurance is a term that describes the legal right held by an insurance company. To claim compensation from a third party that causes a loss. This is done to replace the claims paid by the insurance company to the insured for the loss.
When requesting third party compensation for the loss. The insurance company will have the same legal rights and position as the policyholder.
If the insured party does not have a legal position to sue the third party. The insurance company also can not file a lawsuit.
If the insured chooses to claim the insurance party. Then the right to sue the third party will be taken over by the insurance company. This prevents the insured from gaining double compensation for the same loss and thus secures the Principle of Indemnity.
The Principle of Indemnity is designed to place an insured person in the same financial position shortly before the loss occurs. However, this principle only applies to general insurance policies. As a note:
- This subrogation applies if the insurance contract in question is an indemnity contract.
- Subrogation is implemented to prevent the insured from obtaining greater compensation than full indemnity. Therefore Subrogation is considered as Corollary of Indemnity.
The method for compensation can be either
- Payment in cash.
- Repair namely repairs carried out by the insurance company.
- Replace is the selection or replacement with similar objects.
- Reinstate is rebuilding by the Insurance.
One day there was a fire at house B, then house A also caught fire due to the short distance to house B. House A has insurance, while House B has no insurance. House A submits a claim to the insurance company, the claim is accepted and the insurer compensates the loss.
In this case, the claim rights owned by house A against a third party (house B) have been taken over by the insurance party, because the loss suffered by the insured (house A) has been replaced by the insurance.
Waivers of Subrogation.
Waivers of subrogation is a contractual provision in which the insured waives the right of the insurance company to claim compensation for losses from negligent third parties. Usually, insurance companies charge additional fees for authorization of this particular policy.
Many insurance contracts in the construction and rental sectors include this clause. These provisions prevent insurance companies from submitting claims against third parties to replace money paid by insurance companies to the insured.
In other words, if subrogation is ruled out, the insurance company cannot “represent the client” in a case of loss.
Principle of contribution
The principle of contribution applies to one insured object to more than one insurance company. This practice usually occurs in general insurance and the insurance coverage is very large.
It is important to remember that although there are two underwriters involved. The indemnity principle which states that the total compensation must not be more than the value of the loss still applies. Then how the distribution of coverage between insurance companies?
Payment of compensation from each insurer can be divided based on:
- Proportional, which means that each guarantor will be held responsible prorated according to their respective sections.
- Non-proportional, which means that each insurer has their respective obligations.
- Company A has two health insurance policies.
- The company suffered a total loss of $10000.
- Insurance A pays $7500, so Insurance B can only pay a maximum of $2500.
The Principle of Contribution says: if there is property insurance by more than one Insurance Company. Each of which issues an Insurance Policy with the same Coverage Price of the healthy Value/Price of the object being the object of coverage. The Insurance Company is only required to pay compensation in the average match’s responsibilities according to a balanced comparison.
Principle of loss minimization in insurance
This is the last principle from 7 Insurance principles and practice. An insurance contract must not be about getting free goods every time bad conditions occur. Therefore, little responsibility is given to the insured to take all possible steps to minimize losses to the property.
This principle is debatable, so contact a lawyer if you think you are being judged unfairly based on this principle.
What are the 7 principles of insurance? Being an insurance participant should also understand how this works, don’t just look at insurance benefits, but also about Insurance principles and practice.
By understanding these principles, and insurance participant can determine the steps needed if experiencing problems relating to insurance claims. Read the terms and agreement of the user before signing the types of insurance companies contract. This is important to know so that later can determine the steps when insurance claims.
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