Insurance products are designed to offer financial protection against risks and uncertainties that may cause financial losses to individuals or businesses. Insurance is based on the principles of risk-sharing, whereby a large number of individuals or businesses pool their resources to cover potential losses faced by a few members of the group. The following are the fundamental principles governing insurance products:
- Utmost good faith: Insurance contracts are based on the principle of utmost good faith, which means that both the insurer and the insured must act in good faith and disclose all material information related to the risk. This principle ensures that both parties enter into the contract with complete knowledge of the risks involved and prevents any party from taking advantage of the other.
- Insurable interest: Insurable interest is the legal or financial interest that an insured party has in the property or person being insured. An individual or business must have an insurable interest in the risk being insured to prevent the possibility of moral hazard or adverse selection.
- Indemnity: Indemnity is the principle that the insurer will compensate the insured for the actual financial loss suffered as a result of an insured event, up to the limit of the policy coverage. Insurance products are designed to provide indemnity to the insured and not to create a profit.
- Contribution: Contribution is the principle that if an individual or business has taken out multiple insurance policies covering the same risk, the insurers will share the financial burden of the loss in proportion to their policy limits. This principle ensures that the insured does not profit from the loss and prevents the possibility of over-insurance.
- Subrogation: Subrogation is the principle that after compensating the insured for a loss, the insurer has the right to assume the rights of the insured and take legal action against any third party responsible for the loss. This principle enables insurers to recover some or all of the compensation paid to the insured.
- Proximate cause: Proximate cause is the principle that the insurer will only cover losses caused by the insured event or peril. This principle ensures that the insurer is not liable for any losses that are not directly caused by the insured event.
In summary, the fundamental principles governing insurance products include utmost good faith, insurable interest, indemnity, contribution, subrogation, and proximate cause. These principles ensure that insurance products are designed to provide financial protection against specific risks and that both the insurer and the insured act in good faith to prevent any potential for fraud or unfair advantage.