Download - Insurance principles
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Legal principles of insuranceSoumya V
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1. Principle of indemnityTo Compensate
Two fundamental purposes: a. To prevent the insured from profiting
from a lossb. To reduce moral hazardActual cash value in property insurance
- Replacement cost less depreciation - Fair market value - Broad evidence rule
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2. Principle of insurable interest
The insured must be in a position to lose financially if the loss occurs
Purposes:a. To prevent gamblingb. To reduce moral hazardc. It measures the amount of insured’s loss
in property insurance
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Examples of insurable interest
In property and liability insurance:a. Ownership of propertyb. Potential legal liabilityc. Secured creditorsd. A contractual rightIn life insurance:e. Own lifef. Life of close family tiesg. Pecuniary interest in life of third person
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When must insurable interest exist?
•In property insurance - at the time of loss
•In life insurance - at the time of inception of the policy
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3. Principle of subrogation
Substitution of the insurer in the place of the insured to claim indemnity from a third person for a loss covered under insurance
Purposes:a. Prevents insured from collecting twice for
the same lossb. It is used to hold the guilty person
responsible for the lossc. Helps to hold down insurance rates
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Corollaries to the principle of subrogation•The insurer is entitled to recover only the
amount it has paid under the policy•The insured cannot impair the insurer’s
subrogation rights•The insurer can waive its subrogation rights in
the contract•Subrogation does not apply to life insurance
and to most individual health insurance contracts
•The insurer cannot subrogate against its own insureds
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4. Principle of Utmost good faith
Imposes high degree of honesty on the applicant for insurance
This principle is supported by 3 important legal doctrines – representations, concealment and warranty
a. Representations – statement made by applicant for insurance. The insurance contract is voidable at the option of the insurer if the representation is
a. Materialb. Falsec. Relied on by the insurer
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b. Concealment – intentional failure of the applicant for insurance to reveal a material fact to the insurer
c. Warranty – a statement of fact or a promise made by the insured which is part of the insurance contract and must be true if the insurer is to be liable under the contract
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5. Causa proximaProximate cause
6. Contribution
In case of double insurance, the insurers are to share the loss in proportion to the amount insured by each of them.
Conditions:a. The subject matter of insurance must be
sameb. The event insured must be samec. The insured must be the same
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7. Mitigation of loss
The insured must make necessary effort to minimise the loss
8. Nature of Contract
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Requirements of an insurance contract•Offer and acceptance•Consideration•Competent parties•Legal purpose
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Distinct legal characteristics of insurance contracts•Aleatory contracts•Unilateral•Conditional•Personal•Contract of adhesion