Legal principles of insuranceSoumya V

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

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

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

When must insurable interest exist?

•In property insurance - at the time of loss

•In life insurance - at the time of inception of the policy

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

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

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

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

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

7. Mitigation of loss

The insured must make necessary effort to minimise the loss

8. Nature of Contract

Requirements of an insurance contract•Offer and acceptance•Consideration•Competent parties•Legal purpose

Distinct legal characteristics of insurance contracts•Aleatory contracts•Unilateral•Conditional•Personal•Contract of adhesion