We often regard insurance as a means of protection and as a means of risk reduction for the things we value. However, insurance companies do not have this luxury as they cannot exactly insure themselves from any fraudulent transactions. For this reason, as a means of protecting themselves and their best interest, insurance companies follow the six principles of insurance. These six principles of insurance acts a safeguard for them against people who want to make a quick buck out of their insurance policies.
Utmost Good Faith – when a client insures something, it is understood that they will fully disclose everything that is needed about the item they are insuring. Any intentional act of not disclosing any important or relevant matter is a sign to commit fraud. For example, a client is getting life insurance but fails to mention that they have diabetes. This failure in mentioning a medical condition that they have can be regarded as an act to commit fraud.
Insurable Interest –the insurance company reserves the right to refuse items being insured, especially if they are not important to the client. If you insure something that is not of value to you, it can be deemed that you intend to commit fraud since you would not mind losing the item you insured. Why insure something that is not valuable to you in the first place unless you want to make claims from its loss.
Indemnity – the insurer will only pay the amount of repairs or replacement for loss. When claims have been released, the insurer indemnifies that everything is now at its prior pre-damaged state.
Proximate Cause – there are different coverage available for insurance type. Claims can only be made if the coverage you have is the exact same reason for the loss or damage. For example, you have home insurance for hurricanes. If the cause of damage is flooding that is caused by a hurricane, it means you will not be able to make any claims from the damage incurred.
Subrogation – if a third party damage has been made, the insurer will pay you for claims but will sue the third party so as to compensate their losses from the claims they have given their policyholder.
Contribution – a client can buy two or more insurance policies from different insurers. However, when it comes to making claims, only one will pay the claim and the amount will be shared by the insurers.