There are six principles of insurance which insurance companies follow so that they are able to prevent the undertaking of any risks perpetrated by individuals who try to commit fraud for the purpose to gain financial rewards. The six Principles of Insurance were made to safeguard insurance companies from such fraud. By following these principles, insurance companies are able to prevent paying off claims made by scheming individuals.
Here is a quick guide to the six principles of insurance:
- Principle of Utmost Good Faith – there needs to be a full disclosure of what is being insured, otherwise it can be deemed that the policyholder is in attempt to commit fraud if they do not disclose everything that needs to be disclosed. Proper disclosure allows for proper evaluation or estimates of the item or property that is being insured.
- Principle of Insurable Interest – if the person insuring an item has no best interest over what is being insured, therefore the insurer reserves the right to refuse granting a policy as the client holds no value for what is being insured. A loss will prove meaningless to the client if they hold no value or interest of what is being insured.
- Principle of Indemnity – claims provided will only value to the amount of the overall cost of repair. The insurer will not provide claims that are much higher than the cost of damage. Payout of claims means the case will be deemed as pre-damage condition.
- Principle of Proximate Cause – coverage of insurance will only cover what is inside the policy. Any loss from similar contingencies but are of different coverage will not be covered by the insurer. Claims under such with no proper policy under it will be refused by the insurer.
- Principle of Subrogation – if damage is caused by a third party, the insurer will pay for the damages to bring it back to pre-damage condition. Due to the loss made by the insurer, the insurer will be forced to sue the third party for damages caused unto them. This will allow them to compensate for the loss made from the policyholder’s claims. Settlements will usually cost more than double for the third party than the claims shelled out by the insurer.
- Principle of Contribution – if an individual or entity is insured by two insurers with the same policy, the individual or entity cannot make claims from both insurers. The claims will only be from one policy and will be shared by both insurers.