The principles of insurance: what are they?

Most people take out home, building and vehicle insurance without giving a second thought to what 'insurance' actually means.

Yes, we all know that insurance is a safety net that pays out when a listed event occurs. But behind the scenes, what is really going on when you sign a contract with an insurer?

It might surprise you to know that in order for your insurance contract to function correctly, there are seven principles of insurance that both you and your insurer must uphold.

These are:

Utmost good faith
This principle assures that both you and your insurer act in good faith towards each other when entering into a contract. That means providing clear and concise information related to the terms and conditions of the contract. Your insurer must be transparent as to what your contract covers and does not cover, and you must be honest in disclosing all facts related to your health, home contents, car, house etc.

Proximate cause

Also called the principle of 'causa proxima' or the nearest cause, this principle comes into play when the loss is the result of two or more causes. Your insurer will identify the primary and most influential cause of the event from among the multiple causes, and then either pay out (if you are insured for that event) or not, depending on your policy. Even if all the multiple causes are covered by your policy but the single proximate cause as identified by your insurer is not covered, your claim will be rejected.

Insurable interest
This principle states that you as the insured must have an 'insurable interest' in the asset being insured. In other words, the subject of the insurance contract (i.e. your car, your home, business equipment etc.) must provide some sort of financial gain to you as the insured, but also lead to a financial loss if it is damaged or stolen etc. You must be the owner of the asset both at the time of taking out the insurance contract and at the time of the insurable event (accident, robbery etc.) in order to claim from your policy.

Indemnity
This principle aims to ensure that insured clients are paid out the correct amount of money in a claim in order to return them to the same financial position they were in before they experienced the damage or loss to their insured asset. It says that insurance only covers the cost of the loss, not more (for you to profit from) or less (to leave you out of pocket). For example, if your vehicle is insured for R100 000 but is involved in a bumper bashing that will cost R10 000 to repair, you will be paid out R10 000 to cover the exact loss and not the full R100 000 for which your car is insured.

Subrogation
The principle of subrogation means substituting one creditor for another. This is a legal procedure that allows an insurance company to assume the legal rights of a policyholder once a claim has been paid. In other words your insurance company has the right to claim the amount of loss it paid out to you, from the third-party that was responsible for the loss. For example, in the event of a car accident caused by a third party, your insurer will pay you out, and will sue the third party to recover the money it paid out in your claim.

Contribution
This principle applies when a person takes out more than one insurance policy for the same asset i.e. three vehicle insurance policies to cover the same car. As with the indemnity principle, claimants are not allowed to make a profit from their insurance pay outs. In the case of multiple policies, only one policy can pay out the full amount, or each policy can pay out a certain amount that collectively adds up to the total damages or loss claim. But each policy cannot pay out the full amount of the claim.

Loss minimisation
This principle relates to you as the insured client, and says that you have an obligation to take all necessary precautions to safeguard the asset you are insuring. So protect your home and car, and in the event of an accident, try to reduce the damage as much as possible, instead of just leaving it because 'it is insured'. For example, if a fire breaks out, try to put it out, contain it or immediately call the fire brigade, or if a pipe bursts, switch off the water mains and try mop up the water before even more damage occurs. It asks that you as the insured behave responsibly and are not negligent.