Principles of Insurance
An insurance contract is a type of a legal contract in which a type of risk is transferred to an insurance company in return of a premium by the policyholder. As by their nature, insurance contracts may be exposed to misconduct by both parties: the underwriter and the policyholder. Therefore six principles of insurance, which are recognised by law, were created to reduce this type of abuse. In the following pages I will explain these principles and show by practical examples how these are related to property Insurance.
This is one of the fundamental principles of insurance. Without Insurable interest, insurance contracts can be compared to gambling. Insurable Interest is widely defined as a person who has an interest in the survival of the insured or in the preservation of the property that is insured. That is the policyholder will suffer a financial loss if the property is lost in a fortuitous event. Insurable interest is required by the policyholder from the application process till the expiry of the contract. The key elements of insurable interest are:
* Subject matter
* Financial Interest
* Current Interest
* Legal Interest
Insurable Interest is important in property insurance as it will decrease deliberate acts. As a practical example imagine person A insures person’s B home for a premium of €500 with a sum insured of €50,000 by taking a fire policy. Person A does not have any interest in person’s B home (subject matter). Then person A deliberately sets a fire on person B’s home. Therefore the insurance company will fork out €50,000 to person A. With insurable interest Person A cannot insure person B’s home as he does not have any interest in it, as he will not suffer any loss if this home is destroyed by any event. The policyholder must suffer a financial loss if he has an insurable interest in the subject matter. From the case of Lucena vs Crawford (1806) it was expressed that a person to insure something he must be interested in something in which he or she must suffer a financial loss and also suffers a deprivation when the property item is lost. Some examples of insurable interests are:
Mortgagees and mortgagors
The mortgagor is the owner of the property, while the mortgagor holds the property as a security. Landlord and tenant
The landlord is the owner of the property, while the tenant is responsible for any damages that ensues the property.
Utmost good faith
Insurance policies are contracts of utmost good faith, which means that the insurer and the person who is applying for insurance have a duty to deal honestly and openly with each other in the negotiations that lead up to the formation of the contract. This principle must be shown by both parties: the insured and the insurer. Utmost good faith imposes two duties to both parties:
1) A duty not to misrepresent any facts related to the contract. 2) A duty to disclose all material facts related to the contract.
Normally in insurance proposal forms, there will be questions relating to material facts. For example in the proposal form for fire insurance of Middlesea Insurance Company, there is a question which asks if the proposer had ever a renewal policy declined or a policy cancelled. If this is true the proposer has to give the reasons why.
For example a policyholder is aware that his business operates less than 100m of a fireworks factory and does not disclose this material fact to the insurance company. This would render this policy void as there was a breach of utmost good faith.
All insurance policies will insert this principle under the ‘General Conditions’ Section. For example, in the GasanMamo Fire Insurance policy, this principle is listed as the 1st General Condition under the title ‘Misdescription’. Basically this condition states that if a fact is misrepresented or omitted, the policy will be...