Principles of Insurance

Principles of Insurance

Commerce

Grade 11

Objectives

• Identify the various principles of insurance

• Explain the meaning of indemnity

• Differentiate between overinsurance and underinsurance

• Demonstrate an understanding of applications of the principles of insurance

1. Insurable Interest

Insurable Interest exists when there is financial or any other benefits from someone or something if damage or loss occurs.

For e.g You can insure against your neighbour's house or car because if something happens to your neighbour's house or car, you wouldn't have lost anything (unless you are storing some of your personal items there, then that will be insurable interest)

Multiple Select

There is insurable interest when a company insures the life of their CEO.

• True

• False

Multiple Select

Insurable Interest exists if you insure the life of your favorite celebrity.

• True

• False

2. Utmost Good Faith

The parties involved in the insurance contract have a duty and a legal obligation to be truthful in the declaration they make.

For e.g. when applying for life or health insurance the insurer will ask you to provide information about yourself, family history and medical records.

3. Indemnity

This is the principle by which the policy holder is compensated for the loss incurred. There are several aspects to this principle:

Indemnity

• No Profiteering - There should be no profit gained from claims to compensation.

• Overinsurance - if the insured overestimates (overinsured) the true value of an item, in the event of a loss they would only be compensated for the item's true value

• Underinsurance - If a loss occurs where an item has been underestimated in value (underinsured), the insured will only receive a proportion of the true value

Example of Underinsurance

Shop Value - $100,000

Insured Amt - $80,000

Damage cost - $20,000 (one-fifths)

Compensation - $16,000 (one-fifths)

Multiple Choice

A trader insured his shop for $60,000 but the true value was $80,000. A fire has caused $8,000 of damage. How much will the insurance company pay?

• $6,000

• $3,750

• $5,000

• $4,200

Indemnity cont...

• Contribution - if the case arises in which the insured has policies with different insurers, both companies will contribute towards the payment of the claim. It is unlawful to benefit fully from both claims. e.g Insurance fraud

• Subrogation - This means 'to take the place of'. When an insurance company pays out a claim, it is meant to replace what was lost.

Proximate Cause

When an insurance company covers a particular risk, it is possible for them to include damages that were not directly related to the terms of the policy.

For e.g a house covered by fire insurance may also pay for damages to the door that the firemen damaged in their efforts to put out the fire.

Multiple Select

Which of the following are “Principles of Insurance”. Select as many as you think are correct.

• Indemnity

• Intimidation

• Subrogation

• Alliteration

• Insurable Interest

Multiple Choice

A false statement made by an applicant for insurance violates which insurance principle?

• Utmost good faith

• Proximate Cause

• Indemnity

• Insurable Interest

Multiple Choice

The 'sub' principle of contribution, supported by the principle of indemnity is used to prevent the insured from collecting twice, once from the insured and the other from the negligent party.

• True

• False

Multiple Choice

.........................emphasises on full disclosure of material facts related to the subject matter by both insurer and insured.

• Principle of the Utmost faith

• Principle of Subrogation

• Principle of Proximate cause

• NONE of the above.

Multiple Choice

Identify the Principle which says that,'The insured should have financial interest in the subject matter'.

• Principle of the Utmost faith

• Principle of Contribution

• Principle of Indemnity

• Principle of Insurable Interest

Multiple Choice

The central idea/s of an insurance is to make sure that:

• An insured is put back to the position as or she was before loss.

• As insured under no circumstance should make profit.

• As insured should have a cover over his risk.

• All the above.