INSURANCE
Definition
Insurance provides a system of providing compensation to those who suffer a loss.
It is an agreement between an insurance company (the insurer) and someone who wants
financial protection (the insured or the proposer) that compensation (indemnity) will be
paid if a loss occurs.
Insurance companies charge a premium for services rendered. A policy is really a contract
drawn up between the insurer and the insured.
Purpose:
To uphold the principle of indemnity ie, to put someone who has suffered a loss back into
the position they would have been had the loss not occurred.
To encourage business activity by reducing risk from investments.
To facilitate export/international trade
To provide a source of capital for investors
To allow individuals or firms to recover losses faster and therefore continue with their
operations.
To provide employment
NOTE: insurance companies can compensate people in this way for the relatively small charge
as insurance pools risks.
PRINCIPLES OF INSURANCE
1. Insurable risk – you can only insure your own items against a risk if you have insurable
interest that is the insured must be the one to suffer financially if an even occurs. (Not
your neighbor property or friend’s property).
2. Utmost good faith – parties to the insurance must be truthful. The proposer must give
accurate information to the insurer who will then decide on the premium and then issue a
policy.
3. Indemnity – the policy holder will be compensated for the loss incurred.
Aspects to this principle:
No profiteering – not supposed to make a profit from claims
Over insurance
Underinsurance
Contribution – overlapping of policies by two or more insurance companies. All
companies will contribute towards payment of claims in relation to the amount
covered.
Subrogation – ‘to take the place of’. When an insurance company pays out
compensation on a claim, the money that they pay out takes the place of the
damaged article. Eg. A car in accident is written off. The insurance company will
pay the proposer and retain the car to sell it .
Proximate cause
4. Legality – A person cannot insure against wrongful acts in order to avoid responsibility
for it. The subject matter of the insurance contract must be legal.
5. Proximate Cause – means that the nature of the disaster must have occurred within the
premises and not due to any external causes. Therefore if a gas tank exploded outside of
your home the insurance company will not pay damages since the fire did not originate
from within your home. You can however sue the gas tank company.
