The principles underlying insurance are remarkably simple, and they seem to underpin a system that works!
Key words and phrases that many who work in insurance will be familiar with include:
- Uberrimae fidei (utmost good faith)
- Insurable interest
- Loss minimization
- Causa Proxima (nearest cause)
Uberrimae fidei (Utmost good faith) calls on both insured and insurer to act in good faith, providing correct and clear information to each other. It applies to all types of insurance.
Insurable interest means that the insured party must have an interest in the insured matter. For fire and general insurance it means ownership at the time of taking out the policy and at the time of any loss. The rules are slightly different for marine insurance, where ships are often chartered and cargo may or may not be on board, etc. (For example, insurance can be taken out before cargo is loaded).
Indemnity is a principle that calls for insurers to agree to put the insured in the position they were in immediately before a loss caused by an unexpected event.
Contribution principle establishes that the insured can only claim for the actual value of the loss. Holding multiple policies will not enable them to claim any more than the actual loss.
Subrogation means that, once the insured has been compensated, only the insurers can legally pursue a third party that caused the loss. Say a tradesman’s negligence caused damage to your building, any rights to recover damages from them will have been transferred to your insurer once the insurer has paid your claim.
Loss minimisation places a duty on the insured to take reasonable steps to minimise losses. A simple example here would be to turn off the water stopcock if there’s a water leak!
Causa Proxima (nearest cause) establishes that if a loss involves more than one or a sequence of events, then it is the one nearest to the loss that is taken into account in deciding whether or not the insurer is liable to pay. For example, fire risks typically do not cover damage by explosion, but if the explosion causes actual ignition, which spreads into fire that causes a loss, then the insured will be covered. See our recent article on explosion risk and the need for terrorism cover. Causa proxima does not apply to life policies: whatever the cause of death, the insurer is liable to pay.
As the Organisation for Economic Cooperation and Development (OECD) points out: “The insurance industry is a major component of the economy by virtue of the amount of premiums it collects, the scale of its investment and, more fundamentally, the essential social and economic role it plays by covering personal and business risks.”
The sole purpose of this article is to provide guidance on the issues covered. This article is not intended to give legal advice, and, accordingly, it should not be relied upon. It should not be regarded as a comprehensive statement of the law and/or market practice in this area. We make no claims as to the completeness or accuracy of the information contained herein or in the links which were live at the date of publication. You should not act upon (or should refrain from acting upon) information in this publication without first seeking specific legal and/or specialist advice. Arthur J. Gallagher Insurance Brokers Limited trading as Deacon accepts no liability for any inaccuracy, omission or mistake in this publication, nor will we be responsible for any loss which may be suffered as a result of any person relying on the information contained herein.