What is the Principle of Insurance Law?

The principles of insurance are rooted in common law and generally accepted throughout the world.

The principles of insurance law have their roots in English common law and are generally accepted throughout the world. They consist of the following: indemnity, subrogation, contribution, insurable interest, utmost good faith, and the doctrine of proximate cause.

Indemnity

The principle of indemnity holds that the insured should be restored to the financial position he or she was in prior to the loss, but should not be placed in a better position, lest an incentive be created for the insured to create the loss through fraud.

Subrogation

The term "subrogation" means "to stand in the place of." Under the doctrine of subrogation, an insurance company that has paid your claim may "stand in your place" and pursue other insurance companies or liable parties to recoup some or all of their costs. You are generally precluded from also pursuing the same claims since, under the doctrine of indemnity, the insured should not be able to collect full compensation twice.

Contribution

The doctrine of contribution holds that where multiple insurers insure the same risk, each insurer is responsible for a pro-rata share of damages in the event of a claim. The insured can go to any insurer to file a claim. The insurer that pays the claim is entitled to seek payment from other insurance companies that covered the same risk under the contribution doctrine.

Insurable Interest

The doctrine of insurable interest holds that the insured must suffer actual damage in the event a loss occurs. The insured should never profit from a claim. Under life insurance rules, for example, you have an insurable interest in yourself, a spouse, parent, business partner, key employee, or key vendor, because in the event of that person's death, you would suffer financial consequences. You typically do not have an insurable interest in a stranger, and no responsible carrier would issue you a policy on a stranger.

Utmost Good Faith

The doctrine of utmost good faith recognizes that information about a risk is usually asymmetrical--one party has more information about an insurable risk than the other. Therefore, the doctrine holds that both sides have a duty to disclose any material information that would affect the underwriting decision. If the insured does not disclose material information and the insurer can prove it in court, they may not have to pay the claim.

Proximate Cause

This principle holds that in a situation where multiple causes contribute to a claim, the proximate cause is the mechanism that set in motion a chain of events that led directly to the claim, without relying on another intervening mechanism. This is important in determining what events may be covered by specific policies. For example, if a flood causes a short circuit that causes a fire, the flood is a proximate cause of the claim. The flood insurance policy may cover the damage.

References

• School of Economic and Business Sciences: General Principles of Insurance
• FindLaw: Insurance Law: What is a Subrogation Action?

Resources

• National Association of Insurance Commissioners