The seven basic principles of insurance form the foundation of how insurance operates and helps ensure fairness, clarity, and stability in risk management. Here they are:
- Principle of Utmost Good Faith (Uberrimae Fidei)
Both parties (the insurer and the insured) must act honestly and disclose all material facts that could affect the policy. The insured must disclose all relevant information about the risk being insured, and the insurer must provide clear terms and conditions. - Principle of Insurable Interest
The insured must have a financial or legal interest in the subject matter of the insurance. This means that the insured would suffer a financial loss if the insured event occurs (e.g., loss of property, injury, etc.). Without insurable interest, an insurance contract would be void. - Principle of Indemnity
The purpose of insurance is to restore the insured to the same financial position they were in before the loss occurred, but not to make a profit. The principle ensures that the insured is compensated only for their actual loss, preventing overcompensation. - Principle of Contribution
If the insured has multiple insurance policies covering the same risk, the insurers share the compensation based on their respective policy limits. This principle prevents the insured from claiming more than the actual loss amount and ensures fairness in cases of multiple policies. - Principle of Subrogation
After the insurer compensates the insured for a loss, the insurer gains the right to recover the amount paid from the responsible third party. This principle prevents the insured from receiving compensation from both the insurer and a third party for the same loss. - Principle of Loss Minimization
The insured has a duty to take reasonable steps to prevent or reduce further loss after an insured event occurs. Failure to do so may result in a reduction or denial of the claim. - Principle of Proximate Cause
For an insurance claim to be valid, the loss must be caused directly by an insured peril (event or situation covered under the policy). The proximate cause principle ensures that the insurer only pays for losses directly related to the covered risk, not those caused by unrelated factors.
These principles work together to maintain fairness, prevent fraud, and ensure that insurance operates as intended—providing protection against financial loss while remaining a system of shared risk.
