INSURANCE II

PRINCIPLES OF INSURANCE

There are six main principles which underlie insurance contracts and which must be present for the contract to have validity. These principles are:

Table of Contents

INSURABLE INTEREST: The person who takes an out insurance policy (i.e. the insured) must have an interest in the subject matter of the insurance policy. This means that so far as the subject matter is concerned, the insured must have a benefit from its existence and it must be shown that he will suffer damage or injury from its loss e.g. the owner of a house is said to have insurable interest in that house but the tenant of the house has an insurable interest in his property within the house. The owner of the house can insure his house where as the tenant can only insure his property within the house.
UTMOST GOOD FAITH (i.e. UBERRIMAE FIDEI): Both parties to the insurance contract must deal openly and honestly with each other and disclose all relevant facts. It is essential that the insured tells all material facts which would affect the premium which the insurer charges. In other words, the contract of insurance is one of “uberrimae fidei” where the proposer(i.e the insured) must act with the utmost good faith and produce all relevant facts to the insurer. If, later the insured is found to have provided the insurer with incorrect information (e.g as to the age or value of the property) or to have concealed certain facts, then the contract of insurance can be declared null and void without return of premiums. The insurer too, must disclose the exact terms of contract as well as all material facts he has about the risk to the insured(i.e the proposer).
INDEMNITY: Indemnity is the compensation given to the insured by the insurer in the event of his suffering a loss. Under this principle, the insurance company will help to restore the insured to his former position before the loss occurred. All types of insurance are insurance of indemnity except life assurance and personal accident insurance. Under a contract of indemnity, the policy holder is entitled to be placed in the same position after a loss, as before it, so that he makes neither profit nor loss.
SUBROGATION: Subrogation refers to the right, which a person has to stand in the place of another and enjoy all the rights and remedies of that person. The principle states the insurer, having paid the claim to the insured, is entitled to stand in the place of the insured against other parties who have caused the injury on which the claim has been paid. The insurer is therefore entitled to benefit from any claims which the insured has against a third party which can be used to reduce the damage suffered. Therefore an insurer who has paid on a burglary claim is entitled to the stolen goods should such goods be recovered later. The right to step into the shoes of another applies to all contract of insurance except life assurance and personal accident policies.
CONTRIBUTION: Where a person insures the same risk with more than one insurer and if a loss is incurred, the insured can only recover to the extent of the loss and nothing more. This means he cannot claim compensation in full from each of the insurance companies and thereby make a gain or profit. Therefore each of the insurance companies (insurers) will pay a certain proportion of the loss. This principle does not apply to life assurance and personal accident policies.
PROXIMATE CAUSE: This principle explains that the person insured can only be indemnified if the loss was one that directly and immediately from the risk insured against. In other words there must be a close connection between the risk insured against and the cause of the loss. E.g. a claim for death benefits under a personal accident policy would only be paid if the insured died from accident and not from illness.

EVALUATION

Explain the principle of indemnity
Why is it not applicable to life policies?
Insurance may be described as a “ pooling of risks”. Explain what this statement means.

TYPES OF INSURANCE

There are various risks which a business should/could insure against. These constitute the various types of Insurance, namely: i) Bad debts ii) Goods in transit iii) Group insurance iv) Cash in transit v) Fidelity guarantee vi) Plate glass policy vii) Burglary, theft , robbery viii) Consequential loss ix) Employer liability x) Aviation insurance xi) Motor vehicle insurance xii) Fire xiii) Life insurance xiv) Marine insurance xv) Export credit guarantee xvi) Contractor all risk insurance xvii) Agricultural insurance xviii) Personal Accident insurance xix) Pension or superannuation schemes xx) Pluvius policy

EVALUATION

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List five types of insurance policies that can be taken by a trader.
State and explain three principles of insurance.

GENERAL EVALUATION QUESTIONS

Mention any five government legislations aimed at protecting the consumer
State any five sources of capital for a public limited company
Describe five services rendered by thrift societies to their members
Explain five problems of using rail transportation in Nigeria
Explain three ways by which banks grant credit to their customers

WEEKEND ASSIGNMENT

Which of the following does not permit the insured to make a profit out of insurance a) utmost good faith b) proximate cause c) insurable interest d) indemnity
The primary objective of insurance is to a) prevent accidents b) meet uncertainties in the future c) give loan to businessmen d) control the flow of cash
A tenant was not compensated along with the landlord when the house he was living in got burnt. This is in line with the principle of a) proximate cause b) subrogation c) insurable interest (d) indemnity
If an assured as taken an insurance policy against death by accident and actually dies of malaria fever, which of the following would prevent his beneficiary from being compensated a) subrogation b) proximate cause c) contribution d) insurable interest
The compensation made to an insured for loss incurred in insurance is called
a) commission b) interest c) indemnity d) premium