TOPIC 4:

THE PRINCIPLES OF
INSURANCE
 Learning objectives
 Define the principle of insurable interest and discuss its importance
 Define the principle of indemnity and explain how insurance companies uphold the
principle of indemnifying their insured
 Define the principle of utmost good faith and explain facts which are material to
the contract
 Define the principle of subrogation and describe how subrogation arise
 Define the principle of contribution and determine how to derive with the amount
of contribution
 Define the principle of proximate cause and explain how it works
 Principles of Insurance

01 02 03
Insurable Utmost good Proximate
interest faith cause

04 05 06
Indemnity Subrogation Contribution
 Insurable interest
Defined as the right A legally recognized
to insure arising out financial interest is
of legally recognizes a financial interest
financial interest that is recognized
which a person has in under the common law
the subject matter of or statute.
insurance.

Thus a person whose

financial interest in
the subject matter of For example, a thief
insurance is not could not insure the
recognized by the law goods he stole.
does not have
insurable interest.
 Subject matter of
insurance is the life,
limb, property, rights
or any potential legal
liability insured Subject matter of
under a policy. contract is the
insured’s financial
interest subject
matters of insurance.
 Assignment

Transfer of rights
and liabilities of
the insured to a new Assignee, the person who
insured takes over the
assignments will have no
better rights than those
enjoyed by the assignor.
 Prior consent

General rule; Prior consent is

required before an assignment of a
policy can be affected.

For example: The vendor of a house

cannot assign his fire policy to
the purchaser unless the insurer
concerned agrees to the
substitution of the vendor by the
purchaser as the new insured .
 Utmost good faith
 The duty of utmost good faith is a positive duty (of the insured) to
disclose fully and accurately all material facts that he (the insured)
knows or ought to know, whether asked for or not (by the insurer)
What is a material fact?

A material fact is
defined as a fact
which would influence
the PRUDENT
UNDERWRITER in
accepting the risk or
fixing the premium.
Duration of Duty of Utmost Good Faith

The duty to disclose material facts

lasts until the completion of the
insurance contract.

The proposer is required to notify

the changes to the insurer
otherwise the contract would be
voidable.

The duty of disclosure will

terminate upon the inception of
the contract.
Breaches of Utmost Good Faith

Utmost good faith

is breached if the
duty of disclosure
is not observed.

Fails to Misrepresent a
provide the material fact
insurer with i.e. providing
information the insurer
relating to the with incorrect
material fact, information
or relating to the
material fact.
 Proximate Cause

“Proximate cause means the

active, efficient cause that
sets in motion a train/chain
of events which brings about
a result, without the
intervention of any force
started and working from a
new and independent source”.
Proximate Cause Vs Remote Causes

The dominant cause

Frequently a i.e. the cause that
loss is preceded overshadowed the
by two or more other causes are
causes. deemed to be
‘remote causes’.
Indemnity

Insured shall be restored to

the same financial position
after the loss as he has
enjoyed immediately before it.

The object of the principle is

to ensure that the insured
after being indemnified shall
be either before the loss.

The effect of the principle is

to prevent the insured from
making a profit out of loss.
Method of Indemnity
Subrogation
Subrogation in the context The rights belonging to
of insurance can be the insured may include:
defined taking the rights those rights against third
belonging to an insured by parties who are also
the insurer after the liable for the loss which
latter has indemnified the is the subject of the
insured. claim and the right of the
insured in the salvage.

Subrogation is evolved to
support the principle of
indemnity.
 Why Is Subrogation Necessary?
Contribution

Contribution can be defined as the

amount which each insurer has to
contribute to the cost of a loss when
the loss is covered by two or more
insurers.

According to the principle of

contribution, an insurer who has
indemnified the insures, may call upon
the other insurers who are similarly
liable for the loss to contribute
towards the payment of indemnity.
 For example MrS. A insure her RM600,000 house with insurer X for RM200,000,
Insurer Y for RM200,000 and Insurer Z for RM200,000. In the event of claim, let say
the amount of loss is RM90,000, insurer X, Y and Z will apply the principle of
contribution. Therefore, EACH INSURER will contribute RM30,000.

Insurer X= RM200,000

Insurer y= RM200,000

Insurer Z= RM200,000

If anything happen, each insurer

RM600,000 will pay the claim based on the
percentage of cover
Why is contribution necessary

It follows naturally from

the principle of indemnity
that if the insured is
allowed to recover from
more than one insurer for
the same loss the insured Like subrogation, the principle
would be recovering more of contribution is evolved to
than his loss. support the principle of
indemnity
 Conditions for the application of
contribution
Contribution applies only when the following conditions are
fulfilled:

Two or more Cover a common Cover a common

policies of interest peril which gives
indemnity exist rise to the loss

Cover a common Each policy must be

subject matter liable for the
loss.
 ALI INSURE HOUSE
(RM100,000)
INSURER A= 30,000 Insurer A (FIRE)
(HOUSE)= RM?

INSURER B = 70,000 Insurer B (FIRE)

(HOUSE)= RM?

LOSS: RM20K
THE
END