Welcome to the introduction to insurance principles. There are some basic principles that govern the conduct of insurance. We are going to look at each of them briefly. The principles of insurance are: 1. indemnity, 2. average, 3. subrogation, 4. proximate cause, 5. contribution, 6. utmost good faith, and 7. insurable interest. Let's start with indemnity. Indemnity requires that an insurer must place the insured in the same financial position as he was in before the loss. An insured cannot make a profit from the loss. In the event of total loss of a car in a car accident, the insured will be paid out the value of the vehicle less any applicable excess. The second principle we will look at is average. The application of average is the method which insurers use to deal with underinsurance. In the event of underinsurance, the insured is paid proportionately and not paid in full. The calculation used to settle a claim in the event of underinsurance is the sum insured divided by the actual value of the property times the value of the loss.

suffered. This concept is best understood with the use of an example. An insurance factory value is 25 million, and they insured only the property for seventeen million. A fire occurs, and damage is suffered to the value of 1 million one hundred and twenty thousand. Using our calculation, the sum insured is divided by the actual value of the property, the value of the loss suffered. The settlement is therefore 760 1,600 Rand. In this case, the policyholder ensured 68% of the building's value and has been paid 68% of the cost of repairs. Number three, subrogation. Subrogation is the right that the insurer has to stand in the place of the insured when a claim is notified. Let us look at how subrogation plays out practically. First instance, in the event of a claim, the insurer will recover monies from a third party that is legally liable for the damage. For example, a third party causes a motor car accident. The insurer will attempt to recoup the value of the

damages from the third party. The second way subrogation applies is the insurer has the right to sell any salvage. For example, a motorcar is written off in an accident. The insurer settles the claim by paying the insured the value of the claim less the excess. Then, sure enough, has the right to sell the salvage to recoup some of their expenses. Now we will look at the principle of proximate cause. An insurance policy will cover some events and exclude some events. When handling a claim, the following questions need to be answered: Is the cause of the loss an insured peril? Is the cause excluded by the policy? Has a new source intervened in the chain of events? The definition of proximate cause is the active efficient cause that sets in motion a train of events that brings about a result without the intervention of any force started and working actively from a new and independent source. A mouthful, right? Let's look at two examples to better understand this important principle. Occurs, the fire department arrives and attempts to put the fire out and in the

process causes water damage to the contents of the building. The proximate cause is the fire, not the water damage. A second example: a car is damaged in an accident and taken to a panel beater for repairs. The car is subsequently stolen at the panel beater. What is the proximate cause of the loss? The proximate cause in this instance is theft and not the motor accident. Now on to number five: contribution. If at the time of the event giving rise to a claim, insurance exists with any other insurers covering the insured against the same defined events, the insurance company is liable to make good only a ratable proportion of the amount payable to the insured in respect of such event. What does all of this mean? Well, in the event of a claim, the insured cannot make a profit from the loss. If the insured has insurance with one or more insurers, they cannot claim from both insurers for the full amount of the loss. Let's look at an example to understand this better: a property is valued at a million rand, and the insured takes out a policy with

insurer A and insurer B on both policies. The sum insured is 1 million. A claim happens, and the loss is to the value of 50 thousand rand. Each insurer will pay 50% of the loss, that is, 25 thousand rand each. The insured cannot claim 50 thousand rand from insurer A and 50 thousand rand from insurer B and thereby make a profit from the claim. Short-term insurance policies are contracts of indemnity. Things are different when it comes to life policies. You cannot place a monetary value on a human life, and therefore, contribution does not apply to life policies. Number six, good faith. When a house is sold, unless a seller is asked a particular question, the selling need not say anything about potential issues, for example, a leaking roof. Caveat emptor applies, meaning buyer beware. Insurance is different. The proposer has all the facts that would influence the underwriter's decision on whether or not to accept the risk and what premium to charge. These facts are called material facts and must be disclosed by the insured. Facts that are not material do not need

to be disclosed. This principle works both ways. The insurer must also disclose material facts to the insured. An example of a material fact is details of any previous claims. If the insured is 32 years old and in error ages 33 on the proposal form for household content insurance, this would not be considered a material fact as it would not impact on whether an insurer takes on the risk and at what premium. However, age would be a material fact if the insured is under 25 and proposing for motor insurance cover, as this fact will have a material impact on the risk. And finally, number 7 insurable interest. There needs to be a legally recognized relationship between the insured and the financial loss that he suffers following a loss. This is called insurable interest. You have insurable interest in your house and may insure your house and claim in the event of loss because you have suffered the financial loss. You cannot insure your neighbor's house as you have no insurable interest in his house. The need for insurable interest is the single most important difference between an insurance contract and

gambling. So, one must ensure that interest applies well. It is different depending on the type of claim. In fire accident and motor claims, insurable interest must exist when the policy is issued, at the time of the loss, and at renewal of the policy. In marine insurance, because the ownership of the cargo changes during the course of a voyage, insurable interest must exist at the time of loss. With life policies, there needs to be insurable interest when taking out the policy. Thank you for taking the time to watch our video. Don't forget there are tons more learning experiences awaiting you at WWN coa.

Principles of Insurance

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