Principles of Insurance

The 7 Principles of Insurance Contracts:
There are seven basic principles that create an insurance contract between the insured and the
insurer:
1. Utmost Good Faith

2. Insurable Interest
3. Proximate Cause
4. Indemnity
5. Subrogation
6. Contribution
7. Loss Minimization
These 7 principles combine to form an insurance contract. In this blog we are going to briefly
explain each item and try to show you how understanding each item can shed light into your
personal injury case and insurance questions. These are principles open to interpretation. So if
you think your case has breached one of these principles or your insurance claim has wrongfully
been denied. Jason McMinn and Justin McMinn for help understanding your rights.
Being able to understand these 7 principles will give you the tools you need to advocate for your
rights,
The Principle of Utmost Good Faith
 Both parties involved in an insurance contract—the insured (policy holder) and the insurer (the
company)—should act in good faith towards each other.
 The insurer and the insured must provide clear and concise information regarding the terms and
conditions of the contract
This is a very basic and primary principle of insurance contracts because the nature of the service
is for the insurance company to provide a certain level of security and solidarity to the insured
person’s life. However, the insurance company must also watch out for anyone looking for a way
to scam them into free money. So each party is expected to act in good faith towards each other.
If the insurance company provides you with falsified or misrepresented information, then they
are liable in situations where this misrepresentation or falsification has caused you loss. If you
have misrepresented information regarding subject matter or your own personal history, then the
insurance company’s liability becomes void (revoked).
The Principle of Insurable Interest
Insurable interest just means that the subject matter of the contract must provide some financial
gain by existing for the insured (or policyholder) and would lead to a financial loss if damaged,
destroyed, stolen, or lost.
 The insured must have an insurable interest in the subject matter of the insurance contract.
 The owner of the subject is said to have an insurable interest until s/he is no longer the owner.
In auto insurance, this will most times be a no brainer, but it does lead to issues when the person
driving a vehicle doesn’t own it. For instance, if you are hit by a person who isn’t on the
insurance policy of the vehicle, do you file a claim with the owner’s insurance company or the
driver’s insurance company? This is a simple but crucial element for an insurance contract to
exist.
The Principle of Indemnity
 Indemnity is a guarantee to restore the insured to the position he or she was in before the
uncertain incident that caused a loss for the insured. The insurer (provider) compensates the
insured (policyholder).
 The insurance company promises to compensate the policyholder for the amount of the loss up
to the amount agreed upon in the contract.
Essentially, this is the part of the contract that matters the most for the insurance policyholder
because this is the part of the contract that says she or he has the right to be compensated or, in
other words, indemnified for his or her loss.
The amount of compensation is in direct proportion with the incurred loss. The insurance
company will pay up to the amount of the incurred loss or the insured amount agreed on in the
contract, whichever is less. For instance, if your car is inured for $10,000 but damages are only
$3,000. You get $3,000 not the full amount.
Compensation is not paid when the incident that caused the loss doesn’t happen during the time
allotted in the contract or from the specific agreed upon causes of loss (as you will see in The
Principle of Proximate Cause). Insurance contracts are created solely as a means to provide
protection from unexpected events, not as a means to make a profit from a loss. Therefore,
the insured is protected from losses by the principle of indemnity, but through stipulations that
keep him or her from being able to scam and make a profit.
The Principle of Contribution
 Contribution establishes a corollary among all the insurance contracts involved in an incident or
with the same subject.
 Contribution allows for the insured to claim indemnity to the extent of actual loss from all the
insurance contracts involved in his or her claim.
For instance, imagine that you have taken out two insurance contracts on your used Lamborghini
so that you are covered fully in any situation. Let’s say you have a policy with Allstate that
covers $30,000 in property damage and a policy with State Farm that cover $50,000 in property
damage. If you end up in a wreck that causes $50,000 worth of damage to your vehicle. Then
about $19,000 will be covered by Allstate and $31,000 by State Farm.
This is the principle of contribution. Each policy you have on the same subject matter pays their
proportion of the loss incurred by the policyholder. It’s an extension of the principle of
indemnity that allows proportional responsibility for all insurance coverage on the same subject
matter.
The Principle of Subrogation
This principle can be a little confusing, but the example should help make it clear. Subrogation is
substituting one creditor (the insurance company) for another (another insurance company
representing the person responsible for the loss).
 After the insured (policyholder) has been compensated for the incurred loss on a piece of
property that was insured, the rights of ownership of this property go to the insurer.
So lets say you are in a car wreck caused by a third party and your file a claim with your
insurance company to pay for the damages on your car and your medical expenses. Your
insurance company will assume ownership of your car and medical expenses in order to step in
and file a claim or lawsuit with the person who is actually responsible for the accident (i.e. the
person who should have paid for your losses).
The insurance company can only benefit from subrogation by winning back the money it paid to
its policyholder and the costs of acquiring this money. Anything paid extra from the third party,
is given to the policyholder. So lets say your insurance company filed a lawsuit with the
negligent third party after the insurance company had already compensated you for the full
amount of your damages. If their lawsuit ends up winning more money from the negligent third
party than they paid you, they’ll use that to cover court costs and the remaining balance will go
to you.
The Principle of Proximate Cause
 The loss of insured property can be caused by more than one incident even in succession to
each other.
 Property may be insured against some but not all causes of loss.
 When a property is not insured against all causes, the nearest cause is to be found out.
 If the proximate cause is one in which the property is insured against, then the insurer must pay
compensation. If it is not a cause the property is insured against, then the insurer doesn’t have
to pay.
When buying your insurance policies, you will most likely go through a process where you select
which instances you and your property will be covered for and which ones they will not. This is
where you are selecting which proximate causes are covered. If you end up in an incident, then
the proximate cause will have to be investigated so that the insurance company validates that you
are covered for the incident.
This can lead to disputes when you have suffered an incident you thought was covered but your
insurance provider says it’s not. Insurance companies want to make sure they are protecting
themselves but sometimes they can use this to get out of being liable for a situation. This might
be a dispute where you’ll need a lawyer to help argue for you.
The Principle of Loss Minimization
This is our final principle that creates an insurance contract and the most simple one probably.
 In an uncertain event, it is the insured’s responsibility to take all precautions to minimize the
loss on the insured property.
Insurance contracts shouldn’t be about getting free stuff every time something bad happens.
Therefore, a little responsibility is bestowed upon the insured to take all measures possible to
minimize the loss on the property. This principle can be debatable, so call a lawyer if you think
you are being unfairly judged under this principle.

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The 7 Principles of Insurance Contracts:

1. Utmost Good Faith

The Principle of Utmost Good Faith

The Principle of Insurable Interest

The Principle of Indemnity

The Principle of Contribution

The Principle of Subrogation

The Principle of Proximate Cause

The Principle of Loss Minimization

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