Introduction

The 6 principles of Insurance are:

O Utmost good faith
O Insurable interest
O Indemnity
O Contribution
O Subrogation
O Proximate cause
 Introduction
O Why do we need to examine those
principles?

O Insurance contract is quite different from

other business contracts.

O Our focus:
• Duties of the parties involve
• Legal consequences of breaching rules
Principle of Utmost Good Faith
O The insurance contract should be signed by
both parties (the insured and insurer) in an
absolute good faith towards each other.

O The insured must disclose fully and

accurately all material facts.

O The insurer must provide the insured

complete, correct and clear information
regarding terms and conditions of the
contract.
Principle of Utmost Good Faith
O What is a material facts?

A fact which will influence the prudent

underwriter in accepting the risk or fixing
the premium.

The insurer’s liability gets void if any facts

about the subject matter of insurance are
omitted, hidden, falsified or presented in a
wrong manner by the insured.
Principle of Utmost Good Faith
O Duration of duty of utmost good
faith:

O It lasts until the completion of the

insurance contract.

O Any changes should be notify.

Principle of Utmost Good Faith
O Breaches of Utmost Good Faith:

i. Fails to provide the insurer with

information relating to the material fact
(non-disclosure)

ii. Misrepresent a material fact

(misrepresentation)

O This principle applies to all types of insurance

contracts.
Principle of Insurable Interest
O The insured must have insurable
interest in the subject matter of
insurance.

O The insured must suffer some financial

loss by the damage of the insured
object.

O In life insurance it refers to life insured.

Principle of Insurable Interest
O Example:
The owner of a taxi has insurable
interest in the taxi because he is
getting income from it. But, if he sells
it, he will not have an insurable
interest left in that taxi.
Principle of Insurable Interest
 A right to insure arise out of legally
recognizes financial interest which a
person has in the subject matter of
insurance.

 A legally recognized financial interest

is a financial interest that is
recognized under the common law or
statute.
Principle of Insurable Interest
When must Insurable Interest exists?

O In fire and general insurance: It must be

present at the time of taking policy and also at
the time of the occurrence of loss.

O In life insurance: it must exist at the time of

inception.

O In marine insurance: it must exist at the

time of loss.
 Principle of Indemnity
O Indemnity = security, protection and compensation
given against damage, loss or injury.

O An insurance contract is signed only for getting

protection against unpredictable financial losses
arising due to future uncertainties.
O The insured shall be restored to the same financial
position after the loss as he has enjoyed before it.
O The effect – to prevent the insured from making a
profit out of loss

O Insurance contract is not made for making profit.

 Principle of Indemnity
O The amount of compensation is
limited to the amount insured or the
actual losses (whichever is less).

O Compensation is not paid if the

specified loss does not happen due
to a particular reason during a
specified time period.
 Principle of Indemnity
O 4 methods of Indemnity:
i. Cash – most common
ii. Repair
iii. Replacement
iv. Reinstatement

O This principle does not apply to life

insurance as the value of human life
cannot be measured in terms of money.
 Principle of Indemnity
O Measure of Indemnity
O Total Loss:
O Method 1: reinstatement / replacement
cost
O Method 2: market value of the
destroyed property

O Partial Loss:
O Cost of repair
 Principle of Indemnity

Factors
limiting
indemnity
Average
Sum Policy franchis
conditio
insured excess e
n
 Principle of Indemnity
O Sum insured
O The insured cannot recover more than
the sum insured.

O Average Condition
O Reduce the amount payable to insured
O SUM INSURED X AMOUNT
OF LOSS
VALUE OF PROPERTY
 Principle of Indemnity
O Policy excess
O The amount which is not covered.

O Franchise
O A policy with a franchise may prevent
an indemnity from being provided
unless the amount to be claimed from
the insurer exceeds the franchise.
Principle of Indemnity
Reinstatemen
t policy

Policy
which
pay
more
than
indemni
Agreed ty
additional Valued
costs policies
 Principle of Contribution
O The principle is a corollary of the
principle of indemnity. It applies to
all contracts of indemnity.

O Under this principle, the insured who

has taken more than one policy
on the same subject matter can
claim the compensation only to the
extent of actual loss either from any
one insurer or all the insurers
 Principle of Contribution
O Example:

Mr. A insure his RM600,000 house with:

insurer X for RM200,000
insurer Y for RM200,000
insurer Z for RM200,000
Let say the amount of loss is RM90,000.
So, each insurer will contribute
RM30,000 each.
 Principle of Contribution
O Calculation:

Value insured = sum X + sum Y + sum Z

= 200,000 + 200,000 + 200,000
= RM600,000

% of contribution for each insurer:

= [sum X / Value insured] x 100
= [200,000 / 600,000] x 100 = 33.33%

Contribution X = % of contribution x Total loss

= 33.33% x RM90,000 = RM30,000
 Principle of Subrogation
O Subrogation = taking the rights belonging to an
insured by the insurer, after the insurer has
indemnified the insured.

O The principle is a corollary of the principle of

indemnity. It applies to all contracts of indemnity.

O When the insured is compensated for the losses

due to damage to his insured property, then the
ownership right of such property shifts to the
insurer.
 Principle of Subrogation
O It is applicable only when the
damaged has any value after the
event causing the damage.

O The insurer can be benefit out of

subrogation rights only to the extent
of the amount he has paid as
compensation.
 Principle of Subrogation
O Example:

En. Ali insures his house for RM1 million. The house is totally
destroyed by the negligence of his neighbour En. Abu.

The insurance company shall settle the claim of En. Ali for
RM1 million.

At the same time, it can file a law suit against En. Abu for
RM1.2 million (the market value of the house).

If the insurance company wins the case and gets RM1.2

million from En. Abu, then the insurance company will retain
RM1 million and other expenses regarding the case. The
balance amount (if any) will be given to En. Ali.
Principle of Proximate Cause
O When a loss is caused by more than
one causes, the proximate (nearest /
closest) cause should be taken into
consideration to decide the liability
of the insurer.

O To find out whether the insurer is

liable for the loss or not, the
proximate cause and not the remote
cause must be looked in.
Principle of Proximate Cause
O Example:

A ship’s base has holes due to rats and so sea

water entered into the ship and the ship was
damaged. Two causes:
i. Holes because of rats
ii. Sea water entered the ship through the holes

The risk of sea water is insured but the 1 st cause

was not. The nearest cause is sea water and
therefore the insurer must pay the compensation.
Tutorial
1. Discuss the contractual duty of
utmost good faith.

2. What are the factors limiting

indemnity?

3. State the conditions for the

application of contribution.