The Principles of Insurance
This website is to summarise part of Chapter 15 (Managing a Business and a Household: Insurance), from Inside Business. It is important to remember that these rules are not to broken, or else the insurance policy will be unvalid and no compensation will be paid.
Insurable Interest
If an individual wants to insure their own valuable, they must own the item to be insured. They must benefit from its existence and suffer financially from its loss. An individual cannot insure an item they do not own themselves, e.g: their neighbour's house, as they wouldn't suffer from its loss.
Utmost Good Faith
When an individual is completing a proposal and claim form for insuring a valuable item, they must be completely truthful about the information they gave. This will also include material facts that will not be asked on the form, but will affect the amount of premium or compensation to be paid.
Indemnity
An individual cannot make a profit from insurance, thus they cannot be better off after a loss they have occurred than before the loss happened. The insurer will only pay compensation to the value of the loss suffered, and it is the responsibility of the insured to ensure that they adequately cover their insurance. An under-insured item will have the rule of average clause applied if a loss occurs. The firm will pay the amount for which the item was insured.
If there is partial loss, this calculation is applied when calculating the amount of compensation to be paid:
Amount item insured for x Claim
Real value of the item
Contribution
If a household or business attempts to make a profit from an insurance claim by insuring an item with two or more firms, any compensation payable will be divided between them in proportion to the value insured with each. The claim is made to one insurance company, which then recovers a proportion of the claim from the other insurance company/companies.
This will ensure that the insured cannot make a profit by insuring an item with more than one insurance company with the hope of making a full claim under each policy.
If a loss occurs, this formula is used by the insurance company to calculate the amount of compensation to be paid by each company the claimant is insured with for the particular insurable interest:
Amount item with insurance company x Claim
Total amount insured (all insurance companies)
Subrogation
Once an individual has received compensation, they give up their rate to make any further claims. The insurance firm can pursue the business or individual that caused the damage for compensation.
Why create the Principles of Insurance?
In my opinion, I believe the Principles of Insurance was created to prevent individuals or businesses from completely botching the economy by attempting a profit off insurance claims. While personally, I don't mind the idea existing, I do feel as if these principles only affect the people who aren't well off (the 99%), rather than the 1% (the individuals who are rich.) Still, the Principles of Insurance serve their purpose well; to prevent easy manipulation of insurance firms to gain a profit, (in my opinion.)
Here are links to the other lesson summaries that I have created.
Chapter 14
Section 1
Section 2
Section 3
[Section 4]