The transfer of the risk of a loss from one entity to another in exchange for payment is called insurance. Therefore, insurance is a form of risk management, principally used to prevaricate against the risk of a conditional, doubtful loss. An insurance carrier or insurer is a company selling the insurance while the policy holder or the insured is the entity or the individual buying the insurance policy. Premium is the amount to be charged for a particular amount of insurance coverage.
In an insurance contract, the insured will assume a guaranteed and known relatively small loss in form of payment to the insurer in exchange for the insurer’s promise to indemnify (compensate) the insured in the event of personal or financial loss. You as the insured will thereby receive a contract known as the insurance policy that contains the circumstances and conditions on which you, being the insured will be compensated financially.
Insurance contract entails collecting funds from numerous exposures or insured entities to pay for the losses that some may incur. Therefore, the insured entities are protected from risk for a certain amount of money that depend upon the severity and frequency of the event happening. However, the risk insured against must meet certain distinctiveness for it to be insurable. Although, insurance is a major part of of financial services and a commercial enterprise, individual entities can equally self-insure by saving money for possible future losses.
The Legal Principles of Insurance
There are usually some basic legal requirements when a company insures an individual entity. Therefore, common cited legal principles of insurance are as highlighted below;
This means that in the event of certain losses up to the insured’s interest, the insurance company compensates or indemnifies.
Irrespective of whether property or insurance on a person is involved, insurable interest must exist. The theory necessitates that the insured have a “venture” in the damage or loss to the life or property being insured. What is “venture” or stake will be determined by the insurance type involved as well as the relationship between the persons and the property ownership. What distinguishes insurance from gambling is the requirement of an insurable interest.
Utmost Good Faith
In this case, it is mandatory that the insured disclose all material facts relating to the insurance contract. The utmost good faith principle stipulated that the insured and the insurer are bound by a good faith bond of fairness and honesty.
Insurers with similar commitments or obligations to the insured contribute in the indemnification in accordance with some methods.
This simply means that the insurer gets hold of legal rights to pursue recoveries on behalf of the insured.
This is also known as proximate or the peril cause of the loss, and must be covered under the insuring agreement of the policy which must not exclude the dominant cause.
In case of mitigation, the owner of the asset must make an effort to keep loss to a minimum as if the asset was not insured, in case of any casualty or loss.