In this brief discussion we will give you the basic highlights on some of the insurance principles. Even though insurance is basically governed by the Insurance Policy signed among the signatory parties and the pertinent Insurance laws of the country, the basic Insurance principles of the country will also be considered as parts of an Insurance Policy. So lets discus some points on principles of Insurance.
According to the Ethiopian Commercial Code, a code governing Insurance policies, an Insurance policy is “a contract whereby a person called the insurer, undertakes against payment of one or more premium to pay to person, called the beneficiary, a sum of money where a specified risk materializes. Among the fundamental principles of insurance, The Principles of Insurable Interest, Indemnity, Utmost Good Faith and Proximate Cause are the fundamental ones.
The Principle of Utmost Good Faith
A person who applies for insurance is usually given an application form containing questions about the nature of risk. If the applicant wants insurance on property, the form will call information as to the age, the use description and condition of the property, as well as its location and value or cost. An application for life insurance calls for such facts as to the age, occupation and habits of the applicant, any prior illness or accidents, and the health of the applicant’s parents.
The insurer decides to accept or not to accept the application (offer) based on the information given. The insurer decides to accept or not to accept the application (offer) based on the information giving all necessary information to the insurer. The beneficiary (the insured) must give any information within his knowledge to the insurer. In other words, the beneficiary must disclose (reveal) all relevant facts about the thing or life to be insured. Relevant facts means, facts that may help (assist) the insurer to determine the amount of premium to be charged. The information given must be true.
Failure to disclose such facts is fraud. So there must be utmost good faith regarding insurance contract.
The Principle of Insurable Interest
According to the commercial code of Ethiopia, any interested person, in the preservation of an object may insure it. A person who buys insurance policy must have an insurable interest in the property or in the life insured. An insurable interest is the financial interest or financial stake that a person has in the property or in the life of another or his health. Any person who would suffer a direct financial lose if certain property were damaged or destroyed has an insurable interest in such property. Such a person need not be the owner but may be someone who has a security interest. In property insurance, there some common classes of circumstances that give rise to insurable interest. They are ownership and other rights in property, contract rights, and potential legal liability to others. Every person has insurable interest in his or her own life. A person may have an insurable interest in the life of another, if their relationship is such that an economic benefit can be expected from the continued life of another. An agreement without insurable interest is invalid because a person who has nothing to lose and everything to gain might be tempted to cause the destruction of the insured property or the death of the insured person so that the policy holder would be entitled to the proceeds of the insurance.
The Principle of Indemnity
In the commercial code of Ethiopia, it is stated that contract for the insurance of an object is a contract for compensation. The compensation shall not exceed the value of the object insured on the day of the occurrence. The principle of indemnity/compensation is based on the idea that insurance is a system for distributing loss. It is not a mechanism of generating profit. There fore, in the event of causality, an insured be limited to reimbursement (indemnity) for loss actually suffered. You may not be compensated above the loss. The value of property may be assessed on the day the policy is bought and on the day loss occurs. But the human life can not be expressed in terms of money.
Accordingly, the principle of indemnity does not apply to life insurance policy. The amount inured may be fixed freely and shall be due regardless of the damage suffered by the insured person.
The Principle of Proximate Cause
The doctrine of proximate cause is based on the principle of cause and effect, which states that having proved the effect and traced the cause, it is not necessary to go further. In other words the law doesn’t concern itself with the cause of causes. The law provides the rule -“causa proxima nonremota spectator”. It means we should regard only the immediate cause not the remote or distant cause.
So we can summarize the concept into the following details. The insured peril need not be the initial cause but it must be a direct result of the operation of an excepted peril (unless the policy wording specifically overrules this).
According to this insurance policy Damage as the direct result of an insured peril is covered even though the immediate peril causing that damage is not mentioned in the policy ( unless the policy specifically excludes the result); thus water or smoke damage after fire are covered. Property can be covered even though the named peril does not actually cause damage to the insured property, so long as the named peril does not operate and its results cause loss to the insure. For example, if the building next door to the insure catches fire and the only damage the insured suffers is by water or smoke, his fire policy will operate (provided the original fire was not caused by a peril named as excluded in the insured’s policy). Further damage to attempts to minimize a loss already taking place, is covered. Therefore, water damage from sprinklers or firemen’s hose is covered.
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