Insurance companies always take risk whenever they write an insurance policy to a client. The problem with some clients is that they intentionally attempt to dupe insurance companies and commit fraud so they could benefit from earning money from the claims they make from the insurer. In order to combat fraud and safeguard their interest, insurance companies came up with six principles of insurance. This prevents and protects them from having to pay clients who have maliciously intended to commit fraud for the purpose of personal gain.
Utmost Good Faith – this principle states the good faith of the insurer that the client fully discloses everything about the item they are insuring. In doing so, the insurer can properly assess the value of what is being insured and its relative risk. Proper disclosure is necessary as this is a measure of good faith between the insurer and the client.
Insurable Interest – this principle states that the client insures something of importance or value to them. Insuring something that is not deemed as valuable to the client can be roughly considered as an attempt to commit fraud as they would not really lose any sleep even at the loss of the item they have insured.
Indemnity – the insurer will only pay what amounts to the value of cost of repairs or replacement and not a cent more. Under this principle, once given claims, the insurer indemnifies that the insured item is now at its pre-damaged state.
Proximate Cause – since there are different coverage per insurance type, in the eventuality that the loss or damage of the insured item occurs, if the result comes a different coverage that is not within the coverage policy of the policyholder, the insurance company will deny and refuse any claims made by the policyholder.
Subrogation – under this principle, if damage is caused by a third party, the insurer will still provide claims for the damages made. However, the insurer will sue the third party to compensate their loss for the claims given to the policyholder. Normally, the amount of compensation they require is more than double than the amount they have lost from the claims.
Contribution – this principle states that a policyholder cannot have the same policies with different insurers. If an eventuality do arise and claims need to be given, only one insurer will provide claim and the amount will be shared by both insurers.