These are the rules that guide the conduct of the insurance business. They distinguish insurance from other types of businesses.
Insurable interest
This is the legal right to insure arising out of a financial relationship between the proposer and the subject matter of insurance. The financial interest upon that insured subject matter becomes the basis of the insurance contract.
Utmost good faith
The principle of utmost good faith means that both the insurer and the insured must be honest and transparent when dealing with each other. This means that the insured must provide accurate information about themselves and the risks they want to insure, while the insurer must clearly explain the terms and conditions of the policy.
Proximate cause
The principle of proximate cause states that an insurance company will pay for a loss only if it was directly caused by a covered event or risk. In other words, there must be a clear link between the cause of the loss and the risk that the insurance policy covers.
Indemnity
The principle of indemnity is the one that states the purpose of insurance. To place the insured in the same financial position they were in immediately before the loss.
Subrogation
Subrogation is the right of an insurer, following payment of a claim, to take over the insured’s rights to recover payment from a third party who may have been responsible for the loss. The principle of subrogation operates in favour of insurer in order to prevent the insured from recovering more than a full indemnity. It is limited to the amount paid out under the policy.
Contribution
The principle of contribution applies when a person has multiple insurance policies covering the same risk. If a claim is made, the insurer that is paying the claim can ask the other insurers to share the cost. For this principle to work, all the insurance policies must be active at the time of the loss. This principle does not apply to life insurance.