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7 Key Principles of Insurance Explained: Everything You Need to Know
Insurance principles – principles of insurance – 7 principles of insurance – Insurance is a vital part of financial planning, but do you really understand how it works? Whether you’re buying life, health, or car insurance, every policy is built on the 7 key principles of insurance. These principles are the foundation of trust, fairness, and legal protection between you and your insurer.
In this guide, we’ll break down each principle in simple terms so you know exactly what to expect — and what’s expected of you.
1. Utmost Good Faith (Uberrimae Fidei)
This principle requires both the insurer and the insured to act honestly and disclose all relevant facts. When applying for insurance, you must provide accurate information about your health, lifestyle, or property — hiding details can void your policy.
Why it matters:
Without honesty, insurance can’t function. Your premium and coverage are based on the information you provide.
2. Insurable Interest
You can only insure something if you’ll suffer a financial loss when it’s damaged or lost. For example, you can insure your own car or home, but not your neighbor’s.
Why it matters:
This principle prevents people from taking out insurance policies on things they don’t own or have no stake in.
3. Indemnity
Indemnity ensures that you’re compensated for your loss — no more, no less. The goal is to restore you to your original financial position, not to help you profit.
Why it matters:
It keeps insurance fair and prevents fraud or overcompensation.
4. Contribution
If you have multiple policies covering the same item or risk, the insurers will share the payout. You can’t claim the full amount from each one.
Why it matters:
This prevents people from collecting double compensation and promotes fairness among insurers.
5. Subrogation
After paying your claim, the insurer gains the legal right to recover the money from a third party responsible for the loss. For example, if someone crashes into your car and your insurer pays you, they can then claim that money back from the at-fault driver.
Why it matters:
It helps insurers minimize losses and keeps premiums affordable for everyone.
6. Proximate Cause
This principle looks at the main or closest cause of the loss to determine if the policy covers it. Only claims from insured risks are valid.
Why it matters:
It clarifies how claims are handled, especially when multiple factors contribute to a loss.
7. Loss Minimization
The insured must take all reasonable steps to minimize loss or damage, even after the insurance is in place. For example, if your house catches fire, you should call the fire department — not just rely on the insurer.
Why it matters:
Insurance is not a license to be careless. Your responsibility doesn’t end when you buy a policy.
Final Thoughts
Understanding the 7 key principles of insurance helps you become a more informed policyholder. These principles protect both you and your insurer, ensuring trust, fairness, and clarity.
Need help choosing the right policy?
Start by reviewing your existing plans and checking whether you’re fulfilling these principles. It could save you money — and a lot of headaches down the road.
Frequently Asked Questions
Q: Why are the principles of insurance important?
A: They form the legal and ethical foundation of all insurance contracts.
Q: Can a claim be denied if I break one of these principles?
A: Yes. For example, if you hide information (breach of utmost good faith), your claim may be denied.
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