What Are the Basic Insurance Principles?

There are seven basic principles of insurance, which include subrogation, insurable interest, contribution and utmost good faith; in addition to indemnity, nearest cause and minimization of loss. These principles are meant to safeguard insurance contracts.

The insurable interest principle is that the insured party must have an interest in the property insured and is likely to suffer financial loss if the insured property is damaged or lost. The principle of utmost good faith, also known as uberrimae fidei, states that an insurance contract must be based on good faith. Any form of misrepresentation or fraud renders an insurance contract void. The principle of indemnity stipulates that the insured party can only be indemnified to the extent of the economic loss suffered; therefore, the amount compensated should be equal to the actual loss suffered.

The principle of subrogation allows the insured party to claim compensation from a third party who may be responsible for the loss suffered. This also allows the insurer to use legal means to recover the loss after settling the insured's claim. The principle of contribution is used if the insured took more than one policy to cover the same property and provides that the insured can only be compensated to the extent of his loss. Therefore, if one insurer settles the insured's claim, that insurer can pursue proportionate claims from all the other insurers involved.

The principle of minimization of loss stipulates that the insured must try to minimize, whenever possible, any loss that occurs on insured property. The principle of nearest cause, also known as causa proxima, provides that if a loss has multiple causes, the closest cause is applied in determining the insurer's liability.