Principles of insurance

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What are the principles of insurance policy?

Principles of insurance – Are you a business owner, property owner, who wants to buy insurance for whatever reason or a student who is looking to explore the concept of insurance for a knowledge depth, etc.

If this appears like you, the very guide you are about to read will expose every necessary detail you should know in the most seamless way.

The first question you may want to ask is “What is insurance?”

The history of insurance dated back to the ancient world, however, the first forms of insurance was recorded in a coalition of the Babylonian and Chinese traders.

Similarly, the first types of insurance were formed by the Greeks and Romans at about 600 BC which provided care for the family of the deceased under life and health insurance.

What is insurance?

Insurance is a contract which subsists between two or more parties, where a party called the insured is being indemnified for loss, damage, suffered as a result of an unforeseen event/occurrence, hazard, etc.

In this contract, the insurer/insurance company does a duty of reinstating the insured to his initial state before the damage, loss or accident took place. Although the insured is expected to make a monthly contribution from his part to consolidate the contract.

Read also: Beginner’s guide to Insurance underwriting

The payment expected from the insured on monthly basis is called the “Insurance premium.”

The insurance company provides a cover for the insured on a given item specified in an insurance coverage.

Illustration 1

If a customer Mr. Robert Emmanuel buys an auto insurance coverage from an insurance company XYZ to cover for eventual damage on his car or a third-party’s car.

He is expected to make a specified payment on monthly basis known as the premium to which the contract is made binding.

In event he had an accident with the car, or caused damage to a third-party car depending on the type of cover purchased it’s binding on the insurance company to reinstate Mr. Roberts car or that of the third-party provided the accident occurred in a manner that the insurance coverage adopts.

Types of insurance policy

Insurance coverage comes in different shapes, these include but not limited to

  • Health insurance
  • Life insurance
  • Auto insurance
  • Home owner’s insurance
  • Long term disability insurance, etc.

Insurance could cover a wide range of areas, however, the afore-listed form the basic you should at least be acquainted with in this part of the world.

From here let’s take a shot at the principles of insurance, what they are and how they affect insurance policy from a broad perspective.

Principles of insurance

The principle of insurance are basic components that embody the concept of insurance which the business of insurance coverage covers. They form the key elements of insurance practice that must not be relegated to the background.

The basic principles of insurance are,

  • Insurable interest
  • Utmost good faith
  • Proximate cause
  • Indemnity
  • Subrogation
  • Contribution

1. Insurable interest

Insurable interest is a right to insure which emanates out of a financial relationship between the insured/customer and the insurer/insurance company.

Insurable interest may also be referred as the interest a person has or concern to obtain insurance for person, property against an unforeseen circumstance.

2. Utmost good faith

Insurance cover cannot be consolidated on the altar of deceit or lies, whoever is coming to buy a cover is expected to disclose the true state of affairs of the business, property or health of the person or business to be covered.

Given this concern, utmost good faith is the total disclosure of material facts and true state of affairs without hiding anything by either party concerning the property, individual, or business to be insured  .

The insurer at the other hand will explain everything clearly about the extent of the terms.

Read also: Beginner’s guide to car insurance in Nigeria

It’s based on the available facts known that the insurance underwriter is expected to access, classify risk and provide a cover or decline same, however, the information available will also determine what premium should be paid and to what extent as advised by the underwriter.

3. Proximate cause

The principle of proximate cause is concerned with how an actual loss or damage happened in an insurance contract, usually to the insured party, with cognizance to whether the damage resulted from an insured peril.

4. Indemnity

Insurance contract is structured in such a dimension that the insured will be duly compensated and reinstated to actual/initial state of affairs before the actual damage took place.

Given this, the insurance underwriter accesses and classifies the risk of offering a cover for the said insured property, health or life. Though the insured is expected to make a monthly commitment to this contract known as premium upon which consideration is made during reinstatement.

On the foregoing, indemnity as a principle of insurance is concerned with reinstating the insured to his/her initial state before a damage or loss was incurred. The insurer simply provides financial compensation to the insured aimed at reinstating the insured to a prior state.

5. Subrogation

Subrogation is a legal  title or right confined with an insurance company to legally go after a third-party who is responsible for damages you suffered as the insured.

You may understand it as a legal right you issue the insurance company having reinstated you for a damage caused by a third-party, to go after such third-party and sue him to reclaim whatever it caused the insurer to reinstate you, by this principle you simply subrogate right to the insured.

Read also: What is Public liability insurance?

Illustration 2

If you have an auto insurance with a company XYZ, but eventually suffered a damage to your car caused by a truck driver from say RED international.

It’s the duty of your insurer XYZ to fix and reinstate your car, you thereafter give the insurer a legal right to go ahead and sue RED international driver to reclaim the amount spent in fixing your car.

6. Contribution

The principle of contribution is the practice where all insurance companies issuing a cover for a property contributes to reinstate such property in event of damage.

This is a scenario where multiple insurance policies are covering the same property or loss being suffered. The total payment is being divided among all the insurance companies involved.


Summarily, the principles of insurance are key element factors that run and control insurance contract to which the operation is made even and seemingly.

These principles are already understood by the insured prior signing the dotted lines in any contract.

4 comments on “What are the principles of insurance policy?

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[…] underwriter is a professional who accesses and classifies risks on behalf of an insurance company, the underwriter through his assessment and classification of risk on a potential […]

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