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Principles of Insurance

Special Legal Principles Embodied in the Insurance Contract

Have you gone through the insurance coverage/contract taken for your goods?. If you did you might notice some jargon in it. Here, you can understand exactly what are those jargon and use them too. keep reading to know more on Principles of Insurance

01.Insurable Interest

First, you need to know the subject matter of insurance under the Principles of Insurance. The subject matter can be a property, legal liability, right or life. It varies with the type of insurance you use. Some examples are as below for your easy understanding.

Type of Insurance Subject Matter
Marine Vessel, Cargo
Aviation Aircraft, lives of passengers, Crew
Motor Vehicle

Insurance must be supported by the insurable interest. Insurable interest is the legal right to insure arising from the legitimate financial interest which an insured has in a subject matter of insurance.

Here the legitimate financial interest is the financial interest recognised by the law.

In general insurance, insurable interest must exist at the beginning of the insurance and at the time of loss. For marine insurance, this is not applicable. Having the insurable interest at the time of the loss is adequate to enter into a valid contract. The reason for this is insurable interest is not present at the beginning of the insurance. i.e. A vehicle buyer cannot validly arrange a motor vehicle insurance for the vehicle he wishes to buy in the future. But an Importer can validly arrange insurance for the goods where he later acquires the insurable interest.

02.Utmost Good Faith in Insurance| Uberrima Fides

Trust is a must in foreign trade. The proposer knows every detail of the risk proposed, unlike the insurer. If proposer keeps the insurer in a blindside, the Insurer may not know the actual risks involved with the good to be insured. So, there is a possibility insure obtaining insurance which does not cover the actual risks. To avoid such ambiguities, “Utmost Good Faith” has embodied to the insurance contract.

With the utmost good faith, the proposer must disclose all the risk factors proposer knows even without the insurer’s request.

 Further, insured must disclose all the material facts to the insurer at the time of the contract negotiation.

A material fact is any factor which influences the underwriter on accepting the risk and deciding the premium.

The utmost good faith could breach by the Non-disclosure or misrepresentation of the material fact.

03. Principle of Indemnity

The indemnity requires the insurer to restore the insured to the same financial position same as the insured was immediately before the loss or to the nearest position before the loss. This principle makes sure underwriter pay for the damage of the insured. Further, the recovery should not exceed the actual loss or not less than the actual loss.

The loss can indemnify with cash, repairs or replacements.

04. Principle of Subrogation

The subrogation principle developed to make sure insured only indemnify for the actual loss. For example, insure can claim the damage from the insurance coverage having the goods/property. At the same time can request the third party who caused the accident to pay for the damage. To prevent this type of activities and to avoid insurer making profit out of the loss, subrogation is in place.

With the subrogation, insured unable to claim from both underwriter and from the third party.

Subrogation also considers as a corollary of indemnity. The reason is subrogation only present when indemnity arises. So, for the contracts without the indemnity, subrogation also will not apply.

How does Subrogation Arise?

4.1.Subrogation out of a Tort

The insured property damage due to the negligence of a third party. Here, damage can claim from both insurance policy and from the third party who caused the damage.

4.2.Subrogation out of a Contract

Think, that the shipowner has charted a vessel. So, the parties have a charter party contract. At the same time owner has taken an insurance cover for the vessel. If the vessel damage during the chartering owner can claim from the insurance policy and from the charter party contract.

4.3.Subrogation out of a Subject matter

Imagine, the insured property is totally damaged. The underwriter is entitled to the salvage of subject matter if the total loss is paid. This is due to the subrogation arise due to the subject matter.

4.4.Subrogation out of a Statute

There could be a situation where the cargo owner insured the shipped cargo. Also, the ship has a blanket cover for the cargo. Cargo owner can claim the damage from the shipping line and from the underwriter if cargo damaged during transportation.

05.Principle of Contribution in Insurance

The contribution principle exists when a loss covered by two or more insurance policies. In such time, underwriters share the loss recovery as to the insurance coverage each company is having.

Further, all the loss covered policies must have a common interest, cover common peril and common subject matter to apply the contribution principle.

06.Proximate Cause

There can be several causes of damage as per the Principles of Insurance. It is necessary to identify the dominant cause of all causes. When a loss occurs, the owner is on the insured to prove the cause of loss is an insured peril.

The underwriter is not liable for the claims with proximate clauses which are not covered in the underwriting agreement.

07.Assignment

The assignment can clarify as the transfer of all the rights and liabilities from one person to another person. The cargo policies are assignable freely unlike the hull policies. Hence, the cargo policies generally have prior consent for the assignment. The marine insurance act of 1906 also states that marine policies are freely assignable.

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