The tough thing about insurance is that it is intangible. You can’t see it or size up what it can do for you very easily as a credit card or a home loan. You don’t just pay up and get a product, but have certain responsibilities.
Insurance is a contract that operates under certain principles. As an insured, or potential insured, understanding these principles will help you appreciate the product and get the best out of it.
Here are some main principles as applied to personal insurances.
‘Utmost good faith’ is one of the first principles of an insurance contract. This means that both the parties have to be transparent with each other and material facts have to be disclosed both before the policy is issued and after. Withholding information by one party works against the interests of the other.
When you are buying, say, a health insurance, you should disclose all relevant information about your health, which will impact terms and rates. An adverse health history can mean a higher premium rate matching your risk profile, or even a rejection of your proposal. But non-disclosure will lead to rejection of claims as the contract will be void. Similarly, the insurer has to spell out the terms and conditions of the cover, especially exclusions, as a matter of full disclosure to you.
An important basis of insurance is the principle of indemnity, which means compensation, or reimbursement. An insurance claim makes good your financial loss, but is not meant to let you make a profit.
When you look closely, you don’t insure your health, you insure the financial cost of regaining lost health. You insure the cost of a property or article lost to fire or theft. What about life insurance? You can’t place a value on human life. What is insured is not life, but the potential future earnings of the insured person.
The tie that binds
Insurable interest is the basis on which any insurance can be given. You can insure something only if you would face financial loss when the subject of insurance is damaged, destroyed or lost. You have an insurable interest over all your properties and belongings.
When your health suffers, you incur expenses. Nobody else can insure your car or your health. You can insure the health of your family members, within definitions, as you will be meeting their expenses should they be hospitalised.
When a person dies, their natural or legal financial obligations are at risk.
All these indicate insurable interest. If this were not followed, either an insurance policy can be gambling, or worse still, a basis for crime! There are also limits on the extent to which insurable interest can apply. Lenders can insure their customers up to the extent of the loan or people can insure themselves for a factor of their reasonably proven future potential earnings and life expectancy.
The principle of loss minimisation means after you take an insurance policy, you should still act as if you are a prudent uninsured. That is, regardless of the fact you bought a policy, you should still park your car in a safe place and lock it. If there is an accident, you should behave in such a manner that the financial cost of the accident is minimised – like ensuring proper medical attention to any injured person and getting your vehicle repaired for a fair rate. In the context of health insurance, you should follow medical advice.
These and other principles work in interesting ways to protect you and to keep the relationship of the two parties to the contract on an even keel.
(The writer is a business journalist specialising in insurance & corporate history)
