Belmont Virtual Academy
Issue 1 April 2013
Risk Management Tips brought to
you by the insurance specialists at
Belmont International.
DID YOU KNOW
Insurance as we know it can be traced
back to the Great Fire of London, which
in 1666 devoured more than 13,000
houses. The devastating effects of the
fire transformed the development of
insurance into a matter of real urgency.
Insurance has developed exponentially
since then and is now a highly complex
and sophisticated response to risk.
However, six core principles have been
established over time many of which
have been upheld by the Courts or
codified by Acts of Parliament.
The Six Key Principles
How did insurance come into being? And how is it actually defined? Here, we look at the origins of
insurance and the central principles that make up any insurance contract. These principles are important
to understand to ensure that your insurance policies are covered on the correct basis.
1. Insurable interest
Not all risks are insurable. Insurable risks
have certain characteristics: they must be
capable of financial measurement; there must
be a large enough number of similar risks;
they must not be against public policy; the
premium needs to be reasonable; and there
must be an insurable interest for the person
insuring.
Insurable interest is where you have a valid
reason to insure and stand to suffer a direct
financial loss if the event insured against
occurs.
Insurable interest exists when an insured
derives a financial or other benefit from the
continuous existence of an insured object. For
example, a person has an insurable interest
in their own car but not in their neighbours
car.
To demonstrate insurable interest, there must
be something tangible that can be insured
such as property, life or rights imposed by
law.
2. Utmost good faith
Most commercial contracts are subject to the
principle of caveat emptor (let the buyer
beware). Under these contracts, there is no
need to disclose information that is not asked
for. Insurance contracts are different in that
they are based on facts which are within the
knowledge of the insured, but of which
insurers will not generally be aware. As the
insurer is at a disadvantage, the law imposes
a duty of uberrima fides or utmost good
faith.
The principle of utmost good faith requires
anyone seeking insurance to disclose all
relevant facts. These are facts that would
influence the judgement of a prudent
underwriter in fixing the premium or
determining whether they will take on the risk.
Where material non-disclosure can be
proved, a contract can be voided.
In a new development, duties of disclosure
will no longer apply to personal policies from
6 April 2013 see our Facing the Facts
3. Proximate cause
5. Subrogation
An insurance policy will define the perils or
insured events that cover is provided for. For
example, a building insurance policy will
provide various covers as standard such as
fire, lightning strikes and earthquakes and
cover for additional risks, such as escape of
water, storm or accidental damage, can be
requested.
If a policyholder has a claim paid by their
insurer, they may also have a right to pursue
funds from another source, such as a
third-party who caused the incident. The
principle of subrogation allows the insurer to
pursue any rights or remedies which the
policyholder may possess, always in the
name of the insured. This also ensures that
the policyholder only receives the indemnity
settlement entitled to and therefore they will
not profit from the incident.
All contracts are subject to terms and
conditions that will exclude certain causes of
loss. Therefore, in the event of a claim, it is
important to ascertain the cause of the loss in
order to determine if that cause is insured or
excluded.
There may be multiple elements involved in a
claim, so it is the proximate cause that is
taken into account. The proximate cause is
the dominant cause that sets in play a chain
of events. For example, if lightning damaged
a building and weakened a wall, following
which the weakened wall was blown down by
high winds, lightning would be considered the
proximate cause.
4. Indemnity
Indemnity is considered to be the exact
compensation required to restore the
policyholder to the financial position they
enjoyed immediately before a loss occurred.
Indemnity settlements can be reduced where
it can be proved that there is
under-insurance, and therefore the insurers
are only receiving a premium for a proportion
of the entire value at risk. If this is the case,
any claims payment will be reduced in direct
proportion to the under-insurance.
BelmontVirtualAcademy
Issue1April2013
6. Contribution
An insured party may have policies with two
or more insurers covering the same risk,
although not necessarily with equal degrees
of liability. Therefore, in the event of a claim,
all of the insurers should pay an equitable
proportion of the claim payment.
Contribution is the right of an insurer to call
upon the other insurers to share the costs of
such a claim payment. The fundamental point
is that, if an insurer has paid a claim in full, it
can recoup a proportion of the costs from the
other insurers of the risk.
Find out more
We provide a wide range of risk and
insurance services to businesses and private
individuals. Please get in touch if you would
like to know more, or visit our website at:
www.belmontint.com.
Belmont Internaonal Ltd is authorised
and regulated by the Financial Conduct
Authority.
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