At Allianz, we realise that insurance can sometimes be complicated. This is why we've created this Glossary of Terms where insurance terminology is simplified and explained for you.
Principles of Insurance
Your policy of insurance is a contract. You pay the agreed premium. In return your insurer provides the insurance cover for a defined period of time.
The Principles of Insurance are basic rules which apply to insurance contracts. They include the following:
- Utmost Good Faith
A contract of insurance requires that both the policyholder and the insurer are honest with each other and that they hide no information of relevance to the contract from each other.
In practical terms this means that, when proposing for insurance, you must answer all questions honestly and fully and that you must inform the insurer of any information that you think may be relevant to the insurance for which you are proposing.
The principle applies throughout the duration of the contract of insurance, including to claims. When making a claim you are required to present the circumstances and the details of any loss honestly and fully.
The principle requires that the insurer must tell you if it wishes to alter the terms of your insurance. If for example you notify the insurer of a change of car on your motor insurance policy, the insurer must disclose to you details of any change in premium and of insurance cover terms and conditions.
The principle of indemnity deals with how the insurer will calculate your loss in the event of a claim, i.e. the basis on which claims will be settled.
Basis of claim settlement is usually defined within your insurance policy wording.
On motor insurance policies it is normal for insurers to settle a claim for loss of or damage to your car based on the market value of your car at the time of the loss, i.e. the insurer will not pay more than the market value of the car.
The basis of settlement on home insurance policies differs. The norm (with some exceptions) is for the insurer to pay for either repair of your lost or damaged property or to replace it with new property.
- Insurable Interest
This principle dictates that you cannot insure something (e.g. a building or a car) if it’s loss or damage will result in you incurring no financial loss.
In most cases the property you wish to insure will be owned by you, e.g. your home contents or your car. You have an obvious insurable interest because you will suffer financially from having to repair or replace these if they are damaged or lost.
However you do not need to own something in order to have an insurable interest. Your car may be hired by you under a leasing arrangement. You may have a mortgage on your home. In these circumstances, even if it may be regarded that you are not the legal owner, you still have an insurable interest as you will be responsible for repairing or replacing the property following its loss or damage.
- Proximate Cause
This principle is concerned, in the event of a claim, with identifying how the loss or damage occurred.
This is not always obvious. Say you suffer water damage to the ceiling, units and floor in your kitchen. Proximate cause is concerned with identifying what caused the damage. It may be due to a sudden and identifiable incident, e.g. a burst pipe in your bathroom upstairs. It may however be due to a build up of water over time, perhaps caused by leaking grout or sealant in your shower.
This is important because insurance policies do not cover every eventuality. They cover certain defined perils and benefits. Also every insurance policy will be subject to certain exclusions and limitations in cover.