Basic of Insurance - Part 2

In insurance business, there are a few words, or jargon often used to describe an element in a policy or contract. Some of them can be easily understood, while some not and are subjected to some terms and condition. The following are some of the most frequently used words in a policy:

1. Insurable Interest

Insurable interest is an important element for a policy to be set up between the insurer (insurance company) and the insured (individual purchasing the policy for insurance protection). Two concepts which normally related to this are the subject matter of insurance and subject matter of the insurance contract.

Subject matter of insurance is defined as any property, potential legal liability, rights, life and limbs insured under a policy. While subject matter of the insurance contract is the legal relationship between a person and a certain subject that matters whereby the person suffers financial loss if the subject matter were exposed to a sudden damage or destruction.

For life insurance contract, insurable interest must exist only at the beginning of the contract. On the other hand, for general insurance contract, the insurable interest must exist at the beginning of the contract and at the time of loss. However, marine insurance is an exception.

2. Utmost Good Faith

Utmost good faith is a practice where the insured has to disclose all the important facts regarding the risk to be insured to his/her insurer. The duty of the insured is to disclose all his/her material facts fully and accurately. By doing so, the insurer can have a better understanding on the risk being insured and may provide better services and advices to the insured.

In the case of breach of utmost good faith, such as non-disclosure of material facts, deliberate concealment of facts, misrepresentation, etc…the aggrieved party can either void the contract, sue for damages, or waive the breach.

3. Indemnity

Indemnity is defined as the concept where the insurer restores the insured to the same financial position as he/she had been immediately before the loss (nothing more, nothing less). The measure of indemnity depends on the nature of insurance and it can be provided in the form of depreciation, cash payment, replacement, repair or reinstatement. General insurance contracts are contract of indemnity, while life and personal accident insurance contract may or may not be contracts of indemnity.

4. Proximate cause

Proximate cause is the dominant cause of loss amongst many causes of losses. Three types of perils (cause of loss) are:

• Insured perils (perils which are covered by a policy)
• Uninsured perils (perils not mentioned in the policy and not covered by the policy unless they occur as a result of an insured peril)
• Excluded perils (perils which have been expressly excluded from the policy)

Always bear in mind that the insurer is NOT LIABLE for uninsured perils and excluded perils. Before purchasing a policy, it is the duty or the insured to make sure that he/she understand and know all the insured perils of the policy to avoid dispute in future.