How to Make More Sense of Your Insurance Contract Articles | Insurance

By: Guy Starbuck

The underlying principle of all insurance contracts is based on the concept of ‘offer and acceptance’. The starting point is when you submit your proposal to the insurance company. At times you may also be required to send an accompanying check of the premium amount with your proposal.

Thus you have fulfilled the first part of the contract as you submit the ‘offer’ which is your proposal. When the insurance company ‘accepts’ your proposal, they are fulfilling the second part of the contract. The premium amount is also known as the amount for ‘consideration’. Another concept which is relevant to all insurance contracts is the concept of ‘legal capacity’. This is the basic requirement that both the parties concerned should be legally capable to enter into a contract. The contract which you agree to be part of is for ‘legal purpose’. This means that the contract is a document which is not meant for any illicit activities. There are various other legalities which are involved in an insurance contract. These include:

Principle of Indemnity: This principle is all about the insurer being bound to pay an amount which should never be more than the value of the actual loss, in case there is a loss. Whatever sum is assured in the insurance contract must be paid by the insurance company when they are settling an insurance claim. The whole objective is to ensure that the claimant must get back an amount which will help him recover his financial loss. There are some indemnity contracts where the insurance company pays the claimant the value of the actual loss. Then there are some indemnity contracts where the insurance company will settle a claim only when it exceeds a particular pre-set amount. For instance, if your insurance contract for your car is for $3000, then you are eligible to claim only when the value of the actual loss is over $3000. If it so happens that the value of your loss is less than $3000, you are liable to bear the value of the entire loss.

Insurable Interest: This term pertains to those insurance policies where the coverage extends only to such properties or events which were specified at the time of opening the policy. For instance, if you are living in a rented house or in a relative’s house, your application for home insurance policy will be rejected since you are not the owner of the property and you are not likely to incur any financial loss in case there is any damage or loss to the property in question.

Principle of Subrogation: To understand this principle better, take the example of a road accident where you get injured due to the reckless driving of a third party. This principle of subrogation will ensure that the insurance company settles your claim fully and compensates your loss. The company will then sue the third party who caused this loss or damage to recover the money paid to you.

Doctrine of utmost good faith: This means that all information exchanged between the two parties concerned must be done in good faith. All the information which is relevant to the contract must be disclosed in full faith by both the parties. For example, you are obligated to mention any ailment which you are suffering from, while buying a health insurance policy. Similarly the insurance company must be absolutely clear regarding any ailment which is not covered by this policy.

To understand the scope of your insurance contract better and stand independent of your insurance advisor, it is imperative that you familiarize yourself with the various principles which govern any insurance contract.