Principles of Insurance: Rules, Conditions and Examples for NISM

Understand Principles of Insurance

Key formulas to remember

Utmost good faith

Duty to disclose all material facts, by both parties

Applies to all insurance contracts. Breach can make the contract voidable by the innocent party.

Insurable interest timing

Life: required at inception. Non-life: required at time of loss

A very common trap. Do not swap the two.

Indemnity payout

Claim payable = lower of (actual loss, sum insured)

Subject to policy terms such as deductibles and average clause. Not applicable to life insurance.

Subrogation

Insurer's recovery right = after paying the claim, up to the amount paid

Arises only after the claim is paid. Applies to indemnity contracts.

Contribution (rateable proportion)

Insurer's share = (its sum insured ÷ total sum insured of all policies) × loss

Applies only when the same risk, same subject matter and same insured are covered by two or more policies. The share is also capped at the insurer's own sum insured.

Proximate cause

Claim paid if dominant cause = insured peril; not paid if dominant cause = excluded peril

The nearest cause in time is not always the proximate cause.

Loss minimisation

Insured must act as a prudent uninsured person

Reasonable minimisation costs are typically payable by the insurer. Check policy wording.

How to solve Principles of Insurance questions

1. 1Read the last line first to see what is asked: the principle name, the claim amount, or whether the claim is payable.
2. 2Underline the key facts: who holds the policy, what was hidden, how many policies, who caused the loss, what the cause was.
3. 3Match the facts to a principle. Hidden facts point to utmost good faith. No financial stake points to insurable interest. Two policies point to contribution. A third party at fault points to subrogation.
4. 4Check whether the contract is life or non-life. Indemnity, subrogation and contribution apply only to non-life.
5. 5Recall the exact condition or timing, such as insurable interest at inception or at time of loss.
6. 6If a number is needed, compute the loss, cap it at the sum insured, then apply the proportion for contribution.
7. 7Eliminate options that overstate the rule, such as saying indemnity applies to life insurance.
8. 8Re-read the question to confirm you answered what was asked.

Quickest way: Keyword-to-principle mapping

Common mistakes in Principles of Insurance

• Saying indemnity applies to life insurance.

  Students assume all insurance compensates for loss.

  Fix: Remember life insurance pays a fixed sum on the event, since a life has no measurable value. Indemnity, subrogation and contribution are for non-life.

• Mixing up when insurable interest is needed.

  Both timings sound similar and are learnt together.

  Fix: Life: at inception. Non-life: at time of loss. Write this pair on your revision sheet.

• Confusing subrogation with contribution.

  Both stop the insured from profiting and both are post-loss.

  Fix: Subrogation is against a third party who caused the loss. Contribution is among insurers covering the same risk.

• Choosing the last event in time as the proximate cause.

  Students read 'proximate' as 'nearest'.

  Fix: Proximate means dominant or effective cause. Trace the chain and find which cause was operating throughout.

• Computing contribution using the loss instead of sum insured proportions.

  Rushing and splitting the loss equally.

  Fix: Split the loss in the ratio of the sums insured, and check no insurer pays beyond its own sum insured.

• Thinking utmost good faith binds only the proposer.

  Most examples show the customer hiding facts.

  Fix: The duty is mutual. The insurer must also disclose material terms honestly, though the proposer carries the larger burden.

Worked examples