THE 4TH FUNDAMENTAL PRINCIPLE OF INSURANCE.

I started this article on the topic: 6 FUNDAMENTAL PRINCIPLES OF INSURANCE YOU NEED TO KNOW. The first principle I wrote about was INSURABLE INTEREST.

I talked on the need for an insured to have an insurable interest on the subject matter of insurance before a valid insurance contract must be in force.  I also discussed the elements of insurable interest.

The following week I discussed UTMOST GOOD FAITH. This principle confers a duty on the insured to disclose all material facts about the risk to be insured. It is a duty of disclosure. I discussed what material fact is.

The next principle I discussed was PROXIMATE CAUSE.  This is the exact cause of a loss

Today I want to discuss the fourth fundamental principle of insurance which is indemnity.

THE PRINCIPLE OF INDEMNITY

This can be defined as The financial compensation sufficient to place the insured in the same financial position after a loss as they enjoyed immediately before the loss occurred.

You recall the case study of Ade and his new car in my first article when I discussed insurable interest. By now we all know who an insured is. In case you are yet to read the insurable interest, please visit: https://graceojoblog.org/2020/06/13/6-fundamental-principles-of-insurance-you-need-to-know/  to read it.

To shed more light on this principle of indemnity, let’s examine Ade and his new car again. Ade who is the insured has been enjoying his new car since he bought it. The car had placed Ade on a new status of a car owner, He no longer goes on public transport to his office or anywhere he wishes to go. Ade had indeed been enjoying a level of comfort.

Now the unexpected happened, Ade’s car got stolen at a shopping mall where he went to buy some groceries. Ade would not need to think of the money to buy himself a new car. He will only need to incident the case with the police and initiate the claim process with his insurer.

It could also be that Ade got involved in an accident, or the car got burnt in a fire accident. His insurer will get the car repaired or replaced for him as the case may be.

Ade will enjoy all these benefits of either getting another car from his insurer or getting his car repaired by the insurer if he had comprehensive car insurance on his car. I will discuss different types of car insurance in my future article.

Let’s consider a shop owner who insured the goods in his shop against fire and there was a fire outbreak that consumed all the goods in his shop. The shop owner wouldn’t have to develop a heart attack; he will only call on his insurer to replace the goods in his shop for him.

These scenarios above had adequately explained what it means for an insured to receive financial compensation that is sufficient to place the insured in the same financial position after a loss as they enjoyed immediately before the loss occurred.

Ade will be provided the same type of car he was using immediately before the car was stolen, and the shop owner will have his shop stocked with the exact worth of goods that was raised down by the fire. If the goods that got burnt were worth #5million naira, the insurer will only stock the shop with goods worth #5million naira and not #10 million naira, because insurance takes you back to that financial position you were enjoying immediately before the loss occur. This is the principle of indemnity. The fourth fundamental principle of insurance we all need to be familiar with.

However not all insurance policies are policies of indemnity.

BENEFITS POLICIES

These are:

• Life insurance
• Health insurance
• Sickness insurance
• Personal accident insurance

These types of insurance are called benefits policies because health or life of an individual is involved.

The value on the life of every individual is inestimable, as an individual, you have an unlimited insurable interest on your life, while the subject matter of insurance is either your life or your health as the case may be.

Please refer to my article on insurable interest to refresh on what insurable interest and subject matter of insurance is.

Unlike indemnity policy, where the subject matter of insurance is an object that has fixed value on it, Benefits policies have their subject matter of insurance as either the life of an individual or group of individuals or the health of an individual or group of individuals. The values are not fixed. An individual fix the value on his life or health based on his financial capacity to earn the financial compensation to the tune of the amount insured in time of loss. The terminology might be different, but the principle is the same.

SPEAK TO PROFESSIONALS FOR YOUR INSURANCE CONTRACTS

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