THE 6TH FUNDAMENTAL PRINCIPLES OF INSURANCE

I started this topic as a series:  6 FUNDAMENTAL PRINCIPLES OF INSURANCE YOU NEED TO KNOW

These are:

1. Insurable Interest
2. Utmost Good Faith
3. Proximate Cause
4. Indemnity
5. Contribution
6. Subrogation

These six basic principles are guiding principles on which the concept of insurance hinges on.

These are the 6 PILLARS OF INSURANCE.

Insurance practice anywhere in the world operates on these principles.

To appreciate the holistic concept of this topic, I will suggest you read up on each of the principles as highlighted above from www.graceojoblog.org

SUBROGATION

It is defined as The right of an insurer, following payment of a claim to take over the insured’s rights to recover payment from a third-party responsible for the loss. It is limited to the amount paid out under the policy.

You will recall from the 5^th fundamental principle that: CONTRIBUTION AND SUBROGATION are two principles which ensure the insured does not profit from claim settlement. This is why these two principles are usually referred to as COROLLARY TO INDEMNITY THE 5TH FUNDAMENTAL PRINCIPLES OF INSURANCE

SCENARIOS FOR SUBROGATION RIGHT

An insured’s car is stolen, after 90 days of investigation by the police with the evidence of the first and second police report that all efforts to find the stolen vehicle had proved aborted. The insurer proceeds with the claim process to indemnify the insured.  If afterward the car is found, the insured will no longer be entitled to the recovered vehicle. It is the subrogation right of the insurer to take possession of the recovered vehicle having indemnified the insured. This is to fulfill the principle of indemnity that the insured cannot make a profit from claim settlement.

An insured’s car is involved in an accident. If the cost of repair is beyond “economic repair”, such a vehicle will be referred to as salvage. The insurer will proceed to meet the loss in full and take possession of the salvage. This is to prevent the insured from making a profit from the claim settlement, as the insured may likely sell the vehicle at a scrap value, and retain the money. This is against the principle of indemnity.

This is why it is the subrogation right of the insurer to take possession of the salvaged property, having fully indemnified the insured.

Having followed my articles on the progression of the fundamental principles of insurance, you would have realized that the concept of insurance is governed by principles.

The parties in the insurance industry are being guided by principles

The practices and processes of insurance are expected to be in conformity with the fundamental principles of insurance

If these principles are well understood and implemented by all parties in the insurance industry. From the insurer to the insured through the intermediaries and the regulators, every party will realize that insurance is creating value to everyone as against the erroneous impression portrayed by the insuring public due to insufficient information at our disposal.

Watch out for my next articles on THE PARTIES IN THE INSURANCE MARKET.

In this article, you will fully understand the operations of the insurance industry and what you as an insured stand to benefit from the insurance industry.

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