Understanding Insurance Principles: Uberrimae Fidae (Utmost Good Faith), Insurable Interest, And Indemnity (Part 1)

The primary goal of all insurance contract is to provide an insured financial support and protection from any unexpected future uncertainties and loss. In simple layman terms, the contract is actually a form of agreement between the insurer and the insured on terms to act upon bargaining both resources to further achieved the contract. In the strictest sense, the insured must never try to misuse this safe financial cover. There have been many cases wherein the insured make false reports in order to seek profit from the agreement. Seeking profit out from false reports on occurrences (for example, a false report on a certain accident) is considered a violation on the terms and conditions between the two parties participating in the insurance contract. This will create a stigma of mistrust from one party, breaching of a contract, and worst of all cases, results to the remedy of legalities, as in many cases legal penalties.

On the other hand, the insurer must investigate with a meticulous eye regarding any doubtful reports of insurance claims. It is also the duty of the insurer to approve or reject any claims that are knowledgeably studied and investigated. This will ensure that no money is wasted and hindrances will be experienced.

Thus, in order to peacefully achieved what the insurance policy have stipulated, we will have to review the basic principles that runs in every insurance contract of existence.

The Principle of Uberrimae Fidae (Utmost Good Faith)

The Latin phrase Uberrimae Fidae or Utmost Good Faith when translated to English, is the very basic and important principle of insurance. As similar to all forms of contracts, this principle states the the insurance contract must be signed by both parties (i.e. the insurer and the insured) in utter good faith and trust with the agreement.

As in the philosophical sense, every contract must be participated by parties which have all basic knowledge upon each other. This soothes the contract to be free from the shadows of doubt. In this principle, the the person getting insured must withdraw and surrender all his complete and true information to the insurer with regards to the subject matter of the insurance. On the other hand, the insurer’s liability will be considered null and void if ever any facts and information, as regards to the subject matter of the insurance, are thoughtfully omitted, hidden, falsified or presented in an unlikely manner to the insured.

As basic to any forms of agreement, as it even applies to state agreements and public-private contracts, the casting off of doubt is central to making the contract trustworthy in the face of both parties. The principle of Uberrimae Fidae applies to all insurance contract.

The Principle of Insurable Interest

Insurable interest is very important to any insurance because it is the object of the insurance that is prior to the right of the person to insure. Thus, insurable interest is the legal right of every person to insure. In the most fundamental thing, it means that the assured must be presently situated to the thing insured that with its existence he can benefit and from its destruction he will suffer. It means that the insured must have a direct relationship to the thing insured so that he will suffer direct financial loss on the occurrence of the event insured.

To understand the principle further, lets site one example: A businessman has an insurable interest in his business because it is where he gets his income. However, on matters when he sells the business – the moment the business is bought he no longer posses an insurable interest on it.

As evident in the statement above, the concept of ownership play a critical role in assessing insurable interest. And also, it is always true that “a person has an insurable interest in his life.” As the businessman has an insurable interest in his own business, it is also true that the creditor ha an insurable interest in his debtors – to note the analogy.

The Principle of Indemnity

Indemnity is synonymous to security, protection from any form of loss. and compensation from such damage or injury.

Indemnity means a guarantee to put the insured in the position in precedence prior to the happening of an uncertain event covered by the insurance. the insurer’s duty is to make good the loss of the insured.The object of every insurance contract is to place the insured in the exact financial position (as near as possible) after the loss – retailing a notion as if the loss had not taken place at all.

In an insurance contract, the amount of compensation is proportional to the value of the loss. With this, the amount of compensation must not be greater or less than the actual damage. Compensation is not paid if the specified loss does not happen due to a particular reason during a specific time period. This prevents the insurance contract as a means for profit and the main purpose of giving protection against losses is catered. Moreover the absence of indemnity, there might be the tendency of over insurance which insured could use in order to get more money that is not contemplated and equitable to the report of their loss – this is applicable to fire, marine, and other general insurances. As in the case of life insurance, the principle of indemnity does not apply because the value of human life is not measurable in terms of money.

Editor’s Note:

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