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In today’s Commerce class, We will continue learning about Insurance. We hope you enjoy the class!
- The principle of Insurance
- Types of Insurance
PRINCIPLES OF INSURANCE
There are six main principles which underlie insurance contracts and which must be present for the contract to have validity. These principles are:
- INSURABLE INTEREST: The person who takes out an insurance policy (i.e. the insured) must have an interest in the subject matter of the insurance policy. This means that so far as the subject matter is concerned, the insured must have a benefit from its existence and it must be shown that he will suffer damage or injury from its loss e.g. the owner of a house is said to have an insurable interest in that house but the tenant of the house has an insurable interest in his property within the house. The owner of the house can insure his house whereas the tenant can only insure his property within the house.
- UTMOST GOOD FAITH (i.e. UBERRIMAE FIDEI): Both parties to the insurance contract must deal openly and honestly with each other and disclose all relevant facts. It is essential that the insured tells all material facts which would affect the premium which the insurer charges. In other words, the contract of insurance is one of “uberrimae fidei” where the proposer (i.e. the insured) must act with the utmost good faith and produce all relevant facts to the insurer. If later the insured is found to have provided the insurer with incorrect information (e.g. as to the age or value of the property) or to have concealed certain facts, then the contract of insurance can be declared null and void without return of premiums. The insurer too must disclose the exact terms of contract as well as all material facts he has about the risk to the insured (i.e. the proposer).
- INDEMNITY: Indemnity is the compensation given to the insured by the insurer in the event of his suffering a loss. Under this principle, the insurance company will help to restore the insured to his former position before the loss occurred. All types of insurance are insurance of indemnity except life assurance and personal accident insurance. Under a contract of indemnity, the policyholder is entitled to be placed in the same position after a loss, as before it, so that he makes neither profit nor loss.
- SUBROGATION: Subrogation refers to the right, which a person has to stand in the place of another and enjoy all the rights and remedies of that person. The principle states the insurer, having paid the claim to the insured, is entitled to stand in the place of the insured against other parties who have caused the injury on which the claim has been paid. The insurer is therefore entitled to benefit from any claims which the insured has against a third party which can be used to reduce the damage suffered. Therefore an insurer who has paid on a burglary claim is entitled to the stolen goods should such goods be recovered later. The right to step into the shoes of another applies to all contract of insurance except life assurance and personal accident policies.
- CONTRIBUTION: Where a person insures the same risk with more than one insurer and if a loss is incurred, the insured can only recover to the extent of the loss and nothing more. This means he cannot claim compensation in full from each of the insurance companies and thereby make a gain or profit. Therefore each of the insurance companies (insurers) will pay a certain proportion of the loss. This principle does not apply to life assurance and personal accident policies.
- PROXIMATE CAUSE: This principle explains that the person insured can only be indemnified if the loss was one that directly and immediately from the risk insured against. In other words, there must be a close connection between the risk insured against and the cause of the loss. E.g. a claim for death benefits under a personal accident policy would only be paid if the insured died from an accident and not from illness.
- Explain the principle of indemnity
- Why is it not applicable to life policies?
- Insurance may be described as a “pooling of risks”. Explain what this statement means.
TYPES OF INSURANCE
There are various risks which a business should/could insure against. These constitute the various types of Insurance, namely:
i) Bad debts ii) Goods in transit iii) Group insurance
iv) Cash in transit v) Fidelity guarantee vi) Plate glass policy
vii) Burglary, theft, robbery viii) Consequential loss ix) Employer liability
x) Aviation insurance xi) Motor vehicle insurance xii) Fire
xiii) Life insurance xiv) Marine insurance xv) Export credit guarantee
xvi) Contractor all risk insurance xvii) Agricultural insurance xviii) Personal Accident insurance
xix) Pension or superannuation schemes xx) Pluvius policy
- List five types of insurance policies that can be taken by a trader.
- State and explain three principles of insurance.
Essential Commerce for SSS by O.A. Longe page 185-200
GENERAL EVALUATION QUESTIONS
- Mention any five government legislation aimed at protecting the consumer
- State any five sources of capital for a public limited company
- Describe five services rendered by thrift societies to their members
- Explain five problems of using rail transportation in Nigeria
- Explain three ways by which banks grant credit to their customers
- Mention four types of insurance
- State the principle of subrogation
We have come to the end of this class. We do hope you enjoyed the class?
Should you have any further question, feel free to ask in the comment section below and trust us to respond as soon as possible.
In our next class, we will continue learning about Insurance. We are very much eager to meet you there.
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