INSURANCE

1.  
PRINCIPLES OF INSURANCE
3/18/2022 Haniza/PB502/PSA
1

2. At the end of topic, students would be able to :
o Distinguish clearly the various principles in insurance related
aspects
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3.  Insurance MUST BE supported by insurable
interest
 It differentiates insurance from gambling
 Two related concepts :
o Subject matter of insurance
• Relates to WHAT is insured
• Refers to a property, potential legal liability, life etc insured
under a policy
o Subject matter of insurance contract
• The financial interest of an insured in the subject matter of
insurance
• The value (in dollar) insured – sum insured
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4.  Insurable interest (I2) is :
o The legal right to insure arising from the legitimate financial
interest which an insured has in a subject matter of insurance
o Legitimate financial interest refers to a financial interest which is
recognised at law
o Must be proven with a particular document recognised at law
o Eg. Fire insurance of a house – proven by Selling & Purchase
agreement
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5. o General insurance : at the beginning of contract and at time of
loss (except for marine insurance)
o Life assurance : at the beginning of contract only
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1/1/12 30/6/12
General Insurance
1/1/12 25/9/2050
Life Assurance

6. o In property insurance : the owner, trustee, agent,
mortgagee or hirer (on property held in trust,
commission, mortgaged or hired)
o In liability insurance : anyone who has potential
liability and legal costs expenses (eg. Manufacturer)
o In life assurance : individual on his/her own life; spouse, child;
employee; a person whom he is dependent on
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7.  The insured has to disclose all important facts regarding
the risk to be insured
 Disclose fully and accurately all material facts
 Material facts refer to any facts that may influence a
prudent underwriter in making a decision whether or not
to accept the risk proposed or the premium to be
charged
 When to disclose the facts :
o In general insurance : it extends beyond the inception
of the contract
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8.  UGF is said to have been breached when a proposer who knows or
is reasonably expected to know a material facts :
- fails to disclose the material fact, or
- misrepresents the material fact
 When UGF is breached, it may results to :
o A non-disclosure or concealment
o Misrepresentation or fraudulent misrepresentation
o And the contract becomes voidable
o Concealment & fraudulent misrepresentation may further entitle
the insurer to sue for damages
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9.  Insurance contract promises to make good the
insured loss or damage
 It requires the insurer to restore the insured to
the same financial position as he had enjoyed
immediately before the loss
 The objective is to ensure that the insured shall
not be better off after the loss, after being
indemnified
 The insured cannot receive more than what he
has lost
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10.  General insurance contracts are contract of indemnity
where insurable interest is measurable
 Measures and methods of indemnity :
o Property insurance : replacement cost
o Liability insurance : court awards + costs and
expenses
o Pecuniary insurance : financial loss
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11. An insurer who has indemnified an insured
for a loss may exercise the insured’s rights
to claim from the third party in respect of
the loss
To prevent the insured from getting more
than indemnity when he has two or more
avenues to recover his loss
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12. How does subrogation arise?
oSubrogation arising out of tort
oSubrogation arising out of contract
oSubrogation arising out of statute
oSubrogation arising out of subject
matter
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13. 3/18/2022 Haniza/PB502/PSA 13
Abu negligently knocked down Ali’s car
• A third party committed a negligence damages or
destroys a property insured under a policy
• The insured has the rights to recover the loss either
from the policy or the third party
Ali’s car
Abu’s car

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Bank’ ATM Security company
Bank’s money in transit was robbed whilst under the security company’s
custody
• Insured incurred a loss which is also covered under a
contract entered into with a third party
• Eg security company carrying money

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Hotel Guest’s valuables deposited into a bank’s safe box, was lost
whilst under the hotel’s custody
• A statute may grant a person the right to recover a
loss from third party
• Inkeepers Act 1952

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A car was burnt down in an accident and incurred total loss
• When a property is totally destroyed and
the insurer make a total loss payment
• The insurer is entitle to take over the
remaining subject matter of insurance

17.  When a loss is covered by two or more policies
 An insurer who has indemnified an insured may call
upon other insurers liable for the same loss to contribute
proportionately to the cost of indemnity payment
 To prevent the insured from being more than indemnified
 Essential elements for contribution to operate :
o Two or more policies of indemnity must be in force
o The policies must cover a common interest
o The policies must cover a common peril which give rise to a loss
o The loss involves a common subject matter covered by the
policies
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18. 3/18/2022 Haniza/PB502/PSA 18
Fire Insurer Householder Insurer
Household goods
How Much should we
pay for the loss?

19.  Dominant cause of loss
 Insurer is not liable for uninsured or excluded
peril
o Insured perils : perils which are expressly
covered by a policy
o Uninsured perils : perils not mentioned in the
policy
o Excluded perils : perils which have been
expressly excluded in the policy
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20.  Two or more perils including one insured
occurred concurrently and the ensuring loss can
be separated according to the effects – insurer
will be liable for the loss caused by the insured
perils
 If loss cannot be separated – insurer will be
liable for the full amount (not excluded perils)
 When one of the perils is the excluded peril and
the loss can be separated – insurer will be liable
for the loss caused by the insured peril
 If loss cannot be separated – insurer will not be
liable for the loss
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21. When there is an unbroken chain of
events – insurer will be liable for the loss
caused by the insured peril onwards (no
excluded peril)
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23. 3/18/2022 Haniza/PB502/PSA 23
RIP

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25.  The proximate cause of loss is the one
immediately following the last interruption
Eg.
A man while crossing a river, falls into the river.
He suffers a heart attack, and subsequently
drowns.
The proximate cause is drowning.
The insurer is liable to pay for the benefits under
the personal accident policy.
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