Principles of Insurance, NISCO’s

Products & Insurance Policy

Wording

By: Yitagesu Gebru

Manager, General Insurance Business

February, 2021
 I. Fundamental Principles of Insurance

1. Principle of Utmost Good Faith

2. Principle of Insurable Interest

3. Principle of Indemnity

4. Principle of Subrogation

5. Principle of Proximate Cause

1. Principle of Utmost Good Faith
• Definition: A positive duty voluntarily to disclose,
accurately & fully, all facts material to the risk
being proposed, whether requested or not.
• It means a higher degree of honesty is imposed on
both parties to an insurance contract.
• Breach of duty of Utmost good faith results the
policy is considered as void & insurer refuses any
compensation
Eg. Misrepresentation & Concealment
Fundamental Principles …
* Misrepresentation:
The statements made by the applicant for insurance
that tells the false evidences about the insured
and/or the subject matter.
* Concealment:
It is intentional failure for the applicant to
reveal a material fact to the insurer. That is the
applicant deliberately withholds material
information from the insurer.
2. Principle of Insurable Interest
• Definition: the legal right to insure arising out of
a financial relationship recognized under the law,
between the insured and the subject matter of
insurance.
• It simply means “ right to insure”
• Insurable interest will arise or be limited:
* By Common Law: under common law
insurable interest is automatically created by
ownership rights.
Fundamental Principles …
* By Contract: sometimes insurable interest can
is also created by contractual obligations.
* By Statute: sometimes an act of parliament may
create insurable interest either by granting a benefit
or by imposing a duty
• Application of insurable interest :
* Life: every individual has unlimited interest in
his or her own life. Insurable interest is deemed to
exist based on sentiment or business relations
Fundamental Principles …
* Property: insurable interest normally arises out
of full ownership & sometimes do not.
Eg. Mortgagees, Bailees
* Liability: to the extent of potential liability
which may be incurred by way of damages.
• Insurable interest Time of application:
@ Inception (life) , @ time of loss (marine) and
others policies @ Inception & time of loss
3. Principle of Indemnity
• Definition: a mechanism by which insurers provide
financial compensation to place the insured in the
same financial position before the loss.
• The principle of indemnity applies to property &
liability insurance contracts.
• Importance of the principle of Indemnity:
* Ensures insured doesn’t derive any undue benefit
from the loss
* Control morale hazard
Fundamental Principles …
• Indemnity can be made in the following ways:
* Cash payment, Repair, Replacement or
Reinstatement
• Factors limiting the payment of Indemnity:
* Average: applicable where an insured
underinsures his property
* Contribution: applicable where several insurers
involves for similar risk
Fundamental Principles …
* Limit: refers to the limit in the amount to be
paid as mentioned in the policy
* Excess/deductible: the amount of each and
every claim which is not covered by the policy that
can be voluntary or compulsory
* Life insurance policy is not subject to principle of
indemnity but valued policy wherein the agreed
upon amount in full is paid to the beneficiaries in
case of loss of life. (Exceptions)
4. Principle of Subrogation
• Definition: substitution of the insurer in place of
the insured for the purpose of claiming indemnity
from a responsible third person for a loss covered
by insurance.
• Importance of principle of subrogation:
* It prevents the insured from obtaining
compensation twice for the same loss
* It enforces the rule of law that guilty is made to
pay for the loss
Fundamental Principles …
* It helps insurer to partially/fully recover the
amount paid for the loss
* It helps to lower the insurance rates
• Limitations of doctrine of Subrogation:
* Not applicable to life insurance
* becomes operative only after settlement
5. Principle of Proximate Cause
• Definition: it is not the latest, but the direct,
dominant, operative and efficient cause that must
be regarded as proximate.
• When the mishap occurs as a single event the
determination of proximate cause is simple
whereas the loss occurs as a chain of events in
succession with one event setting off the other it
may be difficult to determine the exact cause of
the damage
II. NISCO’s Products
• Classification: Personal line Vs Commercial line
* Personal line: provide cover to individuals and
families to be indemnify against losses. Some of the
policies include :
- Motor personal line
- Personal accident
- Fire and special perils
- BHB (Theft)
- Plate glass policy
- Householders’ comprehensive policy
- Travel
NISCO’s Products …
* Commercial line: provide cover to businesses to
be indemnify against losses. Some of the policies
include :
- Property Insurance:
Motor, Fire, All risk, Theft, Glass, …
- Liability Insurance:
Employers’, Public, Product, Professional,…
- Engineering Insurance:
CAR, EAR, EEI, MB, Boiler, …
- Pecuniary Insurance:
BI/loss of profit, Money, Fidelity, …
III. Insurance Policy Wording
• What is an insurance policy ?
- Is an evidence of the contract, and not the
contract of insurance itself.
- The contract of insurance comes into effect once
the insurer has accepted the insurance proposal,
terms have been agreed & the premium has been
paid.
- Therefore, the contract exists irrespective of the
existence of an actual policy document and the
absence of the policy document does not
invalidate the contract.
Policy Wording …
• Classification: Named Perils Vs All Risk Policy
• Named Perils Policy : provides coverage on losses
incurred to your property from events/risks
declared/named on the policy.
• All Risk Policy : provides cover for every single risk
that the policy doesn’t explicitly omit from coverage.
• The main difference is that named perils insurance
names every peril that will be covered , while all risks
names the risks that will not be covered.
Structure of Insurance Policies
1. Heading
2. Preamble
3. Operative Clause
4. Exceptions
5. Conditions
6. Policy Schedule
7. Information & Facilities
8. Signature
Structure …
1. Heading :
Includes name of insurer , address and company logo
2. Preamble/Recital Clause :
States that the proposal form is part of the basis of
the contract & incorporated within the policy,
insurer will indemnify insured in accordance with
the policy cover subject to its exceptions, terms &
conditions in return for the premium.
Structure …
3. Operative Clause :
- The core section/heart of policy
- Is where actual cover provided is outlined
- Each operative section within the policy begins
with the phrase “The company will …. ” and then
stating exactly what the insurer or underwriter is
promising to do i.e setting out the cover under the
policy
Structure …
4. Exceptions/Exclusions :
- Policy provisions that waive coverage for
certain types of risks/events
- An important way that an insurer can narrow
the range of coverage
5. Conditions :
- Is a contractual term that the insured agrees to
comply with during the period of cover
Structure …
- Conditions are either implied or express
* Implied Conditions: are implied by the common
law & practice & don’t need to appear in the policy
e.g. Insurable interest, Utmost good faith…
* Express Conditions: are always stated in the
policy
e.g. Notification of change of risk, claim lodging
procedure, contribution, cancellation, …
Structure …
6. Policy Schedule :
- This is where the policy is made personal &
specific to the insured
- Includes: Insured’s name, address, policy
period, premium, details of subject matter, sum
insured/limit of liability, policy number,
reference to special exclusions, conditions and
operative sections of the policy
Structure …
7. Information & facilities :
- Includes Definition, customer service standards
statement, complaint procedure, …
8. Signature :
- Is both for insurer & insured
- For a policy to be enforceable legally it must be
signed
- Undertaking slip signed by insured is part of the
policy
Thank U !