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What is Insurance?
The idea of insurance is that if a large number of people each pays some money into a pool, then sizeable sums of money can be drawn from the pool to ease the hardship of those who might suffer losses. In short, insurance is the science of spreading risks.
In practice, insurers manage the money (called 'premium') paid by policyholders. In good years when claims are few, insurers are able to build up substantial reserves of money to cater for bad years when claims are heavy. Insurers are responsible for managing their business carefully so that they remain financially sound to pay out claims at all times.
Insurance contracts are based on trust. The insurer trusts the policyholder to give precise and true details of the subject matter to be insured. This is called the principle of 'Utmost Good Faith'. Care should always be taken to tell the whole truth so that insurance companies can be fair in their assessment of risk. Equally, having effected an insurance policy the policyholder should read all the documentation very carefully to ensure that he understands the exact nature of the policy he has bought and the risks it does and does not cover.
Insurable Interest
'Insurable Interest' is the right of the policyholder to effect insurance, arising out of certain relationships that may exist between the policyholder and the subject matter insured. Generally speaking, if the policyholder suffers direct losses arising from the subject matter's meeting with misfortune, then Insurable Interest exists. Without Insurable Interest, insurance protection would be speculative in nature, and not be enforceable under the law.
The most common example of Insurable Interest is the ownership of property. There are many other examples, such as being an employer of workers, or a custodian of assets.
Sometimes during the term of an insurance policy, the policyholder might end the relationship with the subject matter insured. If this happens, Insurable Interest ceases and the insurance cover also automatically ends. A common example might be the sale of a car or a flat. The policyholder should take care to notify the insurer of such changes promptly.
Indemnity
By the principle of 'Indemnity', an insurance policy compensates the policyholder only to the extent of the value of the property which he has lost, hence a policyholder should not expect to make any profit from a claim.
Indemnity applies to all classes of insurance but is not always easily discernable in certain classes like 'Personal Accident' or 'Life Assurance'. In theory, human life is invaluable but with Accident and Life coverage the insurers will review circumstances of the applicants to determine the amount of coverage that they can reasonably issue to cover any projected loss.
For the insurance of property, if the insured subject matter has depreciated in value at the time it is lost, the insurer pays the policyholder only the depreciated value. This is called 'Indemnity Basis'. There is an alternative arrangement called 'Reinstatement Value Basis' which pays for the new replacement value at the time of loss without deducting depreciation.
Contribution
For policies to which 'Indemnity' applies, the purchase of several policies to cover the same subject matter will not result in the obtaining of claims payments of several times the value of the subject matter. The insurers simply 'contribute' to make up the amount payable as if only one policy had been issued.
For policies to which 'Indemnity' does not apply, the contribution factor does not apply either.
