Six principles of insurance – and why you can’t afford to ignore them

Insurance relies on trust. You trust the policy provider to keep to their word and pay out when the unfortunate happens. The provider trusts that you are giving them full and accurate information about whatever you’re insuring.

There are six basic principles of insurance that everyone, everywhere, needs to abide by for the agreement to work. Here’s why it pays to adhere to them.

1. Utmost good faith

All of us expect sales assistants to know everything about the product they are selling. With insurance, the reverse is true. With that in mind, the customer is expected to practise good faith by giving a full and accurate representation of what they are insuring – whether it concerns the structural integrity of offices, condition of vehicles, or requirements of staff.

On the flip side, the insurer knows more about insurance policies and so needs to provide the customer with one suitable to their needs. Once the policy is in place, the provider also promises to handle any claim fairly. 

Why considering ‘good faith’ saves you in the long term

In the Middle East, the concept of good faith is a more fundamental part of any contract than in many European countries.

Article 246 of the UAE Civil Code means that a duty to act in good faith is stated in all contracts. At worst, breaching this doctrine could constitute fraud. At best, it will result in over-claiming.

Common breaches of good faith include omitting important information on a policy that could affect its terms, and encouraging employees to make claims on their insurance to ‘use it up’.

This impacts not just on the insurer but on insurance premiums. 

2. Insurable interest

This principle states that a person or company taking out insurance must have a vested interest in the insured object – for instance, that they would suffer a financial impact as a result of its loss. 

This could be ownership of a building, but it could also include leased equipment if your company is liable for damage. It’s also relevant in the case of life insurance taken out by your employees through your company. 

Why you should unpick the complexities of insurable interest

In the UAE, the idea of insurable interest is less well-defined than in other countries. As such, it may be tempting to be less concerned about adhering to the principle here than elsewhere in the world.

However, it’s important to note that the UAE’s Maritime Code prohibits anyone benefiting from a policy of insurance unless they have a ‘lawful interest’ in the event not occurring, so it’s likely that this provision could apply to other types of insurance, too.

Notably, taking out insurance without a vested interest is considered to be gambling, which is prohibited under shariah law. So it’s still important to adhere to the principle and ensure that your employees do, too.

3. Indemnity

This principle means that the insurance company will pay enough to compensate you for any loss – no less, no more. 

Excess aside, the aim is to put you or your employee in the same financial situation as before the event that led to the claim. 

What you need to know about indemnity

Indemnity is only specific to certain lines of insurance, such as property insurance, where the approximate value of a loss is measurable. However, for lines of business like life insurance indemnity is not applicable as you cannot assign a value to life.

4. Subrogation

This principle means that if the insurer pays out, it has the right to recover losses from another party. 

An example would be if your company incurred losses due to the actions of another company. If the insurer pays out, it now has the right to step into your shoes and sue the other company.

Understanding subrogation and your legal position

Put simply, you shouldn’t fall into the trap of thinking you can claim on your insurance and also start a lawsuit against the third party. An insurer’s right of subrogation is set out in UAE law via Article 1030 of the Civil Code, so always check the terms of your insurance. 

5.  Proximate cause

When a loss occurs, it’s not always obvious what the cause is, especially if there has been a series of events leading up to the loss. In this case insurers will use the proximate, or nearest, cause. 

Why proximate cause must be taken into consideration

Sometimes when people read the exclusions in their policy they recoil in horror. This may tempt them to withhold information.

Such an approach can result in an application being declined. For example, if a claim is made after a leaking roof has caused structural damage, the insurer will investigate the proximate cause. If it turns out to be the culmination of an issue that has developed due to poor upkeep of the building, the claim will be rejected. 

A poorly maintained roof is a poorly maintained roof, and should be either fixed or disclosed. Honesty at the outset will minimise the dangers of being caught out by proximate cause.

6. Contribution

In some cases you may have more than one insurance policy covering a loss. This could be because you have double insurance – where the same object or person is insured by a similar policy. Or because you have two policies that cross over.

This can happen as an oversight in large companies, especially with policies that renew automatically.

Why keeping an eye on contribution can keep costs low

Doubling up is a waste of money because you’re paying twice. And you won’t get a bigger payout either as you’re not allowed to make full claims from both companies. 

The principle of contribution means that each insurer will be liable for a proportion of the payment. Working through the detail, especially if the policies are different, will add complications, delaying the process and ultimately your payment. It may also mean you lose your no-claims bonus from both insurers. 

So it makes sense to examine the terms and conditions of your policies closely for overlaps and be mindful of autorenewals. 

Avoiding rising premiums

Claimants sometimes exaggerate the damage inflicted on themselves or their property following an accident. Others are tempted to make fraudulent claims on their health insurance.

Such dishonesty does everyone a disservice, pushing up policy prices. 

It’s vital to promote the principles of trust and honesty when taking out policies and making claims. Educate staff of all levels on the six key principles of insurance, why it’s important to adhere to them, and how to avoid, spot and report abuses. 

Al Futtaim Willis is a commercial insurance broker and consultant operating within the UAE since 1976. Across geographies, industries and specialisms, Al Futtaim Willis provides its local and multinational clients with resilience for a risky world. For more information please call +971 4 376 0200.