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Principles of Insurance

Insurance policies are contracts that protect policyholders from future uncertainty and can help cover actual losses. Consumer insurance contracts address a range of insurance claims. Jurisdictions nationwide are concerned with consumer protection aspects of the insurance business.

Insurance contract law defines the relationship between the insurer and the insured. Certain principles must be upheld by both providers and the insureds that are parties to insurance policies. Read on to learn about the principles of insurance contracts.


The principle of indemnity ensures that an insurance contract protects you. Insurance coverage compensates you for any damage, loss, or injury. The purpose of an insurance contract is to make you "whole."

In the event of a loss, the general principles of insurance provide that you are made whole. The contract terms and public policy do not allow you to make a profit. The amount of your compensation represents the loss you suffered.


Contribution is a similar principle to indemnity. It applies in situations with multiple insurance policies for the same asset or entity. For example, imagine owning a truck insured by both Company A and Company B. A driver hits your vehicle. It will cost you $5,000 to repair the property damage to your car. You can submit your claim to Company A, B, or both.

If Company A compensates you entirely, it can claim a proportionate contribution from Company B. However, you can't keep the total amount if both companies compensate you fully. Turning a profit in this situation amounts to an unfair windfall.

Insurable Interest

The insurable interest principle requires that the owner of a particular insurance policy have an ownership interest in the specific subject matter of the insurance policy. For example, the owner of a food truck has an insurable interest in the food truck. The owner is earning money from the food truck business.

Liability insurance can protect the food truck's owner from losses. If the owner sells the food truck, they will no longer have an insurable interest in it. Creditors also have an insurable interest in debt. The absence of an insurable interest can make the insurance policy in question null and void.


Subrogation means that one party stands in the shoes of another. In the insurance context, subrogation will arise if a negligent third party injures you, and your insurance company will reimburse you for damages. These may include personal injury, property damage, pain and suffering, or other damages.

Under the principle of subrogation, your insurance company has legal rights to recover the payout from the negligent party. This principle encourages accountability by holding negligent parties responsible for injuries they cause.

Loss Minimization

As an insurance policy owner, you must take the necessary steps to minimize the financial loss of your insured property. The law doesn't allow you to be negligent or irresponsible just because you're insured.

Suppose a fire breaks out in your kitchen. You must take reasonable steps to put out the fire. You must use a fire extinguisher or call the fire department. You can't just stand back and allow the fire to burn down your house because you have property insurance.

Proximate Cause

The principle of proximate cause, or nearest cause, comes into play when more than one event or bad actor causes an accident or injury. Suppose two landowners carelessly burn piles of leaves on their respective properties. The fires eventually join together and burn down your house. The insurance principle of proximate cause dictates that the closest cause determines liability in a negligence action.

Utmost Good Faith

Insurance contracts also require that both parties act according to the principle of utmost good faith. This means that both parties must accurately and fully disclose all material information. This ensures fairness and helps insurance companies accurately price premiums for insurance applicants. Insurance policies can be declared null and void if an applicant misrepresents material facts on which the insurance company relies. Misrepresentation at the policy's inception or anytime after that can void the policy.

Get Legal Help With Insurance Contracts

The principles of insurance in this article ensure fairness in insurance contracts. If you have experienced unfairness involving an insurance contract, it's wise to get legal advice. Connect with an experienced insurance lawyer in your area today.

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