Personal Finance

Insurance simplified

insurance

Competence and capacity is expected of any person entering into a contract. FILE PHOTO | NMG

Insurance is the transfer of risk from one entity to another, from self to an insurance company. This means that in the event of a loss, the insured is restored to their original status, allowing for normal business / life continuity and financial security. This therefore, the purpose of insurance is not to gain in the event of a loss.

Insurance is not an entirely new concept. In the non-monetary economy, insurance entailed agreements of mutual aid. If one family's house is destroyed, the neighbours are committed to help rebuild it. Same concept applied when one community was raided, men would gather and organise to raid the other community in an effort to recover whatever was stolen.

Similarly, there are still forms of social insurance today, for instance, in the event of illness or death of a loved one, family and friends gather to raise funds aimed at offsetting the outstanding hospital bills or catering for funeral expenses believing that when their time comes, they will be treated in the same way.

Modern insurance is governed by the following six principles of insurance:

1.Utmost good faith

It applies to both the insurer and insured expecting both to act in good faith/belief. The insured will provide complete, correct and clear information about the subject matter while the insurer is expected to provide complete, correct and clear information about the contract terms and conditions.

2. Insurable interest

The insured should have insurable interest in what they want to insure, i.e. the physical existence of the insured object/person gives him/her some gain and its non-existence will give him/her a loss.

3. Indemnity

This means there’s an assurance by the insurer that they will restore the insured to the same position he/she was before occurrence of loss. This principle is mainly applicable under general insurance.

4. Subrogation

It allows the insurer to sue a third party who caused loss/damage to compensate the repayment of a claim they paid out. In case a person takes insurance from two different companies, the principle of contribution will be used, which allows the insurance companies to both contribute to the repayment.

5. Loss minimisation

requires the insured to take all possible measures to minimise the loss to the insured property on the happening of an insured event.

6.Proximate cause

This principle indicates that in the event of loss due to a number of perils, the closest cause of loss should be taken into consideration by the insurer to determine whether liable or not. For example: A cargo ship's base was punctured by rats and so seawater entered and cargo was damaged. Here there are two causes for the damage of the cargo ship — (i) The cargo ship getting punctured because of rats, and (ii) The seawater entering ship through puncture.

The risk of seawater is insured but not rat damage. The nearest cause of damage is seawater which is insured and therefore the insurer must pay the compensation. However, in case of life insurance, the principle of Causa Proxima does not apply.

Insurance contracts are like other contracts in many ways. First there should be an offer which is the willingness by one party to contract another party based on predetermined terms. An offer is an element that makes the contract legally valid and can be in different forms, for example e-mail, letter etc as long as it conveys the information.

Acceptance of an offer is another element. It is an expression of consent to the terms outlined in the offer. An acceptance should be made in a manner requested or authorised by the offering party.

The third element is consideration, which is an exchange made between the two parties, and is mostly something of value. A consideration is important since both parties incur some sort of obligation in the agreement, it could be monetary or even a promise. When buying insurance the insured pays premium while the insurer promises to compensate in the event of loss.

In light of this, mutuality of obligation is where both parties have a part to play in fulfilling the contract and are bound to execute these obligations. Competence and capacity, it is expected that any person entering into a contract has the competency to act per the terms of the contract and the capacity to legally enter into a contract.

Some of the factors that can easily nullify a contract without the parties being held accountable for breach are, age (if one of the parties is a minor), mental health and soberness (if one of the parties was intoxicated when entering into the contact).

The final element is written instruction, which is a policy. From the insurance company, the insured receives a policy document as which is the written instruction.

As the insured, ensure that you familiarise yourself and understand all the elements that make up your insurance policy before you put pen to paper, it could be the difference between getting your claim paid or not.

Japheth Indakwa, Actuarial & Risk Manager at Jubilee Insurance.