You ought to know this before buying an insurance policy.

Insurance is a contract where by one party assumes risk of another party and undertakes to compensate the other upon occurrence of that risk in consideration for a premium. Insurance is a unique kind of business because it is governed by unique principles. Under this contract there are basically two parties namely the insurer who is the party who assumes risk and the insured who transfers risk.

Understanding how insurance contracts work can be very beneficial when you are deciding if you need a lawyer after a car crash or other serious personal injury. There are seven basic principles applicable to insurance contracts relevant to personal injury and car accident cases.

1. The Principle of Utmost Good Faith. This emphasises that both parties involved in an insurance contract—the insured (policy holder) and the insurer (the company)—should act in good faith towards each other. The insurer and the insured must provide clear and concise information regarding the terms and conditions of the insurance contract.

If the insurance company provides you with falsified or misrepresented information, then they are liable in situations where this misrepresentation or falsification has caused you loss. If you have misrepresented information regarding subject matter or your own personal history, then the insurance company’s liability becomes void (revoked).

2. Insurable Interest. Insurable interest means that the subject matter of the contract must provide some financial gain by existing for the insured (or policyholder) and would lead to a financial loss if damaged, destroyed, stolen, or lost. The insured must therefore have an insurable interest in the subject matter of the insurance contract. The owner of the subject matter like a motovehicle is said to have an insurable interest until he or she is no longer the owner.

3. The Principle of Indemnity. Indemnity is a guarantee to restore the insured to the position he or she was in before the uncertain incident that caused a loss for the insured. The insurer (provider) compensates the insured (policyholder). At the inception of the contract, the insurance company promises to compensate the policyholder for the amount of the loss up to the amount agreed upon in the contract.

Essentially, this is the part of the contract that matters the most for the insurance policyholder because this is the part of the contract that says she or he has the right to be compensated or, in other words, indemnified for his or her loss.

 The insurance company will pay up to the amount of the incurred loss or the insured amount agreed on in the contract, whichever is less. For instance, if your car is insured for UGX 10,000,000 but damages are only UGX 300,000. You get UGX 300,000 not the full insured amount under the insurance contract. The insured are therefore not supposed to profit themselves out of the insurance contract.

4. The Principle of Contribution. Contribution establishes a corollary among all the insurance contracts involved in an incident or with the same subject. Contribution allows for the insured to claim indemnity to the extent of actual loss from all the insurance contracts involved in his or her claim and the insurers are each supposed to contribute a portion of compensation to cover the total claim.

5. The Principle of Subrogation. This principle can be a little confusing, but the example should help make it clear. After the insured (policyholder) has been compensated for the incurred loss on a piece of property that was insured, the rights of ownership of this property go to the insurer.

So lets say you are in a car wreck caused by a third party and your file a claim with your insurance company to pay for the damages on your car and your medical expenses. Your insurance company will assume ownership of your car and medical expenses in order to step in and file a claim or lawsuit with the person who is actually responsible for the accident (i.e. the person who should have paid for your losses). The insurer does this to win back the money paid in compensation for the loss from the person who actually caused the loss.

6. The Principle of Proximate Cause. The loss of insured property can be caused by more than one incident even in succession to each other. Property may be insured against some but not all causes of loss. When a property is not insured against all causes, the nearest cause is to be found out. If the proximate cause is one in which the property is insured against, then the insurer must pay compensation.

7. The Principle of Loss Minimization. This is our final principle that creates an insurance contract and the most simple one probably. In an uncertain event, it is the insured’s responsibility to take all precautions to minimize the loss on the insured property.

Insurance contracts shouldn’t be about getting free stuff every time something bad happens. Therefore, a little responsibility is bestowed upon the insured to take all measures possible to minimize the loss on the property.

And That,  is What Makes Up an Insurance Contract. Because it is such a unique contract, you will always need a lawyer to help you interpret and understand the terms of an insurance policy before opting to buy one to avoid future embracement.

Prepared by,

Wambuya Amos,  branch manager Liberty Insurance