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Insurance contract terminologies: How to simply interpret & understand your Insurance policy in a layman’s terms.

Risks in our lives are all around us. To have peace of mind, we need to either avoid them or reduce the chance and effects, but it’s not that much possible to eliminate them.

The easiest way is to share the risks with a group of people; pay someone to protect us against the risks. That’s exactly the idea behind Insurance companies.

They are created to help us manage our risks and have a peace of mind in our lives.

When we buy an insurance cover from an insurance company, we’re sharing risks with all the other policyholders. The money paid to the insurance company goes into a pool to pay for the claims made by a few.

To get value for your money when buying an insurance cover, one needs to simply interpret & understand the Insurance policy. Below are some of the terminologies that most people fail to take keen interest in.


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Proximate Cause

Within the corridor of justice, a proximate cause is an event sufficiently related to an injury that the courts adjudge the event to be the cause of that injury.

In insurance law contracts, this principle is concerned with how the actual loss or damage happened to the insured party and whether it is a result of an insured risk.

The liability is insured only against the risks that are mentioned in the policy. In case the damage is caused by more than one such risk, the one that is most effective in causing the damage is the cause to be considered.

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For example, A parent had insured his son’s health, then one Monday afternoon the boy was playing with his friends in school and suddenly he broke his leg.

The class teacher calls the ambulance immediately and he is taken to the hospital. On their way to the hospital, the ambulance meets a head-on collision with a garbage truck and all the occupants onboard the ambulance die.

The proximate cause of our son’s death is the accident and not breaking his leg. The ambulance and garbage truck accident being the cause of death is very logical here as compared to breaking his leg.

The principle of proximate cause was introduced to solve such a complex state of affairs and to enable insurance companies to decide at what extent and whether to reimburse a claim or not.


Utmost Good Faith

The principle of utmost good faith or sometimes known as uberrimae fide legally obliged any person entering into a contract of insurance to willingly disclose and surrender a complete true information regarding the subject matter of insurance contract.

If a person wants to prepare an insurance contract, whatever the information he is having regarding the subject matter of policy he has to disclose that information to the insurance company.

For example, in property insurance contract property is the subject matter, in a life insurance contract life is a subject matter.

The insurer has to disclose all information regarding his health i.e health history like types of illness, conditions, how many times he has fallen ill etc. Remember he is the person who knows his body or health issues better than anybody else.

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So, whatever the information he is having regarding the life or the property it is the duty of the person to disclose a true and full information to the insurance company

If the insured fails to make such disclosure, the insurer may avoid the contract

The insurance company also has a responsibility to act with good faith in all its dealings with the insured.



In an insurance contract, the contribution principle is a rule that specifies what happens when a person purchases insurance cover from multiple insurance companies to insure the same property or liability.

It states that if a risk is insured by more than one insurance company, and one insurance company has reimbursed out the claim, that insurance company has a legal right to collect proportionate coverage from other insurance companies.

This principle of contribution enables the total claim to be shared in a fair way.

For Example, if a property owner buys $200,000 earthquake insurance cover for his property from different insurance companies, and earthquake strikes for that matter.

 If the owner files a claim with one company. That company will pay out the $200,000 to the owner. Then, in accordance with the contribution principle, the company can collect half of that amount, $100,000, from the other company.

If the property owner claims full insurance compensation from one insurer, he loses his right to claim any compensation from the other insurance companies.

The amount of total compensation provided to the property owner by the two insurance companies should not exceed the amount of loss.

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Insurable Interest 

Insurable interest basically means having a financial dependency or economic stake in a piece of property or person insured; to the extent that if they get damaged or destroyed, you stand to lose.

Insurable interest must exist at the time of application and at the time of loss. This means that the insurer need not necessarily be the owner of the insured property but he must have some vested interest in it.

People invest in properties or people in order to receive some benefit from their continuous existence. therefore, they would probably want to get them insured.

According to this insurance principle, you can only buy insurance for something or someone in which you have an insurable interest. Mainly, you have insurable interest in a property or person if for example it gets damaged or destroyed you suffer an economic loss.

For example, let’s think about your phone. You bought the phone, if something happened to your phone, you would probably face a financial loss. For this reason, you have an “insurable interest” in your phone.

This principle was established in order to prevent the moral hazard individuals have when buying out insurance covers for the wrong reasons.

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