Further, in insurances on property or against liabilities the law applies the principle that the policyholder must not make a profit if the event insured against happens. The insurance contract is said to be one of indemnity, to make good the insured's loss and no more.

Suppose, for example, that property is insured for more than its value and is destroyed as a result of an event insured against.

The insured's recovery will be limited to the actual value.

Again, if the property has been insured twice over and is destroyed, the insured will not be entitled to recover in all more than its total value. And if, when insured property is destroyed in circumstances which give the insured a right to claim both against his own insurer and against some other person who was responsible for the damage, the insured must allow the insurer to have the benefit of the right to claim against the other person.

Utmost good faith

Contracts of insurance form a special class of contract in that the law requires both parties to them, the insured and the insurer, to exercise the utmost good faith towards each other. In particular when anyone applied for insurance (he is known as the proposer) he must tell the prospective insurer every fact that he knows or ought to know which would influence a prudent insurer in deciding whether to grant the insurance and, if so, on what terms.

To take an example, a proposer for life insurance must reveal if he has recently had a heart attack as this may be a sign that he is more likely to die prematurely.

Similarly if a motorist is seeking to insure his car and has had a number of recent road accidents he must reveal that fact so that the insurer can decide whether to charge him an above-normal premium because he appears to be especially prone to accidents. If any fact of the kind described is not disclosed by the proposer, or if any fact is misstated, even unintentionally, the insurer is entitled to refuse to pay a claim under the policy. Insurers maintain that this is only right because the proposer knows the facts and the insurer does not. The insurer needs to be put in a fair position to decide whether to accept an insurance and on what terms.

New for 2013 Indemnity

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Read On: Legal Principles

We have seen that insurance involves the payment of premiums by persons known as the insured to an insurer who undertakes to pay a sum of money or its equivalent in kind if the policyholder suffers financially when the event insured against happens.

The agreement between the insured and the insurer is usually expressed in a document known as a policy and the insured is often referred to as the policyholder.

Insurable interest

It is sometimes said that insurance is like gambling. In betting, for example, one gives a sum of money to a bookmaker who agrees to pay out... see: Legal Principles


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