General Principles of Insurance: Risk, Insurable Interest, Indemnity, Subrogation, Sum Insured and Sums Assured
Core principles
Insurable interest must exist at inception (and for life, at inception and on the insured’s consent). Indemnity means the insured is restored to the pre-loss financial position, no better - this underpins underinsurance (proportional payment), overinsurance (excess is void), and subrogation. Utmost good faith and proximate cause determine whether a loss is covered. Risk is the uncertain event; the insurer prices it and may exclude or load it.
Sum insured vs sum assured
In indemnity (non-life) contracts, the sum insured is a ceiling; payment is the lesser of the loss and the sum insured, adjusted for underinsurance. In life and personal accident, the sum assured is a fixed benefit payable on the event regardless of actual loss - indemnity does not apply.
Subrogation
After paying, the insurer steps into the insured’s shoes against the third party, up to the amount paid. The insured must not prejudice that right (e.g. by releasing the tortfeasor).
Traps
- Confusing sum insured (non-life cap) with sum assured (life/accident fixed benefit).
- Applying indemnity to life policies - it does not apply.
- Assuming subrogation lets the insurer recover more than it paid, or that it applies against the insured’s own family in certain contexts.
- Ignoring underinsurance: a 50% sum insured yields a proportional payment, not full loss.
Worked example
Property worth 200,000 is insured for 100,000. A 40,000 loss occurs. Underinsurance ratio = 100,000/200,000 = 50%, so the insurer pays 20,000 (subject to policy terms). Rule of thumb: “Indemnity restores, never enriches; subrogation transfers, never doubles.”