Insurance Fundamentals and the Contract of Insurance
Domain 1 tests the legal spine of insurance: the principles that decide whether a valid contract exists and whether a loss is payable. Items are usually short scenarios ending in "how much, if anything, is payable?" rather than pure definition recall. Note: the official IC-83 syllabus could not be retrieved when this was written, so the domain titles here are provisional and should be checked against the current institute syllabus.
Core rules
- Insurable interest must exist at inception for life insurance; for property and marine it must exist at the time of loss.
- Utmost good faith binds both parties - non-disclosure or misrepresentation of a material fact makes the contract voidable.
- Indemnity applies to property, liability and health: the insured is restored, never profited. Life and personal accident are benefit policies and sit outside indemnity.
- Subrogation transfers the insured's recovery rights to the insurer only after full indemnity is paid.
- Contribution applies where two or more policies cover the same interest, perils and period; they share rateably.
- Proximate cause - the dominant, effective cause - decides which peril triggered the loss.
Worked example
A fire policy carries a sum insured of 10,00,000 on property worth 12,50,000; the loss is 5,00,000. The average (underinsurance) clause applies: 5,00,000 x 10,00,000 / 12,50,000 = 4,00,000 payable. Reasoning: premium was paid on only 80% of the value, so the insured carries 20% of every partial loss. Because this is a partial loss, the sum insured does not cap the arithmetic - the average clause does.
Traps
- Applying the average clause to a total loss, where the sum insured is simply exhausted.
- Letting the insured keep a subrogated recovery after full indemnity.
- Confusing contribution with a simple "other insurance" exclusion.