Insurance Principles and Practice
This domain tests the principles that underlie every policy and how they operate in Sri Lankan practice, not just textbook definitions.
Risk transfer and insurable interest
Insurance pools similar risks so that the few losses are met from contributions of the many. Insurable interest is the legal right to insure, and it must exist when it matters: for property, at the time of loss; for life cover, at inception. A policy without insurable interest is void, not merely voidable.
Indemnity and its limits
Indemnity restores the insured to the pre-loss financial position, no better and no worse. It applies to property, liability and marine claims, but not to life or personal accident benefit policies. The sum insured is a limit, not a guaranteed payout. If the sum insured is below the value at risk and the policy has an average clause, the claim is reduced proportionally. The excess is then deducted. Salvage belongs to the insurer after payment; subrogation lets the insurer pursue third parties; contribution shares a loss among policies covering the same interest.
Good faith and causation
Utmost good faith requires disclosure of material facts that would influence a prudent underwriter. Proximate cause is the dominant, efficient cause of loss, not simply the last event.
Worked example
A fire policy has sum insured LKR 8m, property value LKR 10m, loss LKR 2m, excess LKR 50,000 and an average clause. Claim = LKR 2m × (8 ÷ 10) = LKR 1.6m; less excess = LKR 1.55m. The insured bears LKR 400,000 of the underinsurance share plus the excess.
Traps that cost marks
- Applying indemnity to life policies.
- Saying property insurable interest must exist at inception rather than at loss.
- Treating the last event as the proximate cause.
- Forgetting to deduct the excess after applying average.