Insurance Principles and Concepts
What this domain tests
This domain examines whether you can apply the principles that decide coverage before you reach the policy wording: risk, insurable interest, indemnity, utmost good faith, subrogation, contribution and proximate cause. Expect short scenarios asking which principle controls and who pays.
Core rules
- Insurable interest. In property insurance it must exist when the loss occurs (Insurance Code, Secs. 13-14); a person with no pecuniary interest cannot recover.
- Indemnity. The insured is restored to pre-loss position, not enriched. Valued policies and agreed-value clauses are limited exceptions.
- Utmost good faith. Both parties must disclose material facts; concealment or misrepresentation can avoid the policy.
- Subrogation. After paying, the insurer steps into the insured's rights against a third-party wrongdoer, but only up to the amount paid.
- Contribution. Where two or more policies cover the same interest, subject matter and peril, insurers share rateably.
- Proximate cause. The dominant, efficient cause without which the loss would not have happened; it need not be the last event.
Worked example
A faulty wire sparks a fire; sprinklers then water-damage stock. Fire is the proximate cause of both fire and water damage, so the fire policy responds even if 'water damage' is excluded as a separate peril. If the insured has two fire policies on the same stock, contribution applies and the insured cannot recover more than the loss. If a neighbor negligently caused the fire, the insurer pays and then subrogates up to its payment.
Traps
Do not test insurable interest at the wrong time; do not let subrogation exceed indemnity; do not treat contribution as 'first policy pays everything'; and do not select the last event as proximate cause. Waiver-of-subrogation clauses and 'all risks' wording change the answer.