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Buying an Insurance Policy? Some Basic Principles to Note

Insurance, like any other contract is bound by principles. These principles go to the core and validity of the contract.  If you plan to buy an insurance policy, you need to understand these general principles of insurance.  Some of the basic principles are;

Insurable interest. When you have an insurable interest in an asset, you gain or lose financially for its condition. You cannot insure something in which you do not have an interest. Take for instance, if you insure your house and contents within it, items belonging to your brother who lives with you are not covered, because you do not have insurable interest in items belonging to your brother. Your brother may buy another cover for his items.

Utmost good faith. Insurance policy is based on utmost good faith. This is fundamental to the validity of the policy. When you buy a package from an insurer, you are passing on the risks that you face in your everyday lives, essentially asking the insurer to bear all the potential risks. The insurer knows nothing about you and the premium is going to be determined by the insurer based on your risk profile. In evaluating your risk profile, the insurer depends on you to make complete revelation of all substantial information. It is therefore your duty to disclose every relevant information that may influence the decision of the insurer. This is called utmost good faith. Failure to do this gives the insurer the grounds to repudiate your claim in the event of damage or loss. You are however not obliged to state facts of public knowledge. For example, if you are buying a burglary cover and your house is situated in a community well known for a high crime rate, it is not obligatory to state that.

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Excess. An excess is the portion of loss the insured bears in the event of a claim. When there is a claim, the insurer bears a greater proportion say 90% of the cost of damage. The remaining called excess, is borne by the insured. Excess usually ranges from 5% to 15% depending on the policy. A large excess is called a deductible. It can however be bought back for just a little additional premium. This way, the insurer bears everything when there is a damage or loss.

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The “average” clause. Before the inception of a policy, you will be asked by your insurer to state the value of the asset you wish to insure. You are to insure your assets at their full value. There are valuation companies that can assist you in valuation for any asset you wish to insure. In the event of a loss, if it is found that the sum insured is less than the value of the property, the amount claimed will be reduced in ratio to the under-insurance. This penalization is possible because of the average clause.

Clarity of Policy:  Insurance is an enforceable contract subject to its terms and conditions. Any ambiguities in the policy will be interpreted against the insurer. It is however, advised you seek for clarity in policy wordings when they don’t seem straightforward.

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So, the next time you plan to buy an insurance policy, have these principles in mind as a guide. If you already have an existing policy, read your policy thoroughly. If there is anything that you don’t understand, ask your insurer for detailed explanations.

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