Understanding how insurance contracts work can be very beneficial when you are deciding if you need a lawyer after a car crash or other serious personal injury. There are seven basic principles applicable to insurance contracts relevant to personal injury and car accident cases:
- Utmost Good Faith
- Insurable Interest
- Proximate Cause
- Loss Minimization
Below we explain each item briefly, including how each may relate to a potential injury lawsuit. These principles are open to interpretation. If you think one of these principles has been breached, or your insurance claim has wrongfully been denied, we recommend using our free case evaluation to help decide whether hiring a lawyer makes sense for you.
The Principle of Utmost Good Faith
- Both parties involved in an insurance contract—the insured (policy holder) and the insurer (the company)—should act in good faith towards each other.
- The insurer and the insured must provide clear and concise information regarding the terms and conditions of the contract
This is a very basic and primary principle of insurance contracts because the nature of the service is for the insurance company to provide a certain level of security and solidarity to the insured person’s life. However, the insurance company must also watch out for anyone looking for a way to scam them into free money. So each party is expected to act in good faith towards each other.
If the insurance company provides you with falsified or misrepresented information, then they are liable in situations where this misrepresentation or falsification has caused you loss. If you have misrepresented information regarding subject matter or your own personal history, then the insurance company’s liability becomes void (revoked).
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The Principle of Insurable Interest
Insurable interest just means that the subject matter of the contract must provide some financial gain by existing for the insured (or policyholder) and would lead to a financial loss if damaged, destroyed, stolen, or lost.
- The insured must have an insurable interest in the subject matter of the insurance contract.
- The owner of the subject is said to have an insurable interest until s/he is no longer the owner.
In auto insurance, this will most times be a no brainer, but it does lead to issues when the person driving a vehicle doesn’t own it. For instance, if you are hit by a person who isn’t on the insurance policy of the vehicle, do you file a claim with the owner’s insurance company or the driver’s insurance company? This is a simple but crucial element for an insurance contract to exist.
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The Principle of Indemnity
- Indemnity is a guarantee to restore the insured to the position he or she was in before the uncertain incident that caused a loss for the insured. The insurer (provider) compensates the insured (policyholder).
- The insurance company promises to compensate the policyholder for the amount of the loss up to the amount agreed upon in the contract.
Essentially, this is the part of the contract that matters the most for the insurance policyholder because this is the part of the contract that says she or he has the right to be compensated or, in other words, indemnified for his or her loss.
The amount of compensation is in direct proportion with the incurred loss. The insurance company will pay up to the amount of the incurred loss or the insured amount agreed on in the contract, whichever is less. For instance, if your car is inured for $10,000 but damages are only $3,000. You get $3,000 not the full amount.
Compensation is not paid when the incident that caused the loss doesn’t happen during the time allotted in the contract or from the specific agreed upon causes of loss (as you will see in The Principle of Proximate Cause). Insurance contracts are created solely as a means to provide protection from unexpected events, not as a means to make a profit from a loss. Therefore, the insured is protected from losses by the principle of indemnity, but through stipulations that keep him or her from being able to scam and make a profit.
The Principle of Contribution
- Contribution establishes a corollary among all the insurance contracts involved in an incident or with the same subject.
- Contribution allows for the insured to claim indemnity to the extent of actual loss from all the insurance contracts involved in his or her claim.
For instance, imagine that you have taken out two insurance contracts on your used Lamborghini so that you are covered fully in any situation. Let’s say you have a policy with Allstate that covers $30,000 in property damage and a policy with State Farm that cover $50,000 in property damage. If you end up in a wreck that causes $50,000 worth of damage to your vehicle. Then about $19,000 will be covered by Allstate and $31,000 by State Farm.
This is the principle of contribution. Each policy you have on the same subject matter pays their proportion of the loss incurred by the policyholder. It’s an extension of the principle of indemnity that allows proportional responsibility for all insurance coverage on the same subject matter.
The Principle of Subrogation
This principle can be a little confusing, but the example should help make it clear. Subrogation is substituting one creditor (the insurance company) for another (another insurance company representing the person responsible for the loss).
- After the insured (policyholder) has been compensated for the incurred loss on a piece of property that was insured, the rights of ownership of this property go to the insurer.
So lets say you are in a car wreck caused by a third party and your file a claim with your insurance company to pay for the damages on your car and your medical expenses. Your insurance company will assume ownership of your car and medical expenses in order to step in and file a claim or lawsuit with the person who is actually responsible for the accident (i.e. the person who should have paid for your losses).
The insurance company can only benefit from subrogation by winning back the money it paid to its policyholder and the costs of acquiring this money. Anything paid extra from the third party, is given to the policyholder. So lets say your insurance company filed a lawsuit with the negligent third party after the insurance company had already compensated you for the full amount of your damages. If their lawsuit ends up winning more money from the negligent third party than they paid you, they’ll use that to cover court costs and the remaining balance will go to you.
The Principle of Proximate Cause
- The loss of insured property can be caused by more than one incident even in succession to each other.
- Property may be insured against some but not all causes of loss.
- When a property is not insured against all causes, the nearest cause is to be found out.
- If the proximate cause is one in which the property is insured against, then the insurer must pay compensation. If it is not a cause the property is insured against, then the insurer doesn’t have to pay.
When buying your insurance policies, you will most likely go through a process where you select which instances you and your property will be covered for and which ones they will not. This is where you are selecting which proximate causes are covered. If you end up in an incident, then the proximate cause will have to be investigated so that the insurance company validates that you are covered for the incident.
This can lead to disputes when you have suffered an incident you thought was covered but your insurance provider says it’s not. Insurance companies want to make sure they are protecting themselves but sometimes they can use this to get out of being liable for a situation. This might be a dispute where you’ll need a lawyer to help argue for you.
The Principle of Loss Minimization
This is our final principle that creates an insurance contract and the most simple one probably.
- In an uncertain event, it is the insured’s responsibility to take all precautions to minimize the loss on the insured property.
Insurance contracts shouldn’t be about getting free stuff every time something bad happens. Therefore, a little responsibility is bestowed upon the insured to take all measures possible to minimize the loss on the property. This principle can be debatable, so call a lawyer if you think you are being unfairly judged under this principle.
And That, Ladies and Gentlemen, is What Makes Up an Insurance Contract
If you think you’ve been the victim of a breech of contract or that your provider has failed to maintain their duty to you, call us for a free consultation. We can help you work the ins and outs of insurance company jargon and combat their track record of unfair treatment towards policy holders.
About the Author: Justin McMinn is a partner at McMinn Law Firm. Justin McMinn handles personal injury cases for clients in Austin and the surrounding areas. He focuses on cases involving injury in auto wrecks including car, truck, and bicycle accidents. He has been a personal injury accident lawyer at McMinn Law Firm since 2007. Follow him on Avvo.com