Purchasing a new insurance policy for a car, motorcycle, or boat is so common, most people don’t stop to think about what’s written in their insurance contract. But in the event of an accident or natural disaster, your insurance contract’s principles decide how or if you will be compensated for your losses.

Insurance policies are defined by seven basic principles:

  • Utmost Good Faith
  • Insurable Interest
  • Indemnity
  • Contribution
  • Subrogation
  • Loss Minimization
  • Proximate Cause

Defining the principles of insurance law can be significantly beneficial, should you need to negotiate an insurance settlement or find a trusted personal injury attorney to argue your case. Today, we’re breaking down everything you need to know about each insurance principle, including which are most important.

1. Principle of Utmost Good Faith (Uberrima Fides)

Utmost good faith, or “uberrima fides” in Latin, is the primary principle of insurance. In fact, many would argue that utmost good faith is the most important insurance principle. Essentially, this principle states that both parties involved in an insurance contract should act in good faith towards one another. In other words, both parties should respect one another and not seek unjust funds or insurance claims.

Generally speaking, there are two parties in an insurance contract: the insurance company issuing the policy (insurer) and the policyholder (insured). The principle of utmost good faith states the insurer should provide a level of security and solidarity to the policyholder. On the other hand, the policyholder should not submit false or scam claims in an attempt to gain money from the insurance company. These stipulations can be increasingly important during a personal injury case.

For example, under the principle of good faith, a policyholder must disclose the complete truth regarding the subject matter of the insurance. So, for an auto insurance policy, a policyholder cannot provide falsified or misrepresented information regarding medical records, accident history, or a history of smoking or drinking. If the insurance company can prove a policyholder provided falsified information and did not act in good faith, the insurance company can revoke its liability in the insurance claim.

waiver of liability on the white paper with pen

2. Principle of Insurable Interest

Without the principle of insurable interest, the types of insurance as we know them would not exist. This principle states the policyholder must suffer some type of financial loss if anything should happen to the object they’re looking to insure. If damage or loss of the object in question would not affect you financially, chances are, you can’t insure it. The entire purpose of the insurance industry is to compensate you for a financial loss.

Think of it this way: If you’re the breadwinner for your family, you can have your life insured. This is because, in the event of a loss, your family would suffer financially. Similarly, you can have your car, motorcycle, and/or boat insured. If you lost your method of transportation, it’s obvious you would be in a hard financial position. However, you could not have your neighbor’s car insured and profit in the event something happened to their vehicle. You don’t have an insurable interest in your neighbor’s car, therefore, you could not receive financial compensation if anything happened to it.

3. Principle of Indemnity

Right on the heels of insurable interest, the principle of indemnity further explains that an insurance contract is not meant to make a profit. The purpose of insurance is to compensate a policyholder against losses incurred from unexpected events, such as an auto accident, slip and fall, or work injury.

As part of an insurance contract, the insurance company vows to compensate the insured person for the amount of the loss or the insured amount agreed on in the contract (whichever is less).

Accident of a male worker at the construction site. An injured man on the floor.

For instance, if your car is insured for $10,000, but your damages only total $3,000, your insurance company will compensate you for $3,000, not the $10,000 of your entire policy.

The principle of indemnity ensures the compensation paid isn’t more than the amount of the loss, preventing a policyholder from making a profit off their damages. Of course, this is not to say that there won’t be additional damages following an accident. Rather, the principle of indemnity establishes that it’s not the insurance company’s position to compensate policyholders for additional hardships.

4. Principle of Contribution

The principle of contribution is often considered an extension of the principle of indemnity. If you’ve taken out multiple policies on the same item, it forces each policy to pay their portion of the loss incurred. For instance, consider you have two insurance policies on your new car: a policy with Progressive that covers $30,000 in property damage, and a policy with Liberty Mutual that covers $50,000 in property damage. If you end up in an auto accident that causes $50,000 worth of damage, the loss should be compensated between both Progressive and Liberty Mutual.

In this case, Progressive would likely cover $19,000, and Liberty Mutual would cover $31,000. Typically, the more expensive policy is responsible for the larger portion of your compensation. In the event one policy was falsely exhausted after an accident, the insurance company has the right to recover the excess funds they’ve paid from the other insurance company. For example, if Progressive paid the policy’s full $30,000 towards your damages, and Liberty Mutual only paid $20,000, Progressive could legally recover their excess expenses from Liberty Mutual.

road accident car crash on an city road highway

5. Principle of Subrogation

Of all the principles of insurance, the principle of subrogation is especially important for auto, motorcycle, and boating accidents. This principle states that if your vehicle has been destroyed or totaled, your insurance company will receive ownership over the insured object once they pay your compensation. This is referred to as the insurance company’s subrogation rights.

After the insurance company pays your compensation for the insured item, they typically sell whatever is salvageable to recover their losses. This means you can’t attempt to profit off the totaled vehicle after you’ve been paid. For instance, if you have motorcycle insurance and your bike is damaged beyond use in a motorcycle accident, the insurance company will pay your full claim. This also means the insurance company will own the rights to the motorcycle. You cannot scrap or sell the parts.

As per this principle, the insurance company can also try to recover their losses by filing a lawsuit against the at-fault party. So, if your motorcycle was totaled in a collision, you would remit ownership of the vehicle to the insurance company, who could then sue the individual that caused your collision. In this way, your insurance company can recover some or all of the funds they’ve paid you.

6. Principle of Loss Minimization

When you think, “What is the most important insurance principle?” you might not consider the principle of loss minimization. However, this insurance principle is key to ensuring the utmost good faith in many insurance contracts. The principle of loss minimization states the insured person should take all necessary steps to control and reduce their losses whenever possible, thus not furthering the extent of damages.

Consider if there was a small fire under your car’s hood. After ensuring your safety, your first thought cannot be, “Well, I have insurance, so I can let it burn and receive a claim for the damage.” Instead, you should attempt to control the fire by calling the fire department or taking fire safety precautions. If you do not attempt to minimize the damage under the belief that you will be compensated regardless, your insurance company can prove you breached the principle of loss minimization and broke your bond of good faith. In fact, the insurance company could deny your claim altogether for your lack of risk management.

Burning car on fire on a highway road accident at day

7. Principle of Proximate Cause (Causa Proxima)

Last but certainly not least is the principle of proximate cause or “causa proxima” in Latin. Proximate cause is especially important in personal injury cases that result in both bodily harm and property damage.

Injuries and the loss of insured property can be caused by multiple reasons or causes. And your property may be insured against some of these causes but not all of them. In an instance where there were numerous causes of an accident, the nearest cause or proximate cause must be discovered.

For instance, your auto insurance policy may cover collisions but not water damage. If your car was rammed into a lake, your insurance must decide the nearest cause of your damages—the accident itself, or the body of water you landed in. If the proximate cause is determined to be the collision, which is contained in your policy, the insurance company must pay your compensation.

Insurance Law and Your Personal Injury Case

The subject matter of insurance contracts can vary wildly, from health insurance and life insurance to marine insurance, fire insurance, and car insurance. If you feel like your insurance company is not holding up their end of your contract after a personal injury accident, contact a skilled accident attorney. Together, you can decode your insurance contract and fight for your right to fair compensation after an auto accident, slip and fall, or work injury.