Explain the following insurance terms:
(a) proximate cause
(b) contribution
(c) utmost good faith
(d) re-insurance
(e) contract of non-indemnity (compensation).
Explanation
Insurance Terms:
(a) Proximate cause: This is an insurance principle that allows an insured to be compensated only when the event insured against happened as a direct cause and not from other risks not insured against. if a car insured against theft gets involved in an accident the insured will not be compensated.
(b) Contribution: This principle prevents an insured from making profit where he insured his property with more than one insurance company. In case of loss, all the companies will contribute money pro-rata to pay for the loss.
(c) Utmost good faith: This is an insurance principle that demands full disclosure and honesty from both parties in an insurance contract. The parties (insurer/insured) must disclose to themselves material facts that they know will affect their contract. If a party fails to do so the contract will be void at the option of the other party.
(d) Re-insurance: This is the process of sharing risks insured by an insurance company with other insurers. This is done by transferring part of the premium received to other insurers for a cover against what has been insured.
(e) Contract of non-indemnity (compensation): A contract of non-indemnity is a contract of insurance where the insurer can only pay something based on prior agreement because the loss cannot be replaced. It is not possible to give back life; as a result, money will be paid to the assured's family.