Insurable InterestIndemnity Contribution How to select the sum insured? Completing Proposal Forms Lodging a claim Glossary How to choose insurance company?The idea of insurance is that if a large number of people each pays some money into a pool, then sizeable sums of money can be drawn from the pool to ease the hardship of those who might suffer losses. In practice, insurers manage the money paid by policyholders. In good years when claims are few, insurers are able to build up substantial reserves of money to cater for bad years when claims are heavy.
Insurance contracts are based on trust. The insurer trusts the policyholder to give precise and true details of the subject matter to be insured. This is called the principle of "Utmost Good Faith". Care should always be taken to tell the whole truth so that insurance companies can be fair in their assessment of risk. Equally, having effected an insurance policy the policyholder should read all the documentation very carefully to ensure that he understands the exact nature of the policy he has bought and the risks it does and does not cover.
Insurable InterestIndemnity Contribution How to select the sum insured? Completing Proposal Forms Lodging a claim Glossary How to choose insurance company?
Insurable Interest
"Insurable Interest" is the right of the policyholder to effect insurance, arising out of certain relationships that may exist between the policyholder and the subject matter insured. Generally speaking, if the policyholder suffers direct losses arising from the subject matter's meeting with misfortune, then Insurable Interest exists. Without Insurable Interest, insurance protection would be speculative in nature, and not be enforceable under the law.
The most common example of Insurable Interest is the ownership of property. There are many other examples, such as being an employer of workers, or a custodian of assets.
Indemnity
By the principle of "Indemnity", an insurance policy compensates the policyholder only to the extent of the value of the property which he has lost, hence a policyholder should not expect to make any profit from a claim.
For the insurance of property, if the insured subject matter has depreciated in value at the time it is lost, the insurer pays the policyholder only the depreciated value. This is called "Indemnity Basis". There is an alternative arrangement called "Reinstatement Value Basis" which pays for the new replacement value at the time of loss without deducting depreciation.
Contribution
For policies to which "Indemnity" applies, the purchase of several policies to cover the same subject matter will not result in the obtaining of claims payments of several times the value of the subject matter. The insurers simply "contribute" to make up the amount payable as if only one policy had been issued.
For policies to which "Indemnity" does not apply, the contribution factor does not apply either.
How to choose insurance company?
Given the large number of insurers available in Hong Kong, any insurance buyer should look for insurance companies that provide good security, a reputable claims service, reasonable prices and prompt documentation.
How to select the sum insured?
For most property insurance, the "Average Condition" parameter applies, therefore selecting an appropriate insurance sum is delicate matter. Under policies where the "Average Condition" applies, any under-insurance conditions will be penalized by deducting from the claim the percentage of the amount under-insured. As for over-insurance, no penalty is exacted and no extra gains procured, because such claims are limited to the actual amount lost.
The policyholder must remember that it is the value of any item at the time of loss which is used to determine any under-insurance liability. At the time of proposal, the sum insured may be accurate but after a few months, the sum insured may become inadequate because more property has been purchased. Therefore, the policyholder should safeguard against any unintended under-insurance by regularly updating the sum insured under the policy to include new additions.
Completing Proposal Forms
As mentioned previously, insurance contracts are contracts of "Utmost Good Faith". Since the insurer bases any premium and policy terms on the information provided by the insurance buyer, the buyer is expected to be truthful.
A proposal form (application form) is usually provided, so that the buyer can fill in the required information. At the conclusion of the form where the buyer affixes his authorized signature, appears a "declaration clause" which states that the information provided by the buyer will be the basis of the contract, and that such information should be true to the best of his knowledge. A buyer must carefully read any proposal form before signing it and ensure that all the information disclosed is correct and complete. It is worth remembering that revealing extra information does not preclude anyone from obtaining insurance, it simply allows the insurance company to fairly share the risks it is being asked to take.
The duty of the applicant to provide updated information remains a continuing duty throughout the policy period. Any material changes in circumstances should be notified immediately by the policyholder to the insurer or intermediary.
If a policyholder has given false information or hidden material information, then his policy can be declared null and void. This means that the policy will be deemed not valid, and no claims will be entertained.
Lodging a claim
After any loss has occurred, the policyholder should call the insurer's claims department or the insurer intermediary as soon as possible to ask for instructions. The insurer will probably request the policyholder to complete a claims form and provide information.
Regarding property claims :
The insurer usually appoints an independent loss-adjusting firm to survey the loss. Even though the adjuster's fees may be paid by the insurer, he remains fully independent and unbiased. Many insurers have been known to pay out heavy claims without inspecting the damaged item, having relied entirely on the adjuster's report.
When the adjuster's final report is completed, the insurer is in a position to offer a claim payment to the policyholder. Upon the agreement of the policyholder, the insurer sends a "Claim Discharge" form for him to sign, after which a payment cheque follow.
Regarding liability claims :
The insurer may or may not send an adjuster, depending on the nature of the accident. In all cases, it is very important for the policyholder to pass to the insurer all relevant letter and documents from third parties. The policyholder should not admit liability or try to negotiate with any third parties unless the insurer consents to this action.
Since it is the third party who is claiming against the policyholder, the insurer should not control the third party by advising him how to claim. Sometimes, the third party may proceed slowly, and this is one reason why the settlement of liability claims can be extremely protracted. Once the third party has provided full information and evidence, the insurer is then in a position to offer payment to the third party.
Glossary
Additional Perils
Perils added to a fire insurance policy, such as damage by storm, tempest or flood.
Agent
(1) Anyone who acts on behalf of another
(2) A person who introduces purchases of insurance to an insurer.
Agreed value policy
Same as valued policy
Assurance
Same as insurance, especially on life.
Average Condition
A condition in a non-marine property insurance that if the property value has been understated, the insured's claim is reduced proportionately to the understatement.
Consequential Loss
Monetary loss resulting from an occurrence in addition to any material damage suffered.
Contribution
The principle whereby if two or more insurers indemnify the insured in respect of the same subject matter against the same peril on behalf of the same interest they share the loss of liability proportionately.
Insurance
A contract whereby one party, the insurer, for a consideration (the premium), undertakes to pay to the other party (the insured) a sum of money or its equivalent in kind, on the happening of a specified event that is contrary to the interest of the insured.
Insurance Broker
One who advises persons on their insurance needs and negotiates insurance on their behalf with insurers, exercising professional care and skill in so doing.
Intermediary
A person, whether an insurance agent, broker or consultant, who arranges an insurance.
Lapsing
Termination of an insurance by non-payment of the premium or the insurer's decision not to invite its continuance.
Loss Adjuster
A person employed in a professional capacity in the negotiation and settlement of claims.
Policy
A document setting out the terms of a contract to insure.
Sum Insured
The sum expressed in a policy as the maximum of the insurer's liability under an insurance that gives indemnity, or the amount payable by way of benefit in other insurance such as life.
Third Party
A person who is not a party to a contract of insurance.
Total Loss
A loss of the subject matter of insurance such that it is totally lost, destroyed or damaged beyond economic repair.
Under-insurance
Insurance that is not adequate in terms of the sum insured to provide for full payment of a loss.
Valued Policy
A policy under which the insurers agree in advance that the value of property insured, as stated in the policy, shall be conclusively taken as the value in the event of a total loss.
Void
Without legal effect.
* The above information is from "A Guide To Personal Insurance" published by The Hong Kong Federation of Insurers
