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2 | PRINCIPLE OF INSURANCE IN THE EASIEST WAY NUR AMIRAH BINTI MAT ZUBIR AIDA ASHYURANI BINTI MOHD RAZULLY POLITEKNIK KOTA BHARU
3 | Published and printed by: Department of Commerce Politeknik Kota Bharu KM 24 Kok Lanas, 16450 Ketereh, Kelantan. www.pkb.edu.my PRINCIPLE OF INSURANCE IN THE EASIEST WAY First Edition 2023 © 2023 NUR AMIRAH BINTI MAT ZUBIR, AIDA ASHYURANI BINTI MOHD RAZULLY ` All rights reserved. No part of this publication may be produced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior when permission of the copyright holder.
4 | ACKNOWLEDGEMENTS This e-book would not have been possible without the support of the Head of Commerce Department, Politeknik Kota Bharu, Pn. Juli Suzlin binti Mohd Jalaludin, and the Head of the Diploma Insurance Programme, Politeknik Kota Bharu, Pn. Razia Malini binti Mohamad and E Learning Coordinator, Commerce Department, Pn. Che Rogayah binti Che Ismail. We are grateful to all of those with whom we have had the pleasure to work during the completion of this e-book. We would like to thank our family, whose love and guidance provide unending inspiration.
5 | AUTHORS BIBLIOGRAPHY Nur Amirah binti Mat Zubir is a lecturer at the Commerce Department, Politeknik Kota Bharu. She obtained a Bachelor of Business Administration (Risk Management and Takaful) with honors from Universiti Sultan Zainal Abidin, Kuala Terengganu. She also holds a Diploma in Insurance from Politeknik Sultan Salahuddin Abdul Aziz Shah, Shah Alam, and a Basic Certificate of Loss Adjusting from the Malaysian Insurance Institute (MII). She has taught various subjects such as Life Assurance, Introduction to Financial Planning, and Green Technology and Compliance. Besides teaching, she holds the post of Scholarship Officer, Politeknik Kota Bharu. She can be contacted at [email protected]. Aida Ashyurani binti Mohd Razully is a lecturer at the Commerce Department, Politeknik Kota Bharu. She obtained Bachelor of Business Administration (Insurance) with honors from University Teknologi MARA (UiTM) Shah Alam, She also holds a Diploma in Insurance from Politeknik Sultan Salahuddin Abdul Aziz Shah, Shah Alam. She has taught various subjects such as Fundamentals and Operations of Insurance, Insurance Law, Motor Insurance and Medical and Health Insurance. She previously experienced in insurance industry as claims examiner. She can be contacted at [email protected]
6 | PREFACE Since getting a new insurance coverage for a car, motorcycle or boat is so often, most people don't give their insurance contract much thought. However, the terms of your insurance arrangement determine whether you will receive payment for your losses in the event of an accident or natural disaster. Six (6) fundamental concepts describe insurance policies: Utmost Good Faith, Insurable Interest, Indemnity, Contribution, Subrogation and Proximate Cause. If you need to hire a reliable personal injury lawyer to represent you in court or negotiate an insurance settlement, knowing the fundamentals of insurance law can be quite helpful. In this e-book you should know about each insurance principle today, including the most crucial ones.
7 | ABSTRACT To put it simply, insurance is a contract between the identified insured and the insurance firm, also known as the insurer. The insurer agrees in this agreement to assist the insured with damages resulting from a potential contingency. In contrast, the promise made by the insurance is paid for by the insured, who pays a premium. Principles of Insurance in the easiest way e-book provides 6 basic principles that should be implement by both parties in insurance contract which are insurer and insured. The basic principles are Insurable interest, Utmost good faith, Proximate Cause, Indemnity, Contribution and Subrogation. ABSTRAK Ringkasnya, insurans ialah kontrak antara insured yang dikenal pasti dan syarikat insurans, juga dikenali sebagai insurer. Insurer bersetuju dalam perjanjian ini untuk membantu insured dengan kerosakan akibat kemungkinan kontingensi. Dengan balasan janji yang dibuat oleh insurans dibayar oleh pihak yang diinsuranskan yang dikenali sebagai premium. E-book Prinsip Insurans dengan cara paling mudah menyediakan 6 prinsip asas yang perlu dilaksanakan oleh kedua-dua pihak dalam kontrak insurans iaitu syarikat insurans dan diinsuranskan. Prinsip asas ialah Kepentingan Boleh Insurans, Kepercayaan Penuh Mutlak, Punca Terhampir, Indemniti, Sumbangan dan Subrogasi.
8 | TABLE OF CONTENT ACKNOWLEDGEMENTS AUTHORS BIBLIOGRAPHY PREFACE ABSTRACT 1.0 INTRODUCTION 9 1.1 INSURABLE INTEREST 11 1.1.1 Subject Matter of Insurance and Subject Matter of Contract 12 1.1.2 When Must Insurable Interest Exist? 12 1.1.3 Application of insurable Interest 13 TUTORIAL 14 1.2 UTMOST GOOD FAITH 16 1.2.1 What is a material fact? 16 1.2.2 Duration of duty of utmost good faith 17 1.2.3 Breaches of Utmost Good Faith 18 TUTORIAL 19 1.3 PROXIMATE CAUSE 21 1.3.1 Definition 21-23 TUTORIAL 24 1.4 INDEMNITY 26 1.4.1 Method of Indemnity 26 1.4.2 Measure of Indemnity 27 1.4.3 Factors Limiting Indemnity 28 1.4.4 Policies Which Pay More Than Indemnity 29 TUTORIAL 30 1.5 CONTRIBUTION 32-35 TUTORIAL 36 1.6 SUBROGATION 38 1.6.1 Definition 38-41 TUTORIAL 42 REFERENCES 43
9 | 1.0 INTRODUCTION Nowadays, insurance is thought to be a necessary component of our contemporary way of life. It has filtered into every area of our economy, including the one where insurance is now required, as we are undoubtedly all aware. It is true that having our car or motorcycle insured is required in many areas of human endeavours. Without insurance, trade will come to a complete halt. Despite its significant significance in the contemporary economy, a policy is fundamentally a contract, and a contract can only be useful if it can be enforced. All valid contracts must have 6 essential features if a court is to enforce their provisions. However, since insurance contracts are unique, they are not only subject to the general principles of law of contract but also special principles that are embodied in insurance contracts. The illustration below recalls the legal requirements embodied in an insurance contract. Adam required fire insurance after purchasing a home. He then went to his neighbourhood insurance broker, who gave him the name of a suitable insurance provider, and he purchased a homeowner's policy from them. Adam's home later sustained fire damage, and the insurance company covered the claim. Utmost Good Faith Insurable Interest Subrogation 6 Principles of Insurance Contribution Proximate Cause Indemnity
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11 | 1.1 INSURABLE INTEREST The right to ensure that results from a person's legally acknowledged pecuniary interest in the insurance subject matter is known as "insurable interest." A financial interest that is acknowledged by statute or common law is one that is legally recognized. A person does not have an insurable interest if their financial interest in the subject of insurance is not recognized by the law. A criminal, for instance, would not be able to insure the items he stole because he lacks a recognized financial stake in them. The ESSENTIALS of insurable interest are as follows: When it comes to accident insurance, the insurable interest needs to be present both when the contract is signed and when the loss occurs. Person having insurable interest. There must be property, rights interest, life limb or potential liability developing upon the Insured capable of being covered. Such property, rights, interest, life, limb or liability must be the subject matter of the insurance. The Insured must bear some relationship, recognized by law, to the subject matter whereby he benefits by the safety of the property, rights, interest, life, limb or freedom from liability and is prejudiced (hurt) by any loss, damage or injury, or creation of liability. Spouses, in each other's live and property Individual, in his own life Creditor can insure the life of a debtor Employer insuring employee's life Property owners (sole part of joint owners) can insure his property Mortgagor& Mortgagees of properties have their own respective interest in the properties Employer insuring employee's life Lessees & Lessors have their own respective interest in properties
12 | Despite the connection between insurance and gambling, there are a few distinctions between the two. The need that insurance be backed by insurable interest distinguishes it significantly from gambling. It is important to understand the terms "subject matter of contract" and "subject matter of insurance" before delving into the idea of insurable interest. 1.1.1 Subject Matter of Insurance and Subject Matter of Contract The life, limbs, property, rights, or any potential legal obligation covered by a policy constitutes the subject matter of insurance. Conversely, the insured's financial stake in the insurance subject matter is the subject matter of the contract. To differentiate between the two ideas, let's look at an example of a person who has an RM 100,000 house that is insured against fire for the same amount of money. His financial stake (RM100,000) in the house is the subject of a contract, while the house itself is the subject of insurance. Example Of Subject Matter of Insurance Type of insurance Subject Matter of Insurance Fire Buildings, Machineries & Stocks Life Life Assured Workmen's Compensation Employer's potential liability under the Workmen's Compensation Act 1952 Burglary (Business Premises) Stocks and other contents 1.1.2 When Must Insurable Interest Exist? In general, insurable interest must exist at the time of inception of the insurance contract and at the time of loss for all classes of insurance except: ● The Life insurance where insurable interest must exist at the time of inception ● Marine insurance where insurable interest must exist at the time of loss Afiq leaves his car with Areez who conducts a workshop business. What would Afiq's situation be if his car were destroyed by a fire in Areez's workshop?
13 | 1.1.3 Application of insurable Interest Life Insurance Examples that are frequently used include: • A husband and wife have a mutually insurable interest in one another's lives. • Everyone's interest in their own life. • The life of the child is covered by the parent's life insurance policy. • A creditor has an insurable interest in the debtor's life to the extent of the loan plus interest. Property Insurance Examples that are frequently used include: • A co-owner has an insurable interest in the property to the extent of his involvement in financial assurance. • The property's owner. He may insure the entire worth of the property in trust for the benefit of his co-owners if he holds any money from the insurer that exceeds his interest. • An agent's interest in real estate that is his principle's. Liability Insurance Even while a person cannot insure the fines associated with their criminal activity, they do have a legitimate stake in any potential liabilities they may face, as well as the costs associated with the legal system. Reinsurance An insurer bears an insurable interest in the risks he accepts because he stands to lose if the peril insured against damages the subject matter of the insurance. As a result, an insurer has the right to reinsure the risks that he has taken.
14 | TUTORIAL In which case is there no insurable interest? ● a dry cleaner in its customers' clothes ● a bank in property used to secure a loan ● a fan in her favourites’ actor life ANSWER ● a fan in her favourite’s actor life
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16 | 1.2 UTMOST GOOD FAITH (UBERRIMA FIDES) A duty of "uberrima fides" or "utmost good faith" is imposed on the parties to an insurance contract by the contract of insurance. Therefore, it is the insured's responsibility to provide to the insurer with all pertinent information about the insurance's subject matter and its circumstances. A fact is considered relevant if it would affect a sensible insurer's decision-making when determining the premium or whether to accept or reject the risk. The viewpoint of the proposer cannot determine whether a fact is relevant or not. The final determination of what is material may only be made by a court of law. The duty of utmost good faith is a positive duty (of the insured) to disclose fully and accurately all material facts that he (the insured) knows or ought to know, whether asked for or not (by the insurer). 1.2.1 What is a material fact? A material fact is defined as a fact which would influence the PRUDENTS UNDERWRITER in accepting the risk or fixing the premium. According to the definition the materiality of a fact will be determined by the prudent underwriter and not the insurer nor the insured concerned. And whether a fact is material or not will depend on the nature of the proposed insurance. For example, while excessive alcohol consumption of proposer may be material to a proposal for a motor or personal accident insurance, the same fact is not material if the proposal is for marine insurance. The materiality of a fact also depends on the circumstances surrounding a proposed risk. Thus, the fact relating to excessive alcohol consumption may not be a material fact. Material facts include the following: a. Factors that tend to make the risk being suggested higher than average. Physical flaws like the loss of an eye or limb could signify an accident risk and have an impact on the insured person's health and longevity. Family background, interests, and routines are also important. b. Information required to explain a risk's unusual nature when, absent that information, the insurer may reasonably assume that the risk represents, for instance, a typical hazardous vocation. c. Facts that seem to point to specific insurance-related motivations, like blatant over insurance.
17 | The duty of disclosure arises: - a. When the policy first began. The obligation is in effect until the conclusion of the insurance contract talks. However, the Proposer is required to disclose any additional relevant facts before the risks are accepted and if he does so. b. At renewal During the renewal negotiation, the obligation to disclose is reinstated. c. During an insurance policy's currency The Insured has a responsibility to provide all pertinent information on changes to the risk. A breach of utmost good faith, for example misrepresentation or non-disclosure will render the policy voidable at the option of the insurer. Ordinary Commercial Contracts Parties to the contract are subject to a duty of good faith in relation to disclosure during negotiation. Under the duty of good faith, the buyer should ask questions if he needs more information. On the other hand, the seller is required to answer the questions truthfully but is not required to volunteer information relating to the sale. The legal 'maxima' governing such contracts is caveat emptor or let the buyer beware. This principle encourages each man to get the best ‘bargain’ for himself. Insurance Contracts Different considerations apply to a contract of insurance. When an insurer is assessing a proposal, he cannot examine all aspects of the proposed insurance which are material to him. On the other hand, the proposer knows or should know everything about the risk proposed. This situation places the insurer at a disadvantage. He is not able to make a complete assessment of the risk unless the proposer is willing to give his fullest co-operation. To remedy this inequitable situation the law imposes the duty of utmost good faith on parties to an insurance contract. 1.2.2 Duration of duty of utmost good faith The disclosure of important facts is necessary prior to the insurance contract's conclusion. Therefore, the proposer must notify the insurer of any changes to the material facts if they arise after they have been disclosed to the insurer but before the contract is finished; otherwise, the contract will be void. Upon the start of the contract, the disclosure obligation will be finished. Occasionally, a policy condition may allow the duty of disclosure to be increased and to last throughout the life of the contract. In the personal accident policy, for instance, a clause mandates that the insured notify the insurer of any change in address and occupation. The insurer is allowed to break the contract if the insured fails to notify such changes.
18 | 1.2.3 Breaches of Utmost Good Faith If the obligation of disclosure is violated, the highest good faith is compromised. It occurs when a proposer knows or should have known a material fact and does one of the following: • Fails to inform the insurer of the material fact • Falsely depict a material fact by giving the insurer inaccurate information about the fact. A breach of the insured's obligation to act in good faith is referred to as nondisclosure when he fails to reveal a material fact, and a misrepresentation when he fails to disclose a material fact. Regardless of whether a breach of the highest good faith was done intentionally or falsely, the contract is voidable when it occurs. However, dishonest concealment and false representation may also provide the insurer grounds to pursue damages. Contractual duty of utmost good faith When proposal forms are required for property or financial insurances, they frequently include a declaration that the information provided in the proposal is truthful and correct and that the proposal and the declaration will serve as the foundation for the contract. The proposer guarantees the accuracy of this statement by signing the form, and if the assertions are guaranteed accurate, they must be true; otherwise, the insurers may avoid the contract, regardless of whether the warranty pertains to a relevant fact or not. As a result, the basis of contract provision effectively transforms representation into warranties. A warranty must be accurate and literal when used in the insurance environment. ACTIVITY A owns a house worth RM100,000 and borrows RM50,000 on a mortgage from B. On his insurance policy, A endorses a standard mortgage clause to protect B. A loss of RM50,000 occurs. What would the settlement be if it were found that the policy was void with respect to A because A had misrepresented a material fact at the time the policy was obtained.
19 | Tutorial Principles of utmost good faith holds the insured to a higher standard of honesty. (TRUE/FLASE) Answer: True
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21 | 1.3 PROXIMATE CAUSE Concept: The insurer is only liable for losses proximately caused by an insured peril. 1.3.1 Definition Cited by cases Pawsey & Company v Scottish Union & National Insurance Company (1907) the court defined proximate cause “as the active efficient cause that sets in motion a train of events which brings about a result, without the intervention of any force stated and working from a new and independent source”. Basically, there is a chain of events or causes leading up to a loss than a single cause. If an insured peril operates and directly causes a loss then that loss will be covered provided that there was no excepted peril operating efficiently or dominantly in the chain of events leading up to the operating of insured peril.
22 | This doctrine is important because more than one cause may operate to produce the condition resulting in the claim. It must then be ascertained whether the dominant and effective cause want an insured peril one which is excluded from the contract. For examples: Situation 1: An insured suffered from a gallstone, is knocked down by motorcar and dies, although but for the gallstones, he would not have dies. His death is not an accident within the policy (Louden v British Merchants Ins. Co. Ud 1961). Situation 2: An insured person trips over a ladder, breaks his leg, and needs medical attention. He died after getting diphtheria from a patient in the bed next to him there. The event was not the direct cause of death because diphtheria was not the expected result of a broken leg. Situation 3: An insured scratches his leg unintentionally, developing erysipelas, which progresses to septicaemia, septic pneumonia, and death. According to Mardorf v. Accident Insurance Co. (1903), each subsequent disease is a natural and likely link between the scratch and death, and death is thereby caused by the scrape. Situation 4: If the insured dies in a train accident on the way to work while suffering from a condition that does not prohibit him from attending to his business, his death is considered accidental, and the existence of the disease is to be disregarded.
23 | Situation 5: The insured is not protected by the policy if the accident's aftermath discloses the existence of a sickness that is the only factor contributing to the insured's death or disability. Situation 6: If the insured makes a rupture claim following an accident, but it is later determined that the rupture was not caused by the accident and that the insured instead had a congenital hernia, the claim must be rejected. Situation 7: When disease occurs after an accident, they are not always separate, independent causes. Death or disability may still be a natural result of the accident because the disease was a link in the chain of causation and the accident was the immediate, not a secondary, cause.
24 | Tutorial 1. The proximate cause of the loss is usually considered to be a. the main reason. b. the most proximate cause of the loss. c. the most remote cause of the loss. d. covered perils. Answer: a
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26 | 1.4 INDEMNITY In insurance contract, the mechanism of the indemnity is to provide financial compensation to place the Insured in the same financial position after the loss as he enjoyed immediately before it. Where a claim is valid, the Insured can be indemnified (at Insurers' option) by way of cash payment, repair, replacement, or reinstatement subject to the policy conditions. The maximum amount recoverable under any policy is limited by the sum insured or the limit of indemnity. However, the amount payable is also subject to the following clauses: - Insurance contracts promise 'to make good the loss or damage'. The promise if subject to the principle of indemnity which requires that when a loss arises under an insurance policy, the insured shall be restored to the same financial position after the loss as he has enjoyed immediately before it. The object of the principle is to ensure that the insured after being indemnified shall be either better or worse off than before the loss. The effect of the principle is to prevent the insured from making a profit out of loss. Contract of Indemnity When the insured has measurable insurable interest the contract of insurance will be a contract of indemnity. Examples include property, pecuniary, and liability insurance contracts. (Life insurance and personal accident contracts are generally deemed to be nonindemnity contracts because the insured's insurable interest in such contracts tend to be unlimited.
27 | 1.4.1 Method of Indemnity The methods of indemnity include payment by: - Cash most suitable method of settling claim in most insurance policy indeed, the only practicable method available for liability insurance insurer produce cheque direct to insured - Repair Common in motor insurance policy Insurer settles the repair bill direct with workshop concerned -Replacement insurer will replace the property perhaps with same type and model - Reinstatement Applied for fire insurance policy concerns the restoration or rebuilding of premises ACTIVITY Why is a property and liability insurance contract generally a contract of indemnity whereas a life insurance contract is not? 1.4.2 Measure of Indemnity a) Total Loss There are two main methods of measuring indemnity used by property insurers. Method 1 Reinstatement/replacement cost Less: allowance for new & better features Method 2 Market value of a property like the one destroyed. b) Partial Loss The measure of indemnity used is the cost of repair.
28 | 1.4.3 Factors Limiting Indemnity • Sum Insured When policies have a sum insured or limit of indemnity, even if the indemnity is for a higher amount, the insured cannot collect more than the sum insured or limit of indemnity. • Average Condition To combat underinsurance, use average. Settlement is determined according to the following formula if an insurance has an average condition: SUM INSURED X AMOUNT OF LOSS VALUE OF PROPERTY Thus, average lowers the amount due to the insured, meaning that the insured will receive less than indemnity. Theoretically, the insured is regarded as the insurer for the portion of underinsurance and is obligated to pay the damage. • Policy Excess This sum represents every claim that is not covered. The insured will get less than indemnity when a policy is subject to an excess, as in the case of automobile insurance coverage. For instance, an insured person filed an RM6,000 claim for damage to his fully covered automobile with his insurer. There is an excess of RM1,000 on the vehicle policy. If the policy covers the loss, the insured will get RM5,000, or (RM6,000-RM1,000). • Franchise The insured is liable for claims that fall below the franchise when a policy is subject to one, such as marine insurance. The insurance will cover the whole cost of the claim if this sum is surpassed. An indemnity may not be granted under a franchise insurance unless the sum to be recovered from the insurer is more than the franchise. For instance, if an insured person had a RM800 loss covered by a RM1,000 franchise, they would be responsible for paying the loss. Nonetheless, he would be eligible to receive the whole amount if the sum above RM1,000, meaning that if the loss was RM1,200. ACTIVITY Farid has a Burglary Policy covering stock in his business premises. He insured his stock valued at RM200,000 for a sum insured of RM120,000. A theft involving violent and forcible entry took place at his premises. The thieves took away RM100,000 worth of stock. Farid filed a claim against his insurer. How much will he recover from his policy?
29 | 1.4.4 Policies Which Pay More Than Indemnity ❖ Reinstatement Policies It is feasible to create building and machinery insurance policies with fire insurance that will cover the cost of rebuilding or replacing destroyed property and equipment without deducting any wear and tear: ❖ Agreed Additional Costs A fire may result in higher expenses for the insured under fire insurance. For instance, the expense of clearing debris, the costs for the architect and surveyor, etc. These expenses may be covered under the policy, and any reimbursement made by the insurer for these expenses will go beyond indemnity. ❖ Valued Policies A valued insurance is one that was created with an agreement between the insurer and the insured that the sum insured will represent the property's worth and that it will be paid out in the event of a total loss regardless of the property's value at the time of loss. Marine insurance is an example of one of these products.
30 | Tutorial Identify FOUR (4) methods of providing indemnity. Answer: Cash Reinstatement Repair Replacement
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32 | 1.5 CONTRIBUTION When an insured has more than 1 policy, he can confine his claim to one of them. The insurer must meet the loss to the limit of his liability then can only call for contribution from others after he has paid. For example: Adam took protection for his property worth RM100,000 with two Insurance Company. The property belonging to Adam that was destroyed is worth RM60,000. So, Adam can claim full loss of RM60,000 from either Insurance Company A or Insurance Company B or he can claim RM36,000 from Insurance Company A and RM24,000 from Insurance Company B. Insurance Company A cover for RM90,000 Insurance Company B cover for RM60,000
33 | Must remember contribution will only apply where the following conditions are met. Policies do not require to cover the same interests, perils, or subject matter of insurance, provided there is an overlap between one policy and another where: • Two or more policies of indemnity exist. • The policies cover a common interest. • The policies cover a common peril which gives rise to the loss. • Each policy must be liable for the loss. To overcome this difficulty, must non-marine policies contain a contribution clause. It states that the insurer is liable only for his “rateables proportions” of the loss. The insurer is liable for his share only and the insured is left to make a claim against the other insurer. The purpose of the clause is to prevent the insured from claiming against one insurer only and that insurer is put to a disadvantage of having to meet the total cost of claim and them subsequently pursue contribution recoveries from other interested insurers in the same loss. The market practice of calculating contribution: 1. Property policies (not subject to average) The market agreement of calculating, contribution is properly policies (not subject to average) is: Sum insured by particular insurer x Loss = Liability Total of sums insured of all insurer
34 | For example: A insures : RM7000 B insures : RM3000 Loss : RM2000 A pay : RM7000 x RM2000 = RM1400 RM10000 B pay : RM3000 x RM2000 = RM300 RM10000 2. Other property policies (more frequent method used) Where policies are subject to an average or where an individual loss limit applies within a sum insured, the “independent liability” method is used. The “independent liability” is the amount which an insurer would be obliged to pay it. For example: A insures : RM3000 B insurers : RM1000 Loss : RM550 Insurer’s independent liability x Loss = Liability Liability Total of sums insured of all insurer
35 | A pays : RM3000 x RM550= RM367 RM 4500 B pays : RM1000 x RM550= RM122 RM 4500 This principle does not apply to personal accident insurance and a person may claim the full sums payable under several policies with different insurers (except for medical expenses)
36 | Tutorial Which of the following is the principle of sequence of indemnity that gives the right of the insurer to request that another insurer be liable to pay each part of the claim? a. Cause of proximity b. Subrogation c. Contribution d.Insurable interest Answer: c
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38 | 1.6 SUBROGATION Concept: The right of one person to stand in the place of another and avail himself to all the rights and remedies of that other, whether enforced or not (Burnard vs Rodocanachi). The principle was forward that an Insurer, having indemnified a person was entitled to receive back from the Insured anything he may receive from any source. 1.6.1 Definition Where one party has the right to take the place of another party for the purpose of making damages. It is based on the Indemnity principle to ensure that participants do not profit from actual loss. It can be used before payment to participants. In the case where the participant has been partially covered by the loss by a third party, the Insurer will only pay the balance, up to the total payment made to the Insured. If the Insurer obtains compensation from a third party more than the value which has been paid to the Insured, the excess must be returned to the Insured. The common law right of subrogation does not arise until the insurers have admitted the insured claim and paid for it. Due to problems arising from this doctrine, insurers placed a condition on the policy giving themselves subrogation rights before a claim is paid (exception marine) but the insurer must act in the insured’s name.
39 | Example 1: NO NO YES Loss to the insured caused by a third party Can the Insured claim from a third party? Can the Insured claim from the Insurer The Insured cannot claim from the Insurer The Insurer obtains the right of subrogation Insured claims loss from third party Case Closed Case Closed
40 | Example 2 .0 There are four potential causes of subrogation: i. Subrogation arising out of tort. ● Frequent cause of subrogation is negligence. ● For example: If an automobile driven by Mr. Ali was struck by a car driven carelessly by Mr. Badrul, that would be negligence. Mr. Ali reported the loss to his auto insurer, who then used Mr. Ali's legal recourse against Mr. Badrul. ii. Subrogation arising out of contract. ● If a third party has a contractual obligation to compensate someone for a loss they sustained while also carrying insurance that will cover that loss. ● After the loss is compensated, the insurer may assume control of the claim against the third party. ● For instance, a shipper whose commodities were damaged while in the carrier's care may use this right to sue either the carrier who is responsible for the loss under the terms of the carriage contract or his marine cargo insurer. If Ahmad's house was destroyed by fire due to the explosion of a nearby factory. Claims submitted by Ahmad to his Insurer for RM500,000. After payment of the claim, the Insurer uses subrogation rights to claim the amount settled with Ahmad’s from the factory owner responsible for the above the loss. the loss If the factory has Insurance cover, their Insurer will handle the compensation.
41 | he makes a claim against his insurer, the insurer may, after paying the shipper's indemnity, assume his right against the carrier. iii. Subrogation arising out of the statute. ● For example: The Innkeepers Act ● If a third party is required to do so by law, they must compensate someone else for a loss they themselves have insurance coverage for. ● After the loss is compensated, the insurer may assume control of the claim against the third party. iv. Subrogation arising out of the subject matter. ● The remains of an insured object are salvaged. ● The insured is the rightful owner of the salvage. However, the insurer may assume the insured's claim to the salvage if the insured requests payment on the premise of total loss.
42 | Tutorial Why do insurers include subrogation terms in policies? a. To give them the right to continue the action of demanding payment from the party responsible. b. To enable them to initiate action to claim payment despite claims not yet pay. c. To give them the right to continue the action of claiming payment in the name of their own insurer. d. To prevent the insured from making a claim twice for the same loss. Answer: b
43 | REFERENCES George E. Rejda, Michael J.McNamara., Principle of Risk Management and Insurance, 13th Edition Institute, T. M. (2014). Pre-Contract Examination for Insurance Agents (9th ed.). The Malaysian Insurance Institute. Oswald, T.E., Azitadoly, M.A., Ainon, B., Nurul Aida, H., Norfaezah, M.S., Faziatul, A.M.B., (2017), Risk and Insurance. McGraw-Hill (Malaysia), 3rd Edition. The Malaysian Insurance Institute, Basic Certificate Course in Insurance Loss Adjusting.
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