Principles of Insurance   29th January 2007

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Principles of Insurance

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Having adequate insurance is vital. Various insurance packages can be arranged at reasonable cost  to cover all kinds of insurable risks for landlords, and to protect the interests of tenants - for both residential and commercial tenancies.

Always use a reputable insurance company. It's only when you have a claim that you find out how good your insurers are, so think very carefully when taking out insurance cover.

Insurance is a special form of contract between insured and insurer (policy holder and insurance company). In return for the payment of premiums the insurers indemnify the insured against certain insurable (measurable) risks.

Indemnity means that the insurers agree to compensate in the event of loss such that the insured is left substantially in the same position financially after the loss as she was before it - the insured cannot profit from a loss!

An insurance contract is one of utmost good faith. What this means is that all material facts about an insured risk must be disclosed to the insurers at the time of completing the proposal form, or subsequently if the facts change.

If you misrepresent the facts about a risk to your insurers they will quite happily take your premiums without question. However, in the event of a loss everything is investigated - your insurance becomes void - in fact if you misrepresent material facts you are not insured!

You must have an interest (insurable interest) in the thing insured. If you could insure something which you did not have an insurable interest in (ownership of) it would be possible to gain in the event of another's loss!

In the event of a claim and where the thing reinstated improves the insured's position, the principle of betterment applies. In this case a financial payment is required of the insured. 

For example, following a fire, it may not be possible to replace a roof in the same dilapidated condition as the old one. Following the principle of indemnity, the insured is now in a better financial position with a new roof than before, therefore betterment applies. 

The insured therefore must pay something towards the cost of the replacement.

The betterment principle can be varied where the final  compensation for loss is an agreed value beforehand, or where the policy is based on an agreed replacement of new-for-old.

If more than one policy covers the same risk it is not possible for the insured to claim on both and make a gain. In this situation each of the insurers involved would be required to contribute a proportionate amount of the loss - this is known as the principle of contribution.

In the event of a claim and where the insurers have fully indemnified the insured, the insured's original interests can be taken over by the insurers - this is known as the principle of subrogation.

For example, where a third party causes damage to the insured's property, after the insurers have settled the claim they can pursue the third party for the cost of the damage. 

Underinsurance can have serious implications when insuring a property. Underinsurance means that the replacement value of the property or the value of the contents has been understated on the proposal, thereby lowering the premiums paid.

In an underinsurance situation, in the event of a claim, the loss adjuster will average the compensation paid. 

The principle of average means that the amount of the claim payment will be reduced proportionality if the property was not insured to the full amount of its replacement cost.

An important point for landlords: if you rely on an insurance agent to complete your proposal form and to set replacement values, bear in mind that the agent is usually your agent and not the insurance company's agent.

If your agent makes a mistake, misrepresents material facts or miscalculates values and replacement costs, then it is your mistake, not the insurance company's mistake.  

Your only redress on facing a loss in this instance would be against your insurance agent on professional negligence grounds!

In the event of a claim the insurers will want to ascertain if the cause of the loss was an insured risk. The principle of proximate cause relates to this and is define as: The efficient cause which brings about a loss with no other intervening cause which breaks the chain of events.

An example of this might be where belongings were removed from a house in the event of a flood, stored in an outside yard and subsequently damaged by rain. Was the proximate cause of the loss of the belongings the flood or the rain?  

If the owner had made every attempt to protect the items quickly that the proximate cause would be deemed to be the flood. If however, the owner had neglectfully left the good unprotected for an excessive length of time the proximate cause would be deemed to be the rain.  

 LandlordZONE January 2006 all rights reserved

Information here is by definition general in its nature. Before acting or refraining from action on insurance matters consult an insurance expert authorised by the Financial Services  Authority (FSA) - all insurers advertising here are approved by the FSA. For property management and legal issues we recommend you consult a chartered surveyor or a solicitor.

Contents © LandlordZONE® 2007 all rights reserved.