Insurance law: The basics
In the present day financial industry, insurance plays a key role and many new and establish institutions undertake someone else’s risk for a premium, which will not be refunded even if such an event does not occur. This is the fundamental principle governing the insurance industry and in simple, the insurance company will facilitate the task of sharing a particular risk and losses among many individuals who contribute to a common insurance fund. Thus, the insurance company would merely be the facilitator to hold and regulate the common pool of funds while disseminating money at pre-defined instances.
With insurance industry becoming a lucrative as well as a competitive financial entity, competitiveness between companies to lure customers towards their products gathered momentum and unless governments regulate and enforce laws, it may cause financial instability in a country. Thus, in the United States, enactment of McCarran-Ferguson Act in the year 1944 can be considered the turning point in which state was given the power to regulate the insurance industry, which until then remained un-regulated.
However, although state laws do override federal laws in relation to governing most aspects of the insurance industry, some portions of federal law remain superior to any other state law. Thus, labor, tax, and securities related laws in the insurance industry would be governed by the federal law while activities related to the insurance business would be governed by the state law.
In essence, insurance law would govern three aspects related to insurance industry. These include,
-regulating business of insurance
-regulating content of insurance policies
-regulating claim handling.
In order to regulate these aspects, the insurance law abides by several principles as mentioned below.
Utmost good faith
The definition of utmost good faith is the “A positive duty to voluntarily disclose, accurately and fully, all facts material to the risk being proposed, whether requested or not”. Unless the party being insured discloses these facts or else the insurer disclose their terms and conditions accurately, the insurance contract would not comply with this principle.
The legal right to insure arising out of a financial relationship recognized by law, between the insured and the subject-matter insured is the legal definition of insurable interest. This will prevent an insurance contract being considered a ‘gamble’ or a ‘bet’ and would prevent fraudulent acts related to insurance claims.
In indemnity principle, the insurance contract should be able to place the insured that have suffered a loss as depicted in the matter insured, to the same financial position enjoyed by the insured before the event occurred. This will prevent undue gains, which may harm the integrity of the insurance industry.
It is based on the doctrine of cause and effect and the insurance contract should look into the aspects of direct, most dominant, most effective, closely connected to loss in efficiency and effectiveness as well as commonsense in order to determine the cause and the effect. It allows defining the scope of the insurance contract and will protect the rights of all relevant parties to that particular insurance contract.
However, because of the laws defining these principles, it is not necessary for the consumer to be proficient in knowing these legal aspects, which simplifies the complex process of obtaining insurance, while protecting the rights of all relevant parties optimally.
Cornell University Law School : Legal Information Institute