Explain the following insurance terms: (a) proximate cause (b) contribution (c) utmost good faith (d) re-insurance (e) contract of non-indemnity (compensati...

Answer Details

Insurance terms explained

• (a) Proximate cause: the principle that the insurer is liable only where the loss is caused by the nearest, most direct and effective cause covered by the policy, and not by a remote cause. Compensation is paid only if the insured peril is the proximate cause of the loss.
• (b) Contribution: the principle that where the same risk has been insured with more than one insurer, each insurer bears the loss only in proportion to the amount it insured. The insured cannot recover more than the actual loss from all the insurers together.
• (c) Utmost good faith (uberrimae fidei): the principle that both parties, especially the insured, must disclose all material facts about the risk honestly and completely. Concealment or misrepresentation of a material fact makes the policy void.
• (d) Re-insurance: an arrangement by which an insurer that has accepted a large risk transfers part of that risk to another insurance company (the re-insurer) so as to spread the risk and avoid heavy loss.
• (e) Contract of non-indemnity: a form of insurance (mainly life assurance and personal accident) in which the sum payable is fixed in advance because the loss (life, limb) cannot be measured in money. The agreed sum is paid on the happening of the event, rather than the exact loss suffered.