Answer to Question #286499 in Management for Lisisia

Question

John owns a car valued at sh. 3 million. He also has two personal accident insurance policies both covering him against accidental death and accidental bodily injury with two different insurers, A for sh. 5 million and B for sh. 15 million. John had decided to insurer his car with three different insurers as follows: - Insurer X sh. 2 million. Insurer Y for sh. 3 million. And Insurer Z for sh. 1.5 million.

Last week, Peter a matatu driver who was driving while drunk lost control of the matatu he was driving and rammed it on Johns car, completely destroying it and causing john very serious bodily injuries resulting in a medical bill of sh. 2million.

Discuss the Principles of insurance that will be relevant John’s compensation for both the loss of his car and his bodily injuries (18 marks)

Answer 1

Insurance is a contract, a legal agreement between two parties, i.e., the individual named insured and the insurance company called insurer. In this agreement, the insurer promises to help with the losses of the insured on the happening contingency. The insured, on the other hand, pays a premium in return for the promise made by the insurer. The contract of insurance between an insurer and insured is based on certain principles. In John’s case, some principles are relevant for his compensation as discussed below;

Principle of Subrogation

Subrogation means one party stands in for another. As per this principle, after the insured, i.e. the individual has been compensated for the incurred loss to him on the subject matter that was insured, the rights of the ownership of that property goes to the insurer, i.e. the company. Subrogation gives the right to the insurance company to claim the amount of loss from the third party responsible for the same. In this case John gets injured in a road accident, due to Peter’s reckless driving, the company with which John took the accidental insurance will compensate the loss occurred and will also sue Peter to recover the money paid as claim. 

Principle of Indemnity

This principle says that insurance is done only for the coverage of the loss hence insured should not make any profit from the insurance contract. In other words, the insured should be compensated the amount equal to the actual loss and not the amount exceeding the loss. The purpose of the indemnity principle is to set back the insured at the same financial position as he was before the loss occurred. Principle of indemnity is observed strictly for property insurance and not applicable for the life insurance contract.

Principle of Contribution

Contribution principle applies when the insured takes more than one insurance policy for the same subject matter. The insured cannot make a profit by claiming the loss of one subject matter from different policies or companies. For instance, in John’s case, due to the damage of his car he can claim the full amount from company Y but then he cannot claim any amount from company X or Z.