Commonly Misunderstood Insurance Terms

In this blog, we clarify a few commonly misunderstood insurance terms:

Insurable Interest
Insurable interest refers to the insured’s interest in insuring certain assets against financial loss. A person has an insurable interest in something when loss or damage to it would cause that person to suffer a financial loss.

Forcible and Violent Entry or Exit (where it is an insurer’s requirement)
In order to validate a claim of theft, there must be evidence that either a break in (or out of) the premises occurred, or violence or threat of violence against the insured. In some cases, a call-out report from an armed response will meet this criterion, when the alarm was activated on entry. Photographic evidence (broken window or forced entry) on a claims report, certified by a police station, can also validly support the claim.

Third Party
This is classified as a person who is not a party to a contract of insurance.

Third Party Cover
Third party cover provides protection against the claims of another. The insured (first party) purchases third party cover from an insurance company (second party) to cover against another party’s claims (third party). In the case of vehicle insurance, this would cover damage to the other vehicle.

The right of one party to stand in the place of another and to assume their legal rights against a third party. In the name of the insured, the insurer (insurance company) has the right to pursue a third party that caused an insurance loss to the insured to recover the amount of the claim paid to the insured for a loss. It’s a way to protect you and your insurance company against paying for a loss that wasn’t your fault.

Waiver of Subrogation
An agreement that prevents your insurance company from acting on your behalf (insured) to recoup expenses from the party at fault. Once a waiver is signed, your insurance company won’t be able to pursue a third party since you’ve waived their right to step into your shoes from a legal standpoint.

Proximate Cause
The direct and dominant cause that had the most significant impact to bring about the loss in question.

Consequential Loss
A loss that directly arises from another loss. Insurance loss or damage can be classified in two ways: first loss or damage or following loss or damage. For following loss or damage to be classified as consequential loss, it must arise as a result of first loss or damage, for example when a fire caused the loss of your ability to earn rent.

Claims Preparation Costs
Reasonable and supportable costs incurred by the insured through using external consultants for preparing, certification or verification of any claim.

The purpose of insuring property or a vehicle is to financially restore you to the same position you were in before the loss or damage to the property or vehicle. In principle, you should not be placed in a better position than you were before the loss or damage. In other words, an insurer should not compensate you for more than the value of the insured property or vehicle.

Replacement Cost
The value of property based on the most recent purchase price of a similar item.

This is a principle of insurance that results in the proportionate reduction of a claim payment where underinsurance has been shown.

A survey is a physical examination of the property where defects, risks and hazards that may influence an underwriter’s decision are noted and recommendations made.

A process whereby the cause of the loss is identified in line with the cover under the policy; it also quantifies the value of the loss.

The provisions of a contract are interpreted according to how a reasonable person would interpret it. However, it is important to note that what is reasonable to one person may not be considered reasonable to another, therefore it is good practice to use an authorised broker when faced with such a challenge.

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