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Difficulty: MediumBasic Principles of Insurance

Match each basic principle of insurance on the left with its correct legal definition or application on the right.

  • Utmost Good Faith (Uberrimae Fidei)The insured must disclose all material facts fully and accurately prior to contract formation.
  • Insurable InterestThe policyholder must possess a recognized financial relationship to the subject matter, suffering a loss if damaged.
  • Proximate CauseThe direct, active, and dominant peril that sets off an unbroken chain of events resulting in the loss.
  • SubrogationThe insurer steps into the legal position of the insured to recover costs from a liable third party after paying indemnity.

Answer

Utmost Good Faith matches full disclosure of material facts; Insurable Interest matches having a financial stake in the subject matter; Proximate Cause matches the direct dominant cause of loss; Subrogation matches the insurer taking over legal rights to claim against third parties.
Each insurance principle correctly pairs with its legal application: Utmost Good Faith obligates disclosure of material facts, Insurable Interest establishes a legal financial connection to the insured item, Proximate Cause pinpoint the dominant operational origin of damage, and Subrogation substitutes the insurer into the insured's recovery rights against third parties.

Step-by-Step Solution

1
Identify the meaning of Utmost Good Faith
It establishes a duty to disclose all material facts without misrepresentation or concealment.
Insurance contracts rely on mutual trust between the insurer and the insured.
2
Identify the meaning of Insurable Interest
It requires the insured to have a legal and financial stake in the subject matter.
Without insurable interest, an insurance policy constitutes an illegal gambling or wagering contract.
3
Identify the meaning of Proximate Cause
It determines the actual primary cause setting off the chain of events leading to damage.
Insurers only pay for losses caused directly by insured perils.
4
Identify the meaning of Subrogation
It allows an insurer who has fully indemnified the insured to pursue a negligent third party for damages.
It prevents the insured from profiting by recovering compensation twice for a single loss.

Key Concept

Basic Principles of Insurance
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Topics

Basic Principles of Insurance

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