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Question

Difficulty: MediumInsurance: Principles and Types

A merchant insured his shop inventory strictly against loss caused by fire. Subsequently, a heavy flood submerged the warehouse and damaged the inventory, but no fire occurred. The insurance company denied the merchant's claim for compensation. Which principle of insurance supports the insurer's decision?

  1. Proximate causeAnswer
  2. B
    Indemnity
  3. C
    Subrogation
  4. D
    Utmost good faith

Answer

Proximate cause
Under the principle of proximate cause (causa proxima), an insurer is obligated to pay compensation only when the direct, immediate, and dominant cause of the loss is the specific risk insured against. Because the inventory was damaged by flooding (an uninsured peril) rather than fire (the insured peril), the insurer is legally justified in rejecting the claim.

Step-by-Step Solution

1
Identify the insured peril and the actual cause of damage
The insured peril was fire, whereas the actual cause of loss was flooding.
To determine policy coverage, the active event leading to the damage must be identified.
2
Apply the relevant insurance principle to the facts
The principle of proximate cause (causa proxima) dictates that compensation is only payable if the direct and effective cause of loss is the peril insured against.
Because flooding was not included in the fire policy, the loss falls outside the insurer's liability.

Key Concept

Principle of Proximate Cause (Causa Proxima)
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Topics

Insurance: Principles and Types

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