One of the most common complaints about insurance companies generally is that they do not honor claims when they happen. A typical insured person expects that whenever there is a loss, the insurance company should pay compensation while an insurance company on the other hand will check the policy document to be sure that the insured is covered for the claimed occurrence. The two parties are looking at the same scenarios from different perspectives, hence the difference in their views. In order to arrive at a common understanding between the parties, it is important to understand the meaning of insurance to understand what insurance is meant to do regardless of the views of the parties involved.

The most basic definition of insurance says ‘insurance is a contract where an insurer promises to pay the insured party a sum of money if one or more specified events occur in the future, in return for regular payment know as premium’. The main purpose is to reduce the financial effect of a specified loss on the insured person. This implies that insurance is a form of financial compensation for losses suffered from a specified future occurrence. It is important to also note at this point that a determinant of whether an insurer pays a claim or not is the occurrence of a specified future events. In order words, if an event that is not specified occurs, an insurer may not pay a claim.

One should also bear in mind that every insured person contributes to a pool, from where anyone that suffers a loss will be indemnified. In this case, based on actuarial calculations, a premium rate is determined to know what each insured pays into the pool. It will rather be unfair for anyone to take from the pool more than necessary. Therefore, compensation is based on actual loss suffered subject to the maximum limit of the sum insured and not more.

As explained earlier, insurance generally works by the principle of indemnity which seeks to restore an insured person to his pre-loss condition despite suffering a loss. This means that if James insured his car worth N2,000,000 against accident, in case of an accident, his insurer will payment compensation to cover the cost of repair or replacement including other inconvenience he might have suffered depending on the type of coverage he has. In this case, James does not have to worry about where to get money in case of accident to his car. Some specified future event has happened and James would be financially compensated. However, the compensation is not expected to make James richer, but rather to restore him to his pre-loss state.

In the above example, if James had valued his car worth N3,500,000 for N2,000,000, the liability of the insurer is limited to the sum insured of N2,000,000. Although a specified future event has occurred, the insurer will not agree to a liability in excess of the sum insured because it will amount to James taking more than he fairly deserved from the common pool. He will not be allowed to make profit from his loss by taking more than he has proportionately contributed. In this case, James has under-insured and will be responsible for the under-insurance of N1,500,000. This scenario further explains why the insured is expected to give true and complete information when applying for insurance.

In conclusion, insurance seeks to restore insured persons to the pre-loss state by compensating them for loss insured on specified future events. To avoid disputes in time of claim settlement, policyholders are expected to ask questions on grey areas when buying covers. It is also advisable to engage brokers or agents, who are trained professionals to explain the scope of cover and the responsibilities of the insured person. Engaging their service is also free as you are not paying any fee for their engagement. They are rewarded with commissions by the insurance companies.

Premium is a token paid to buy peace of mind when life happens – BeInsuredNaija

For all insurance news, updates, jobs, feedback etc, visit www.beinsurednaija.com. You can also submit an editorial on any area of insurance by sending a mail to editorials@beinsurednaija.com