What are the 7 rules of insurance?

The 7 Foundational Rules That Govern Insurance

When you purchase an insurance policy, you're not just buying peace of mind—you're entering a contract built on long-standing legal principles. These principles ensure fairness, clarity, and accountability for both the insurer and the insured. At the core of every policy lie seven essential rules that shape how coverage works and how claims are handled.

First is utmost good faith—a requirement that both parties be completely honest when entering the agreement. You must disclose all relevant facts, and the insurer must clearly outline the terms. Then comes insurable interest, meaning you must have a legitimate financial stake in the person or asset being insured. You can't, for instance, insure your neighbor's car without a legal connection.

Indemnity is another cornerstone: insurance isn't meant to profit you, but to restore you to the financial position you were in before a loss. This principle prevents overcompensation. Linked to this is contribution, which ensures that if you have multiple policies covering the same risk, insurers share the payout—you shouldn't collect double.

Subrogation allows the insurer to step into your shoes after paying a claim, so they can pursue recovery from a third party at fault. This helps keep premiums lower for everyone. Equally important is loss minimisation—you're expected to take reasonable steps to reduce damage, like putting out a fire if possible.

Finally, proximate cause determines whether a loss is covered by identifying the most direct and dominant cause. If a flood damages your home but your policy excludes water damage, knowing the primary cause is crucial.

Together, these principles uphold trust and consistency in the insurance world—ensuring that promises made in policies are promises kept.