Not all risks are insurable because as insurance evolved over the years the industry identified the following criteria a risk must possess in order to be considered insurable
* the loss must be accidental – damage caused by gradual operating causes is a typically excluded loss common to all insurance contracts
* the loss should not be catastrophic. Insurance is not designed to cater for losses like war as these
could result in financial catastrophe
* there must be a large number of exposure units
In other to accept a risk, Insurers assess whether the premium payable is economically feasible and also whether the chance of loss is calculable.
Other Reasons for excluding certain types of losses
A loss may be excluded because the legislation in the country of operation has already made
provision to protect the insured following a financial loss. An example would be the exclusion of loss or destruction attributable to radioactive contamination and also the exclusion relating to war and kindred risks.
A loss may also be excluded where coverage is provided by other insurance contracts. Tenants contents insurance, for instance, excludes property more specifically insured by any other insurance
The presence of an extraordinary hazard is also another factor. Exclusion of Loss or damage attributable to coastal or river erosion commonly found in most Contents and Buildings insurance will fall under this category.
Moral hazard which refers to the character, habits and actions of the insured that influence the possibility and extent of a loss is another vital criteria.
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Carelessness and dishonesty are two of the top characteristics insurance companies avoid. However, on the subject of carelessness, insurers are required to be explicit as the courts have held that one of the risks insured against is a policyholder’s own carelessness and have thus interpreted ‘reasonable precautions’ to be a basis for avoiding liability where the policyholder is reckless as opposed to just being negligent.
Insurers are therefore not allowed to incorporate into policy documents atrocious terms which make it difficult for claimants to successfully receive full payment. A good example would be the condition to take all reasonable precautions to prevent the loss. This appears absurd when in fact the policyholder believes the premium paid is to ensure he gets indemnity if he makes such eventuality.
The courts are there to curb the excesses of any insurance company that interpret such terms to include unquestionable negligent acts.
Insurance generally excludes acts that are against public policy hence the exclusion of loss or damage caused by items being confiscated or legally taken by customs officers or other officials
The Insurance Company as the victim
There is the popular belief that Insurance is a necessary evil and that insurance companies make huge profits from taking advantage of the hapless insuring public. In reality, these firms do not make profits that compare to firms in the banking sector for instance largely because the bulk of premium income goes back to members of the pool i.e. policyholders that suffer loss.
Information that does not make headlines often enough is the fact that insurance firms are frequently targeted by fraudsters who make dubious insurance claims. These criminals take advantage of the fact that the insurance company only has as much information about a risk as an insured decides to provide.
A popular folklore about a hunter and a sought after bird quotes the creature as saying “as the hunter has learned to shoot without missing, I have also learnt to fly without perching”. This statement best describes the cat and mouse game between insurers and fraudsters continually seeking to profit from insurance.
One approach adopted by insurers to keep up with these criminals is the inclusion of policy/risk specific exclusions / warranties and conditions into an insurance contract.
Insurers also continually update information about a risk insured on its files by incorporating into contracts, the duty of disclosure which requires the insured to disclose all material facts i.e. a fact about a risk proposed for insurance which would influence a prudent insurer in deciding to accept the risk and on what terms.
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