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HISTORY OF INSURANCE
Insurance is when one party transfers the risk of loss to another party in exchange for payment. The money one party pays to transfer the risk is called the “premium.”
Transferring and distributing the risk of loss can be traced back to the Chinese and Babylonian traders. As Chinese merchants traveled by dangerous seas, they distributed their goods across many vessels in order to limit their loss in case they lose any single vessel. When the Babylonian traders received loans to fund their shipments, they paid extra in exchange for the lender promising to cancel the loan in the event the shipment is lost during transport.
Insurance practices advanced in Europe during the Enlightenment Era. After a catastrophic fire destroyed over 13,000 homes in London in the mid 1600’s, insurance went from a matter of convenience to a matter of urgency and gave way to what is known today as property insurance. The first fire insurance company was established in 1667 by Nicholas Barbon.
Around the same time, insurance for loans and businesses was becoming available. As the production of automobiles increased, auto insurance became common among automobile owners. Eventually insurance grew into a big business it is today.
LEGAL PRINCIPLES OF INSURANCE
The process of risk transfer is based on several legal principles of insurance. The basic legal principle of insurance is “indemnity.” A defining characteristic of insurance, providing that a loss payment will replace what is lost, putting the insured back to where it was financially prior to the loss without rewarding or penalizing the insured for its loss.
The insured and the insurer are bound by the doctrine of the utmost good faith. The doctrine of utmost good faith requires the insured and the insurer to act honestly toward each other and not withhold material facts from one another.
Under the principle of subrogation, the insurer acquires the legal right to pursue recoveries on behalf of the insured. This permits the insurer to”step into the shoes of the insured” to sue the liable third party for the damages caused to the insured.