CHAPTER 3
Legal Principles of Insurance
The foundational legal concepts that underpin all insurance contracts in Canada.
Core Legal Principles
Utmost good faith (uberrimae fidei) — higher standard than ordinary contracts. Both parties must act honestly and disclose all material facts. Failure by either party can void the contract.
Principle of indemnity — compensation should restore the insured to their pre-loss financial position — no more, no less. Prevents profiting from a loss. Applies to P&C and health insurance. Does NOT apply to life insurance (which is a valued policy — pays a pre-agreed sum regardless of actual financial loss).
Subrogation — after paying a claim, the insurer steps into the insured's shoes to recover the amount from a negligent third party. Prevents the insured from collecting twice. Applies to P&C and health insurance. Does NOT apply to life insurance.
Insurable interest — must exist at inception of the policy. For P&C insurance, must also exist at the time of loss.
Proximate cause — the dominant, effective cause of a loss. Used to determine whether a loss is covered under the policy.
KEY POINTS
- ✓Principle of indemnity: restore to pre-loss position — no profit
- ✓Indemnity does NOT apply to life insurance (valued policy)
- ✓Subrogation: insurer recovers from negligent third party after paying claim
- ✓Subrogation does NOT apply to life insurance
- ✓Proximate cause: the effective dominant cause of the loss
AML & FINTRAC Obligations
Anti-Money Laundering (AML) obligations apply to life insurance agents dealing in certain products under the Proceeds of Crime (Money Laundering) and Terrorist Financing Act.
- Covered products:
- Permanent life insurance policies with cash value or investment component
- Immediate annuities
- Seg funds
Agent obligations: 1. Verify client identity using government-issued photo ID at account opening 2. Keep records for at least 5 years 3. Report large cash transactions of $10,000 or more to FINTRAC 4. Report suspicious transactions — no threshold, based on reasonable grounds to suspect money laundering or terrorist financing 5. Implement a compliance program — written policies, training, ongoing monitoring
FINTRAC (Financial Transactions and Reports Analysis Centre of Canada) is Canada's financial intelligence unit.
KEY POINTS
- ✓AML applies to permanent life, immediate annuities, and seg funds
- ✓Verify client identity at account opening
- ✓Report cash transactions of $10,000+ to FINTRAC
- ✓Report suspicious transactions regardless of amount
- ✓Keep records for minimum 5 years