Principles of Insurance-7 Principles of Insurance

The principles of insurance are the rule of action or conduct adopted by the stakeholders involved in the insurance business. The specific principles of a valid insurance contract consist of the following:

  • Utmost good faith: A contract of insurance is a contract found on utmost good faith. Both the insurer and the insured should display good faith towards each other in regard to the contract. It is the duty of the insured to voluntarily make full, accurate disclosure of all facts, material to the risk being proposed and the insurer to make clear all the terms and conditions in the insurance contract. Failure to make disclosure of material facts by the insured makes the contract of insurance voidable at the discretion of the insurer.

 

  • Insurable interest: The insured must have an insurable interest in the subject matter of insurance. It is the pecuniary interest in the subject matter of the insurance contract. The insured must have an interest in the preservation of the thing or life insured, so that he / she is insured will suffer financially on the happening of the event against which he / she is insured. In case of insurance of property, insurable interest of the insured in the subject matter of the insurance must exist at the time of happening of the event. In order to name insurable interest however, it is not necessary that one should be the owner of the property. For example, a trustee holding property on behalf of others has an insurable interest in the property.

 

  • Indemnity: All insurance contracts of fire or marine insurance are contracts of indemnity. According to it, the insurer undertakes to put the insured, in the event of loss, in the same position that he occupied immediately before the happening of the event insured against. The compensation payable and the loss suffered are to be measured in terms of money. The compensation payable and the loss suffered are to be measured in terms of money. The principle of indemnity is not applicable to life insurance.

 

  • Proximate Cause: according to this principle, an insurance policy is designed to provide compensation only for such loss as are caused by the perils which are stated in the policy. When the loss is the result of two or more causes, the proximate cause means the direct, the most dominant and the most effective cause of which the loss is the natural consequence.

 

  • Subrogation: It refers to the right of insurer to stand in the place of insured, after settlement of a claim, as far as the right of insured in respect of recovery from an alternative source is involved. After the insured is compensated for the loss or damage to the property insured by him / her right of ownership of such property passes on to the insurer. This is because the insured should not be allowed to make any profit, by selling the damaged property or in the case of lost property being recovered.

 

  • Contribution: As per this principle it is the right of an insurer who has paid claim under insurance, to call upon other liable insurers to contribute for the loss of payment. It implies that in case of double insurance, the insurers are to share losses in proportion to the amount assured by each of them. In case there is loss, when there is more than one policy on the same property, the insured will have no right to recover more than full amount of actual loss. If the full amount is recovered from one insurer the right to obtain further payment from the other insurer will cease.

 

  • Mitigation : This principle states that it is the duty of the insured to take reasonable steps to minimize the loss or damage to the insured property. The insured must behave with great prudence and not be careless just because there is an insurance cover. If reasonable care is not taken like any prudent person then the claim from the insurance company may be lost.