Principals of Insurance
Principals of Insurance
1. Principal of utmost good faith
Insurance contracts are the contracts of mutual trust and confidence.
Both parties to the contract i.e., insurer and the insured, must disclose all the relevant information relating to the subject matter of insurance.
Example - Incase of life insurance, the proposer must honestly disclose all information relating to his/her health, habits, personal history, family history etc.,
In case of any concealment about the material facts, the contract will not be valid.
2. Principal of Insurable interest
According to this principal, the insured must have insurable interest in the subject matter of insurance
Insurable interest means financial or pecuniary interest in the subject matter of insurance.
A person has insurable interest in the property or life insured, if he stands to gain from its existence or loose from its damage or destruction.
In case of life insurance, the insurable interest must be present at the time of taking the policy; in case of marine insurance, insurable interest must exist at the time of loss or damage to the property ; in case of fire insurance, it must exist both at the time of taking the policy as well as at the time of loss or damage to the property
3. Principal of Indemnity
The word indemnity means compensating somebody for the actual loss suffered by him or restore someone to the same position that he was in before the insured event took place.
This principal is only applicable to fire, marine and general insurance. It is not applicable to life insurance because the loss of life cannot be restored.
The principal of indemnity implies that the insured is not allowed to make any profit from the insurance contract on the happening of the event that is insured against.
Compensation is paid on the basis of amount of actual loss or the sum insured, which ever is less.
Example - A person insures his house against fire for 20 lakhs. The fire takes place and he has to spend Rs. 5 lakhs to repair the damage so caused. He can claim only Rs.5 lakhs from insurer and not the sum assured.
6. Principal of Mitigation
In case of a mishap the insured must take all the steps to reduce or mitigate the loss or damage to the subject matter of insurance.
This principal ensures that the insured does not become negligent about the safety of the subject matter after taking an insurance policy.
The insured is expected to act in a manner as if the subject manner has not been insured. If appropriate steps are not taken to save the assets, then the insured may not get the full compensation from the insurance company.
Example - If a house is insured against a fire and the fire takes place, the owner must take all possible steps to extinguish the fire and minimise the loss. Similarly, when a house is insured against a theft, he must take all precautions and steps to prevent theft.
4. Principal of contribution
The same subject matter may be insured with more than one insurer
In such a case, the insurance claim to be paid to the insured must be shared or contributed by all insurers in proportion to the amount of sum assured by each one of them.
If one insurer has paid the full compensation to the insured, he has the right to ask other insurers to share the loss proportionately.
5. Principal of Subrogation
According to this principal, once the claim of the insured has been settled, the ownership right of the subject matter of insurance passes on to the insurer.
In other words, if the damaged property has any value, such property cannot be allowed to remain with the insured because, otherwise, the insured will realise more than the actual loss which goes against the principal of indemnity.
Example - When goods worth Rs.1,00,000 are damaged due to accident and the insurance company pays the full compensation to the insured, the insurance company takes the possession of that damaged property and is entitled to dispose off that property.
7. Principal of Causa-Proxima (nearest cause)
According to this principal, the insured can claim the compensation only if the loss is caused by the event insured against.
In other words, unless the event insured is nearest cause (not a remote cause) for the loss occurred, the insured cannot claim the loss from the insurance company.
Example - A ship carrying oranges was insured against losses arising from the accident. The ship reached the port safely and there was a delay in unloading the oranges from the ship. As a result, the oranges got spoilt. The insurer did not pay any compensation for the loss because the proximate cause of loss was delay in unloading and not an accident during the voyage.