PRINCIPLES OF INSURANCE

The fundamental principles of insurance are common in all types of insurance contracts with the exception of the principle of indemnity which is not applicable to life insurance contract. Following principles of insurance are applicable in insurance contracts.

1. Principle of utmost good-faith

All the material, facts and information relating to proposed contract should supplied by each party to others in true and correct manner which helps to enter in to a contract and proves as a legality. Insurer and insured both are under an obligation to disclose relevant material information which may effect the decision of each other. All the insurance contract based upon mutual trust and confidence between the insurers and insured.

Utmost good faith requires each party to tell others “The truth, the whole truth and nothing but the truth”. If at any time, it is found that the insured has closed some material facts, the contract of insurance becomes avoidable at the option of the insurer. Like the same, the insurer must also disclosed the scope, advantage, disadvantage and provision of insurance contract and its all material facts.

2. Principle of insurable interest

All the valid insurance contract must have insurable interest in the object or life insured. Insurable interest is understood as on proprietary or monetary interest in the preservation of things or continuance of life, recognized by law. It follows that one can have an insurable interest only when one should stand to benefit financially by the continence of life or subject insured.

A person is said to have an insurable interest in the property, if he is financially compensated by its loss, destruction or non-existence. Similarly a person taking a life insurance policy must have an insurable interest in the life of the insured person. In case of fire insurance, the insured must have insurable interest in the things insured against fire. Thus, insurable interest means monetary gain from the continuation of subject matter or loss from its destruction.

3. Principle of Indemnity

Indemnity means security against loss or damage or compensation for loss. It is a principle that a person gets exactly the same amount as he has lost due to the loss of his property or things. The compensation can never be more than the amount of actual loss suffered by the insured. In another words, insured is never allowed to make profit out of loss. If the insurance company agree to pay fixed sum higher than the amount of loss which is insured may suffer, there with be a possibility of destroy by intention to make a profit out of insurance.

All contract of insurance, except for life insurance contract are contracts of indemnity. The principle of indemnity cannot applied to life and other kind of personal insurance, because the loss of life i.e. death of a person cannot be calculated in terms of money, nor the money can compensate for loss of life. So in life insurance, a previous agreement regarding the amout payable one the happening of risk is made between insurer and insured.

4. Principle of proximate cause

Proximate cause came from Latin word ‘causa proxima’ which means nearest or immediate cause. This principle is based that the compensation is paid if the cause is insured. If the cause of loss is insured, the insurer will pay, otherwise the insure will not be liable to compensate. According to the principle of proximate cause, if the loss is produced by two or more than two causes acting one by one, it become necessary to choose the most important, effective and efficient, the most powerful and immediate or nearest cause which has brought about the loss. The powerful and immediate or nearest cause which has brought about the loss. The powerful efficient and effective cause is known as proximate cause and all other causes are known as remote cause.

For an example, an insured suffered in an accident and was admitted to the hospital. While undergoing treatment, it is found that he has serious disease which caused his death. According to this principle, the death was the cause of services disease and the accident is not payable under personal accident insurance and the claim is payable under life insurance, if he has insured.

5. Principle of subrogation

The principle of subrogation, also known as ‘Doctrine of rights substitute’ is an extension and outcome of the principle of indemnity. This principle prescribes that the scrap or what ever is left of the damaged subject matter of insurance passed in the hands of insurer after the payment of claim. Thus, subrogation is the transfer of right and remedies of the insured in the subject matter to the insurer after the indemnification. In simple word, after paying the amount of loss to the insured, the insurer gets all the rights which is available to be insured.

6. Principle of contribution

This principle refers to the equitable distribution of loss between different insurer. Sometimes a person insures his goods and property with more than one insurer. This is referred to the double insurance and all these insurer are known as co-insurer. In case of loss, the incurred compensated against the actual amount of loss insured through the risk. In such as case, having co-insurer, they follow the principle of contribution and contribute that proportion of loss which the policy insured. Thus, the insured cannot claim total loss to each insurer. The total loss suffered by the insured in contributed by different insurer in the ration of value of policy issued by them.

7. Principle of Mitigation of loss

Mitigation of loss means to minimize or decrease the loss. It is the duty of the insured to act to minimize the loss. Under this principle, it is prescribed that when over the event of risk, occurs, it shall be the duty of the insured to take all such steps to minimize the loss as would have been taken by any person who is not insured. The idea behind this principle is that the insured should not become careless and inactive in the event of mishap because of property insured. This does not mean that the insured should risk his own life for saving the property which is getting damaged or destroyed.

The principle of mitigation of loss provides a check on the behavior at the time of loss. It implied that the reasonable efforts towards the saving of insured properly must be made by policyholder in the event of loss occurred.