Principles of Insurance

1.Utmost Good Faith -

One of the basic and primary principles of insurance is Utmost Good Faith. It states that insurance contract must be made in absolute good faith on the part of both the parties. The insured must give to the insurer complete, true and correct information about the subject matter of the insurance. Material fact should not be hidden on any ground. This principle is applicable to all types of insurance contracts. Insurance is for protection and not for profit and hence, correct information must be given to the insurance company.

2.Insurable Interest -

This principle suggests that the insured must have insurable interest in the object of insurance. In other words, the insured must suffer some kind of financial loss by damage to the subject matter of insurance. Ownership is the most important test of Insurable Interest. Every individual had insurable interest in his own life. An insurance contract without insurable interest is void. Insurable Interest is not a sentimental concept but a pecuniary interest. Insurance contract without Insurable Interest is nothing but a wagering contract. Some of the examples of Insurable Interest are: A trader has Insurable Interest in his business and a creditor has Insurable Interest in his debtor. Similarly, an exporter has Insurable Interest in the goods, which he is exporting. In addition, the owner of a shop or a building has Insurable Interest in his shop or building.

3.Principle of Indemnity -

This is one important principle of insurance. This principle suggests that insurance contract is a contract for affording protection and not for profit making. The purpose of insurance is to secure compensation in case of loss or damage. Indemnity means security against loss. The compensation will be paid in proportion to the loss actually occurred. The amount of compensation in the insurance contract is limited to the amount assured or the actual loss whichever is less. The compensation will not be more or less than the actual loss. Compensation will not be paid if the specified loss does not occur during a particular period due to a particular reason. Thus, insurance is simply for giving protection and certainly not for profit- making.

4.Principle of Contribution -

There is no restriction as to the number of times the property can be insured. But on the occurrence of loss only the amount of actual loss can be realized from one insurer or all the insurers together. This principle is however, not applicable to Life Insurance contract.

5.Principle of Subrogation -

This principle is an extension and a corollary of the principle of Indemnity. It is applicable to all the contracts of Indemnity. It states that once the insurance company pays the full compensation, it acquires all the rights and remedies, which the assured would have enjoyed regarding the said loss. When the compensation is paid for the total loss, all the rights of the insured in respect of the subject matter of insurance are transferred to the insurer. The assured will not be able to keep the damaged property because in that case he will realise more than the actual loss suffered. This principle prevents the insured from making profit out of loss. When the partial compensation is paid, the insurance company cannot exercise such rights. The principle is applicable to fire, marine and all other accident policies. In such policies the insured has to give a letter of subrogation to the insurance company. The insurance company protects its interest with the help of such letter of subrogation.


6.Principle of Mitigation Loss -

According to this principle every insured should take all the necessary steps to minimize the loss. E.g. If a trader takes out a marine policy for the goods being shipped from Goa to Mumbai and if the storm takes place due to which there might be risk of ship sinking. According to this principle, the ship can be saved by throwing away some of the goods in order to reduce the weight of the ship.

7.Principle of “Cause Proxima” -

The efficient or the effective cause that causes loss is “Proximate Cause”. It is the real and actual cause of loss. If the cause of loss is insured, the insurer will pay. In “Life Insurance” the doctrine of “Cause Proxima” is not applied because the insurer is bound to pay the amount of insurance whatever may be the reason of death. It may be natural or unnatural. Hence, this principle is not much practical importance with Life Insurance.