7/30/2019 Basic Principles of Insurance

1/2

Basic principles of insurance

The following are the basic essentials 'or requirements of insurance irrespective of the type of

insurance concerned.

1. Utmost good faith

All types of contracts of insurance depend upon the contracts of utmost good faith. Both parties

(insurer and the insured) in the contract must disclose all material facts for the benefit of each other.

False information or non-disclosure of any important fact makes the contract avoidable. So the

conditions to show utmost good faith is very strict on the part of the insured.

2. Insurable Interest

The insured must possess an insurable interest in the object insured. It may be defined as a financial

interest in the subject matter of contract. The presence of insurable interest is a legal requirement.

So an insurance contract without the existence of insurable interest is not legally valid and cannot be

claimed in a Court. The object of this principle is to prevent insurance from becoming a gambling

contract.

3. Principle of indemnity

All types of contracts except life and personal accident insurance are contract of indemnity.

According to them, the insurer undertakes to indemnify the insured against a loss of the subject

matter of insurance due to insured cause. In life assurance the question of loss and, therefore, of its

indemnification does not rise. Because the loss of life cannot be estimated in term of money. The

principles of indemnity is based on the idea that the assured in the case of loss only shall be

compensated against the actual total loss. But if no event happens, the insured has not to receive

any amount, so in this case the premiums paid by him becomes the profit of the Insurer.

4. Doctrine of subrogation

This principle applies to the contract of indemnity only i.e. marine and fire. It lays down a principle

which is quite equitable. According to this doctrine, where a loss occurs and the insurer pays as for a

total loss, he is entitled to all the rights and remedies which the insured has against a third party in

respect of loss so paid for. It prevents the insured being indemnified from two sources in respect of

the same loss. Suppose A has damaged B is motor car negligently. If he pays B is loss in full. B

cannot collect the same from the insurance company. On the other hand if B applied to his insurance

company for indemnity under his policy, he will not be permitted to collect the damages from A. In

the latter case the insurance company will be entitled to collect that amount.

5. Doctrine of proximate cause

This principle is found very useful when the loss occurred due to series of events. It means that in

deciding whether the loss has arisen through any of the risks insured against, the proximate or the

nearest cause should be considered. To take an illustration in one case where a policy holder

sustains an accident while hunting. He was unable to walk after the accident and as a result of lying

on wet ground before being picked up, he suffered pneumonia. There was an unbroken change of

7/30/2019 Basic Principles of Insurance

2/2

cause between the accident and the death, and the proximate cause of the death, therefore, was the

accident and not the pneumonia.

6. Cancellation

Both parties have right to cancel the policy before its expiry date. The period of .the policy comes to

an end on the cancellation of policy. So the protection provided by the insurer to the insured stopsfrom the date of such cancellation. The premium received by the insurance company is also

returnable to the insured.

7. Attachment of risk

Without the attachment of definite risk to the policy, the contract of insurance cannot be in force. So

in this case the consideration fails and the premium received by the insurance company must be

returned.

8. Mitigation of loss

When the event insured against takes place, the policy holder must do every thing to minimize theloss and to save what is left. This principle makes the insured more careful in respect of this insured

property.

9. Arbitration

Most fire and accident insurance policies contain an arbitration clause which provides for referring' to

differences to an arbitration. The arbitrator is to be appointed in writing by the parties in difference.

The object of this clause is to reduce litigation.