7 Principles of Insurance - with Examples

Insurance concept was started to distribute risk among group of people. Co-operation is the basic principle behind every insurance contract.

1) Principal of Utmost Good Faith

  • Both parties, insurer and insured should enter into contract in good faith.
  • Insured should provide all the information that impacts the subject matter
  • Insurer should provide all the details regarding insurance contract
For example - John took a health insurance policy. At the time of taking policy, he was a smoker and he didn't disclose this fact. He got cancer. Insurance company won't pay anything as John didn't reveal the important facts.

2) Principle of Insurable Interest

  • Insured must have the insurable interest on the subject matter
  • In case of life insurance spouse and dependents have insurable interest in the life of a person. Corporations also have insurable interests in the life of it's employees
  • In case of life or marine insurance, insured must be the owner both at the time of entering of entering into the insurance contract and at the time of accident.

3) Principle of Indemnity

  • Insured can't make any profit from the insurance contract. Insurance contract is meant for coverage of losses only
  • Indemnity means a guarantee to put the insured in the position as he was before accident
  • This principle doesn't apply to life insurance contracts

4) Principle of Contribution

  • In case the insured took more than one insurance policy for same subject matter, he/she can't make profit by making claim for same loss more than once
For example - Raj has a property worth Rs.5,00,000. He took insurance from Company A worth Rs.3,00,000 and from Company B - Rs.1,00,000.
In case of accident, he incurred a loss of Rs.3,00,000 to the property. Raj can claim Rs. Rs.3,00,000 from A but after that he can't make profit by making a claim from Company B. Now Company A can make a claim from Company B to for proportional loss claim value.

5) Principle of Subrogation

After the insured gets the claim money, the insurer steps into the shoes of insured. After making the payment insurance claim, the insurer becomes the owner of subject matter.
For example :- Ram took a insurance policy for his Car. In an accident his car totally damaged. Insurer paid the full policy value to insured. Now Ram can't sell the scrap remained after the scrap.

6) Principle of Loss Minimisation

  • This principle states that the insured must take all the necessary steps to minimize the losses to inured assets.
For example - Ram took insurance policy fo his house. In an cylinder blast, his house burnt. He should have called nearest fire station so that the loss could be minimised.

7) Principle of Causa Proxima

  • Word "Cause Proxima" means "Nearest Cause"
  • An accident may be caused by more than one cause. In case property insured for only one cause. In such case nearest cause of the accident is found out. 
  • Insurer pays the claim money only if the nearest cause is insured.

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  1. Wonderful Collection :)

  2. thanks sir..plz clarify 1 doubt
    In point 4 ..proportional claim here means.....company B will have to return 1/4 th of the 3lakh to A after A has indemnified Raj. Isn't it sir?
    Thereby A's contri= 3/4 th of loss and B's contri= 1/4 th of the loss ???

  3. As loss subject matter can be covered under one policy. Insured won't make second claim.

    Company A will make the claim from Company B

  4. Principles of Co-Operation
    Insurance is a co-operation device. If one person is supply for his own losses, it cannot be strictly an insurance because in insurance, up of persons who are agreeable to co-operate. In often very old period, the persons of a group were willingly sharing the loss to a member of the group. They used to share the loss to a member of the group. They used to share the loss at the time of damage.

    Read more - http://bigfactreview.com/principles-of-insurance/


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