Explain briefly the principles of insurance with suitable examples.


Insurance is a contract or agreement under which one party agrees in return for a consideration to pay an agreed amount of money to another party to make a loss, damage or injury to something of value in which the insured has a pecuniary interest as a result of some uncertain event. This writing is called ‘policy’. The person whose risk is insured is called ‘insured’ and the firm which insures the risk of loss is known as insurer/ assurance underwriter.

The principle of insurance is explained below:


a. Utmost good faith: Under this contract, both the parties must have faith over each other. It is the duty of the client to disclose 100% information to the insurance company. If there is any misinterpretation of facts can even lead to the cancellation of the entire contract. For example, life insurance, all the information regarding the age, previous medical history and any smoking or drinking habits must be disclosed.


b. Insurable interest: The insured must have some interest in the matter of the insurance. For example, a person has an unlimited interest in the life of his or her spouse. This interest must be present at the time of the purchase of the insurance. If there is no interest the contract would become null and void and the insurance company will not issue of policy.


c. Indemnity: Indemnity means compensation against the loss incurred. According to this principle, insurance Company cannot compensate the insured person in an amount which exceeds the insured economic loss. This principle is observed mostly in property insurance as compared to Life Insurance. The insured would be provided the compensation with the amount equal to the actual loss only. The insured will be brought back to the same financial position he was before the occurrence of the loss.


d. Subrogation: This principle allows the insured to claim the amount from the third party responsible for this loss. The insurer can pursue legal methods to recover the amount of loss. For example, if you are injured in a road accident, you will receive compensation from the insurance company and the insurance company will sue the third party to recover the money paid as a claim.


E. Proximate Cause: It means the nearest cause or direct cause. It is applicable when the loss is a result of two or more causes. The most dominant cause is considered to be the reason behind the loss.


F. Contribution: As per this principle it is the right of an insurer who has paid a claim under insurance, to call upon other liable insurers to contribute for the loss of payment.


G. Mitigation: It is the duty of the insured to take reasonable steps to minimize the damage to the insured property, even though it has been insured. They must not be careless in this regard. If reasonable care is not taken, the claim from the company may be lost.


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