PRINCIPLES OF INSURANCE – Part 1

Insurance contracts are based on certain fundamental principle. They are:

• Utmost good faith (Uberrimae fidei)
• Insurable interest
• Indemnity
• Subrogation
• Contribution
• Mitigation of loss
• Causa proxima (Proximate cause)

1. UTMOST GOOD FAITH - Every contract of insurance is based on the principle of utmost good faith. It implies that the insurer and the insured must act in good faith and disclose all material facts concerning the subject matter of insurance. This rule applies particularly to the insured because he is naturally in possession of all material facts relating to the subject matter of insurance. If he does not disclose all the material facts at the time of the contract, the insurer can avoid the contract, when he comes to know of such concealment.

2. INSURABLE INTEREST - In simple words, insurable interest means monetary interest. No person can enter into a valid contract of insurance unless he has insurable interest in the subject matter of insurance. A person is said to have insurable interest in the subject matter, if he suffers financially, by its loss or destruction. Thus a person has insurable interest in his own life, in the life his spouse or child or debtor. Similarly the owner of a property has an insurable interest in it. In fire insurance, the insurable interest must be present not only at the time of the contract but also at the time of loss of the subject matter. In marine insurance, it must be present at the time of loss of the subject matter. It need not be present at the time of making the contract.

3. INDEMNITY – All the insurance contracts, except life and personal accident insurance, are based on the principle of indemnity. It means that the insured will be paid only the actual amount or loss or the amount of the policy whichever is less. That is, he will not be allowed to make a profit. However in the case of life and accident insurances, this principle of indemnity does not apply. The monetary loss caused by death or accident cannot be calculated, as value of human life cannot be measured in terms of, money. Therefore, the sum insured is paid in such events.

4. SUBROGATION - The principle of subrogation is an extension of the principle of indemnity. This principle applies only to contracts of indemnity. So it does not apply to life insurance and personal accident insurance contracts as they are not contract of indemnity. According to this principle, when the insurer pays compensation to the insured for loss, the insurer will get all the rights of the insured of the damaged property and against a third party who is responsible for the loss.

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