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insurance involves principles:

1) Insurable Interest.
2) Utmost Good Faith.
3) Indemnity.
4) Subrogation
5) Proximate Cause
6) Contribution
7) Warranties.


For an insurance contract to be valid, the insured must posses an insurable interest in the
subject matter of insurance. The insurable interest is the pecuniary interest whereby the
policy-holder is benefited by the existence of the subject-matter and is prejudiced by the
death or damage of the subject-matter.
The essential of a valid insurable interest are the following:
 There must be a subject-matter to be insured.
 The policy-holder should have monetary relationship with the subject-matter.
 The relationship between the policy-holders and the subject-matter should be
recognized by law.
 The financial relationship between the policy-holders and subject-matter be such
that the policy0holder is economically benefited by the survival or existence of the
subject-matter and/or will suffer economic loss at the death or existence of the
When a person fulfils the above criteria or when a person has such a relationship with the
subject-matter, it is said that he has insurable interest and it is only then that he can


The doctrine of disclosing all material facts in embodied in the important principle ‘utmost
good faith’ which applies to all forms of insurance. Both parties of the insurance contract
must be of the same mind (ad item) at the time of contract. There should not be any
misrepresentation, non-disclosure or fraud concerning the material facts.
An insurance contract is a contract of uberrimae fidei, i.e., of absolute good faith
where both parties of the contract must disclose all the material facts truly and fully.

Material Facts
A material fact is one which affects the judgment or decision of both parties in entering to
the contract. Facts which count materially are those which knowledge influences a party in
deciding whether or not to offer or to accept such risk and if the risk is acceptable, on
what terms and conditions the risk should be accepted. In case of life insurance, the
material facts or factors affecting the risk will be age, residence, occupation, health,
income etc, and in case of property insurance, it would be use, design, owner and situation of
the property.
Full and True Disclosure
The utmost Good Faith says that all the material facts should be disclosed in true and full
form. It means that the facts should be disclosed in that form in which they really exist.
There should be no concealment, misrepresentation, mistake or fraud about the material
facts. There should be no false statement and no half truth nor any silence on the material

Duty of Both the Parties

The duty to disclose the material facts lies on both the parties, the insured as well as the


The following facts are required to be disclosed:
(a) Facts which would render a risk greater than normal. In the absence of this
information the insures would consider the risk as normal and deceived.
(b) Facts which would suggest some special motive behind insurance, e.g., excessive
(c) Facts which suggest the abnormality of the proposer himself e.g., making frequent
(d) Facts explaining the exceptional nature of the risk.


The following facts, however, are not required to be disclosed by the insured:
I. Facts which tend to lessen the risk.
II. Facts of public knowledge.
III. Facts which could be inferred from the information disclosed.
IV. Facts waived by the insurer.
V. Facts government by the conditions of the policy.


Insurance is usually a contract of indemnity. The insurer agrees to pay for actual loss
suffered by the insured, and no more. The purpose of the contact is to shift the burden of
risk from the insured to the insurer.
So, according to this principle, the insurer undertakes to put the insured, in the event
of loss, in the same position that occupied immediately before the happening of the event
insured again.

To avoid intentional loss:
According to the principle of indemnity insurer will pay the actual loss suffered by the
insured. If there is any intentional loss created by the insured the insurer’s is not bound to
pay. The insurer’s will pay only the actual loss and not the assured sum (higher is higher in
To avoid an Anti-social Act
If the assured is allowed to gain more than the actual loss, which us against the principle of
indemnity, he will be tempted to gain by destruction of his own property after it insured
against a risk. So, the principle of indemnity has been applied where only the cash-value of
his loss and nothing more than this, through he might have insured for a greater amount, will
be compensated.

To maintain the Premium at Low-level

If the principle of indemnity is not applied, larger amount will be paid for a smaller loss and
this will increase the cost of insurance and the premium of insurance will have to be raised.
If premium in raised two things may happen –
 First, persons may not be inclined to insure and
 Second, unscrupulous persons would get insurance to destroy he property to gain
from such act.


The following conditions should be fulfilled in full application of principle of indemnity.

 The insured has to prove that he will suffer loss on the insured matter at the time
of happening the event and the loss is actual monetary loss.
 The amount of compensation will be the amount of insurance. Indemnification
cannot be more than the amount insured.

 If the insured gets more amount then the actual loss; the insurer has right to get
the extra amount back.
 If the insured gets more amount then from third party after being fully
indemnified by insurer, the insurer will have right to receive all the amount paid by
the third party.
 The principle of indemnity does not apply to personal insurance because the amount
of loss is not easily calculable there.


There are various ways through which indemnity may be provided. These are:
Cash payment
This is the usual way of making payment of a claim. This method is simpler, easier and less
This is also another way of providing compensation. Rather than making cash payment, the
insurers will get the loss repaired to pre-loss condition as practicable.
Usually in case of total loss the insurers may replace the subject-matter by another one of
the same standard, age & quantity.
The insurers may also reinstate the property by option. This is usually considered with
regard to buildings damaged or destroyed by fire.

The principle of indemnity is also implemented by the principles of subrogation. This
principle gives the insurance company whatever right against third parties the insured may
have as a result of the loss for which the insurer paid him.
So, the doctrine of subrogation refers to the right of the insurer to stand in the
place of the insured, after settlement of a claim, in so far as the insured’s right of recovery
from an alternative source is involved.


Corollary to the Principle of Indemnity

If the damaged property has any value left, or any right against a third party the insurer
can subrogate the left property or right of the property because it the insured is allowed
to retain, he shall have realized more than the actual loss, which is contrary to principle of

Subrogation is the Substitution

The insurer, according to this principle, becomes entitled to all the rights of insured
subject-matter after payment because he has paid the actual loss of the property. He is
substituted in place of other persons who act on the right and claim of the property

Subrogation only up to the amount of payment

The insurer is subrogated all the rights, claim, remedies and securities of the damaged
insured property after indemnification, but he is entitled to get these benefits only to the
extent of his payment.

The Subrogation may be applied before payment

If the assured got certain compensation from third party before being fully indemnified by
the insurer can pay only the balance of the loss.

Personal Insurance
The doctrine of subrogation does not apply to personal insurance because the doctrine of
indemnity is not applicable to such insurance. The insurer has no right of action against the
third party in respect of the damages.


The rule is than immediate and not the remote cause in to be regarded. The maxim is sed
causa proxima non-remote spectature i.e., see the proximate cause and not the distant
cause. The real cause must be seen while payments of the loss. If the real cause of loss is
insured, the insurer is liable to compensate the loss; otherwise the insurer may not be
responsible for loss.

So, Proximate cause means the active efficient cause that acts in motion a train of
events which brings about result, without intervention of any force started and working
activity from a new and independent source.

Contribution is a right that an insurer has, who has paid under a policy, of calling other
interested insurers in the loss to pay or contribute ratably to the payment.
This means that if at the time of loss it is found that there is more than one policy
covering the same loss then all policies should pay the loss proportionately to the extent of
their respective liabilities so that the insured does not get more than one whole loss from
all these sources.
If a particular insurer pays the full loss than that insurers shall have the right to call all
the interested insurers to pay him back to the extent of their individual liabilities, whether
equally or otherwise.


There are certain conditions and promises in the insurance contract which are called
warranties. A warranty is that by which the assured undertakes that some particulars thing
shall or shall not be done, or that some conditions shall be fulfilled, or whereby he affirms
or negatives the existence of a particular state of facts.
Warranties which are mentioned in the policy are called express warranties. There are
certain warranties which are not mentioned in the policy. These warranties are called
express warranties.