PRINCIPLES OF INSURANCE

• The concept of Insurance is based on the principles of large numbers.

• Co-operation is the basic principle behind every insurance contract.
• The basic terms used in the principles are insured, insurer, claim, subject matter,
policy etc.
• The contract of insurance is based on seven fundamental principles, called as seven
pillars.
• The principles of insurance are as follows:
 Principle of Utmost Good Faith
 Principle of Insurable Interest
 Principle of Indemnity
 Principle of Proximate Clause/Principle of Causa Proxima
 Principle of Contribution
 Principle of Subrogation
 Principle of Mitigation
 1-Principle of Utmost Good Faith

• Both insurer and insured should enter into contract in good faith
and honest to in each other.
• They must expose all material facts clearly, effectively, and
accurately.
• The insured must voluntarily disclose complete, sharp and
accurate information to the insurer whether requested or not.
• The insurer must provide all information about the terms and
conditions of the contract with fairness to the insured.
• Non-disclosure of material facts leads to non-settlement of claims.
Any misrepresentation of facts and figures will make insurance
policy revoked or cancelled
 2-Principle of Insurable Interest

• Insured must have the insurable interest on the subject

matter.
• The right to insure arising out of a financial relationship,
between the insured to the insurer and is legally
recognized.
• In life insurance, the insurable interest applies to the life
insured. Insurable interest must exist at the time of taking
life insurance.
• In fire and marine insurance, the insurable interest must be
there both at the time of buying the policy and at the time
of occurrence of loss.
 3-Principle of Indemnity

• According to this principle, the purpose of insurance contract is to

bring back the insured to the same financial position as he or she was
before the loss occurred to him or her(because of mishap).
• The principle states that, insurance contracts are done to provide
protection and compensation against uncertain losses, damages or
injuries.
• Insured can’t make any profit from the insurance contract.
• Insurance contract is meant for coverage of losses only.
• This principle aims at putting the insured in the same position as he
was before the incident.
• This principle doesn’t apply to life insurance contracts.
 
 4-Principle of Proximate Clause/Principle of Causa-
Proxima

• This principle states that the reason for a loss or damage to

the insured object should be related to the subject matter of
the contract.
• As per this principle, when there are several causes for
losses or damages to insured property, then most nearest
and dominant cause of loss is considered for calculating the
liability of the insurer.
• This principle of insurance is concerned with how the loss
/damage actually occurred. It is only nearest cause and not
the remote cause which is considered for compensation.
• Insurer admit the claim only if the nearest cause is insured.
 5-Principle of Contribution

• This principle is applicable when there are two or more insurers for some
underlying property or assets.
• This principles states that when two or more insurers each liable for a
covered loss should participate in the payment of such loss.
• As per this principle, insured cannot make profits by insuring the
property with more than one insurance company.
• All insurance companies will share the losses to the extent of sum
assured with them.
• In case, only one insurance company pays the full amount of loss, it can
demand contribution from other insurance companies.
• This principle does not apply for life insurance, wherein you have multiple
insurances but still you have the right to claim insurance from all
insurance companies.