Answer the following question:
Define insurance. Explain the various principles of insurance.
Insurance is the service that provides protection from certain types of risks that arise out of uncertain events. It gives individual an assurance by promising a certain sum of money in case of death or damage to personal property. The insured needs to pay
a premium in return for this assurance. The following are the principles of insurance on which insurance contracts are based:
i. Utmost good faith - Both the insurer and the insured should have faith in each other and in the contract signed by them. Example: Rahul who is a heart patient should inform his insurance company about his health issues while buying a life insurance policy.
ii. Insurable interest - It implies that the insured should have some interest vested in the object being insured by him/her.
Example: A businessperson has an insurable interest in his or her land, house and other property.
iii. Indemnity - According to the principle of indemnity, the purpose of an insurance contract is to bring back the insured to the financial position he or she was in before the loss occurred to him or her (because of a mishap).
Example: If an individual suffers a loss of Rs 1 lakh in a fire accident, then the insurance company will accept a claim of up to Rs 1 lakh and not more.
iv. Proximate cause - This principle states that the reason for the loss or damage of the insured object should be related to the subject matter of the contract.
Example: If an individual suffers a loss in a fire accident, then this should already be a part of the contract so that the person can claim the insurance amount.
v. Subrogation - Once the compensation is paid, the right of ownership of the damaged property passes on to the insurer. The insured cannot sell the damaged property to make profits.
Example: If a person receives Rs 1 lakh for his or her damaged stock, then the ownership of the stock will be transferred to the insurance company and the person will hold no control over the stock.
vi. Contribution - If an individual buys more than one insurance policy for the same object, then the insurer will contribute to
compensate the insured for the actual amount of loss.
Example: If A insures his or her house for Rs 2 lakh with insurer B and for Rs 1 lakh with another insurer, say, C, then, in case of a loss of Rs 90,000, insurer B and insurer C will together pay A Rs 90,000 and not more.
vii. Mitigation - The insured should take care of the insured object in the same way as he or she would have in the absence of the insurance.
Example: If a person has insured his house against fire, then he or she should take all possible measures to minimise the damage to the property in case of a fire in the same way he or she would have done in the absence of the insurance.