Maharashtra State BoardHSC Commerce 12th Board Exam
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Principles of Insurance? - Organisation of Commerce and Management

Answer in Brief

Principles of Insurance?

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Principles of Insurance

Introduction: -Insurance is a protection against financial loss arising on the happening of an unexpected event. As an individual's life is subject to various risks in personal life, death by accident or premature death. In business, person's business property is subjected to loss by fire, theft and natural calamities. Insurance is a device by which loss suffered from various risks to an individual can be minimized.

Insurance is a contract between two parties. Hence, all the elements of a valid contract should be present in every insurance contract. Besides these elements, there are certain other principles also to be followed essentially at the time of entering into an insurance contract, which are as follows:

Definition: -According to Insurance Act of 1938, Insurance is defined as "A provision which a prudent (careful) man makes against inevitable (expected) contingencies (event)".

1. Principle of Utmost Good Faith (Uberrimae Fidei): -All types of insurance contracts require utmost good faith towards each other. The insurer and the insured must also disclose all material facts, clearly, correctly and completely. If the insurer finds that certain material facts relating to the contract was not disclosed the insurer may avoid the contract, this principle is more important for Life Insurance as the information disclosed will affect the decision of the Insurance Company to decide whether to accept or reject the proposal.

2. Principle of Insurable Interest: -The insured must have insurable interest (financially) in the subject matter of insurance. In Life Insurance it refers to the life insured. In Fire and General Insurance, it must be present at the time of occurrence of loss and in Marine Insurance; the insurable interest exists only at the time of the occurrence of the loss. The owner of the contract is said to have insurable interest as long as he is the owner. It is applicable to all contracts of insurance.

3. Principle of Indemnity: -Indemnity means a guarantee or assurance to put the insured in the same position in which he was immediately prior to the happening of the uncertain event. The insurer undertakes to make payment of actual loss incurred by the insured. Insurance contract is signed only for getting protection against unpredicted financial losses arising to the future uncertainties. Compensation is paid in proportion to the losses incurred.

4. Principle of Contribution: -This principle is a corollary to the principle of indemnity. It is applicable to all contracts of indemnity. Under this principle the insured can claim the compensation only to the extent of actual loss either from any one insurer or all the insurers. If one insurer pays full compensation then that insurer can claim proportionate (balanced) claim from the other insurers.

5. Principle of Subrogation: -According to principle of Subrogation, after the insured is compensated for the loss due to damage to property insured then the right of ownership of such property passes on to the insurer. This principle is corollary (effect) of the principle of indemnity and is applicable to all contracts of indemnity. This principle is applicable only when the damaged property has any value after the event causing the damage.

6 . Principle of Mitigation of loss: -Under this principle, insured must always try his level best to minimize the loss of his insured property, in case of uncertain events like fire outbreak, blast etc. the insured must take all possible measures and necessary steps to control and reduce the losses. The insured must not neglect and behave irresponsible during such events just because the property is insured. Hence, it is responsibility of the insured to protect his insured property and avoid further losses.

7 .Principle of Cause-Proxima (nearest cause: -Principle of Causa-Proxima means when a loss is caused by more than one causes, the proximate (nearest) cause should be taken into consideration to decide the liability of the insurer. The property may be insured against some causes and not against all causes, in such as instance, the proximate cause of loss to be found. If the proximate cause is the one which is insured against, the insurance company is bound to pay the compensation and vice versa. 

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