Insurance and its

principles

Definition
An arrangement by which a company
or the state undertakes to provide a
guarantee of compensation for
specified loss, damage, illness, or
death in return for payment of a
specified premium.

Principles of Utmost Faith

Under this insurance contract both
the parties should have faith over
each other.
As a client/company it is the duty of
the insured/insurer to disclose all the
facts to the other party.
Any fraud or misrepresentation of
facts can result into cancellation of
the contract.

Principle of Insurable Interest

Under this principle of insurance, the
insured must have interest in the
subject matter of the insurance.
In the life insurance it refers to the
life insured
Example: The owner of a taxicab
has insurable interest in the taxicab
because he is getting income from it.
But, if he sells it, he will not have an
insurable interest left in that taxicab.

Principle of indemnity
Indemnity

means

security

or

compensation against loss or damage.

The

principle

of

indemnity

is

such

principle of insurance stating that an

insured may not be compensated by the
insurance

company

in

an

amount

exceeding the insureds economic loss.

Principle of Contribution
Principle of Contribution is a corollary of the
principle of indemnity. It applies to all
contracts of indemnity, if the insured has
taken out more than one policy on the same
subject matter.
According to this principle, the insured can
claim the compensation only to the extent of
actual loss either from all insurers or from any
one insurer. If one insurer pays full
compensation then that insurer can claim
proportionate claim from the other insurers.

Example of principle of contribution

Mr. John insures his property worth $
100,000 with two insurers "AIG Ltd."
for $ 90,000 and "MetLife Ltd." for $
60,000. John's actual property
destroyed is worth $ 60,000, then Mr.
John can claim the full loss of $
60,000 either from AIG Ltd. or
MetLife Ltd., or he can claim $
36,000 from AIG Ltd. and $ 24,000
from Metlife Ltd.

Principle of subrogation
The principle of subrogation enables the
insured to claim the amount from the third
party responsible for the loss. It allows the
insurer to pursue legal methods to recover
the amount of loss, For example, if you
get injured in a road accident, due to
reckless driving of a third party, the
insurance company will compensate your
loss and will also sue the third party to
recover the money paid as claim.

Principle ofCausa Proxima

a Latin phrase, or in simple english words, the
Principle of Proximate (i.e Nearest) Cause,
means when a loss is caused by more than
one causes, the proximate or the nearest or
the closest cause should be taken into
consideration to decide the liability of the
insurer.
The principle states that to find out whether
the insurer is liable for the loss or not, the
proximate (closest) and not the remote
(farest) must be looked into.

 For example:- A cargo ship's base was

punctured due to rats and so sea water
entered and cargo was damaged. Here there
are two causes for the damage of the cargo
ship - (i) The cargo ship getting punctured
beacuse of rats, and (ii) The sea water
entering ship through puncture. The risk of
sea water is insured but the first cause is not.
The nearest cause of damage is sea water
which is insured and therefore the insurer
must pay the compensation