Principles of Insurance
Insurance concept was started to distribute risk among group of people. Co-operation is the basic principle behind every Insurance contract. The following are the important principles of Insurance
According to this principle, both insurer and insured should enter into contract in good faith. Insured should provide all the information that impacts the subject matter. Insurer should provide all the details regarding insurance contract. Both the insurer and the insured should display good faith towards each other in regard to the contract.
Example: Mr. M is a heart patient. But he hides this fact to the LIC while taking a life policy. On his death due to a heart attack, LIC can refuse to pay compensation to his legal representative because a material fact was not disclosed by the insured.
The insured must have an insurable interest in the subject matter of insurance. Insurable interest means some pecuniary interest in the subject matter of the insurance contract. The insured must have an interest in the preservation of the thing or life insured, so that they will suffer financially on the happening of the event against which they are insured.
Example, a businessman has insurable interest in his stock of goods.
Indemnity means security or compensation against loss or damages. In insurance, the insured would be compensated with the amount equivalent to the actual loss and not the amount exceeding the loss. This principle ensures that the insured does not make any profit out of the insurance. This principle of indemnity is applicable to property insurance alone.
Example: A businessman gets his sock of goods insured for Rs. 5,00,000. If the goods are destroyed by the fire, the insurance company will be liable to pay compensation for the loss caused to the insured. However, maximum compensation shall be Rs. 5,00,000 even if loss is more than this.
“The principle of indemnity is not applicable to life insurance because one cannot estimate the loss due to the death of a person”
The word ‘Causa proxima’ means ‘nearest cause’. According to this principle, when the loss is the result of two or more cause, the proximate cause, i.e. the direct. The direct, the most dominant and most effective cause of loss should be taken into consideration. The insurance company is not liable for the remote cause.
In the previous example,where ‘fire’ is accepted as the proximate cause of loss and if there is no fire and goods are destroyed due to excessive heat, the insurance company would not be liable to pay compensation.
The same subject matter may be insured with more than one insurer then it is known as ‘Double Insurance’. In such a case, the insurance claim to be paid to the insured must be shared on contributed by all insurers in proportion to the sum assured by each one of them. It may be noted that in case of multiple insurance, the insured can claim the loss from any of the insurers subject to the condition that the insured cannot recover more than the amount of actual loss from all taken together.
Example: A businessman gets his factory insured against fire for Rs. 10,00,000 with insurer A and Rs. 5,00,000 with insurer B. Due to fire, a loss of Rs. 1,50,000 occurred. Then, insurers A and B will contribute the loss in the ratio of 2:1. A will pay Rs. 1,00,000 and B will pay Rs. 50,000.
Subrogation means ‘stepping the shoes on others’. According to this principle, once the claim of the insured has been settled, the ownership right of the subject matter of insurance passes on to the insurer. Otherwise, the insured will realize more than the actual loss which goes against the principle of Indemnity. This is because the insured cannot make any profit by selling the damaged property
Example: Mr. B gets his motor car insured. Some of its parts got damaged at a road accident. He gets the insurance claim and gets the damaged parts replaced with new ones. In this case the damaged parts will be taken by the insurance company. The insured has no right over the damaged parts since they had already got compensation for the damaged parts.
In case of a mishap, the insured must take off all possible steps to reduce or mitigate the loss or damage to the subject matter of insurance. This principle ensures that the insured does not become negligent about the safety of the subject matter after taking the insurance policy. Insured is expected to act in a manner as if the subject matter has been insured. If appropriate steps are not taken to save the property then the insured may not get the full compensation from the insurer.
Example: When a factory is insured against fire and theft by insured, insured must take all possible precautions and steps to prevent those from the risk.