Principles of Insurance

  1. Principle of indemnity – Indemnity means security or compensation against loss or damage. The principle of indemnity is one such principle of insurance stating that an insured may not be compensated by the insurance company in an amount exceeding the insured’s economic loss. In type of insurance the insured would be compensation with the amount equivalent to the actual loss and not the amount exceeding the loss. This is a regulatory principal. This principle is observed more strictly in property insurance than in life insurance. The purpose of this principle is to set back the insured to the same financial position that existed before the loss or damage occurred.
  2. Principal 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.
  3. Principle of proximate cause – Proximate cause literally means the ‘nearest cause’ or ‘direct cause’. This principle is applicable when the loss is the result of two or more causes. The proximate cause means; the most dominant and most effective cause of loss is considered. This principle is applicable when there are series of causes of damage or loss.
  4. Principal of utmost good faith – Under this insurance contract both the parties should have faith over each other. As a client it is the duty of the insured to disclose all the facts to the insurance company. Any fraud or misrepresentation of facts can result into cancellation of the contract.
  5. Principle of Insurable interest – Under this principle of insurance, the insured must have interest in the subject matter of the insurance. Absence of insurance makes the contract null and void. If there is no insurable interest, an insurance company will not issue a policy. An insurable interest must exist at the time of the purchase of the insurance. For example, a creditor has an insurable interest in the life of a debtor, A person is considered to have an unlimited interest in the life of their spouse etc.
  6. Principle of Loss Minimization – This principle states that the insured must take all the necessary steps to minimize the losses to inured assets. For example – Ram took insurance policy for his house. In a cylinder blast, his house burnt. He should have called nearest fire station so that the loss could be minimized.
  7. Principle of Contribution – In case the insured took more than one insurance policy for same subject matter, he/she can’t make profit by making claim for same loss more than once. For example – Raj has a property worth Rs.5, 00,000. He took insurance from Company A worth Rs.3, 00,000 and from Company B – Rs.1, 00,000. In case of accident, he incurred a loss of Rs.3, 00,000 to the property. Raj can claim Rs. Rs.3, 00,000 from A but after that he can’t make profit by making a claim from Company B. Now Company A can make a claim from Company B to for proportional loss claim value.
  8. Principle of probability – According to the principle of probability, everything remaining the same, the future risk or financial liability and other expenses are calculated on the assumption that future will be like in the past. This principle pays attention to the experience of previous years by considering some changes to calculate the expenses. Thus, this principle takes into account of the situation of previous years risks, expenses, number of deaths, paid claims etc. to forecast the probability of similar risks and expenses being encountered in the future which is known as principle of probability.
  9. Principle of cooperation – insurance is a business based on the principle of cooperation. It is a voluntary device to share the risks and uncertainties collectively. Insurance is based on the ideology of common interest and welfare. Cooperation is based on the cooperative principle, “one for all and all for one.” Origin and development of insurance are based on cooperation.
  10. Principle or warranties


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