question_answer

Explain briefly the principles of insurance with suitable examples.

Answer:

Ans.     The principles of insurance are explained below:

1. Principle 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.

2. 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.

3. Principle of Indemnity:

Indemnity means security or compensation against loss or damage. The principle of indemnity is such a principle of insurance stating that an insured person may not be compensated by the insurance company in an amount exceeding the insured's economic loss.

In this type of insurance the insured would be provided compensation with the amount equivalent to the actual loss and not the amount exceeding the loss.

This is a regulatory principle. 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.

4. 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.

5. Principle of Contribution:

If the same subject matter, except life is insured by more than one insurers, then the actual loss will be shared by all the insurers.

6. Principle of Mitigation:

If means that the insured should try to minimise the loss of the subject matter of the insurer even if it is insured.

7. Principle of Proximate Cause:

Proximate cause literally means the dearest 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.