7 Principals of Insurance

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Principal of:

  1. Utmost Good Faith

Principle of Uberrimae fidei (a Latin phrase), or in simple english words, the Principle of Utmost Good Faith, is a very basic and first primary principle of insurance. According to this principle, the insurance contract must be signed by both parties (i.e insurer and insured) in an absolute good faith or belief or trust.

For example – John took a health insurance policy. At the time of taking policy, he was a smoker and he didn’t disclose this fact. He got cancer. Insurance company won’t pay anything as John didn’t reveal the important facts.

  1. Indemnity

Indemnity means security, protection and compensation given against damage, loss or injury.

For example – If you have a four year motorcar and it is damaged, the insurance company will only give you the current value. They will not give you the value on when it was new. This way it puts the insured in the same position in which he was immediately prior to the happening of the uncertain event.

  1. Insurable Interest

The principle of insurable interest states that the person getting insured must have insurable interest in the object of insurance. A person has an insurable interest when the physical existence of the insured object gives him some gain but its non-existence will give him a loss. In simple words, the insured person must suffer some financial loss by the damage of the insured object.

For 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.

  1. 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.

For example – 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.

  1. Subrogation

Subrogation means substituting one creditor for another. Principle of Subrogation is an extension and another corollary of the principle of indemnity. It also applies to all contracts of indemnity. According to the principle of subrogation, when the insured is compensated for the losses due to damage to his insured property, then the ownership right of such property shifts to the insurer.

This principle is applicable only when the damaged property has any value after the event causing the damage. The insurer can benefit out of subrogation rights only to the extent of the amount he has paid to the insured as compensation.

For example – Ram took a insurance policy for his Car. In an accident his car totally damaged. Insurer paid the full policy value to insured. Now Ram can’t sell the scrap remained after the scrap.

  1. Loss Minimization

This principle states that the insured must take all the necessary steps to minimize the losses to inured assets.

For example – Peter 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.

  1. Cause Proxima

Principle of Causa 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.

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 because 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.

– Karin

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