7 Principles of Insurance

Meaning of Insurance

Insurance is a means of protection from any unforeseen losses and contingencies. It is a risk-management technique used for hedging against various uncertain losses. Insurance is a contractual agreement between two parties in which one party promise to protect another party from uncertainties and losses. The first party is the insurance company or insurer who agrees to protect and compensate the other party for losses suffered by it. Another one is insured or insurance policyholder who gets protection under an insurance policy in return for premium which he is required to pay regularly to the insurer.

In simple terms, insurance is just the protection against the losses. By taking insurance policy, different insurance policyholders pool their interest together. Loss suffered by any of the insured is paid out of the premium amount paid by these policy holders to the insurance company.  Insurance is an effective tool to avoid losses by transferring or sharing it with other individuals. It boosts confidence level of peoples and acts as a supporting pillar by compensating them at time of emergencies. Insurance helps in economic development of country by mobilising people’s saving by attracting them for investment in insurance policies.

Insurance companies reinvest the collected amount in different investment avenues for earning profit. There are generally three steps in insurance process: Firstly, select the insurance policy as per your needs, then you need to pay the premium amount regularly and at last claim your insured amount with the help of supporting documents in case if any unfortunate event occurs. Principles of Insurance are as follows:

7 Principles of Insurance

Principles of Insurance
Principles of Insurance

Principle of Utmost Good Faith

It states that both the parties to contract must enter into a contract in good faith. They both should reveal all material information and facts regarding contract to each other accurately and honestly. Insured should tell the insurer all details truly so that insurance companies are able to calculate the right premium amount. Also, the insurer should provide all information regarding insurance contract with fairness to insured. Any misrepresentation of facts and figures will make insurance policy legally revoked or cancelled.

Principle of Indemnity

Principle of indemnity means insurance contracts are done to provide protection and compensate against uncertain losses, damages or injuries.  Indemnity simply means protection, security and compensation for damages or losses. Insured cannot enter into an insurance contract for earning profit but it is meant for recovery of losses only. Insurance are meant to bring back the insured into the original position in which he was before happening of uncertainties. Principle of indemnity does not apply to the life insurance contract.

Principle of Insurable Interest

This principle states that insurance policy holder must have insurable interest in the subject matter of insurance. He must have some vested interest in it and must be affected by existence and non-existence of object of insurance. It is not necessarily required by insured to be the owner of insurance object. Existence of an object should provide him some benefits and gains. Any damage to an insurance object should adversely affect the insured and provides him heavy losses. 

Principle of Subrogation

Principle of subrogation states that after paying compensation, the ownership right of property will transfer from insured to insurer. This principle gives insurer right to recover amount from third party who is responsible for happening of uncertainties and losses to insurer. Principle of subrogation allows insurer to pursue legal methods against that third party to recover the amount of losses. However, insurer can claim amount only to the extent of amount paid by him to insured as compensation. 

Principle of Loss Minimization

This principle states that insured should always take all necessary steps to avoid losses and damages to insured property. It is his obligation to minimize the losses to insured property in case of any uncertainties like blast or fire outbreak. Insured should not be negligible or act irresponsible towards the property only because it is insured for losses. Therefore, insured should try to protect insured property and avoid any losses.

Principle of Contribution

Principle of contribution states that insured cannot make profit by insuring the property with more than one insurance company. The insured in case of any uncertainties can claim only the actual amount of loss. Insurance companies will compensate to insured on basis on ‘principle of contribution’. All Insurance companies will share the losses to extent of sum insured with them. In case if only one insurance company pays the full amount of loss it can demand contribution from other insurance companies.

Principle of Causa Proxima

Causa proxima means the ‘direct cause’ or ‘nearest cause’. The principles of Causa proxima are applicable when there are series of causes for losses or damages to insured property. According to this, the most nearest and dominant cause for losses and damages is considered for calculating the liability of insurer.