Principles of Insurance
Hi friends welcome to My site. In this Article.I will tell you about the principles of
First principle of insurance is the principle of
utmost good faith. According to this principle, the person who is getting insurance
shall willingly disclose all the required information in a complete and true
knowledge. You shall not find any information asked by the insurance company.
So you shall correctly inform about:(i) Your health- if you have any kind of
disease, your past medical history, any medicines you are taking etc. (ii) you
should also tell correctly about your income (iii) you should also tell correctly
about your family history, like if any of your parents or your siblings have suffered
from any kind of disease etc. (iv) you should also tell correctly about your age,
generally you have to produce any document which contains the date of birth. (iv)
you should also correctly tell about where you work, in which industry you work,
how risky is your job etc.
Now let’s see principle number two, which is principle
of insurable interest. According to this principle you should have personal interest
in the subject matter of insurance. That means if you lose those persons or things
you have direct loss. So, for example you can take insurance for your son, your
wife, and your parents, but you cannot take insurance for your neighbour’s son or
for your friends. Losing your neighbour’s son or your friend may have emotional
loss to you, but it will not have any kind of financial loss. Similarly, you can take
insurance for your car, your house, or your property but you cannot take insurance
for your friend’s car, house or property.
Now the principle number 3 of the
insurance is, the principle of indemnity. According to this principle, insurance is
not made for making profit, but it is made for compensating you against the loss
that has incurred to you. That means compensation paid cannot be more than the
losses incurred, a person earning rupees 5 lakh a year cannot take insurance plan ofrupees 500 crore. Or you cannot take car insurance of rupees 10 lakh for a car
pricing Rupees 500000.
This is the reason insurance companies do not provide term insurance to an
unemployed person, or a housewife, or a student. Next principle is principle of
contribution. This principle is applicable when there are more than two insurers for
the same underlying property or asset. In this case the insurance company has the
right to share the loss with other insurancers. Now suppose you have taken an
insurance of rupees 10 lakh from one company and of rupees 10 lakh from another
company. And in a fire incident, your total loss is rupees 10 lakh.
Now you go to
insurance company number 1 and claim entire loss. The insurance company will
pay you the compensation, however now the insurance company number one will
approach to the other insurer, and ask for 500000 rupees. Because both the
insurance companies had equal share in your property. This principle does not
apply for Life Insurance, wherein you can have multiple insurances, but still you
have right to claim insurance claims from all the insurance companies. Next
principle is principle of subrogation, according to this principle once the insured is
paid for the losses, then the ownership right of such property shipped to the
insurance. You cannot take the benefit from the damaged asset.
For example if
your bike or car is stolen and the insurance company has paid you the
compensation, thereafter you cannot have the ownership On The Lost car or bike.
Now after sometime, if the insurance company finds the bike or car it can sell them
and you cannot make any claim from the insurance company, because you have
already been paid for your damage. Next principle is principle of loss
minimization. According to this principle you should put all the efforts to minimise
the loss to the insured asset. Opposite your car is stolen then you should
immediately call the police call the insurance company and tell them about the
If there is fire in your car, you should immediately call the fire brigade or if
you have water or fire extinguisher you should use them, so that the loss can be
minimised. You cannot simply sit and watch, feeling that you have already getthem insured and the insurance company will pay you the compensation for the
Next principle is principle of Causa Proxima (Nearest Cause). According
to this principle if your loss has caused because of two things, then the nearest
cause should be taken into consideration to decide the liability of the insurance.
For example, there is a ship and the Rat have made hole in it, because of which
water entered into the ship. And the goods loaded in the ship have damaged. In this
case there are two causes of the incident, first is the rat and the second is sea water.