PRINCIPLES OF

INSURANCE
Presented by:
Iqra Rashid
M.Com (h) 2nd Sem
Roll no. 10
 INTRODUCTION
Insurance is a contract in which one party
(Insurer) for a compensation (consideration)
called the premium, takes the risks of the other
party (insured) and promises to pay him or his
nominee a certain sum of money on a specified
contingency. In this way, a contract of insurance,
in addition to fulfilling the basic or essential
characteristics of a valid contract i.e. proposal,
free consent, acceptance, competency of the
parties, also observes certain basic principles.
These principles may be described as:
Basic Principles
Legal Principles
BASIC PRINCIPLES
 PRINCIPLE OF CO-OPERATION
Insurance can be described as the highest degree of Co-
operation. The insurance company or insurer collects
premium from large number of insured persons and puts
the premium in pool. The claims of those who actually
suffer the loss are paid out of the pool. The insured are co-
operating by paying premium in advance to strengthen the
pool.

PRINCIPLE OF PROBABILITY
Without premium, co-operation is not possible and the
premium cannot be determined without applying theory of
probability. The occurrence of risk in each type of insurance
can be estimated with the help of theory of probability. The
probability tells about the chances and amount of loss.
 LEGAL PRINCIPLES
Legal principles, with the exception of
principle of indemnity which is not
applicable in case of personal insurance-
are common for all types of insurance. The
principles are as follows:
Principle of insurable interest
Principle of subrogation
Principle of indemnity
Principle of approximate cause
Principle of contribution
Principle of utmost good faith
Principle of mitigation of losses
 1) PRINCIPLE OF INSURABLE
INTEREST

An insurance contract will be valid only if the

person getting a policy must possess an insurable
interest in the subject matter. A person is said to
have an insurable interest in the property if he is
financially benefitted by its existence and is
prejudiced by its loss, destruction or non-existence.
In the case of life insurance policy, the insured
must stand financially benefitted by the existence
or the continuance of life and will suffer a financial
loss due to the non-existence of the subject.
For example, an employer has the insurable
interest in the life of his employees; a creditor has
an insurable interest in the life of his debtor. A
banker will have an insurable interest in the
property mortgaged against a loan by a loanee.
 EXISTENCE OF INSURABLE
INTEREST
In life insurance the person taking out the life
insurance policy must have an insurable
interest in the life of insured at the time of
taking up the policy. It may or may not exist at
the time of death.
In case of fire insurance, insurable interest
must exist both at the time of taking out the
policy and also at the time when loss occurs.
In case of marine and other insurances,
insurable interest must be present at time of
occurrence of loss.
 ESSENTIALS OF INSURABLE
INTEREST
Following are the essentials of a valid insurable
interest:
There must be a subject matter to be insured.
The policy holder should have monetary interest
in the subject matter.
The relationship between the policy holder and
the subject matter should be recognized by law.
The economic relationship between the policy
holder and the subject-matter should be such
that the policy holder is economically benefitted
by the existence or survival of the subject-matter
and/or will suffer economic loss at the
destruction or death of the subject matter.
INSURABLE INTEREST IN LIFE INSURANCE
A person has an unlimited interest in his own life.
A husband in the life of his wife and vice-versa.
A father in the life of a dependent son and vice-versa.
A partner in the life of his co-partner.
A creditor in the life of a debtor to the extent of the amount of debit.

INSURABLE INTEREST IN MARINE INSURANCE

•The owner of the ship in the ship.
•The cargo owner in the cargo.
•The master and the crew of the ship in their wages.
•A creditor who has lent money for the ship or the cargo
to the extent of debt.
•The ship owner in the freight to be received.
INSURABLE INTEREST IN FIRE
INSURANCE
The owner of the property in his own property.
Partners in the property of partnership.
The owners of joint property.
An agent has an interest in the property of his
principal.
A bailee in the properties bailed.
A trustee in the properties covered under
trusteeship deed.
An insurer on the properties covered under re-
insurance.
A mortgagee in the properties mortgaged.
A lessee on the properties under lease.
2) PRINCIPLE OF INDEMNITY
Indemnity in simple words means a promise to
compensate the loss. Under insurance contract, the
insurer undertakes to indemnify the insured against
loss suffered by the latter.
For example, a fire insurance policy has been taken
for Rs. 1,00,000, there is a loss of goods by fire to
the extent of Rs. 25,000, insurance company will
compensate the insured for Rs. 25,000 only even
though the policy has been taken for the higher
amount.
Principle of indemnity doesn’t apply to life insurance
because loss of life cannot be measured in
monetary terms. So this principle applies to other
insurances except life insurance cases.
 FEATURES OF PRINCIPLE OF
INDEMNITY
Principle of indemnity doesn’t apply to life
insurance since value of loss of life cannot be
measured in terms of money.
There must be an actual loss and insurer has
to compensate it under the policy.
The loss should have occurred from the risk
insured.
The loss should be measurable in terms of
money.
The compensation will be paid to the insured.
3) PRINCIPLE OF SUBROGATION
In simple words, subrogation means stepping into the
shoes of another. Once the insurer compensates the
insured for the loss suffered by him, he will inherit all the
rights available to the insured against the third parties
with regard to the subject-matter of the insurance.
Principle of subrogation also known as ‘Doctrine of
Rights Substitution’ is in fact the extension of principle of
indemnity.
Under principle of Indemnity, the insured can not be
compensated more than the actual loss suffered, under
the principle of subrogation, the insurer acquires all the
rights of the subject matter after making the claims. In
case some amount is recovered from the third party or
from the sale of damaged subject matter then it belongs
to the insurer and not the insured. The insured cannot be
better placed after receiving the claim than he was before
the occurrence of event.
DEFINITION:
Federation of Insurance Institutes defines subrogation, “Transfer of rights
and remedies of the insured to the insurer who has indemnified the
insured in respect of the loss.
4) PRINCIPLE OF PROXIMATE CAUSE
OR CAUSA PROXIMA
The principle of proximate cause lays down that
proximate cause (nearest cause) is to be the
basis of determining the liability of the insurer.
While determining the liability of the insurer, the
nearest or proximate cause and not the remote
cause of the loss is to be taken into account.
The doctrine of causa proxima is especially
applicable to marine insurance. Section 55 of
the Marine Insurance Act, 1963 prescribes that
insurance company shall be liable to indemnify
only those losses which have been caused by
proximata or nearest cause covered under the
policy and not the remote causes.
CONTD.
Under marine insurance the loss may be
attributed to many causes, it may not be
attributed to any single reason or cause.
Marine insurance policies generally cover a
large variety of risks including sinking and
burning of ship or cargo, collusion of ships,
piracy, explosion etc. The principle of
proximate cause helps in determining the
nearest cause or efficient cause. In case the
nearest cause is covered under marine policy
then insurer will indemnify the loss.
5) PRINCIPLE OF CONTRIBUTION
Principle of contribution is also an off-shoot of
the principle of indemnity. When the insured has
taken more than one policy for the same
subject-matter against the same risk during the
same period, the liability of insurers will be
determined on pro-rata basis. The insured
cannot have the benefit of claiming same claim
from more than the insurer. He may claim the
amount from more than one insurer but the
total claim will not exceed the actual loss.
CONTD.

For example:
A takes an insurance policy for his residential
house from insurer X for Rs. 1,00,000, from
insurer Y for Rs. 2,00,000, and from insurer Z
for Rs. 3,00,000. A suffers a loss of Rs. 1, 20,
000, due to the fire accident. Though A has
total insurance policy of Rs. 6, 00,000, from
three companies but the total loss to be
recovered will be Rs. 1, 20,000, only. The
insurers will contribute this loss in the ratio of
1:2:3 (the value of the policy issued by them).
 6) PRINCIPLE OF UTMOST GOOD FAITH
The contract of insurance is based on the principle of utmost
good faith on the part of all parties concerned. The contracts
of insurance are contract of good faith and absence of good
faith may result in the invalidation of contract of insurance.
MEANING:
According to the provisions of Indian Contract Act, 1872 all
commercial contracts require that good faith must be observed,
otherwise these shall be null and void. By good faith we mean
absence of fraud and deceit on the part of parties to the
contract. But under the contract of insurance greater degree of
good faith is expected from the insured in respect of disclosure
of all material facts relevant to the contract.
Material information is that information which enables the
insurance company to decide:
Whether to accept or not to accept any risk
If accepted, at what rate of premium and on what terms and
conditions.
PRINCIPLE OF GOOD FAITH IN LIFE INSURANCE

Following material facts are required to be

supplied by the insured:
Name, address, occupation of the insured
person.
Date of birth, age, height, weight etc.
Facts about life and habits
Family history
Information about health of proposer
Quantum and nature of income of the proposer
 PRINCIPLE OF GOOD FAITH IN MARINE
INSURANCE
Under the contract of insurance the insured
must disclose the following material facts in the
proposal form:
Method of packing
Nature of goods
The particulars of the ship carrying the goods
The part of shipment and destination along with
the route of journey
 PRINCIPLE OF GOOD FAITH IN FIRE
INSURANCE

Following material facts are required to be disclosed in

the case of fire insurance:
Construction and description of building
Location of the building.
Particulars of occupiers, whether office, residence, ship,
godown, manufacturing unit or services undertaking
etc.
Nature of the goods or material i.e. normal, hazardous,
extra-hazardous etc.
Particulars of previous losses suffered.
Previously lodged claims and their settlement, etc.
7) PRINCIPLE OF MITIGATION OF LOSS
Mitigation of loss means minimizing the
security of loss. Under the doctrine whenever
the insured event occurs, it shall be the duty of
the insured to take all such steps to minimize
the loss as would have been taken by any
person who is not insured. As such, it is the duty
of the insured to act to minimize the loss.
The logic behind this principle is that the insured
should not become careless and passive at the
time of loss simply because his property is
insured. So the insured must act like an
uninsured prudent person. All that is expected is
that he must act reasonably, in the event of loss,
to make the loss minimum as far as possible.