PRINCIPLES OF INSURANCE:

1. Utmost Good Faith

When an insurance policy is to be taken, the applicant must fill in a proposal form, answering all the questions it contains, truthfully. This will form part of a legal contract between the applicant and the insurance company. The contract will become invalid if the applicant hides any information, which comes to light later. The company likewise must have good faith in its clients by explaining all the terms of the insurance policy.

2. Insurable Interest

Insurance policies can be taken only if the applicant is to suffer directly from the loss or liability. For example, if the applicant’s car were stolen he would suffer a loss and so can insure his car. But if the applicant’s neighbour’s car were stolen, the applicant will not suffer a loss and so cannot insure his neighbour’s car.

3. Indemnity

The aim of the insurance company is to restore the insured to the position he was in before the loss had occurred. The principle of indemnity prevents the insured from making any loss or profit out of the accident. For example, if the insured’s 6 year old car is damaged, the insurance company will give the insured money to buy another 6 year old car.

-         Rule of Subrogation: Sometimes the insured can make a profit by selling the damaged car after receiving compensation. This is ruled out by the rule of subrogation, which states that the insurance company will become the owner of the damaged car after paying compensation.

-         Rule of Contribution: Sometimes the insured may insure the car with two companies and claim from both. This is ruled out by the rule of contribution, which states that each company will pay a certain proportion, so that no profit is made by the insured.

4. Proximate Cause

The root cause of the event is known as the proximate cause. The insurance company will first determine if the root cause is within the terms of the policy and then make a payment. For example, a person might insure himself against death by accident when flying, but if he dies of a heart attack, the insurance company is not required to make any payment.