Ques. What are the principles of Insurance?
Ans. The concept of
insurance is risk distribution among a group of people. Hence, cooperation
becomes the basic principle of insurance.
To ensure the proper functioning of an insurance
contract, the insurer and the insured have to uphold the 7 principles of Insurances
mentioned below:
- Utmost Good Faith
- Proximate Cause
- Insurable Interest
- Indemnity
- Subrogation
- Contribution
- Loss Minimization
Let us understand each principle of insurance with
an example.
Principle of Utmost Good Faith
The fundamental principle is that both the parties
in an insurance contract should act in good faith towards each other, i.e.,
they must provide clear and concise information related to the terms and
conditions of the contract.
The Insured should provide all the information
related to the subject matter, and the insurer must give precise details
regarding the contract.
Example –
Jacob took a health insurance policy. At the time of taking insurance, he was a
smoker and failed to disclose this fact. Later, he got cancer. In such a
situation, the Insurance company will not be liable to bear the financial
burden as Jacob concealed important facts.
Principle of Proximate Cause
This is also called the principle of ‘Causa
Proxima’ or the nearest cause. This principle applies when the loss is the
result of two or more causes. The insurance company will find the nearest cause
of loss to the property. If the proximate cause is the one in which the
property is insured, then the company must pay compensation. If it is not a
cause the property is insured against, then no payment will be made by the
insured.
Example –
Due to fire, a wall of a building was damaged, and
the municipal authority ordered it to be demolished. While demolition the
adjoining building was damaged. The owner of the adjoining building claimed the
loss under the fire policy. The court held that fire is the nearest cause of
loss to the adjoining building, and the claim is payable as the falling of the
wall is an inevitable result of the fire.
In the same example, the wall of the building
damaged due to fire, fell down due to storm before it could be repaired and
damaged an adjoining building. The owner of the adjoining building claimed the
loss under the fire policy. In this case, the fire was a remote cause, and the
storm was the proximate cause; hence the claim is not payable under the fire
policy.
Principle of Insurable interest
This principle says that the individual (insured)
must have an insurable interest in the subject matter. Insurable interest means
that the subject matter for which the individual enters the insurance contract
must provide some financial gain to the insured and also lead to a financial
loss if there is any damage, destruction or loss.
Example – the
owner of a vegetable cart has an insurable interest in the cart because he is
earning money from it. However, if he sells the cart, he will no longer have an
insurable interest in it.
To claim the amount of insurance, the insured must
be the owner of the subject matter both at the time of entering the contract
and at the time of the accident.
Principle of Indemnity
This principle says that insurance is done only for
the coverage of the loss; hence insured should not make any profit from the
insurance contract. In other words, the insured should be compensated the
amount equal to the actual loss and not the amount exceeding the loss. The
purpose of the indemnity principle is to set back the insured at the same
financial position as he was before the loss occurred. Principle of indemnity
is observed strictly for property insurance and not applicable for the life
insurance contract.
Example – The
owner of a commercial building enters an insurance contract to recover the
costs for any loss or damage in future. If the building sustains structural
damages from fire, then the insurer will indemnify the owner for the costs to
repair the building by way of reimbursing the owner for the exact amount spent
on repair or by reconstructing the damaged areas using its own authorized
contractors.
Principle of Subrogation
Subrogation means one party stands in for another.
As per this principle, after the insured, i.e. the individual has been
compensated for the incurred loss to him on the subject matter that was
insured, the rights of the ownership of that property goes to the insurer, i.e.
the company.
Subrogation gives the right to the insurance
company to claim the amount of loss from the third-party responsible for the
same.
Example –
If Mr A gets injured in a road accident, due to reckless driving of a third
party, the company with which Mr A took the accidental insurance will
compensate the loss occurred to Mr A and will also sue the third party to
recover the money paid as a claim.
Principle of Contribution
Contribution principle applies when the insured
takes more than one insurance policy for the same subject matter. It states the
same thing as in the principle of indemnity, i.e., the insured cannot make a
profit by claiming the loss of one subject matter from different policies or
companies.
Example –
A property worth Rs. 5 Lakhs is insured with Company A for Rs. 3 lakhs and with
company B for Rs.1 lakh. The owner in case of damage to the property for 3
lakhs can claim the full amount from Company A but then he cannot claim any
amount from Company B. Now, Company A can claim the proportional amount
reimbursed value from Company B.
Principle of Loss Minimisation
This principle says that as an owner, it is
obligatory on the part of the insurer to take necessary steps to minimise the
loss to the insured property. The principle does not allow the owner to be
irresponsible or negligent just because the subject matter is insured.
Example – If
a fire breaks out in your factory, you should take reasonable steps to put out
the fire. You cannot just stand back and allow the fire to burn down the
factory because you know that the insurance company will compensate for it.
Ques.
lovely
ReplyDelete