SCHOOL OF LAW
KIIT DEEMED TO BE UNIVERSITY
BHUBANESWAR-74
SUBJECT NAME AND CODE- BANKING AND INSURANCE LAW & LW 4017
MODE OF ASSESSMENT- ARTICLE SUBMISSION
TOPIC OF THE ARTICLE- GENERAL PRINCIPLES AND CONCEPTS OF
INSURANCE
SUBMITTED TO:-
Dr. Sthita Prajna Mohanty
ASSISTANT PROFESSOR
SCHOOL OF LAW
KIIT DEEMED TO BE UNIVERSITY BHUBANESWAR
SUBMITTED BY
NEHA MOHANTY
ROLL NO- 2082085
SECTION- B
BRANCH-BBALLB
INTRODUCTION
Concept of the Term Insurance:-
Insurance is an important element of our lives. It is what protects us, preserves ourselves, and
even our loved ones from harm. There are numerous types of insurance available. You can also
get as many as you need for yourself.
Insurance is a policy-based arrangement in which a policyholder receives financial protection or
payment from an insurance company in the event of a loss. Insurance is a contract (insurance) in
which an insurer indemnifies another against losses caused by particular eventualities or dangers.
The true meaning of insurance is a safeguard against unpredictable and regrettable loss. This
means that if you experience a less-than-normal incident in your usual course of life and suffer a
financial loss as a result, you may be reimbursed.
For example, suppose you were in an accident on your way to work in your automobile and it
was damaged. In this instance, your insurer may pay you for the repair costs. However, the
insurer will not compensate typical wear and tear, such as a broken headlamp.
Legally Insurance is an arrangement in law between two parties, namely the person who is
named insured and an insurance provider known as an insurer. In this contract, the insurer
engages in to assist the insured in the event of a contingency.
, Why do we need Insurance?
Life is unpredictable; there are no assurances or predictions about what will happen. Similarly,
businesses have no certainty because they risk several unexpected losses or damages in the long
run. Cars, bikes, and other assets have no guarantee of survival; they can be stolen or damaged in
the long run. All of these hazards can be mitigated with insurance coverage.
The insurer and the insured engage into a formal contract for insurance, known as an insurance
agreement, which provides financial protection against unpredictability in the future.
The basic idea behind insurance is to disseminate and control risk among a large number of
insurance customers, allowing them to collaborate on their resources and share the monetary
burden of unforeseen events.
Principles of Insurance
Insurance is the spreading of risk among a group of people. As a result, cooperation becomes the
fundamental 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:
1.Insurance contracts or the Principle of Utmost Good Faith:-
Under common law, a party to a contract has no duty/obligation to reveal any material
information, and failure to disclose such information does not normally provide the party a right
to avoid the contract, as the principle of caveat emptor applies, with the exception of sales
contracts1.
The underlying idea is that both parties in an insurance contract must operate in good faith
towards one other, which means they must offer clear and concise information about the
contract's terms and circumstances.
The insured must supply all relevant information about the subject matter, and the insurer must
provide specific contract terms.
Based on this principle, it is essential for both parties involved, namely the insurer and the
insured, to enter into the insurance contract with unwavering honesty, faith, or trust. This
principle underscores that the individual seeking insurance must willingly provide the insurer
with full and accurate information about the insured subject matter.
In practice, the following facts must be revealed:
The facts that raise an elevated risk level over normal.
Any information that increases the likelihood of loss.
Any previous claims or damages.
Any facts which restrict the insurer's subrogation rights
In the case of Smt Krishna wanti Puri Vs life Insurance Corporation of India2
The company had a right to revoke the policy on the grounds available to carriers under Section
45 of the Insurance Act of 1938, because the person who was insured not only did not reveal
1
Investopedia, Doctrine of Utmost Good faith in Insurance,(October, 19,2023)
https://www.investopedia.com/terms/d/doctrineofutmostgoodfaith.asp
2
Smt Krishna Wanti Puri Vs Life Insurance Corporation of India, AIR 1975 Delhi 19
what was important for him to disclose, but he also made an untrue declaration to the
consequence that he had never endured from any heart disease.
1. Principle of Proximate Cause:-
This is also known as the 'Causa Proxima' idea, which refers to the closest cause. When an
impairment is caused by two or more variables, this principle applies. The insurance company
will look into the cause of the property harm. If the proximate cause is one for which the
property is covered, the firm is required to compensate the victim. If the cause is not one for
which the property is insured, the insured will not pay.
To show that a defendant should be held responsible for an injury sustained by someone else,
certain essential factors must be proven. You must demonstrate:
Legal cause is another term for proximate cause. It refers to the initial event or reason that put
everything in motion.
The Proximate Cause Principle, is one of the six key insurance principles, and its focus is on
finding the causes of harm in an insurance claim that are the most proximate, nearest, or
immediate of all potential causes3. A cause is said to be proximate when it is efficient and
effective in initiating or initiating a chain of events that eventually results in an outcome. The
proximate cause can be either the beginning or ultimate cause; nonetheless, its definition
demands that it be the cause that is most actively responsible for producing the result.
Proximate Cause Insurance Example:-
An inebriated driver causes an accident by swerving into oncoming traffic and colliding with
another vehicle. There is a link between the accident and driving under the influence of alcohol.
2. Principle of Insurable interest:-
This principle states that the person being protected (insured) must have an appropriate interest
in the subject matter. The term "insurable interest" refers to the fact that the subject of the policy
for which the owner of the policy engages into the insurance contract must provide a certain
amount of money to the insured as well as create a monetary loss if there is any harm,
devastation, or loss.
In the case of a covered loss or deterioration, the principle of indemnification in insurance
assures that the insured party is compensated for their real financial loss. This idea promotes
fairness and prevents insurance from being used for profit
In the field of insurance, there are two sorts of insurable:
3
Insuranceopedia, Principle of Proximate cause, (October, 19,2023)
https://www.insuranceopedia.com/definition/472/proximate-cause
1. Contractual interest
2. Legal interest
Contractual interests are insurable interests that exist because of an existing relationship between
the proposer and the insurable asset or person. For example, suppose you're purchasing insurance
for your pricey home entertainment system.
The insurable interest may not exist prior to the contract in the case of statutory interest. As a
result, the contract protects any future insurable interest relationships. Liability insurance
policies are an example of this type of coverage. These plans cover the unforeseen and
unintended damages caused by your product or activity to unknown people.
In Macaura v. Northern Assurance Company (1925) 4, a man named Macaura insured his land's
timber against fire. He sold timber to a company in which he owned the majority of the stock. He
demanded compensation after the majority of the timber was destroyed by fire. The insurer
avoided having to comply with the regulation. Despite the fact that he would incur loss if the
firm lost its property, the insured had no statutory interest in the firm's assets, nor did he have
any contractual interest under the policy because he couldn't establish interest at the time of the
loss.
4.Principle of Indemnity:- Indemnity is a commitment to get back the insured to their
previous position prior to the unexpected event that led to a loss. The insurance company
(policyholder) compensates the insured5.
Functions:-
a) You get reimbursement when the insurer has thoroughly examined and estimated the loss. The
amount of the claim is neither less nor greater than the amount of the loss.
b) This principle is maintained to prevent you from profiting from an insurance claim.
Illustration:- Jethalal is a business owner that owns an electronics store. He has insured his
belongings for Rs 10 lakhs. When a fire broke out in the warehouse, some of the goods were
damaged. Jetha sought compensation in the amount of ten lakhs. Only commodities worth Rs 2
lakh were damaged, according to an examination. He will now be given only Rs 2 lakh.
5.Principle of Subrogation:-
4
Macaura Vs Northern Assurance Co Ltd (1925) AC 619
5
Insuranceopedia, Principle of Indemnity, (last visited on October 12,2023),
https://www.insuranceopedia.com/definition/459/principle-of-indemnity
It refers to an insurer's legal authority to put itself into the shoes of the policyholder after
resolving the complaint and seek legal action against an outside party who may be liable for the
consequence or harm. Subrogation is founded on the premise that when an insurance company
pays an invoice, they should be entitled to obtain some or all of their reimbursement from the
party who caused the loss.
Subrogation happens when a single creditor occupies the position of another (another insurance
provider defending the individual accountable for the damage).
6. Principle of Contribution:-
When an insured obtains multiple insurance policies for the same subject matter, the contribution
principle applies. It states the same thing as the indemnity concept, namely that the insured
cannot profit by claiming the loss of one subject matter from different policies or businesses.
In the event of an incident or claim, this principle assures that the policyholder cannot receive
more than the actual value of the damage from all insurance policies combined. The basic goal of
the Contribution Principle is to prevent over-insurance and profiteering from an insurance claim.
Insurance is intended to indemnify or recompense the insured for actual loss, not to give a cash
opportunity.
For the contribution principle to apply, more than one insurance policy must be involved, and all
policies insuring the loss must be in force. If only one policy is implicated, nothing can be
contributed. Similarly, if it is determined during the loss that one of the pool policies is not in
effect for some reason, that policy will not be relied upon to contribute.
7. Principle of Loss Minimization:-
According to this principle, Loss minimization is an essential concept in insurance which
motivates insurers to take appropriate measures in order to minimize the amount of harm or
destruction in the event of an insurance risk or a catastrophe. This premise is closely related to
the wider concept of strongest good faith (uberrimae fidei) and is intended to motivate insurers to
act ethically.
This establishes an agreement for insurance, which is potentially the most fundamental. It is the
insured's obligation to make every reasonable attempt to mitigate the loss to the protected
property in the case of an unanticipated disaster.
CONCLUSION
Insurance concepts and theories are vital to the operation of the insurance sector. They advocate
for equitable treatment, accessibility, and the handling of risks. Understanding these concepts
becomes essential for both insurance providers and policyholders in order to guarantee that
insurance serves its intended function of providing financial safety and tranquilly of mind in the
face of unforeseen events.
Insurance is an arrangement in law between two parties, namely the person who is named
insured and an insurance provider known as an insurer. In this contract, the insurer engages in to
assist the insured in the event of a contingency.
Insurance fundamental concepts serve as vital for comprehending the way insurance functions
and the benefits it provides to consumers and entities. Finally, these ideas can be described as
follows:
Risk Management- Insurance is an important instrument in the management of risks. It assists
individuals as well as organizations in transferring the monetary cost of unanticipated losses to
insurers, minimizing their risk vulnerability and offering peace of mind.
Financial Protection- Insurance provides monetary security against a wide range of hazards,
including destruction of property, accountability for losses or damages, and loss of income due to
a variety of circumstances. In times of crisis, this protection can be critical.
Uncertainty Reduction:- Insurance minimizes the improbability and volatility connected to
prospective financial losses. It empowers individuals and organizations to make stronger future
plans.
Insurance is a significant financial instrument that supports individuals and businesses in
lessening the monetary impact of unforeseen occurrences and risk management.
