GENERAL PRICIPLES OF INSURACE

Our life is full of uncertainties. We are facing uncertainties on every step, while
proceeding in our life. Same in the field of business also, there are various types of
uncertainties, such as uncertainty of flood, war, earthquake, riots, civil war, etc. Some time
the prices of good produced fluctuates so that business suffers loss. Some time machinery
installed became obsolete due to modern innovation in the same field. Where goods are in
transit they may damaged or destroyed by fire or other natural calamities. Some time offices,
factories, buildings are damaged due to various natural and manmade calamities. So the
business face various types of risks and a business man to reduce impact of these risks go for
insurance for smooth sailing of his/her business.
Insurance prevents or minimises the hindrance due to risks of various kinds, it has
attained such an importance that without it modern business cannot function properly. Our
life is also going through various types of risks. A human being is prone to various types of
diseases, death, accidents or injuries. We have to insure ourselves for our family members.
MEANING OF INSURANCE;
Insurance is a contract in which one party, known as the insured or assured, insures
with another person, known as the insurer, assures or underwriter, his property of life or the
life of another person in whom he has a pecuniary interest, or property in which he is
interested, or against some risk or liability, by paying a sum of money as a premium. Under
the contract, the insurer agrees to indemnify the insured against a loss which may accrue to
the other on the happening of some event. The instrument or the contract is called Policy of
Insurance.
Represented in a form of policy, Insurance is a contract in which the individual or an
entity gets the financial protection in other words reimbursement from the insurance company
for the damage (big or small) caused to their property. The insurer and the insured enter a
legal contract for the insurance called the insurance policy that provides financial security
from the future uncertainties.
In simple words, insurance is a contract, a legal agreement between two parties, i.e.,
the individual named insured and the insurance company called insurer. In this agreement,
the insurer promises to help with the losses of the insured on the happening contingency. The
insured, on the other hand, pays a premium in return for the promise made by the insurer. The
contract of insurance between an insurer and insured is based on certain principles, lets us
know the principles of insurance in detail.
PRINCIPLE OF UTMOST GOOD FAITH (UBERRIMAE FIDEI)

The principle of utmost good faith is the most basic and primary level principle of
insurance and it applies to all kind insurance policies. It simply means that the person who is
getting insured must willingly disclose to the insurer, all his complete & true information
regarding the subject matter of insurance.

The insurer’s liability exists only on the assumption that no material fact is hidden or
falsely presented by the person getting insured. There is a process called as “Underwriting” in
insurance industry which is the activity of studying the risk and assigning the premium value
for the case and it’s very important that the person buying any kind of insurance tells all the
facts correctly and does not hide it. If you think about term plan or health insurance, you need
to correctly mention things like

 If you are a smoker or drinker

 Your family illness history
 The Industry you work for
 Your Income
 Your Age
 Your current illnesses (which you are already aware of)
If you do not tell these things correctly, you are violating the “Principle of utmost good faith”
here and it can impact your insurance claim process in future.

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 –‘A’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 ‘A’concealed important facts.
PRINCIPLE OF INSURABLE INTEREST

This principle says that the person who is taking insurance should have some
insurable interest in that thing which is getting insured. So if there will be financial loss to the
person if the insured object gets destroyed. If this is not the case, insurance cannot be
taken .So when a breadwinner takes life insurance for his life, it makes sense because in case
the person dies, there will be financial loss to family .In the same way, you can get your car,
bike, home, gold insured because you have insurable interest in that object. You can’t get
your neighbour car insured and benefit because you do not have insurable interest in that.

This principle says that the 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. 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.
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.
PRINCIPLE OF INDEMNITY

Principle of Indemnity says that Insurance is not to make profit, but only to
compensate you against the losses incurred. It’s an assurance to restore the same
position which was there before the loss. So the compensation paid cannot be more
than the losses incurred. In term plan, people ask why companies ask for income details.
It’s to make sure that a person takes limited insurance which goes with his financial
status and is good enough to restore back his family life style which was there in
existence.

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.

PRINCIPLES OF PROXIMATE CAUSE

Insurance Policies only provide cover for loss or damage if it is as a result of one
of the perils listed in the Policy. Determining the actual cause of loss or damage is
therefore a fundamental step in the consideration of any claim. Proximate cause is a key
principle of insurance and is concerned with how the loss or damage actually occurred
and whether it is indeed as a result of an insured peril. The important point to note is
that the proximate cause is the nearest cause and not a remote cause.

Proximate cause is concerned with how the actual loss or damage happened to the
insured party and whether it is a result of an insured peril. A policy may cover certain perils
mentioned specifically therein (known as insured perils), whilst some perils may be
specifically excluded (known as excepted perils) and some may still be neither included nor
excluded (known as uninsured perils). It is not always that much straightforward that a loss
would be caused by a singular insured or uninsured or an excepted peril so that a claim would
be either payable or not payable.

Difficult situations do occur where numbers of perils get involved simultaneously,

some insured, some uninsured and some still accepted. More so, the position gets further
complicated when an insured peril is followed up by an excepted peril or an excepted peril is
followed up by an insured peril, simultaneously getting mixed up by uninsured perils.
 The principle of proximate cause has been established to solve such a cumbersome
situation and to enable a claims manager to decide whether a claim is at all payable or not and
if payable, then to what extent. The doctrine of proximate cause or causa poxima is one of the
principles of insurance. In insurance law ‘causa proxima et Non Remota Spectrum’ means the
immediate and not the remote cause is to be considered. For the purpose of claiming any
insurance policy the loss or injury caused must be as a result of any one of the insured perils.
The term proximate cause was first defined in a case as: “the doctrine of ‘proximate
causa’ indicates “the active and efficient cause that sets in motion a train of events
which brings about a result , without the intervention of any force started and working
actively from a new and independent source. Peril is basically the cause of loss or the
prime cause of what will give rise to a loss.. The immediate and not the remote cause is
to be regarded as proximate cause, the insurer always considers the proximate cause
while paying the claim (Pawsey & co. v. Scottish Union & National Insurance Co., 1907).

Application of the rule of ‘causa proxima’:

Life Insurance:

Under life insurance, the insurance policy is taken against the risk of death and
any natural causes which may probably result in death, makes the party eligible to claim
the cover except in the cases suicides.

Accident Insurance:

If cause of death is direct i.e.; caused by accident then there is no question of

proximate cause. The doctrine is directly satisfied and the money can be recovered. In
Issit v. Railway Passengers Assurance Co., a railway passenger was insured against
death from the effect of an injury caused by accident. He fell down from the train and
was hospitalized. He was undergoing treatment in the hospital and died due to attack of
pneumonia. “The court held that the death was a result of the accident by applying the
maxim ‘causa Sproxima’ and the insurer was liable.”

Fire Insurance:

The principle of causa proxima is applicable in the case of Fire Insurance.

Marine Insurance:

When the loss is caused by the perils of the sea the maxim ‘causa proxima ‘is applicable
to the case of Marine Insurance
 The theory of proximate cause is that it is that cause which triggers a chain of
events resulting in the actual loss. For example, due to a storm if the wall collapses and
as a result of this there is short circuit and due to the spark there is damage resulting
from fire (insured peril). Thus herein in the present example there is a train of events
which resulted in the actual damage. Even though fire is the insured peril the proximate
cause is storm and thus the insurer is liable to pay the damage. However, the insurer in
no case is liable to compensate if the loss is from excepted perils or uninsured perils or
if it is caused by the misconduct or fault of the assured. The main point to note in the
principle of proximate cause is that it is not applicable in the case of life Insurance as in
the case of death the insurer is liable to pay whatever may be the cause of death
whether natural or unnatural except in the case of suicide.

There are certain exceptions to this as well like in the case of Accident Benefit, if
an insured is killed or suffered injury which has an immediate cause which results to
death of the insured. Once the cause is identified and then the relationship of the cause
with the insured peril is established and after it becomes clear that it is covered under
the head of proximate cause the principle of indemnity takes effect; indemnity is the
way the insurer places the insured as before the loss i.e., making good the loss or
reinstating the position of the insured. Both the principle of indemnity and causa
proxima is not applicable in the case of life insurance. The principle of indemnity cannot
be applied in the case of life insurance as human life cannot be measured in terms of
money and thus it cannot be regarded as contract of indemnity. Also the principle of
causa proxima does not apply to Life Insurance as the insurer is obliged to pay the
money regardless of the reason for death is it natural or unnatural.

The determination of proximate cause is that it is always easy to determine the

direct cause of loss but when there exist a series of events the process becomes
complicated i.e, to determine whether the cause of loss has been covered under the
insurance or is it proximately connected with the insured peril. There is no legal
definition of the term proximate cause, it is a mere use of common sense and also in
each case the term can be interpreted differently, it is always important to establish the
relationship between cause and effect. Proximate cause is not always the last cause
which resulted in the loss it is the nearest cause which resulted in the happening of the
uncertain event and not the cause which is nearest in time. Everything depends upon
the circumstances and the facts of the case and therefore it is important to note that the
Court interprets and decides the proximate cause in each case and that it is a question of
fact.

Another important phrase to note in this context is the ‘immediate cause’ or

‘nearest cause’. While deciding the proximate cause only the immediate cause and not
the remote cause is taken into consideration.
 The insurer or the company is liable if one of the causes of loss is an insured peril
and none of them is an excepted peril or the loss is caused by the insured and the
excepted perils can be distinguished. Thus there must be insured peril and the
relationship between the causation and the actual event must be ascertained, the
principal of proximate cause identifies the nearest or direct cause which resulted in the
damage, when there exist a chain of events. In this case the most influential cause is to
be determined in order to settle the claim. Once the predominant cause is determined
and it becomes clear that the causa proxima is covered under the ‘insured peril’, the
insurer is liable to compensate and at that point the principle of Indemnity will take
place. However, the insurer is not liable if the losses caused by the insured and the
excepted perils cannot be separated or distinguished and also if it is caused by the
negligent act of the insured.

Principle of Subrogation

Subrogation in insurance is a term used to describe a legal right the insurance

company holds to legally pursue a third-party responsible for the damages caused to
the insured. In simple language, when an insurance company pays you the amount you
claimed in a situation where the third party was responsible for the damage in question,
you subrogate your rights to the insurance company. This means you give the insurance
company the legal right to sue the person who caused the accident to recover the money
paid to you for the damages .The insured here gets his payment on time in case of a
claim and the insurance company reimburses the same amount from the third party
who may have caused the impairment.

The insurance sector is considered a primary area of application of the

subrogation principle. By using subrogation, an insurance company can recover the
amount of the insurance claim paid to the insured client from the party that caused the
damage. Note that in such situations, the insurance company represents the interests of
its insured client. In other words, subrogation is a remedy to the insurance company for
the paid-out insurance claim.

The subrogation right is generally specified in contracts between the insurance

company and the insured party. The contracts may contain special clauses that provide
the right to the insurance company to start the process of recovering the payment of the
insurance claim from the party that caused the damages to the insured party.
Subrogation in the insurance sector generally involves three parties: the insurer
(insurance company), the policymaker (insured party), and the party responsible for
the damages.

The process usually starts when the insurer pays out the losses of the insurance claim
filed by the policymaker. When the policyholder receives the amount of money for the claim,
the insurer may start the process of collecting the amount of the claim from the party that
caused the damages. Note that if the party responsible for the damages is covered by another
insurance carrier, the carrier will represent the interests of the client. Subrogation is
substituting one creditor (the insurance company) for another (another insurance company
representing the person responsible for the loss).

Indemnity is a fundamental principle of insurance law, and the principle of

Subrogation is a corollary of this principle in as much the insured is precluded from obtaining
more than the loss he has sustained. The most common form of subrogation is when an
insurance company pays a claim caused by the negligence of another. The doctrine of
subrogation confers two specific rights on the insurer. Firstly, the insurer is entitled to all the
remedies which the insured has against the third party incidental to the subject matter of the
loss, such that the insurer can take advantage of any means available to extinguish or
diminish, the loss for which the insurer has indemnified the insured. Secondly, the insurer is
entitled to the benefits received by the assured from the third party with a view to compensate
himself for the loss.

The fact that an insurer is subrogated to the rights and remedies of the insured does
not ipso jure enable him to sue third parties in his own name. It will only entitle the insurer to
sue in the name of insured, it being an obligation of the insured to lend his name and
assistance to such an action.

An insurance policy may contain a special clause whereby the insured assigns all his
rights, against third parties, in favour of the insurer. In case of subrogation, which vests by
operation of law rather than as the product of express agreement, the insured would be
entitled to only to the extent of his loss. The excess amount, if any, would be returned to the
insured.

PRINCIPLE OF CONTRIBUTION

The principle of contribution is implemented when multiple insurance policies are

covering the same property or loss; the total payment for actual loss is proportionally divided
among all insurance companies. In insurance, the principle of contribution inborn from the
principle of indemnity. In fact, however, there would have been possibilities of getting more
than the actual loss had the principle of contribution not been established with legal force.

The contribution principle in insurance is a rule that specifies what happens when a
person buys insurance from multiple companies to cover the same event, and that event
occurs. The principle says that if the policyholder files a claim with one company, that
company is entitled to collect a proportional amount of money from the other involved
insurance companies. The contribution is a right that an insurer has, who has paid under a
policy, of calling other interested insurers in the loss to pay or contribute rate-able to the
payment.

This means that if at the time of loss it is found that there is more than one policy
covering the same loss then all policies should pay the loss proportionately to the extent of
their respective liabilities so that the insured does not get more than one whole loss from all
these sources. If a particular insurer pays the full loss then that insurer shall have the right to
 call all the interested insurers to pay him back to the extent of their individual liabilities,
whether equally or otherwise.

The insured, under no circumstances, shall be allowed to take the advantage of all the
policies individually so as to get the full claim number of times. Even if the insured recovers
from all the policies, he shall have to refund all such payments in excess of the actual loss
sustained. As this principle virtually comes to the rescue of the principle of indemnity,
therefore, like subrogation, the assertion “it is a corollary to the principle of indemnity”
equally holds well with regard to the principle of contribution. As life and personal accident
contracts are not contracts of indemnity, this principle does not apply thereto.

Before contribution can operate the following conditions must be fulfilled;

1. There must be more than one policy involved and all the policies covering the loss must
be in force.

This is well understood. If there is only one policy involved there is nothing which
can contribute and similarly if at the time of loss it is found that a particular policy in the lot
is not in force because of some reason that that policy cannot be called upon to contribute.

2. All the policies must cover the same subject-matter.

If all the policies cover the same insured but different subject-matters altogether then
the question of contribution would not arise.

3. All the policies must cover the same peril causing the loss.

If the policies cover different perils, some common and some uncommon, and if the
loss is not caused by a common peril, the question of contribution would not arise.

4. All the policies must cover the same interest of the same insured.

“A” is the owner of a car and has obtained a loan from “B” on the security of the car. Here
both A and B have got insurable interest and can, therefore, affect policies individually. In the
case of damage to a car, both A & B will get claims independently and no contribution will
apply in between the policies.

The reason is that the interests are different and also the insured’s. It should be
remembered that if any of the above four factors are not fulfilled, the contribution will not
apply; Once it is established that the above factors are satisfied and contribution is to apply
then the next course is to find out the liability under each policy. Usually, this is on the sum-
insured basis under each policy and is commonly known as the proportionate liability or
respective liability of each policy.

The contribution principle states that if you can hold more than one insurer liable
for your losses, they have to share the loss. If you take out two policies on your car, you
can't collect from both insurers. One company would pay you and then collect from the
second, or both companies could cut you a check for part of the loss.
LOSS MINIMIZATION

In the advent of any occurrence of uncertain event, it is the utmost duty of the insured
to make sure that if controlled, minimalist of loss on the damaged insured property should be
taken into account. The attitude of negligence to such event is not tolerable to the insurer,
given such in the contract created in the insurance policy, for the very reason of security that
compensation will be given. That is the very essence of the principle of loss minimization.

This principle says that the insured must take all necessary steps to curtail the loss of
insured property, in the case of events like fire, blast, etc. Just because the insured has an
insurance policy, it doesn’t mean that he/she can act negligently. It is the main responsibility
of the insured to act diligently and take all steps to cut losses to the insured property.

Under this principle it is the duty of the insured to take all possible steps to minimize
the loss to the insured property on the happening of uncertain event. According to the
Principle of Loss Minimization, insured must always try his level best to minimize the loss
of his insured property, in case of uncertain events like a fire outbreak or blast, etc. The
insured must take all possible measures and necessary steps to control and reduce the losses
in such a scenario. The insured must not neglect and behave irresponsibly during such events
just because the property is insured. Hence it is a responsibility of the insured to protect his
insured property and avoid further losses.