What Are The Principles Of Insurance?

There are certain principles on which insurance functions in India. They are:

Utmost Good Faith: The customer and the insurance company should enter the agreement in utmost good faith. The customer should declare all the material information to the insurance company without holding any information that can affect the risk, while the insurance company or its representative should educate the customer regarding the terms and conditions of the insurance policy.

Insurable Interest: There should be proof of insurable interest at the time of taking the insurance policy. In simple words, the insured customer should suffer financially or mentally if the insured property is damaged.

Indemnity: The principle of insurance states that the insured will be placed in the same financial position as he/she was just before the occurrence of the loss. In simple words, the insurance company will pay only the claim amount to repair or replace the property and make sure that the property is in the same condition just before the occurrence of the loss. The principle of indemnity states that the insured customer cannot profit from the insurance.

Subrogation: The principle of subrogation states that the rights of the insured property would be transferred to the insurance company after the claim is paid. Once the claim is paid to the insured, the damaged property would be owned by the insurance company so that the insured cannot be benefited from both the claim amount and from the proceeds of selling the damaged property.

Contribution: The principle of contribution states that if the customer has taken more than one insurance policy for the same property, then the insurance companies would settle the claim equally or as per the sum insured selected. The customer cannot claim “full” from more than one insurance company for the same damaged property even though he/she has taken an insurance policy for the same property from more than one company.

Proximate Cause: It is an active and efficient cause in the chain of events that lead to the damage of the property. The nearby cause in a series of events would be taken into consideration before settling the claim.

Loss Minimization: The principle of loss minimization states that the customer should act appropriately to reduce the loss in case of an insured peril. Merely having insurance doesn’t entitle the customer to a claim in case of loss if it’s found that the customer didn’t act in a proper manner to reduce the loss.