This post outlines the six principles of insurance and how to apply them to an insurance contract.

Every insurance contract gives financial protection and security to the person who buys the insurance, which is the main objective of getting an insurance policy. The insured must never try to misuse or gamble this safe financial cover. If an insured tries to get the same financial profits by reporting false occurrences to the insurance company. That is breaking the trust of both parties, and it is also a breach of a contract and invites legal penalties.

An insurer has a doubt about a claim; he must investigate it. It is a duty of the insurer to accept and approve only all genuine insurance claims made, as early as possible, without any further delays and annoying hindrances.

When dealing with the insurance contract, both of insurer and the insured have to follow key six main principles. If both are following these principles, their insurance contract are valid and reasonable. The key insurance principles are as follows.

1. Principle of Insurable Interest
2. Principle of Utmost Good Faith
3. Principle of Proximate cause
4. Principle of Indemnity
5. Principle of Subrogation
6. Principle of Contribution

Principle of Insurable Interest

There are many risks affecting people. But can’t take insurance for all risks. There must be certain characteristics for the Insurable risks. they are., They must be capable of financial measurement, they must not be against public policy, there must be a large enough number of similar risks, the premium needs to be reasonable, and there must be an “insurable interest” for the person insuring.

The meaning of insurable interest is where the insured has a valid reason to insure and stands to suffer a direct financial loss if the event insured against occurs. Insurable interest exists when an insured derives a financial or other benefit from the continuous existence of an insured object.

Example: A person has an insurable interest in their own car, but not in their neighbor’s car.

To show the insurable interest by the insured, there should be something tangible that can be insured, like property, life, or rights imposed by law.

Principle of Utmost Good Faith

Utmost Good Faith is a very basic principle of insurance. According to this principle, the insurance contract must be signed by both parties of insurer and the insured in an absolute good faith or belief, or trust.

This principle requires anyone seeking insurance to disclose all relevant facts. These are facts that would influence the judgement of a prudent underwriter in fixing the premium or determining whether they will take on the risk. Where material non-disclosure can be proved, a contract can be voided.

Principle of Proximate cause

In the Proximate cause, when a loss occurs and is caused by more than one cause, the nearest(proximate or closest) cause should be taken into consideration to decide the liability of the insurer.

All contracts are subject to terms and conditions that will exclude certain causes of loss. Therefore, in the event of a claim, it is important to ascertain the cause of the loss in order to determine if that cause is insured or excluded.

Example: If lightning damaged a building and weakened a wall, following which the weakened wall was blown down by high winds, lightning would be considered the proximate cause.

Principle of Indemnity

Simply, the principle of indemnity means security, protection, and compensation given against damage, loss, or injury. According to this principle, an insurance contract is signed only to get protection against unpredictable financial losses arising due to future uncertainties. In case of any damage or loss, the insurance contract is not made for making a profit; else, its sole purpose is to give compensation.

Principle of Subrogation

The principle of Subrogation also applies to all contracts of indemnity. and is an extension and another corollary of the principle of indemnity. The means of subrogation is substituting one creditor for another. According to the principle of subrogation, when the insured is compensated for the same losses due to damage to his insured property, then the ownership right of such property shifts to the insurer.

Example: A and B, the people who are backing out of their respective parking spots at the mall simultaneously, collide in the middle of the row. Both A and B have insurance to cover the loss, and both make claims on their policies. In such a case, both drivers will likely be deemed at least partially at fault. Both insurance companies may make subrogation claims against one another, with each company ultimately paying their respective client’s portion of the other party’s claim.

Principle of Contribution

The principle of Contribution can apply to all contracts of indemnity, and is a corollary of the principle of indemnity. If the insured has taken out more than one insurance policy on the same subject matter of insurance. The insured can claim the compensation only to the extent of actual loss either from all insurers or from any one insurer. If one insurer pays full compensation for the loss, then that insurer can claim a proportionate claim amount from the other insurers.