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Insurance is an important aid to trade. It is a contract between two parties whereby one party undertakes the risk of the other by receiving an amount is called premium. The principles of insurance are;

1. Utmost good faith; An insurance contract is based on the principle of utmost good faith. It means that both the parties to the contract must disclose all the material facts relating to the subject matter of the insurance. If the insured does not disclose all material facts, the contract between the parties becomes void. For example, when applying for the assurance, a person must disclose the age, the ownership of the property and the previous history furnishing the any loss happened so far.
2. Insurable interest; The insured should have insurable interest in the subject matter of insurance. It means that the insured must suffer a loss by the destruction of the subject matter and is benefited by its safety. For example, a person has insurable interest on his life, wife, his property, etc.
3. Indemnity; According to this principle, the insured will be paid only the actual loss happened to the subject matter. Here the insured is paid only the actual compensation.
For example, if a 10-years old car is damaged so badly in an accident that it cannot be repaired; the insurance company will give the amount which is sufficient to buy a 10-years-old car in a similar model rather than a new model.
4. Subrogation ; This principle follows the principle of indemnity. According to this principle, after the insured is compensated for a loss, the right of ownership of such damaged part of the property passes to the insurer.
For example, a car is insured for one lakh, unfortunately it is damaged completely on a fire and the scrap remained worth 500. The insured will be paid one lakh as compensation and the insurance company will undertake the damaged car (scrap).
5. Contribution; Sometimes a person may get his goods insured with more than one insurer for the purpose of making profit. This is referred to as double insurance. But in the event of loss, each company pays a proportion of the cost so that no profit is made by the insured.

6. Proximate cause; Before an insurance company pays out on a claim, it will want to satisfy itself that the claim is for an event caused by something which is within the precise terms of the policy. The root cause of the event is known as the proximate cause and this must be covered by the policy for a claim to be valid. For example, a house is insured against the fire, if it is damaged due to earth quake, the insurer does not give the compensation.

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