Principles of Insurance
In insurance, there are 7 basic principles that should be upheld, ie Insurable interest,
Utmost good faith, proximate cause, indemnity, subrogation, contribution and loss of
minimization.
1. Principle of Utmost Good Faith : This is a primary principle of insurance. According to
this principle, you have to disclose all the information that is related to the risk, to the
insurance company truthfully. You must not hide any facts that can have an effect on the
policy from the insurer. If some fact is disclosed later on, then your policy can be
cancelled. On the other hand, the insurer must also disclose all the features of a life
insurance policy.
2. Principle of Insurable Interest : According to this principle, you must have an
insurable interest in the life that is insured. That is, you will suffer financially if the insured
dies. You cannot buy a life insurance policy for a person on whom you have no insurable
interest.
3. Principle of Proximate Cause : While calculating the claim for a loss, the proximate
cause, i.e., the cause which is the closest and the main reason for a loss should be
considered. Though it is a vital factor in all types of insurance, this principle is not used in
Life insurance.
4. Principle of Subrogation : This principle comes into play when a loss has occurred
due to some other person/party and not the insured. In such a case, the insurance
company has a legal right to reach that party for recovery.
5. Principle of Indemnity : The principle of indemnity states that the insurance will only
cover you for the loss that has happened. The insurer will thoroughly inspect and calculate
the losses. The main motive of this principle is to put you in the same position financially
as you were before the loss. This principle, however, does not apply to life insurance and
critical health policies.
6. Principle of Contribution : According to the principle of contribution, if you have taken
insurance from more than one insurer, both insurers will share the loss in the proportion of
their respective coverage. If one insurance company has paid in full, it has the right to
approach other insurance companies to receive a proportionate amount.
7. Principle of Loss Minimisation : You must take all the necessary steps to limit the loss
when it happens. You must take all the necessary precautions to prevent the loss even
after purchasing the insurance. This is the principle of loss minimization.