In today’s scenario, we are facing uncertainties in every aspect of life. Life is full of unpredictable things. How things will change tomorrow, nobody knows. In business, there are uncertainties of fluctuation in prices, market changes, floods, war, etc. Our lives are also unpredictable because there can be diseases, injuries, accidents and many more things. So, to prevent all these types of risk, principles of insurance comes into picture.
Meaning of insurance
Insurance is a contract between two parties in which one party pays a premium and gets the protection of the thing and the other party seeks that if there is any loss done to that thing, they have to give the financial protection to the insured.
Principles of insurance
Principle of insurable interest
The assured should have actual interest in the subject matter of insurance. This means that the relation of assured with subject matter is in a way that assured suffers loss if there is any destruction or should be benefitted by its existence or safety. Insurable Interest is the basic requirement in an Insurance. If there is no insurable interest then the contract will be void because insurance provides protection to the interest and not to the subject matter only.
According to Professor Hansell, “Insurable Interest is a financial, which is able to be insured”.
Time and duration of insurable interest
The time and duration of cases are as follows-
In Life Insurance, the insurable interest is necessary at the time of taking the policy. It is not necessary to have insurable interest afterwards or even when the loss occurs.
In Dalby v. India and London Life Assurance Company , it was held that insurable interest should be there at the time of taking the policy.
In fire insurance, insurable interest is required both at the time of starting of policy and at the time when the loss occurs.
In Marine Insurance, insurable interest is needed only at the time of loss. It is of no importance that the insured had the insurable interest at the time of taking the policy or not.
Principle of indemnity
This principle of Insurance is applied in all insurance contracts except in life and personal accident insurance. Indemnity means compensation for loss.
The Indian Contract Act defines indemnity as a contract by which one party promises to save the other from loss caused to him by the conduct of the promisor himself or by the conduct of another person .
According to this principle, if the insured suffers any loss on subject matter then he/she shall be indemnified by the insurer. But in this, the insured cannot get profit out of the insurance contract i.e. the insured will get only the actual loss suffered by him but it will not be more than fully indemnified.
In the case of Dalby v. India and London Life Assurance Company , it was held that fire and marine insurance are contracts of indemnity and the insurer should compensate the loss suffered by the insured.
Exceptions of indemnity
There are some exceptions to the principle of indemnity-
- It does not apply to life insurance because death of a person cannot be measured in terms of money.
- Accident and sickness insurance is also an exception as in these cases there is liability to pay a fixed amount without measuring the actual loss suffered.
- In case of valued policy, this principle does not apply as the value of subject matter and amount to be paid at the time of loss is fixed.
Principle of utmost good faith
Every contract of insurance is an uberrimae fidei i.e. a contract of good faith. This means that both parties i.e. insured and the insurer should disclose each and every material fact which can change the decision of another party related to the contract. When there is breach of duty of utmost good faith, the contract may be either void or voidable.
In Life Insurance Corp. of India v. Asha Goel , it was held that contracts of insurance are contracts of utmost good faith and every material fact need to be disclosed otherwise the contract can be void.
Facts which need not to be disclosed
- The facts which the insurer knows or is deemed to know, need not be disclosed.
- The facts which reduce the risk need not be disclosed.
- Any circumstance as to which information is waived by the insurer.
- Any facts which are superfluous to disclose by reason of any express or implied warranty.
- Facts which may be known to a prudent person as in his course of business.
Principle of subrogation
The right of subrogation is corollary to the principle of indemnity. The word subrogation is derived from two latin words: “sub means under” and “rogare means to ask”. Thus, it means “asking (for payment) under another’s name”.
Subrogation means stepping into the shoes of the insured by the insurer. It means that when loss occurs, then after indemnifying the insured, the insurance company acquires the right to sue the third party to compensate for the loss occurred.
For example- if a vehicle hits your vehicle and damages occur to you, then the insurer will indemnify you for that loss and will sue that third party for damages.
Principle of contribution
This principle provides that when an insured has taken insurance from more than one insurer for the same subject matter, then in case of loss, it has to be shared proportionately among all insurers according to the rateable proportion of the loss. The amount of compensation provided to insured should not be more than the amount of loss.
So, when there are more than one insurers for any insurance and at the time of loss, it is the right of the insurer who has paid under policy, to call other insurers for contribution in the payment.
Conditions to be satisfied
- All insurance should be for the same subject matter .
- It should cover the same interest of the same insured.
- It should cover the same peril which caused the loss.
- The policies should be enforceable at the time of loss .
- Policy should not contain any condition by which it (policy) is excluded from contribution.
Calculation of contribution
It can be done in two ways-
-In proportion to the sum insured-
CONTRIBUTION = Sum insured with individual insurer/total sum insured amount of loss
-In proportion to liability-
CONTRIBUTION = Independent liability of individual insurer/total sum insured amount of loss
Principle of proximate cause
When loss occurs to policyholders and there are more than one causes for the loss, then the nearest cause will be taken into consideration while deciding the liability of the insurer. When that nearest cause is insured by which loss has occurred, then only the insurance company will be liable otherwise not. This principle is there to find out the liability of the insurer and for this, the closest cause should be looked into and not the remote.
For ex-A cargo ship base was punctured by rats and due to which sea water entered the ship and destroyed cargo. In this situation, there are two causes of destruction of cargo-
- The ship got punctured due to rats.
- Sea water entered the ship due to puncture.
Risk by sea water is insured but the first case was not. The nearest cause for the damage is sea water which is insured and hence, the insurer is liable to pay damages.
Determination of proximate cause
-Loss caused by single cause-
When there is loss that arises due to a single cause, it can be easily checked that whether that cause comes within the purview of insurance policy and accordingly insurance company acts.
-Loss caused by chain of events-
When loss arises due to various events that is called as loss caused by chain of events.The chain of events is further divided into two parts-
- Unbroken sequence
- Broken sequence
Principle of proximate cause in various insurance
The insurer calculates the average duration of human life. The insurance is for the death due to natural causes.If the death is not natural, the insurer is not liable.
In accident insurance, the cause of accident is seen whether it is a proximate cause or not and if that particular cause is insured against.
This principle (Proximate Cause) is applicable in case of fire insurance. It has to be seen that cause of fire is the proximate cause for that fire or not.
Three things have to be proved for making marine insurer liable-
- loss is caused by perils of the sea.
- Perils of the sea are insured.
- Peril insured is the proximate cause for the loss arising.
Principle of mitigation of loss
It is the duty of the insured to take all reasonable care in order to avoid the risk. He cannot become careless by thinking that subject matter is insured.If it is found that the insured has taken reasonable care to prevent damages and even after taking reasonable care loss occurs, then the insurance company will pay damages.
Although the insured is bound to take reasonable care to prevent the risk, he is not bound to do it at the risk of his life.
Principle of attachment of risk
A contract of insurance will become enforceable when risk is attached to it. When the risk is attached in insurance policy, then only the insurer will be liable for any loss or damage to the subject matter of insurance .
 (1854) 15 CB 365.
 The Indian Contract Act, 1872, s 24.
 (1854) 15 CB 365.
 SCC (2001) 601.
 North British v. London, Liverpool and Globe, (1877) 5 Ch. D 569.
 Jenkines v. Deane (1933) 103 LJKB 250, 254, 255.
 Sachin Rastogi, Insurance:Law and Principles (1st edn., 2014).
BY AKSHITA KHANDELWAL | S.S.JAIN SUBODH LAW COLLEGE, MANSAROVAR, JAIPUR