Principles of Insurance

principles of insurance

Principles of Insurance

The insurance contract is guided by certain fundamental principles that control the insurance policy. Some of the major principles of insurance has been discussed below:

A) Principle of utmost good faith

The agreement between the insured and the insurer is based on absolute good faith. It means both the parties involved in insurance should disclose the truth to each other. The insurer must provide complete and correct information about the insurance policy, risk coverage amount of premium to be paid. Its due date…..etc. Similarly, the insured also should furnish correct information about his age, health condition, nature of his property, source of income…etc. Neither of the party should be a fraud. If all facts aren’t provided to each other the insurance policy can become null and void.

B) Principle of insurable interest

The insurance contract will be valid only if the subject matter to be insured has an insurable interest. According to this principle, the insured person should have a close relationship with the subject matter of insurance and wants to protect himself against loss caused to the subject matter. In case of life insurance if a person depends upon the income of another person he has the right to take insurance for that person. In the case of non-life insurance only the true owner of the property has insurable interest thus a non-owner cannot purchase an insurance policy.

C) Principle of indemnity

 Indemnity refers to the security against loss for compensation paid for the loss. This principle completely controls the insurance contract. According to this principle, the insurer promises the insured to compensate for the actual loss to the subject matter up to the amount of insurance. Such compensation paid cannot be more than the actual loss suffered and the loss must be capable of being measured in terms of monetary value. Thus, this principle is applicable to all types of insurance except life insurance as human life cannot be measured in terms of monetary value.

D) Principle of subrogation

The principle of subrogation is also applicable to property insurance only. Subrogation means the transfer of the right of the insured over the subject matter to the insurer after payment of compensation. These shouldn’t be any profit to the insured due to damage to the subject matter. For e.g., Mr. A(Insured) suffered a loss of Rs 10000 due to Mr. B(Third-party). In such a situation Mr. A can recover the amount of loss suffered by him either from the insurance company. If he claims from his insurer. The insurance company can recover the compensation paid from the third party. After compensation, the insurance company can sell the damaged property in scrap.

E) Principle of proximate cause

The principle refers to the nearest cause of loss to be considered for compensation. The main cause that results in loss is called proximate cause and all other reason or causes is called remote cause. This principle has provisions to pay for the damage caused by the insured risk only. If the loss is caused by one event only it becomes easier to identify whether the risk has been insured or not. The insurance company is not at all liable to pay compensation for the risk that hasn’t been included under the insurance policy.

F) Principle of contribution

Contribution refers to the sharing of loss between the co-insurer. A person can insure the same property or subject matter with as many insurers as he likes. But, the insured will be entitled to recover only the actual amount of loss suffered by him. Here, the insured cannot recover the full claim from all insurers. For e.g.: Mr. A (Insured) his property in 3 different insurance companies for Rs 5 lakh each. Now if he suffers a loss of 100000 then all the insurance companies collectively will pay the lost amount i.e. 1 lakh by sharing it proportionately. This saves the insured from making a profit out of misfortune. The amount of contribution is calculated as:

G) Principle of mitigation of loss

Mitigation means to minimize or to make lossless as far as possible the insured must try to take necessary actions to minimize the loss in case of any accidents. According to this principle, he must be effortful like uninsured and try to save his property from damage. If he doesn’t do so the insurer can avoid payment of a claim. However the insured needn’t risk his life to minimize the damage.

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About Life Insurance In Nepal

Life Insurance in Nepal is a blog that provides information regarding insurance, investing and finance. Moreover, the blog is concentrated on Life insurance.

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