MADHUR GARG

HARSHIT NANGIA
KUSAGRA KUMAR

PRINCIPLES OF INSURANCE

SOME IMPORTANT TERMINOLOGIES

INSURANCE : IT IS A MECHANISM WHICH INVOLVES A CONTRACTUAL AGREEMENT IN WHICH THE INSURER
AGREES TO PROVIDE FINANCIAL PROTECTION AGAINST A SPECIFIED SET OF RISK FOR A PRICE CALLED PREMIUM.
RISK : IT REFERS TO THE FUTURE EVENT WHICH CAN BE KNOWN WITH REASONABLE DEGREE OF CERTAINTY. WE
CAN INSURE AGAINST RISK BUT NOT AGAINST UNCERTAINTY.
UNCERTAINTY : IT REFERS TO A FUTURE EVENT WHERE THE POSSIBILITIES ARE LARGELY UNKNOWN.
INSURER : THE PARTY WHO PROMISES TO PAY INDEMNITY TO THE INSURED ON THE HAPPENING OF
CONTINGENCY. THE INSURANCE IS THE INSURANCE COMPANY.
INSURED : THE PARTY OR INDIVIDUAL THAT SEEKS PROTECTION AGAINST A SPECIFIED TASK AND ENTITLED TO
RECEIVE PAYMENT FROM THE INSURER ON THE HAPPENING OF A STATED EVENT. AN INSURED IS ALSO CALLED AS
THE POLICY HOLDER.
PREMIUM : THE AMOUNT WHICH IS PAID TO THE INSURER BY THE INSURED IN CONSIDERATION TO INSURANCE
CONTRACT IS KNOWN AS PREMIUM.
PROSPER : A PERSON WHO PROPOSES TO ENTER AN INSURANCE POLICY CONTRACT WITH A INSURANCE
COMPANY, TO INSURE HIMSELF OR ANOTHER PERSON ON WHOSE LIFE HE HAS INSURABLE INTEREST, AND WHO
ALSO PAYS THE PREMIUM OF THE POLICY.

PRINCIPLES OF INSURANCE
VARIOUS PRINCIPLES AND THEIR APPLICABILITY
 PRINCIPLES OF
INSURANCE
INSURABLE THE LEGAL RIGHT TO INSURE
INTEREST
REFERS TO THE RIGHT THAT THE INSURER SUBROGATION
HAS PAID HIM AN INDEMNITY

UTMOST GOOD DUTY TO DISCLOSE ALL RELEVANT

FAITH FACTS
PROCESSING OF A CLAIM PROXIMITY
LODGED BY THE INSURED CAIUSE

INDEMNITY DETERMINES THE EXTENT OF

INSURER LIABILITY
ADVOCATES THAT ALL NECESSARY STEPS WERE MITIGATION OF
TAKEN TO MITIGATE THE LOSS LOSS

CONTRIBUTION TELLS US HOW THE LIABILITY IS TO BE MET WHEN THE INSURED HAS TAKEN
INSURANCE WITH MORE THAN ONE INSURER
THE PRINCIPLE OF INSURABLE INTEREST
1. A COMMON DEFINITION USED FOR INSURABLE INTEREST IS “ THE LEGAL RIGHT TO INSURE ARISING OUT
OF FINANCIAL RELATIONSHIP, RECOGNISED UNDER LAW, BETWEEN THE INSURED AND THE SUBJECT
MATTER OF INSURANCE.
2. INSURABLE INTEREST IS A PERSON’S LEGALLY RECOGNISED RELATIONSHIP TO THE SUBJECT MATTER
THAT GIVES THEM THE RIGHT TO EFFECT INSURANCE ON IT.
3. FOR EXAMPLE:
A OWNER HAS AN INSURABLE INTEREST IN THE HOUSE OR FACTORY AS HE STANDS TO BENEFIT BY THE
SAFETY OF THE PROPERTY.
THE BANK THAT LENT MONEY FOR THE CONSTRUCTION OF THE HOUSE OR A FACTORY TOO HAS AN
INSURABLE INTEREST TO THE EXTENT OF THE OUTSTANDING AMOUNT AS THE BANK STANDS TO LOSE
BY ANY LOSS, DAMAGE, OR DESTRUCTION TO THE PROPERTY.
A THIEF IN POSSESSION OF STOLEN GOODS DOES NOT HAVE THE RIGHT TO INSURE THE GOODS,
BECAUSE THEIR IS NO LEGAL RELATIONSHIP BETWEEN THE INSURER AND THE SUBJECT.
4. AN INSURANCE AGREEMENT IS VOID WITHOUT INSURABLE INTEREST.

APPLICATION IN DIFFERENT INSURANCE POLICIES !

1. WITH LIFE INSURANCE , INSURABLE INTEREST IS ONLY NEEDED AT THE TIME OF FORMATION OF
POLICY. FOR EXAMPLE IF A WOAMAN TOOK A LIFE POLICY FOR HER HUSBAND, IF AT THE MAN’S
DEATH, THEY WERE NO LONGER IN RELATIONSHIP, I.E. THE WOMAN HAD NO INSURABLE INTEREST
IN THE LIFE OF THE DECEASED, NEVERTHELESS SHE WOULD RECEIVE THE CLAIM.

2. IN FIRE INSURANCE, THE INSURABLE INTEREST MUST EXIST THROUGHOUT THE CONTRACT, I.E. AT
THE TIME OF INCEPTION,DURING THE PERIOD AND EVEN AT THE TIME OF LOSS.

3. WITH MARINE INSURANCE, INSURABLE INTEREST IS ONLY NEEDED AT THE TIME OF LOSS.

THE PRINCIPLE OF UTMOST GOOD FAITH

- UNDER THIS BOTH THE INSURER AND THE PROSPER SHOULD RELY AND TRUST ON THE
INFORMATION DISCLOSED.

- ON THE BASIS OF THE INFORMATION PROVIDED THE INSURANCE COMPANY DECIDES

THE APPROPRIATE RATES AND THE TERMS AND CONDITIONS.

- THE DUTY OF DISCLOSURE OF MATERIAL FACTS CONTINUES THROUGHOUT THE

CONTRACT.

- THIS PRINCIPLE OF UTMOST GOOD FAITH APPLIES BOTH TO LIFE INSURANCE AND
GENERAL INSURANCE.

FACTS, WHICH MUST BE DISCLOSED

IN LIFE INSURANCE MATERIAL FACTS ARE AGE, INCOME, OCCUPATION, HEALTH, HABITS,
RESIDENCE, FAMILY HISTORY AND PLAN OF INSURANCE. MATERIAL FACTS ARE DETERMINED
NOT ON THE BASIS OF OPINION, THEREFORE, THE PROSPER SHOULD DISCLOSE NOT ONLY
THOSE MATTERS WHICH THE PROSPER MAY FEEL ARE MATERIAL BUT ALL FACTS WHICH ARE
MATERIAL.

FACTS, WHICH SHOW THAT A RISK REPRESENTS A GREATER EXPOSURE THAN WOULD
EXPECTED FROM ITS NATURE E.G., THE FACT THAT A PART OF THE BUILDING IS BEING USED
FOR STORAGE OF INFLAMMABLE MATERIALS.

HISTORY OF INSURANCE (a) DETAILS OF PREVIOUS LOSSES AND CLAIMS (b) IF ANY OTHER
INSURANCE COMPANY HAS EARLIER DECLINED TO INSURE THE PROPERTY AND THE SPECIAL
CONDITION IMPOSED BY THE OTHER INSURES.

THE EXISTENCE OF OTHER INSURANCES

FULL FACTS RELATING TO THE DESCRIPTION OF THE SUBJECT MATTER OF INSURANCE.

FACTS INSURED NEED NOT DISCLOSE

Circumstances which are diminishing the risk.
Facts which are known or reasonably should be known to the insurer in his ordinary course of
business.
Facts which the insurer should infer from the information given.
Facts which are waived by the insurer.
Facts which are superfluous to disclose by reason of a condition or warranty.
Facts of public knowledge.

THE PRINCIPLE OF INDEMNITY

- THE PRINCIPLE OF INDEMNITY ENSURES THAT AN INSURANCE CONTRACT PROTECTS YOU FROM AND
COMPENSATES YOU FOR ANY DAMAGE, LOSS, OR INJURY.

- THE PURPOSE OF AN INSURANCE CONTRACT IS TO MAKE YOU "WHOLE" IN THE EVENT OF A LOSS, NOT
TO ALLOW YOU TO MAKE A PROFIT. FOR EXAMPLE, IN CASE OF AN INSURANCE TAKEN AGAINST A
MACHINERY WHICH GETS DESTROYED BY FIRE, THE MEASURE OF INDEMNITY IS THE MARKET VALUE OF
THE MACHINERY AFTER TAKING INTO CONSIDERATION THE DEPRECIATION.

- IF THERE IS ANY SALVAGE OF THE DAMAGED PROPERTY THE VALUE IS DEDUCTED FROM THE AMOUNT
OF LOSS.

- THERE ARE 4 METHODS OF INDEMNIFICATION :- CASH PAYMENT, REPAIR, REPLACEMENT,

REINSTATEMENT.

- IN CASE 0F LIFE INSURANCE, HOWEVER, THE ECONOMIC VALUE OF A HUMAN LIFE CANNOT BE
MEASURED PRECISELY, HENCE SUCH INSURANCE POLICIES CANNOT BE A CONTRACT OF INDEMNITY

CONDITIONS FOR INDEMNITY PRINCIPLE ARE :

1. THE INSURED HAS TO PROVE THAT HE WILL SUFFER A LOSS ON THE INSURED MATTER AT THE TIME
OF HAPPENING OF AN EVENT AND THE LOSS IS AN ACTUAL MONETARY LOSS.

2. THE AMOUNT OF COMPENSATION WILL BE THE AMOUNT OF INSURANCE. INDEMNIFICATION

CANNOT BE MORE THAN THE AMOUNT INSURED.

3. IF THE INSURED GETS MORE AMOUNT THAN THE ACTUAL LOSS , THE INSURER HAS THE RIGHT TO
GET THE EXTRA AMOUNT BACK.

4. IF THE INSURER GETS SOME AMOUNT FROM THE THE THIRD PARTY AFTER BEING FULLY
INDEMNIFIED BY THE INSURER, THE INSURER HAS THE RIGHT TO RECEIVE ALL THE AMOUNT PAID
BY THE THIRD PARTY.

5. THE PRINCIPLE OF INDEMNITY DOES NOT APPLY TO PERSONAL ACCIDENT/LIFE INSURANCE

BECAUSE THE AMOUNT OF LOSSS CANNOT BE CALCULATED.

THE PRINCIPLE OF SUBROGATION

- According to Black's Law dictionary, subrogation is “the principle under which an insurer that has paid a loss
under an insurance policy is entitled to all the rights and remedies belonging to the insured against a third
party with respect to any loss covered by the policy”.

- The doctrine of subrogation lets one person to stand in another person's shoes and assert the rights of that
person against the third party. It comes into picture when an insurance carrier wants to take legal action
against a third party who was responsible for the loss caused to the insured 

THE PRINCIPLES OF SUBROGATION LAID DOWN BY THE APEX COURT ARE AS FOLLOWS:
- When an insurer settles an insured's claim for the loss incurred by it, an equitable subrogation right
arises in favour of the insurer. Equitable subrogation allows the insurer to assert rights against the
third party or the wrong-doer who caused damage to the insured.
- The doctrine of subrogation does not put an end to the rights and duties of the insured. It only allows
the insurer to recover the claims paid by it to the insured from the third party. The insurer continues
to enjoy the right to proceed with legal actions against the wrong-doer.
- The insurer and the insured may exchange a letter of subrogation limiting the subrogation terms. In
such a scenario, the letter of subrogation would govern the rights of the insurer vis-à-vis the insured.
- The rule of subrogation gives the right to the insurer to take any legal action against the third party/
wrong-doer, but only in the name of the insured.
- Inbecomes
case the insured executes a subrogation-cum-assignment in favour of the insurer, the insurer
completely entitled to the amount recovered from the third party.
- When a loss is su ered by the insured, the remains of the property after the damage and destruction
is called salvage.In such circumstances, the insured can only le a claim to the extent of loss su ered
if he does not abandon the entire property. But if the insured chooses to surrender the salvage to the
insurer, then the insurer shall pay the entire claim and become the owner of the salvage.
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SOME KEY POINTS :

THE INSURER CANNOT RECOVER MORE THAN HE HAS PAID AS AN INDEMNITY. FOR EXAMPLE,
SUPPOSE THEIR IS AN INSURED LOSS OF AN ANTIQUE. THE INSURER PAYS, AND SOMETIMES LATER
THE ANTIQUE IS FOUND, ITS VALUE IS MUCH HIGHER, THE INSURER CAN ONLY KEEP AN AMOUNT
EQUAL TO WHAT HE HAS PAID AND THE BALANCE BELONG TO THE INSURED.

IT IS APPLIED TO ALL CONTRACTS OF INDEMNITY. IT MEANS THAT AFTER PAYMENT OF LOSS THE
INSURER GETS THE RIGHT OF TAKING ALL STEPS TO RECOVER MONEY FROM THE THIRD PARTY IN
COMPENSATION.

THE DOCTRINE OF SUBROGATION DOES NOT APPLY TO LIFE INSURANCE. THE INSURER HAVE NO
RIGHT OF ACTION AGAINST THE THIRD PARTY IN RESPECT OF THE DAMAGE. FOR EXAMPLE, IF ANY
INSURED DIES DUE TO THE NEGLIGENCE OF A THIRD PARTY HIS DEPENDENTS HAS THE RIGHT TO
RECOVER THE AMOUNT OF LOSS FROM THE THIRD PARTY ALONG WITH POLICY AMOUNT.

THE PRINCIPLE OF CONTRIBUTION

- THIS IS A CLAIM RELATED DOCTRINE OF EQUITY WHICH APPLIES AS BETWEEN INSURERS IN THE
EVENT OF DOUBLE INSURANCE.

- DOUBLE INSURANCE REFERS TO A SITUATION WHERE 2 OR MORE POLICIES HAVE BEEN

EFFECTED.FOR EXAMPLE, A HUSBAND AND WIFE BOTH INSURE THEIR HOME, IF A FIRE OCCURS AND
A DAMAGE OF RS.200000 IS SUSTAINED, THEY WILL NOT RECEIVE A COMPENSATION OF RS.400000.
THE RESPECTIVE INSURERS WILL SHARE THE LOSS OF RS.200000.

- INDEMNITY IS ALSO GOVERNED BY THE PRINCIPLE OF CONTRIBUTION.

- IF A PROPERTY HAS BEEN INSURED WITH MORE THAN ONE INSURER, IN THE EVENT OF LOSS THE
INSURED WILL GET A PROPORTIONATE PART OF THE LOSS FROM EACH INSURER, SO THAT THE
INSURED DOES NOT MAKE A PROFIT OUT OF THE SETTLED CLAIM.

 EXAMPLE OF PRINCIPLE OF CONTRIBUTION

SUPPOSE MR.RAWAT HAS INSURED HIS HOUSE WITH 3 DIFFERENT INSURERS

SUM ASSURED WITH X 50000

SUM ASSURED WITH Y 100000
SUM ASSURED WITH Z 150000
TOTAL 300000

THE PROPERTY IS DESTROYED BY FIRE AND THE LOSS IS ESTIMATED 60000 IN SUCH A CASE ALL
THE INSURER CONTRIBUTED TOWARDS THE LOSS IN THE EQUAL PROPORTION

X Y Z

50000/300000=1/6 100000/300000=1/3 150000/300000=1/2

X=10000 Y=20000 Z=30000

THE PRINCIPLE OF PROXIMITY CAUSE

A PROXIMATE CAUSE OF A LOSS IS ITS MOST EFFECTIVE OR DOMINANT CAUSE.
IN LAW, A PROXIMATE CAUSE IS AN EVENT SUFFICIENTLY RELATED TO AN INJURY THAT THE
COURTS DEEM THE EVENT TO BE THE CAUSE OF THAT INJURY.
THE CAUSE HAVING THE MOST SIGNIFICANT IMPACT IN BRINGING ABOUT THE LOSS UNDER A
FIRST-PARTY PROPERTY INSURANCE POLICY, WHEN TWO OR MORE INDEPENDENT PERILS
OPERATE AT THE SAME TIME (I.E., CONCURRENTLY) TO PRODUCE A LOSS. COURTS EMPLOY A SET
OF PROXIMATE CAUSE RULES TO RESOLVE CAUSATION DISPUTES WHEN A PROPERTY POLICY
STATES THAT IT COVERS OR EXCLUDES LOSSES “CAUSED BY” A PERIL AND THERE IS MORE THAN
ONE PERIL AT WORK IN A FACT PATTERN.

LETS CONSIDER AN EXAMPLE

Example 1: Driver of “Car A” runs a red light and hits “Car B,” which had a green light, causing injury to
the driver of Car B. Driver of Car A had a duty to not run the red light, and, assuming no extenuating
circumstances that excused running the red light, his actions in doing so directly (and therefore,
proximately) caused injuries to the driver of Car B.
But proximate cause can also be the most di cult issue in a personal injury case. Not every remote cause
of an injury will result in a right to recover damage.
Example 2: Driver of “Car A” runs a red light, and “Car B” which has a green light, swerves to avoid being
hit. The driver of Car B is fuming and nervous, with a racing pulse. Upset, the driver of Car B continues
driving, and three blocks later, hits a parked car, injuring himself. The driver of Car B can try and claim
that the actions of the driver of Car A caused him to get hurt when he hit the parked car. And it may well
be a remote cause; but it is probably not the proximate cause.
Sometimes, the actions of the person who got hurt can be the cause of their own injuries.
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APPLICATION OF PROXIMITY CAUSE

- Ionides Vs. Universal Marine Insurance Company it was held that – “The relation of causation is a
matter that cannot be often distinctly ascertained, but if in the ordinary course of events, the one
antecedent is constantly followed by other” sequence they may be taken to stand in common
parlance, in relation of cause and e ect.The ordinary rule of insurance law is that you are not to
trouble yourself with distinct causes, that you are not to go into metaphysical distinctions between
causes e cient and causes material and causes nal and so on, of the rest of them, but you are to
look into proximate and immediately operating cause of the loss.
- Clan Line Steamers Ltd. Vs. Board of Trade; there was collision between two ships, results in delay
and mishandling of goods, which further deteriorated. Lord Esher, MR held that the damage to the
goods was not direct result of collision;“The law will not allow the insured to go back in the
succession of causes to nd out what is the original cause of loss”.
- Marsden Vs. City and County Assurance Company: the plate glass in the plainti ’s shop front was
insured against loss or damage originating from any cause whatsoever, except re, breakage during
removal etc. A re broke our on the premises adjoining those of the plainti and slightly damaged the
near of his shop, but did not approach that part, where the plate glass was. Whilst the plainti is
removing his stock and furniture to a place of safety a mob attracted by the re broke the shop
shutters and took away the plate glass. It was held that the breakage, etc., was not damage by re
within the meaning of the exceptions, and the insurer was liable. The court said that, no doubt remote
cause of damage was the re, but the proximate cause was lawless violence of the mob. Since
breakage was not caused by re, it was decision of lawless mob and their violence.
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THE PRINCIPLE OF MITIGATION OF LOSS
- IN THE EVENT OF SOME MISHAP TO THE INSURED PROPERTY, THE INSURED MUST TAKE ALL THE
NECESSARY STEPS TO MINIMISE OR MITIGATE THE LOSS.

- IF HE DOES NOT DO SO, THE INSURER CAN AVOID THE PAYMENT OF LOSS DUE TO THE NEGLIGENCE
OF THE INSURED.

- FOR EXAMPLE, IT IS NECESSARY FOR A FACTORY OWNER TO TAKE ALL NECESSARY STEPS TO
PREVENT A FIRE HAZARD BY INSTALLING FIRE EXTINGUISHERS BEFORE TAKING A FIRE INSURANCE.