CHAPTER 2

LECTURE 2.5: PRINCIPLES OF INSURANCE

The concept of insurance is risk distribution among a group of people. Hence, cooperation
becomes the basic principle of insurance.
To ensure the proper functioning of an insurance contract, the insurer and the insured have to
uphold the principles of Insurances mentioned below:
INDEMNITY; A contract of insurance is a type of contract of indemnity (except in the case of life
and personal accident insurance) in which an insurer contract with the insured to mitigate any
monitory loss held to the insured on happening of some event as mentioned in the contract.
It is necessary that some monitory or pecuniary loss happen to the insured due to happening of
some event.
The insured is not permitted to make profit from the insurance. Suppose Mr. X taken a policy to
insure his car against theft and accident of Rs. 1, 00,000. He got the accident and damage cost is of
Rs. 10000. Then the insurance company will allow his claim up to Rs. 10000 only. In case his car has
been stolen then they may claim maximum claim of Rs. 100000 in case of total loss.
GOOD FAITH; The contract of insurance must me on good faith. The insured is of the obligation
to declare full and true disclosure of facts to the insurer. The insurance company on the facts
declared by the insured will decide the type of insurance and the liability and as well as the
premium. So, the true disclosure of all facts is necessary. The insurance company may declare any
contract as void, if later found that the facts declared by the insured are not true.
So, all contracts of insurance are the contracts “Uberrimae fidei”, i.e., the contracts of utmost good
faith and therefore non-disclosure of a material fact entitles other party to avoid the contract.
Note: a new material fact , which is not material at the time of entering into the contract but later it
became material during the course of time on the basis of which the insurer may declare the
contract void or not ready to renew the contract , should be declare by the insured to the insurer as
soon as he came to know the fact.
Any material facts come in the knowledge of the insured subsequently need not to be disclosed.
INSURABLE INTEREST; it is some monitory or pecuniary interest. A person is said to have an
insurable interest when he is so situated with regard to thing insured that he would have benefit
from its existence and loss from its destruction.
The insured must have insurable interest in every contract of insurance with respect of any object or
life.
A factory owner has insurable interest in the factory or if a person has a car has insurable interest in
the car. Suppose Mr. A has car and the car cannot insured by Mr. B, since Mr. B has no insurable
interest in Mr. A’s car.
The insurable interest of a husband will be in the life of his own and his wife or wife has insurable
interest in the life of her own or his husband in case of life insurance policies.
The insurable interest must be pecuniary interest.
CAUSA PROXIMA; i.e. the “proximate cause” this is applicable in case of marine and fire
insurance. In these cases when damage has resulted due to two or more causes, we have to look to
the proximate or the nearest cause of damage, although the damage might have not been taken
without remote cause. In the case of loss, the proximate cause should be considered not the remote
cause. If the cause of the loss is the peril as mentioned in the contract then the insured will get the
claim otherwise not.
As held in case of Pink v. Fleming (1899) 25 QBD 396, lord Esher observed, “The question, which is
the cause proxima of a loss, can only arise where there has been a succession of causes. When a
result has been brought by two causes, you must, in insurance law, look to the nearest cause;
although the result would no doubt not have happened without the remote cause. In the above case
the ship collided with another ship, resulting in delay and mishandling of cargo of oranges which
deteriorated. It was held that the deterioration of oranges was not due to collision of ships (peril
insured) but that was due to mishandling and improper storage.
MITIGATION OF LOSS; it is an important principal of insurance, that in case of peril or
accident the insured must try his best to save insured interest in the property or life. That he must
take all measures to minimise the loss that he would have taken if the property were uninsured.
RISK MUST ATTACH; the risk must be attached i.e. the insurer receives the premium in a
contract of insurance for running a certain risk. If the risk is not run or not continuous on the
business or the property of the insured then the premium received by the insurer should be
returned.
SUBROGATION: it applies in case of fire and marine policies Subrogation is a right of the
insurers to enforce for their own benefit all the rights and remedies which the insured possess
against third parties in respect of subject matter. Subrogation is thus the substitution of one person
in place of another in relation to the claim, its rights, remedies or securities.
Suppose two ships were insured and belong to Mr. X and Mr. Y, they have collided and Mr. X
received insurance claim from insurance company. Now in this case insurance company may sue Mr.
Y for negligence and claim for damages.
CONTRIBUTION: Where a particular property is insured with two or more insurers against the
same risk, it is called “double insurance”. In the event of loss, the insured will get compensation only
for the amount of actual loss. He will be compensated by the concerned companies on the basis of
“principal of contribution”. The insurers must share the claim to the extent sum insured with them.
If in this case whole loss is paid by one insurer then it is entitled to demand contribution from other
insurers.