Apart from the principles governing all contracts

insurance is also governed by its own unique

principles.
 The Principle of Utmost Good
Faith

A positive duty voluntarily to

disclose, accurately and fully, all
facts material to the risk
being proposed, whether requested
or not.
 The Principle of Utmost Good
Faith

The term “material fact” refers to every

fact or information, which has a bearing on
the decisions with respect to the
determination of the severity of risk
involved and the
amount of premium.
The Principle of Utmost Good Faith

Breach of duty of Utmost Good Faith

a) Misrepresentation which may be either innocent or

fraudulent with reference to false facts, material to
the acceptance or assessment of the risk.
b) Non-disclosure which may be either innocent or
fraudulent gives grounds for avoidance by the second
party where a fact is within the knowledge of the first
party and not known to the second party.
 Principle of Insurable Interest

The legal right to insure arising out

of a financial relationship
recognized under the
law, between the insured and the
subject matter of insurance.
 Principle of Insurable Interest

The legal right to insure arising out

of a financial relationship
recognized under the
law, between the insured and the
subject matter of insurance.
Principle of Insurable Interest

Insurable interest simply means “right to

insure”. The policyholder must have a
pecuniary or monetary interest in the
property, which he has insured. The subject
matter of insurance can be any type of
property or any event that may result in a
loss of a legal right or creation of a
legal liability.
Principle of Insurable Interest

Essentials of insurable interest include:

- There must be some property, right, interest, liability or potential
liability capable of being insured.
- It is this property, right etc, which must be the subject matter of
insurance.
- The insured must stand in a relationship with the subject matter
of insurance whereby he benefits from its safety, well being or
freedom from liability and would be prejudiced by its loss,
damage or existence of liability.
- The relationship between the insured and the subject matter of
insurance must be recognized at law.
Principle of Insurable Interest
Application of insurable interest:
Life

Every individual has unlimited insurable interest in his or her own

life. In life insurance context, insurable interest is deemed to exist in
the case of certain relationships based on sentiment. (E.g. Husband
& wife, parent & child) Insurable interest is also deemed to exist
when the members of a family are in business
together. Under such circumstances, it is not the family ties which
create insurable interest but it is the extent of financial involvement
that creates insurable interest.
The business partners can insure each other’s lives because they
stand to loose in the event of the death of any of them.
Principle of Insurable Interest
Application of insurable interest:
Property

Insurable interest normally arises out of ownership where

the insured is the owner of the subject matter of
insurance, such as a car or a house.
Principle of Insurable Interest
Application of insurable interest:
Liability

The concept of liability insurance is very different from property

and life assurance. In this insurance, it is not possible to
predetermine the extent of the insurable interest because there
is no way of knowing how often one may incur liability
and in such a case, what would be the monetary value of such
liability. Thus, in other words it is implied that insurable interest
in liability insurance is without monetary limit, but in practice it
is possible to make a realistic judgment as to the maximum
liability that may be incurred.
Principle of Insurable Interest
Application of insurable interest:
Liability

The concept of liability insurance is very different from property

and life assurance. In this insurance, it is not possible to
predetermine the extent of the insurable interest because there
is no way of knowing how often one may incur liability
and in such a case, what would be the monetary value of such
liability. Thus, in other words it is implied that insurable interest
in liability insurance is without monetary limit, but in practice it
is possible to make a realistic judgment as to the maximum
liability that may be incurred.
 Principle of Indemnity

The dictionary meaning of ‘indemnity’ is ‘the protection

or security against damage or
loss or security against legal responsibility’.
Principle of Indemnity

Indemnity may be referred to as a mechanism by which

insurers provide financial compensation in an attempt
to place the insured in the same pecuniary position
after the loss as enjoyed just before it.
Principle of Indemnity

The principle of Indemnity ensures that the insurer is

liable to pay up to the amount of loss and not more
than that. In other words it implies that the insured
should not derive any unwarranted benefit from a loss.
Principle of Indemnity

Example –

Mr. Kumar had insured his car for Rs. 5 lakhs. The car
met with an accident and was damaged. The loss
suffered was valued at Rs.1 lakh. As per the principle of
indemnity the compensation to be paid will be based
on the amount of loss, i.e. Rs. 1 lakh. In case the
compensation exceeds Rs. 1 lakh, Mr. Kumar stands to
gain from the loss.
Principle of Indemnity

Indemnity is made in the following ways:

- Cash payment – for the amount payable under the policy
- Repair – most extensively used method of providing
indemnity (motor claims)
- Replacement – commonly used in glass insurance -
Reinstatement – used in restoring or rebuilding machinery
or building under engineering insurance policies

A life insurance policy is not subject to the principle of indemnity

but is a valued policy wherein the agreed upon amount in full is
paid to the beneficiary in case of loss of life.
Principle of Subrogation

Subrogation means the restitution of the rights of an

assured in favor of the insurer against the third party
for any damages caused by him in place of the assured
after the insurer has indemnified him for the loss.

The principle of subrogation is invoked when a third

party is responsible for the loss.
Principle of Subrogation

Example:
Mr. X was on his way to office in his car when it was hit
from behind by a Lorry, and the lorry driver was drunk.
X can claim compensation from the insurance company.
The insurer in turn can sue the lorry owner Y for the
damages.
Here X has no right of action against Y since he has
already been paid compensation for the loss.
Principle of Subrogation

Importance:

1. It prevents the insured from profiting from the damage, i.e.,

obtaining compensation twice for the same loss.
2. It enforces the rule of law that the guilty is brought to book and
made to pay for the loss.
3. It helps the insurer to partially or fully recover the amount paid for
the loss.
4. It helps to lower the insurance rates. With reimbursements from the
concerned third party, the insurance company’s losses are substantially
scaled down, the benefit of which in turn is passed on to the final
policyholder by way of reduction
in premium.
Principle of Contribution

Contribution is the right of an insurer to call upon others

similarly, but not necessarily equally liable to the same insured
to share the cost of an indemnity payment. This principle of
contribution enables the total claim to be shared in a fair way.
Principle of Contribution

As per the doctrine of contribution the indemnity provided for

the loss occurring on the asset, which is insured with several
insurers has to be proportionately shared among them according
to the rateable proportion of the loss.
Principle of Contribution

Essentially for contribution to apply the following conditions

must be met:
- The 2 policies must cover the same insured.
- They must cover the same subject matter.
- They must cover the same interest.
- The peril causing the loss must be covered by both policies
albeit for different amounts.
- Both policies must be current.
Principle of Proximate Clause

The term “Proximate cause“ literally means the nearest cause or

direct cause. In insurance parlance it relates to the immediate
cause of the mishap, which resulted in the loss.
Principle of Proximate Clause

For example if the person is insured to be protected against fire

occurring due to electric short circuit and the fire occurs due to
leakage of LPG cylinder then the insurance company is not liable
to pay for the losses. In this case only if the fire were caused by
short circuit would the loss be covered.