Principles of Insurance

Insurance is based on several fundamental principles that govern how it operates and provides protection to individuals and businesses against various risks. Here are the key principles of insurance:

Both the insured and the insurer must act in utmost good faith towards each other. This principle ensures that all material facts relevant to the insurance contract are disclosed transparently and honestly. Failure to do so may result in the contract being voided.

The insured must have an insurable interest in the subject matter of the insurance. This means that the insured must derive some financial or other kind of benefit from the continuous existence of the insured object. Without insurable interest, the insurance contract is considered invalid.

The principle of indemnity states that insurance is meant to compensate the insured to the extent of the actual financial loss suffered, without allowing the insured to make a profit from the insurance claim. The objective is to restore the insured to the same financial position as before the loss occurred.

Under the principle of contribution, if the same risk is insured with multiple insurers, each insurer will contribute proportionately to the covered loss. This prevents the insured from receiving more than the actual loss incurred and ensures a fair distribution of liability among the insurers involved.

Subrogation allows the insurer, after settling a claim, to take over the rights and remedies of the insured against a third party responsible for the loss. This principle ensures that the party ultimately responsible for the loss bears the financial consequences rather than the insurer.

Insured parties have a duty to take all reasonable steps to minimize the extent of the loss once an insured peril occurs. Failing to do so may result in the insurer reducing the amount of the claim payment.

This principle determines the cause of the loss or damage that is legally considered the most direct or proximate. Insurance coverage is typically based on the proximate cause of the loss rather than the remote or indirect causes.

For business interruption insurance, the principle of indemnity period specifies the maximum duration for which the insurer will compensate the insured for the loss of income due to the interruption caused by an insured peril.

Understanding these principles is essential for both insurers and insured parties to ensure fair and transparent insurance practices. Adhering to these principles helps maintain the integrity of the insurance system and provides effective risk management for individuals and businesses.