What are the basic Principles of Insurance - A brief information

As netizens we are very much familiar with the term Insurance, but we are not familiar with its working principle. What is insurance service in reality? What are the basics of the insurance contract? All these doubts will be cleared by knowing the basic principles of insurance in brief in this article.

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Small Introduction

Insurance is a very old financial service. This is to share the financial loss occurred by the peril with the concept of pooling of the people with similar risk exposure. Today's insurance industry, both Life and General Insurance, follow some principles which are at the core of every insurance policy from proposal to claim settlement. These principles are also called the basic principles of insurance.

The six basic principle of Insurance is as follows
1.Principle of Uberrimae Fides(Utmost good faith)
2.Principle of Insurable Interest
3.Principle of Indemnity
4.Principle of Subrogation
5.Principle of Contribution
6.Principle of Proximate cause

Now we will see what it implies one by one

1.Principle of Uberrimae Fides(Utmost good faith)

The contract of insurance is governed by the belief of utmost good faith i.e. the proposer must disclose all material facts to the insurer. This is to place the insured in the same position before the occurrence of the peril. The person who wants to get insured offers a proposal to an insurer. A proposal form is given to the person to fill it with all correct information. The proposal form is the most important document to finalize whether to accept the proposal or not. It is presumed that the insured has given all correct information.

2.Principle of Insurable Interest

Insurable interest is the legal right of insured to buy an insurance policy. The insured is only that part to which his financial interest is attached or to which it has an obligation. You cannot buy insurance for your friend and vice versa. You ca not buy insurance for your neighbor. Why? because you don't have any direct financial interest in these cases. But the bank can buy insurance for your property if you have taken the loan for the same. This is called insurable interest.

3.Principle of Indemnity

An insurance policy is not to make the profit out of peril. The principle of Indemnity is to place the insured in the same financial position where insured had immediately before peril or loss. It prohibits the insured to make any profit out of a loss in way of claim. If I buy a bike 4 years ago in say Rs.90,000/- and I met with an accident and my bike got total damaged. I make a claim. The insurer will not give me Rs.90,000/-. I used the bike for 4 years and the parts of the bike got depreciated. The insurance company will offer me depreciated amount. This is the principle of Indemnity.

4.Principle of Subrogation

The principle of Subrogation is the corollary to the principle of indemnity. It is a legal term which deals with the transfer of legal rights from insured to the insurer. If third party responsible for the accident, then the insurance company has the right to recover from the third party the amount of loss out of an accident.

5.Principle of Contribution

The principle of Contribution is also a corollary of the principle of indemnity. It is applicable in the case of double insurance of same subject matter (insured property) for same peril. This arrangement avoids fraud. In such case insured cannot claim for loss for two insurers. The claim is payable in proportion by the two company. Many a time fraudster think that to claim from two company to gain financially. This principle ensures this fact to be checked.

6.Principle of Proximate cause

This is important principle where the loss is indemnified or considered for the payment only if the loss is occurred by the insured peril(given in the policy document).

These are the basic principles of insurance. One must know this before going deep in the world of insurance.

Please give your comments in a response below & any queries for more information on the topic.

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