What is insurance? Explain the principles of insurance?
Solution:
Insurance is a means of protection from financial loss. It is a form of risk management, primarily used to hedge against the risk of a contingent or uncertain loss. Insurance is a contract between the insurer and the insured, whereby the insurer agrees to compensate the insured against loss. The insured has to pay a certain fixed sum of money on a timely basis to the insurer.
Principles of Insurance:
1. Principle of Utmost good faith:
In all types of insurance contracts, both parties must have the utmost good faith towards each other. The insurer and insured must disclose all material facts clearly, completely, and correctly. Failure to provide complete, correct, and clear information may lead to a non-settlement of the claim.
2. Principle of Insurable interest:
Insurable interest means some financial interest in the subject matter. The insured must have an insurable interest in the subject matter of insurance. Insurable interest is applicable to all insurance contracts.
3. Principle of Indemnity:
Indemnity means a guarantee or assurance to put the insured in the same financial position in which he was immediately prior to the happening of the uncertain event. Under this principle, the insurer agrees to compensate the insured for the actual loss suffered. The amount of actual compensation is limited to the amount assured or the loss, whichever is less. This principle is applicable to fire, marine, and general insurance. It is not applicable to life insurance as loss of life can never be measured in monetary terms.
4. Principle of Subrogation:
This principle is applicable to all contracts of indemnity. As per this principle, after the insured is compensated for the loss due to damage of the property insured, then the right of ownership of such property passes on to the insurer. This principle is applicable only when the damaged property has any value after the event causing the damage.
5. Principle of Contribution:
This principle is applicable to all contracts of indemnity where the insured has taken out more than one policy for the same risk or subject matter. Under this principle, the insured can claim the compensation only to the extent of actual loss either from one insurer or all the insurers.
6. Principle of Mitigation of loss:
Insured must always try to minimize the loss of the property, in case of uncertain events. The insured must take all possible measures and necessary steps to control and reduce losses.
Hence, it is the responsibility of the insured to protect the property and avoid loss.
7. Principle of Causa-Proxima:
The principle of causa Proxima means, when a loss is caused by more than one cause, then the proximate cause of a loss should be taken into consideration to decide the liability of the insurer. The property is insured against some causes and not against all causes, in such a case, the proximate cause of loss is to be found. If the proximate cause is the one which is insured against, the insurance company is bound to pay compensation and vice versa.
