PRINCIPLES :-A. BASIC PRINCIPLESB. LEGAL PRINCIPLES

(A) BASIC PRINCIPLES

1. PRINCIPLE OF CO-OPERATION

2. PRINCIPLE OF PROBABILITY

(B) LEGAL PRINCIPLE

1)Principle of insurable interest2)Principle of indemnity3)Principle of subrogation4)Principle of approximate cause or

cause proxima5)Principle of contribution.6)Principle of utmost good faith7)Principle of mitigation of losses.

PRINCIPLE OF INSURANCE INTEREST

An insurance contract will be valid only if the person getting a policy must possess an insurable interest in the subject matter. In the absence of an insurable interest, the insurance contract will be wagering contract which is invalid and unenforceable.

ESSENTIALS OF INSURABLE INTEREST There must be a subject matter to be

insured. The policy holder should have monetary

interest in the subject matter. The relationship between the policy holder

and the subject matter should be recognized by law

The economic relationship between the policy-holder and the subject matter should be such that the policy holder is economically benefitted by the existence

INSURABLE INTEREST IN LIFE INSURANCE

i. A person has unlimited insurable interest in his own life.

ii. A husband in the life of his wife and vice-versa.

iii. A father in the life of a dependent son and vice-versa.

iv. A partner in the lives of his co-partners.

v. A creditor in the life of a debtor to the extent of the amount o debt.

vi. A sister in the loves of his employees.vii. A mother and a son in the lives of

each other.

INSURABLE INTEREST IN MARINE INSURANCEi. The owner o the ship in the

shipii. The cargo owner in the cargoiii. The master and the crow of the

ship in their wages.iv. A creditor who has lent money

fro the ship or the cargo to the extent of debt.

v. The ship owner in the freight to be received.

INSURABLE INTEREST IN FIRE INSURANCEi. The owner of a property in his own

property.ii. Partners in the property of partnership.iii. The owners of joint propertyiv. A creditor having a lien on property to

the extent of debt.v. An agent has interest in the property of

his principle.vi. A bailee in the properties bailed.vii. A lessee on the properties under lease.

PRINCIPLE OF INDEMNITY

Indemnity in simple words mean a promise to compensate the loss.Under insurance contract, the insurer undertakes to indemnify the insured against lose suffered by the latter.Prof. Hawell has defined indemnity as “an exact financial compensation.

FEATURES OF PRINCIPLE OF INDEMNITY Principle of indemnity does not apply to life

insurance. There must be an actual loss and insurer

has to compensate it under the policy. The loss should have occurred from the risk

insured. The compensation cannot exceed actual

loss. The compensation will be paid by the

insurer.

CONDITIONS FOR INDEMNITY

The insured has to prove that he has suffered a loss on the subject matter and if is the monetary lose.

The indemnified amount cannot exceed the amount of loss suffered.

The insurer has a right to recover the extra amount if it is paid to the insured.

This principle is not applicable to life insurance.

ADVANTAGES OF PRINCIPLE OF INDEMNITY The amount paid to compensate the loss

suffered cannot exceed actual loss, there is no temptation to show loss at higher figures.

In case the insured is given a gain in compensation then anti-social elements will be tempted to destroy their property for getting more compensation than the loss suffered.

METHODS OF PROVIDING INDEMNITY

i. CASH PAYMENTii. REPAIRSiii.REPLACEMENTiv.REINSTATEMENT

PRINCIPLE OF SUBROGATION

Principle of subrogation supplements the principle of indemnity. In simple words, subrogation means stepping into shoes of another. Once the insurer compensates the insured for the loss suffered by him, he will inherit all the rights available to the insured against the third parties with regard to the subject-matter.

FEATURES OF DOCTRINE OF SUBROGATION

I. Corollary to principle of Indemnity

II. SubrogationIII.Subrogation only upto the

Amount of Payment.IV.Subrogation may be applied

before payment.V. Personal Insurance

ESSENTIALS OF SUBROGATIONExtension of principle of indemnity.SubstitutesSubrogation only upto payment Subrogation for the balanceLife insurance

How does subrogation arise?

TortContractSubject matter of insurance

Principle Of Proximate Cause

According to this principle the cause or reason for the loss must be related to the subject matter of the insurance contract. If the loss is due to some other cause then the insurer can deny to pay the compensation.

Determination of proximate cause

Single causeConcurrent cause successive cause

PRINCIPLE OF CONTRIBUTIONPrinciple of contribution states that if a person has taken more than one insurance policy for the same subject matter then all the insurers will contribute the amount of loss and compensate him for the actual amount of loss. Separately he can not claim total loss from each insurer.

Formula to compute the liability of each insurer is: Sum assured with a particular insurer x Actual loss Total sum insured

Need for principle of contribution

This principle is needed so that insured can’t claim more amount than the loss suffered by him. If insured receives more amount than the loss suffered by him then he will be placed in a better position than that prior to the loss and thereby the basic principle of indemnity will fail. In case the insured collects the amount from one insurer, the insurer paying the total loss can collect it from other insurers with whom the insured has insured the same subject matter.

Pre-condition for principle of contribution

Subject matter of insurance should be same for all the policies.The perils which cause the loss must be common to all the policies.The policies must be enforceable under the law.All the policies must be in force at the time of loss.The insurable interest under all policies must be the same and all policies must be effected in favour of a common person .

Principle of utmost good faith According to this principle insurance is a

contract based on faith. The insured and insurer must disclose all the material facts to each other and both the parties should not hides any fact related to insurance policy from each other. If the insured hides any material facts from the insurance company and later on the insurer comes to know about it, then he can refuse to pay compensation.

Principle of mitigation of loss

According to this principle the insured must take care of his property or subject matter of insurance in the same ways as he would take care without taking the insurance policy. The insured should not become careless of his property after taking insurance policy. It is the duty of the insured to make a reasonable efforts and take all available precautions to save the insured property.

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