Tutorial 2: General Principles on which an Insurance Policy is based on

Incase you missed the earlier article and want to learn the terms to be used in this article click here

1) Principle of Uberrimae fidei (Utmost Good Faith)

 Uberrimae fidei means utmost good faith. It means that there should be trust and faith between the insurer (insurance company) and insured (Mr. Harinath). Both should provide true and correct information regarding the matters of insurance.

2) Principle of Insurable Interest

Lets say Mr. Harinath owns a cab.Then, Mr. Harinath has insurable interest in the taxicab because he is getting income from it. But, if he sells it, he will not have an insurable interest left in that taxicab.

From above example, we can conclude that, ownership plays a very crucial role in evaluating insurable interest. Every person has an insurable interest in his own life. A merchant has insurable interest in his business of trading. Similarly, a creditor has insurable interest in his debtor.But a taxicab owner can not take insurance for a truck as there is no financial loss to him on the loss of the truck.

3)  Principle of Indemnity

Indemnity means security, protection and compensation given against damage, loss or injury.

According to the principle of indemnity, an insurance contract is signed only for getting protection against unpredicted financial losses arising due to future uncertainties. Insurance contract is not made for making profit. Its sole purpose is to give compensation in case of any damage or loss.

In an insurance contract, the amount of compensations paid is in proportion to the incurred losses. The amount of compensations is limited to the amount assured or the actual losses, whichever is less. The compensation must not be less or more than the actual damage.

However, in case of life insurance, the principle of indemnity does not apply because the value of human life cannot be measured in terms of money.

4)Principle of Contribution

For example :- Mr. Harinath insures his property worth Rs 10,00,000 with two insurers "Star Health Insurance" for  8,00,000 and "Reliance General Insurance" for Rs 2,00,000. Harinath’s actual property destroyed is worth  6,00,000, then Mr. Harinath can claim the full loss of Rs. 6,00,000 either from Star Health Insurance or Reliance General Insurance, or he can claim Rs. 4,00,000 from Star Health Insurance and Rs. 2,00,000 from Reliance General Insurance

According to this principle, the insured can claim the compensation only to the extent of actual loss either from all insurers or from any one insurer. If one insurer pays full compensation then that insurer can claim proportionate claim from the other insurers.

So that’s the end of this article, we will conclude the remaining principles in the next one.

Chiranjibi Chapagain
Find me on twitter