Tutorial 3: General principles on which an insurance policy is based on

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5) Principle of Subrogation

Subrogation means substituting one creditor for another.

For example :- Mr. Harinath insures his house for Rs. 1 million. The house is totally destroyed by the negligence of his neighbour Mr. Badrinath. The insurance company shall settle the claim of Mr. Badrinath for Rs. 1 million. At the same time, it can file a lawsuit against Mr. Badrinath for Rs 1.2 million, the market value of the house.

If insurance company wins the case and collects Rs. 1.2 million from Mr. Badrinath, then the insurance company will retain Rs. 1 million (which it has already paid to Mr. Badrinath) plus other expenses such as court fees. The balance amount, if any will be given to Mr. Badrinath, the insured.

6) Principle of Loss Minimization

For example :- Assume, Mr. Badrinath's house is set on fire due to an electric short-circuit. In this tragic scenario, Mr. Badrinath must try his level best to stop fire by all possible means, like first calling nearest fire department office, asking neighbours for emergency fire extinguishers, etc. He must not remain inactive and watch his house burning hoping, "Why should I worry? I've insured my house."

According to the Principle of Loss Minimization, insured must always try his level best to minimize the loss of his insured property, in case of uncertain events like a fire outbreak or blast, etc. The insured must take all possible measures and necessary steps to control and reduce the losses in such a scenario. The insured must not neglect and behave irresponsibly during such events just because the property is insured. Hence it is a responsibility of the insured to protect his insured property and avoid further losses.

7) Principle of Causa Proxima (Nearest Cause)

The principle states that to find out whether the insurer is liable for the loss or not, the proximate (closest) and not the remote (furthest) must be looked into.

For example :- A cargo ship's base was punctured due to rats and so sea water entered and cargo was damaged. Here there are two causes for the damage of the cargo ship - (i) The cargo ship getting punctured because of rats, and (ii) The sea water entering ship through puncture. The risk of sea water is insured but the first cause is not. The nearest cause of damage is seawater which is insured and therefore the insurer must pay the compensation.

However, in case of life insurance, the principle of Causa Proxima does not apply. Whatever may be the reason of death (whether a natural death or an unnatural death) the insurer is liable to pay the amount of insurance.

 So, that's it for the principles of Insurance. Hope ypu got some value out this article.

Chiranjibi Chapagain
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