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Insurance works on certain principles which are universally applicable across different forms of insurance contracts. These include Indemnity, Contribution, Good Faith, Insurable Interest, Subrogation, Loss Minimization and Causa Proxima.
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This week let’s have a look at the basic principles of insurance. These are universally applicable and generally followed across Life, General and Marine Insurance contracts. This is not an exclusive list of principle as only the important principles are covered. There may be a slight deviation in the actual practice followed on the ground due to applicable rules in the country (e.g. IRDA rules)
It is a common observation that insurance policies are incorrectly sold. While there are things that the regulator is fixing on the distribution side, it will help if all of us keep these principles in mind when we seek our insurance cover.
Indemnity: Insurance is to indemnify you against the losses. This means that insurance is not to be used for making a profit. So we should look at insurance as a risk management tool, estimate potential losses, as like loss of income to family in case of death and obtain a protection against the same.
Contribution. This is applicable when you have multiple insurance policy, say for health cover. This principle implies that you cannot claim from the multiple insurers against the same loss. This is in line with the Principle of Indemnity i.e. Insurance reimburses you only for the loss. The principle also allows the Insurance company which honours the claim to recover the loss proportionate from other insurers.
Good Faith (Uberrimae Fidei): Insurance is a contract between two parties i.e. Insurer and Insured. Insurer is dependent on Insured to know all the material facts about the Insured person’s present situation. So as an example, if you are taking a health policy, you must disclose all information to the insurer.
It is a common observation that insurance policies are incorrectly sold. While there are things that the regulator is fixing on the distribution side, it will help if all of us keep these principles in mind when we seek our insurance cover.
Indemnity: Insurance is to indemnify you against the losses. This means that insurance is not to be used for making a profit. So we should look at insurance as a risk management tool, estimate potential losses, as like loss of income to family in case of death and obtain a protection against the same.
Contribution. This is applicable when you have multiple insurance policy, say for health cover. This principle implies that you cannot claim from the multiple insurers against the same loss. This is in line with the Principle of Indemnity i.e. Insurance reimburses you only for the loss. The principle also allows the Insurance company which honours the claim to recover the loss proportionate from other insurers.
Good Faith (Uberrimae Fidei): Insurance is a contract between two parties i.e. Insurer and Insured. Insurer is dependent on Insured to know all the material facts about the Insured person’s present situation. So as an example, if you are taking a health policy, you must disclose all information to the insurer.
Insurable Interest: This means you can take insurance only when you have an ownership or financial interest in whatever you want to get issued. In case of life insurance, you can take life insurance for yourself and dependent family members, who have a need for insurance. You cannot take an insurance for Taj Mahal, as an example.
Subrogation: This means that the insurance company has the right to take actions against the parties that may be the reason for you to make the insurance claim. As an example, if you meet with an accident due to a third party mistake and need hospitalization, the insurance company may take actions against the third party concerned.
Loss Minimization: This principle implies that insured must try to minimize the loss even though the insurance cover exists. So as an example, if your property is insured for a structural protection, you should still try and minimize the loss out of say a fire breakout.
Causa Proxima: This means the nearest cause of the loss. When there are multiple reasons that caused the loss, the nearest cause, and not the remote cause, must be looked into to decide the liability of the insurer. This principle is helpful when there are multiple reasons that caused the loss and not all of the causes may have been insured.
Subrogation: This means that the insurance company has the right to take actions against the parties that may be the reason for you to make the insurance claim. As an example, if you meet with an accident due to a third party mistake and need hospitalization, the insurance company may take actions against the third party concerned.
Loss Minimization: This principle implies that insured must try to minimize the loss even though the insurance cover exists. So as an example, if your property is insured for a structural protection, you should still try and minimize the loss out of say a fire breakout.
Causa Proxima: This means the nearest cause of the loss. When there are multiple reasons that caused the loss, the nearest cause, and not the remote cause, must be looked into to decide the liability of the insurer. This principle is helpful when there are multiple reasons that caused the loss and not all of the causes may have been insured.
Note: This article was written for Dainik Bhaskar and published on 17-Jan-2014
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