Fundamental Principles of Insurance
Insurance contracts are special types of commercial contracts governed by the Indian Contracts Act, which defines a contract as:
“An agreement enforceable by law.”
An insurance contract must meet the basic requirements of any valid contract and also adhere to the following additional principles:
1. Principle of Insurable Interest
- Definition: You must have a financial stake in the insured subject.
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Life Insurance Example:
- You benefit financially if the insured person lives.
- You suffer financial loss if they pass away.
- Key Point: Without this interest, the insurance contract isn’t valid.
2. Principle of Utmost Good Faith (Uberrima Fides)
- Definition: Full honesty is required from both parties.
- Why?: Insurance involves intangible products (e.g., promises).
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Your Duty:
- Disclose all important facts, even if not asked.
- Misrepresentation or non-disclosure = contract becomes void.
3. Principle of Indemnity
- Definition: Insurance compensates for your actual loss—no profit allowed.
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Goal:
- Restore your financial position to what it was before the loss.
- Reason: Prevents people from causing intentional losses for profit.
4. Principle of Subrogation
- Definition: After compensation, your rights transfer to the insurer.
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Example:
- If you’re paid for a wrecked car, the insurer gets ownership of the wreck.
- Purpose: Prevents double recovery (from both insurer and third parties).
5. Principle of Contribution
- Definition: If multiple policies cover the same risk, each insurer shares the loss.
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How It Works:
- Each insurer pays a portion based on their coverage ratio.
- Insurers avoid overcompensation of the insured.
Memory Aid
Think of the acronym "I UISC" to remember the principles:
- Insurable Interest
- Utmost Good Faith
- Indemnity
- Subrogation
- Contribution
