Definition of Insurance and Fundamental Principles of Insurance

 An insurance plan or a policy can be defined as a legal contract between the insured (an individual) and the insurer (insurance company). Under the contract, you pay regular amounts of money (as premiums) to the insurer, and they pay you the sum assured in specific situations of suffering to cover the losses, against payment of premiums for a specified period. In addition, some insurance plans aid in growing your wealth too.

The Insurance sector comprises two primary segments – Life and General Insurance. Life insurance includes whole life insurance, Term life insurance, Child Plans, Annuities life policies, and Endowment policies, etc. General insurance includes motor insurance, property insurance, and health insurance; crop insurance liability insurance, travel insurance, marine insurance, cargo insurance, etc. For details of these policies read: EXPLAINED: DIFFERENT TYPES OF LIFE AND NON-LIFE INSURANCE POLICIES. 

Definition of Insurance and Fundamental Principles of Insurance

The insurance industry is governed by multiple principles. These principles include:

Principle of Indemnity:

The principle of insurance is predominantly established to indemnify the policyholder for their losses and not to earn profits. The principle of indemnity states that the insurance company should only pay the insured amount to the insured person in the event of the amount of money or life they have lost.

Principle of Utmost Good Faith:

The doctrine of utmost good faith is a principle used in insurance contracts, which legally obliges all parties entering a contract to act honestly and not mislead or withhold critical information.  It means when the insured (an individual) and the insurer (insurance company) are entering into an insurance contract, both of them must act in good faith. This means that the insured must disclose all relevant information to the insurer. (Uberrima fides (sometimes seen in its genitive form uberrimae fidei) is a Latin phrase meaning “utmost good faith” (literally, “most abundant faith”). It is the name of a legal doctrine that governs insurance contracts).

 Principle of Insurable Interest

This principle states that the insured person must have an insurable interest in the property or person that they are insuring. Insurable interest just means that the subject matter of the contract must provide some financial gain by existing for the insured (or policyholder) and would lead to a financial loss if damaged, destroyed, stolen, or lost.

 Principle of Contribution:

Contribution is also known as the shared responsibility. The principle of contribution states that if the loss arises and you have taken more than one insurance policy, then the loss will be covered by the policies based on the proportion of the coverage the insurance policy provides. It means when the insured takes more than one insurance policy for the same subject matter. It states the same thing as in the principle of indemnity, i.e. the insured cannot make a profit by claiming the loss of one subject matter from different policies or companies.

 Principle of Subrogation:

The principle of subrogation in insurance enables the insurer to take over the policyholder’s legal right to recover damages. In other words, the insurance company can now pursue the person or entity that caused the loss to recover the money that it paid to the insured.

Principle of Proximate Cause:

Proximate Cause is an important principle of insurance, defined as the cause that is most active in bringing forth a result. The principle helps in deciding how the loss or damage happens and whether it is the result of an insured peril or not. The important point to consider here is that the proximate cause is the only nearest cause and not the remote cause.

Principle of Loss Minimization:

According to the Principle of Loss Minimization, the insured must always try their level best to minimize the loss of his insured property, in case of sudden events like fire, etc. The insured must minimize their losses, take all necessary steps to control and reduce the losses and save what is left. In other words, the insured must take reasonable steps to prevent or minimize the amount of loss that may occur.

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