Fundamental Principles Governing Insurance Products

Insurance is a legal agreement between an insurer (insurance company) and an insured (individual/legal entity), in which an insured receives financial protection from an insurer for the losses he may suffer under specific circumstances.

In insurance policy, there are three important terms viz. Premium, Sum insured, Sum assured.

Premium: The insured needs to pay a regular amount of premiums to the insurer. The insurer pays a predetermined sum assured to the insured if an unfortunate event occurs, such as the death of the life insured, or damage to the insured or his property.

Sum Insured: Sum insured is applicable for a non-life insurance policy like home and health insurance. It refers to the maximum cap on the costs you are covered for in a year against any unfortunate event.

Sum Assured: Sum assured is the amount the life insurance company pays to the nominee if the insured event happens (death of insured).

The insured receives a contract, called the insurance policy, which details the conditions and circumstances under which the insured will be financially compensated. The amount of money charged by the insurer to the insured for the coverage outlined in the insurance policy is called the premium. If the insured experiences a loss that is potentially covered by the insurance policy, the insured submits a claim to the insurer for processing by a claims adjuster.

In insurance, 7 basic principles should be upheld, insurable interest, Utmost good faith, indemnity, proximate cause, subrogation, contribution, and loss minimization.. The right to insure arises out of a financial relationship, between the insured to the insured and is legally recognized.

Principle of Utmost Good Faith:

The principle of utmost good faith requires anyone seeking insurance to disclose all relevant facts. This is a primary principle of insurance. According to this principle, you have to disclose all the information that is related to the risk, to the insurance company truthfully.

Principle of Indemnity:

The principle of indemnity states that the insurance will only cover you for any damage, loss, or injury caused only to the extent of the loss incurred.. The insurer will thoroughly inspect and calculate the losses. The main motive of this principle is to put you in the same position financially as you were before the loss and the insurer does not make a profit in the event of an incurred loss. This principle, however, does not apply to life insurance and critical health policies.

Insurable Interest: This principle can be equated with the common phrase of ‘skin in the game.’ Insurable interest refers to an investment that protects anything subject to a financial loss. A person or entity may have an insurable interest in an event, item, or, action when the loss or damage of the insured object or person can cause a financial loss. That is, you can buy a life insurance policy for a person on whom you will suffer financially if the insured dies. If the goods arrive on time and undamaged, the insured entity stands to benefit, and if they do not reach their stipulated time in their described condition, the same entity stands to bear a loss. The Insurance cover protects the insured from financial loss.

Proximate Cause: Proximate cause refers to the primary event or series of events that directly leads to an insured loss. It is the cause that is primary to the occurred event. The principle of ‘Causa Proxima’ or simply proximate cause is vital in insurance when there is more than one event taking place simultaneously. The principle helps in determining whether the insurer should cover the loss or not. On the other hand, if that cause is covered in the insurance policy, the insurer will settle the claim and is bound by the same principle.

Subrogation: Subrogation is the follow-through principle for the indemnity principle. It limits the scope to profit from an insurance contract. After disposing of the damaged goods, the net amount exceeding the actual price of the goods post the claim must be returned to the insurer. For instance, assume that you have an insurance of ten lakh Rupees on a particular cargo. It gets damaged in an accident on the vessel. Your insurer pays you seven lakh and fifty thousand Rupees as per the policies stated in the claim. You sell the damaged goods for three lakh Rupees. When this amount is added to the claim amount, the total cash you received exceeds the goods’ value by ₹50,000. Under the principle of subrogation, this amount must be returned to the insurer.

Principle of Contribution: According to the principle of contribution, 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. In such cases, both insurers will share the loss in the proportion of their respective coverage. That is, if one insurance company has paid in full, it has the right to approach other insurance companies to receive a proportionate amount.

Principle of Loss Minimisation: The insured must take all the necessary steps to limit the loss when it happens. This is the principle of loss minimization.

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