“PROJECT ON PRINCIPLES OF INSURANCE”

T.Y.B.Com. (Banking & Insurance)

Semester -VI
(2017 – 2018)

Submitted
In Partial Fulfillment of the requirements
For the award of degree of
T.Y.B.Com. (Banking & Insurance)
By
POOJA RAJESH GUPTA

Seat No. _______

Tolani College of Commerce

Sher – E – Punjab society,
Andheri (East),
Mumbai – 400 093.

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 CERTIFICATE

This is to certify that Pooja Rajesh Guptaof T.Y.B.Com. (Banking &

Insurance) Semester V (2017 – 2018) has successfully completed the
project on “Principles Of Insurance” under the guidance of Prof.
DelishaD’souza

Project Guide: - _____________

Course Co-Ordinator: - _____________

External Examiner: - _____________

Principal: - _____________

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 DECLARATION

I, Pooja Rajesh Guptathe student of T.Y.B.Com. (Banking &

Insurance) Semester V (2017 – 2018) hereby declare that I have
completed the project on “Principle Of Insurance”.

The information submitted is true and original to the best of my

knowledge. References have been cited wherever necessary.

Date: - _________
Place: - Mumbai

Signature of Student
(Pooja Rajesh Gupta)

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 ACKNOWLEDGEMENT

Preparing the project on (Principle of Insurance)has given me extensive practical

knowledge related to the course.

I would like to first thank our Principal Dr. Vijaya Krishna, for her valuable
support in preparing this project.

I express my deep sense of Gratitude to the Course Co-ordinator, Mr.

IshtiyaqChiplunkar for the valuable guidance and support during my project
work.

I am thankful to my guide Prof. DelishaD’souzafor providing me the guidance

throughout the course of this project. I am also thankful to herfor patiently and
critically evaluating the content of this project.

I would like to take this opportunity to express my gratitude to all the staff of the
Library and the Computer Lab for their support.

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Serial no. Topic Page
no

1 Executive summary 6

2 Introduction 7-8

3 Nature of insurance 9-10

4 Functions of insurance 11-12

5 Need of insurance 13-15

6 Essentials of insurance 16-18

7 Insurance contract 19-23

8 Nature of insurance Contract 24-26

9 Importance of Principles 27-28

10 Principle of Utmost Good Faith 30-36

11 Principle of Insurable Interest 37-41

12 Principle of Proximate Cause 42-45

13 Principle of Indemnity 46-51

14 Principle of Contribution 52-55

15 Principle of Subrogation 56-60

16 Principle of Mitigation of Loss 61-62

17 Suggestions 63

18 Conclusion 64

19 Bibliography 65

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 1. EXECUTIVE SUMMARY

Insurance is Risk-transfer mechanism that ensures full orpartial financial compensation for the
loss or damage caused by event(s) beyond the control of the insured party. Under an
insurance contract, a party (the insurer) indemnifies the other party (the insured) against a
specified amount of loss, occurring from specified eventualities within a specified period,
provided a fee called premium is paid. Insurance, however, provides protection only
against tangible losses. It cannot ensure continuity of business, market share,
or customer confidence, and cannot provide knowledge, skills, or resources to resume
the operations after a disaster.

Insurance, however, provides protection only against tangible losses. It cannot ensure continuity
of business, market share, or customer confidence, and cannot provide knowledge, skills, or
resources to resume the operations after a disaster. Following the strict insurance principle of
indemnity, in the event of a claim and where the thing reinstated improves the insured’s
position,

Insurance is a very old financial service. This is to share the financial loss occurred by the peril
with the concept of pooling of the people with similar risk exposure. Today's insurance industry,
both Life and General Insurance, follow some principles which are at the core of every insurance
policy from proposal to claim settlement. These principles are also called the basic principles of
insurance.

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 2.INTRODUCTION

Every risk involves the loss of one or other kind. In older time, the contribution by the person
was made at the time of loss. Today, only one business, which offers all walks of life, is
insurance business.Owing to growing complexity of life, trade and commerce, individual and
business firms and turning to insurance to manage various risks. Every individual in this world is
subject to unforeseen uncertainties which may make him and his family vulnerable. At this place,
only insurance helps him not only to survive but also recover his loss and continue his life in a
normal manner.

Insurance is an important aid to commerce and industry. Every business enterprise involves large
number of risks and uncertainties. It may involve risk to premises, plant and machinery, raw
material and other things. Goods may be damaged or may be destroyed due to fire or flood.
Some risk can be avoided by timely precautions and some are unavoidable and are beyond the
control of a business. These unavoidable risks can be protected by insurance.

What is Insurance?

In D.S. Hamsell words, insurance is defined “as a social device providing financial
compensation for the effects of misfortune, the payment being made from the accumulated
contributions of all parties participating in the scheme”

In simple terms “Insurance is a co-operative device to spread the loss caused by a

particular risk over a number of persons, who are exposed to it and who agree to insure
themselves against the risk”

Thus, the insurance is

(a) A cooperative device to spread the risk;

(b) The system to spread the risk over a number of persons who are insured against the risk;

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 (c) The principle to share the loss of the each member of the society on the basis of
probability of loss to their risk and

(d) The method to provide security against losses to the insured

Definition-

Insurance may be defined as “form of contract between two parties (namely insurer and
insured or assured) whereby one party (insurer) undertakes in exchange for a fixed
amount of money (premium) to pay the other party (Insured), a fixed amount of money on
the happening of certain event (death or attaining a certain age in case of life) or to pay the
amount of actual loss when it takes place through the risk insured (in case of property)”

Terminology used in definition of Insurance

 Insurer or insurance company – The agency involved in Insurance business is known as

insurer

 Insured/ Assured – The person who gets his property/life insured is known as insured

 Policy - The agreement or contract which is put in writing is known as a Policy88

 Premium – The consideration in return of which the insurer undertakes to make goods the
loss or give a certain amount in case of life insurance is known as premium.

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 3. NATURE OF INSURANCE

Following are the main characteristics of insurance which are applicable to all types of insurance
(life, fire, marine and general insurance).

1. Sharing of Risks - Insurance is a device to share the financial losses which may occur to
individual or his family on the happening of certain events

2. Co operative Device – Insurance is a co-operative device to spread the loss caused by a

particular risk over a large caused by a particular risk over a large number of persons who are
exposed to it and who agree to insure themselves against the risk.

3. Value of Risk – Risk is evaluated at the time of insurance. There are several methods of
valuing the risk. Higher the risks, higher will be premium

4. Payment on Contingency -If the contingency occurs, payment is made; payment is made
only for insured contingency. If there is no contingency, no payment is made. In life
insurance contract, payment is certain because the death or the expiry of term will certainly
occur. In other insurance contract like fire, marine, the contingency may or may not occur

5. Amount of Payment of Claim - The amount of payment depends upon the value of loss
occurred due to the particular insured risk. The insurance is there upto that amount. In life
insurance insurer pay a fixed sum on the happening of an event or within a specified time
period.

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 Example – In fire insurance, if fire occurs and half the property is destroyed, but the
whole property is insured, then payment of claimwill be made only for that half building
that is destroyed not the whole amount of insured.

a) Insurance is different from Charity - In charity, there is no consideration but insurance

is not given without premium

b) Large number of Insured Person - Insurance is spreading of loss over a large number
of persons. Larger the number of persons, lower the cost of insurance and amount of
premium and incase lower the number of persons, higher the cost of insurance and
amount of premium.

c) Insurance is different from Gambling - In gambling, there is no guarantee of gain, by

bidding the person expose himself to risk of losing. Whereas in insurance, by getting
insured his life and property, he protect himself against the risk of loss.

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 4.FUNCTIONS OF INSURANCE

Functions of insurance can be divided into parts;

I Primary functions.

II Secondary functions.

I Primary Functions

1. Certainty of compensation of loss: Insurance provides certainty of payment at

the uncertainty of loss. The elements of uncertainty are reduced by better planning
and administration. The insurer charges premium for providing certainty.

2. Insurance provides protection : The main function of insurance is to provide

protection against risk of loss. The insurance policy covers the risk of loss. The
insured person is indemnified for the actual loss suffered by him. Insurance thus
provide financial protection to the insured. Life insurance policies may also be
used as collateral security for raising loans.

3. Risk sharing : All business concerns face the problem of risk. Risk and insurance
are interlinked with each other. Insurance, as a device is the outcome of the
existence of various risks in our day to day life. It does not eliminate risks but it
reduces the financial loss caused by risks. Insurance spreads the whole loss over
the large number of persons who are exposed by a particular risk.

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II Secondary Functions

1. Prevention of losses : The insurance companies help in prevention of

losses as they join hands with those institutions which are engaged in loss
prevention measures. The reduction in losses means that the insurance
companies would be required to pay lesser compensations to the assured
and manage to accumulate more savings, which in turn, will assist in
reducing the premiums

2. Providing funds for investment : Insurance provide capital for society.

Accumulated funds through savings in the form of insurance premium are
invested in economic development plans or productivity projects.

3. Insurance increases efficiency : The insurance eliminates the worries and

miseries of losses. A person can devote his time to other important matters
for better achievement of goals. Businessman feel more motivated and
encouraged to take risks to enhance their profit earning. This also helps in
improving their efficiencies.

4. Solution to social problems : Insurance take care of many social

problems. We have insurance against industrial injuries, road accident, old
age, disability or death etc.

5. Encouragement of savings : Insurance not only provides protection

against risks but also a number of other incentives which encourages
people to insure. Since regularity and punctuality pf payment of premium
is a perquisite for keeping the policy in force, the insured feels compelled
to save.

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 5. NEED OF INSURANCE

 As individuals it is inherent to differ. Each individuals insurance needs and requirements

are different from that of the others. Insurance Plans and policies that talk to you
individually andgive you the most suitable options that can fit your requirement.

 What would happen to your family's financial health if you and your income were gone?
Could they maintain their standard of living? Pay for college tuition? Household bills?
What about monthly mortgage or rent?

 Having adequate life insurance coverage should be an essential part of your overall
financial plan - at every age. And the sooner you buy, the better. That's because the
younger and healthier you are when you purchase coverage, the less you'll pay in
premiums. Some life insurance plans also offer cash savings options, which means the
sooner you begin saving, the sooner the cash value of the plan can begingrowing.

 It's important to review your life insurance needs regularly to ensure your policy keeps
pace with changes in your life. For example, events like marriage, divorce, birth/adoption
of a child, reduction or increase in your income, children entering or finishing college,
and large purchases like a new home can all impact the level of coverage you may need.

 Depending on what changes have occurred, you may need to reassess your coverage
needs. The Calculator can help you reassess your needs. At the same time, check your
beneficiary designation on your policy to make any necessary updates to be sure your
policy benefits are distributed in accordance to you.

 The Importance of Life Insurance when it comes to wealth management and financial
planning , one of the most important, yet most overlooked products is life insurance. It
often serves as the foundation to any plan, and most advisers consider it to be paramount
in importance.

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 The major reason one would acquire life insurance is to protect his family after his death.
Just think about it; how would your family pay for your mortgage, school tuition or even
groceries if you were to suddenly pass away? A life insurance policy would protect your
loved ones financially and help them keep their present lifestyle without much
interruption.

 Investment:-

If you decide to purchase an investment type of insurance, called a whole life insurance
policy, part of your premium will go to an account that can be accessed later, even
without someone dying first. This can be used as a savings instrument to accumulate
substantial wealth or it can be used in an emergency, such as a serious illness or disabling
injury. The benefit of this type of insurance is that if you start early, even when you have
no real beneficiaries, you are building up value for yourself4

 Protecting Assets:-

You may have real and personal property that you would not want to go to ruins if you
should pass away. With a life insurance policy, you can protect a home, boat, business or
any other property for which you have an outstanding loan or tax bill or which requires
significant upkeep. This prevents your family or other beneficiaries from having to sell
the property because they cannot afford to pay for it.

 Leaving a Legacy:-

People who purchase a life insurance policy may also be interested in leaving a legacy
behind by donating theproceeds of their policy to a particular school or an organization.
In most states, such organizations receive the sums tax free and you may be able to write
off the premiumfrom your taxes as well.

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 Proper Selection:-

With the importance of life insurance comes the importance of shopping around. Make
sure to talk to a number of agents and compare various plans before deciding on a
purchase, as pricing and features can vary greatly. Also, make sure whomever you speak
with is a licensed insuranceagent and can provide you with the best policy for your
specific situation.

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 6.ESSENTIALS OF INSURANCE

Insurance means protection against loss. It is the process of safeguarding the interest of people
from loss and uncertainty. It is based on contract. It is a valid agreement that incorporates certain
terms and conditions. It may be described as a social device to reduce or eliminate a risk of loss
to life and property. The essential elements of insurance are listed below:

1.Agreement

The agreement means communication by the parties to one another regarding their intentions to
create a legal relationship.

For a valid contract of insurance, there must be an agreement between the parties.

That is one making offer or proposal and another accepting the proposal or signifying his
acceptance of the proposal.

2. Free consent

There must be free consent between the two parties in the contract. Parties entering into the
contract should enter it by their free will and consent.

The contract entered via undue force, influence, fraud, misrepresentation, hiding the facts is not
the valid contract. Consent received forcefully can't be a free consent.

3. Components of contract

An agreement must be legally competent between the parties to enter into the contract.

It means both parties in the insurance contract must be at the age of majority.

He/she must have a sound mind and not disqualified by law of the country.

It states that a person who is minor, lunatics, idiot and alike cannot enter into an insurance
contract.

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The contract entered into by these will be declared as void.

4. Increase self-respect

There is the direct connection between self-respect and independence of a person in the society.

Insurance supports to the person to be independent.

It provides economic support to an individual, businessman which helps to increase the self-
respect of the person in the society.

5. Legal consideration

There must be valid considerations in a valid insurance contract.

Consideration is the value that each party gives to the other party.

For the establishment of the legal relationship, creation of an obligation between them and to
make it enforceable by law there must be a lawful consideration.

6. Compliance with legal formalities

In the contract of insurance, the agreement between parties must be in written form and signed
by both the parties.

It must be properly tested by the witness and registered otherwise, it may not be enforced by the
court.

7. Competent of contract

The parties to the contract should satisfy certain qualifications to enter into contracts.

A person who is at the age of majority according to the law, who is of sound mind and who is not
disqualified by law can enter into the contract.

So, the person of unsound mind disqualified and minors cannot enter into insurance contracts.

A contract made by incompetent parties will be invalid.

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8. Certainty

The terms and conditions of a contract should be clear and certain.

They should be clearly understood by both the parties.

Hence, to make it clear and certain, the insurance company provides a printed policy document.

It contains all the terms and conditions of the policy.

9. Insurable interest

Insurable interest refers that the insured must suffer if the loss takes place in the property.

In case of the property interest, ownership of property can support to insurable interest but in the
case of life insurance, close family ties or marriage will satisfy the requirement of insurable
interest.

10. Encourage saving

The insurance should pay the amount of premium regularly and compulsorily.

It develops the habit of saving.

The deposited insurance premium cannot be withdrawn like a bank deposit. Life insurance is the
best method of saving an investment.

It is a good means to make provision for retirement age.

11. Writing and registration

The insurance contract must be in writing, duly signed, stamped and registered.

12. Warranties

Certain conditions and promises imposed in the contract are calledwarranties.

A warranty is that by which the insured undertakes that some particular thing shall or shall not
be done.

Warranty is a very important condition in an insurance contract which is to be fulfilled by the

insurance company.

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 7. INSURANCE CONTRACT

 Insurance is based on certain principles which form the foundation of an insurance

policy.

 These principles have evolved over the decades. While in several countries, some of them
may be adopted after modifications, to provide for better service levels, most of the basic
principles would generally still hold good.

 In many countries also, Insurance is slowly evolving into a financial instrument,

especially for large businesses and it would remain to be seen as to how far this aspect
can really be taken to.

 All insurance purchases involve contracts. In fact, insurance is a distinct branch of

contract law. It would be easier to understand insurance, if general knowledge of contract
law is available with a person.

 It is important to understand the term ‘contract’ as it is used in general and the

distinguishing feature of insurance contract.

 A ‘contract’ is an agreement between two or more parties which, if it contains the

elements of a valid legal agreement, is enforceable by law or in other words a ‘contract’
involves exchange of promise and in case of breach the parties to the contract can avail of
legal remedy. The law of contract in India is governed by the Indian Contract Act, 1872.
Meaning Of Valid Contract

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  A contract may be defined as an agreement between two or more parties to do or to
abstain from doing an act, and which is intended to create a legally binding relationship.
This could be summarized as ‘an agreement designed to have legal consequences’.

According to Indian Contract Act, “An agreement enforceable by law is a contract”, which
satisfies the following essential elements:

i) Agreement (offer and acceptance)

(ii) Legal Consideration

(iii) Competence to Contract

(iv) Legal object

(v) Certainty

(vi) Possibility of performance

(vii) Writing and registration.

Elements Of A Valid Contract

All valid contracts must have the following four elements: offer and acceptance, consideration,
capacity and legal purpose.

1. Offer And Acceptance

 In any valid contract, there should be an offer and acceptance.

 If we take the insurance policy as an example, the insured makes an offer by way of
filling up a proposal and the insurer accepts the offer by quoting rates and terms under
which he is willing to accept the offer to insure.
 It is of absolute importance in a contract that both the offer and acceptance should be
expressed in terms which are unambiguous and clear.
 It is also important that the acceptance should be on the same terms on which the offer is
made.

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  For instance, if an insured makes an offer to cover his house in Karol Bagh, Delhi, then
the acceptance should be for coverage of the same house and not a different property. If
the second party to whom the offer is made wishes to make a counteroffer, he may do so
and the contract is valid only when the first party agrees to the terms proposed by the
second party. This is called “consensus ad idem”.The acceptance of an offer should be
unconditional.
 If any conditions are imposed then those conditions have to be agreed to by both the
parties for the contract to come into existence.
 While it is good for the offer and acceptance to be in writing, both oral and written offer
and acceptance are recognised by law.

2. Consideration

 Consideration is the price paid by both the parties for the promise and is a key
requirement for a valid contract.
 The logic for this is that each part to the contract should confer some benefit on the other.
In insurance, the consideration on the part of the insured is the money he pays as
premium and the insurer makes a promise to indemnify the insured in the event of the
happening of the contingency insuredagainst.

3. Capacity

 The third requirement for a valid contract is the capacity of the parties to enter into a
contract.
 The reason being a person entering into the agreement should have the ability to honour
the commitment made under the contract.
 Minors, a person of unsound mind, those in an intoxicated state etc. cannot enter into a
legally binding agreement.

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  The purpose is to ensure that people who are not in a fit state should not be taken
advantage of. Similarly the insurer should possess the necessary qualification to enter
into a contract.
 In India only those insurers who have been licensed by IRDA to carry on the business of
insurance can issue insurance policies.
 A person who is not competent to enter into a contract by reason of the provisions in
Section 11 of the Contract Act, 1872, can still be a beneficiary under a contract of
insurance.
 A minor’s property may be insured by persons competent to act for him. He would be
entitled to recover the insurance money.
 The court rejected the defence of the insurance company that the person on whose behalf
the goods were insured was a minor and allowed the minor to recover the insurance
money.
 A minor is allowed to enforce a contract which is of some benefit to him and under which
he is required to bear no obligation.

4.Legal Purpose

 The purpose of the agreement/contract should be legal.

 If two parties enter into an agreement the purpose of which is not legal, the same cannot
be enforced in a court of law and hence the contract would not be valid.
 For example, if an insurance policy is issued to cover the results of a race, the contract
would become invalid. Section 23 of the Contract Act, 1872 prescribes the requirement
that the consideration for and the object of the agreement must be lawful.
 It has been held that there is nothing unlawful in a vehicle insurance policy providing that
no compensation would be payable if the vehicle was being driven at the time of the
accident by an unlicensed person or by a learning license holder. Section 64-VB of the
Insurance Act, 1938 prohibits the insurer from entering into a contract unless the
premium is paid in advance. The court said that such a condition could be waived.
 Insurance ContractLike any other contract the contract of insurance must fulfill all the
essential elements of contracts as laid down in the law of contract of Indian Companies

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 Act, 1872. Insurance is a contract between two parties whereby one party called insurer
undertakes, in exchange for a fixed amount of money on the happening of a certain event.
 At the same time the Insurance Contract must fulfill certain other elements relating
exclusively to insurance which are known as Fundamental Principles.
 The insurance contract involves:

(a) The elements of general contract.

(b) The elements of special contract relating to insurance.

The special contract of Life insurance involves the following principles:

1. Insurable interest

2. Utmost good faith

3. Material Facts

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 8. NATURE OF INSURANCE CONTRACT
 The contract of insurance is called an allegory contract because it depends upon an
uncertain event.

 For example, if a house is burnt down or the ship is stranded, the insurer will pay the
value of it. At first sight this would seem to be a wagering transaction, the insurer betting
with the assured that his house will not be burnt or his ship will not sink and giving him
the odds of its value against the premium. It is due to this uncertainty that Lord Mansfield
described insurance ‘as a contract on speculation’.

 According to the modern view, however, insurance contracts are not speculative or
wagering contract. Insurance is not merely a gamble on an uncertain future. It is a
perfectly valid contract for the assured is only, indemnified for his loss and he does not
gain by the happening of the event insured against, he does not make a profit of his loss.
While in a wager no insurable interest is present, in insurance the assured must have an
insurable interest on the subject matter insured.

 Therefore, although insurance is an allegory contract depending upon an uncertain event,

it is not a wagering or a speculative contract nor is it a gamble on an uncertain future.

 A contract of insurance is entered as soon as the insurance company accepts, the

premium after the proposal being accepted.

 The following essential elements are deemed to be fulfilled after the acceptance of the
premium by the insurer. The more important conditions or elements known as
fundamental principles must be satisfied for a valid insurance contract. Following are the
essentials of a contract which should be fulfilled:

1. Agreement:

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  It involves both offer and acceptance at the same time.
 Filling up of a proposal form by the proposer is an offer and the notice of
acceptance of the proposal by the insurer is a valid acceptance of insurance.

2. Legal Consideration:
 To every contract there must be some legal or lawful consideration.
 In insurance, payment of premium is the valuable consideration in return to get a
lump sum on the happening of the event.

3. Competence to Contract:
 If the insured person is of sound mind and has attained majority (18 years of age)
he is said to be competent to enter into an agreement or contract.
 Also he must not have been debarred by any law to which he is subject to enter
into agreement.
 An insurance policy taken on a minor’s life by his legal guardian will constitute a
valid contract.

4. Legal Object:
 The object of contract must be lawful. It must not be illegal, immoral or opposed
to public policy.
 Thus the object of insurance must be lawful. The assured should pay his premium
in time and in turn, the insurer should pay the assured amount at the time of loss
or maturity without causing any unnecessary hardship for the assured.
 The intention of both the parties must be a holy one.

5. A Certainty:
 An agreement must not be vague, loose and uncertain.
 The terms and conditions must be clearly understood by both.
 If the proposer turns out to be an illiterate, the insurer must analyze or make the
terms and contracts clear to him.

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  Otherwise, there will be no mental accord.
 In insurance the terms and conditions are deemed to be understood as the
proposer gives an understanding on the proposal form.
 The insurance company issues a printed policy document which contains all the
terms and conditions of insurance contract.

6. Possibility of Performance:
 The agreement must be capable of being performed.
 A promise to do an impossible thing cannot be enforced.
 In insurance contract there is every possibility of its performance.
 The insurer must be able to pay the money on happening of the event.
 The insured is expected to make regular payment of premium; otherwise it would
defy the meaning of the insurance plan.

7. Writing and Registration:

 The contract law requires certain formalities of writing and registration etc.
 For insurance the agreements must be in writing, properly signed, stamped and
registered.
 These formalities are fulfilled as the proposer makes his proposal through a
printed form, duly signed by him.
 The insurer issues the original policy document, properly signed and stamped.

Distinguishing Characteristics Of Insurance Contracts While all the contracts should

have the abovementioned four features to be legally binding, an insurance contract
has some special characteristics while at the same time adhering to the above
mentioned features.The special contract of insurance involves principles:

1) Utmost Good Faith. 5) Proximate Cause.

2) Insurable Interest. 6) Contribution.

3) Indemnity. 7) Minimization of loss.

4) Subrogation

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 9. IMPORTANCE OF PRINCIPLE

 A unique feature of principles is that, unlike concepts and procedures, they are
discovered rather than invented.

 Principles are the only kind of content which represents "truth" in any significant
way. Certainly, facts (which can only be learned on a memorization level) are often
either true or false, but they are trivial compared to principles they are particulars
rather than generalities.

 Also, a procedure can either produce the desired outputs (the goal) or not. But
procedures don't provide us with an understanding of how things work, and
procedures can often be changed and still produce the desired outputs.

 Furthermore, there are often several different procedures for accomplishing the
same goal.

 In contrast, principles provide us with an understanding of the world around us,

among us, and within usóan understanding of how things happen and why they
happen the way they do.

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 Therefore, principles are probably the most important kind of content for us to
include in the majority of our instruction. And it is usually helpful to learn how to
apply the principles to new situations.

 Insurance policies are contracts that provide people with financial security and
protection from future uncertainty.

 In order for the relationship between the insurer and the insured to work,
however, there are certain important principles that must be upheld.

 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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 IMAGE

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 10.PRINCIPLE OF UTMOST GOOD FAITH (UBERRIMA FIDES)

 Insurance contracts are based upon mutual trust and confidence between the insurer and the
insured. Hence, they are said to be uberrimae fidei, i.e., of the utmost good faith. Utmost
good faith in insurance means that each party to a proposed contract is legally obliged to
reveal to the other party all information which would influence the other’s decision to enter
the contract, whether such information is requested or not.

 Though the insurance contract are subject to good faith and are based upon mutual trust and
confidence, it is not possible to apply any doctrine or caveat emptor (let the buyer beware)
because of the fiduciary nature of insurance. The information necessary for the parties to
assess the contract adequately cannot be ascertained as with contracts of sale where the buyer
before contracting to purchase anything must satisfy himself as to the nature and quality of
goods he needs.

“A positive duty voluntarily to disclose, accurately and fully, all facts material to the risk using
proposed, whether requested or not”.Thus one of the important basic principles of insurance is
known as 'utmost good faith'. The Insurance contract being a promise to pay in the case of a peril
operating is a unique type of contract between the Assured and the Insurer.

Explaining the reason for this stringent rule in an early case Lord Mansfield said:

“Insurance is a contract upon speculation. The special facts upon which the contingent chance is
to be computed lie most commonly in the knowledge of the insured only; the underwriter trusts
to his representation, and proceeds upon confidence that he does not keep back any circumstance
in his knowledge, to mislead the underwriter into a belief that the circumstance does not exist,

30
and to induce him to estimate the risk as if it did not exist. The keeping back of such a
circumstance is a fraud, and therefore the policy is void. Although the suppression should happen
through mistake, without any fraudulent intention, yet still the underwriter is deceived and the
policy is void; because the risk run is really different from the risk understood and intended to be
run at the time of the agreement...Good faith forbids either party, by concealing what he
privately knows, to draw the other into a bargain into his ignorance of that fact and his believing
the contrary.”

Very often, the Insurer has to rely only on the description and details filled in the proposal form.
The Insurer has no way of verifying these details and after an insured peril has operated, the
subject matter of the insurance may very well have gone up in smoke or washed away. Therefore
any mis-description, misrepresentation or blatantly false declarations made by the Assured would
result in the Insurer paying “wrong claims.

Obviously, in the longer term no Insurer can survive payment of wrong claims or charging of
wrong premiums for the risk. Such payment of claims also imposes a burden on the rest of the
premium paying community, since ultimately claims have to be paid out of the premium pool.

It is therefore an implied condition or principle of insurance that the Assured be required to make
a full disclosure of all material particulars within his knowledge about his risk.

However today, especially with imminent privatization, it would be logical to expect that
insurers would attempt to become increasingly more customer friendly and provide risk survey
and assessment, appraisal, etc. services, directly or through

brokers, surveyors, etc. Whether these factors may dilute this principle and to what extent
remains to be seen. Our opinion yet would be that the Assured knows his business and risk best
and whenever in doubt, must attempt to disclose that particular aspect.

A corollary to this would be that even after taking out an insurance policy, during its validity
period, if there are any alterations or changes to the business or risk - say alteration of process or
storage of any hazardous material - which increases the risk, the Assured must inform the Insurer
of the same and get their acceptance for the same. At times, additional premium payment may be
required. If it is found that an Assured has not disclosed or attempted to conceal any material
aspects of the risk, the Insurer would obviously be entitled to avoid any payment of claims or

31
monies under the Policy. If it is found that the Assured had misrepresented any aspect of the risk,
then the Insurer would again obviously be entitled to avoid any payment of claims or monies
under the Policy. However, in certain cases of misrepresentation, where the effect may only have
been increased premium, it is possible that the Insurer may partly pay the claim.

Material Fact

The definition of Material Fact is:

Every circumstance is material which would influence the judgment of a prudent insurer in
fixing the premium or determining whether he will take the risk.

The duty extends not only to facts which the insured knows, but also to those which he, as a
reasonable person, ought to have known and which are in fact material, whether he thinks them
to be so or not.6

There has been some criticism of the use of the term ‘prudent underwriter’ and there has been a
tendency to substitute ‘reasonable underwriter’ in applying the rule. In some quarters it has been
suggested that the view of the ‘reasonable insured’ rather than a ‘reasonable underwriter’ should
be the test of whether a fact is material or not. However, it is not a question of whether the
proposer regards the matter as material or even whether the insurer regards a fact as material.
The test will be a view of a prudent or reasonable underwriter.

Facts Which Must Be Disclosed

Those facts, which must be disclosed, are any circumstances which would influence the insurer
in accepting or declining a risk or in fixing the premium or terms and conditions of the contract.

The fact must be material at the date at which it should be communicated to the insurer. A fact
which was immaterial when the contract was made, but becomes material later on need not be
disclosed. There is one exception to the rule and it occurs when there is a policy condition
requiring continuous disclosure. This would be an usual condition to find in most general
insurance policies. The categories of facts which must be disclosed are:

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 a) facts which show that the particular risk represents a greater exposure than would be expected
from its nature or class;

b) external factors which make the risk greater than would normally be expected;

c) previous losses and claims under other policies;

d) any declinature or special terms imposed on previous proposals by other insurers;

e) the existence of other non-indemnity policies such as life and accident;

f) Full facts relating to the description of the subject matter of insurance.Some examples of such
facts are

i. Fire Insurance: The construction of the building, the nature of its use, fire detection and
firefighting equipment.

ii. Theft insurance: The nature of stock, its value and the nature of security precautions.

iii. Motor insurance: The type of car, whether it has been specially adapted, details of regular
drivers

iv. Marine insurance: Cargo insurance-the terms of sale, mode of carriage, whether
containerized.

v. Life insurance: Age, previous medical history, occupation, smoking/drinking habits.

vi. Personal accident insurance: Age, height, weight, previous medical history, occupation.

These are only examples and not exhaustive. In all classes of insurance there will be a need to
have details of previous loss experience and all facts which the proposer is reasonably expected
to know. As an example, a landlord should know the nature of occupancy of his property by his
tenant.

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Facts Which Need Not Be Disclosed

There are, however, certain facts which it is no duty of the insured to bring to the notice of the
insurer for example facts which the insurer knows or is deemed to know. They were summed up
by Lord Mansfield in an early case” Good faith forbids either party by concealing what he
privately knows, to draw the other into a bargain, from his ignorance of that fact, and his
believing the contrary.

There are some circumstances which are material but it is not necessary to disclose. The areas
concerned are:

a) Facts of law: Everyone is deemed to know the law;

b) Facts of common knowledge: An insurer is deemed to know about such things as the strife in
any part or normal processes within a particular trade;

c) Facts which lessen the risk: the existence of an alarm system for a theft risk or sprinkler for
fire risk;

d) Facts which could reasonably be discovered: This occurs where an insurer has bean put on
inquiry by, for example, a statement on a proposal form. The most common example of this
would be where a proposer inserts a phrase ‘see your records’ instead of completing fully the
previous claims history;

e) Facts which a survey should have revealed: If an insurer carries out a survey then any
material facts which are clearly visible, or which any reasonable surveyor would enquire about
do not need to be disclosed by the proposer. However, the proposer is not permitted to conceal
material matters from the surveyor;

f) Facts covered by policy conditions: These would be facts, which it is superfluous to disclose
because of an express, or implied warranty e.g. that burglar alarms are regularly maintained.

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 CASE STUDIES AND EXAMPLES OF UTMOST GOOD FAITH

 Last year, M.S Engineering bought a group health insurance policy for its 150 employees.
However, at the time of buying the policy, the company did not give correct information
about the maximum age-limit of its employees. A few months back, when Anuradha
Prasad, one of the employees, got hospitalised after a cardiac arrest, the insurer refused to
settle the claim because M.S Engineering hides the true age of its employees.

Interpretation: In this case, Anuradha Prasad was 58- year old, but at the time of buying
the policy, M.S Engineering said that all its employees were below 45.There was a
breach of principlre of utmost good faith. The information disclosed was not true.

 Mr. G made a claim for goods stolen from his home during a burglary. Among the many
items he claimed for were some Star Wars DVDs. This alerted the firm’s loss adjusters to
the possibility of fraud, since at the time of the burglary the films in question had not
been released on DVD.

Interpretation: The firm rejected the claim and "forfeited" Mr. G’s policy from the date
of his claim. Mr. G complained to us, arguing that he must have mistakenly claimed for
pirated copies of the DVDs, and that this mistake did not warrant "forfeiture" of the
policy.We were satisfied that this was a clear attempt to defraud the firm. There was
evidence that showed "beyond reasonable doubt" – more than the usual civil requirement
of "balance of probabilities" – that Mr. G was claiming for something that he could never
have owned. This higher standard of proof indicated that Mr. G would still be guilty of
fraud, even if the pirated DVDs did exist, since he had attempted to claim for legitimate
copies.

The value of the DVDs was relatively small compared with the overall size of the claim,
but we did not feel this was a case of "innocent and minimal exaggeration". Mr. G had
dishonestly claimed for something he was not entitled to. This went to the very root of

35
 the insurance contract, and was a breach of the policyholder’s duty to act in "utmost good
faith" when submitting a claim.

We also felt that this fraud, and Mr. G’s subsequent attempt to cover it up, cast doubt on
the validity of the entire claim. The firm’s decision to "forfeit" was therefore fair and
reasonable.

 In the recent case of Synergy Health (UK) Ltd v CGU Insurance Plc (t/a Norwich Union)
and others [2010] EWHC 2583 the insured informed its insurance company, four months
before renewal of its policy, that it was installing an intruder alarm. Due to administrative
errors the alarm was not installed and a major fire occurred.
Interpretation: The court held, that by failing to correct its material misrepresentation, the
insured had impliedly repeated the misrepresentation on renewal. However, on the facts,
the insurance company had not been induced by the misrepresentation to renew the
policy and so could not avoid it. The information was not disclosed before and was
disclosed at the time of renewal

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 11.PRINCIPLE OF INSURABLE INTEREST
 The second principle of insurance is that the subject-matter of the insurance must be of
insurable interest. This means that the insured stands in such relation to the subject-matter of
insurance that he suffers loss by its destruction or damage and is benefited by its safety, or
existence.

 An insurable interest is “an interest of such a nature that, if the event insured against takes
place, the insured might suffer a financial loss. If the happening of the event insured against
cannot cost the insured money, then there is no insurable interest.”

 Thus insurable interest means proprietary or monetary interest. It is the legal right to insure
as an insurance policy does not cover property, but relates to the insured’s interest in the
property. In every contract of insurance, the law regards possession of an insurable interest in
the subject-matter of insurance to be a necessary pre-requisite.

 The insured must own either own part or whole of it or he must be in such a position that
injury to it would affect him adversely.

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 For example, a man who insures his scooter against accident has insurable interest in it
because he uses it for official and non-official visits and is thus benefited from its existence.
If the scooter is damaged or is totally lost, it would cause him financial or pecuniary loss. He
will have to incur huge expenses on its repairs, if it is damaged, or has to replace it, if it is
totally lost, or will have to pay hire of alternative modes of transport.

 Similarly, a person has insurable interest in the house he lives in. A businessman has
insurable interest in the goods he deals in. A person has insurable interest in his own life. A
wife has insurable interest in the life of her husband. A creditor has insurable interest in the
debtor. The partners have insurable interest in the lives of one another.

 To be valid the insurable interest must be recognized as such under the law in operation in
the country. It must satisfy the following conditions:

(i) There must be a physical object (life or limb or property) which is subject to risk and the
risk can operate on such object and cause damage or destruction.

(ii) There must be a potential liability (death of a pedestrian by a motor car) and this must be
caused by the operation of the insured risk or by the happening of an event which is insured.

(iii) The subject-matter of insurance must be the physical object or potential liability.

(iv) The insured must be in a legally recognized relationship with the subject-matter of the
insurance, whereby he benefits from its continued safety or the absence of liability and is
prejudiced by its damage or destruction, or the creation of liability.

In the case of Wilson v. Jonesa policy taken out by a shareholder for the success of his
company’s adventure was held to be valid.

In life insurance, insurable interest should exist at the commencement of the policy, but it
need not continue to exist up to the occurrence of the loss. A creditor may, for example,
insure his debtor’s life and the policy remains valid even after the debtor has paid off the
creditor. But where the debtor dies without payment and the payment was subsequently made
by his executors, the assured could not recover anything on the policy of his life.

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When Insurable Interest Exists. Insurable interest exists in the following cases:

I. Owners: Owners have got insurable interest to the extent of full value.

II. Part owners or joint owners: They have insurable interest to the extent of their part or
financial interest.

III. Mortgagor/Mortgagee: Mortgagor, being the owner of the property, has got insurable
interest. Mortgagee though not owner, has got insurable interest to the extent of the money
advanced, plus interest and an amount to cover up insurance premium.

IV. Ballees: They have got insurable interest because of a potential liability being created if
goods belonging to others get lost or damaged whilst in their custody.

V. Carries: Like bailees, carries have also got insurable interest in view of potential liability that
might devolve on them for any mishap to the goods belonging to others, but whilst in their
custody.

VI. Administrator, Executors & Trustee: They have insurable interest in view of responsibility
put on them by law.

VII. Life: A person has got insurable interest in his own life. A husband has also got insurable
interest in the life of his wife and vice-versa. No other relationship as such merits existence of
insurable interest. However, insurable interest has been created up to $30 on the lives or parents,
step-parents and grandparents, under the Industrial Assurance & Friendly Societies Act, 1984 &
1958 of U.K., for funeral expenses.

VIII. Debtors and Creditors: A debtor has insurable interest in his own life, but he has no
insurable interest in the life of his Creditor. A creditor on the other hand has insurable interest in
his own life and he has also insurable interest in the life of his debtor to the extent of the loan,
interest and something to cover up premium. This is because of the financial interest being
created by advancing money.

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IX. Insurers: They have got insurable interest because of a potential liability undertaken from
the insured under a policy, and this justifies taking out a reinsurance policy.

X. Liability: The creation of a potential liability justifies existence of insurable interest. The best
examples are third party motor insurance, public liability insurance etc.

It should be remembered that a person in the lawful possession of goods of another has got
insurable interest so long responsible for goods. More possession without responsibility does not
carry any insurable interest. Similarly a person having illegal possession of goods has got no
insurable interest, e.g., thieve.

One important point with regard to insurable interest is that it must be capable of being valued in
terms of money. Sentimental value is co criteria.

When Insurable Interest Must Exist

When insurable interest must exist varies depending on the type of insurance. The position is as
follows:

a) Marine: Insurable interest must exist at the time of claim although. It need not exist at the
time of effecting the policy.
b) Fire: Insurable interest must exist both at the time of effecting the policy and at the time of
claim.
c) Life: Insurable interest must exist at the time of effecting the policy and it may not exist at
the time of claim.
d) Accident: Like fire, insurable interest must exist both at the time of effecting the policy and
the time of claim. IN fire or accident policies, however, the interest should continue to exist
down upon to the occurrence of the loss. Thus where a person took out a policy of indemnity
against loss that may be caused by his motor car or any other car being driven in its place, he
could not recover, because he had sold the car and the loss was caused by new car purchased
by him. His interest in the car ceased when he sold it and the new car was not being used
instead of it.11 In marine insurance, interest should exist at the time of the loss.

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CASE STUDIES AND EXAMPLES ON PRINCIPLE OF INSURABLE
INTEREST

 R.S Automobile bought a group gratuity policy to cover 200 employees. As the company
has an insurable interest in the wellbeing of employees, the policy is issued.

Interpretation: In case R.S Automobile shuts down its business, the company will also
lose insurable interest present in the group gratuity policy and they no longer need to pay
premiums.

 In the case of Brahma Dutt v. LIC[2], Mukhtar Singh a petty school teacher on salary of
Rs 20 took a policy for Rs 35,000 on his life making false statements in the proposal and
nominated a stranger Brahma Dutt for the policy. The nominee paid the first two
quarterly premiums by which time the life insured died. The nominee intimated the
insured's death and claimed the sum assured.

Interpretation: It was found on evidence that Brahma Dutt had taken the policy without
any insurable interest in the life of the deceased for his own benefit and that therefore it
was void being a wagering agreement.

 The purchasers took the risk of loss to their goods, and hence the appellant had no
"insurable interest" in them, unlike in the consignment in question for which due
declaration was made. Reference was made to the decisions of this Court in New India
Assurance Co. Ltd v. G.N. Sainani and New India Assurance Company Limited v. Hira
Lal Ramesh Chand & Ors, wherein it was held that "insurable interest" over a property is
"such interest as shall make the loss of the property to cause pecuniary damage to the
assured and under this case it will make a damage to the interest of the insured.

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 12.PRINCIPLE OFPROXIMATE CAUSE
 Insurable interest and utmost good faith apply to all insurance contracts, the primary
application being at the time the contract is being arranged (policy inception).

 Proximate cause is also likely to be important with all types of insurance, but its application
will be exclusively related to claims. Some of its features to be noted are as follows:

Definition

The classic definition is taken from a law case nearly a hundred years ago: "The active efficient
cause that sets in motion a train of events which brings about a result, without the intervention of
any force started and working actively from a new and independent source."

This is very impressive, but what does it mean? In simple terms, it means it is necessary to
determine the real effective cause of the loss, because not every cause of loss will be insured.

Types Of Peril

A cause of loss is known as a peril. There are essentially three kinds of peril:

(a)Insured peril: which is covered by the policy and must occur with any claim, e.g. fire under a
fire policy, collision with a motor policy etc.

(b)Excepted (or excluded) peril: this is a peril that would be covered, but is specifically
removed from cover by a policy exclusion, e.g. fire caused by war, death from suicide etc.

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(c)Uninsured peril: this is a peril that is neither insured nor excluded, it is outside the cover
provided by the policy, e.g. accidental damage with a policy covering fire only.

Determination of Proximate Cause

The determination of real cause depends upon the working and practice of insurance &
circumstances to loss. Also-

1. If there is a single cause of the loss, the cause will be the proximate cause and further if the
peril (cause of loss) was insured insurer will have to indemnify the loss.

2. If there are concurrent causes, the insured perils and excepted perils have to be segregated.
The concurrent causes may be first, separable and second, inseparable. Separable causes as those
which can be separated from each other. The loss occurred due to a particular cause may be
distinguish known. If the circumstances are such that the perils are inseparable, then the insurers
are not liable at all when there exists any excepted peril.

3. If the causes occurred in form of chain, they have to be observed seriously--

a) If there is unbroken chain the excepted and insured perils have to be separated. If an excepted
peril precedes the operation of the insured peril so that the loss cause by the latter is the direct
and natural consequences of the excepted peril, there is no liability.

b) If there is a broken chain of events with no excepted peril involved, it is possible to separate
the losses. The insurer is liable only for that loss which caused by an insured peril; where there is
an excepted peril, the subsequent loss caused by an insured peril will be a new and indirect cause
because of the interruption in the chain of events.

Policy Modification of the Principle

Great care must be taken with this principle, as individual circumstances can be very important
in determining whether the loss is recoverable or not. One complication can arise from policy
wordings which modify proximate cause:

(a)to reduce the normal application: some fire policies might for instance have a wording that
allows a claim for fire damage caused by, say, earthquake or explosion, when impact damage
from such risks is in fact excluded;

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(b)to extend the normal application: proximate cause is normal only concerned with the direct
or dominant cause. For example, a policy exclusion may say that damage "directly or indirectly"
arising from a particular peril is excluded. This will mean that the loss may not be recoverable
even if the excluded peril is only a remotely contributory factor.

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CASE STUDIES AND EXAMPLE ON PRINCIPLE OF PROXIMATE
CAUSE (NEAREST CAUSE)

 Mr. Rajiv Saxena was on his official trip to London when he came to know that his
airline lost his luggage, which had some important office documents. He immediately
asked his Indian office to prepare new documents and courier them. Though the loss of
baggage was covered under his group travel insurance policy (bought by his company J.S
Engineering), the charges incurred in preparing and sending new documents were not
covered.

Interpretation: In this case, the nearest cause of the damage was a loss of baggage,
which was insured and therefore settled by the insurance company.

 A trawler vessel was insured against losses resulting from collision. Co-incidentally a
trawler vessel gets to collide, which result in further delay for few days. Because of this
delay, the banana on the trawler vessel got putrid and was unsuitable for consumption.

Interpretation: There are two reasons for the losses one is of collision and other is delay,
the closest cause of putrid banana was delay. As the trawler vessel was insured only for
collision and not for the delay, so for putrid bananas the insured will not get any
compensation from the insurance company. But trawler vessel will get compensation for
collision.

 GASKARTH V. LAW UNION (1876)

The insurer, Law Union, issued a fire policy to an insured covering fire, but not storm or
cyclone etc. There was a fire in the insured premises as a result of which the walls lost
strength, but nevertheless were standing. Some days later there occurred a furious storm
which caused the walls to fall. The insured lodged a claim for fire. The insurer repudiated
the claim on the ground that the loss was proximately caused by the storm and not fire.
The dispute went up to court.Interpretation: It was held that the proximate cause of loss
was the storm and, therefore the insurer was entitled to repudiate the claim.

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 13.PRINCIPLE OF INDEMNITY

This is a principle which will not apply to every kind of insurance, for reasons that will be
explained. In very simple terms we may think of it as compensation for the loss sustained. More
detailed consideration is, however, necessary.

Definition

As mentioned above that we may think of indemnity as compensation. To be more accurate

perhaps we should say that it is an exact financial compensation for a loss, no more no less.

Implications

If we accept the definition of "an exact financial compensation", we can see at once why
indemnity cannot apply to all types of insurance. Some types of insurance deal with "losses" that
cannot be measured precisely in financial terms. Specifically, we refer to Life Insurance and
most Personal Accident Insurances. Both are dealing with death or injury to human beings, and
there is no way that these things can be measured precisely. Thus, full compensation cannot be
PRINCIPLE OF given, indemnity cannot normally apply to these classes of business.

How Indemnity Is Provided

 With policies undertaking to indemnify the insured, the extent of any loss must be measured
as accurately as possible, but indemnity may be given in different ways, as follows:

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(a) Cash payment (to the insured): this is always acceptable and in some cases may be the only
practical option (e.g. reimbursement of medical bills - which incidentally is an indemnity, even
though it may be covered under a personal accident policy).

(b)Repair: payment to a repairer is a perfectly acceptable way to provide indemnity, and is the
norm, for example, with non-total loss motor claims.

(c)Replacement: with new items, or articles that suffer little or no depreciation, giving the
insured a replacement item may be a very suitable method, especially if the insurer can obtain a
discount from the supplier.

(d)Reinstatement: this is a word that has a number of meanings in insurance. As a method of

providing an indemnity, its usual meaning is rebuilding or reconstructing property after damage.
(In some cases, e.g. with damaged machinery, the term is used when replacement is involved.)

Almost all contacts other than life and personal accident insurance are contracts of indemnity.
Where the promise to indemnify is an absolute one, a suit can be filed immediately on failure of
performance, irrespective of actual loss. If the indemnity holder has incurred liability and that
liability is an absoluteone, he is entitled to call upon the indemnifier to save him from that
liability by paying it opt.

 Uses

To avoid intentional loss:

According to the principle of indemnity insurer will pay the actual loss suffered by the
insured. If there is any intentional loss created by the insured the insurer’s is not bound to
pay. The insurer’s will pay only the actual loss and not the assured sum (higher is higher in
over-insurance).

To avoid an Anti-social Act:

If the assured is allowed to gain more than the actual loss, which us against the principle of
indemnity, he will be tempted to gain by destruction of his own property after it insured
against a risk. So, the principle of indemnity has been applied where only the cash-value of

47
 his loss and nothing more than this, through he might have insured for a greater amount, will
be compensated.

If the principle of indemnity is not applied, larger amount will be paid for a smaller loss and
this will increase the cost of insurance and the premium of insurance will have to be raised. If
premium in raised two things may happen –

 First, persons may not be inclined to insure and

 To maintain the Premium at Low-level:
 Second, unscrupulous persons would get insurance to destroy he property to gain from
such act.

Conditions Of Indemnity Principle

The following conditions should be fulfilled in full application of principle of indemnity.

 The insured has to prove that he will suffer loss on the insured matter at the time of
happening the event and the loss is actual monetary loss.
 The amount of compensation will be the amount of insurance. Indemnification cannot be
more than the amount insured.
 If the insured gets more amount then the actual loss; the insurer has right to get the extra
amount back
 If the insured gets more amount then from third party after being fully indemnified by
insurer, the insurer will have right to receive all the amount paid by the third party.
 The principle of indemnity does not apply to personal insurance because the amount of
loss is not easily calculable there.

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CASE STUDIES AND EXAMPLE ON PRINCIPLE OF INDEMNITY

 J.S Construction Ltd. has a group health insurance policy for its 600 employees. Last
year, one of the employees was hospitalized after being diagnosed with dengue. The total
medical expenses came out to be Rs 40,000, which was covered by group health
insurance policy.

Interpretation: In this case, the insurer covered only actual medical expenses which
were incurred even when the coverage was more than that.

 A wheelchair manufacturer enters into an agreement with a large hospital to provide 500
wheelchairs at a discount price. The manufacturer asks that an indemnity clause be
included in the contract, in which the hospital agrees to protect the company from any
losses or lawsuits should patients be injured while using any of the wheelchairs.

Interpretation: In this, the hospital indemnifies the wheelchair company, or the hospital
guarantees indemnity for any losses or injuries that may occur.

 Insurance and Indemnity

The most common use of the terms indemnify and indemnity occur in insurance policies.
When purchasing an insurance policy, the insurance company agrees to indemnify the
policyholder, or another specified party, against losses or damages that may occur
Lola has a homeowner’s insurance policy on her home in Texas. The insurance company
has agreed to indemnify Lola against damages to her home and the personal property kept
there, from many types of damage, including fire, burglary, and liability if someone gets
injured on Lola’s property. A visiting neighbor trips on a crack in the walkway and falls,
breaking her arm. Lola’s insurance company would protect Lola from the medical bills
and other losses claimed by the neighbor by paying the claim.

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 Indemnify and Hold Harmless Agreements

Any time one person is using another person’s property, or one person is performing services
for another, the creation of an indemnify and hold harmless agreement helps ensure one party
will take responsibility for any problems that may occur. In other words, the person
borrowing the item, or doing work on someone’s property, agrees to indemnify the owner of
the property from loss or damages.

 Luke takes his car to the shop for repairs that will take a few days. The shop offers Luke a
loaner car so he can get back and forth to work. Luke signs the shop’s loaner car agreement,
which requires Luke have insurance, and includes an indemnify and hold harmless clause.

While driving through town in in the loaner car, Luke rear-ends a car at a stoplight. Luke
suffers minor injuries, but the driver of the other car has several moderate injuries, and the
damage to the loaner car is substantial. A couple of weeks later, the other driver demands
payment from the repair shop, as owner of the car that hit her, for medical bills, repairs to her
own car, and pain and suffering.

 In case of Leppard vs Excess Insurance Company Ltd (1979), where the subject matter was a
cottage. As a result of a conflict with the farmer owning all the surrounding land, Mr Leppard
could not sell the cottage as no one could access the cottage. He had to drop the price of the
cottage excluding land from £8694 to £3000. A loss occurred just then, and the indemnity
amount paid to Leppard was £3000 which was the value just before the fire, not the £8694
cost of rebuilding.

Interpretation:

In the case of a total loss of property, its financial value at the time and place of loss must be
paid. Deductions are made for wear and tear and betterment. The indemnity principle may be
adjusted in three ways:

1) Valued policies for subject matters which do not have a measurable value

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2) Allowing more than indemnity, for example in cases of new-for-old where no deduction
for depreciation is made, or in cases of property insurance covering architects’ and
surveyors’ fees after fire damage to ensure that rebuilding complies with local legislation

3) Allowing less than indemnity, for example in cases of underinsurance where the insured is
deemed to be his own insurer for the proportion of the underinsured loss, or excess which is
the first part of a claim paid by the insured.

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14. PRINCIPLE OF CONTRIBUTION

This is one of the two important corollaries (sub-principles) of indemnity. As such, it will only
apply if indemnity applies. It is therefore another principle connected with claims. Its major
features are as follows:

Definition

In simple terms, contribution means that if two (or more) insurers are contracted to provide an
indemnity to the same person (interest), the insurers should share ("contribute" towards) the
indemnity payment. The net effect is that the insured does not recover more than he has lost.

How Arising

The criteria that need to be satisfied before contribution exists are:

(a) the respective policies must each be providing an indemnity;

(b) they must each cover the same financial interest;

(c) they must each cover the same peril giving rise to the loss;

(d) they must each cover the same subject matter;

(e) each policy must cover the loss (i.e. not be subject to a policy exclusion or limitation
preventing contribution).

How Applicable

As mentioned, contribution will only apply if indemnity applies. Thus, if a person dies whilst
insured by two or more separate life insurance policies, each must pay in full, because the
insurances are not subject to indemnity.

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Conditions/When Contribution Operates

Before contribution can operate the following conditions must be fulfilled:

I. There must be more then one policy involved and all policies covering the loss must be in
force.

II. All the policies must cover the same subject-matter. If all the policies cover the same insured
but different subject-matters altogether then the question of contribution would not arise.

III. All the policies must cover the same peril causing the loss. If the policies cover different
perils, some common and some uncommon, and if the loss is not caused by a common peril, the
question of contribution would not arise.

IV. All the policies must cover the same interest of the same insured. It should be remembered
that if any of the above four factors is not fulfilled, contribution will not apply.

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 CASE STUDIES AND EXAMPLE ON PRINCIPLE OF CONTRIBUTION:
 M.W Electrical Ltd. bought group personal accident insurance policies from two insurance
companies— ABC Insurance for Rs 5 lakh and XYZ Insurance for Rs 2 lakh. In case if one
of its employees gets injured, he/she can approach any of the insurer, provided the expenses
are within the sum insured available with the policies.

Interpretation: In the case where the entire claim is settled by one insurer, the employee
can’t approach the second insurer for the claim settlement.

Example – B gets his house insured against fire for Rs. 10000 with insurer P and for Rs. 20000
with insurer Q. a loss of Rs. 15000 occurs, P is liable to pay for Rs. 5000 and Q is labile
to pay Rs 10000. If the whole amount pf loss is paid by Q, then Q can recover Rs. 5000
from P. The liability of P &Q will be determined as under:

Sum insured with Individual insurer (i.e. P or Q ) x Actual Loss = Total sum
insured

Liability of P = 10000 x 15000 = Rs.5000

30000

Liability of Q = 20000 x 15000 = Rs.10000

30000

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EXAMPLE OF PRINCIPLE OF CONTRIBUTION

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15. PRINCIPLE OFSUBROGATION

Definition

Again in simple terms, subrogation provides that an insurer who provides an indemnity is
entitled to take over and use for his own benefit any recovery rights the insured may possess
against third parties.

Suppose, for example, that the insured is covered by a motor insurance and his car is damaged by
the negligence of a building contractor when faulty scaffolding falls on to the car. The motor
insurer must pay for any insured damage to the car, but the insured also has rights against the
contractor. These rights become subrogated (transferred) to the motor insurer.

From this, it will easily be seen how subrogation seeks to protect the parent principle of
indemnity, by ensuring that the insured does not get paid twice for the same loss.

How Arising

(a) In tort: this usually arises where a third party is negligent (the main "tort", or civil wrong)
and causes loss or damage to be indemnified by the policy. This is undoubtedly the most
common source of subrogation.

(b) In contract: a hirer or leaseholder may make certain contractual promises regarding damage
to the owner's property. If the owner is insured for that damage, subrogation arises against the
hirer/leaseholder in question.

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(c) Under statute: this is not common here, but for example if a workman is injured at work by
the actions of a third party, the employer will have to pay an employee compensation benefit to
the injured man. The Employees' Compensation (EC) Ordinance, however, will grant
subrogation rights to the employer, who must in turn pass these to the EC insurer.

(d) In salvage: this we have already considered (see 2.4.5). The insurer may be said to have
subrogation rights in what is left of the subject-matter (salvage), arising under the circumstances
already discussed.

How Applicable

As with contribution, subrogation can only apply if indemnity applies. Thus, with our previous
example, if an insured under a life policy is killed by the negligence of a motorist the life insurer
must pay under his policy, but he is not entitled to subrogation rights for this payment, as it was
not an indemnity.

Essentials Of Doctrine Of Subrogation

Corollary to the Principle of Indemnity If the damaged property has any value left, or any right
against a third party the insurer can subrogate the left property or right of the property because it
the insured is allowed to retain, he shall have realized more than the actual loss, which is
contrary to principle of indemnity.

 Subrogation is the Substitution-

The insurer, according to this principle, becomes entitled to all the rights of insured subject-
matter after payment because he has paid the actual loss of the property. He is substituted in
place of other persons who act on the right and claim of the property insured.

 Subrogation only up to the amount of payment-

The insurer is subrogated all the rights, claim, remedies and securities of the damaged
insured property after indemnification, but he is entitled to get these benefits only to the
extent of his payment.

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 The Subrogation may be applied before payment-

If the assured got certain compensation from third party before being fully indemnified by
the insurer can pay only the balance of the loss.

 Personal Insurance-

The doctrine of subrogation does not apply to personal insurance because the doctrine of
indemnity is not applicable to such insurance. The insurer has no right of action against the
third party in respect of the damages.

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 CASE STUDIES AND EXAMPLE ON PRINCIPLE OF SUBROGATION:

 R.J Associates has a group health insurance cover for its employees. Last year, the company
sent one of its employees to M.J Mining on a contract basis, where he got injured while
working.

Interpretation: The group health insurer settled the claim of the injured employee and at the
same time, the insurer filed a legal case against M.J Mining as the injury happened because
the company did not have proper safety measures

 For illustration, when the loss to the assured is Rs.1,00,000/-. The insurer settles the claim of
the assured for Rs.75,000/-. The wrong-doer is sued for recovery of Rs.1,00,000/-

Interpretation:

If the suit filed for recovery of Rs.100,000/- is decreed as prayed, and the said sum of
Rs.1,00,000/- is recovered, the assured would appropriate Rs. 25,000/- to recover the entire
loss of Rs. 100,000/- and the doctrine of subrogation would enable the insurer to claim and
receive the balance of Rs.75,000.

If the suit filed for recovery of Rs.100,000/- is decreed as prayed for, but the assured is able
to recover only Rs.50,000/- from the Judgment-Debtor (wrong-doer), the assured will be
entitled to appropriate Rs.25,000/- (which is the shortfall to make up Rs.100,000/- being the
loss) and the insurer will be entitled to receive only the balance of Rs. 25,000/- even though
it had paid Rs. 75,000/- to the assured.

Where, the suit is filed for recovery of Rs.100,000/- but the court assesses the loss actually
suffered by the assured as only Rs.75,000/- (as against the claim of the assured that the value
of goods lost is Rs.100,000/-) and then awards Rs.75,000/- plus costs, the insurer will be
entitled to claim and receive the entire amount of Rs.75,000/- in view of the doctrine of
subrogation. Where the assured executes a letter of subrogation entitling the insurer to

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 recover Rs. 75,000/- (The suit is filed in the name of the assured or jointly by the assured and
insurer).

If the suit is filed for recovery of Rs.1,00,000/-, and if the court grants Rs.1,00,000/-, the
insurer will take Rs.75,000/- and the assured will take Rs.25,000/-.

If the insurer sues in the name of the assured for Rs.75,000/- and recovers Rs.75,000/-, the
insurer will retain the entire sum of Rs.75,000/- in pursuance of the Letter of Subrogation,
even if the assured has not recovered the entire loss of Rs.1,00,000/-. If the assured wants to
recover the balance of the loss of Rs.25,000/- as he had received only Rs. 75,000/- from the
insurer, the assured should ensure that the claim is made against the wrongdoer for the entire
sum of Rs.100,000/- by bearing the proportionate expense. Otherwise the insurer will sue in
the name of the assured for only for Rs. 75,000;/-.

 In case, here is that of Castellain vs Preston (1883) where Preston recovered fire damage loss
from his insurers and also the full purchase price after completion of the sale, making a profit
out of this situation. Castellain, the insurers, were given the right to stand in the place of
Preston and recover the amount paid in the claim to Preston.

Interpretation:The basic concepts are that the insured cannot make a profit out of a loss by
recovering twice, the insurer can recover the amount paid in claim to the insured from the
third-party responsible for the loss, and that subrogation only applies to contracts of
indemnity not to benefit policies (such as life assurance).

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16. PRINCIPLE OF LOSS MINIMIZATION
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.

This principle states that the insured must take all the necessary steps to minimize the losses to
inured assets.

As the owner of an insurance policy, you have an obligation to take necessary steps to minimize
the loss of your insured property. The law doesn't allow you to be negligent or irresponsible just
because you know you're insured.

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.

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 CASE STUDIES AND EXAMPLE ON PRINCIPLE OF LOSS
MINIMIZATION

 If a fire breaks out in your kitchen, you have an obligation to take reasonable steps to put it
out, like using a fire extinguisher or calling the fire department. You can't just stand back and
allow the fire to burn down your house because you know that insurance will pay for it.

Interpretation: All possible steps are to be taken to minimize the loss.

 Assume, Mr. John's house is set on fire due to an electric short-circuit.

Interpretation:In this tragic scenario, Mr. John must try his level best to stop fire by all
possible means, like first calling nearest fire department office, asking neighbors 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."

 Ram took insurance policy for his house. In an cylinder blast, his house burnt.

Interpretation:He should have called nearest fire station so that the loss could be
minimized.

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 17.SUGGESTIONS

 Principles are some set of rules which everyone should follow.

 Everyone involved in the insurance contract should read all the documents carefully and
should provide all information in a true and fair way so there is no breach of contract.

 Insurer should always ask the company about all its principle before taking any policy.

 There should be no misrepresentation of facts from the side of both the parties insurer and
insured.

 If the principles of insurance are not applied properly the claim will not take place properly.

 Principles of insurance should be applied wherever it is necessary.

 All process should take place legally and with complete formality.

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 18. CONCLUSION

Insurance and economic growth mutually influence each other. As the economy grows, the
living standards of people increase. As a consequence, the demand for life insurance increases.
As the assets of people and of business enterprises increase in the growth process, the demand
for general insurance also increases. In fact, as the economy widens the demand for new types
of insurance products emerges. Insurance is no longer confined to product markets; they also
cover service industries. It is equally true that growth itself is facilitated by insurance. A well-
developed insurance sector promotes economic growth by encouraging risk-taking. Risk is
inherent in all economic activities. Without some kind of cover against risk, some of these
activities will not be carried out at all.

Various principles of Insurance Laws have been discussed. These include principles relating to:
good faith, Insurable interest, minimization of loss, Indemnity, subrogation, contribution,
proximate cause.

Each of the seven principles of insurance defines a fundamental rule of action or conduct that
addresses the legal side of the insurance industry. Each applies to both the insured and insurer
throughout the life of an insurance contract, from the date of application to the date of
cancellation. In total, the six principles of insurance make up legal, binding guidelines for
entering into an insurance contract and for preparing, lodging and managing lawful insurance
claims.

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 19.BIBLIOGRAPHY

 http://www.youarticlelibrary.com/insurance/7-most-important-principles-of-
insurance/753

 https://iedunote.com?utmost-good-faith-in-insurance

 https://sol.du.ac.in/mod/book/view.php?id=1226

 https://en.m.wikipedia.org/wiki/insurance

 Insurance Principles and Practice – M.N. Mishra

 Insurance: Concepts and Coverage – Marshall Wilson

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