FUNDAMENTAL

PRINCIPLES
OF INSURANCE

Adv.Jissykrishnakumar
Elements of insurance contract
The insurance contract involves—
 1. General Principles of Insurance Law

&
 2. Specific Principles of Insurance Law
OR
 (A) the elements of the general contract, and
 (B) the element of special contract relating to
insurance.
GENERAL PRINCIPLES OF INSURANCE LAW
For a valid insurance contract, like any other
contracts, according to section 10 of the Indian
contract act 1872, the agreement must based upon
the following principles:-
 Offer and acceptance
 Free consent
 Competent to make contract

 Lawful consideration

 Lawful object
 Not expressly declared to be void
 Intro
 Besides,the general principles of a valid
insurance contract there are certain Specific or
Fundamental principles, which are of
paramount significance to the contract of
insurance
 There are certain principles that are important to
ensure the validity of the insurance contract.
Both parties must abide by these principles.
 The fundamental or Specific principles of
insurance contract are available in public to
understand benefits of insurance.
THE SPECIFIC/FUNDAMENTAL PRINCIPLES
CONTRACT OF INSURANCE ARE,
1.Utmost Good Faith
2.Proximate Cause
3.Insurable Interest
4.Indemnity
5.Subrogation
6.Contribution
7.Mitigation of Loss
8.Principle of co-operation
9.Principle of probability
&
10. Principle of warranties
 INTRODUCTION
 The insurance is acontract, a legal agreement
between two parties i.e. the individual named
insured and the insurance company called insurer.
 In this agreement, the insurer promises to make
good the losses of the insured on the happening
of the contingency and the insured pays a
premium in return for the promise made by the
insurer.
 The contract of insurance between an insurer and
insured is based on certain principles
 1.PRINCIPLE OF UTMOST GOOD FAITH

 A contract of insurance must be made based on

utmost good faith ( a contract of uberrimae fidei).
 The very basic principle is that both the parties in
an insurance contract should act in good faith
towards each other i.e. they must provide clear and
concise information related to the terms and
conditions of the contract.
 The Insured should provide all the material
informations related to the subject matter and
the insurer must give clear details regarding the
contract.
 …

 As a client it is the duty of the insured to disclose

all the material facts to the insurance company.
Any fraud or misrepresentation of facts can result
into cancellation of the contract.
 Both parties involved in an insurance contract—the
insured (policy holder) and the insurer (the
company)—should act in good faith towards each
other.
 The insurer and the insured must provide clear and
concise information regarding the terms and
conditions of the contract
…
 Utmost Good Faith is a positive responsibility of
the insured (the owner of the insured objects) to
submit facts in regard to the insured objects
(material facts) which are important in nature and
are needed to be complete and accurate by the
insured, whether on demand or voluntarily.
 If there are any material facts deliberately
hidden by the insured, the insurer will consider it
as fraudulent, and reserves the right to refuse to
compensate in the event of a claim, or to terminate
the insurance contract.
 This is a very basic and primary principle of
insurance contracts
2.PRINCIPLE OF PROXIMATE CAUSE
 This is also called the principle of ‘Causa Proxima’
or the nearest cause or direct cause.
 This principle applies when the loss is the result
of two or more causes.
 The insurance company will find the nearest cause
or direct cause of loss to the property.
 If the proximate cause is the one in which the
property is insured, then the company must pay
compensation. If it is not a cause the property is
insured against, then no payment will be made to
the insured.
…
 Proximate cause literally means the ‘nearest
cause’ or ‘direct cause’.
 The proximate cause means, the most dominant
and most effective cause of loss is considered.
 The rule of Causa Proxima means that the cause of
the loss must be proximate or immediate and
not remote.
 This principle is applicable when there are
series of causes of damage or loss, the question
arises as to which is the Proximate cause, that
resulted the loss.
3.PRINCIPLE OF INSURABLE INTEREST
 Insurable interest means an interest which
can be or is protected by a contract of
insurance.
 Insurable interest means that the subject matter
for which the individual enters the insurance
contract must provide some financial gain to the
insured and also lead to a financial loss if there
is any damage, destruction or loss.
 The insured must have some legally
recognised relationship with the subject
matter of the insurance.
 …
 Every person effecting for insurance must have an
insurable interest in the subject matter, otherwise the
insurance contract can’t be enforced.
 It is the right of the person to insure the subject
matter.
 Insurable interest is not mere sentimental right or
interest. It is a right in subject matter or right arising
out of a contract in relation to subject matter.
 The interest must be pecuniary i.e. capable of
estimation in terms of money, anything which can’t be
measured in terms of money like disadvantage,
inconvenience or mental distress can’t be regarded as
insurable interest.
 The interest must be lawful i.e. it should not be illegal or
immoral.
 The time and duration of insurable interest varies as per
the class or type of insurance.
 …
 This principle says that the individual (insured)
must have an insurable interest in the subject
matter. This means that the insurer must have
some pecuniary interest in the subject matter
of the insurance.
 To claim the amount of insurance, the insured
must be the owner of the subject matter both at
the time of entering the contract and at the time of
the accident or at the time of loss.
 This means that the insured need not necessarily
be the owner of the insured property but he
must have some vested interest in it. If the
property is damaged the insured must suffer from
some financial losses.
 4.THE PRINCIPLE OF INDEMNITY
 Indemnity is a guarantee to restore the
insured to the position he or she was in before
the uncertain incident that caused a loss for
the insured. The insurer compensates or make
good the loss of the insured (policyholder).
 The insurance company promises to
compensate the policyholder for the amount of
the loss up to the amount agreed upon in the
contract.
 The amount of compensation is in direct
proportion with the incurred loss.
 …
 Thisprinciple says that insurance is done only for
the coverage of the loss hence insured should not
make any profit from the insurance contract. In
other words, the insured should be compensated
the amount equal to the actual loss and not the
amount exceeding the loss.

 The purpose of the indemnity principle is to set

back the insured at the same financial position
as he was before the loss occurred.
 Principle of indemnity is observed strictly for
property insurance and not applicable for the
Life insurance contract.
 5.PRINCIPLE OF SUBROGATION
 Subrogation literally refers to the act of one
person or party standing in the place of
another person or party. It effectively defines the
rights of the insurance company both before and
after it has paid claims, made against a policy.
 The subrogation right is generally specified in
contracts between the insurance company and
the insured party. The contracts may contain
special clauses that provide the right to the
insurance company to start the process of
recovering the payment of the insurance claim
from the party that caused the damages to the
insured party.
 It makes easier the process of obtaining a
settlement under an insurance policy.
…
 Subrogation means substitution of one person
for another. The doctrine of subrogation confers
upon the insurer the right to receive the benefit
of such rights and remedies as the assured has
against third parties in regard to the loss to the
extent that the insurer has indemnified the loss and
made it good.

 Subrogation involves transfer of right and

remedies of the insured to the insurer who has
indemnified the insured in respect of the loss.
That is why it is said that on the payment of claim of
the insured, the insurer steps into the shoes of
the insured, to claim the damages or loss caused to
the property by the third parties.
…

 The principle of subrogation in insurance

enables the insurer to take over the
policyholder's legal right to recover damages.
If the insured party does not have the legal
standing to sue the third party, the insurer will
also not able pursue a claim.
 Subrogation is a remedy to the insurance
company for the paid-out insurance claim.
 The goal of this principle is to encourage
responsibility and accountability by holding
negligent parties responsible for injuries they
cause.
 6.PRINCIPLE OF CONTRIBUTION
 Contribution is a principle of insurance which
applies if an insured object is insured by
two or more insurers.
 In other words, Contribution principle applies
when the insured takes more than one
insurance policy for the same subject
matter.

 Where there are two or more insurance on

one risk, the principle of contribution
comes.
…
The right of contribution arises when-
 (i) there are different policies which
relate to the same subject-matter
 (ii) the policies cover the same peril
which caused the loss, and
 (iii) all the policies are in force at the
time of the loss, and
 (iv) one of the insurers has paid to the
insured more than his share of the loss.
 …
 The aim of contribution is to distribute the
actual amount of loss among the different
insurers who are liable for the same risk
under different policies in respect of the same
subject matter.
 Any one insurer may pay to the insured the
full amount of the loss covered by the policy and
then become entitled to contribution from
his co-insurers in proportion to the amount
which each has undertaken to pay in case of loss
of the same subject-matter.
7.PRINCIPLE OF MITIGATION OF LOSS
 This principle says that as an owner, it is
obligatory on part of the insurer to take
necessary steps to minimize the loss to
the insured property.
 The principle does not allow the owner to
be irresponsible or negligent just because
the subject matter is insured.
 In an uncertain event, it is the insured’s
responsibility to take all precautions to
minimize the loss on the insured property .
 …
 In the event of some mishap to the insured
property, the insured must take all necessary
steps to mitigate or minimize the loss, just as any
prudent person would do in those circumstances. If
he does not do so, the insurer can avoid the
payment of loss attributable to his negligence.
 The law doesn't allow you to be negligent or
irresponsible just because you know you're
insured.
 But it must be remembered that though the insured
is bound to do his best for his insurer, he is, not
bound to do so at the risk of his life.
8. PRINCIPLE OF CO-OPERATION
 The first principle of insurance which may be
mentioned is the principle of co-operation. It
involves sharing of risks and uncertainties
collectively on the basis of co-operation.
 Insurance is based on the ideology of common
interest and welfare.
 Co-operation is based on the co-operative
principle. It is said, "One for all and all for
one". Thus, in true sense the origin and
development of insurance are based on co-
operation.
…
 Insurance is the business of covering risks for
which a common fund is created with the
contribution of a large number of people by way of
payment of premium.
 The contribution made by one for all and the
contribution of all are used for compensation of
any one of them.
 Co-operation is other name of insurance. In
ancient times and today people create funds to
indemnify each other on happening of any calamity.
This is an evidence that the foundation of insurance
was based on co-operation.
 Insurance represents the highest degree of co-
operation for mutual benefits.
9.PRINCIPLE OF PROBABILITY
 Business of insurance is risk and there may be
probability of risk which may happen or may
not happen as there is uncertainties of
quantum or happening of risk .
 Probabilities of quantum of risk may be high or
low and that is the determining factor of
insurance premium. The rate of premium
depends on the quantum of risk and probability
of risk. Probability throws light on the uncertain
events.
 It is the probability principle on the basis of
which insurer accepts the risk of insured in
consideration of premium.
10. PRINCIPLE OF WARRANTIES
 In the process of formation of any contract many
representations are made by parties before an
agreement is reached and a contract is formed.
When these representations are incorporated in
the contract become stipulations and form part of
the contract and non-performances of that will be
fatal for the contract. Such stipulation may also be
known as warranty.
 These stipulations may be
1) Those which form merely the inducing causes to the
other party to give his consent to the contract, and
2) Those which form part of the contract.
…
 Warranty has been defined as a stipulation
collateral to the main purpose of the contracts
the breach of which gives rise only to a claim for
damages but not avoid the contract altogether.
 The stipulation which is essential may be
condition and stipulation which is collateral may
be warranty for the contract.
 A warranty is a statement or promise made by the
insured that certain facts are true and that certain
conditions will be met. If any of these promises are
breached, the insurer may be released from its
obligations under the policy. The principle of
warranty is designed to protect both the insurer
and the policyholder.
 …
 In contract of insurance particularly of marine insurance
the term 'warranty is important aspect as to the
interpretation of for determination of loss under the
contract.
 Section 35 of the Marine Insurance Act, 1963 defines
warranty
 A warranty may be Express, Implied or Promissory.
 Express warranties are promises or statements made by
the policyholder that are explicitly stated in the policy
document.
 Implied warranties are promises that are not explicitly
stated in the policy but are assumed by law or by the
nature of the transaction.
 Promissory warranties are assurances that certain
conditions will be met during the term of the policy.
THANK YOU
Jissy.K