Definition:
Insurance is a contract between an individual/firm and an insurance company to avail financial
protection.
Represented in the form of an insurance policy.
Purpose:
Provides reimbursements/compensation for damages to the insured’s property.
Assures financial security against unforeseen risks and uncertainties.
Parties Involved:
Insurer → The insurance company that provides protection.
Insured → The individual or firm that buys the policy.
Insurance Policy:
A legal contract between the insurer and the insured.
The insurer promises financial help at the time of a contingency/event.
The insured pays a premium in exchange for the assurance.
Essence of Insurance:
A form of risk management.
Provides financial help in uncertain situations.
Risk Transfer → Shifts financial risk from the insured to the insurer.
Protection → Provides security against unexpected losses.
Premium → Regular payment made by the insured for coverage.
Indemnity → Compensation for actual loss (no profit, just recovery).
Legal Contract → Binding agreement between insurer and insured.
PRINCIPLES OF INSURANCE
1. Utmost Good Faith:(🌟 Principle of Utmost Good Faith (Uberrimae Fidei)
Definition:
A fundamental principle of insurance requiring both parties (insurer & insured) to act in good faith.
Both must disclose true, full, and clear information related to the insurance contract.
Obligation of the Insured:
Must not hide or misrepresent any material facts (e.g., health issues, smoking habits, prior damages,
etc.).
Obligation of the Insurer:
Must explain terms, conditions, exclusions, and coverage clearly to the insured.
Consequence of Violation:
If any party conceals or provides false information, the contract becomes void.
The insurer can deny claims if material facts are hidden.
Example:
Mr. X, a chain smoker, did not disclose this fact while buying health insurance.
Later, he developed cancer.
Since he withheld material information, the insurance company is not liable to cover his treatment
expenses.
👉 Essence: Full truth and honesty are mandatory in insurance contracts.
Meaning:
Insurance is based on complete honesty and full disclosure between both parties.
Without truth, the contract loses its validity.
🔹 Duties of the Insured (Must Tell the Truth)
Disclose all material facts → e.g., smoking habits, illnesses, previous accidents.
No misrepresentation → should not give false information.
No concealment → should not hide important details.
Answer truthfully → respond honestly to insurer’s questions.
🔹 Duties of the Insurer (Must Explain Clearly)
Explain terms & conditions → coverage, exclusions, limits.
Provide clarity → avoid confusing or misleading clauses.
Ensure fairness → policy wording should not deceive the insured.
🔹 Consequences of Breach
Contract becomes void → policy may be cancelled.
Claim rejection → insurer is not liable to pay.
Legal implications → may result in disputes or lawsuits.
🔹 Example (Easy Memory Case)
Mr. X = Chain smoker 🚬 (didn’t disclose to insurer).
Later = Diagnosed with cancer.
Insurer = Rejects claim ❌ because material fact was hidden.
🔹 Essence in 3 Words
👉 Truth – Disclosure – Trust
🔹 Acronym for Quick Recall → “D-M-C-C-T”
D → Disclosure of facts
M → No Misrepresentation
C → No Concealment
C → Clear Explanation by insurer
T → Trust between parties
2.🌟 Principle of Proximate Cause (Causa Proxima = Nearest Cause)
Meaning:
When loss occurs due to multiple causes, the insurer looks at the nearest (most effective) cause.
If the nearest cause is covered by the policy, compensation is payable.
If the nearest cause is not covered, the claim is rejected.
🔹 Key Points
Insurance does not cover remote causes → only the proximate (dominant/nearest) cause matters.
Helps in deciding whether the claim is valid or not.
Insurer investigates the chain of events and identifies the main cause directly responsible for the loss.
If the proximate cause falls under insured risks → ✅ claim accepted.
If the proximate cause falls under excluded risks → ❌ claim rejected.
🔹 Example (Memory Case)
A wall damaged due to fire 🔥.
Authorities ordered demolition → adjoining wall also damaged.
Owner claims under fire policy.
Court decides → Proximate cause = fire (covered risk).
✅ Claim becomes payable.
🔹 Essence in 3 Words
👉 Cause – Nearest – Covered
🔹 Acronym for Quick Recall → P-C-C-C
P → Proximate cause considered
C → Chain of events checked
C → Covered cause → Claim payable
C → Cause excluded → Claim rejected
3.🌟 Principle of Insurable Interest
🔹 Meaning
The insured must have a legal right / financial interest in the subject matter of insurance.
This means:
If the property is safe → the insured benefits financially.
If the property is damaged/lost → the insured suffers financial loss.
Without insurable interest → the contract is null and void.
🔹 Key Features
1. Legal Right → The insured must be legally connected to the property/person insured.
2. Financial Loss → The insured must suffer a monetary loss if the property/person is harmed.
3. Personal Gain Not Allowed → Insurance cannot be taken for mere profit or speculation (e.g., you
cannot insure a stranger’s car).
4. Ownership Requirement →
Insurable interest must exist:
At the time of contract (when policy is purchased).
At the time of loss (when damage occurs).
🔹 Example (Memory Case)
A stationery shop owner has insurable interest because he earns income from it.
If he sells or leases the shop → he loses insurable interest.
Therefore, he cannot claim insurance after loss if he is no longer the owner.
🔹 Types of Insurable Interest (Extra for Understanding)
1. Property Insurance → Owner must have ownership rights (house, shop, car).
2. Life Insurance → A person has insurable interest in their own life and close relations (spouse,
children, business partner).
3. Fire/Marine Insurance → Insurable interest must exist at the time of loss.
🔹 Essence in 3 Words
👉 Legal – Financial – Ownership
🔹 Acronym for Quick Recall → L-F-O
L → Legal right exists
F → Financial loss possible
O → Ownership required at contract & loss
✅ In short: Insurance only works if the insured has something to lose financially.
4.🌟 Principle of Indemnity
🔹 Meaning
Insurance is meant to cover losses only, not to provide profit.
The insured is compensated only for the actual loss incurred.
Objective: Restore the insured to the same financial position they were in before the loss.
Mainly applicable to property and general insurance (NOT life insurance).
🔹 Key Features
1. No Profit Rule → Insured cannot gain more than the actual loss.
2. Actual Loss Basis → Compensation is limited to the real financial loss suffered.
3. Restoration Objective → Restores insured to pre-loss position, not better, not worse.
4. Not for Life Insurance → Human life cannot be measured in monetary terms → indemnity principle
not applicable.
5. Applies to Property Insurance → Fire, marine, motor, theft, accident insurance, etc.
🔹 Methods of Indemnity
Cash Payment → Insurer pays money equal to loss.
Repair/Replacement → Damaged property is repaired or replaced.
Reinstatement → Property is restored to its original condition.
🔹 Example (Memory Case)
Owner insures a residential building 🏠.
Fire causes structural damage 🔥.
Insurer pays the exact repair cost, no more, no less.
Compensation made to restore building = Indemnity.
🔹 Essence in 3 Words
👉 Loss – Compensation – No Profit
🔹 Acronym for Quick Recall → L-C-R-N
L → Loss covered only
C → Compensation = Actual loss
R → Restores position before loss
N → No profit allowed
✅ In short: Indemnity = Protection from loss, not a source of gain.
5.🌟 Principle of Subrogation
🔹 Meaning
Subrogation = “Substitute / Step into the shoes”.
After the insured is compensated, the rights of ownership/claim of the damaged property transfer to
the insurer.
Prevents the insured from recovering twice (once from insurer and again from the responsible third
party).
🔹 Key Features
1. Right Transfer → Once claim is paid, insurer takes over the insured’s rights against third parties.
2. No Double Benefit → Insured cannot collect compensation from both the insurer and the third
party.
3. Applies to Property & Liability Insurance → Common in fire, marine, and motor insurance.
4. After Indemnity → Subrogation rights arise only after the insured is compensated.
5. Legal Right of Recovery → Insurer can sue the negligent third party for recovery.
🔹 Example (Memory Case)
Mr. X = injured in road accident 🚗.
Third party driver at fault.
Insurance company compensates Mr. X 💰.
After payment → Insurer gains right to sue the third party to recover that amount
🔹 Essence in 3 Words
👉 Rights – Transfer – Recovery
🔹 Acronym for Quick Recall → R-N-A-L
R → Right transfer to insurer
N → No double recovery
A → Applies after indemnity
L → Legal right against third party
✅ In short: Subrogation = insurer pays the insured, then claims from the guilty third party.
6.🌟 Principle of Contribution
🔹 Meaning
Applies when the same property is insured with multiple insurers.
Ensures that the insured does not make a profit by claiming full compensation from different
companies.
All insurers share the loss proportionally according to their coverage.
Based on the Principle of Indemnity → compensation only up to the actual loss.
🔹 Key Features
1. Multiple Policies → Same property insured with more than one insurer.
2. No Profit Rule → Prevents insured from claiming more than the actual loss.
3. Proportional Sharing → Each insurer contributes proportionately to the total claim.
4. Right of Recovery → If one insurer pays more than their share, they can recover the excess from the
other insurers.
5. Applicable in Property Insurance → Common in fire, marine, or motor insurance.
🔹 Formula (for Proportionate Contribution)
Contribution\; of\; Insurer = {Policy Amount with Insurer/t{Total Sum Insured}} *{Loss}
🔹 Example (Memory Case)
Property value = ₹5 lakhs.
Insured:
₹1 lakh with Insurer A
₹3 lakhs with Insurer B
Loss = ₹3 lakhs.
Owner may claim from either A or B.
If owner claims full from B → B can recover ₹75,000 (1/4th share) from A.
🔹 Essence in 3 Words
👉 Multiple – Proportion – No Profit
🔹 Acronym for Quick Recall → M-P-P-R
M → Multiple insurers involved
P → Proportional sharing of loss
P → Prevents profit to insured
R → Right of recovery for insurers
✅ In short: Contribution = all insurers share the loss fairly; insured cannot profit from multiple policies.
7.🌟 Principle of Loss Minimization
🔹 Meaning
States that the insured is obligated to take reasonable steps to minimize the loss or damage to
insured property.
Insurance does not allow negligence — the insured cannot be careless simply because the property is
insured.
The insured must act as if there were no insurance and protect property responsibly.
🔹 Key Features
1. Duty to Act → Insured must try to control or reduce loss when an accident happens.
2. No Negligence → Loss should not be increased by careless behavior.
3. Shared Responsibility → Insurer provides financial protection, insured provides responsible action.
4. Applies to Property Insurance → Especially in cases like fire, accident, marine, motor, theft.
5. Consequences → If the insured ignores this duty, the insurer can deny or reduce the claim.
🔹 Example (Memory Case)
Fire breaks out 🔥 in a commercial building.
The insured owner must:
Try to put out the fire (fire extinguishers, water, etc.)
Call firefighters 🚒 immediately.
Save documents/assets if possible.
If the owner does nothing (thinking “insurance will pay”) → insurer may reject/limit the claim.
🔹 Essence in 3 Words
👉 Care – Action – Responsibility
🔹 Acronym for Quick Recall → C-P-O-R
C → Care must be taken
P → Prevent negligence
O → Obligation to minimize loss
R → Responsible behavior expected
✅ In short: Principle of Loss Minimization = Insured must act responsibly to reduce damage, not rely
blindly on insurer.
