Principles of Insurance and Elements of Insurance Contract
Principles of Insurance
1. Disclosure of materials.
2. Insurable interest.
3. Principle of indemnity.
4. Principle of subrogation.
1. Disclosure of materials: There are two parties involved in insurance contract. These are Insured and Insurer. Before entering into the insurance contract both parties have the responsibilities to disclose all information relating to the insurance contract. A material fact is one which affects the judgment or decision of both parties in entering into the contract. You may or may not enter into the contract. Insured and insurer are both the same responsibilities relating to the insurance contract. Here one party is reliable to another party hundred percent. This is also known as utmost good faith. Read: 7 Elements of Insurance Contract
2. Insurable Interest: Insurable interest means pecuniary/ monetary/ voluntary/ financial interest in the subject matter of insurance of the insured is known as insurable interest. Existing of insurable interest is different in different types of insurance.
a) Life Insurance: Insurable interest should be present when you take the policy.
b) Marine Insurance: Insurable interest should be present when you make the claim.
c) Fire Insurance: Insurable interest should be present when you take the policy and make the claim.
3. Principle of Indemnity: Insurable contract is a contract of indemnity. Insurance will never allow making any profit but insurance will simply to make good the loss. Two terms are important here.
a) Over Insurance, and
b) Under Insurance.
- Over Insurance: To disclose over insurance the principle of indemnity is an essential feature of an insurance contract, in absence whereof this industry would have the hue of gambling and the insured would tend to effect over insurance and then intentionally cause a loss to occur so that a financial gain would be achieved. So, to avoid this intentional loss, only the actual loss becomes payable and not the ensured sum (which is higher in over insurance).
- Under Insurance: If the property is under insured, i.e., the insured amount is less than the actual value of the property insured, the insured is generally regarded his own insurer for the amount if under insurance and in case of loss he or she shall share the loss himself or herself.
4. Principle of Subrogation: Principle of subrogation is the corollary to the principle of indemnity. The doctrine of subrogation refers to the right of the insurer to stand in the place of the insured after settlement of a claim, in so far as the insured’s right of recovery from an alternative source is involved. If the insured is in a position to recover the loss in full or in part from a third party due to whose negligence the loss may have been precipitated, his right of recovery is subrogated to the insurer on settlement of the claim. The insurers thereafter recover the claim from the third party. The right of subrogation may be exercised by the insurer before payment of loss.
Elements of Insurance Contract
1. General Contract
Agreement (Offer and acceptance)
Legal Consideration
Competent to make contract
Free consent
Legal object
2. Insurable Interest
3. Utmost Good Faith
Material Facts
Full and True Disclosure
Duty of Both the Parties
Facts need not be disclosed by the insured
4. Principle of Indemnity
To discourse over insurance
To avoid an Anti-social Act
To maintain the premium at Low-level
5. Doctrine of Subrogation
Corollary to the principle of Indemnity
Subrogation is the Substitution
Subrogation only up to the amount of payment
The Subrogation may be applied before payment
Personal Insurance
6. Warranties
7. Proximate Cause
8. Assignment of Transfer of Interest
9. Return of Premium
By Agreement in the policy
For reasons of Equity
Over-insurance by double insurance