Principles of Insurance
The following are some basic principles of insurance . These principles are very important when insurance companies are established, they need to follow these principles.
1) Principal of utmost good faith:
A contract of insurance must be made based on utmost good faith mean credible information. It is important that the insured disclose and show all relevant facts to the insurance company. Any facts that would increase his premium amount or rate, or would cause any prudent insurer to reconsider the policy must be disclosed and mentioned . If it is later discovered that some such fact which are not disclosed and was hidden by the insured, the insurer (company) will be within his rights to void the insurance policy.
2) Principle of Insurable interest:
This principle means that the insurer (company) must have some pecuniary interest in the subject matter of the insurance. It means that the insurer 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 insurer must suffer from some financial losses.
3) Principle of Contribution:
This principle of contribution applies if there are more than one insurers. In such a cases, the insurer can ask the other insurers to contribute their share of the compensation for any loss . If the insured claims full insurance from one insurer he losses his right to claim any amount from the other insurers. Mean that customer once get his compensation from one insurer. He cannot get compensation from other insurers.
4) Principle of indemnity:
Insurances like fire and marine insurance are contracts of indemnity. Here the insurer undertakes the responsibility of compensating for loss of the insured against any possible damage or loss that he may or may not suffer. Life insurance is not a contract of indemnity.
5) Principal of subrogation:
This principle says that once the compensation has been paid, the right of ownership of the property will shift from the insured to the insurer. So the insured will not be able to make a profit from the damaged property or sell it. It usually happened when the insured property suffer from loss at the beginning ,when premium paid was much low than loss.
6) Principle of proximate cause:
This principle states that the property is insured only against the incidents and risks that are mentioned in the policy. In this case if the loss occur due to more than one such peril or incidents , the one that is most effective in causing the damage is the cause to be considered. Mean the incident which damage the property more than other incident ,will be compensated. For example if a car face incident like Accident and Fire at one time. If accident affects the car more than fire ,then accident will be proximate cause.