PRINCIPLE OF INSURANCE
What is Insurance?Insurance is a legal contract in which the individual or a company gets financial protection. It is a kind of reimbursement from the insurance company for the damage caused to the property. This legal contract for the insurance is called the insurance policy. This contract/agreement guarantees that the insured will be compensated for any damages incurred as a result of contingency. On another side, the insured pays a premium in return for the promise made by the insurer.
Principle of Insurance There are certain principles on which the contract of insurance is based. These principles are seven in numbers namely, Utmost Good Faith, Proximate Cause, Insurable Interest, Indemnity, Subrogation, Contribution, and Loss Minimization. Let us know about these below:
1.) Indemnity According to this principle that insurance is done only for the coverage of the loss and the insured should not make any profit from the insurance agreement. The insured should be paid for the amount that is equal to the real loss, not for the amount that is greater than the loss. The primary objective of the indemnity principle is to maintain the financial status of the insured at the same level as he was before the loss occurred. It is noteworthy to learn that the principle of indemnity is observed strictly for property insurance and it is not applicable for the life insurance contract.
2.) Utmost Good Faith Utmost Good Faith refers that both the parties in an insurance contract should act in good faith towards each other. Both must give clear information related to the terms and conditions of the contract.
3.) Insurable interest According to insurable interest, the individual must have an insurable interest in the subject matter. Insurable interest refers to the subject matter for which the individual enters the insurance contract must provide some financial gain to the insured.
4.) Proximate Cause The principle of Proximate Cause is also called the principle of the nearest cause. It is used when a loss is caused by two or more factors.. The insurance company tries to find the nearest cause of damage to the property. If the proximate cause is the one for which the property is covered, the company must pay compensation.. If it is not a cause the property is insured against, then no payment is made by the insured.
5.)Subrogation According to this principle, the owner is paid for the incurred loss on the subject matter that was insured, and the rights of the ownership are transferred to the insurance company. It gives the insurance firm the right to claim the amount of loss from the third party responsible for it.
6.) Contribution: This principle is applied when the insured takes more than one insurance policy for the same subject matter. According to it the same thing as in the principle of indemnity, i.e. the insured cannot earn a profit by claiming the loss of one subject matter from different policies or companies.
7.) Loss Minimization In this principle, it is obligatory on the part of the insurer to take necessary steps to minimize the loss to the insured property. It does not allow the owner to be irresponsible just because the subject matter is insured.
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