PRINCIPLES OF INSURANCE General Principles Basic Principles Specific

PRINCIPLES OF INSURANCE

General Principles Basic Principles Specific Principles

General Principles Offer & Acceptance Lawful Consideration Competency Free Consent Lawful Object Certainty and Possibility of Performance

c i s a s B e l p i c n i Pr Principle of Co-operation Principle of Probability

n o i t a r e p o o C Insurance is a cooperative device to spread loss caused by a particular risk over a large number of persons who are exposed to a similar risk and who have agreed to insure themselves against

y t i il b a b o r P Probability indicate the chances and amount of loss Occurrence of risk in each type of insurance can be estimated with the help of theory of probability

Specific Principles Utmost Good Faith Insurable Interest Indemnity Subrogation Proximate Cause Mitigation of Loss Contribution

Utmost Good Faith Ø Good faith- Let the buyer beware Ø Declaration of all material Information about the subject matter of insurance

• whether he will accept the risk and; • if so, at what rate of premium and subject to what terms and conditions Material Information is that information which enables the insurer to decide: • Non-disclosure of material factsoversight, intentional, proposer thought it’s not essential etc. • Misrepresentationwith fraudulent purposes or by negligence. Breach of duty of utmost good faith arises in three ways:

Insurable Interest The legal right enjoyed by the owner of a property to insure is called ‘Insurable Interest’. The insurance will become null and void, without the insurable interest.

Insurable The Interest i. e. Pecuniary interest insured should be economically benefited by the existence of the subject matter and should suffer an economic loss on its non-existence or at the death of the insured.

Indemnity An Exact Financial Compensation (only actual loss should be paid). The principle of Indemnity states that under the policy of insurance, the insured has to be placed after the loss in the same financial position in which he was immediately before the loss.

Applicability: When the losses suffered by the insured can be measured in terms of money. It is practicable to place the insured in the same financial position which he occupied before the loss. Compensation cannot exceed actual loss. Valued policies are not covered under the principle of indemnity.

Liability of Insurer for Indemnity Sum assured or value of the policy whichever is less § Excess/Franchise Excess clause If less than limit- no compensation If more than limit- only excess is paid Franchise Clause- Total loss is compensated §

Life Insurance - Principle of Indemnity does not apply. Fire Insurance. Indemnity= Actual loss x amount of policy value of goods insured Marine Insurance- Value of indemnity is decided at the time of taking policy irrespective of the consideration of depreciation and other relevant factors.

Subrogation Transfer of rights and remedies from the insured to the insurer who has indemnified the insured in respect of the loss.

Applicability Corollary to the principle of indemnity. Insurer is substituted in place of insured for rights and claims. Subrogation only up to the amount of payment. Subrogation does not apply to personal insurance.

Contribution The right of insurers who have paid a loss under a policy to recover a proportionate amount from other insurers, who are liable for the same loss.

Proximate Cause The rule is that the immediate but not the remote cause is to be regarded. The real, nearest and direct cause of loss must be seen while making payment of loss. • If the real cause of loss is insured, only then the insurer is liable to compensate the loss •

a) Single Cause: when there is a single event which causes loss then it will be a clear case of proximate cause. b) Concurrent Cause: when a number of causes occur at the same time and the loss is the result of these causes, then the insured peril and expected perils will have to be segregated.

c) Successive Causes : When there is a chain of events causing loss to the subject-matter insured, the insurer’s liability would arise if the original cause is an insured peril.

Mitigation of Loss • • • Means to minimize or decrease the severity of loss on the part of insured. The insured must act reasonably in the event of loss, to make the loss minimum as far as possible. Every insurer, in consideration of agreeing to indemnify the loss, expects a genuine but not the careless behaviour from insured, especially at the time of occurrence of loss.

Contribution It is the right of an insurer who has paid a loss under a policy to cover a proportionate amount from other insurers who are liable for the loss. The principle of indemnity restricts the amount received by the insured.