Explain any four principles of insurance with examples.
Explain any four principles of insurance with examples.
Four principles of insurance with examples are explained below :
1. Utmost good faith : An insurance contract is based on utmost good faith of both the parties, insurer and insured. Utmost good faith implies that the applicant for an insurance policy should reveal all material facts about the subject to be insured. Similarly, the insurer is bound to exercise the same good faith in disclosing the scope of the insurance which he is prepared to grant. Failure to make disclosure of material facts by the insured makes the contract of insurance voidable at the discretion of the insurers. For example, Ram has taken Life Insurance Policy for his wife but does not inform the insurance company, that his wife was suffering from cancer. In this case, the insurance company is not liable to pay for the loss of life of his wife.
2. Insurable interest : Insurable interest means some pecuniary interest in the subject matter of insurance contract. It must be lawful and clear that the insured has an interest in the preservation of the thing or life insured so that he will suffer financially on the happening of the event against which he is insured. In case of marine and fire insurance, the insurable interest in the subject matter of the insurance must exist at the time of the happening of the event unlike in life insurance. For example, a businessman may ensure the rented warehouse building. Though, he does not own it but will suffer loss if any damage happens to the building.
3. Indemnity : The purpose of all contracts of indemnity is to put the insured in the same position in which he was immediately prior to the happening of the uncertain event. The objective behind making this principle is to ensure that the insured does not make any profit by recovering more than the amount of actual loss to him by the event insured against such insurance may be for a sum less than the actual value of the property but usually it should not be for more. For example, Mr. Vanil Arora insured his stock for a value of 10 lakhs. A fire occurred and stock valuing 8 lakhs was destroyed. The insurance company will pay the value of the actual loss is Rs 8 lakhs and not the value of the policy. In case the loss exceeds Rs 10 lakhs, then the compensation will be a maximum of Rs 10 lakhs.
4. Proximate cause : An insurance policy is designed to provide compensation only for such losses as it is caused by the perils which are stated in the policy. For example, In airlines, all passengers are insured against death caused by a plane crash. If a passenger dies during the course of flight due to heart attack, the insurer is not liable to pay compensation for the death of passenger under the provisions of air flight insurance contract.
Four principles of insurance with examples are explained below :
1. Utmost good faith : An insurance contract is based on utmost good faith of both the parties, insurer and insured. Utmost good faith implies that the applicant for an insurance policy should reveal all material facts about the subject to be insured. Similarly, the insurer is bound to exercise the same good faith in disclosing the scope of the insurance which he is prepared to grant. Failure to make disclosure of material facts by the insured makes the contract of insurance voidable at the discretion of the insurers. For example, Ram has taken Life Insurance Policy for his wife but does not inform the insurance company, that his wife was suffering from cancer. In this case, the insurance company is not liable to pay for the loss of life of his wife.
2. Insurable interest : Insurable interest means some pecuniary interest in the subject matter of insurance contract. It must be lawful and clear that the insured has an interest in the preservation of the thing or life insured so that he will suffer financially on the happening of the event against which he is insured. In case of marine and fire insurance, the insurable interest in the subject matter of the insurance must exist at the time of the happening of the event unlike in life insurance. For example, a businessman may ensure the rented warehouse building. Though, he does not own it but will suffer loss if any damage happens to the building.
3. Indemnity : The purpose of all contracts of indemnity is to put the insured in the same position in which he was immediately prior to the happening of the uncertain event. The objective behind making this principle is to ensure that the insured does not make any profit by recovering more than the amount of actual loss to him by the event insured against such insurance may be for a sum less than the actual value of the property but usually it should not be for more. For example, Mr. Vanil Arora insured his stock for a value of 10 lakhs. A fire occurred and stock valuing 8 lakhs was destroyed. The insurance company will pay the value of the actual loss is Rs 8 lakhs and not the value of the policy. In case the loss exceeds Rs 10 lakhs, then the compensation will be a maximum of Rs 10 lakhs.
4. Proximate cause : An insurance policy is designed to provide compensation only for such losses as it is caused by the perils which are stated in the policy. For example, In airlines, all passengers are insured against death caused by a plane crash. If a passenger dies during the course of flight due to heart attack, the insurer is not liable to pay compensation for the death of passenger under the provisions of air flight insurance contract.
