Explain briefly the principles of insurance with suitable examples.
The specific principles of a valid insurance contract consist of the following
(i) Utmost Good Faith: A contract of insurance is a contract of uberrimae fidei i. e. , a contract found on utmost good faith. It is the duty of the insured to voluntarily make full, accurate disclosure of all facts, material to the risk being proposed and the insurer to make clear all the terms and conditions in the insurance contract, e. g., if any person has taken a life insurance policy by hiding the fact that he is a, cancer patient and later on if he dies because of cancer then insurance company can refuse to pay the compensation as the fact was hidden by the insured.
(ii) Insurable Interest: The insured must have an insurable interest in the subject-matter of insurance. Insurable interest means some pecuniary interest in the subject-matter of the insurance contract. The insured must have an interest in the preservation of the thing or life insured, e. g. If a person has taken the loan against the security of factory premises then the lender can take fire insurance policy of that factory without being the owner of the factory because he has a financial interest in the factory premises.
(iii) Indemnity: According to it, the insurer undertakes to put the insured in the same position that he occupied immediately before the loss due to the happening of the event insured against. The principle of indemnity is not applicable to life insurance, e. g. A person insured a car for 2.5 lakh against damage or an accident case. Due to the accident, he suffered a loss of 1.5 lakh, then the insurance company will compensate him 1.5 lakh only not the policy amount i. e. 2.5 lakh as the purpose behind it is to compensate not to make a profit.
(iv) Contribution: Under this principle, an insurer who has paid a claim under insurance has the right to call upon other liable insurers to contribute for the loss of payment, e. g. A person gets his house insured against fire for e. g. 1 lakh with insurer A and for 50000 with insurer B. A loss of 75000 occurred. Then A is liable to pay 50000 and B is liable to pay 25000.