Principles of Insurance

Before getting an insurance policy, you must know what is insurance and what are the principles of insurance. Simply put, insurance is a written agreement between two parties: the policyholder (the person applying for the insurance) and the insurer (the company providing the insurance). Each company has different criteria for granting insurance based on the business’s risk. For example, if a person has a history of road accidents due to reckless driving, he might have to pay more premium to get higher insurance. 

Insurance can be primarily of two types: general insurance and life insurance. General insurance includes insurance on all items such as home, car, health and travel. On the other hand, life insurance helps to meet the financial needs of the family after the demise of the policyholder. 

Every company has certain basic principles to follow when giving an insurance policy. 

Principles of Insurance

There are seven fundamental principles that every insurance company and their policyholders should obey:

Principle of utmost good faith

According to this principle, both the insurer and the policyholder (insured) should have good faith in each other. They are obliged to provide accurate information while making an insurance policy. This is a basic principle, and its violation can cause serious trouble. As the insurance company provides security to the insured’s goods and life, they hold the right to know about their history, which can be concerning for the policy. If you provide false information to the insurance company, then they have the right to cancel your policy. Similarly, if the insurance company has granted you some false information, they will be liable for the loss caused to you due to their misrepresentation. 

Principle of insurable interest 

The principle of insurable interest states that the person should have interest in something whose damage, loss or theft can cause them financial loss. In other words, the item to be insured should have some financial profit from its existence. 

Principle of contribution

As per this principle, if you took insurance for the same item from two insurance companies, then both companies will share the loss to compensate you in a specific proportion based on the agreement. Moreover, if one company has granted you the full compensation, then the company will have the right to address the other company for their proportionate contribution. For example, if you have insurance for your car from two different companies and the car meets an accident, both companies will share the loss proportionately incurred by the car. 

Principle of subrogation

According to the principle of subrogation, the right of the property substitutes from the policyholder to the insurer after compensation. The insurer does this to take action against the third party that caused the loss. Let’s understand the concept using an example. If your insured car meets an accident due to reckless driving of a third party, then the company will compensate you and take the ownership for taking legal actions against that third party. Moreover, if they end up getting more money than the compensation amount, the company will give you the extra money.

Principle of indemnity

The principle of Indemnity is one of the most important principles of any insurance policy. According to this principle, the policyholder is guaranteed indemnity to compensate for their loss after subtracting the deductibles. The compensation will depend upon the amount mentioned in the contract. Moreover, each company has set some policy limits and will not compensate above it. The compensation amount will depend upon the loss and claim by the policyholder. 

However, the company will not pay compensation if the incident didn’t happen during the allotted time or under the specific conditions of the agreement. This is because these policies only provide protection against unexpected financial losses and do not help you to make a profit from the incurred loss. 

Principle of proximate cause

An insurance policy will only compensate for losses incurred due to some specific causes mentioned in the agreement. Therefore, it is necessary to evaluate the nearest cause that can compensate you. The insurance company can use this to protect themselves; thus, involving a lawyer in such a case can become necessary. 

Principle of loss minimisation

Having insurance doesn’t mean you can leave your stuff carelessly without worrying about theft. An insurance policy compensates you for your unexpected losses and reduces financial risks. However, the policyholder holds certain responsibilities to be careful and minimise the loss to the insured items. 

Conclusion

Insurance reduces financial risks to their policyholders by compensating them for their unexpected losses on the insured items. The policies of the company vary based on the history of the insured. For example, a person with diseases such as diabetes shall have to pay more as a premium than a healthy person. There are certain principles of insurance that every policyholder and insurer must obey. Having trust is the foremost principle to obey. You are obliged to provide accurate information to the insurer as any false information can cause legal issues. Reading all the terms and conditions thoroughly is a must before signing for any insurance policy.