Definition of Insurance

An insurance policy is a contract between a person or individuals and an insurance company in which the individual or entity agrees to pay the insurance company a premium in exchange for financial security or compensation in the event of a loss. Because the company pools the risks taken on by its customers, the insured will have lower premium costs.It is common practise to purchase insurance policies in order to protect oneself against the possibility of suffering significant or even minor monetary losses as a direct or indirect consequence of an event such as the destruction of the insured’s or her assets, or the assumption of legal responsibility for an accident or injury sustained by a third party. 

Definition of Insurance

Insurance can also be referred to as insurance coverage or perhaps an insurance policy. Insurance consists of a legally binding contract between two parties, the insurer as well as the insured. The insurer offers the insured person financial protection against losses that the insured person may incur as a result of specific events or conditions.

A contract that takes the shape of a financial protection legislation is what is meant when people talk about having insurance coverage. This insurance coverage protects an individual against the financial losses that could be incurred as a result of unforeseen events. The term “insured” refers to the person who owns the policy, whereas “insurer” refers to the company that provides insurance, often known as “the insurance carrier” or “the underwriter.” In most instances, the policyholder receives some form of financial support or reimbursement from their insurer.

Insurable Interest

A form of investment known as insurable interest safeguards anything that could suffer a monetary loss in the future. An individual or organisation seems to have an insurable interest in an asset, incident, or activity whenever the deterioration or loss of the thing would result in a financial loss or even other types of suffering.An insurable interest is a necessary condition for the issuance of an insurance policy, which protects a person, organisation, or event from purposefully destructive acts and ensures that it can continue to exist legally. Those who are immune to the possibility of suffering a financial setback may not have an insurable interest. 

Principles of Insurance with Example

1) The Principle of Absolute and Complete Faith-

When entering into a contract, both the insurer and the insured party should do so in good faith.

Insured is obligated to supply all of the relevant information that bears on the topic at hand.

The insurer is obligated to supply all of the pertinent information on the insurance contract.

Consider the case of John, who purchased health insurance coverage. He was a smoker when he took out the policy, but he failed to disclose this information to the insurance company. Cancer developed in him. Due to John’s failure to disclose the relevant information, the insurance company will not pay anything.

2) The General Acceptance of the Insurable Interest-

The insured party is required to have an insurable interest in the topic at hand.

In the event of a life insurance claim, a spouse and any dependent children have an insurable interest in a person’s life. The lives of the people working for a company are likewise an insurable interest for the company.

In the event of life or marine insurance, the insured person needs to have been the owner both when the insurance contract was signed and when the accident occurred.

3) The Principle of Indemnification-

The insured party is prohibited from releasing any profits from the insurance contract. Only the coverage of losses is intended for the purpose of insurance contracts. Indemnity refers to the guarantee that the insured will be returned to the same position he or she was in prior to the accident.

This idea is not applicable to agreements about life insurance.

4) The Principle of Collective Responsibility-

In the event that the insured purchased multiple insurance policies covering the same risk, they will not be able to generate a profit by submitting claims for the same loss more than once.

As an illustration, Raj owns a property that is valued at Rs. 500,000. He purchased insurance from Company A in the amount of Rs. 3,000,000, as well as insurance from Company B in the amount of Rs.

In the event of an accident, he would be responsible for a property loss of Rs. 3,000,000. After making a claim for a total of three million rupees from Company A, Raj will no longer be eligible to receive any profit from Company B. At this time, Company A is able to lodge a claim against Company B for a proportional loss claim.

5) The General Subrogation Principle-

Following the receipt of the claim payment by the insured, the insurer assumes the role of the insured. Following the successful completion of the insurance payment claim, the insurer takes ownership of the subject matter.

As an illustration, Ram purchased a car insurance policy for his vehicle. Accidentally, his car was left in a complete state of disrepair. The total value of the policy was paid out in full by the insurer to the insured. Because of this, Ram is unable to sell the scrap that was left behind after the scrap.

6) The Aim of Reducing Losses as Much as Possible-

According to this guiding principle, the insured party is obligated to take all appropriate measures to reduce the risk of damage to the assets that are covered by the policy.

As an illustration, Ram purchased a home insurance coverage for his property. His home was destroyed when a cylinder exploded. He was remiss in not contacting the closest fire station in order to lessen the extent of the damage.

7) The Premise of Proximate Causation

The phrase “Cause Proxima” literally translates to “Nearest Cause.”Multiple factors can contribute to the occurrence of an accident. in the event that the property was insured against only one type of peril. In such a scenario, the accident’s most immediate cause is identified and addressed.Only in cases when the nearest cause is insured would an insurer pay out on a claim for damages.

Conclusion

In the form of a policy, insurance is a type of contract that ensures a person or organisation will be compensated by an insurance provider for any loss or damage to their property, regardless of how severe the loss or damage may be. In the process of purchasing insurance, both the insurer and the insured party enter into a binding legal agreement known as the insurance policy. This policy offers the insured party financial protection against the unpredictability of the future. Those who are immune to the possibility of suffering a financial setback may not have an insurable interest.