Explain briefly the principles of insurance with suitable examples.

(a) Utmost good faith : It is the principle of insurance that insured person should disclose all the facts to the insurer. Non-disclosure of these facts by the knowledgeable party, could affect the validity of such contract e.g. in a court case decided in England, the court decided that the insurance company could not be made to pay the claim, since it had come to know of the illness after the person had died.

(b)Indemnity : A contract of indemnity is one where the insured person is paid only the actual amount of loss or the amount of the policy, whichever is less e.g. a person insured his house against fire. Later he agreed to sell his house to another person.
Before the completion of sale the house was destroyed by fire. The seller received not only compensation from the insurance company but also, as per the contract of sale, the price of the house from the buyer.
The court decided that the insurance company could recover the amount it had paid. But life insurance contracts are treated differently.

(c) Insurable interest : It represents a legally recognisable relationship between (a) the person insuring another person or thing, (b) the person or thing which is insured, such that he will stand to gain in financial terms if the person or thing insured by him continues to exist, and he would suffer a financial loss if that person dies or that thing is destroyed. Thus, X cannot insure the life of Y if there is no relationship between the two.

(d) Causa proxima: An insured person can recover the loss only if it is caused by any of the risks insured. Such risk should be the nearest, and not a distant or remote, cause of the loss e.g. a ship carrying oranges has met with an accident as a result of which there is some delay in unloading and the oranges were spoilt.
In this case the loss is not due to the accident but because of the delay in unloading. Hence, the shiper would not be able to recover the loss from the insurance company.

(e) Contribution : When we take insurance with insurance company, we have to pay contribution. Its object is to divide the actual amount of loss among the different insurers who are liable for the same risk in respect of the same subject matter, though under different policies.
However, this does not apply to life insurance e.g. X insures his house against fire for Rs. 20,000 with insurer Y and Rs. 40,000 with insurer Z. If the house catches fire and the actual loss amounts to Rs. 24000 then Y will be liable to pay Rs. 8,000 and Z Rs. 16000.
If the whole amount of loss is paid by Y, he can recover Rs. 16000 from Z and if it is paid by Z, he can recover Rs. 8,000 from Y.

(f) Subrogation : The principle of subrogation applies in the fire and marine insurance only. It implies that one paying the amount of loss to the insured person, the insurance company will become entitled to all the signs which were available to the insured person to protect himself against the loss i.e. after paying full indemnity in respect of the loss to the assured the insurer will step into the shoes of the assured and exercise all rights and remedies to which the assured was entitled against third parties and continue doing so until he has recouped the entire amount paid under the policy to the assured.

(g) Period of insurance : A contract of life insurance is a continuing contract subject to regular payments of premium. A contract of fire insurance is for a fixed duration. A contract of marine insurance may be for certain period or for a certain voyage.