Table of Contents
What is Insurance?
Insurance is a way of protecting yourself or your belongings from the risk of loss or damage due to unforeseen events. It is a legal agreement between you and an insurance company, where you pay a regular amount of money (called premium) and the company promises to compensate you for the losses you may suffer from certain specified causes (called perils). Insurance can help you cope with the financial impact of accidents, illnesses, natural disasters, theft, lawsuits, and even death. There are different types of insurance for different purposes, such as life insurance, health insurance, car insurance, home insurance, and travel insurance. By getting insurance, you can reduce your worry and enjoy your life with more peace of mind.
Principles of Insurance
Insurance is a way of protecting yourself and your assets from the risks and uncertainties of life. It is a legal agreement between you and an insurance company, where the company promises to pay you a certain amount of money if something bad happens to you or your property, such as an accident, illness, fire, theft, or death. In return, you pay a regular fee called a premium to the company.
Insurance can be divided into two main categories: general insurance and life insurance. General insurance covers your belongings, such as your home, car, health, and travel. Life insurance covers your life and provides financial support to your family after your death.
However, insurance is not a simple transaction. It is based on some fundamental principles that both you and the insurance company must follow. These principles ensure that the insurance contract is fair, valid, and enforceable. They also help to prevent fraud, misuse, and disputes.
In this article, we will explain the seven principles of insurance that you should know. These principles are:
- Principle of Utmost Good Faith
- Principle of Insurable Interest
- Principle of Indemnity
- Principle of Subrogation
- Principle of Contribution
- Principle of Proximate Cause
- Principle of Loss Minimization
Principle of Utmost Good Faith ( Uberrima Fides )
The principle of Utmost Good Faith, also known as Uberrima Fides, is a fundamental aspect of insurance contracts. It requires both parties to act in good faith, with a positive duty to disclose all material facts that could influence the decision to enter the contract. Material facts are those that could affect the assessment of the risk by the insurer.
In India, Section 45 of the Insurance Act emphasizes the importance of good faith. It states that a life insurance policy cannot be questioned by the insurer based on inaccuracies or falsehoods in the proposal form unless the insured intentionally and fraudulently provided false information on a material matter.
In legal cases like Mithoolal Nayak v. Life Insurance Corporation of India and Smt. Krishna Wanti Puri v. Life Insurance Corporation of India, conditions for applying Section 45 were outlined, emphasizing the materiality of the statement, fraudulent suppression by the policyholder, and the policyholder’s knowledge of the falsehood.
The duty of Utmost Good Faith places a greater responsibility on the insured to disclose all material facts voluntarily, whether requested or not. However, certain facts, such as those of public knowledge or covered by policy conditions, need not be disclosed. The duty ends when the proposal form is correctly filled, but continuous disclosure may be required if specified by the policy.
The absence of Utmost Good Faith gives the aggrieved party options such as avoiding the contract, avoiding liability for a specific claim, suing for damages, or waiving rights and allowing the contract to continue. Once a voidable contract is validated by a party, it cannot be later avoided by that party.
In summary, the principle of Utmost Good Faith is the foundation of insurance contracts, requiring full and honest disclosure of material facts to ensure transparency and fairness between the parties involved.
Principle of Insurable Interest
Insurable Interest is a crucial element in validating insurance policies. It is presumed that any contract is enforceable unless it is illegal, immoral, or against public policy. Initially, insurable interest was not a mandatory requirement for the validity of contracts, but it evolved as the insurance sector developed.
Insurable interest refers to the interest that the insured must have in the subject matter of the insurance, which can be protected by the insurance contract. This interest is pecuniary in nature and must be recognized by the law of the relevant country. In Castellian v. Preston, it was clarified that in a fire policy, the insured is not insuring the physical materials but their interest in the subject matter.
(i) Insurable Interest and Life Insurance:
- In life insurance, the subject matter is the life being insured. Creditors, spouses, children, and even sureties have insurable interest in the life of the debtor or others.
(ii) Insurable Interest and Fire or Accidental Insurance:
- In fire insurance, the insured must have an interest in the subject matter, but complete ownership is not necessary. The interest is in the insured property’s well-being.
(iii) Insurable Interest and Marine Insurance:
- The assured must have an interest in the subject matter at the time of loss in marine insurance. Sections 7 to 17 of the Marine Insurance Act, 1963, elaborate on insurable interest.
(iv) Terms and Conditions of Insurance Policy:
- Insurance companies need to clearly state conditions precedent and the extent of liability in their proposal forms and policies. Non-fulfillment of these conditions may render the policy voidable or void ab initio.
(v) Interpreting Insurance Documents:
- Courts interpret insurance policy terms based on their ordinary meaning. It is the insured’s responsibility to show that the loss is covered by the contract’s terms and conditions.
(vi) Ambiguous Clauses (Contra Proferentem Rule):
- Ambiguous clauses in policies are interpreted contra proferentem, favoring the insured. However, this rule applies only when there is ambiguity.