I.

GENERAL PRINCIPLES AND CONCEPTS OF INSURANCE

1. PRINCIPLE OF UBERRIMAE FIDEI (UTMOST GOOD FAITH) • Both the
parties i.e. the insured and the insurer should have a good faith towards
each other. • The insurer must provide the insured complete, correct
and clear information of subject matter. • The insurer must provide the
insured complete, correct and clear information regarding terms and
conditions of the contract. • This principle is applicable to all contracts of
insurance i.e. life, fire and marine insurance.
Principle of Uberrimae fidei (a Latin phrase), or in simple English words,
the Principle of Utmost Good Faith, is a very basic and first primary
principle of insurance. According to this principle, the insurance contract
must be signed by both parties (i.e insurer and insured) in an absolute
good faith or belief or trust. The person getting insured must willingly
disclose and surrender to the insurer his complete true information
regarding the subject matter of insurance. The insurer's liability gets void
(i.e legally revoked or cancelled) if any facts, about the subject matter of
insurance are either omitted, hidden, falsified or presented in a wrong
manner by the insured. The principle of Uberrimae fidei applies to all
types of insurance contracts
2. 2. PRINCIPLE OF INSURABLE INTEREST • The insured must have insurable
interest n the subject matter of insurance. • In life insurance it refers to
the life insured. • In marine insurance it is enough if the insurable
interest exists only at the time of occurrence of the loss. • In fire and
general insurance it must be present at the time of taking policy and also
at the time of the occurrence of loss. • The owner of the party is said to
have insurable interest as long as he is the owner of it. • It is applicable
to all contracts of insurance. The principle of insurable interest states
that the person getting insured must have insurable interest in the
object of insurance. A person has an insurable interest when the physical
existence of the insured object gives him some gain but its non-
existence will give him a loss. In simple words, the insured person must
suffer some financial loss by the damage of the insured object. For
example: The owner of a taxicab has insurable interest in the taxicab
because he is getting income from it. But, if he sells it, he will not have
an insurable interest left in that taxicab. From above example, we can
conclude that, ownership plays a very crucial role in evaluating insurable
interest. Every person has an insurable interest in his own life. A
 merchant has insurable interest in his business of trading. Similarly, a
creditor has insurable interest in his debtor.
3. PRINCIPLE OF INDEMNITY • Indemnity means guarantee or assurance to
put the insured in the same position in which he was immediately prior
to the happening of the uncertain event. The insurer undertakes to
make good the loss. • It is applicable to fire, marine and other general
insurance. • Under this the insurer agreed to compensate the insured
for the actual loss suffered. Indemnity means security, protection and
compensation given against damage, loss or injury. According to the
principle of indemnity, an insurance contract is signed only for getting
protection against unpredicted financial losses arising due to future
uncertainties. Insurance contract is not made for making profit else its
sole purpose is to give compensation in case of any damage or loss. In an
insurance contract, the amount of compensations paid is in proportion
to the incurred losses. The amount of compensations is limited to the
amount assured or the actual losses, whichever is less. The
compensation must not be less or more than the actual damage.
Compensation is not paid if the specified loss does not happen due to a
particular reason during a specific time period. Thus, insurance is only
for giving protection against losses and not for making profit. However,
in case of life insurance, the principle of indemnity does not apply
because the value of human life cannot be measured in terms of money.
4. PRINCIPLE OF SUBROGATION • As per this principle after the insured is
compensated for the loss due to damage to property insured, then the
right of ownership of such property passes to the insurer. • This
principle is corollary of the principle of indemnity and is applicable to all
contracts of indemnity. Subrogation means substituting one creditor for
another. Principle of Subrogation is an extension and another corollary
of the principle of indemnity. It also applies to all contracts of indemnity.
According to the principle of subrogation, when the insured is
compensated for the losses due to damage to his insured property, then
the ownership right of such property shifts to the insurer. This principle
is applicable only when the damaged property has any value after the
event causing the damage. The insurer can benefit out of subrogation
rights only to the extent of the amount he has paid to the insured as
compensation. For example: Mr. Arvind insures his house for ` 1 million.
The house is totally destroyed by the negligence of his neighbour Mr.
 Mohan. The insurance company shall settle the claim of Mr. Arvind for `
1 million. At the same time, it can file a law suit against Mr. Mohan for `
1.2 million, the market value of the house. If insurance company wins
the case and collects ` 1.2 million from Mr. Mohan, then the insurance
company will retain ` 1 million (which it has already paid to Mr. Arvind)
plus other expenses such as court fees. The balance amount, if any will
be given to Mr. Arvind, the insured.
5. 5. PRINCIPLE OF CONTRIBUTION • The principle is corollary of the
principle of indemnity. • It is applicable to all contracts of indemnity. •
Under this principle the insured can claim the compensation only to the
extent of actual loss either from any one insurer or all the insurers.
Principle of Contribution is a corollary of the principle of indemnity. It
applies to all contracts of indemnity, if the insured has taken out more
than one policy on the same subject matter. According to this principle,
the insured can claim the compensation only to the extent of actual loss
either from all insurers or from any one insurer. If one insurer pays full
compensation then that insurer can claim proportionate claim from the
other insurers. For example: Mr. Arvind insures his property worth Rs.
100,000 with two insurers "AIG Ltd." for `90,000 and "MetLife Ltd." for
`60,000. Arvind's actual property destroyed is worth ` 60,000, then Mr.
Arvind can claim the full loss of `60,000 either from AIG Ltd. or MetLife
Ltd., or he can claim `36,000 from AIG Ltd. and `24,000 from Metlife Ltd.
So, if the insured claims full amount of compensation from one insurer
then he cannot claim the same compensation from other insurer and
make a profit. Secondly, if one insurance company pays the full
compensation then it can recover the proportionate contribution from
the other insurance company.
6. PRINCIPLE OF CAUSA PROXIMA (NEAREST CAUSE) • The loss of insured
property can be caused by more than one cause in succession to
another. • The property may be insured against some causes and not
against all causes. • In such an instance, the proximate cause or nearest
cause of loss is to be found out. • If the proximate cause is the one
which is insured against, the insurance company is bound to pay the
compensation and vice versa. Principle of Causa Proxima (a Latin
phrase), or in simple English words, the Principle of Proximate (i.e
Nearest) Cause, means when a loss is caused by more than one causes,
the proximate or the nearest or the closest cause should be taken into
 consideration to decide the liability of the insurer. The principle states
that to find out whether the insurer is liable for the loss or not, the
proximate (closest) and not the remote (farest) must be looked into. For
example: A cargo ship's base was punctured due to rats and so sea water
entered and cargo was damaged. Here there are two causes for the
damage of the cargo ship - (i) The cargo ship getting punctured beacuse
of rats, and (ii) The sea water entering ship through puncture. The risk of
sea water is insured but the first cause is not. The nearest cause of
damage is sea water which is insured and therefore the insurer must pay
the compensation. However, in case of life insurance, the principle of
Causa Proxima does not apply. Whatever may be the reason of death
(whether a natural death or an unnatural death) the insurer is liable to
pay the amount of insurance.
II.
1 the duty of the insured to take all possible steps to minimize the loss
to the insured property on the happening of uncertain event.
2 MATERIAL FACTS Material fact is every circumstance or information,
which would influence the judgment of a prudent insurer in assessing
the risk. EXAMPLES OF MATERIAL FACTS (a) In Fire Insurance: The
construction of the building, the nature of its use i.e. whether it is of
concrete or Kucha - having thatched roofing and whether it is being
used for residential purposes or as a godown, whether fire fighting
equipment is available or not. (b) In Motor Insurance: The type of
vehicle, the purpose of its use, its age (Model), Cubic capacity and the
fact that the driver has a consistently bad driving record. (c) In
Marine Insurance: Type of packing, mode of carriage, name of carrier,
nature of goods, the route. (d) In Personal Accident Insurance: Age,
height, weight, occupation, previous medical history and occupation
especially if it is likely to increase the chance of an accident. Proclivity
of substance abuse has to be disclosed as well- eg. alcohol or drug
addiction.
FACTS, WHICH NEED NOT BE DISCLOSED (a) Facts of Law: Ignorance of
law is not excusable - every one is deemed to know the law. Overloading of
goods carrying vehicles is legally banned. The transporter cannot take shelter
behind the excuse that he was not aware of this provision; in the vent of an
accident. (b) Facts which lessen or diminishes the Risk: The existence of a good
fire fighting system in the building. (c) Facts of Common Knowledge: The
insurer is expected to know the areas of strife and areas susceptible to riots
and of the process followed in a particular trade or Industry. Any fact which is
known or which, by law, may be presumed to be known to the insurer the
insurer is presumed to know matters of common notoriety or knowledge, and
matters which an insurer, in the ordinary course of his business, ought to
know. (d) Facts which could be reasonably discovered: For e.g.the previous
history of claims which the Insurer is supposed to have in his record. (e) Facts
which the insurer’s representative fails to notice: In burglary and fire Insurance
it is often the practice of Insurance companies to depute surveyors to inspect
the premises and in case the surveyor fails to notice hazardous features and
provided the details are not withheld by the Insured or concealed by him them
the Insured cannot be Unless inquiry is made, it is not necessary to disclose the
following facts.Any fact which it is superfluous to disclose by reason of an
express or implied condition. (f) Any fact as to which information is waived by
the insurer. (g) Any fact as to which inurer is given sufficient information to put
him on inquiry.
III. INSURANCE CONTRACT
A contract of insurance is an agreement whereby one party, called the
insurer, undertakes, in return for an agreed consideration, called the
premium, to pay the other party, namely the insured, a sum of money or
its equivalent in kind, upon the occurrence of a specified event resulting
in a loss to him. An insurance agreement should satisfy all essentials of
valid agreement i.e. (a) Proposal (b) Acceptance (c) Consideration (d)
Competency to Contract (e) Free Consent (f) Lawful object

There are mainly two types of insurance businesses recognised under

the Insurance Act, 1938: (i) Life insurance business (ii) General insurance
business (also called “Non-Life” business). This is sub divided into the
following 3 subcategories: i. Fire insurance business ii. Marine insurance
business iii. Miscellaneous insurance business