In this article, you will discover the principles of insurance. Insurance is related to protection from financial loss. It is a kind of risk management. Primary used to hedge against the risk of uncertain loss. Insurance is a deal between the insurer and the insured, where the insurer agrees to pay the insured against loss. The insured has to give some fixed money on a timely basis to the insurer. Â
Insurance companies reinvest insured amounts in different avenues in order to make a profit.
Some basic terms in insurance before knowing principlesÂ
- Insured: The person who is defended against some losses. Insured is called as assured in the case of life insurance contracts. he is the policy owner.Â
- Insurer: The person who agrees to compensate against loss for a consideration. The insurer is known as an assurer in life insurance contracts.Â
- Claim: It is a request made by the ( protected ) insured to the insurer to compensate for the loss that happened due to the accident.
- Subject Matter: It is related to life, property, cargo or ship, etc. which is insured against policy.Â
- Policy: The statement of the agreement between the insurer and the insured. It includes the terms and conditions of service.
Principles of InsuranceÂ
Following are some main principles of insuranceÂ
1. Principle of Utmost good faith:
The First and basic principle of insurance is almost good faith. In insurance, both parties must have utmost good faith in each other. The insurer and insured must expose all material facts clearly, effectively, and accurately. The person who is getting insurance shall disclose all the required information.Â
The insured must give complete, sharp, and accurate information on the topic matter of insurance to the insurer. Thus, the insurer must give proper information about the terms and conditions of the agreement. If they fail to give full, right, and clear information may point to non – a settlement of the claim.Â
Example
Mr. Shiv has not given information about his lung cancer at the time of taking the policy. After his death, the insurance company comes to know about this fact. As Mr shiv has not given correct and complete information at the time of taking the policy, the insurance company can refuse to give compensation to his family members.Â
2. Principle of Insurable interest:
According to this principle, you should have a personal interest. In this who is taking insurance should have monetary benefits. The person who is protected must own an insurable interest in the subject matter. Insurable interest is suitable for all types of insurance.Â
ExampleÂ
- A person has an insurable interest in his own life and property.
- A business has an insurable interest in the goods it deals with and in the property of the business.Â
In life insurance, the insurable interest applies to the life insured. Insurable interest must exist at the time of taking life insurance.Â
In fire and marine insurance, the insurable interest must be existing at the time of buying the policy and at the time of occurrence of loss.Â
3. Principle of Indemnity
According to this principle of insurance, insurance is not made to make a profit but is made for compensation against the loss that has been incurred to you. That means compensation paid cannot be more than the losses. The value of real compensation is restricted to the amount or the lossÂ
ExampleÂ
If shiv property is insured for rs 4 lacs and if the loss by fire is rs2 lacs, then the insured shiv can claim compensation of 2 lacs only.Â

4. Principle of Subrogation
According to this insurance, after the insured is paid for the loss due to loss of the property insured then the right of ownership of such property moves to the insurer. This principle is only applicable when the damaged property has a value after the incident causing the damage. This principle does not apply to life insurance. but still, you have the right to claim from all insurance companies. Â
Example
Now suppose you have taken insurance of 10 lakhs from one company and 10 lakh from another company. In fire incident. In a fire incident, your total loss is rupees 10 lakh. Now you go to insurance company number 1 and claim the entire loss. The insurance company will pay you the compensation, however, now insurance company no. 1 will approach the other insurer and ask for 5 lakh rupees. Because both insurance companies had an equal share in the property.Â
5. Principle of Contribution:
This principle is applicable when there are two or more insurers. For some underlying property or assets. In this case insurance company has the right to share the loss with other insurance. This principle does not apply to life insurance wherein you have multiple insurances but still you have the right to claim insurance from all insurance companies.Â
Example
Now suppose you have taken insurance of rupees 10 lakh from another company & in the fire incident, your total loss is rupees 1o lakh. Now you go to the insurance company and claim the entire loss. The insurance company will pay you the compensation.Â
Now insurance company number one will approach the other insurer, and ask for 5 lakh. because both the insurance companies had an equal share in your property.Â
6. Principle of Mitigation of Loss
According to this principle of insurance, you should put all effort to reduce loss to the insured assets. in case of uncertain events. Hence, it is the duty of the insured of the property and avoids a loss. He/She must always try to minimize the loss of the property. The insured must take all important steps to reduce loss.
Example
If your car is stolen then you should immediately call the police, call the insurance company and tell them about the loss.

If there is a fire in your home, you should immediately call the fire brigade or if you have water or fire extinguishers you should use them so that loss can be minimized you cannot simply sit and watch, feeling that you have already gotten them insured and the insurance company.Â
7. Principle of Causa Proxima
Causa proximal means, when a loss is caused by more than one reason. According to this principle of insurance. If your loss has been caused because of four things, the nearest cause should be taken into consideration to decide the liability of the insurance. The property is insured for some reason and not against all reasons, in such case this principle of insurance is found.Â
Example
There is a ship and rat have made a hole in it, because of which water entered into the ship and goods loaded in the ship have damaged. In this case, there are two causes of the incident, the first is the rat and the second is seawater. Though rats have made holes in the ship, the actual cause of damage was seawater, so here the nearest cause is damage due to seawater.
So, friends, these were the principles of insurance and I hope you have understood them clearly. But still, if you see any need in this post, then please give your view in the comment box and help us to improve that deficiency, thanks.
For more information watch this videoÂ
FAQ on insuranceÂ
1. What is the basic principle of insurance?
Answer: The basic principle of insurance is almost good faith.Â
2. What are the principles of insurance?Â
Answer: There are 7 principles of insurance as follow:Â
1. Utmost good faith, 2. Insurable interest, 3. Indemnity, 4. Subrogation, 5. Contribution, 6. Mitigation of loss, 7. Causa-Proxima.
3. Who is the insurer?
Answer: The person who agrees to compensate against loss for a consideration. The insurer is known as an assurer in life insurance contracts.Â
4. What is the subject matter in insurance?Â
Answer:Â It is related to life, property, cargo or ship, etc. which is insured against policy.Â
5. How many types of insurance?
Answer: There are 3 types of insurance. Life insurance, Fire insurance, Marine insurance