Principles of Insurance: Types and Their Significance
by Yuvi K - December 16, 2023
What Is Insurance?
Insurance is a contract between two parties—the insurer (the insurance company) and the insured (the policyholder). The insurer agrees to pay out a sum of money to the insured in the event of an unfortunate occurrence (for example, death, illness, property damage, etc.), in exchange for a premium. Insurance can help protect policyholders from potential financial loss during difficult times or from disasters.
Principles of Insurance: Types and Their Significance
Insurance is based on certain fundamental principles such as utmost good faith, insurable interest, indemnity, contribution, loss minimization, subrogation, and proximate cause. Here, we provide a detailed look at these insurance principles and their importance in the insurance sector.
1. Utmost Good Faith (अतिशय निष्ठा)
The utmost good faith principle states that information disclosed by the insured to the insurer during the time of policy purchase must be truthful and accurate. This is important for the insurer so they can properly assess the risk level and offer the appropriate premium and coverage amount.
2. Insurable Interest (बिमा के तरह रूपये कमाने का हक्क)
Under this principle, the policyholder must have a financial stake in the subject matter of insurance. Without an insurable interest, the insured cannot obtain an insurance policy. This is usually computed based on the insured’s financial liability for the subject matter or based on the amount of benefit that they may receive in the event of a claim.
3. Indemnity (प्रतिपूरक)
The indemnity principle states that the policyholder can be compensated only up to the actual loss suffered. This principle helps protect the insurer from bearing the burden of paying out claims higher than the actual losses.
4. Contribution (योगदान)
Under this principle, the insurer and the insured both participate in bearing the financial responsibility of the loss suffered by the policyholder. This includes the insurer providing a cover for the risk exposure and the insured paying a premium to cover the cost. The insurer will pay the first part of the claim, and the rest will be born by the policyholder’s other insurance policies.
5. Loss Minimization (नुकसान को कम करना)
The loss minimization principle states that the insured must make every effort to reduce losses. This includes taking preventive measures such as installation of protective gear, proper maintenance of the insured property, etc. The insured should also take precautions while transporting the property, as transit accidents may increase the chances of loss.
6. Subrogation (अधिगमनिष्ठा)
Subrogation is a legal right of an insurer to recover the compensation amount from a third party who is responsible for the loss that has been suffered by the insured. This helps the insurer recover part of the claim amount which they have paid to the policyholder.
7. Proximate Cause (निकटवर्ती कारण)
The proximate cause principle states that the insurer must determine the main cause of the unfortunate occurrence and provide coverage for the same. This helps them arrive at the correct claim amount and enables them to pay out the claim to the policyholder without any delay.
Conclusion
The fundamental principles of insurance provide a framework for the insurance companies to effectively assess risks and provide adequate cover for the same. They also help ensure that the policyholder is compensated for the losses suffered. Understanding these principles is important for policyholders to ensure that they get the right cover and benefits in case of a claim.
