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Fundamental Principles of Insurance

Utmost good faith , Insurable interest

Corollaries of Indemnity Subrogation,
Proximate cause



In financial sense

It is a social device in which

a group of individuals (insured)

transfer risk to another party (insurer)

in order to combine loss experienced, which

permits statistical prediction of losses and

provides for payment of losses from funds contributed

(premium) by all members who transferred risk

Definition (Contd.)

In legal sense
It is a contract by which
one party (Insurer)
in consideration of price paid to him
proportionate to risk provides security to
the other party (Insured) that
o he shall not suffer loss, damage or prejudice
by the happening of certain specified events.
Insurance is meant to protect insured
against uncertain events which may cause
disadvantage to him

Fundamental Principles


Principle of Utmost Good Faith

(uberrima fides)

A duty to disclose, accurately and fully, all

facts material to the risk being proposed,

whether requested or not.
Specially applicable to insurance contracts,


The product is intangible.

Only the proposer knows the details of risk being

proposed. (example: medical history of proposer)

Principle of Utmost Good Faith

(uberrima fides)

As the Underwriter knows nothing,

and the man who comes to him to ask him to insure
knows everything,
it is the duty of the assured
to make a full disclosure to the underwriter
of all material circumstances,
without being asked.
Rozanne vs. Bowen (1928)

Principle of Utmost Good Faith

(uberrima fides)

Reciprocal duty on the part of both parties

Insurer to disclose, fully, product features and benefits

Insurer not to make untrue statement at the time of

negotiating the contract

Material fact includes all information that would

influence the judgement of a prudent insurer in

fixing the premium or accepting the risk.

Principle of Utmost Good Faith

(uberrima fides)

Principle of Utmost Good Faith

(uberrima fides)

Principle of Utmost Good Faith

(uberrima fides)

Principle of Insurable Interest


Can everything be insured?

Must be capable of financial measurement

There must be large number of similar risks

The person applying for insurance must be having

insurable interest in the subject matter of

Existence of insurable interest is an essential

ingredient of any insurance contract

Principle of Insurable Interest


Legal right to insure arising out of a financial

relationship (recognized under law), between
the insured and the subject matter of insurance.

There must be certain property, right, interest or life

capable of being insured.

That property/right/interest etc. must be the subject

matter of insurance.

The insured must be having benefits from the safety or

well being of the subject matter and would be suffering by
its loss or damage.

The relationship between the insured and subject matter

of insurance must be recognized at law.

Principle of Insurable Interest


Subject matter of insurance

In case of fire policy building, stock etc.

In case of life assurance human life

In marine insurance ship or its cargo

It is not the property, but the monetary interest in

the object of insurance, that is insured

Principle of Insurable Interest


Principle of Indemnity

Indemnity is a mechanism to provide

financial compensation to place
insured in the same pecuniary position
as enjoyed immediately before the

At the option of the insurer, in the form of cash

payment, repair or replacement

Not possible to be precise in terms of monetary sums

in case of human life / disablement

Corollaries of Indemnity

Principle of Subrogation

Right of a person, having indemnified another

under a legal obligation, to stand in the place

of that other and avail himself of all the rights
and remedies of that other.
Insured is entitled to indemnity, not more than

Subrogation avoids the situation where an

insured might profit from an insured event.

Not applicable to life and personal accident

insurance as indemnity is not applicable.

Corollaries of Indemnity

Principle of Contribution

Applicable in case of two or more insurers on

one risk.
Insurers to share the cost of indemnity.
Right of the insurer, who has paid the claim,

to recover a proportionate amount from

other insurers.
In other words, insurers to contribute


Principle of Proximate Cause

(causa proxima)

Latin word causa proxima means nearest

Loss to be indemnified if the proximate

cause is covered under the insurance

In life insurance, proximate cause is

significant in the following cases:

Suicide clause

Accident benefit