study about principles of insurance

1. Chapter2
Principal of insurance
1. Principle of Uberrimae fidei (UtmostGoodFaith)
Principle of Uberrimae fidei (aLatinphrase),orinsimple englishwords,the Principleof UtmostGood
Faith,isa verybasicand firstprimaryprinciple of insurance. Accordingtothisprinciple,the insurance
contract must be signedbybothparties(i.e insurerandinsured) inanabsolute goodfaithorbelief or
trust.
The persongettinginsuredmustwillinglydiscloseandsurrendertothe insurerhiscompletetrue
informationregardingthe subjectmatterof insurance.The insurer'sliabilitygetsvoid(i.elegallyrevoked
or cancelled) if anyfacts,aboutthe subjectmatterof insurance are eitheromitted,hidden,falsifiedor
presentedinawrongmannerby the insured.
2. Principle of Insurable Interest
The principle of insurable intereststatesthatthe persongettinginsuredmusthave insurable interestin
the objectof insurance.A personhas an insurable interestwhenthe physical existence of the insured
objectgiveshimsome gainbutitsnon-existencewillgive himaloss.Insimple words,the insuredperson
mustsuffersome financial lossbythe damage of the insuredobject.
For example :- The ownerof a taxicabhas insurable interestinthe taxicabbecause he isgettingincome
fromit. But,if he sellsit,he will nothave aninsurable interestleftinthattaxicab.
From above example,we canconclude that,ownershipplaysaverycrucial role inevaluatinginsurable
interest.Everypersonhasaninsurable interestinhisownlife.A merchanthasinsurable interestinhis
businessof trading.Similarly,acreditorhasinsurable interestinhisdebtor.
3. Principle of Indemnity
Indemnitymeanssecurity,protectionandcompensationgivenagainstdamage,lossorinjury.

2. Accordingto the principle of indemnity,aninsurance contractissignedonlyforgettingprotection
againstunpredictedfinancial lossesarisingdue tofuture uncertainties.Insurance contractisnotmade
for makingprofitelse itssole purposeis togive compensationincase of any damage or loss.
In an insurance contract,the amountof compensationspaidisinproportiontothe incurredlosses.The
amountof compensationsislimitedtothe amountassuredorthe actual losses,whicheverisless. The
compensationmustnotbe lessormore than the actual damage.Compensationisnotpaidif the
specifiedlossdoesnothappendue toa particularreasonduringa specifictime period.Thus,insurance
isonlyfor givingprotectionagainstlossesandnot formakingprofit.
However,incase of life insurance,the principleof indemnitydoesnotapplybecause the value of human
life cannotbe measuredintermsof money.
4. Principle of Contribution
Principle of Contributionisacorollaryof the principle of indemnity.Itappliestoall contractsof
indemnity,if the insuredhastakenoutmore thanone policyonthe same subjectmatter.Accordingto
thisprinciple,the insuredcanclaimthe compensationonlytothe extentof actual losseitherfromall
insurersorfrom anyone insurer.If one insurerpaysfull compensationthenthatinsurercanclaim
proportionate claimfromthe otherinsurers.
For example :- Mr.John insureshispropertyworth$100,000 withtwoinsurers"AIGLtd." for$ 90,000
and "MetLife Ltd."for$ 60,000. John'sactual propertydestroyedisworth$60,000, thenMr. Johncan
claimthe full lossof $ 60,000 eitherfromAIGLtd. or MetLife Ltd.,or he can claim$ 36,000 fromAIG Ltd.
and $ 24,000 fromMetlife Ltd.
So,if the insuredclaimsfull amountof compensationfromone insurerthenhe cannotclaimthe same
compensationfromotherinsurerandmake aprofit.Secondly,if one insurancecompanypaysthe full
compensationthenitcanrecoverthe proportionate contributionfromthe other insurance company.
5. Principle of Subrogation
Subrogationmeanssubstitutingone creditorforanother.
Principle of Subrogationisanextensionandanothercorollaryof the principle of indemnity.Italso
appliestoall contractsof indemnity.

3. Accordingto the principle of subrogation,whenthe insurediscompensatedforthe lossesdue to
damage to hisinsuredproperty,thenthe ownershiprightof suchpropertyshiftstothe insurer.
Thisprinciple isapplicable onlywhenthe damagedpropertyhasanyvalue afterthe eventcausingthe
damage.The insurercan benefitoutof subrogationrightsonlytothe extentof the amounthe haspaid
to the insuredascompensation.
For example :- Mr.John insureshishouse for$ 1 million.The house istotallydestroyedbythe
negligenceof hisneighbourMr.Tom.The insurance companyshall settle the claimof Mr.Johnfor $ 1
million.Atthe same time,itcanfile alaw suitagainstMr.Tom for$ 1.2 million,the marketvalueof the
house.If insurance companywinsthe case andcollects$ 1.2 millionfromMr.Tom, thenthe insurance
companywill retain$1 million(whichithasalreadypaidtoMr. John) plusotherexpensessuchascourt
fees.The balance amount,if anywill be giventoMr. John,the insured
6. Principle of LossMinimization
Accordingto the Principle of LossMinimization,insuredmustalwaystryhislevelbesttominimize the
lossof his insuredproperty,incase of uncertaineventslike afire outbreakorblast,etc.The insured
musttake all possible measuresandnecessarystepstocontrol andreduce the lossesinsucha scenario.
The insuredmustnot neglectandbehave irresponsiblyduringsucheventsjustbecausethe propertyis
insured.Hence itisa responsibilityof the insuredtoprotecthisinsured propertyandavoidfurther
losses.
For example :- Assume,Mr.John'shouse isseton fire due to an electricshort-circuit.Inthistragic
scenario,Mr. Johnmusttry his level besttostopfire byall possible means,like firstcallingnearestfire
departmentoffice,askingneighboursforemergencyfire extinguishers,etc.He mustnot remaininactive
and watchhis house burninghoping,"WhyshouldIworry?I've insuredmyhouse."
7. Principle of CausaProxima(NearestCause)
Principle of CausaProxima(a Latinphrase),orinsimple englishwords,the Principleof Proximate(i.e
Nearest) Cause,meanswhenalossiscausedbymore than one causes,the proximate orthe nearestor
the closestcause shouldbe takenintoconsiderationtodecide the liabilityof the insurer.
The principle statesthattofindout whetherthe insurerisliable forthe lossornot,the proximate
(closest) andnotthe remote (farest) mustbe lookedinto.

4. For example :- A cargo ship'sbase waspunctureddue to rats and sosea water enteredandcargo was
damaged.Here there are twocauses forthe damage of the cargo ship - (i) The cargo shipgetting
puncturedbeacuse of rats,and (ii) The seawaterenteringshipthroughpuncture.The riskof seawater
isinsuredbutthe firstcause is not.The nearestcause of damage is seawaterwhichisinsuredand
therefore the insurermustpaythe compensation.
However,incase of life insurance,the principleof CausaProximadoesnotapply.Whatevermaybe the
reasonof death(whetheranatural deathor an unnatural death) the insurerisliable topaythe amount
of insurance.

5. Chapter3
Typesof insurance
Autoinsurance
Autoinsurance protectsthe policyholderagainstfinanciallossinthe eventof anincidentinvolvinga
vehicle theyown,suchasina trafficcollision.
Gap insurance
Gap insurance coversthe excessamountonyourauto loaninan instance where yourinsurance
companydoesnot coverthe entire loan.Dependingonthe company'sspecificpoliciesitmightormight
not coverthe deductible aswell.Thiscoverage ismarketedforthose whoputlow downpayments,have
highinterestratesontheirloans,andthose with60-monthor longerterms.Gap insurance istypically
offeredbyafinance companywhenthe vehicle owner purchasestheirvehicle,butmanyautoinsurance
companiesofferthiscoverage toconsumersaswell.
Healthinsurance
Healthinsurance policiescoverthe costof medical treatments.Dentalinsurance,likemedical insurance,
protectspolicyholdersfordental costs.Inmostdevelopedcountries,all citizensreceive some health
coverage fromtheirgovernments,paidforbytaxation.Inmostcountries,healthinsuranceisoftenpart
of an employer'sbenefits.
Life insurance
Life insurance providesamonetarybenefittoa decedent'sfamilyorotherdesignatedbeneficiary,and
may specificallyprovide forincome toaninsuredperson'sfamily,burial,funeral andotherfinal
expenses.Life insurance policiesoftenallow the optionof havingthe proceedspaidtothe beneficiary
eitherina lumpsumcash paymentor an annuity.Inmoststates,a personcannotpurchase a policyon
anotherpersonwithouttheirknowledge.
Property
Propertyinsurance providesprotectionagainstriskstoproperty,suchasfire,theftorweatherdamage.
Thismay include specializedformsof insurance suchasfire insurance,floodinsurance,earthquake
insurance,home insurance,inlandmarineinsuranceorboilerinsurance.The termpropertyinsurance
may,like casualtyinsurance,be usedasa broadcategory of varioussubtypesof insurance,some of
whichare listedbelow: