5. Insurance is a co-
operative device to
spread loss caused by a
particular risk over a
large number of persons
who are exposed to a
similar risk and who have
agreed to insure
themselves against
6. Probability indicate the
chances and amount of
loss
Occurrence of risk in each
type of insurance can be
estimated with the help
of theory of probability
7. Specific Principles
Utmost Good Faith
Insurable Interest
Indemnity
Subrogation
Proximate Cause
Mitigation of Loss
Contribution
8. Utmost Good Faith
Good faith- Let the buyer beware
Declaration of all material Information
about the subject matter of insurance
9. • whether he will accept
the risk and;
• if so, at what rate of
premium and subject
to what terms and
conditions
Material
Information is
that information
which enables the
insurer to decide:
• Non-disclosure of
material facts-
oversight, intentional,
proposer thought it’s
not essential etc.
• Misrepresentation-
with fraudulent
purposes or by
negligence.
Breach of duty of
utmost good faith
arises in three
ways:
10. Insurable Interest
The legal right enjoyed by the owner of a
property to insure is called ‘Insurable
Interest’. The insurance will become null and
void, without the insurable interest.
11. Insurable Interest i.e. Pecuniary interest
The insured should be economically
benefited by the existence of the subject
matter and should suffer an economic loss
on its non-existence or at the death of the
insured.
12. Indemnity
An Exact Financial Compensation (only actual loss
should be paid).
The principle of Indemnity states that under the
policy of insurance, the insured has to be placed
after the loss in the same financial position in
which he was immediately before the loss.
13. Applicability:
When the losses suffered by the
insured can be measured in terms of
money.
It is practicable to place the insured in
the same financial position which he
occupied before the loss.
Compensation cannot exceed actual loss.
Valued policies are not covered under the
principle of indemnity.
14. Liability of Insurer for Indemnity
Sum assured or value of the policy
whichever is less
Excess/Franchise
Excess clause
If less than limit- no compensation
If more than limit- only excess is paid
Franchise Clause- Total loss is
compensated
15. Life Insurance - Principle of Indemnity
does not apply.
Fire Insurance-
Indemnity= Actual loss x amount of policy
value of goods
insured
Marine Insurance- Value of indemnity is
decided at the time of taking policy
irrespective of the consideration of
depreciation and other relevant factors.
16. Subrogation
Transfer of rights and remedies from the
insured to the insurer who has
indemnified the insured in respect of the
loss.
17. Applicability
Corollary to the principle of indemnity.
Insurer is substituted in place of insured
for rights and claims.
Subrogation only up to the amount of
payment.
Subrogation does not apply to personal
insurance.
18. Contribution
The right of insurers who have paid a loss
under a policy to recover a proportionate
amount from other insurers, who are
liable for the same loss.
19. Proximate Cause
• The rule is that the immediate but not
the remote cause is to be regarded.
The real, nearest and direct cause of
loss must be seen while making
payment of loss.
• If the real cause of loss is insured,
only then the insurer is liable to
compensate the loss
20. a) Single Cause: when there is a single
event which causes loss then it will be
a clear case of proximate cause.
b) Concurrent Cause: when a number of
causes occur at the same time and the
loss is the result of these causes, then
the insured peril and expected perils will
have to be segregated.
21. c) Successive Causes : When there is a
chain of events causing loss to the
subject-matter insured, the insurer’s
liability would arise if the original cause is
an insured peril.
22. Mitigation of Loss
• Means to minimize or decrease the
severity of loss on the part of insured.
• The insured must act reasonably in the
event of loss, to make the loss minimum as
far as possible.
• Every insurer, in consideration of agreeing
to indemnify the loss, expects a genuine
but not the careless behaviour from
insured, especially at the time of
occurrence of loss.
23. Contribution
It is the right of an insurer who has paid
a loss under a policy to cover a
proportionate amount from other insurers
who are liable for the loss.
The principle of indemnity restricts the
amount received by the insured.
Editor's Notes
Not the remote cause is taken into consideration. The efficient cause of a loss is called the proximate cause of loss.
