The document outlines several key legal principles of insurance: 1) The principle of indemnity states that insurance should compensate for actual losses without profiting the insured and reduces moral hazard. Actual cash value considers depreciation. 2) The principle of insurable interest requires the insured to have a financial stake in the insured item/life to prevent gambling and reduce moral hazard. 3) The principle of subrogation allows insurers to recover payments from liable third parties to prevent double recovery and hold responsible parties accountable. 4) The principle of utmost good faith requires high honesty from applicants regarding representations, concealments, and warranties.

1. Legal principles of insurance
Soumya V

2. 1. Principle of indemnity
To Compensate
Two fundamental purposes:
a. To prevent the insured from profiting from a
loss
b. To reduce moral hazard
Actual cash value in property insurance
- Replacement cost less depreciation
- Fair market value
- Broad evidence rule

3. 2. Principle of insurable interest
The insured must be in a position to lose
financially if the loss occurs
Purposes:
a. To prevent gambling
b. To reduce moral hazard
c. It measures the amount of insured’s loss in
property insurance

4. Examples of insurable interest
In property and liability insurance:
a. Ownership of property
b. Potential legal liability
c. Secured creditors
d. A contractual right
In life insurance:
a. Own life
b. Life of close family ties
c. Pecuniary interest in life of third person

5. When must insurable interest exist?
• In property insurance - at the time of loss
• In life insurance - at the time of inception of the
policy

6. 3. Principle of subrogation
Substitution of the insurer in the place of the
insured to claim indemnity from a third person
for a loss covered under insurance
Purposes:
a. Prevents insured from collecting twice for the
same loss
b. It is used to hold the guilty person responsible
for the loss
c. Helps to hold down insurance rates

7. Corollaries to the principle of
subrogation
• The insurer is entitled to recover only the
amount it has paid under the policy
• The insured cannot impair the insurer’s
subrogation rights
• The insurer can waive its subrogation rights in
the contract
• Subrogation does not apply to life insurance and
to most individual health insurance contracts
• The insurer cannot subrogate against its own
insureds

8. 4. Principle of Utmost good faith
Imposes high degree of honesty on the applicant
for insurance
This principle is supported by 3 important legal
doctrines – representations, concealment and
warranty
a. Representations – statement made by applicant
for insurance. The insurance contract is
voidable at the option of the insurer if the
representation is
a. Material
b. False
c. Relied on by the insurer

9. b. Concealment – intentional failure of the
applicant for insurance to reveal a material fact
to the insurer
c. Warranty – a statement of fact or a promise
made by the insured which is part of the
insurance contract and must be true if the
insurer is to be liable under the contract

10. 5. Causa proxima
Proximate cause
6. Contribution
In case of double insurance, the insurers are to
share the loss in proportion to the amount
insured by each of them.
Conditions:
a. The subject matter of insurance must be same
b. The event insured must be same
c. The insured must be the same

11. 7. Mitigation of loss
The insured must make necessary effort to
minimise the loss
8. Nature of Contract

12. Requirements of an insurance contract
• Offer and acceptance
• Consideration
• Competent parties
• Legal purpose

13. Distinct legal characteristics of
insurance contracts
• Aleatory contracts
• Unilateral
• Conditional
• Personal
• Contract of adhesion