Q.Mr. Deshmukh, a Mumbai-based trader, has purchased a large consignment of machinery parts from a supplier in Germany. The goods will travel by ship across the sea to reach Mumbai port, and Mr. Deshmukh wants to protect himself against the risk of the goods being lost or damaged during this sea voyage. Which type of insurance should Mr. Deshmukh take, and why?

Life insurance is a contract of assurance, not indemnity. Because a human life has no measurable money value, the principle of indemnity does not apply to it, though insurable interest and utmost good faith still do.

Insurance contracts rest on a set of basic principles. Three of them appear in this question:

• Insurable interest — the insured must stand to suffer financially if the event insured against occurs. In life insurance a person has insurable interest in their own life and in the life of a spouse or dependant, so this principle does apply.
• Utmost good faith (uberrimae fidei) — both parties must disclose all material facts honestly (age, health, habits, family history). This principle also applies to life insurance.
• Indemnity — the insurer restores the insured to the same financial position as before the loss, paying only the actual loss and no more. This prevents the insured from making a profit out of a loss.

Why indemnity does not apply to life insurance: the value of a human life cannot be calculated in terms of money, so it is impossible to measure an "actual loss" on death. Life insurance is therefore treated as a contract of assurance under which a fixed, agreed sum (the sum assured) is paid on death or on maturity, regardless of any calculation of financial loss. Indemnity applies mainly to general insurance such as fire and marine insurance, where the loss is measurable.

The principle of indemnity does not apply to life insurance.

The principle of indemnity states that insurance compensates the insured only for the actual monetary loss suffered — the insured should neither profit nor lose from the event. This principle works for property insurance because the loss can be valued in money.

Life insurance is different. The value of a human life cannot be measured in terms of money, so a life policy is not a contract of indemnity; it is a contract for a fixed assured sum that is paid on death or maturity, regardless of any 'loss'. In contrast, fire insurance and marine insurance are contracts of indemnity, where the insurer pays only the actual loss caused to property. Therefore the principle of indemnity does not apply to life insurance.

Insurance helps to minimize/reduce business risks, not to increase them.

Insurance is a contract in which the insurer agrees to compensate the insured against a possible future loss, in return for a premium.

How insurance minimizes risk:

• It transfers the financial burden of a loss from the businessman to the insurance company.
• Losses due to fire, theft, accident, natural calamities, etc. are compensated, giving financial security.
• The businessman can operate with confidence and plan ahead without the fear of heavy uncertain losses.

Insurance is based on the principle of spreading the loss of a few over many, so it reduces (minimizes) the impact of risk — it can never maximize risk.

The correct sequence is Taking the policy, Accident, Claim.

The insurance process follows this natural order:

1. Taking the policy – The insured first enters into an insurance contract and pays the premium.
2. Accident – During the policy period, an unexpected event/loss (accident) occurs.
3. Claim – The insured then applies to the insurance company for compensation for the loss suffered.

A claim can be made only if a valid policy already exists and a loss (accident) has occurred during its term — so the policy must come first.