Q.Explain briefly the principles of insurance with suitable examples.

• Utmost good faith — both parties disclose all material facts fully and truthfully (e.g., a life-insured must reveal smoking/drinking habits).
• Insurable interest — the insured must stand to lose financially (e.g., an owner in his own house).
• Indemnity — the insurer restores the insured to the pre-loss position (applies to fire and marine, not life).
• Proximate cause — only losses from the dominant, covered peril are paid.
• Subrogation — after paying, the insurer takes the insured's place to recover the damaged property's value. …

Why these principles exist

The principles of insurance are the rules of conduct adopted by the parties in the insurance business. They keep the contract fair, prevent the insured from profiting from a loss, and ensure honest dealing on both sides. Seven principles are of the greatest significance to a valid contract.

• Utmost good faith — an insurance contract is one of uberrimae fidei (utmost good faith). Both parties must act in good faith: the insured must voluntarily make a full and accurate disclosure of all facts material to the risk, and the insurer must make clear all the terms and conditions. Any fact likely to affect a prudent insurer's decision to accept the proposal or fix the premium is "material." Example: a person taking a life policy must honestly disclose age, previous medical history and smoking/drinking habits — failure to disclose a material fact makes the contract voidable at the insurer's discretion.
• Insurable interest — the insured must have an insurable interest in the subject matter; it is not the house, ship, machinery or life that is insured but the insured's pecuniary (financial) interest in it, so that he stands to suffer financially if the event occurs. Example: a person has insurable interest in his own house or business stock; ownership is not essential — a trustee holding property for others has an insurable interest in it.
• Indemnity — all fire and marine contracts are contracts of indemnity: the insurer restores the insured to the same position he occupied immediately before the loss, compensating in money terms. Example: if an insured factory building is damaged by fire, the insurer pays the actual money loss so the owner is neither better nor worse off. This principle does not apply to life insurance.
• Proximate cause — a policy compensates only for losses caused by the perils stated in it. When a loss results from two or more causes, the proximate cause is the direct, most dominant and most effective cause. Example: if goods are destroyed and fire is the direct, dominant cause, a fire policy pays; a loss from a peril not covered would not.
• Subrogation — after settling a claim, the insurer has the right to stand in the place of the insured to recover from an alternative source; the ownership of the damaged property passes to the insurer. Example: after paying for goods damaged by fire, the insurer takes over the salvage so the insured cannot also profit by selling the damaged goods. …