Life is full of risks. Being a social animal and risk averse, man always tries to reduce risk. An age-old method of sharing of risk through economic cooperation led to the development of the concept of ‘insurance’.
Insurance may be described as a social device to reduce or eliminate risk of loss to life and property. Insurance is a collective bearing of risk. Insurance spreads the risks and losses of few people among a large number of people, as people prefer small fixed liability instead of big uncertain and changing liability. Insurance is a scheme of economic cooperation by which members of the community share the unavoidable risks. The risks, which can be insured against include fire, the perils of sea, death, accidents, and burglary. The members of the community subscribe to a common pool or fund, which is collected by the insurer to indemnify the losses arising out of risks. Insurance cannot prevent the occurrence of risk but it provides for the losses of risk. It is a scheme, which covers large risks, by paying small amount of capital. Insurance is also a means of savings and investment.
Insurance can be defined as a legal contract between two parties whereby one party called insurer undertakes to pay a fixed amount of money on the happening of a particular event, which may be certain or uncertain. The other party called insured pays in exchange a fixed sum known as premium. The insurer and the insured are also known as Assurer, or Underwriter, and Assured, respectively. The document, which embodies the contract, is called the policy.
An insurance contract is based on some basic principles of insurance.
Principle of ‘Uberrima Fides’ or Principle of utmost good faith.
Principle of Indemnity.
Doctrine of Subrogation.
Principle of Causa Proxima.
Principle of insurable interest.
Principle of utmost good faith: It means “maximum truth”. All material information regarding the subject matter of insurance should be disclosed by both the parties-the insurer and the insured. This duty of full disclosure rests more heavily on the insured than the insurer. The insurer has a right to avoid the contract if the insured fails to make the full disclosure.
Principle of indemnity: This means that if the insured suffers a loss against which the policy has been made, he shall be fully indemnified only to the extent ofloss. In other words, the insured is not entitled to make a profit on his loss.
Doctrine of subrogation: This means the insurer has the right to stand in the place of the insured after settlement of claims in so far as the insured’s right of recovery from an alternative source is involved. The right may be exercised by the insurer before the settlement of the claim. In other words, the insurer is entitled to recover from a negligent third party any loss payments made to the insured. The purposes of subrogation are to hold the negligent person responsible for the loss and prevent the insured from collecting twice for the same loss.
Principle of causa proxima: The cause of loss must be direct and an insured one in order to claim for compensation.
Principle of insurable interest: The assured must have insurable interest in the life or property insured. Insurable interest is that interest which considerably alters the position of the assured in the event of loss taking place and if the event does not take place, he remains in the same old position. One who has to lose as a result of loss may be said to have insurable interest in the life or property insured. If this principle is absent, the insurance contract degenerates into a wagering contract. It is taken as given that an individual has insurable interest in his/her own life or property. Cases where no proof of insurable interest is required are that of a husband’s interest in his wife’s life and wife’s interest in her husband’s life. In cases of business and family relationships, proof of insurable interest is required.