Fundamental Principles of Insurance Contract

The Contract of Insurance is a contract whereby a person undertakes to indemnify another against a loss arising on the happening of an event or to pay a sum of money on the happening of an event. The person who insures is called “Insurer”. The person who effects the insurance is called the “Insured” or “Assured”. The price for the risk undertaken by the insurer and paid by the insured to the insurer is called “Premium” and the document which contains the contract of insurance is called “Policy”.

Following are the general principles of contract of insurance:

  1. Uberrimae Fidei: A contract of insurance is a contract uberrimae fidei, i.e. a contract requiring utmost good faith of the parties. So, all material facts which are likely to influence the insurer in deciding the amount of premium payable by the insured must be disclosed by the insured. Failure to disclose material facts renders the contract voidable at the option of the insurer.
  2. Insurable Interest: The assured must have, what is called “insurable interest” in the subject matter of the contract of insurance. “He must be so situated with regard to the thing insured that he would have benefit from its existence, loss from its destruction”.
  3. Indemnity: Every contract of insurance such as life insurance and personal accident and sickness insurance, is a contract of indemnity. So, the insurer pays the actual loss suffered by the insured. He does not pay the specified amount unless this amount is the actual loss to the insured.
  4. Mitigation of Loss: The insured must take reasonable precautions to save the property, in the event of some mishap to the insured property. He must act as a prudent uninsured person would act in his own case under similar circumstances to mitigate or minimize losses.
  5. Risk must Attach: The insurer must run the risk of indemnifying the insured. If he does not run the risk, the consideration for which the premium is paid, fails and consequently, he must return the premium paid by the insured.
  6. Causa Proxima: The insurer is liable for loss which is proximately caused by the risk insured against. The rule is “causa proxima non remota spectatur”, i.e. the proximate but not the remote cause is to be looked to. So, the loss must be proximately caused in order that the insurer is to become liable.
  7. Period of Insurance: Except in the case of life insurance, every contract of insurance comes to an end of the expiry of every year, unless the insured continues the same and pays the premium before the expiry of the year.
  8. Subrogation: According to the rule of subrogation, when the loss is caused to the insured by the conduct of a third party, the insurer shall have to make good such loss and then have a right to step into the shoes of the insured and bring an action against such third party who caused the loss to the insured. This right of subrogation is enforceable only when there is an assignment of cause of action by the insured in favour of the insurer. The doctrine of subrogation does not apply to life insurance.
  9. Contribution: Where there are two or more insurances on one risk, the principle of contribution applies as between different insurers. The aim of contribution is to distribute the actual amount of loss among the different insurers who are liable for the same risk under different policies in respect of the same subject-matter. In case of loss, any one insurer may pay to the assured the full amount of the loss covered by the policy. Having paid this amount, he is entitled to contribution from his coinsurers in proportion to the amount which each has undertaken to pay in case of loss of the same subject-matter.