Insurance is a contract between two parties the insured and the insurer. Certain elements in this contract must be present in order to make it legally binding and enforceable. It is, therefore, argued that the following are different principles of insurance.
Utmost Good Faith
Insurance contract is based on mutual trust and it is because of this it is said to be the uberrimae fidei. It becomes the duty of the insured to reveal all the material facts about the object which is being insured. This will help the insurer to study the object to be insured, frame the terms and Conditions of the agreement which he shall be entering into and take a decision in the matter. Any material fact concealed which might have affected this decision of the insurer will nullify the insurance contract and legally it may become invalid. Particularly the insured is under legal obligation to reveal
- The fact which may reduce the risk of the insure
- The fact which the insurer knows
- The fact which the insurer must know in ordinary course of his insurance contract
- The fact in which the insurer is not interested
- The fact which is required to be revealed under the terms of the contract: and
- The fact which the law of land legally provides to be revealed
Utmost good faith also obliges the insurer lo let know the insured about all which the insurer will do by way of compensation and reveal all in which the insured might be interested in knowing.
Interest may have or may not have insurable interest in the object or life which he wants to be insured. Insurable interest relates to an interest of the insured in the object or life the loss of which may plunge him into an economic loss of the magnitude for The insurance is being asked and premium is agreed to pay Regarding life husband and wife have insurable interest in the life of each other. The creditor has is insurable interest in the life of debtor. The mortgagee has an insurable interest in the assets mortgaged to him the owner has an insurable interest in the building he owns
Principle of a Valid Contract
Like all other contracts in an insurance contract also all the elements of a valid contract must be present in order to make it enforceable in law. Insurance contract is also a contract under the Indian Contract Act. The provided essentials of a valid contract are as given below:
- There must be a proposal and its acceptance. The insured proposes and the insurer accepts.
- There must be free and full unqualified consent both of the insured and insurer.
- The parties to the contract must be competent to enter into the contract.
- Lawful consideration
- Lawful objectives
Principle of Compensation
The insurance contract is a contract of compensation on the condition that against the consideration which the insured has agreed to pay if certain specific event takes place he will be compensated (according to terms and conditions) by the insurer. This a promise which the insurer makes which he has to fulfill.
Principle of Subrogation
This is based on the principle that to the extent the insured object is compensated becomes the property of the insurer and the insured is under legal obligation to surrender the right on that object to the extent he has been compensated. The objective behind this principle is that the insured should not take advantage of the insured object. The insurance is only for covering the risk. It is not for taking advantage of the facility.
Principle of Contribution
The insured should not take advantage of the insurance facility. This important principle obliges the insured to be clear in his mind that if he has insured his object (not life) with more than one insurer and subsequently suffers loss the insurers will have the right to seek contribution (based on the amount of insurance policy) and pay compensation to the insured accordingly. Though the insured will be within his rights to claim the full amount of loss from one of his insurers. However, if he does so, the insurer paying in full (on coming to know the fact of insurance from more than one insurer) may share proportionately his paid amount with the other insurer.