Principles of insurance contract

Principles  of insurance contract

What are the principles of insurance contract

Insurance is affected by means of a legal contract and must meet the general requirements of contract. Thus the insurance contract must not be against public policy, must be enacted by parties with legal capacity to contract, must be affected with a meeting of the minds of the parties and must be supported by a consideration. Insurance is a contract of adhesion and any ambiguities are construed against the insurer. The following legal doctrines are vital to the understanding of insurance contract.

Insurable Interest:

A fundamental legal principle underlying all insurance contracts is the principle of insurable interest. This means insurance is operative only in respect of the interest of the insured in the event of property concerned and it is this interest that is the subject matter of insurance contract. It means it is not the bricks and materials used in building which is the subject matter of insurance. The subject matter of insurance is the legally recognized relationship of the owner of the building whereby he will suffer loss if the building is caught in fire. This is essential; otherwise an individual would claim indemnification, even when he had not suffered any loss. The doctrine of insurable interest is also necessary to prevent insurance from becoming gambling.


Principle of Indemnity:

The principle of indemnity ensures that a person does not get more than his actual loss, in the event of damage caused by an insured peril. It is important to note that only the contracts of property and liability insurance is subjected to this doctrine. Life insurance, health insurance and personal accident insurance policies are not contracts of indemnity (as no money payment can actually indemnify for loss of life or for bodily injury to the insured).

There are several ways by which an insured can be indemnified i.e. by cash payment, repair, replacement and reinstatement. In every instance the onus of proving that that the loss was caused by an insured peril rests upon the insured. The onus of proving that the loss was caused by other than in insured peril rests upon the insurer.

Without application of this principle, the insured would be tempted to make profit out of the happening of loss. There would be a tendency in the direction of over insurance. There are, however, some exceptions to the application of this principle in property insurance. For example, in marine insurance, for commercial convenience, it is customary to issue “value” policies i.e. the insured value is mutually agreed between the insured and the insurer. In the event of loss, the indemnity is measured in terms of the value fixed by the policy.


Principle of Subrogation:

This principle states that the insurer, if and when indemnifies the insured, is entitled to recover from third party liable for the loss. One of the important reasons for this doctrine is to reinforce the principle of indemnity i.e. to prevent the insurer from collecting more than his actual loss. Another reason for subrogation is to hold premiums below what they would otherwise be. This, however, does not allow the insurer to lodge claim against the insured, even if the insured is negligent. The principle of subrogation also does not apply to personal accident and life policies.


Principle of Utmost Good Faith:

This principle imposes a higher standard of honesty on parties to an insurance contract. The proposer must disclose before the contract is concluded all material facts, which he knows or ought to know. Failure to make such disclosure renders the contract avoidable at the insurers option. It is, important to note that avoiding the contract does not follow unless the misrepresentation is material to the risk. It is generally held that even an innocent misrepresentation of a material fact is no defense to the insured, if the insurer elects to avoid the contract. The insurer, however, in good faith pay the claim even if there is breach, and a breach of warranty may also be waived by the insurers. However, unless it is waived, a warranty must be complied with strictly and literally. It makes no difference whether the breach of warranty is material or immaterial, fraudulent or innocent.