Fundamental Concepts and Principles of Insurance Contracts

Meaning of Insurance

Insurance is a form of contract under which one party (the Insurer or Insurance Company) agrees, in return for a consideration (the Insurance Premium), to pay an agreed sum of money to another party (the Insured) to compensate for a loss, damage, or injury to something of value in which the insured has a financial interest as a result of some uncertain event.

Core Principles of Insurance

Insurance contracts are governed by several fundamental principles:

1. Utmost Good Faith (Uberrimae Fidei)

   Insurance contracts are based upon mutual trust and confidence between the insurer and the insured. It is a condition of every insurance contract that both parties (the insurer and the insured) must disclose every material fact and information related to the contract to each other.

2. Insurable Interest

   This means having a pecuniary interest in the subject matter of the insurance contract. The insured must have an insurable interest in the subject matter (i.e., the life or property insured). If damage occurs, the insured must incur a loss, and conversely, the insured benefits if security is provided. For example, a businessman has an insurable interest in his house, stock, his own life, and the lives of his wife and children.

3. Indemnity

   The Principle of Indemnity applies to all insurance contracts except life insurance, as the loss of life cannot be financially estimated. The primary objective of an insurance contract is to compensate the insured for the actual loss incurred. These contracts provide security against loss, ensuring that no profit can be made from the claim.

4. Proximate Cause (Causa Proxima)

   The insurance company compensates for losses incurred by the insured due to perils specifically mentioned in the insurance policy. If losses arise from reasons not mentioned in the policy, the Principle of Proximate Cause (or the nearest cause) is followed to determine if the loss is covered.

5. Subrogation

   This principle applies to all insurance contracts that are contracts of indemnity. When an insurance company compensates the insured for the loss of any property, all rights related to that property automatically transfer to the insurance company.

6. Contribution

   If a person has taken more than one insurance policy for the same risk, all insurers will contribute the amount of loss in proportion to the amount assured by each of them. The insured is compensated only for the actual amount of loss, as they have no right to recover more than the full amount of their actual loss.

7. Mitigation of Loss

   The insured must take reasonable steps to minimize the loss or damage to the insured property. Failure to do so may result in the claim being denied by the insurance company.