Principles of Insurance
This domain is the backbone of the paper: six legal doctrines that decide whether a claim is payable and how much. Examiners test the definition, the timing rule, and which principle does not apply to a given class of business.
Core rules
- Insurable interest: a financial relationship recognised by law. In life insurance it must exist at inception; in indemnity insurance (fire, marine, motor) it must exist at the time of the loss.
- Indemnity: the insured is restored to the pre-loss financial position, never better off. It applies to general insurance, not to life or personal accident, which are benefit policies.
- Subrogation: after paying, the insurer steps into the insured's shoes and can recover from the negligent third party. It flows from indemnity, so it does not arise in life insurance.
- Contribution: where two or more policies cover the same subject matter, interest, peril and insured, the loss is shared pro rata to the sums insured, so the insured cannot profit.
- Proximate cause: the dominant, effective cause of the loss, not the remotest one, decides whether the peril is covered.
- Utmost good faith: both parties must disclose every material fact honestly and completely.
Worked example (contribution)
A godown is insured for Rs 5,00,000 with Insurer A and Rs 3,00,000 with Insurer B. Fire causes a Rs 4,00,000 loss. Total sum insured = Rs 8,00,000. A pays 4,00,000 x 5/8 = Rs 2,50,000; B pays 4,00,000 x 3/8 = Rs 1,50,000. The insured recovers exactly the loss, no more.
Worked example (proximate cause)
Lightning strikes a warehouse and fire follows; water used by the fire brigade damages stock. The damage by fire and by water used to extinguish it is treated as fire damage, because fire is the dominant cause.
Traps
Subrogation and contribution do not apply to life policies; contribution needs identity of subject matter, interest, peril and insured; insurable interest in marine cargo may be acquired after the loss if it existed at the time of loss.