Principles of Insurance
This domain tests the legal principles that decide whether a loss is covered, who can claim, and how much is payable. Questions often turn on insurable interest, indemnity, utmost good faith, proximate cause, subrogation and contribution.
Core rules
- Insurable interest is a pecuniary interest in the subject matter. In fire insurance it must exist when the policy starts and when the loss occurs; in marine cargo it must exist at the time of loss.
- Indemnity restores the insured to the pre-loss financial position, no better and no worse. It does not apply to life or personal accident cover.
- Utmost good faith requires disclosure of every material fact that would influence a prudent underwriter and prohibits misrepresentation.
- Proximate cause is the dominant, effective cause, not merely the last event in the chain.
- Subrogation gives the insurer the insured's rights against a third party after payment, limited to the amount paid.
- Contribution applies when two or more policies cover the same subject matter, peril and interest; insurers share rateably.
Worked example
A contractor's welding sparks ignite packing material in a warehouse. Fire is the proximate cause even though the roof later collapses. The fire policy responds. After paying ₹40 lakh, the insurer may use subrogation to pursue the contractor. If a second fire policy covered the same stock, same peril and same interest, contribution would apply: each insurer shares the loss rateably, and the insured cannot recover more than the loss.
Traps
Do not confuse the last event with proximate cause. Do not allow subrogation before payment. Do not apply contribution where the policies cover different interests or perils. Do not treat betterment as indemnity.