Principles of Insurance (IC-01)
What IC-01 tests here
The Principles of Insurance domain of IC-01 examines the legal foundations every policy rests on: insurable interest, utmost good faith, indemnity, subrogation, contribution and proximate cause, applied to Indian market practice under the Insurance Act, 1938 and IRDAI regulation. Questions are usually short scenarios; you must name the principle, state its rule and calculate a figure.
Core rules
- Insurable interest must exist at inception for life insurance, but at the time of loss for property and liability covers. A creditor may insure a debtor's life only up to the debt.
- Utmost good faith obliges the proposer to disclose every material fact known, or which ought to be known; material non-disclosure makes the contract voidable.
- Indemnity restores the insured to the pre-loss financial position, never better. It governs property, liability and marine cargo claims; it does not apply to life or personal accident benefits.
- Subrogation arises automatically when an indemnity insurer pays, letting it pursue third parties in the insured's name. The insurer recovers no more than it paid, and the insured must not prejudice those rights.
- Contribution operates only between indemnity policies covering the same insured, interest, subject matter and peril.
Worked example
Stock is insured against fire for ₹10 lakh with Insurer A and ₹5 lakh with Insurer B. A fire causes ₹6 lakh of damage and both policies carry rateable proportion clauses. Insurer A pays 6 × (10/15) = ₹4 lakh; Insurer B pays 6 × (5/15) = ₹2 lakh. The insured receives ₹6 lakh in total - full indemnity, no profit.
Traps that cost marks
- Applying indemnity to a life policy, where the sum assured is paid.
- Reading proximate cause as the last event instead of the dominant, effective cause.
- Expecting contribution between a fire policy and a personal accident policy.
- Discussing subrogation in life insurance.
- Testing insurable interest in property at inception rather than at loss.