Principles of Insurance
The Principles of Insurance domain tests whether you can apply the legal doctrines that decide if a loss is covered, who may claim, and how much is payable. Expect scenario questions on insurable interest, indemnity, utmost good faith, proximate cause, subrogation, and contribution.
Core rules
- Insurable interest: a financial relationship with the subject matter. In life insurance it must exist at inception; in property insurance it must exist at the time of loss.
- Indemnity: restores the insured to the pre-loss financial position, subject to the sum insured. Life, personal accident, and valued policies are common exceptions.
- Utmost good faith: the insured must disclose all material facts; non-disclosure or misrepresentation can allow the insurer to avoid the contract.
- Proximate cause: the dominant, efficient cause of loss, not necessarily the last event in the chain.
- Subrogation and contribution: prevent over-indemnity by transferring recovery rights to the insurer and sharing losses among insurers.
Worked example
A factory insured for ₹50 lakh with an average (underinsurance) clause suffers a ₹20 lakh fire loss; at the time of loss the property value is ₹80 lakh. Indemnity = ₹20 lakh × (50/80) = ₹12.5 lakh, less any deductible. Reasoning: because the sum insured is below the value at risk, the average clause reduces the claim proportionally, and the payment cannot exceed the sum insured.
Traps
Do not apply indemnity to life policies; do not confuse proximate cause with the final event in a chain; and remember that insurable interest in property must exist at the time of loss, not merely at proposal.
Key points
- Insurable interest timing differs between life and property insurance.
- Indemnity is limited by the sum insured and average clauses.
- Utmost good faith requires disclosure of material facts.
- Proximate cause is the dominant cause, not the last event.
- Subrogation transfers recovery rights after indemnity; contribution shares loss among insurers.