Principles of Insurance
Principles of Insurance
This domain tests the legal and conceptual foundations that decide whether a life insurance contract is valid and whether a claim is payable. Expect questions on risk pooling, insurable interest, utmost good faith, indemnity, proximate cause, subrogation and contribution - and on why life insurance departs from some of them.
Core rules
- Insurable interest is the legal right to insure. In life insurance it must exist when the proposal is made; a person may insure their own life, and is presumed to have an interest in a spouse or dependent. In property insurance it must exist at the time of loss.
- Utmost good faith requires disclosure of every material fact that would influence a prudent underwriter: health history, occupation, habits, other policies, previous declines. The proposal form is the basis of the contract.
- Indemnity restores the insured to the pre-loss financial position. It applies to property and liability, not to life: a life policy pays the agreed sum assured because a human life cannot be valued in money.
- Proximate cause is the dominant, effective cause of loss, not necessarily the last event. Subrogation and contribution are indemnity principles and do not apply to life policies.
Worked example
A proposer conceals treatment for diabetes and the policy is issued. The insurer discovers this on a death claim 18 months later. Under Section 45 of the Insurance Act, 1938, the insurer may repudiate within three years of issuance if the suppression was material and was known to be false or was reckless. After three years, a policy cannot generally be called in question on the ground of misstatement or suppression, except for fraud. The reasoning: the remedy depends on both the materiality and the timing, not merely on the fact that a question was answered wrongly.
Traps that cost marks
- Saying indemnity applies to life insurance because the sum assured is paid.
- Treating insurable interest in life as requiring proof of financial loss for a spouse.
- Choosing the last event as proximate cause when an earlier cause is dominant.
- Applying subrogation or contribution to a life claim.