Insurance principles and practice
Domain 1: Insurance principles and practice
This section tests the foundational doctrines that decide whether a loss is insured and how much is paid. Expect questions on insurable interest, utmost good faith, indemnity, proximate cause, contribution and subrogation, plus risk pooling and the difference between speculative and pure risk.
Core rules
- Insurable interest must exist at inception for life policies and at the time of loss for property. It is a pecuniary interest recognised at law, not merely an expectation.
- Utmost good faith requires the proposer to disclose all material facts; non-disclosure or misrepresentation can avoid the contract.
- Indemnity restores the insured to the pre-loss financial position, subject to sum insured, deductibles and average clauses. Life policies are benefit policies, not contracts of indemnity.
- Proximate cause is the dominant, effective cause, not the last event. Contribution applies only between indemnity policies covering the same interest and peril; subrogation transfers the insured's recovery rights to the insurer after payment.
Worked example
A building worth ₹10 lakh is insured with Insurer A for ₹6 lakh and Insurer B for ₹4 lakh. A fire causes ₹2 lakh damage. Both policies are indemnity policies covering fire. Under rateable contribution, A pays 6/10 × ₹2 lakh = ₹1.2 lakh and B pays 4/10 × ₹2 lakh = ₹0.8 lakh. The insured recovers ₹2 lakh, not ₹4 lakh, because indemnity prevents profit. If A had already paid the full ₹2 lakh, A could seek ₹0.8 lakh from B under contribution.
Traps
- Applying indemnity to life or personal accident benefits.
- Treating the last event as the proximate cause when an excluded peril set the chain in motion.
- Ignoring underinsurance and the average clause.
- Confusing subrogation (insurer's right against third parties) with contribution (between insurers).