Legal Principles and Insurance Contract
What the domain tests
This domain tests the insurance contract as a contract of utmost good faith and, for indemnity covers, indemnity. You must know offer, acceptance, consideration, capacity, insurable interest, disclosure, warranties, conditions, subrogation, contribution, and proximate cause.
Core rules and concepts
- An insurance policy is a contract; Indian contract law principles apply, subject to insurance-specific rules such as insurable interest and good faith.
- Insurable interest is a legal and pecuniary relationship. In property insurance it must exist at the time of loss; in life insurance it must exist at inception.
- Utmost good faith requires disclosure of material facts a prudent underwriter would consider relevant. Non-disclosure can avoid the policy.
- Indemnity restores the insured to the pre-loss financial position, no better. It supports subrogation and contribution.
- Subrogation lets the insurer step into the insured’s recovery rights after paying an indemnity. Contribution apportions a loss among policies covering the same interest.
- Proximate cause is the dominant, effective cause of loss, not necessarily the last event.
Worked example
A car insured for ₹8 lakh is damaged in a collision caused by another driver. The insurer pays the repair cost of ₹2 lakh, then pursues the negligent driver. The insured cannot also recover the same ₹2 lakh from the other driver because indemnity prevents profit. If two motor policies covered the same car, contribution would apportion the payout.
Traps that cost marks
Do not apply subrogation to a pure life policy, which is not a contract of indemnity. Do not confuse contribution with subrogation. Do not treat a warranty as a mere representation. Do not assume insurable interest must exist at death for life cover. Do not ignore exclusions when identifying proximate cause.