Principles and Practice of Insurance
Principles and Practice of Insurance
This domain tests the legal principles that underpin every insurance contract and how they are applied in underwriting, claims and distribution. Expect questions on insurable interest, indemnity, utmost good faith, proximate cause, contribution, subrogation and salvage.
Core rules
- Insurable interest: the insured must suffer financial loss. In property, it must exist at inception and at loss; in life, at inception (or at the life assured's death for a beneficiary).
- Indemnity: the insured is restored to the pre-loss financial position, not better off. It applies to property and liability, not to life or personal accident benefit policies.
- Utmost good faith: material facts must be disclosed. A fact is material if it influences the prudent underwriter's decision. Non-disclosure or misrepresentation can allow the insurer to avoid the contract.
- Proximate cause: the dominant, effective cause of loss, not necessarily the last event. Excluded causes do not defeat a claim if the covered peril is proximate.
- Contribution: insurers sharing the same interest rateably share the loss; the insured cannot recover more than the loss.
- Subrogation: after indemnifying, the insurer acquires the insured's rights of recovery against third parties.
- Salvage: the insurer may take over damaged property after paying a total loss.
Worked example
A property is insured for INR 8 lakh; its actual value is INR 10 lakh. A fire causes INR 4 lakh damage; the policy has a INR 10,000 deductible. The average clause applies: (8/10) × 4,00,000 = INR 3,20,000; less deductible = INR 3,10,000. If a third party caused the fire, the insurer pays and then pursues subrogation. If another policy covers the same interest, contribution applies.
Traps
- Applying indemnity to life insurance.
- Ignoring the average clause in underinsurance.
- Treating proximate cause as the first or last event.
- Assuming insurable interest is needed only at claim stage for property.
- Forgetting salvage and subrogation recoveries.