Principles of Insurance and Loss Assessment Practice
Principles of Insurance and Loss Assessment Practice
This domain tests whether you can apply insurance principles to quantify a loss. The exam favours short scenarios where you must identify the governing principle before calculating.
Core principles
- Insurable interest: the insured must suffer financial loss. Without it, no claim.
- Utmost good faith: material facts must be disclosed; breach can avoid the policy.
- Indemnity: restore the insured to pre-loss financial position, not better.
- Subrogation: after paying, the insurer steps into the insured’s rights against a negligent third party.
- Contribution: where two policies cover the same loss, insurers share rateably.
- Proximate cause: the dominant, effective cause determines cover.
Adjustment tools
- Average clause: if sum insured < property value, claim = loss × sum insured / value.
- Depreciation: deduct for age/use on market-value policies.
- Salvage: credit the residual value to the insurer.
- Excess: deduct the policy excess.
- Betterment: recover the new-for-old advantage where repairs improve the asset.
Worked example
Sum insured ₹60 lakh; actual value ₹80 lakh; loss ₹20 lakh; salvage ₹2 lakh; excess ₹10,000. Average ratio = 60/80 = 0.75. Adjusted loss = 20 × 0.75 = ₹15 lakh. Less salvage ₹2 lakh = ₹13 lakh. Less excess ₹10,000 = ₹12.90 lakh payable.
Traps
Applying average when the sum insured equals value; forgetting salvage; deducting depreciation on a reinstatement-value policy; treating subrogation and contribution as the same; choosing a remote cause instead of the proximate cause.