Six Principles of Insurance

The element of risks is the essential characteristics of a business activity and the businessman earns profit at the risk of loss. Some of the risks are controlled through effective planing but for other risks the loss can be shifted to others by purchasing and insurance policy.


Definition of Insurance:

The insurance can be defined as follows.

By Barry L. Reece”

An Insurance is a contract in which one party (Insurance Company) agrees to pay a specified sum to another (insured) if a certain event occurs.

From the above mentioned definition, we will find that an insurance is a contract where by insurance company agrees to pay the certain sum of money on the happening of a certain event or to indemnifies the other party (Policy Holder) against a loss, in return for the considerations called premium.

Did You Know: Top 10 Life insurance companies in pakistan 

There are two parties of contract of insurance i.e the insurer and insured. The insurer means the company which provides the insurance coverage. The insured means the person or firm that buys insurance policy. The insurance policy means the contract between the insurer and insured. Which contains all the terms and conditions agreed upon between the parties. the premium is the consideration paid by the insured to the insurer against the insurance coverage.

Principle of life insurance

The main principle on which a contract of insurance is based are as under.

(1) Insurable interest: The principle of insurable interest says that a party which wants to get the insurance policy must have some interest in the property or life that insured.  The insurable interest principle applies in different ways to property insurance and life insurance. In case of property insurance, the insurable interest must exit at the time of loss. For example a person, who has continuously paid the premiums on the fire insurance policy of a house, cannot collect the amount in case of loss if the house is sold out. In case of life insurance, the insurable interest can arise from either family or business relationships. The insurable interest must exit at the time when the policy was purchased.

(2) Principle of Good Faith: This principle says that both the contracting parties must have good intentions for each other. This insured must disclose clearly the facts related to the property or person that is insured. Similarly the insurer must described clearly the terms and condition of the policy insured. Nothing must be kept secret from each other.

(3) Principle of Indemnity: Indemnity means the compensation for loss. According to this principle, the insurance company (Insurer) is bound to pay the insured (policyholder) equal to the loss actually suffered by him. So an insured (Individual or a firm) cannot get a greater amount than the actual amount of loss. For example the policy has been purchased for $500 but the estimate amount of loss is for $100, the insurance company can pay only $100 and not more. As there is no substitute of a life and it cannot be measured in money, so this principle is not applicable in case of life insurance.

(4) Principle of Subrogation: Sometimes the insured gets greater than the actual loss suffered by him. According to the principle, it is the right of an insurance company to get back, the amount paid to the insured in excess of his actual loss.

(5) Principle of Contribution: Sometimes a person gets his property insured with more than one insurance company. This principle says that in the events of loss, all those insurance will contribute proportionately for the payments of the total loss. The insured cannot get more than the total amount of loss suffered by him. For Example, a person insures his property for $1000 worth with each of company A and company B separately. Later on the surfers a total loss of $500 on the same property. In such situation, he can claim only $500 from both company A and company B collectively and not separately $500 from each of these two companies.

(6) Doctrine of Proximate cause: the loss to the insured property may due to many reasons. This principle says that the insurance company will look the immediate or proximate case of damage, which is near to the events against which property has been insured. If the loss is due to any other reason, which has not been covered by the insurance, the company will not be held liable to pay the loss. For example the company has issued policy to compensate the loss occurred due to fire, will not pay if the policyholder himself burns the goods due to decrease in price.

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