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Principles of Insurance

Insurance is the business of risk coverage and compensating the affected party for their loss. There are certain principles of insurance, that form the basis of this business.


The first principle of insurance is the contract which is nothing but the insurance policy. The policy is governed by the same rules, as any other contract would be governed. The policy is offered by the insurance company and the same gets accepted by the person taking the insurance. As it is a contract, both the parties should be competent in the legal sense to enter into it. There should not be any form of misrepresentation by both the parties, as this can make the contract void.


This brings us to the second principle, which is Utmost Good Faith. The insurer has to clearly state all the clauses governing a policy which he is offering. He should not in any way hide a clause, in the fear of loosing a customer. On the part of the person buying the policy, it is expected that he gives the correct information about the person or property, he is insuring. If it is a health policy, the person should reveal truthfully his current state of health, whether he has any existing diseases, and so on. This gives a correct picture to the insurer, and which will determine the premium amount.

The entity which is being insured must be of some value to the person taking the insurance. This brings us to the principle of Insurable interest. The loss, damage or destruction of the insured entity, should entail a financial loss to the person taking the insurance. There should be a relationship of financial interest between the entity being insured and the insurer. For example a person can insure his car, as its loss would affect him in some financial way. He cannot take an insurance on someone’s car, as there is no Insurable Interest involved.


The main idea behind any insurance policy is to cover the loss suffered by the assured. This is based on the principle of indemnity, among the different principles of insurance. The indemnification is to the extent that the loss is suffered. This is important as the assured should not profit from an insurance policy. For example if a person has taken an insurance on his car, and if he meets with an accident, the policy should pay him only to the extent of the damaged parts and that too after deducting depreciation of those parts.

Tags: coverage, Insurance, Legal, policy, risk

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