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Principles of Insurance contracts

Edited by: Vaani Garg

The principles of insurance contracts are as follows:

1 Indemnity- This principle of indemnity states that on happening of an event insured against, the insured will be placed by the insurer in the same monetary position that he/she was earlier before the event.

It includes the two points:

1.To prevent the insured from benefiting under the contract

2.To reduce the impact of moral hazards

This principle of Insurance contracts does not implies to life insurance policies

2. Utmost good faith- In these principles of Insurance contracts, the insured is duty-bound to disclose all materials facts relating to the risk to be covered. The duty of disclosure applies to both insured and insured. Breach of duty of disclosure is not as a valid insurance contract.

3. Subrogation – This principle means the legal right of one person to stand in a place of another. A loss may occur accidentally or by the negligence of the third part so entitles the insurer who has granted an indemnity to receive after the payment of a loss.

4.Contribution – In these principles of Insurance contracts, if an insured obtains more than one policy covering the same risk, he cannot recover the same loss from another policy.

This principle contains three points:

  1. Cover the same peril
  2. Cover the same subject matter
  3. are affected by or on behalf of the same insured

5. Insurable interest –The insured must have an insurable interest in the subject matter and must get benefit by its safety and also have financial gains by keeping safe the subject matter.

Example: Everybody would have insurable interest own possessions like car, motorbike etc.

6. Proximate cause-

If a loss could be due to cause of causes, so in this chain reaction of causes it is the most dominant cause, which would be the proximate cause or nearest cause

7. Arbitration: when a condition of arbitration is added then the matter will be disposed of according to the provision of arbitration act, 1996. The award will be bind on both the parties.

Also read about Special features of Insurance Contracts

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