The principles of insurance are listed below:
1. Principle of nature of contract
Nature of contract is a fundamental principle of an insurance contract. An insurance contract comes into existence when one party makes a proposal of a contract and the other party accepts the proposal. A contract should be simple to be a valid contract. The person who is entering into a contract should enter with his free consent.
2. Principle of utmost good faith
An insurance contract is based on the principle of utmost good faith.Under this insurance contract both the parties should have faith over each other. They must behave or act in utmost good faith. It means that they should disclose all material facts or information fully and truly at the time of entering into a contract.
3. Principle of insurable interest
Under this principle of insurance, the insured must have an interest in the subject matter of the insurance. In the absence of insurable interest, no one can get a property insured and can claim the compensation of loss from the insurance company by destroying property.
4. Principle of indemnity
The principle of indemnity the insurer makes compensation to the insured against the loss in financial terms. This principle clarifies that the insurance is only for compensation of loss but not for any financial benefits. It means compensation given to the insured can never be more than the actual loss of the property.
5. Principal of mitigation
According to this principle, it is the duty of the insured to make every effort and to take all possible steps to minimize the loss in the event of an accident. He must do his best to minimize the damage and save the property from damage.
6. Double insurance
Double insurance denotes the insurance of same subject matter with two different companies. It is the same company under two different policies. A double insurance policy is adopted where the financial position of the insurer is doubtful. Here, the insured cannot recover more than the actual loss and cannot claim the whole amount from both the insurers.
7. Principle of proximate cause
The Proximate cause literally means the ‘nearest cause’ or ‘direct cause’. This principle states that if the loss is caused by two or more than two reasons, then it becomes necessary to identify the nearest cause of the loss. The insurance company is not liable to compensate the loss caused by remote cause.
8. Principle of subrogation
This principle of subrogation strongly supports the principle of indemnity. Subrogation is the right of the subject matter of insurance gets to be transferred from insured to the insurance company after indemnity.
9. Principle of contribution
The principle of Contribution allows insurance companies to share the cost of claims and prevents an insured from collecting in full on more than one policy. This principle exists when the insured can insure the same property within more than one insurance company. It states that if a person takes insurance policy from more than one insurance company for a single property than the insured will be paid the actual loss by these insurance companies in the ratio of the value of policy issued by them.