Principles of Insurance (Utmost Good Faith) Part 4 (For CBSE, ICSE, IAS, NET, NRA 2022)

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There are certain principles that may apply to the contracts of insurance between insurer and insured. These principles are discussed below.

Principles of Insurance

Utmost Goods Faith

Insurance contracts are the contracts of mutual trust and confidence. Both parties to the contract i.e.. , the insurer and the insured must disclose all relevant information to each other. The insurer must honour all the promises made in the policy, intentional withholding of information invalidates the contract. For example, while entering into a contract of life insurance, the insured must declare to the insurance company if he is suffering from any disease that may be life threatening. If he fails to do so and afterwards it is established that the insured was suffering from a decease which was the cause of his death, then the insurance company shall not be liable to pay any claim.

Insurable Interest

It means financial or pecuniary interest in the subject matter of insurance. It means that if there is a loss due to the damage of the incurred property or to the assured life it will be the personal loss of the insured. A person has insurable interest in the property or life insured if he stands to gain from its existence or loose financially from its damage or destruction. In case of life insurance, a person taking the policy must have insurable interest at the time of taking the policy. For example, a man can take life insurance policy in the name of his wife and if later they get divorced this will not affect the insurance contract because the man had insurable interest in the life of his wife at the time of entering into the contract. In case of marine insurance insurable interest must exist at the time of loss or damage to the property. In contract of fire insurance, it must exist both at the time of taking the policy as well as at the time of loss or damage to the property.


The word indemnity means to restore someone to the same position that he/she was in before the event concerned took place. This principle is applicable to the fire and marine insurance. It is not applicable to life insurance, because the loss of life cannot be restored. The purpose of this principle is that the insured is not allowed to make any profit from the insurance contract on the happening of the event that is insured against. Compensation is paid on the basis of amount of actual loss or the sum insured, whichever is less.

Contribution The same subject matter may be insured with more than one insurer. In such a case, the insurance claim to be paid to the insured must be shared or contributed by all insurers in proportion to the amount of insurance of individual insurers.


Contract of insurance subrogation means that after the insurer has compensated the insured, the insurer gets all the rights of the insured with regard to the subject matter of the insurance. For example, suppose goods worth ₹ 20,000/- are partially destroyed by fire and the insurance company pays the compensation to the insured, then the insurance company can take even these partially destroyed goods and sell them in the market.


In case of a mishap the insured must take all possible steps to reduce or mitigate the loss or damage to the subject matter of insurance. The insured is expected to act in a manner as if the subject matter has not been insured. This principle ensures that the insured does not become negligent about the safety of the subject matter after taking an insurance policy.

Causa-Proxima (Nearest Cause)

According to Causa-Proxima principle the insured can claim compensation for a loss only if it is caused by the risk insured against. The risk insured should be nearest cause (not a remote cause) for the loss. Only then the insurance company is liable to pay the compensation. For example, a ship carrying orange was insured against losses arising from accident. The ship reached the port safely and there was a delay in unloading the oranges from the ship. As a result, the oranges got spoilt. The insurer did not pay any compensation for the loss because the proximate cause of loss was delay in unloading and not any accident during voyage.

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