DEFINE INSURANCE. WHAT ARE THE PRINCIPLES OF INSURANCE ?
Ans. In the 21" century, the business environment is said to be more volatile. The multi dimensional developments in the service sector have activated and have made ways for sophistication in almost all areas. Positive attitude, creative approach and innova tive strategies would make our efforts productive. This requires a fair blending of performance orientation and employee orientation. Our services and products are to be of world class and our employees are to be professionally sound. This requires an in-depth knowledge of quality of service and its changing perception.
Prof. Willet defines Insurance as "a social device for making accumulations to meet uncertain losses of capital, which is carried out through the transfer of risks of many individuals to person or to a group of persons
Insurance is defined as, "a cooperative device to spread the loss caused by a particular risk over a number of persons, who are exposed to it and who agree to insure themselves against that risk."
According to Oxford Dictionary, Insurance is "an arrangement by which a company or the state undertakes to provide a guarantee of compensation for specified loss, damage, illness or death in return for payment of a specified premium".
From the legal framework point of view, Insurance is "a contract whereby, for specified consideration, one party undertakes to compensate the other for a loss relating to a particular subject as a result of the occurrence of designated hazards".
Insurance is a social device for spreading the chance of financial loss among a large number of people. By purchasing insurance, a "person" shares risk with a group of others, thereby reducing the individual potential for disastrous financial consequences. Transacting insurance includes soliciting insurance, collecting premiums and handling claims. Insurance contracts, to whatever category they may belong, are based on the following fundamental principles.
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1) Utmost Good Faith: The contracts of insurance are included in the category of contracts uberrimae Fidel, ie., those contracts which require absolute and utmost faith on the part of the parties concerned. In this respect, such contracts are different from the ordinary business contracts which are based on the rule of caveat emptor(let huyer beware). But in insurance contracts of any kind, each one of the parties is under an obligation to make the fullest disclosure all such facts which may some bearing on the decision of the other party to enter into such contract. This binding applies particularly to the insured party who naturally in possession of all material facts relating to his life or property.
2) Insurable Interest (No person can enter into a valid contract of insurance unless he has insurable interest in the object or life insured. If it were not so, and if everyone is at liberty to take out an insurance policy on any object or life in the world irrespective of his insurable interest in it, the contracts of insurance would have been reduced to sham or gambling) In such conditions, insurance contracts would be wagering contracts which are not valid and therefore, cannot be enforced at law Essentially speaking, insurable interest is in the nature of financial interest in a life or thing. Insurable insurance is not a mere sentimental interest in the object insured. It is a pecuniary interest and it follows that the loss caused by the risk insured against must be capable of estimation in terms of money.
3) Indemnity: All contracts of insurance, except for life insurance contracts, are contracts of indemnity. The basic purpose of insurance is to transfer the loss of a person to the insurance company which can be easily spread it over a large number of policyholders. The principle of indemnity does not apply to life and other kinds of personal insurance. In such cases, the loss caused by the death of a person cannot be calculated in terms of money nor is money any compensation for loss of life.
4) Subrogation: The doctrine of subrogation is an extension and a corollary of the the principle of indemnity. According to it, the insurer steps into the shoes of the insured and becomes entitled to all 'rights of the insured regarding the subject-matter of insurance after the claim of the insured has been fully and finally settled'. In some cases, there may be a possibility of his getting something in addition to that which he has received from the insurance company. The goods may have been partially damaged or the property may not have been fully destroyed. In such cases, the insured may try to obtain the value of scrap in addition to the money received in settlement of the claim.
5) Contribution: Sometimes a person may get his goods insured with more than one insurer. This is referred to as 'Double Insurance'. In the event of a loss, the insured will deserve to be indemnified only against the actual amount of loss incurred through the risk insured against. In such cases, the companies concerned will follow the principle of contribution. Each company will contribute that proportion of the loss which the policy issued by it bears to the total amount for which insurance has been effected with all the companies. In case the insured chooses to collect the amount of loss from one particular company or two of them, the paying company or companies can later on adjust account with other insurers of the same property by receiving their contributions according to the proportion of their insured amount
6) Mitigation of Loss: When the mishap insured against occurs, it is the duty of the insured to take all such steps to mitigate or minimize the loss as would have been taken by anybody who is not insured. The idea behind this principle is that the insured should not become careless and inactive in the event of the mishap merely because the property which is getting damaged is insured, he must, instead, act like any uninsured prudent man. This does not in any event mean that the insured should risk his own life for saving the property which is getting damaged or destroyed. All that is implied is that a reasonable effort towards saving the insured property must be made by the policy holder in the event of the mishap insured against.
7) Causa Proxima: In those cases, where the mishap insured against is the outcome of series of events, the insurance company will meet the losses only if it is definitely established that the said loss was caused directly by an event covered by the policy. The maxim in this regard is 'Causa Proxima non remota optima ' i.e. the nearest or the direct cause not the remote cause is to be looked to.