Risks that humans and companies face may result in financial losses for both. Insurance is a means to cover losses and minimize the risks. Insurance contracts are all included in a document. A person should be aware of the basic requirements of insurance in order to understand his insurance need and plan accordingly.
The basic principles of insurance are as follows:
- Good faith: Both the parties in the insurance contract must disclose all the facts accurately. False information will make the contract void and thereby utmost good faith is an important part of the insurance contract.
- Insurable interest: The owner of the property must have insurable interest in the insured object. The absence of insurable interest will make the insurance contract illegal and the contact cannot be claimed in the court.
- Principle of indemnity: Except for life insurance and personal accident insurance all insurance contracts are contract of indemnity. Only in case of actual loss, compensation is provided. If no losses are faced then the premiums that are paid by the insured become profit for the insurer.
- Cancellation: Both the parties in the contract have the right to cancel the insurance policy before its expiry. When the policy is canceled, the protection provided by the insurer ceases to exist.
- Doctrine of proximate cause: Insurance company is liable to pay for the claim only if the loss was proximately caused by an insured peril.
- Arbitration: Accident and fire insurance policies consist of Arbitration clause. To reduce litigation, arbitrator is appointed by the parties in difference.
- Mitigation of loss: This principle makes policy holders more careful of insurable property and requires him/her to minimize the losses in case of any hazardous event.
- Contribution: When more than one company insure the same risks, the claim is shared between the companies i.e. the insured cannot claim twice.
