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Principles of Insurance

UIIC AO · Insurance Awareness

Also prepare for:IBPS PO IBPS Clerk SBI PO SBI Clerk

Types of Life Insurance →

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Core Concept

Read this first — the foundation of the topic

→There are 7 core principles of insurance

Principle of Utmost Good Faith (Uberrimae Fidei): Both parties must disclose all material facts honestly. The insured must reveal health issues, property details, etc. The insurer must explain policy terms clearly. 2. Principle of Insurable Interest**: You can only insure something you would financially lose if damaged.

You cannot insure your neighbor's car because you have no financial stake in it. 3. Principle of Indemnity: Insurance compensates for actual loss, not profit. If your Rs. 50,000 car is damaged by Rs. 10,000, you get Rs. 10,000, not Rs. 50,000. 4. Principle of Contribution: When multiple policies cover the same risk, each insurer pays proportionally

🔑Formula

1

Total coverage = Rs. 60,000 + Rs. 40,000 = Rs. 1,00,000

2

Policy A's share = (60,000 / 1,00,000) × 30,000 = Rs. 18,000

3

Policy B's share = (40,000 / 1,00,000) × 30,000 = Rs. 12,000 Total paid = Rs. 18,000 + Rs. 12,000 = Rs. 30,000 Worked Example 2: Sita buys life insurance without disclosing her diabetes. She dies in an accident after 1 year.

1

Check violation - Principle of Utmost Good Faith violated

2

Materiality test - Diabetes affects premium calculation

3

Remedy - Insurer can void the policy or adjust claim amount Result: Claim may be rejected or reduced Exam Shortcut: In contribution cases, always check if total policies exceed the actual loss. If yes, apply contribution principle. If no, each policy pays fully up to its limit. #1 Most Common Mistake: Students confuse Subrogation with Contribution

💡Remember

Subrogation is about recovering money from third parties who caused the loss. Contribution is about sharing payments between multiple insurers of the same risk. Subrogation happens AFTER claim payment, Contribution happens DURING claim settlement. Quick Trick: Life insurance follows only 3 principles (Utmost Good Faith, Insurable Interest, Causa Proxima). General insurance follows all 7 principles.

This distinction appears in 80% of principle-based questions.

🔑 Key Points

Principle of Utmost Good Faith requires complete disclosure by both parties
Insurable Interest must exist at time of policy purchase and at time of loss
Indemnity principle ensures no profit from insurance, only compensation for actual loss
Contribution Formula: Each insurer's share = (Policy amount ÷ Total coverage) × Loss amount
Subrogation gives insurer right to recover from third parties after paying claims
Proximate cause determines claim validity, not remote or distant causes
Loss minimization requires policyholder to take reasonable preventive steps
Life insurance follows only 3 principles, General insurance follows all 7
Contribution applies only when multiple policies cover same risk and total exceeds loss
Material facts concealment can void policy even after premium payment

📌 Exam Facts

Uberrimae Fidei means 'Utmost Good Faith' in Latin
Principle of Indemnity does not apply to life insurance policies
Insurable interest must exist both at policy inception and at time of loss for property insurance
In marine insurance, insurable interest need only exist at time of loss, not at policy start
Causa Proxima means 'nearest cause' and determines claim liability
Subrogation rights arise only after insurer has paid the claim amount
Contribution principle applies only when sum insured exceeds actual loss amount
Material facts are those that influence insurer's decision to accept risk or fix premium

🚀 60-Second Revision

Remember: Life insurance = 3 principles, General insurance = 7 principles
Formula: Contribution share = (Individual policy ÷ Total policies) × Actual loss
Trap: Don't confuse Subrogation (recovery from third party) with Contribution (sharing between insurers)
Key: Insurable interest timing differs - Property needs it at start and loss, Marine only at loss
Remember: Indemnity prevents profit, applies only to property insurance not life
Quick check: Material facts are those affecting premium or acceptance decision
Proximate cause rule: Immediate cause matters, not remote causes

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