Meaning & essential Principles of the Insurance contract.
Insurance is a contract between two parties where one party called the insurer agrees to indemnify the loss suffered by the other party called the insured. The process of indemnifying the loss is undertaken in consideration of a premium. The word insurance and assurance should not mean same thing. Insurance denotes a contract of indemnity whereas assurance denotes a contract whereby the insurer undertakes to pay an agreed sum after the expiry of certain period or on the death of the assured.
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The following are some of the essential principles of the contract of insurance:
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I. Contract of Indemnity:
Insurance contract is a contract of indemnity because the insurer indemnify the insured against some losses which are likely or not likely to occur. Here a stipulated sum of money is paid by the insurer to the insured.
II. Insurance Interest:
The person getting an insurance policy must have an insurable interest in the subject matter of insurance. The word insurable interest denotes a relation whereby one person is benefited by its existence and prejudiced by its destruction. The nature of interest should be such that the insured gains by the safety of the subject-matter of insurance. Mere love and affection is not sufficient to constitute an insurable interest. Except life insurance contract, insurable interest must be present in all types of insurance contract.
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III. Indemnity:
The presence of indemnity is an important feature of the contract of insurance. All insurance contracts except life insurance contracts are contracts of indemnity. The word indemnity denotes making good the loss suffered by the insured. A contract of insurance is a contract of indemnity because the insurer compensate for the losses of the insured. The amount of compensation in no case will exceed the actual monetary losses.
IV. Cause proxima:
The principles of cause proxima states that the loss must be proximately caused. The nearest cause but not the remote cause is taken into account while determining the liability of the insurers. One should not go into the successive causes to find the original cause of the loss. The last or the nearest cause is always taken into account for determining the amount of loss.
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V. Subrogation:
The word subrogation denotes transfer of rights and remedies of the insured to the insurer who has indemnified the insured for the losses. If the insured has any right of action to recover the loss from any third party, the insurer is entitled to recover the loss from such a third party because in no case the insured will receive more than the actual amount of loss.