Did You Know?
Insurance isn’t just
about paying
premiums or claims.
It’s built on 7 core
principles that keep it
fair, transparent, and
reliable for everyone
involved!
Principle of
01 Utmost Good Faith
This Principle states that the person taking
the insurance and the insurance company
should disclose all material information to
each other at the time of taking the policy.
They both should be transparent and honest
with each other
There are two ways in which the principle of
Utmost Good Faith is breached.
Non Disclosure: Not disclosing material
facts
Misrepresentation: Giving wrong
information.
Example: If applying for health insurance,
the policyholder should disclose any pre-
existing medical conditions, surgeries, or
chronic health issues.
FIDES
RRIMA
UBE
Principle of
02 Insurable Interest
This Principle forms the basis for deciding
who can take insurance and for whom.
It says that we can get insurance only for
things in which our Financial Interest lies.
It also means that we can take insurance
for only those things whose well-being or
safety would benefit us and if anything
goes wrong with them, it would affect us
financially, and we would suffer losses.
Example: You can get insurance for your
car because it's yours. But you can't get
insurance for your neighbor's car because
you don’t own it and it doesn’t affect you
financially.
Principle of
03 Indemnity
The insurance company compensates the
insured only to the extent of the loss so that
the insured does not profit from insurance.
Insurance should place the insured in the
same financial position after the loss, as they
enjoyed before it, not better.
This Principle is not applicable in Life
Insurance.
The principle of indemnity ensures that
insurance cannot be used to make a profit.
Example: Sam insures his car for Rs.
2,00,000 and the car meets with an accident,
resulting in damage of Rs. 45,000. the
insurance company will compensate Sam
for Rs. 45,000 only, which is the amount of
damage.
Principle of
04 Conribution
04 According to the principle of contribution, if
you have taken insurance from more than
one insurer, all insurers will share the loss in
the proportion of their respective coverage.
If one insurance company has paid in full,
they have the right to approach other
insurance companies to receive a
proportionate amount.
The principle of contribution does not apply
to life insurance policies or personal accident
policies.
Example: Saurabh insures his car for ₹10,000
with Insurer A and ₹20,000 with Insurer B.
After a ₹3,000 accident, the Principle of
Contribution applies. Insurer A pays ₹1,000,
and Insurer B pays ₹2,000, based on their
coverage ratios, covering the ₹3,000 loss
proportionally.
Principle of
05 Subrogation
Once the insurance company compensates
the insured for the financial loss, the rights
of the insured person get transferred to
the insurance company. The process of
transfer of rights from the insured person to
the insurance company is known as
subrogation.
Example: Nishant negligently crashes into
Rahul's car, causing ₹10,000 in damage.
Rahul filed a claim with his insurer, which
pays him ₹10,000. Following the Principle of
Subrogation, Rahul’s right to recover this
amount from Nishant transfers to the
insurance company.
Source: Insurance Institute
of India
Principle of
06Proximate Cause
04
This principle means that the insurance
company will look at the main cause of the
damage or loss to see if it's covered under the
insurance policy. Sometimes, there can be
multiple events that lead to a loss, so this
principle helps identify the “closest” or most
direct cause that triggered the damage.
Example: Imagine a person has insurance for
his house covering fire damage, but not for
floods. If there’s a flood, and then that flood
causes an electrical fire, the insurance
company will look at the main cause. Since
the fire was directly caused by the flood,
which isn’t covered, the insurance may not
pay for the fire damage.
Principle of
07 Loss Minimization
This principle states that the policyholder
must take reasonable steps to reduce or
prevent further damage or loss when an
insured event occurs. Even though they have
insurance, they are expected to act
responsibly to minimize the loss instead of
relying solely on insurance coverage.
Example: When a fire starts in X’s kitchen, he
quickly uses a fire extinguisher and calls the
fire department, even though his home is
insured. By taking action, he limits the
damage, following the Principle of Loss
Minimization, which requires policyholders to
prevent further losses wherever possible.
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Pranjal Bajaj
