7 Basic Principles of Insurance Explained in Simple Words
7 Principles of Insurance
Why These
Principles Even Matter
Insurance is not just paperwork and policy numbers — it’s a deal built on trust.
For that deal to work properly, there are some basic
rules that both sides (you and the insurance company) have to follow. These
rules are called the principles of insurance, and every valid policy is based
on them.
Let us go through them one by one, without the boring
jargon.
1. Utmost Good Faith – Be Honest, Fully
Both sides need to be truthful.
If you are buying insurance, you must share all the
important info (like health issues, past claims, smoking habits, etc.).
In addition, the insurance company must tell you clearly,
what is covered and what is not.
If either side hides something, the deal breaks.
2. Insurable Interest – You Can’t Insure Just Anything
You can only insure something if its loss hurts you financially.
Examples:
✔ Your own
car → yes
❌ Neighbour’s
car → no
✔ Your
spouse’s life → yes
❌ A random
person’s life → no
This rule exists to stop insurance from becoming a way to “make profit” off
someone else’s loss.
3. Indemnity – Insurance Pays for Loss, Not Profit
Insurance is meant to put you back in the same financial position, not make you
richer.
If your ₹50,000 phone is stolen, you get ₹50,000.
You don’t get ₹80,000 “just because you have insurance.”
4. Contribution – If You Insure the
Same Thing Twice
Let’s say you insured the same house with two companies.
If it gets damaged, both companies share the payout.
You don’t get double money — that would be cheating the
system.
5. Subrogation – Insurer can recover the money later
after the insurance company pays you, they get the right to collect that money
from the person who caused the damage.
Example:
Another driver hits your car.
Your insurer pays you first, then goes after the guilty
driver later.
6. Causa Proxima – What was the real cause behind
the loss?
If there are multiple things which caused the damage,
then the claim is based on the main cause, not the side effects happened due to
main cause.
Example:
Earthquake >
which causes FIRE>
which causes HOUSE BURNS.
If the policy covers loss due to fire but not the loss
due to earthquakes, the claim may be rejected because the real cause of loss
was the earthquake and not the fire.
7. Loss Minimization – You Still Need to Act
Responsibly
Even after something goes wrong, you must try to reduce the damage.
If your shop catches fire, you must try to control it or
call the fire brigade.
You can’t sit and wait for the insurance company to
handle everything.
Insurance helps you recover — it’s not a free pass to do
nothing.
Frequently Asked Questions (FAQ)
Q1. What are the 7 principles of insurance?
The seven core principles are: Utmost Good Faith, Insurable Interest, Indemnity, Contribution, Subrogation, Causa Proxima, and Loss Minimization.
Q2. Why is the principle of utmost good faith important?
Because insurance is based on trust. If either the insurer or the insured hides facts, the contract becomes invalid.
Q3. What is an example of insurable interest?
You can insure your own car or house because you suffer loss if they are damaged. You cannot insure your neighbour’s property, because you have no financial loss if it gets damaged.
Q4. Does insurance make you profit?
No. The principle of Indemnity ensures you get compensated for the loss — not more than what you actually lost.
Q5. What is subrogation in simple words?
After the insurer pays you, they get the right to recover the money from the person who caused the loss.
Once you understand them, you’ll read insurance policies with much more confidence, and you’ll know exactly what to expect when you file a claim.
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