Introduction
Insurance is based on certain fundamental principles that ensure fairness, transparency, and efficiency. These principles guide the functioning of insurance contracts and protect the interests of both the insurer and the insured.
Principle of Utmost Good Faith
This principle requires both parties to disclose all relevant information honestly. The insured must provide accurate details about health, property, or assets, while the insurer must clearly explain policy terms and conditions.
Principle of Insurable Interest
Insurable interest means that the insured must have a financial interest in the subject matter of insurance. Without insurable interest, the insurance contract becomes invalid.
Principle of Indemnity
The principle of indemnity ensures that insurance compensates only the actual loss suffered. It prevents the insured from making a profit from insurance claims.
Principle of Contribution
When the same risk is insured with more than one insurer, all insurers share the loss proportionately. This ensures fairness and avoids overcompensation.
Principle of Subrogation
After compensating the insured, the insurer gains the right to recover the loss from a third party responsible for the damage.
Working of Insurance
Insurance works through risk pooling. A large number of people pay premiums into a common fund. When a loss occurs, compensation is paid from this fund.
The process involves selecting a policy, paying premiums, filing claims after a loss, verification by the insurer, and settlement of claims according to policy terms.
Conclusion
The principles and working of insurance create a strong foundation for financial protection. Understanding these principles helps people choose the right policies and use insurance effectively to manage risks and secure their future.