Insurance means protection against loss. It is the process of safeguarding the interest of people from loss and uncertainty. It is based on contract. It is a valid agreement that incorporates certain terms and conditions. It may be described as a social device to reduce or eliminate a risk of loss to life and property. The essential elements of insurance are listed below:
Insurance is a contract between the insurer and the insured. It needs to follow some certain basic principles. Every business has their own values and assumptions which play important role in related business. To run the insurance business effectively, it has its own values, assumptions, and guidelines. Such values, assumptions, and guidelines are known as principles. The principles of insurance are listed below:
Business Hub. 03 01 2015. Electronic. 15 06 2016. http://yourlearningtopics.blogspot.com/2015/01/essentials-of-insurance-contract.html
Chand, Smriti. your article library.com. Since 1998. Electronic. 15 06 2016. http://www.yourarticlelibrary.com/insurance/7-most-important-principles-of-insurance/7536/
Any six principles of insurance are as follows:
1. Principle of nature of contract
Nature of contract is a fundamental principle of an insurance contract. An insurance contract comes into existence when one party makes a proposal of a contract and the other party accepts the proposal. A contract should be simple to be a valid contract. The person who is entering into a contract should enter with his free consent.
2. Principle of utmost good faith
An insurance contract is based on the principle of utmost good faith.Under this insurance contract both the parties should have faith over each other. They must behave or act in utmost good faith. It means that they should disclose all material facts or information fully and truly at the time of entering into a contract.
3. Principle of insurable interest
Under this principle of insurance, the insured must have an interest in the subject matter of the insurance. In the absence of insurable interest, no one can get a property insured and can claim the compensation of loss from the insurance company by destroying property.
4. Principle of indemnity
The principle of indemnity the insurer makes compensation to the insured against the loss in financial terms. This principle clarifies that the insurance is only for compensation of loss but not for any financial benefits. It means compensation given to the insured can never be more than the actual loss of the property.
5. Principal of mitigation
According to this principle, it is the duty of the insured to make every effort and to take all possible steps to minimize the loss in the event of an accident. He must do his best to minimize the damage and save the property from damage.
6. Double insurance
Double insurance denotes the insurance of same subject matter with two different companies. It is the same company under two different policies. A double insurance policy is adopted where the financial position of the insurer is doubtful. Here, the insured cannot recover more than the actual loss and cannot claim the whole amount from both the insurers.
The agreement means communication by the parties with one another. There must be an offer and acceptance of the terms and conditions of the insurance contract. The acceptance or rejection of an offer is made by the insurer. The insurance contract becomes valid after the issuance of acceptance notice by the insurer to the insured.
2. Free consent
The parties involved in a contract are said to consent freely when they agree upon the same thing in same sense. There must be free consent between the two parties in the contract. The consent is free when the contract is not made by coercion, undue influence, fraud oor misrepresentation or mistake.
3. Competents to contract
The parties to the contract should be competent to enter into contracts. Every person is competent to contract who is of the age of majority according to the law and who is of sound mind and is not disqualified from by any law. The insurer must also be legally competent. The insurer must have license to sell the insurance contract.
4. Increase self-respect
There is the direct connection between self-respect and independence of a person in the society. Insurance supports to the person to be independent. It provides economic support to an individual, businessman which helps to increase the self-respect of the person in the society.
5. Legal consideration
In every contract, there should be a legal consideration. In insurance contract, payment of premium is taken as a valid consideration. Without payment of premium, the insurance contract cannot be initiated.