Essential Elements and Principles of Insurance

Essential elements of Insurance

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:

1. Agreement

The agreement means communication by the parties to one another regarding their intentions to create a legal relationship. For a valid contract of insurance, there must be an agreement between the parties. That is one making offer or proposal and another accepting the proposal or signifying his acceptance of the proposal.

2. Free consent

There must be free consent between the two parties in the contract. Parties entering into the contract should enter it by their free will and consent. The contract entered via undue force, influence, fraud, misrepresentation, hiding the facts is not the valid contract. Consent received forcefully can't be a free consent.

3. Components of contract

An agreement must be legally competent between the parties to enter into the contract. It means both parties in the insurance contract must be at the age of majority. He/she must have a sound mind and not disqualified by law of the country. It states that a person who is minor, lunatics, idiot and alike cannot enter into an insurance contract. The contract entered into by these will be declared as void.

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

There must be valid considerations in a valid insurance contract. Consideration is the value that each party gives to the other party. For the establishment of the legal relationship, creation of an obligation between them and to make it enforceable by law there must be a lawful consideration.

6. Compliance with legal formalities

In the contract of insurance, the agreement between parties must be in written form and signed by both the parties. It must be properly tested by the witness and registered otherwise, it may not be enforced by the court.

7. Competent of contract

The parties to the contract should satisfy certain qualifications to enter into contracts. A person who is at the age of majority according to the law, who is of sound mind and who is not disqualified by law can enter into the contract. So, the person of unsound mind disqualified and minors cannot enter into insurance contracts. A contract made by incompetent parties will be invalid.

8. Certainty

The terms and conditions of a contract should be clear and certain. They should be clearly understood by both the parties. Hence, to make it clear and certain, the insurance company provides a printed policy document.It contains all the terms and conditions of the policy.

9. Insurable interest

Insurable interest refers that the insured must suffer if the loss takes place in the property. In case of the property interest, ownership of property can support to insurable interest but in the case of life insurance, close family ties or marriage will satisfy the requirement of insurable interest.

10. Encourage saving

The insurance should pay the amount of premium regularly and compulsorily. It develops the habit of saving. The deposited insurance premium cannot be withdrawn like a bank deposit. Life insurance is the best method of saving an investment. It is a good means to make provision for retirement age.

11. Writing and registration

The insurance contract must be in writing , duly signed, stamped and registered.

12. Warranties

Certain conditions and promises imposed in the contract are called warranties. A warranty is that by which the insured undertakes that some particular thing shall or shall not be done. Warranty is a very important condition in an insurance contract which is to be fulfilled by the insurance company.

Principles of Insurance

Insurance is a contract between the insurer and 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:

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. As a client, it is the duty of the insured person to disclose all the facts to the insurance company. Any fraud or misrepresentation of facts can result in cancellation of the 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 states that the insurer agrees to pay no more than the actual amount of loss. Indemnity is the security or compensation against loss or damage. The principle of indemnity is such principle of insurance stating that an insured may not be compensated by the insurance company in an amount exceeding the insured’s economic loss.

5. Principal of mitigation

According to this principle, insured should try to minimize the loss as far as possible when the incident takes place. It is the duty of the insurer to make every effort and to take all possible steps to minimize the loss in the event of the accident.

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. Insurance is possible in case of indemnity contracts like fire, marine and property insurance. 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.

7. Principle of proximate cause

The Proximate cause literally means the ‘nearest cause’ or ‘direct cause’. This principle is applicable when the loss is the result of two or more causes. The proximate cause means; the most dominant and most effective cause of loss . This principle is applicable when there are series of causes of damage or loss.

8. Principle of subrogation

This principle of subrogation strongly supports the principle of indemnity. Subrogation means substitution of the insurer in place of the insured for the purpose of claiming from the third person for a loss covered by insurance.For example, in the case of an auto accident, subrogation stops an insured from collecting payment from two insurance companies for the same loss, places responsibility for the accident on the third party and gives an insurance company the legal right to demand recovery.

9. Principle of contribution

The principle of Contribution allows insurance companies to share the cost of claims and prevents an insured from collecting in full on more than one policy. The main purpose of the principle is to compensate only the actual loss in a proportionate way by the insurers. If one insurer pays the claim in full, the insurer can then recover a percentage of the payment from the other insurers. (Chand)


Business Hub. 03 01 2015. Electronic. 15 06 2016.

Chand, Smriti. your article Since 1998. Electronic. 15 06 2016.

  1. Insurance has evolved as a process of safeguarding the interest of people from loss and uncertainty. 
  2. The parties in an agreement must be legally competent to enter into the contract.
  3. Consent means that parties to an agreement must agree on a specific thing in the same sense or their understanding should be the same.
  4. An insurable interest must exist at the time of the purchase of the insurance. 
  5. The principle of indemnity is such principle of insurance stating that an insured may not be compensated by the insurance company in an amount exceeding the insured’s economic loss.
  6. Subrogation is a principle of substitution and recovery. 

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