Fundamental Principles of Insurance Contracts

In the modern world, most people express concern of the risks which they could face in future point of time. Thus, they all try to obtain a minimum safeguard for an uncertain event, which could occur in the future. Therefore, people will have a tendency to enter into a insurance contract in order to minimize the risk of an uncertain event.

A contract of insurance is a perfectly valid contract and its object is to protect the insured against loss on the occurrence of uncertain future event. Hence the general principles of the law of contract should basically apply to the insurance contract as well.

However, there are certain fundamental principles common to all type of insurance contracts and all these principles should be followed in order to legally enforce the insurance contract.

 Let us now see the important principles which govern any insurance contract between an insured and an insurer.

1)    Principle of utmost good faith

This simply means the parties to the insurance contract are required to observe good faith. Thus the parties to the insurance contract must deal openly and honestly to the each other and it is the duty of the proposer of an insurance contract to disclose all material facts which may influence the decision of the insurer. 

Hence, where the utmost good faith is not observed by either party, the insurance contact becomes voidable and the innocent party could repudiate the contract.  

2)    Principle of indemnity

Principle of indemnity is the main fundamental principle of insurance law and the object of indemnity is to place the insured after the loss in the same financial position as he occupied immediately before the occurrence of uncertain event.  The rationale behind this principle is to prevent the insured obtaining any profits from his loss. Therefore no person is allowed to benefit more than the loss suffered by him under an insurance policy. 

3)    Insurable interest.

Insurable interest is a prerequisite of every insurance policy and its existence is necessary to enforce the insurance contract.

However, Insurable interest basically means the financial interest.

If a person enjoys benefits from existence of the subject matter and he suffers a financial loss from its destruction, then it is said’ that person has an insurable interest to the subject matter.

Thus, a creditor has an insurable interest in the life of his debtor and also a wife has an insurable interest in the life of her husband.

Hence, insurable interest is an essential element of every insurance contract and without the insurable interest; no insurance contact can be legally enforced.