Principle of Indemnity
This principle ensures that an insured person is compensated only for the actual loss they suffer, preventing them from profiting from an insurance claim. This maintains the primary function of insurance as financial protection rather than a source of gain.
This principle is vital because:
Prevents policyholders from exploiting insurance for financial gain
Ensures fairness and integrity in insurance claims
Maintains the affordability and sustainability of insurance policies
Example: If a shop owner insures their stock for ₹2,000,000 and a fire destroys goods worth ₹1,500,000, the insurer will only compensate them for ₹1,500,000, not the full insured amount.
Principle of Contribution:
If multiple policies cover the same asset, this principle ensures a fair distribution of claims among insurers. This prevents overcompensation and maintains the financial balance in the insurance sector.
It plays a significant role as:
Prevents excessive claims from multiple insurers
Ensures fair distribution of liability
Maintains balance in the insurance industry
Example: Sarah insures her house, which is worth ₹60,00,000, with two insurers. Company A for ₹35,00,000 and Company B for ₹25,00,000. If a fire causes ₹24,00,000 in damage, both insurers will contribute proportionally based on their respective coverage amounts.
Principle of Loss Minimisation:
Policyholders are expected to take reasonable steps to prevent any kind of damage, even after the policy is in place. This principle ensures that insurance is not misused as an excuse for negligence and encourages responsible behaviour.
It is important because it:
Encourages responsibility and preventive measures
Reduces the frequency and severity of claims
Helps insurers maintain lower premium rates
Example: If a homeowner notices a gas leak, they must take immediate action to fix it rather than waiting for an explosion to occur and claiming insurance. This aligns with the principle of loss minimisation.
