There are a lot of questions that every person has when it comes to insurance. There are various principles of insurance that every investor should know about.

Here are 7 principles that investors should know about:

Principle 1: Principle of utmost good faith for an investor:

principles of insurance
Source: Fact/Myth

The most basic and primary rule of insurance that every investor should know about is the principle of utmost good faith.

The simple meaning of this principle is that the person who is getting the insured should tell the insurer all about the subject matters which are required for the insurance.

The liability of the insurer is based on the fact that they hide nothing while getting the insurance.

Principle 2: Principle of the insurable interest:

Source: Vanguard

It means that the person taking insurance should have an insurable interest in the thing they are getting insured. If the person faces a financial loss and the insured object gets destroyed, then the insurance won’t be taken.

If you have an insurable interest, then it will help you in getting the material things that you need.

Principle 3: Principle of indemnity:

principles of insurance
Source: Bytestart

The principle of indemnity states that any insurance is not to make any profit but to only deal and compensate with the loss that has occurred.

It is a principle that helps in ensuring that you get the same position that you had before the loss occurred. The compensation which is paid in this situation cannot be more than the loss at any cost.

A lot of people ask this question about why a company asks questions about the income while taking upon the term plan and the reason for asking that question is to make sure that the person is taking limited insurance which is relatable with their financial status and also good enough to restore his lifestyle if there is any case of loss.

For example: if a person earns Rs 1 Lakhs per month, then insurance of 2 to 3 crores is sufficient for them, and they cannot take up insurance for500 crores even if they premiums.

The whole intention of the insurance policy is not just to cover up the losses but also to benefit you from the insurance policy.

Principle 4: Principle of contribution:

Source: Business Finance and Accounting Blog

This principle is just a proposition that follows from the principle of indemnity. The principle means that the insurance company is liable to pay the amount as their contribution and recover the excess amount that is being paid by the other insurer.

For example: if a person has two health insurance A and B and both are for Rs 5 Lakhs, and if there is a claim for Rs4 Lakhs, then both the insurer can pay Rs 2 Lakhs each for the claim.

You, as the insurer, also have the right to go to any insurer and claim it or divide it between the insurer.

Principle 5: Principle of Subrogation:

principles of insurance
Source: Cleverism

According to this principle, if the insured has paid for the damage that is caused by the insured property, then the ownership right of such property will shift to the insurer after the claim.

For example, if your house/ car or anything that you insured is completely damaged and once the insurance company gives you the compensation for it, then they get the ownership for the property which further means that they can sell it to recover the excess amount for their dues in the process.

The person who insured cannot benefit from the remaining amount of that item. You can imagine this in the scenario: if a person owns a car and then that car is stolen by someone, so now the insurance company will pay you the full amount of the claim, but after this, the insurance company will have the full ownership on the item, so if the car is found by the police then the insurance company will own it.

Also, as per this principle, the insurer sometimes tries to recover the losses from the other party. The principle of subrogation is one of the most important principles that any investor needs to know about.

Principle 6: Principle of loss minimization:

Source: Insurance Company Blog

According to the principle of loss minimization, it is important to take all actions and fulfill all duties that need to be done to minimize the loss if it is in control. The insured person should make sure to control and reduce the loss if they can do it in a given situation.

For example, if the car catches fire, then the insured person cannot just relax and sit back because they need to take some actions to minimize the loss by calling the fire department or doing something that they can at that moment.

If they do not try to take steps to minimize the loss, then it will be considered as a violation of the principle.

Principle 7: Principle of Causa Proxima:

principles of insurance
Source: Deacon Insurance

It is a fundamental principle that the investor needs to be aware of before taking up any insurance. According to this principle, if there is a loss caused by more than one reason or one cause, then the closest loss will be taken into consideration with the property and the person’s liability.

The nearest cause will be considered, and only the insurer’s property will come into consideration and the policy will be paid accordingly. The insurer will not be liable for the farthest cause.

One example that suits this situation is: A cargo ship was damaged by the rats because of this; the seawater entered the ship and spoiled the goods.

The closest reason here will be that the seawater entered the ship, and the rats damaging the ship will be the farthest cause.


It is essential to understand these principles because it gives you a better understanding of the insurance that you will take up and will also help you in knowing the things that you should know about the insurance that you are taking up.