Fundamental Principles of Insurance Contract

In life’ we all concern about the risks we will have to face in future point of time. Every person live in society should have minimum of safeguard to face the occurrence of uncertain future event. Therefore we all need to create a contract with an Insurance company to transfer the risk and get the proper protection against losses, on the occurrence of uncertain future event.

However, there must be a proper contract between two parties named insurer and insured to be enforced the insurance contract, in the insured claim on the insurance policy. Therefore certain fundamental features should be reflected from every insurance contract in order to honour the insurance policy.

“Utmost good faith”

Utmost good faith simply means, the both parties should enter in to the contract good faith. In Latin it’s called “uberrimae fidei”. That is a duty of both parties to enter in to an insurance contract with the full disclosure of material facts related to subject matter.  

Suppose you want to have life insurance policy being a diabetic patient, and then it’s your duty to disclose the insurer about the illness as it is a material facts to a life insurance policy.

The duty to disclose of important facts’ usually referred to as material facts is often rest on the insured as he knows more about the subject matter insured. Non disclosure of material facts by the policy holder would affect the insurer in deciding whether he enters in to the contract or on which premium rate, it should be considered. 

However, insurance contract would become voidable on the request of the party not at fault, if the contract did not follow the principle of utmost good faith.

Indemnity

Indemnity is the second principle of insurance contract.  It is simply meant, that the insured will only be re-instated to the previous position after the loss, resulted from occurrence of uncertain event. It’s clear any insured is not allowed to make profit from the insurance contract and could recover the actual amount of loss not exceeding the amount of policy.

Insurable Interest.

 Insurable interest is another fundamental principle of an insurance contract and it means that the insured should have particular relationship with the subject matter insured.

For an example, in the life insurance policy wife has an insurable interest in the life of her husband.

If a person is said to have an insurable interest in the subject matter insured, he must benefit from its existence and suffer a monetary loss from its destruction.

For an example, a creditor has an insurable interest in the life of the debtor.

“Causa proxima”

   “Causa proxima” is also a principle of insurance. It speaks about the proximate cause of the loss. When you claim from insurer for the loss resulted from the occurrence of uncertain event, the loss should be caused by the peril insured in order to make the insurer liable.  

Suppose “X” insured his house against loss or damage by fire. “X” quarrelled with his neighbour and ultimately neighbour set fire to the X’s house and damaged the house. “X” could claim from the insurer under the insurance policy as the damage was caused by fire that is the peril insured against the loss.   

However the proximate cause has been clearly explained by the Queens Bench, in the case of pink v Fleming .(1899)25 Q.B.D.396.

       In a marine policy, the cargo was a shipment of oranges .and the peril insured was the collusion with another ship. The ship was collided with another ship and resulted in delay and mishandling of  shipment. Due to the delay and the mishandling of the shipment, oranges were become unfit for human consumption

It was held that the proximate cause for the loss was the delay and mishandling of shipment and not the collusion. There fore insurer was not liable for damages as the peril insured is the collusion.

       However it is note worthy, that the insurance contract is a perfect valid contract   and those fundamental principle should clearly be reflected from each and every  insurance contract.