Fundamental Principles of Insurance with Examples, PPT, PDF

It is important that everyone should understand fundamental principles of insurance examples. As you should never misuse such benefits for your necessity. If you are looking for profits by reporting false information then, you violate insurance terms and conditions. Such breaching can cost you huge legal charges.

If you are an insurance company and drafting policy rules are big risky and a difficult task. You are aware of your health, assets condition but not the insurance company. It became really vital for the insurer to understand to need and requirement of every person while writing policy wordings. A very generic policy may not be suitable for a person who is looking for cover various types of risk. There are 7 principles of insurance which reduces the risk for an insurer company.

Principles of Insurance

These below 7 principles of insurance combined together while creating an insurance agreement. These are basic principles of insurance contract are available in public to understand benefits of insurance. The information provided here is verified by trusted sources like wikipedia. Let us look one by one closely into it.

Principle of Utmost Good Faith

Both the parties in insurance agreement needs to have full faith on each other. The “utmost good faith” principal, a tenet of the insurance industry, stipulates that all parties involved in insurance activities must always be honest and sincere. Before selecting an insurance policy, it is in everyone’s best interest to adhere to this guideline. This will ensure that all relevant information is accessible to everyone.

Principle of Utmost Good Faith Example

Maria took a term insurance policy from xyz company but she didn’t reveal the fact that she is a cigarette smoker. Maria died due to cancer tumours. Whereas doctor’s mentioned that this was due to excessive consumption of cigarettes. In such cases, insurance company have full rights to reject claims mentioning that important facts were not reveal by policy holder.

Principle of Insurable Interest

A person must have a “insurable interest” in something in order to obtain insurance coverage. This rule ensures that people purchase insurance for the appropriate reasons and discourages them from purchasing protection for objects or individuals in which they have no real interest by making it illegal to do so. It would also lead to a financial loss in-case of damaged or stolen. In simple words, there are no financial gains and losses if you do not have ownership of that assets.

Principle of Insurable Interest Example

Auto insurance claims are often declined by insurance companies when the person driving the vehicle does not hold ownership of that particular vehicle. Consider a situation where you are involved in an accident with a vehicle that you do not own. In this case, you lack the necessary insurable interest in the vehicle. This absence of insurable interest serves as grounds for rejecting auto insurance claims. This principle is a clear and vital aspect of insurance agreements that must be acknowledged.

Principle of Indemnity

Principle of Indemnity means protection or security up to loss or damages or insurance cover, whichever is lower. The Indemnity Principle states that an insured party is entitled to reimbursement proportional to the actual quantity of monetary damage caused by a covered risk.

It attempts to place the insured in the same financial position as before the loss, but without giving them too much money. Under the indemnification principle, the insurance company would pay the lesser of the two amounts to the policyholder.

Principle of Indemnity Example

Consider a scenario where your automobile is insured for a value of 50,000. When you go through a claims process, the insurance company assesses the vehicle’s damage to be around 10,000. In such instances, the insurance company provides a payout of 10,000 to cover the damages, rather than the full 50,000 specified in the insurance coverage agreement. This illustrates that the compensation amount is directly tied to the extent of the loss experienced.

Principle of Contribution

Principle of contribution means, similar asset used by one or more than one businesses under two different types of insurance policies. People usually adopted buying multiple policies when the financial risk of insurer is actually doubtful. This fundamental principles of insurance means that insured are unable to get compensation more than the actual loss as well as insured cannot claim total amount with multiple insurer companies.

Principle of Contribution Example

Let’s consider the situation where Mr. Mike has insured his property valued at 500,000 with three different insurance companies. Each insurer provides coverage of 300,000. Unfortunately, due to unforeseen circumstances, the property incurs damages amounting to 200,000.

In this scenario, Mr. Mike has a couple of options. He can either make a full claim for the entire loss from one of the insurance companies, or he has the choice to file partial claims with all three insurers. It’s important to note that regardless of the choice he makes, Mr. Mike won’t be able to receive the full damage amount from all three insurance companies simultaneously.

Principle of Subrogation

Principle of subrogation means substituting one creditor for another. You should understand the importance of insurance in your life. Subrogation is a legal procedure that allows an insurance company to assume the legal rights of a policyholder once a claim has been paid. Once losses incurred against property are compensated to policyholder, the rights of property ownership go to their insurer.

In many cases, when a vehicle or property sustains severe damage rendering physical possession impossible, the insurance company takes on the role of initiating a lawsuit. If the lawsuit is successful, the insurer can recover the compensation amount previously paid to the policyholder.

Principle of Subrogation Example

So let us assume that you are in a vehicle wreck caused by a 3rd party and your register a claim at the insurance company to cover that the damages on your medical as well as vehicle expenses. Here insurer might take the ownership of your car as well as medical expenses in order to get claimed by file the lawsuit against individual accountable for the accident.

Principle of Proximate Cause

Principle of proximate cause means either direct cause or nearest cause. This principle of insurance is one of the six that applies when losses result from two or more factors. In such instances, the primary and most influential cause of the loss is taken into account. This principle comes into play when damages arise from multiple factors.

The “Proximate Cause” study focuses on the item most directly to blame for the loss rather than investigating all of the potential causes. If a storm causes a tree to fall during a storm and cause damage to a home, the storm is the immediate cause of the damage, while the tree’s weakness is the remote cause.

Principle of Proximate Cause Example

Assume that Mr. John keep driving when there is a red signal and hit Mr. Sam which had a green signal. Due to the mistake of other person Mr. Sam got personal injuries. Such incidence is categorized under principle of proximate cause which has caused injuries to Mr. Sam.

Principle of Loss Minimization

Principle of loss minimization means; it is the responsibility of insured towards safeguarding and taking appropriate precautions in order to minimize the losses incurred on insured asset. It is the last of 7 principles of insurance which is quite simple to understand.

The principle of Loss Minimization emphasizes that insured parties should take quick and reasonable actions to minimize damages after an insured incident occurs. If an insured person experiences a catastrophe, such as a burst pipe, they must immediately turn off the water supply and make repair plans.

Principle of Loss Minimization Example

Imagine a situation where Mrs. Emma’s house catches fire during a party and celebration event at her home. Faced with this tragic scenario, Mrs. Emma must do everything in her power to stop the fire. To start, she should immediately call the nearest fire department and utilize any available emergency fire extinguishers. Instead of merely watching her house burn, she needs to take decisive action. Worrying won’t solve the problem; she must remember that her belief in full fire insurance coverage for her house doesn’t change that fact.

Principles of Insurance PPT

Below are some excellent materials for further exploration in this area. These resources offer valuable insights into fundamental insurance principles through informative presentations. Feel free to download the Principles of Insurance PowerPoint (PPT) presentation using the provided details.

Fundamental Principles of Insurance PDF

We have gathered some of the best reading material for you with lot of more examples with it. You can download Fundamental Principles of Insurance PDF from the below described.


The fundamental concept of insurance is based on a simple idea. A large group of individuals or businesses come together and pool their assets. This collective pool of resources is used to cover the losses of a smaller group of customers when they face unexpected situations. By doing so, people and organizations can pursue their objectives without the constant fear of losing a substantial amount of money.

Understanding these principles and examples of insurance can be incredibly helpful. With this knowledge, you can grasp the core foundations of insurance. Moreover, we provide various learning materials to help you delve deeper into this subject. These materials include principles of insurance PDFs and PowerPoint presentations. By exploring these resources, you can expand your understanding and knowledge. We believe that this information has the potential to bring positive changes to your life and benefit you in various ways.

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