What is insurance in simple words? Meaning-Principal

What is meaning of Insurance?

Meaning of Insurance : 

Insurance is a written agreement between two parties by which the insured receives a promise from the insurer in lieu of premium amount that if he (the insurer) suffers loss due to fixed risks.  Financial loss will be reimbursed within the limit of the amount and as per the calculation fixed.  A written agreement of insurance is known as an insurance policy.  Insurance does not eliminate the risk, but compensates for the financial loss arising from the risk. 

Principles of Insurance : 

The origins of insurance relate to socialization and become an agreement between two parties.  Thus, insurance is not a general contract and cannot be linked to common contract law.  

As insurance is a special contract, in addition to the general contract principles, the following specific principles apply to it: 

(1) Principle of Utmost Good Faith: 

The purpose of an insurance contract can never be to make a profit.  The purpose of an insurance contract is to obtain financial compensation for losses.  The basic approach to insurance is social.  As such, the parties to the insurance contract have to place complete trust in each other.  At the time of signing the contract, both the parties have to give each other all the necessary information about the insurance item.  Even if the information is not requested at the time of taking out insurance, if the contract is affected, one party has to give it to the other party.  An insurance contract made by concealing any information is called a betrayal And is said to have violated the principle of absolute trust.  Whenever the insured party finds that the principle of absolute trust has been violated;  The insurance contract is then deemed canceled and the insured cannot get back the amount of premium he has paid and also has no right to get compensation in case of loss.  

(2) Principle of Indemnity: 

An insurance contract is signed so that the insured can get compensation in case of loss.  The core of the insurance contract is the principle of loss-compensation.  This principle is used to determine how much the insurance company will pay if the insured suffers a loss.  The insured can only get compensation for the loss incurred by him.  He cannot make a profit i.e. he cannot get more than the amount of loss as compensation.  The principle of loss compensation does not apply to life insurance.  If the insured insures less than the value of the item, he implicitly acknowledges that he will suffer a proportional loss of less value.  

E.g.(A) A person has insured 3 lakh of his 5 lakh item;  But when the item is completely destroyed, it gets a maximum loss of Rs 3 lakh.  

(B) the value of one item is 5 lakhs;  But if it is insured for Rs 3 lakh and it suffers a loss of Rs 2 lakh, it will get a proportional compensation of Rs 1,20,000 of the sum insured.  

(C) If the value of the item is Rs. 5 lakhs and its insurance is Rs. 5 lakhs and the item is completely destroyed, the insurance company will pay full compensation of Rs. 5 lakhs.

(3) Principle of Insurable Interest: 

The principle of insurable interest means that the insured should have financial interest in the insured item.  

E.g., The landlord has an economic interest in the house;  When the tenant has no financial interest in the house.  

(4) Principle of Subrogation: 

When an insurable item is insured and it is destroyed, the insured company becomes the owner of the destroyed item when the insurance company pays its compensation.  The original owner has no right over it.  This does not apply to life insurance.

What is Meaning of Insurance?

Insurance is a written agreement between two parties by which the insured receives a promise from the insurer in lieu of premium amount that if he (the insurer) suffers loss due to fixed risks

What is Principles of Insurance?

The origins of insurance relate to socialization and become an agreement between two parties.  Thus, insurance is not a general contract and cannot be linked to common contract law.  

What is Principle of Insurable Interest?

The principle of insurable interest means that the insured should have financial interest in the insured item.