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Class 11 Business Studies - Chapter Business Services NCERT Solutions | Explain briefly the principles of insura

Welcome to the NCERT Solutions for Class 11th Business Studies - Chapter Business Services. This page offers a step-by-step solution to the specific question from Exercise 1, Question 4: explain briefly the principles of insurance with s....
Question 4

Explain briefly the principles of insurance with suitable examples.

Answer

Principles of insurance are as follows:
(a) Utmost good faith: It is the principle of insurance that insured person should open or defined all the facts to the insurer. Non disclosure of these facts by the knowledgeable party could affect the validity of such types of contract; e.g. in a court case in England, the court decided that the insurance company could not be made to pay the claim, since it had come to know of the disease after the person has died.

(b) Indemnity: Indemnity's contract is one where the insured person is paid only the original amount of loss or the amount of the policy, whichever is low e.g. a person insured his house against fire and later he agreed to sell his house to another person. Before the completion of sale the house was damaged by fire. The seller received not only the compensation from the insurance company but also, the price of the house from the buyer as per the sale's contract. The court decided that the insurance company could recover the amount it had paid. But life insurance contracts are treated well.

(c) Insurable interest: It shows a legally recognisable relationship between the person insuring another person or thing, (b) the person or thing which is insured like that he will stand to gain in financial terms if the person or thing insured by him without being stop to exist, and he would suffer a financial loss if that person dies or that thing is destroyed. Thus, X cannot insure the life of Y if there will be no relationship between the two of them.

(d) Cause proxima: An insured person can overcome the loss only if it is caused by any of the risks insured. Such types of risk should be the closest, and not a distant or remote, because of the loss e.g. a ship carrying oranges has met with an accident as a conclusion of which there is some delay in unloading and the oranges were also spoilt. In this case, the loss is not due to the accident but because of the getting late in unloading. Hence, the shipper would not be much able to overcome the loss from the insurance company.

(e) Contribution: When we take advantage of insurance company, we have to pay the contribution. Its motif is to divide the actual amount of loss among the various different insurers who are liable for the same risk in respect of the same subject matter, under different policies. However, this does not apply to life insurance e.g. X insures his house against the fire for Rs. 20,000 with insurer Y and Rs. 40,000 with insurer Z. If the house catches the fire and the actual loss amounts to Rs. 24000 then Y will be responsible to pay Rs. 8,000 and Z Rs. 16000. If the whole amount of loss is paid by Y, he can recover Rs. 16000 from Z and if it is paid by Z, he can recover Rs. 8,000 from Y.

(f) Subrogation: The principle of subrogation appeals in the fire and marine insurance only. It is understood that one paying the amount of loss to the insured person, the insurance company will become entitled to all the signs that were available to the insured person to protect himself against the loss i.e. after paying full indemnity in respect of the loss to the assured, the insurer will come into the shoes of the assured and exercise all rights and remedies to which the assured was entitled against third parties and continue doing so until he has recouped the entire amount will be paid under the policy to the assured.

(g) Period of insurance: Life insurance's contract is a continuing contract subject to regular payments of premium. A contract of fire insurance is for a fixed duration. A contract of marine insurance may be for certain period of time or for a certain voyage.

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