• The roots of insurance are connected with society and it is an agreement between two parties.
• Insurance is not an ordinary contract and so we cannot compare it with ordinary rules or laws. Insurance is a special type of contract and hence has got specific principles too.

Principles of insurance are as follows:
1. Principle of utmost good faith:

• The main objective of selling insurance is not profit but to fulfill specific social objectives of providing financial compensation in cases of pre-defined risks.
• This principle says that both the parties i.e. the insurer and insuree should have mutual and complete faith on each other. This means that the insuree will claim for financial losses only for genuine and pre-defined losses as mentioned in the insurance policy and the insuree will pay the full compensation in case of genuine claims raised by the insuree.
• While entering into an insurance contract both the parties i.e. the insurer and insuree should provide all the necessary information even if it is not asked by either party but if it is felt that the information may have an impact on the contract during claims.
• Any information that one hides and if it affects the claims made for financial loss can be termed as fraud and a breach of the principle of utmost good faith.
• In case the insuree provides wrong information or does not provide some important information during signing the contract and if he faces a financial loss, the insurance company i.e. the insurer will reject the claim and will not refund the paid premium. The insuree then loses all the rights of compensation for the risk.

2. Principle of indemnity:

• Indemnity means protection against future loss. The main objective of an insurance contract is to compensate a future loss.
• This principle is used to decide how much amount does an insurance company needs to pay to the insuree in case he faces a loss.
• The insuree can only get the actual compensation for his loss and cannot earn profit i.e. cannot get additional amount other than pre-decide in his insurance policy.
• In case the insuree takes the insurance for a lesser amount then he will get only that much amount for which he has taken the insurance. The remaining loss will have to be borne by him.
• For example, if the market value of a car is rupees five lakh and if the insuree takes insurance only of rupees two lakh and if his car gets stolen he can claim for a loss of rupees two lakh only i.e. the insured value.

3. Principle of insurable interest:

• The person seeking insurance should have insurable interest for which he ‘ seeks insurance. In other words, the insuree should have interest in recovering the financial loss he suffers.
• For example, if your house gets damaged/destroyed you will be interested in having a financial recovery for it but if your neighbour’s house gets destroyed you may have sympathy but no insurable interest in his house.

4. Principle of subrogation:

• As per this principle when the insuree claims for the financial loss he encountered and receives the compensation, he loses the ownership of the damaged product.
• For example, in case of accident to a vehicle, after receiving the compensation from the insurance company, the insuree cannot sell the damaged part because thereafter the insurance company becomes the owner of that part.
• This principle is not applicable in life insurance.