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Answer
(i) Utmost good faith (uberrima fides): As contrast of insurance is based on mutual trust and confidence. It means that each party to the insurance contract must disclose all the information which is likely to influence the other party's decision to enter into contract. The proposer knows better the facts relating to the risk. Therefore, he must disclose all material facts known to him. For example, in a contract of life insurance, the proposer must disclose his correct age, any chronic illness, etc. If he misrepresents or conceals certain facts, the insurance company can cancel the contract of insurance.
(ii) Insurable interest: A person must have interest in the non-occurence of the event being insured. He should stand in a position that he would benefit from the existence of the subject matter and would suffer a loss from its destruction or damage. For example, a person has interest in his life and property. But a person has no interest in the life or property of a stranger. This principle is based on the logic that no one should be allowed to make profit out of insurance.
(iii) Indemnity: Indemnity implies compensation. According to this principle, the insurer shall compensate the insured in case of a loss against which the policy was issued. The purpose is to place the insured financially in the same position in which he was before the loss. The logic behind this principle is that the insured should not be allowed to make a profit from his loss. The principle of indemnity is not applicable to life insurance. This is because human life can not be valued in terms of money.
(iv) Subrogation: This principle is a corollary to the principle of idemnity. According to the principle of subrogation, the insurer becomes owner of the damaged property after compensating the insured for loss. For example, a person insures his car for ₹2,50,000. The car is badly damaged in an ac-cident. The insurance company pays 2,50,000 to the insured. The damaged car which is worth *5,00,000 becomes the property of the insurance company.
(v) Contribution: This is also a corollary to the principle of indemnity. According to the principle of contribution, if a person gets the same property insured with two or more insurers, all the insurers will contribute to the compensation to be paid to the insured. The insurance companies will pay in proportion to the sums insured with them. The share of each company can be calculated as follows:
$\frac{\text { Sum insured with an insurance company }}{\text { Total sum insured with all the companies }} \times$ Amount to loss
Suppose, a person insured his house against fire for ₹1,00,000 with company A, for ₹2,00,000 with company B and for ₹3,00,000 with company C. He suffers a loss of ₹60,000. The three companies will contribute ₹10,000, ₹20,000 and ₹30,000, respectively to the loss.
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