An Insurance Contract can be defined as a contract between two parties where one party i.e., the insurance company also known as ‘Insurer’ undertakes to cover the losses or indemnify the other party i.e., the policy holder also called as ‘Insured’ from the premium paid by the insured on the happening of a certain event or circumstances. In an Insurance Contract the Insurer has more power than that to Insured because the terms and conditions of the policy are set by the insurance company and the policy holder has no power to alter these terms but to either accept the policy or reject it. An Insurance Contract helps the policy holder to assist in the financial losses suffered by him by providing him financial assistance from the premium paid by him.

To regulate the insurance business in India we have The Insurance Act, 1938 along with Insurance Regulatory and Development Authority (IRDA). They are responsible for the regulation and maintenance of the Insurance industry in India. It is mandatory for the Insurance Companies to be registered under the Companies Act, 2013 and to obtain license from the IRDA and the Insurance Act, 1938 also provides that the companies can take only the business of insurance to get licence from IRDA.

Essentials of Insurance Contract

Since and Insurance Contract is a contract, it has all the essentials elements of a basic contract which are given below-

  1. Offer and acceptance – For applying for insurance, the first step is to get the proposal form from a particular insurance company, fill the details and send it to the insurance company. This is called as offer. Now on receiving the offer if the insurance company agrees to provide insurance, then it is called as acceptance.
  2. Consideration – The premium which is paid by the policy holder in respect of the insurance provided by the insurance company is called as consideration. This premium is used by the insurance company to indemnify the policy holder on the occurrence of loss.
  3. Legal Capacity – Both the parties to an insurance contract must be legally competent to enter into a contract. The policy holder should be of sound mind, major and should not be disqualified by law. And the insurance company should have a valid licence from the IRDA
  4. Legal Purpose – The purpose of the insurance contract must be legal. Insurance taken for illegal things like explosives, arms and ammunition will not be considered as a valid insurance contract.
  5. Two Parties – There must be two parties to a contract of insurance i.e., the Insurer which is the Insurance company and the Insured which is the policy holder.
  6. Writing – The insurance contract must be in writing. All the terms and conditions must be laid down in writing in the insurance contract itself.

Principles of Insurance Contract

In Insurance Contract there are 7 basic principles which are applicable, which are as follows;

  1. Principle of Utmost Good Faith
  2. Principle of Insurable Interest
  3. Principle of Indemnity
  4. Principle of Subrogation
  5. Principle of Contribution
  6. Principle of Proximate Cause
  7. Principle of Loss Minimization

We will be explaining each principle briefly and will se how are these applicable in an insurance contract.

  • Principle of Utmost Good Faith

It is the most basic and primary principle of insurance contract. Before entering into an insurance contract both the parties i.e., the Insurer and the Insured must reveal all the material facts and they should enter into the contract with good faith. If any party does not follow this principle, then the insurance contract will be held void.

Illustration – A policy holder while entering into a life insurance contract does not reveal the facts of his digestive problem and after taking the insurance policy, he dies within 1 month. Here all the material facts were not disclosed by the policy holder, so the insurance company will not be liable to compensate the beneficiary of the policy holder ad can declare the contract as void.

  • Principle of Insurable Interest

This principle means that the Insured must have an insurable interest in the property or thing which has been insured. The policy holder should have a relationship with the subject matter and he must experience a financial loss on the damage of that subject matter. This principle will be only beneficial when the policy holder has a direct relationship with the insured property.

Illustration – A person has an insurable interest in his house only. He cannot have an insurable interest in his neighbor’s house and cannot take insurance for his house.

  • Principle of Indemnity

Indemnity in simple sense means giving security or compensation for the loss or any other financial burden. The Insurer i.e., the Insurance company promises to compensate the Insured i.e., the policy holder for the losses occurred to him. This principle is not applicable to Life Insurance Policies because a human life cannot be measured in monetary terms. In Life Insurance a lump-sum amount is paid to the beneficiary of the policy holder when the policy holder dies.

Illustration – Rohan suffers loss on his insurable property because of fire. He can claim compensation from the insurance company. The insurance company is liable to provide financial assistance to Rohan for the loss suffered by him. Here Principle of Indemnity lies.

  • Principle of Subrogation

Subrogation means one party stands in for another. As per this principle after the insured i.e., the policy holder is indemnified for the losses occurred to his insured property the right of ownership of the insured property goes to the insurer i.e., the insurance company. This principle gives right to the insurance company to claim the amount of loss from the third-party responsible for the same.

Illustration – If A gets injured in a road accident due to the negligence of a third-party then he can claim for the losses from the insurance company with whom he has taken insurance and the insurance company can also sue the third-party to recover the money as claim.

  • Principle of Contribution

This principle applies when the policy holder has taken insurance for a subject matter from more than one insurance companies. The loss which is occurred on the insured property is covered by all the insurance companies in a proportionate matter. This principle insures that the policy holder does not claim more than the actual loss suffered on the insured property by claiming from different insurance companies.

Illustration – A person has taken insurance for a particular subject matter from two insurance companies. On the happening of a certain event or loss occurred by the insured both the companies will be liable to compensate for the losses occurred by the insured in a proportionate matter.  

  • Principle of Proximate Cause

This principle is applicable when the insured property suffers loss because of more than one incident in succession to each other. The property may be insured against some incidents but not for all. The insurance company considers the nearest cause which is most likely to cause loss to the insured property. If the proximate cause is the one in which the property is insured then the insurance company will pay compensation but if it is not a cause in which the insured property is insured then the insurer does not have to pay.

Illustration – when a driver fails to see a stop sign while speeding, another driver who is behind him also misses the sign. The second driver fails to notice a pedestrian on the footpath. The speeding driver is the proximate cause for the injury caused to the pedestrian.

  • Principle of Loss Minimization

This principle states that the insured i.e., the policy holder must take all the necessary steps to minimize the loss of the insured property, in case of sudden events like fire etc. it is the responsibility of the insured to take necessary steps to control and reduce the losses and try to save what is left. This principle makes the insured more sensible towards his insured property just like any other person would be in situations like these.

Illustration – Ayan has taken insurance on his house from fire. In case of sudden fire Ayan calls fire brigade and tries to control it by pouring water on it. Here he has taken all the necessary steps to reduce the fire and control the loss and save his house.


In the end it can be concluded that by understanding the above-mentioned principles of insurance one can understand clearly how insurance works and the process of claiming money works. Merely because you have entered into an insurance contract does not mean that its written-on stone that you will be able to claim for the losses and it will be paid. An insurer’s liability arises only after the happening of a certain event or under certain circumstances. Unless and until the insured has not suffered any loss, the insurance company will not be liable to indemnify the policy holder.


Aishwarya Says:

I have always been against Glorifying Over Work and therefore, in the year 2021, I have decided to launch this campaign “Balancing Life”and talk about this wrong practice, that we have been following since last few years. I will be talking to and interviewing around 1 lakh people in the coming 2021 and publish their interview regarding their opinion on glamourising Over Work.


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In the year 2021, we wrote about 1000 Inspirational Women In India, in the year 2022, we would be featuring 5000 Start Up Stories.

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