A policy that offers an individual, a company or an entity, certain reimbursement or financial protection from a financial institution against possible future losses is termed as insurance. Insurance may range from medical to life to general purposes and includes various kinds like commercial insurance, health insurance, public liability insurance etc.
Insurance works under certain principles that include insurability, indemnity, good faith, and contribution
Insurance operates through the concept of pooling resources. Individual members of large classes are provided with insurance policies that allows to benefit from large number of similar exposure units. The loss should be insurable that is it is to be definite, which occurs at a known place, time and from a known cause, like death. Also the loss may be accidental for the policy to be insurable.
Except for life insurance, all the policies of insurance include the principle of indemnity. A promise that is made to compensate in case of loss is termed indemnity. The insured is promised to be helped to restore the position before loss. The loss gets compensated when there is a loss of property. The loss suffered and the compensation payable should be termed in terms of money. The compensation is maximum up to the value of policy, that is fixed when the contract is undertaken. The principle is not applicable to life insurance as the loss of life cannot be compensated by terms of money.
It is the most important and loyal principle for an insurance policy. It is to be provided that a good faith exists between the two parties, that is, the insurer and the insured. All the conditions and material facts about the subject should be presented by the insured to the insurer. Also the premium should be fixed and the facts of policy should be made understood to the policyholder by the insurer. When any conditions are exposed later, then the insurer has the right to avoid the contract.
With an insurance policy, an entity or a person, cannot be restored to a better position than that before loss. When the property is insured by more than one company, the insured will be compensated by the contribution from different insurance companies according to the ratio of the value of the policies which are issued by them. However the insured cannot claim the same loss from different companies. This is termed as the principle of contribution.