There are various principles of insurance we have studied. These principles are in fact the basic guides in regulating the business of insurance and the students are expected to have clear and precise knowledge as to the implications of these principles, not only theoretically but also practical applicability thereof.
These principles have been developed because of intense necessity, to take care of certain peculiar circumstances in the practice of insurance, in the absence of which it would have been fairly impossible to carry out the business of insurance soundly. On numbers of occasions these principles came under legal tests through the interpretation of courts, sometimes being cleanly supported and backed up by Statutes, and as such these are indeed the legal principles which are necessarily required to be followed strictly by the parties to the contract of insurance.
These principles occupy such a central position in the whole study of insurance that in the absence of the precise knowledge thereof, it would not be wrong in saying that, a substantial portion in the study of the vast insurance technicalities will not be understood.
There are six principles of insurance (doctrines of insurance) involved in the domain of insurance, such as-
- Principle Of Utmost Good Faith (Uberrima Fides)
- Principle Of Insurable Interest
- Principle Of Indemnity
- Principle Of Subrogation
- Principle Of Contribution
- Principle Of Proximate Cause
Here I am going to discuss the principle of utmost good faith and the principle of insurable interest.
The Principle Or The Doctrine Of Utmost Good Faith (Uberrima Fides)
In relation to this principle, both the parties to the parties to the contract must disclose all facts material to the risk voluntarily to each other. Any breach of this duty shall make the contract voidable at the choice of the aggrieved party. Although insurance contract is a simple commercial contract but it differs from other commercial contracts with regard to the application of this principle.
In other commercial contracts, the rule of Caveat Emptor or Let the buyer beware applies. This means that the parties to the contract need not disclose facts which would influence the other party. This means each of the parties can remain silent even on a matter of fact which he thinks might influence the decision of the other party.
Therefore, under usual circumstances, the seller of goods is not under any obligation to disclose any defect of the goods. It is the duty of the buyer to examine the goods before purchase. If he is not satisfied he may not buy it, but once bought it is over, and he cannot change it or return it simply because he has discovered a defect after purchase, i.e., after completion of the contract.
The reason of such a provision of law is this that the goods are tangible and visible. These can be very well examined before purchase. If the buyer is not an expert on the thing he is going to buy he may very well engage an expert to examine before purchase. If the buyer is not an expert on the thing he is going to buy, he may very well engage an expert to examine the thing on his behalf.
But the question remains that once the purchase is made the buyer cannot take the defence of any defect that is discovered afterwards. Even though there is no notice as such the legal position is the same. However, the seller must not take the shelter of any fraud which means that normal good faith is required to be observed.
SALE OF GOODS ACT, 1893 (of the United Kingdom) is important in this regard. Section 14 (1) of the said Act corroborates to what has been said so far as to the duty of disclosure by the seller. No defence, therefore, is usually available to the buyer unless it is a case of fraud or deceit by the seller. Section 14 (2) however provides a very limited defence to the buyer. It says that if at the time of purchase the buyer relies onto the judgment and integrity of the seller then the seller, knowing fully of the defect of his product, should not mislead the buyer by a wrong statement so as to influence the buyer in taking a decision. In such circumstances the seller may however keep his mouth shut and/or go by Section 14 (1), putting the responsibility of making the choice onto buyer’s shoulder by requesting examination of the product.
Insurance contracts actually stand in a different category because there is nothing visible or tangible here which can be physically examined like other contracts as explained. Therefore, the law is not of “let the buyer beware”.
Unless both the parties to the contract disclose voluntarily to the other party all facts relating to the proposed contract it is not possible for the other party to know precisely as to what type of bargain he is entering into. Therefore, this doctrine requires that both the parties to an insurance contract should disclose all facts material to the risk to the other party.
Although this duty applies to both, but in practice it applies more to the insured. With regard to a proposed risk the proposer must disclose all facts material to the proposed risk to the insurer and this has- to be done voluntarily even if not asked by the insurer.
A material fact is a fact which would influence the decision of a prudent underwriter to decide whether to enter into an insurance contract or not, if to enter, at what rate terms and conditions.