The principles of marine insurance are a set of rules that support the functioning of marine insurance policies. Since the scope of marine insurance is vast, the principles are necessary to maintain fairness and transparency in managing the risks associated with maritime business.
These principles are the basic set of rules that lay down the foundation for the functioning of a marine insurance policy. They help us to understand the basis on which insurance functions and the risks that are associated with maritime business and trade.
Discover the principles of marine insurance in depth in this blog.
6 Principles of Marine Insurance
1. Utmost Good Faith
This principle involves an element of trust and faith. According to the principle of utmost good faith, the insured and the insurer must disclose all the essential facts and details when entering into an insurance agreement.
The insured is obliged to disclose all facts related to the insured property that may affect the insurer’s decisions. Similarly, the insurer must disclose all the terms and conditions of the policy to the insurance company.
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2. Indemnity
The principle of indemnity states that the insured must receive compensation only to the extent of actual loss. For instance, if an individual has taken transit insurance, he must receive compensation equal to the loss and nothing more or less.
This principle makes it clear that insurance policies are meant to protect from financial losses. Thus, they must not be used to make profits.
3. Insurable of Insurable Interest
The individual purchasing the insurance must have a legal or financial interest in the property that is insured. It means that the insured must suffer a loss if the events mentioned in the policy were to occur. For instance, the insurer must benefit if the goods reach on time and he must suffer a loss if the goods are not delivered on time or in a good condition. The idea behind this principle is that insurance must be used to transfer risks and not for speculative reasons.
4. Contribution
The principle of contribution ensures fair treatment to the insurers when the insured has multiple insurance plans. According to this principle, each insurer must contribute towards the claim raised by the insured. Thus, the claim burden is shared among the insurers.
5. Subrogation
The principle of subrogation is similar to the principle of indemnity. It says that the insured must be compensated for the actual loss that he suffers. Thus, once the insured has received compensation for the loss, he should not make profits from the damaged property or goods.
For example, if you have taken a marine insurance policy of ₹5 lakhs for the cargo and the entire thing gets damaged in an accident. After receiving the claim amount, you sell the damaged cargo for ₹50,000. Thus, your loss is reduced by ₹50,000. In such a case, you must return ₹50,000 to the insurance company.
6. Proximate Cause
This is another fundamental principle of marine insurance, which is essential in determining the cause of damage in transit insurance. It is used to determine the most direct cause of loss to the insured property where multiple causes/events are involved. The principle states that the insured is liable to pay compensation only if the proximate cause is mentioned in the insurance.
For example, you suffered a loss due to a piracy attack while the goods were in transit. The policy covers loss by natural disasters only. If the principle of proximate clause did not exist, you could claim that heavy rains were the reason why you could not spot the pirates and, hence, the loss incurred. However, as per marine insurance principles, piracy would be considered the direct cause.
Summary
The principles of marine insurance are the foundation on which the maritime insurance sector operates. These principles are necessary for the smooth and fair functioning of the insurance sector. They provide the necessary framework for managing the risk and ensuring that the insured and insurer receive fair treatment.
Frequently Asked Questions
Who governs the principles of marine insurance in India?
The General Insurance Council governs the principles of marine insurance.
What happens if an insured breaches one of the principles?
In the event of a breach of principle, the matter may be taken through the legal route. Thus, the decision of the court of law will prevail.
