The 6 Principles of Insurance, Explained for IC-01
Six rules decide every insurance claim. Here is what each one says and which ones apply to life cover.
Every insurance claim in India, from a burnt flat in Pune to a stolen scooter in Indore, is decided by the same six principles. They tell you who may buy a policy, what the buyer must disclose, how much a claim can pay, and which loss counts as covered.
IC-01 spends three chapters on them (chapters 4 to 6 of the 2024 edition), and they come back in underwriting, claims and the legal chapters. Learn them as a set: most exam questions describe a short claim story and ask which principle decides it.
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The Six Principles at a Glance
One line each. Every principle has its own page with examples and the traps.
Utmost good faith
The rule in one line
Both sides must disclose every material fact honestly before the contract is made
The question it answers
Was the proposal honest and complete?
Insurable interest
The rule in one line
You may insure only what you stand to lose money on if it is damaged or lost
The question it answers
Is this person allowed to insure this?
Indemnity
The rule in one line
A claim puts you back where you were before the loss, no better off
The question it answers
How much should the claim pay?
Subrogation
The rule in one line
After paying, the insurer takes over your right to recover from whoever caused the loss
The question it answers
Who recovers from the person at fault?
Contribution
The rule in one line
When two policies cover the same loss, the insurers share it
The question it answers
Which insurer pays, and how much each?
Proximate cause
The rule in one line
The dominant, effective cause of the loss decides whether it is covered
The question it answers
Is this loss covered at all?
| Principle | The rule in one line | The question it answers |
|---|---|---|
| Utmost good faith | Both sides must disclose every material fact honestly before the contract is made | Was the proposal honest and complete? |
| Insurable interest | You may insure only what you stand to lose money on if it is damaged or lost | Is this person allowed to insure this? |
| Indemnity | A claim puts you back where you were before the loss, no better off | How much should the claim pay? |
| Subrogation | After paying, the insurer takes over your right to recover from whoever caused the loss | Who recovers from the person at fault? |
| Contribution | When two policies cover the same loss, the insurers share it | Which insurer pays, and how much each? |
| Proximate cause | The dominant, effective cause of the loss decides whether it is covered | Is this loss covered at all? |
How the Six Fit Together
Utmost good faith and insurable interest are tested when the contract is formed. If either fails, there may be no valid policy to claim under. An insurance contract with no insurable interest is a bet, and the Indian Contract Act 1872 (section 30) makes agreements by way of wager void.
Proximate cause is tested at the claim: did an insured peril actually cause this loss? If yes, indemnity sets the amount. Subrogation and contribution are the two corollaries of indemnity. Both exist to stop the insured from profiting: subrogation by passing the right to recover from a wrongdoer to the insurer, contribution by stopping the insured from collecting the same loss twice from two insurers.
Which Principles Apply to Life Insurance?
A favourite IC-01 angle. Life cover pays a fixed sum because a human life has no market value, so the indemnity family does not fit.
Utmost good faith
General insurance
Applies
Life insurance
Applies (section 45 of the Insurance Act limits when the insurer can question the policy)
Insurable interest
General insurance
Needed at inception and at the time of loss
Life insurance
Needed at inception
Proximate cause
General insurance
Applies
Life insurance
Matters for accident benefits and exclusions
Indemnity
General insurance
Applies (with modified forms like agreed value)
Life insurance
Does not apply: a fixed sum is paid
Subrogation
General insurance
Applies
Life insurance
Does not apply
Contribution
General insurance
Applies
Life insurance
Does not apply: you can claim under every life policy
| Principle | General insurance | Life insurance |
|---|---|---|
| Utmost good faith | Applies | Applies (section 45 of the Insurance Act limits when the insurer can question the policy) |
| Insurable interest | Needed at inception and at the time of loss | Needed at inception |
| Proximate cause | Applies | Matters for accident benefits and exclusions |
| Indemnity | Applies (with modified forms like agreed value) | Does not apply: a fixed sum is paid |
| Subrogation | Applies | Does not apply |
| Contribution | Applies | Does not apply: you can claim under every life policy |
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Fixed-Benefit Health and Accident Policies
Personal accident and fixed-benefit health covers behave like life cover: they pay a stated sum, so indemnity and contribution do not apply. IRDAI's 2024 master circular on policyholders' interests says that under benefit-based policies the policyholder can claim from all insurers under all policies, while under indemnity health policies the policyholder chooses which policy to claim under first.
Working Through a Claim Question
Run the principles in this order and most scenario questions resolve themselves.
- 1
Is there a valid contract?
Check insurable interest and whether a material fact was hidden or misstated.
- 2
Was the loss caused by an insured peril?
Find the proximate cause, then check it against the covered perils and exclusions.
- 3
How much is payable?
Apply indemnity: actual loss, less depreciation, excess and any under-insurance.
- 4
Is another policy involved?
If yes, contribution splits the loss between insurers.
- 5
Did someone else cause it?
If yes, subrogation lets the insurer recover what it paid.
How IC-01 Tests This
Expect two kinds of question. Definition questions swap near-identical words (subrogation for contribution, peril for hazard). Scenario questions describe a loss and ask which principle applies or what the insurer pays. The common trap is applying indemnity, subrogation or contribution to a life policy.
FAQs
What are the 6 principles of insurance?expand_more
Utmost good faith, insurable interest, indemnity, subrogation, contribution and proximate cause. Some textbooks also list loss minimisation, the insured's duty to act as if uninsured to reduce a loss.
Which principles of insurance do not apply to life insurance?expand_more
Indemnity, and its two corollaries subrogation and contribution. A life policy pays a fixed sum assured, so there is no actual loss to measure, no wrongdoer to recover from on the insurer's behalf, and no sharing between policies.
Why are subrogation and contribution called corollaries of indemnity?expand_more
Both follow from the rule that the insured must not profit from a loss. Subrogation stops the insured collecting from both the insurer and the person at fault; contribution stops the insured collecting in full from two insurers.
Which chapters of IC-01 cover the principles of insurance?expand_more
Chapters 4, 5 and 6 of the 2024 edition. III's contents list names chapter 6 as subrogation, contribution and proximate cause.
Next steps
- Utmost Good Faitharrow_forward
- Indemnityarrow_forward
- Proximate Causearrow_forward
- Syllabusarrow_forward
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