Business StudiesCBSE Class 11 · Business Services

Insurance Class 11 Business Studies: Principles, Functions and Types with Indemnity and Contribution Numericals

Updated 17 October 2026 · Fact-checked

Insurance is a contract in which the insurer agrees, for a premium, to compensate the insured for a loss from a specified risk or to pay a sum on a stated event. Its main principles are utmost good faith, insurable interest, indemnity, proximate cause, subrogation, contribution and mitigation. The main types are life, health, fire and marine insurance; all except life insurance are contracts of indemnity.

Notice how many small premiums flow into one fund that pays the few who suffer loss, so the risk is shared across all four types of insurance.

Illustration drawn for QuestionBuddy.

Understand Insurance: Principles, Functions and Types (Life, Health, Fire, Marine) with Numericals (CBSE 11)

Meaning. In an insurance contract the insurer promises, in return for a premium, to pay the insured for a loss from a specified risk, or to pay a sum on an event such as death or maturity. Many people pay small premiums into a fund from which the few who suffer loss are paid, so the risk is spread.

Functions. Certainty of payment, protection against loss (it does not stop the event, it reduces its financial effect), risk sharing among many, and capital formation because premiums are invested.

Principles.
1. Utmost good faith: both sides must disclose all material facts honestly; concealment makes the contract voidable.
2. Insurable interest: the insured must suffer a financial loss from the event (an owner in his house; a person in his own life and that of a spouse).
3. Indemnity: compensation only for the actual loss, to restore the position, not to give a profit (not applicable to life insurance).
4. Proximate cause: the insurer pays only if the nearest, direct cause of the loss is covered by the policy.
5. Subrogation: after paying, the insurer takes over the insured's rights over the damaged property and against third parties.
6. Contribution: if the same property is insured with more than one insurer, they share the loss in proportion to the sums insured; the insured cannot recover more than the loss.
7. Mitigation: the insured must take reasonable steps to reduce the loss after the event, as an uninsured person would.

Types.

Life insurance: a sum is paid on death or maturity. It is a contract of assurance, not of indemnity, because death is certain and only its time is uncertain. Insurable interest must exist at the time of the contract. Types include whole life policy (payable on death) and endowment policy (payable at maturity or earlier death).
Health insurance: covers medical expenses such as hospitalisation, treatment and medicines; in most cases a contract of indemnity.
Fire insurance: compensates for loss by fire within a period (usually one year); fire must be the proximate cause and actual ignition must occur; insurable interest is needed at the time of the contract and at the time of loss; a contract of indemnity.
Marine insurance: covers sea risks. Ship (hull) insurance covers damage to the ship, cargo insurance covers goods in transit, freight insurance covers loss of freight charges. A contract of indemnity; insurable interest must exist at the time of loss.

Contribution formula. Share of an insurer = (sum insured with that insurer / total sums insured) x actual loss.

Insurance: Principles, Functions and Types (Life, Health, Fire, Marine) with Numericals (CBSE 11): key facts

Seven principles: utmost good faith
insurable interest
indemnity
proximate cause
subrogation
contribution
mitigation; Indemnity does not apply to life insurance.
Indemnity: claim = actual loss, limited to the sum insured | no profit from insurance; Compensation restores the position.
Contribution: insurer share = sum insured with it / total sums insured x actual loss | shares add up to the actual loss; Total recovery cannot exceed the loss.
Insurable interest timing: life at the time of contract
fire at contract and at loss
marine at the time of loss; Health is generally indemnity.

How to answer Insurance: Principles, Functions and Types (Life, Health, Fire, Marine) with Numericals (CBSE 11) questions

To answer an insurance question, name the principle first and then apply it.

1Underline the fact in the case: concealment, nearest cause, double insurance, recovery from a third party.
2Match it to the principle: concealment is utmost good faith; nearest cause is proximate cause; several insurers is contribution.
3For indemnity pay the actual loss, never more than the sum insured.
4For contribution compute each insurer's ratio and multiply by the actual loss; check that the shares add up to the loss.
5State whether the contract is of indemnity or assurance.

Insurance: Principles, Functions and Types (Life, Health, Fire, Marine) with Numericals (CBSE 11) in real life

The idea, met in an everyday situation. Answer the question in your own words, then compare with the model answer. The one-line hook is what to remember.

A shop insured with one company

Suppose a stationery shop is insured against fire for 10,00,000 and a fire damages stock worth 4,00,000.

How much can the owner claim, and which principle decides it?

Try it first, then show the solutionSolution

The insured can claim only the actual loss, to restore the position and not to make a profit.
Actual loss is 4,00,000, which is within the sum insured of 10,00,000.

Answer: 4,00,000, by the principle of indemnity.

Memory hook: Insurance restores a loss; it never pays a profit.

Tricks to remember Insurance: Principles, Functions and Types (Life, Health, Fire, Marine) with Numericals (CBSE 11)

Short memory aids. Say each one aloud once, then use it on a question the same day.

Seven principles: UI-IPS-CM
Utmost good faith, Insurable interest, Indemnity, Proximate cause, Subrogation, Contribution, Mitigation.
Use it when: Listing the principles in order.
Life is assurance
Death will happen, so life is assured, not indemnified.
Use it when: Why indemnity does not apply to life insurance.
Share by sums insured
Contribution splits the loss in the ratio of the policies.
Use it when: Double insurance numericals.

Insurance: Principles, Functions and Types (Life, Health, Fire, Marine) with Numericals (CBSE 11): solved examples

Ordered from board level to HOTS. Try each one before you open the solution.

Example 1: Principle that denies profit · 1 mark · MCQBoard level

Which principle ensures that the insured does not make a profit from insurance?
(a) Utmost good faith
(b) Indemnity
(c) Subrogation
(d) Mitigation

Try it first, then show the solutionSolution

Indemnity pays only the actual loss to restore the insured's position.

Answer: (b) Indemnity

Example 2: Two principles · 3 marks · Short answerBoard level

Explain the principles of utmost good faith and insurable interest. (3 marks)

Try it first, then show the solutionSolution

Utmost good faith: both parties must honestly disclose all material facts; concealment makes the contract voidable.
Insurable interest: the insured must stand to suffer a financial loss from the event, for example an owner in his house or a person in his own life and that of a spouse.

Answer: Honest disclosure of material facts; a financial stake in the insured subject.

Example 3: Indemnity and contribution · 4 marks · Short answerHarder board level

A building is insured against fire with Insurer A for 8,00,000 and with Insurer B for 2,00,000. A fire causes a loss of 4,50,000. Find how much each insurer pays, and the total recovered. Which principles apply? (4 marks)

Try it first, then show the solutionSolution

Total sums insured = 8,00,000 + 2,00,000 = 10,00,000.
A pays 8/10 x 4,50,000 = 3,60,000.
B pays 2/10 x 4,50,000 = 90,000.
Total recovered = 4,50,000, equal to the actual loss.
Contribution divides the loss among insurers; indemnity limits recovery to the actual loss.

Answer: A pays 3,60,000; B pays 90,000; total 4,50,000 (contribution and indemnity)

Example 4: Scooter case · 5 marks · Case-basedHOTS / competency

Case: A scooter insured for 90,000 is damaged by a careless third party and repair costs 60,000. The insurer pays 60,000 to Gita. Later Gita also asks the third party for 60,000. After the accident she parked the damaged scooter safely instead of riding it. (5 marks)
(i) Which principle lets the insurer recover the 60,000 from the third party? (1)
(ii) Which principle stops Gita from keeping both amounts? Explain. (2)
(iii) Which principle does her safe parking illustrate? (2)

Try it first, then show the solutionSolution

(i) Subrogation: after paying, the insurer takes over the insured's rights against third parties.
(ii) Indemnity: the insured must not gain from the loss; since Gita has already been paid her actual loss, she cannot receive it again from the third party.
(iii) Mitigation: the insured must take reasonable steps to reduce the loss, as an uninsured owner would.

Answer: (i) Subrogation. (ii) Indemnity, no double recovery. (iii) Mitigation.

Example 5: Identify the type · 4 marks · Short answerHarder board level

Name the type of insurance in each situation. (4 marks)
(a) A ship is damaged in a storm.
(b) Goods are lost in transit at sea.
(c) A sum is payable on death or on maturity of the policy.
(d) Hospital bills of the insured are reimbursed.
Also state which of these is not a contract of indemnity.

Try it first, then show the solutionSolution

(a) Marine insurance, ship (hull) insurance.
(b) Marine insurance, cargo insurance.
(c) Life insurance.
(d) Health insurance.
Life insurance is a contract of assurance, not of indemnity.

Answer: (a) Hull (b) Cargo (c) Life (d) Health; life is not a contract of indemnity

Where students lose marks in Insurance: Principles, Functions and Types (Life, Health, Fire, Marine) with Numericals (CBSE 11)

The slips examiners see most often, and what to write instead.

Mistake: Applying indemnity to life insurance
Treating all insurance alike.
Wrong working
Life insurance pays only the actual loss
Right working
Life insurance is assurance; the agreed sum is paid on death or maturity
Do this: Indemnity does not apply to life insurance.
Usually costs: 1 mark
Mistake: Dividing the loss equally in double insurance
Ignoring the ratio of sums insured.
Wrong working
Loss 4,50,000 paid 2,25,000 by each insurer
Right working
8:2 gives 3,60,000 and 90,000
Do this: Use the ratio of sums insured.
Usually costs: 1 to 2 marks
Mistake: Mixing subrogation and contribution
Both involve more than one party.
Wrong working
Subrogation is sharing the loss between insurers
Right working
Subrogation transfers the insured's rights to the insurer; contribution is sharing among insurers
Do this: Link subrogation with third parties.
Usually costs: 1 mark

Exam tips

Name the principle and then apply it to the facts of the case.
Write the contribution ratio before the amounts and check that they add up to the loss.
Mention that life insurance is a contract of assurance.
Write when insurable interest must exist for each type.

Practice questions on Insurance: Principles, Functions and Types (Life, Health, Fire, Marine) with Numericals (CBSE 11)

Write each answer on paper first. Open the hint only if you are stuck, and the answer only when you have finished.

Q1 · 1 mark · MCQBoard level
Life insurance is a contract of
(a) indemnity
(b) assurance
(c) subrogation
(d) contribution
Hint
Death is certain.
Answer
(b) assurance
Q2 · 1 mark · Assertion-reasonHarder board level
Assertion (A): The principle of indemnity does not apply to life insurance.
Reason (R): In life insurance the event, death, is certain and the sum payable is agreed in advance, not measured by a loss.
(a) Both A and R are true, and R is the correct explanation of A.
(b) Both A and R are true, but R is not the correct explanation of A.
(c) A is true, but R is false.
(d) A is false, but R is true.
Hint
Assurance versus indemnity.
Answer
(a) Both A and R are true, and R is the correct explanation of A.
Q3 · 4 marks · Short answerHarder board level
Distinguish between life insurance and fire insurance on four bases. (4 marks)
Hint
Nature, event, insurable interest, indemnity.
Answer
Nature: life is a contract of assurance, fire is a contract of indemnity. Event: life pays on death or maturity; fire pays for loss by fire within a period (usually one year). Insurable interest: life needs it at the time of contract; fire needs it at the time of contract and at the time of loss. Amount: life pays the agreed sum, fire pays only the actual loss.
Q4 · 4 marks · Short answerHarder board level
A godown is insured for 3,00,000 with X, 5,00,000 with Y and 2,00,000 with Z. A fire causes a loss of 6,00,000. Find the amount payable by each insurer and verify the total. (4 marks)
Hint
Total sum insured is 10,00,000.
Answer
Ratio 3:5:2 of 10. X pays 3/10 x 6,00,000 = 1,80,000; Y pays 5/10 x 6,00,000 = 3,00,000; Z pays 2/10 x 6,00,000 = 1,20,000. Total = 6,00,000, equal to the loss.
Q5 · 5 marks · Case-basedHOTS / competency
Case: An exporter insures cargo worth 20,00,000 and the freight charges of 2,00,000 with an insurer, while the shipping company insures its ship (hull) for 9,00,000. A storm damages the ship to the extent of 5,00,000, part of the cargo worth 3,00,000 is lost, and the freight of 30,000 on that cargo is not received. (5 marks)
(i) Name the three types of marine insurance involved. (1)
(ii) Find the compensation under each type. (3)
(iii) At what time must insurable interest exist in marine insurance? (1)
Hint
Indemnity: actual loss up to the sum insured.
Answer
(i) Ship (hull) insurance, cargo insurance and freight insurance. (ii) By indemnity each pays the actual loss within its sum insured: hull 5,00,000 (below 9,00,000), cargo 3,00,000 (below 20,00,000), freight 30,000 (below 2,00,000). (iii) At the time of loss.

Test your recall

Answer in your head or on paper first, then open the card. Pulling an answer out of memory makes it stick far better than re-reading.

1.Name the seven principles of insurance.Show answer
Utmost good faith, insurable interest, indemnity, proximate cause, subrogation, contribution and mitigation.
2.What is the premium?Show answer
The amount paid by the insured to the insurer.
3.What does subrogation give the insurer?Show answer
The insured's rights over the damaged property and against third parties after payment.
4.Name the three kinds of marine insurance.Show answer
Ship (hull), cargo and freight insurance.
5.When must insurable interest exist in life insurance?Show answer
At the time of the contract.

Insurance: Principles, Functions and Types (Life, Health, Fire, Marine) with Numericals (CBSE 11): frequently asked questions

Does insurance prevent a loss?

No; it does not stop the event but reduces its financial effect.

What happens if a material fact is concealed?

The contract becomes voidable because of the breach of utmost good faith.

Can I claim from two insurers for the same loss?

You can claim from both, but they share the loss by contribution and you cannot recover more than the actual loss.