Principles of Insurance (ICSE Class 10 Commercial Studies)
Updated 17 October 2026 · Fact-checked
Insurance is a contract in which the insurer, for a premium, undertakes to compensate the insured for a specified loss or to pay a fixed sum on a specified event. It rests on seven principles: utmost good faith, insurable interest, indemnity, contribution, subrogation, proximate cause and mitigation of loss. Indemnity applies to general insurance, not to life insurance.
Understand Principles of Insurance: Good Faith, Insurable Interest, Indemnity and More
1. Meaning of insurance
Insurance is a contract between the insurer and the insured, in which the insurer, in return for a premium, promises to compensate the insured for loss from a specified risk, or to pay a fixed sum on a specified event. The written contract is the policy. It works by pooling: many people facing a similar risk pay premiums into a common fund from which the losses of the few are paid. The risk must be uncertain and accidental.
2. Types (recap)
- Life insurance: pays a fixed sum assured on maturity or to the nominee on death. Death is certain, its time is not.
- General insurance: for property, health and liabilities, usually for one year. Fire insurance covers accidental fire damage to property; health insurance meets medical expenses; marine insurance covers ship, cargo or freight against perils of the sea. These are meaning-only in the syllabus.
3. Principles
1. Utmost good faith: both parties must disclose all material facts honestly; if the insured hides or misstates a material fact, the insurer can cancel the policy.
2. Insurable interest: the insured must have a financial interest in the subject matter, gaining by its safety and suffering by its loss. Without it the contract is a wager. In life insurance it must exist when the policy is taken; in marine insurance at the time of loss.
3. Indemnity: the insured is compensated only for the actual loss, up to the sum insured, and makes no profit. It applies to general insurance, not to life insurance, because the value of a life cannot be measured.
4. Contribution: where the same property is insured with more than one insurer, they share the loss in proportion to the sums they insured; the insured cannot recover more than the loss.
5. Subrogation: after paying the claim, the insurer takes over the insured's rights against third parties and any salvage.
6. Proximate cause: the insurer is liable only if the loss is caused by an insured risk as the nearest, dominant cause.
7. Mitigation of loss: the insured must take reasonable steps to reduce the loss, as if uninsured.
4. Which principle for which situation
| Situation | Principle |
|---|---|
| Hiding a heart condition from the insurer | Utmost good faith |
| A person insuring a neighbour's shop | Insurable interest |
| Claim limited to actual loss | Indemnity |
| Two policies on the same goods | Contribution |
| Insurer sues the careless driver after paying | Subrogation |
| Loss by theft during a fire policy | Proximate cause |
| Calling the fire brigade | Mitigation of loss |
5. Calculations
Indemnity: claim = lower of the actual loss and the sum insured. Contribution: each insurer pays loss x (its sum insured / total sums insured).
6. Writing
Name the principle, explain it in a sentence and link it to the case. Do not state two names for one idea.
Principles of Insurance: Good Faith, Insurable Interest, Indemnity and More: key facts
- Seven principles
- Utmost good faith
- Insurable interest
- Indemnity
- Contribution
- Subrogation
- Proximate cause
- Mitigation of loss
- Learn in this order.
- Indemnity claim
- Claim = lower of actual loss and sum insured | No profit to the insured
- General insurance only.
- Contribution
- Share of insurer = Loss x its sum insured / total sums insured | Insured cannot gain
- Two or more policies.
How to answer Principles of Insurance: Good Faith, Insurable Interest, Indemnity and More questions
Expect identification of a principle from a case, explanation, a small calculation of claim or contribution, and life versus general insurance.
- 1Find the clue: hiding facts (good faith), no financial interest (insurable interest), compensation limited to loss (indemnity), several policies (contribution), insurer takes over rights (subrogation), dominant cause (proximate cause), reducing loss (mitigation).
- 2For a claim, take the smaller of the actual loss and the sum insured.
- 3For contribution, share the loss in the ratio of the sums insured.
- 4State clearly that life insurance is not indemnity.
Principles of Insurance: Good Faith, Insurable Interest, Indemnity and More 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.
Indemnity
Suppose a shop is insured against fire for ₹5,00,000 and a fire causes a loss of ₹3,20,000.
How much can the owner claim, and why not ₹5,00,000?
Try it first, then show the solutionSolution
- Claim cannot exceed the actual loss.
- The lower of ₹3,20,000 and ₹5,00,000 is payable.
Answer: ₹3,20,000; insurance must not give a profit.
Memory hook: Back to where you were, not better.
Mitigation of loss
Imagine a house owner who sees smoke from a fire, does nothing because the house is insured, and the whole house burns down.
Which principle may reduce the claim?
Try it first, then show the solutionSolution
- The insured must take reasonable steps to reduce the loss.
- Careless inaction increases the loss, which the insurer may refuse to pay.
Answer: Mitigation of loss.
Memory hook: Act as if uninsured.
Tricks to remember Principles of Insurance: Good Faith, Insurable Interest, Indemnity and More
Short memory aids. Say each one aloud once, then use it on a question the same day.
GII-CSPM
Good faith, Insurable interest, Indemnity, Contribution, Subrogation, Proximate cause, Mitigation.
Use it when: Seven principles.
Life has no price tag
A life cannot be valued, so life insurance is not a contract of indemnity.
Use it when: Exam favourite.
Principles of Insurance: Good Faith, Insurable Interest, Indemnity and More: solved examples
Ordered from board level to HOTS. Try each one before you open the solution.
Example 1: Identify · 1 mark · MCQBoard level
The principle which says that the insured should not make a profit from insurance is:
(a) utmost good faith
(b) indemnity
(c) subrogation
(d) mitigation of loss
Try it first, then show the solutionSolution
- Compensation limited to actual loss, with no profit, is indemnity.
Answer: (b)
Example 2: Meaning · 2 marks · Very short answerBoard level
What is meant by the principle of utmost good faith? Give one example.
Try it first, then show the solutionSolution
- Both parties must honestly disclose all material facts.
- Example: a person with a heart ailment must tell the insurer when taking a health policy.
Answer: Both parties must disclose all material facts honestly; for example, the insured must reveal an existing illness.
Example 3: Contribution · 4 marks · Short answerHarder board level
Suppose a stock of goods is insured with Insurer A for ₹3,00,000 and with Insurer B for ₹2,00,000, and a fire causes a loss of ₹2,50,000. How much does each insurer pay? Which principle applies?
Try it first, then show the solutionSolution
- Total insured = 3,00,000 + 2,00,000 = ₹5,00,000. Ratio = 3 : 2.
- A pays 2,50,000 x 3/5 = ₹1,50,000.
- B pays 2,50,000 x 2/5 = ₹1,00,000.
- Check: 1,50,000 + 1,00,000 = ₹2,50,000, so the insured gets exactly the loss. Principle: contribution (a corollary of indemnity).
Answer: A pays ₹1,50,000; B pays ₹1,00,000; principle of contribution.
Example 4: Indemnity and subrogation · 4 marks · Short answerHarder board level
Suppose a truck insured for ₹8,00,000 is damaged in an accident caused by another driver, and the loss is assessed at ₹6,40,000. The wreck is sold for ₹1,10,000 as salvage. (a) How much does the insurer pay? (b) What happens to the salvage and to the right to sue the other driver? Name the principles.
Try it first, then show the solutionSolution
- (a) Under indemnity the insurer pays the actual loss, ₹6,40,000, which is below the sum insured.
- (b) Under subrogation, after paying, the insurer takes over the wreck (salvage ₹1,10,000) and the right to recover from the careless driver.
- The owner cannot also claim from the other driver, otherwise he would profit.
Answer: (a) ₹6,40,000; (b) the insurer gets the salvage and the right to sue under subrogation.
Example 5: Case on principles · 8 marks · Case-basedHOTS / competency
Suppose Rohan insures his factory against fire and does not tell the insurer that he stores a large quantity of inflammable chemicals. A fire occurs, the fire brigade is not called for an hour, and the loss is ₹7,00,000 against a sum insured of ₹6,00,000. (a) Name the principles broken or applied. (b) How much can the insurer be expected to pay if it accepts the claim? (c) Suggest what the insurer may do.
Try it first, then show the solutionSolution
- (a) Utmost good faith was broken: a material fact (inflammable chemicals) was not disclosed. Mitigation of loss was not followed: delaying the call increased the loss. Indemnity limits the claim to the actual loss and the sum insured.
- (b) Even if the claim were accepted, the payment cannot exceed the lower of the loss (7,00,000) and the sum insured (6,00,000), so the maximum is ₹6,00,000.
- (c) Because of the non-disclosure, the insurer may cancel the policy or reject the claim, and may refuse the part of the loss caused by delay.
Answer: (a) Good faith and mitigation broken, indemnity applies; (b) at most ₹6,00,000; (c) the insurer may reject the claim.
Where students lose marks in Principles of Insurance: Good Faith, Insurable Interest, Indemnity and More
The slips examiners see most often, and what to write instead.
Mistake: Applying indemnity to life insurance
All insurance seems alike.
Wrong working
Life insurance is a contract of indemnity.
Right working
Life insurance is not a contract of indemnity because the value of life cannot be measured.
Do this: Indemnity: general insurance only.
Usually costs: 2 marks.
Mistake: Dividing contribution equally
The sums insured are ignored.
Wrong working
Each insurer pays half of the loss.
Right working
Each pays in proportion to the sums insured (3 : 2 in the example).
Do this: Use the ratio of sums insured.
Usually costs: 2 marks.
Mistake: Paying more than the sum insured
The loss is larger than the sum.
Wrong working
Claim = ₹7,00,000.
Right working
Claim = lower of loss and sum insured = ₹6,00,000.
Do this: Cap at the sum insured.
Usually costs: 1-2 marks.
Mistake: Confusing subrogation with contribution
Both follow payment of a claim.
Wrong working
Subrogation: sharing loss between insurers.
Right working
Subrogation: the insurer takes over the insured's rights and salvage. Contribution: sharing among insurers.
Do this: Subrogation: stepping into the shoes.
Usually costs: 1-2 marks.
Exam tips
- In calculations, write the ratio, the shares and a check that they add up to the loss.
- Name the principle first and then apply it to the facts of the case.
- Life, fire, health and marine are meaning only; principles carry the larger marks.
- Learn one example for each principle.
Practice questions on Principles of Insurance: Good Faith, Insurable Interest, Indemnity and More
Write each answer on paper first. Open the hint only if you are stuck, and the answer only when you have finished.
Q1 · 2 marks · Very short answerBoard level
Why is life insurance not a contract of indemnity?
Hint
Value of a life.
Answer
The value of a human life cannot be measured in money, so the sum assured is paid as agreed and not as compensation for a measurable loss.
Q2 · 4 marks · Short answerHarder board level
Suppose a person insures the shop of a neighbour with no connection to it. Which principle is missing? Explain why the policy would not be valid.
Hint
Gain by safety, loss by damage.
Answer
Insurable interest is missing. The insured must have a financial interest in the subject matter, so that he gains from its safety and loses from its damage. Without it the contract becomes a wager, in which one could gain from someone else's misfortune, so it is not valid.
Q3 · 4 marks · Short answerHarder board level
A house worth ₹10,00,000 is insured for ₹8,00,000 with Insurer X and for ₹4,00,000 with Insurer Y. A fire causes a loss of ₹6,00,000. Find how much each insurer pays.
Hint
Ratio 2 : 1.
Answer
Total insured = 12,00,000; the ratio is 8 : 4 = 2 : 1. X pays 6,00,000 x 2/3 = ₹4,00,000. Y pays 6,00,000 x 1/3 = ₹2,00,000. Total ₹6,00,000, equal to the loss, so the insured does not gain.
Q4 · 4 marks · Short answerHarder board level
Explain proximate cause with an example.
Hint
Nearest dominant cause.
Answer
Proximate cause means the insurer is liable only if the loss is caused by an insured risk as the nearest and dominant cause. For example, if a fire policy is taken and goods are stolen during the confusion of a fire, the proximate cause is theft, which is not insured under the fire policy, so the insurer is not liable for it.
Q5 · 4 marks · Case-basedHOTS / competency
Suppose a policyholder claims the full ₹2,00,000 sum insured though his actual loss in a fire was ₹1,20,000, saying "I paid the premium every year." Evaluate his claim with reference to a principle.
Hint
Compensation, not profit.
Answer
The claim is not valid. Under the principle of indemnity the insured is compensated only for the actual loss, up to the sum insured, so that he is restored to his earlier position and does not profit. The insurer will pay ₹1,20,000. Premiums are the price for protection, not a right to the full sum insured.
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.How many principles of insurance are in the syllabus list here?Show answer
Seven.
2.Which principle prevents profit from insurance?Show answer
Indemnity.
3.What is the document of an insurance contract called?Show answer
The policy.
4.Which principle deals with several policies on one property?Show answer
Contribution.
5.What is the payment made by the insured called?Show answer
Premium.
Principles of Insurance: Good Faith, Insurable Interest, Indemnity and More: frequently asked questions
Is insurable interest needed in life insurance?
Yes, at the time the policy is taken.
Does insurance prevent loss?
No. It spreads the financial burden of the loss among many persons.
Who receives the sum assured if the insured dies?
The nominee or the family.