A Fire Insurance Policy works on the following principles:
Principle of Insurable Interest
Insurable Interest means that a person benefits from the continued presence of the asset or is prejudiced by the loss of the subject-matter. Principle of Insurable Interest in a Fire Insurance Policy means that the Insured can insure only those assets which he benefits from. Insurable Interest must exist at the time of purchasing the fire insurance policy, during the currency of the policy as well as at the time of loss.
Principle of Utmost Good Faith
Uberrimae Fidei or Principle of Utmost Good Faith is another important principle of Fire Insurance and means that all parties to an Insurance Contract must make a complete declaration of all facts that are material for accepting or declining the Fire Insurance Proposal. The Insured has a duty to disclose all material facts and not conceal, misrepresent, or withhold any material facts which might change the decision of the insurance company to accept or reject the risk proposal.
Principle of Proximate Cause
Proximate Cause or Efficient Proximate Cause is the dominant risk factor in the chain of causation which has caused the loss. It need not be the initiating or last act in the chain of events. Proximate Cause needs to be identified when 2 or more causes are responsible for the loss. In that case, the Proximate Cause or the dominant factor which has caused the loss needs to be determined. If the Proximate Cause falls within the perils named in a Fire Insurance Policy, the claim is payable. If the Proximate Cause does not falls within the perils named in a Fire Insurance Policy or falls within the exclusions in a Fire Insurance Policy, the claim is repudiated.
Principle of Indemnity
The Principle of Indemnity in a Fire Insurance Policy aims to place the Insured in the same financial position after the loss as the Insured was in before the occurrence of the loss. As per the Principle of Indemnity, the Insured is not allowed to make a profit from his insurance policy.
Principle of Subrogation
Principle of Subrogation allows the Insurance Company to recover losses from a negligent third party after it has paid the losses to the Insured Party. The Principle of Subrogation places the Insurance Company in place of the Insured, allowing the Insurance Company to pursue all rights and remedies available to the Insured to recover his losses. Additionally, the Insurance Company is allowed to recover losses only after payment of the claim to the Insured, and any excess amount that the insurance company receives should be remitted back to the Insured.
Principle of Contribution
Principle of Contribution in a Fire Insurance Policy means that, if an Insured has the 2 or more policies covering the same subject-matter at the same time, then the Fire Insurance Company will pay the losses on a pro-rata basis in case of a claim. The Principle of Contribution prevents the policyholder from profiting from his insurance policy by insuring the same assets under multiple fire insurance policies.