Three functions of Insurance are:

(i) Protection: Insurance provides protection against risk of loss due to an uncertain reason. It provides a sense of security in the minds of the businessmen. Therefore, they can concentrate more on the important business decisions in order to increase profitability.

(ii) Distribution of risk: Insurance is an arrangement pooling of risk. Insurance spreads the risk over a large number of persons who contribute premium, which is used to compensate the person suffering loss.

(iii) Specialisation: Insurance deals with making the losses of the concerned good. So, the security is provided to the businessman as a result of which he can perform better by concentrating on the core issues

of the business necessary for its growth, development and expansion.

Following are the main principles of insurance:

Insurable interest: Any person taking an insurance polic have an insurable internet in the subject matter that is mis person is said to have insurable internet in the property on matter insured if he is benefited by its existence and is preceded by its destruction.

(ii) Utmost Good faith: Both the insured and the insurer must have the utmost good faith on each other. The proposer (insured) must make the fullest disclosure of all. Material facts desired by the insurer.

(iii) Indemnity: The principle of indemnity is applicable to all insurance policies except life insurance policies. This means that the misuser makes a promise to compensate the less suffered by the insured i.e. case of any loss.

(iv) Principle of contribution: This principle is applicable when the property is insured with more than one insurer. The insured under this principle cannot claim compensation for more than this loss from all the companies.

Example: A has a property of Rs.1,00,000. He makes an insurance policy with B-& C for Rs.50,000 and another policy with C & Co for Rs.50,000. Now, if the property is damaged by fire for Rs.40,000

A cannot claim compensation of Rs.40,000/- from both B Co and C&Co. He can claim compensation of Rs.20,000 each from both companies.

(v) Principle of Subrogation: This principle is applicable to all insurance policies except life insurance. Thus, if the insured claims compensation from the insurance company he cannot claim the same compensation for any other party.

Example: A gets his house insured for Rs. 1,00,000/-. Show house is set on fire by B. A claims compensation from the insurance company. Now, A cannot sue B to get compensation from him. Whatever right A had against B will now be shifted to the insurance company who can claim compensation from B to make good the

loss suffered by it. Subrogation is thus the transfer of rights and remedies of the insured to the insurer.