In case of contract of insurance, the principle which states that it is the duty of the insured to take reasonable steps to minimize the loss or damage to the insured property is called :

Correct — D, (d) Principle of Mitigation. The duty described in the stem — that the insured must take reasonable steps to minimise the loss or damage to the insured property — is the principle of mitigation, also called the doctrine of loss minimisation.

The rule works like this. When a loss occurs, the insured is not entitled to stand by and let it grow simply because the property is insured. He must act as a prudent uninsured person would: put out the fire, call the fire brigade, move undamaged stock out of the path of the flood, secure a building whose door has been forced, protect the salvage from the weather. The insurer's liability is limited to the loss that a reasonably careful insured could not have prevented, so a loss that grew because the insured did nothing may not be recoverable in full.

Two qualifications keep the principle fair, and both are worth knowing because questions are built on them. The insured is expected to take REASONABLE steps only. He is not required to risk his life, spend without limit or achieve the impossible, and the standard is what an ordinary prudent person would do in the circumstances without insurance. And expenses reasonably incurred in mitigating the loss are ordinarily recoverable from the insurer, because it would be perverse for the law to require the insured to spend money to reduce the insurer's liability and then leave him out of pocket for having done so.

Mitigation also explains why an insurance contract is not a licence for carelessness. Along with the principle of insurable interest and the requirement that the loss be caused by an insured peril, it keeps the incentives of the insured pointing in the same direction as those of the insurer.

The other three options are each a genuine principle of insurance, and the notes below state what each of them actually does. On an item where all four options share the frame 'Principle of …', the work is in matching the described duty to the right principle rather than in recognising a name.

Why the others are wrong

• (a)Principle of Subrogation — Subrogation operates AFTER the claim has been paid, not while the loss is happening. It is the principle by which an insurer who has indemnified the insured steps into the insured's shoes and takes over his rights and remedies against the third party responsible for the loss — so a motor insurer who pays for damage caused by another driver may sue that driver in the insured's place, up to the amount it has paid. Its purpose is the same as that of indemnity, to prevent the insured recovering twice for one loss, and it is described as a corollary of indemnity for that reason. It therefore applies only to contracts of indemnity and not to life assurance. What it does not do is impose any duty on the insured while the loss is in progress, which is what the stem describes.
• (b)Principle of Utmost Good Faith — Utmost good faith — uberrimae fidei — governs DISCLOSURE at the time of contracting rather than conduct at the time of loss. Because the insurer knows nothing about the subject matter except what the proposer tells it, each party is required to disclose all material facts, that is, facts that would influence a prudent insurer in deciding whether to accept the risk and on what terms. It goes well beyond the ordinary rule of caveat emptor: silence about a material fact can avoid the policy even where no question was asked. Section 45 of the Insurance Act, 1938, as substituted in 2015, now limits the insurer's ability to call a life policy in question after three years, which is a statutory qualification on the doctrine. Utmost good faith is about what was said before the policy began; mitigation is about what was done after the loss began.
• (c)Principle of Co-operation — There is no recognised principle of insurance by this name. The standard list is six or seven: utmost good faith, insurable interest, indemnity, subrogation, contribution, proximate cause, and loss minimisation or mitigation. 'Co-operation' is included here as a plausible-sounding invention, and it is plausible precisely because an insured is in practice expected to co-operate with the insurer — reporting the loss promptly, allowing inspection, producing documents and assisting in the recovery from third parties. But those duties come from the express conditions of the policy, not from a general principle of that name. When one option in a set of four names a principle that does not appear on the standard list, it is usually the one to discard first.

The law of insurance rests on a small set of principles, and most examination questions are decided by matching a described situation to the right one. UTMOST GOOD FAITH requires both parties to disclose all material facts, the duty being heavier on the insured because he alone knows the subject matter. INSURABLE INTEREST requires the insured to stand to gain by the survival of the subject matter and to lose by its loss; in life assurance it must exist at the time the policy is taken out, in marine insurance at the time of loss, and in fire and general insurance at both times. INDEMNITY means the insured is restored to the position he was in immediately before the loss and no better, so he can never profit from a claim; it applies to all contracts except life and personal accident, where the sum is fixed in advance because human life cannot be valued. SUBROGATION transfers to the insurer, after payment, the insured's rights against a third party responsible for the loss. CONTRIBUTION applies where the same subject matter is insured with more than one insurer, and lets each insurer call on the others to share the loss rateably, so that the insured recovers once and once only. PROXIMATE CAUSE looks to the nearest and most effective cause of the loss, not the remotest, and decides whether the loss falls within an insured peril. LOSS MINIMISATION or MITIGATION obliges the insured to take reasonable steps to limit the loss when it occurs, with the expenses of doing so ordinarily recoverable. Indemnity is the hub: subrogation and contribution both exist to protect it, and mitigation supports it by keeping the loss no larger than it need be.

Key facts

• The principle of mitigation, or loss minimisation, requires the insured to take reasonable steps to minimise the loss or damage to the insured property when a loss occurs.
• The standard is that of a prudent uninsured person; the insured need not risk his life or spend without limit.
• Expenses reasonably incurred in mitigating the loss are ordinarily recoverable from the insurer.
• Utmost good faith requires disclosure of all material facts by both parties at the time of contracting.
• Insurable interest must exist at the time of taking the policy in life assurance, at the time of loss in marine insurance, and at both times in fire and general insurance.
• Indemnity restores the insured to his position immediately before the loss and no better; it does not apply to life and personal accident policies.
• Subrogation transfers the insured's rights against a responsible third party to the insurer after the claim has been paid, and is a corollary of indemnity.
• Contribution allows insurers of the same subject matter to share a loss rateably so that the insured recovers only once.
• Proximate cause looks to the nearest and most effective cause of the loss in deciding whether an insured peril operated.
• There is no recognised 'principle of co-operation' in the standard list of insurance principles.

Common traps

• Choosing subrogation because it also involves reducing the insurer's ultimate loss. Subrogation operates after payment, mitigation during the loss.
• Choosing utmost good faith because it sounds like a general duty. It governs disclosure at the time of contracting.
• Accepting an invented principle. 'Co-operation' is not on the standard list.
• Assuming the insured must spend his own money without recovery. Reasonable mitigation expenses are ordinarily recoverable.

• practice — not a real PYQ

  An insurer who has settled a motor claim sues the driver whose negligence caused the damage, standing in the place of its own insured. This is an application of the principle of :

  • (a)Contribution
  • (b)Subrogation
  • (c)Mitigation
  • (d)Proximate cause

  Answer(b) Subrogation

• practice — not a real PYQ

  Which one of the following principles does NOT apply to a contract of life assurance ?

  • (a)Utmost good faith
  • (b)Insurable interest
  • (c)Indemnity
  • (d)Proximate cause

  Answer(c) Indemnity