Laws of Insurance - marine insurance, fire insurance, life

insurance.

CONTRACT OF INSURANCE

Contract of insurance. A contract of Insurance is a contract by which a person,

in consideration of a sum of money, undertakes to make good the loss of another
against a specified risk. e.g., fire, or to compensate him or his estate for happening
of a specified event, e.g., accident or death.

Insurer and insured. The person undertaking the risk is called the insurer,
assurer, or underwriter and the person whose loss is to be made good is called the
insured or assured.

Premium. The consideration for which the insurer undertakes to indemnify the
assured against the risk is called the premium. It may either be a single or a
periodic payment.

Policy. The instrument in which the contract of insurance is generally embodied

is called the policy. The policy is not the contract; it is the evidence
of the contract.

Subject matter of insurance and insurable interest. The thing or property

insured is called the subject matter of insurance, and the interest of the assured in
the subject matter is called his insurable interest.

Perils insured against. That which is insured is the loss arising from uncertain
events or casualties, i.e., destruction of or damage to the property or the death or
disablement of a person, and these are called perils insured against.
There are various kinds of insurance, but the following kinds stand out as being
of special importance:

1. Life insurance: In this case, a certain fixed amount becomes payable on

the death of the assured or on the expiry of a certain fixed period,
whichever is earlier.
2. Fire insurance: It covers losses caused by fire.
3. Marine insurance: It covers all marine losses, that is to say, the losses
incidental to marine adventure.
4. Personal accident insurance: In this case, the amount payable is
compensation for any personal injury caused to the insured.

All insurance businesses in India have been nationalized. The life insurance
business was nationalized on 19th January 1956, and the general insurance
business on 13th May 1971.

Nature of Contract of Insurance

Insurance is the law's attempt to socialise responsibility. When it first appeared as

a strange intruder in the field of jurisprudence it was dismissed as a kind of
gambling and wagering. In Carter v. Boehm, (1765) 1 Sm. L.C. 546, Lord
Mansfield described insurance as a 'contract on speculation, which in the legal
sense means a wagering agreement. A wagering agreement is one in which a
person promises to pay money or transfer property upon the happening or non-
happening of an uncertain event.

A contract of insurance bears a superficial resemblance to a wagering agreement

in which social evolution, the attitude that insurance was a contract on speculation
changed, and the law came to recognize insurance as a system of sharing risk too
great to be borne by one individual. The contract of insurance is an aleatory
(depending on contingencies) contract. It depends on an uncertain event. But it is
not a wagering agreement.
Difference between Insurance and Wager

1. A contract of insurance (except life, accident, and sickness insurance) is a

contract of indemnity. It seeks to indemnify the assured for the loss suffered
by him on the happening of an uncertain event. In life insurance, the
amount payable in case of death of the assured is ascertained and fixed in
advance. In a wagering agreement, however, there is no question of
indemnity as the parties do not intend to cover any risk.
2. The object of a contract of insurance is to protect the assured against losses
on the happening of some uncertain events, whereas the object of a
wagering agreement is to earn speculative gains.
3. In a contract of insurance, the assured must have a pecuniary or insurable
interest in the subject matter of insurance. In a wagering agreement, neither
party has any pecuniary interest except that created by the contract itself.
4. A contract of insurance is a contract requiring utmost good faith by the
parties to the contract. In a wagering agreement, good faith need not be
observed.
5. A wagering agreement is void ab initio because it is against public policy.
A contract of insurance is legally enforceable and is encouraged as it
benefits the community as a whole.
6. A contract of insurance is based on scientific and actuarial calculation of
risks and the premium is calculated taking into account all the
circumstances attending to the risk. A wagering agreement is a mere
gamble and there is no scientific calculation of risk.
7. An insured event may cause varying degrees of loss or damage. A wager is
either won or lost. A contract of insurance, if it is by way of wagering, is
void.
PRINCIPLES OF INSURANCE:

The concept of insurance is risk distribution among a group of people; hence co-
operation becomes the basic principle of insurance in addition to probability.
However, to ensure fairness and proper functioning of the Insurance contract the
following seven principles are essential:

1. Utmost Good Faith

2. Insurable Interest
3. Indemnity
4. Proximate Cause
5. Subrogation
6. Contribution
7. Mitigation of Loss (Minimization)

1. Principle of Utmost Good Faith: The very basic principle is that both the
parties in an insurance contract should act in good faith towards each other
i.e., they must provide clear and concise information related to the terms
and conditions of the contract. The Insured should provide all the
information related to the subject matter and the insurer must give clear
details regarding the contract.

E.g. – Jacob took a health insurance policy. At the time of taking insurance,
he was a smoker and failed to disclose this fact. Later, he got cancer. In
such a situation the Insurance company will not be liable to bear the
financial burden as Jacob concealed important facts.

2. Principle of Insurable interest: This principle says that the individual

(insured) must have an insurable interest in the subject matter. Insurable
interest means that the subject matter for which the individual enters the
 insurance contract must provide some financial gain to the insured and also
lead to a financial loss if there is any damage, destruction, or loss.
E.g. – the owner of a vegetable cart has an insurable interest in the cart
because he is earning money from it. However, if he sells the cart, he will
no longer have an insurable interest in it. To claim the amount of insurance,
the insured must be the owner of the subject matter both at the time of
entering the contract and at the time of the accident.
3. Principle of Indemnity: This principle says that insurance is done only
for the coverage of the loss hence insured should not make any profit from
the insurance contract. In other words, the insured should be compensated
the amount equal to the actual loss and not the amount exceeding the loss.
The purpose of the indemnity principle is to set back the insured in the
same financial position as he was before the loss occurred. The principle
of indemnity is observed strictly for property insurance and is not
applicable to the life insurance contract.
E.g. – The owner of a commercial building enters an insurance contract to
recover the costs for any loss or damage in future. If the building sustains
structural damages from fire, then the insurer will indemnify the owner for
the costs to repair the building by way of reimbursing the owner for the
exact amount spent on repair or by reconstructing the damaged areas using
its authorized contractors.
4. Principle of Proximate Cause: This is also called the principle of ‘Causa
Proxima’ or the nearest cause. This principle applies when the loss is the
result of two or more causes. The insurance company will find the nearest
cause of loss to the property. If the proximate cause is the one in which the
property is insured, then the company must pay compensation. If it is not
a cause the property is insured against, then no payment will be made by
the insured.
 E.g. - Due to fire, a wall of a building was damaged, and the municipal
authority ordered it to be demolished. While demolition the adjoining
building was damaged. The owner of the adjoining building claimed the
loss under the fire policy. The court held that fire is the nearest cause of
loss to the adjoining building and the claim is payable as the falling of the
wall is an inevitable result of the fire. In the same example, the wall of the
building was damaged due to fire, fell due to a storm before it could be
repaired, and damaged an adjoining building. The owner of the adjoining
building claimed the loss under the fire policy. In this case, the fire was a
remote cause and the storm was the proximate cause hence the claim is not
payable under the fire policy.
5. Principle of Subrogation: Subrogation means one party stands in for
another. As per this principle, After the insured i.e., the individual has been
compensated for the incurred loss to him on the subject matter that was
insured, the rights of the ownership of that property goes to the insurer i.e.,
the company. Subrogation gives the right to the insurance company to
claim the amount of loss from the third party responsible for the same.
E.g. – If Mr. A gets injured in a road accident, due to the reckless driving
of a third party, the company with which Mr. A took the accidental
insurance will compensate the loss that occurred to Mr. A and will also sue
the third party to recover the money paid as claim.
6. Principle of Contribution: The contribution principle applies when the
insured takes more than one insurance policy for the same subject matter.
It states the same thing as in the principle of indemnity i.e., the insured
cannot make a profit by claiming the loss of one subject matter from
different policies or companies.
E.g. – A property worth Rs.5 Lakhs is insured with Company A for Rs. 3
lakhs and with Company B for Rs.1 lakhs. The owner in case of damage to
the property for 3 lakhs can claim the full amount from Company A but
 then he cannot claim any amount from Company B. Now, Company A can
claim the proportional amount reimbursed value from Company B.
7. Mitigation of Loss (Minimization): This principle says that as an owner,
it is obligatory on the part of the insurer to take necessary steps to minimize
the loss to the insured property. The principle does not allow the owner to
be irresponsible or negligent just because the subject matter is insured.
E.g. – If a fire breaks out in your factory, you should take reasonable steps
to put out the fire. You cannot just stand back and allow the fire to burn
down the factory because you know that the insurance company will
compensate for it.

PREMIUM

Premium is the consideration paid by the insured to the insurer for the risk
undertaken by the latter. It may be in cash or kind. But usually, it is in the form
of cash. It is determined by the insurer by taking into account the average of losses
and the contributions (in the form of premiums) that he receives. Besides taking
into account the special circumstances affecting risk in a particular case, the
insurer also keeps a margin for his overhead and other expenses and profit.

A simple illustration would explain the point. Suppose there are 10,000 houses in
a locality and the owners of 8,000 of them decide to get their houses insured.
Experience shows that every year two houses (on average) catch fire. Let us
assume that each house is valued at ₹2,00,000. This means the average loss
arising from fire to the houses in any year will work out to be 4,00,000. If the
insurer fixes up the rate of premium at, say, ₹100 per house, his total receipts from
premium will aggregate to 8,00,000. Out of this sum, he will make good the loss
of the assured, meet overhead expenses, and will be left with some profit. It is
simply common sense that if some houses are subject to more than ordinary risk,
the insurer would charge some additional premium to protect himself against that
extra risk. The premium in marine insurance is also fixed on mortality. like
considerations. In life insurance, the premium is based on the average rate

The duty of the assured to pay the premium and the duty of the insurer to issue
the policy to the assured are concurrent conditions. The parties may also agree
otherwise.

The premium is usually paid in instalments which may be annual, half-yearly,

quarterly, or monthly.

The policy lapses if the premium is not paid when it falls due or within the days
of the grace Return of the premium.

RE-INSURANCE AND DOUBLE INSURANCE

Re-insurance

Every insurer has a limit to the risk that he can undertake. If at any time a
profitable venture comes his way, he may insure it even if the risk involved is
beyond his capacity. Then, in order to safeguard his own interest, he may insure
the same risk either wholly or partially with other insurers. This is called
reinsurance. The reason for re-insurance like the reason for original insurance is
the necessity of spreading the risk.

Re-insurance can be resorted to in all kinds of insurance. The insurer has an

insurable interest in the subject matter insured to the extent of the amount by him
because a contract of re-insurance is also a contract of indemnity. The re-insurers
are liable to pay the amount of the loss to the original insurer only if the original
insurer has paid the amount to the assured.

The re-insurer is, however, not liable to the insured or assured. This is because
there is no privity of contract between them. However, re-insurance is entitled to
all the benefits that the original insurer is entitled to under the policy. The policy
of re-insurance, in other words, is co-extensive with the original policy. If the
original policy for any reason comes to an end or is avoided, the policy of re-
insurance also comes to an end. A contract of re-insurance is also a contract of
uberrimae fidei. The original insurer, vis-a-vis the re-insurer, is in the position of
the assured. He must disclose to the re-insurer all the material facts disclosed to
him. On payment of the loss under the policy of re-insurance, the re-insurer is
subrogated to all the rights of the original insurer including the rights of the
assured to which the original insurer is subrogated.

Double Insurance

Where the assured insures the same risk with two or more independent insurers,
and the total sum insured exceeds the value of the subject matter, the assured is
said to be over-insured by double insurance. There is over-insurance where the
aggregate of all the insurances exceeds the total value of the assured's interest at
risk. If there is no express condition in a contract of insurance, both double
insurance and over-insurance are perfectly lawful.