insurance i

8/8/2019 Insurance I

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PRINCIPLESPRINCIPLES OFOF

INSURANCEINSURANCE


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BASICS OF INSURANCEBASICS OF INSURANCE

INTRODUCTION TO INSURANCE:

In the modern civilized world even after taking

proper care at every step, life and property iscontinuously exposed to loss or damage. A personmoving on road can be killed by a car, a motor bikeparked may be stolen, a factory may be gutted,cargo may be damaged while in transit by a ship what not - to say everything including life is exposedto risk and there is uncertainty every where despitetaking necessary precautions.


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CONTRACT OF INSURANCECONTRACT OF INSURANCE

It is an agreement between the Insurers(Insurance companies) and the insured (Policyholder)


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Insurance Contracts

where by the Insurers, in consideration

of having received the premium,

undertake to make good the financial

loss, subject to the limit of a specified

amount, suffered by the insured as a

result of loss or damage of the insured

property by specified perils during the

stated period.


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INSURABLE RISKINSURABLE RISK

RISK

Pure risks Trade Risks

Risk must be fortuitous in nature

Loss caused must be capable of being

measured.

Risk must not be of illegal nature

Insurance must not be against public policy.


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Pure & Speculative

Pure Risk :

Pure Risk always produce losses. In Pure risks,

there is no possibility of gain.

Speculative Risk:

Speculative risks can result into a gain or loss.


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Insurance Contracts

Involves two parties Insured & Insurer

Governed by Indian Contract Act, 1872.

Elements for legal validity of contract:Elements for legal validity of contract:

Offer and Acceptance

Consideration

Agreement between parties consensus ad idemCapacity of the parties

Legality of the contract


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Offer & Acceptance

Offer from proposer made orally, in paper,

over telephone or by completing a Proposal

form.

Acceptance by Insurer usually by issuance of

cover note


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Consideration

Act or Promise offered by one party and

accepted by the other as the price of the

promise. In Insurance, consideration from the

insured is known as Premium and that from

the Insurer is the Promise to Indemnify.


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Capacity of the parties to contract

Insured:

Should have attained age of majority

Is sound of mindInsurer:

Must have legal capacity to contract.

Authorisation by the Government


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Legality of contract

Subject matter should be legal.

Object is not lawful if:

it is forbidden by law

Is of such a nature that if permitted would defeatthe provisions of any law.

Involves or implies injury to the person andproperty of another.

The court regards it as immoral or opposed topublic policy.


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INSURANCE

LIFE INSURANCELIFE INSURANCE GENERAL INSURANCEGENERAL INSURANCE


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LIFE INSURANCE GENERAL INSURANCE

Benefit policy Indemnity policy

Renewal cannot be denied Can be denied

Not duty to inform any Changes to be informed

change

Constant Premium Premium varies every yr.


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RISK:

Uncertainty about a Loss.

PERIL :

Cause of Loss

HAZARD :Conditions which may create or increasethe chance of loss arising from any peril.


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Principles of Insurance

Insurable Interest

Utmost Good faith

Indemnity Subrogation and Contribution

Proximate Cause


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Insurable Interest

There must be property, right, interest, life or

potential liability capable of being insured.

Such property should be the subject matter ofinsurance.

The insured must bear a legal relationship to

the subject matter

Insurable interest must exist at the time of

loss.


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Insurable Interest

Interest arising from ownership

Interest arising from law

Interest arising from contract Interest arising from legal liability

Interest of a person in life

Interest arising out of insurance


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Utmost Good Faith

Duty of Utmost Good faith implies that aproposer must disclose to the insurer all materialfacts in regards to the proposed insurance. The

duty applies not only to the material facts that heknows but also extends to the facts that he oughthe oughtto knowto know..

Material Fact : Fact which would affect thedecision of a prudent underwriter w.r.tacceptance of risk.


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Utmost Good Faith

ExceptedMaterial Fact :

Facts which diminish the risk

Facts which are presumed to be known by

underwriter

Facts which could be ascertained from

information provided.

Matters of law. Facts in regard to which insurer is indifferent

Facts possible of discovery during inspection.


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Utmost Good Faith

A breach of utmost good faith is by :

Non disclosure

Misrepresentation.


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Principle of Indemnity

Compensation for loss or injury sustained

Security or protection against loss or damage.

Object: Loss or damage must be made good in such a manner

that financially the insured should be neither better offnor worse off as a result of loss.

To place the insured in the same financial position ashe was before a loss.

Prevent insured from making a profit out of a loss.


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Principle of Indemnity

Methods :

Cash Payment

Repairs Replacement

Reinstatement


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Subrogation & Contribution

Subrogation:

Transfer of rights and remedies of insured to

the insurer who has indemnified the insuredin respect of the loss.

This arises from the principle of indemnity.

Collecting claim as well as money/ goods from

the person responsible for loss will be against

indemnity principle.


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Subrogation & Contribution

Contribution : The right of an insurer who has paid a loss under

a policy to recover a proportionate amount fromother insurers who are liable for loss.

Arises from the principle of indemnity as theinsured is prevented from claiming from allinsurers separately.

The foll. are reqd.:

Subject matter must be the same. Peril which causes the loss should be common to

all policies.

Policies must be in force at the time of loss.


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Proximate Cause

The active efficient cause that sets in motion a

train of events which brings about a result,

without the intervention of any force started and

working actively from a new independent source.

Cause of causes not to be looked into but for the

immediate cause.

Immediate does not mean the cause nearest tothe loss in point of time. It should be understood

in terms of effectiveness and efficiency.


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ReinsuranceReinsurance


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Why Reinsurance?

Wider distribution of risk

Insurers can contract more risk

Stabilize the income and losses of insurer Insurer can insure large amount


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Double insuranceDouble insurance

100%

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