Legal Concept
In legal terms, insurance is a contractual agreement whereby one party agrees, for a consideration called premium, to compensate another party for losses. Thus an insurance transaction involves the following: Insurer: The party agreeing to pay for the losses of the insured. Insured: The party who insured his risk with the insurer.
Contd..
Premium: the payment to the insurer received from the insured for indemnifying the losses. Policy: is the contract between the insurer and insured that sets the contractual obligation between the two. Exposure to loss: The insureds possibility of incurrence of loss is called the insureds exposure to loss.
IS POOLED IN A FUND
Mechanism of Insurance
The mechanism of insurance is very simple. People who are exposed to the same kind of risks come together and agree that, if any one of them suffers a loss, the others will share the loss and make good to the person who lost. In other words, the risk is spread among the community and the likely big impact on one or few is reduced to smaller manageable impacts on all. There are certain principles also, which make it possible for insurance to remain a fair arrangement.
Contd..
The first being sharing of risk as it is difficult for any one individual to bear the consequences of the risks that he is exposed to. It will become bearable when the community shares the burden. The second is that the peril should occur in an accidental manner. The occurrence of loss has to be random, accidental, and not the deliberate action of the insured person(s). The manner in which the loss is to be shared can be determined beforehand. average, may suffer losses.
Contd..
A contract of insurance other than life insurance contract is a contract of indemnity. The insurer undertakes to indemnify the insured for loss or damage arising as a result of risk specified. In case of life insurance, if a person dies the insurance company can only give a specified claim amount as compensation to the survivors, it cannot indemnify the loss of lost life . Since the person who is dead cannot be brought back.
Classification of Insurance
Types of Insurance
Life Insurance
Non-life Insurance
General Insurance Marine Insurance Fire Insurance Personal Accident Insurance Vehicle Insurance
Miscellaneous Insurance Fidelity Guarantee Insurance Crop Insurance Burglary Insurance Flood Insurance etc. Cattle Insurance Cash in Transit Insurance
Fire, marine insurance and other contracts are contracts of indemnity. In fire insurance, insurable interest must be present both at the time of affecting the policy and also at the time of occurrence of loss also. In marine insurance. It must be present only at the time of loss . It is not necessary at the time of affecting the policy. In the case of marine and fire insurance, policy cannot be surrendered by the assured before its maturity. In the case of fire and marine insurance, insurance contain only the protection element.
It accepts the risk from people and corporate bodies who are exposed to them.
It collects small amounts of premium, which are pooled together to be called an insurance fund . This fund is used for investment purpose. It organizes compulsory insurance in certain areas as per the provisions of the law. It sells voluntary insurance covers through its sales force .
It settles claims arising out of insured losses . Neither the insurance company nor the insured are allowed to make profits out of insurance . If insurance company gets a surplus after meeting claims , it distributes it among policyholders in form of bonus or reduction in premium
It follows the principles of Indian Contract Act which help to prevent its misuse or abuse.
Indemnity
Principle of Indemnity is that insurer will indemnify insured for loss and will restore him to the position he was immediately before loss occurred. Where indemnity is the purpose, insured should not be better off as a result of the loss, fraud will be otherwise encouraged. Insured cannot claim more than once on the same risk with two insurers (double insurance) Insured cannot recoup his loss from another party after the claim was settled. E.g. cargo owner after claiming from his insurers cannot claim again from his carrier.
[Contd]2.Indemnity The object of every contract of insurance is to place the assured in the same financial position, as nearly as possible, after the loss as if the loss had not taken place at all. It would be against he public policy to allow an assured to make a profit out of the happening of the loss or damage insured against. This is because, if that were so, the assured might be tempted to bring about the event insured against in order to get the money. Moreover, in the absence of principle of indemnity, there might be a tendency in the direction of over insurance.
Example2.Indemnity
Insurable interest
The subject matter must be a physical object exposed to peril. Insured must have some legal relationship (not necessarily ownership) to the subject matter. Insured must stand to benefit by its preservation. Insured must stand to lose by its loss or damage.
Contd..
A proposer should disclose all material facts at the time of making the proposal for insurance and must continue to do so till the negotiations are completed. [Looker
vs.Law Union &Rock Insurance Co. Ltd.(1928)].
L made a proposal to an insurance company for an insurance on his life for.50,000 sterling pounds. He trustworthily answered various questions on the proposal form and disclosed all relevant facts. A few days later but before the proposal was accepted by the insurance company, L was taken ill with pneumonia.Two days later, he died of pneumonia and the company learned about his illness for first time. [Looker vs.Law Union &Rock
Insurance Co. Ltd.(1928)].
Held, the company was not liable to pay the claim, as the notice of illness which amounted to material alteration in the risk between the date of the proposal and its acceptance was not given.
Example
[4.Causa Proxima: ]
The cargo of rice in a ship was destroyed by sea-water flowing in the ship through a hole made by rats in bathroom lead pipe.Held, the underwriter was liable as the damage was due to a peril of the sea.The proximae causa of the damage in this case is sea water.If however , the loss is caused directly by rats or vermin, the underwriter will not be liable. [Hamilton Fraser & Co. vs.Pandroff(1887)]
Another Example
[4.Causa Proxima: ]
A ship carrying meat was delayed by a storm in consequence of which it became decomposed and had to be thrown overboard.Held, the loss of meat was not a loss by perils of the sea.
[Taylor VS.Dunbar(1869)]