General
Principles of Law of Insurance
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Role
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Name
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Affiliation
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Principal
Investigator
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Dr.Gyanendra
Kumar sahu
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Asst.Professor
Utkal University
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Content Reviewer
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Dr.Gyanendra
Kumar sahu
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Asst.Professor
Utkal University
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Description of Module
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Items
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Description of Module
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Subject
Name
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Law
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Paper
Name
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Law
of Insurance
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Module
Name /Title
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General
Principles of Law of Insurance
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Module
No.
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II
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General Principles of Law of Insurance
Objective: After reading this module, the
learners will have a clear picture of :
The aim
of all types of insurance is to make provision against such risks. In this way,
life insurance is a social device to share the risk of loss of life.
Learning Outcomes:
It means
an agreement in which one party agrees to pay a given sum of money upon the
happening of a particular event contingent upon duration of human life in
exchange of the payment of a consideration.
MEANING AND DEFINITION
Insurance
is a co-operative device to spread the loss caused by a particular risk over a
number of persons who are exposed to it and who agree to insure themselves
against the risk. The aim of all types of insurance is to make provision
against such risks. In this way, life insurance is a social device to share the
risk of loss of life. In simple words, it means an agreement in which one party
agrees to pay a given sum of money upon the happening of a particular event
contingent upon duration of human life in exchange of the payment of a
consideration.
Insurer: The person who guarantees
the payment is called Insurer, the amount given is called Policy
Amount, the person on whose life the payment is guaranteed is called Insured or Assured. The particular
event on which the payment is guaranteed to be given may be Death or Life.
The consideration is called the Premium. The document evidencing the
contract is called Policy.
“Life insurance
contract is a contract whereby a person (insurer) agrees for a consideration
(that is payment of a sum of money) or a periodical payment, called the premium
to pay to another (insured or his estates) a stated sum of money on happening
of an event dependent on human life.
The best
explanation of the definition and nature of life insurance contract undoubtedly
occurs in the case titled Dalby v.
India and London Life
Assurance Company. The basic
fact about life insurance recognized in this case is that a contract of life
insurance is not a contact of indemnity (against a loss). One of the effects of
life insurance not being a contract of indemnity is that on happening of the
event insured against the insurer should pay the agreed amount irrespective of
whether the assured suffers any loss or not.
The essential features of life
insurance can be summed up as under:
(i) It is a contract relating to human
life
(ii) The amount is paid at the expiration
of certain period or on death of the person.
TYPES OF INSURANCE
The risks which can be insured have increased
in number and extent due to the growing difficulty of the present day economic
system. Insurance occupied an important place in the modern world.
Generally insurance is divided in to two main
branches;
(a) Life insurance.
(b) General Insurance.
a. Marine insurance
b. Fire insurance
c. Motor vehicle insurance
d. Miscellaneous insurance
Utmost good faith
Most commercial contracts are subject
to the principle of caveat emptor (let
the buyer beware). Under these contracts, there is no need to disclose
information that is not asked for. Insurance contracts are different in that
they are based on facts which are within the knowledge of the insured; the law
imposes a duty of uberrima fides or ‘utmost good faith’. The
principle of utmost good faith requires anyone seeking insurance to disclose
all relevant facts. Where material non-disclosure can be proved, a contract can
be voided.
Insurable Interest
Interest in the
object: The principle of insurable interest
states that the person getting insured must have insurable interest in the
object of insurance. A person has an insurable interest when the physical existence
of the insured object. In simple words, the insured person must suffer some
financial loss by the damage of the insured object.
For example: The
owner of a taxicab has insurable interest in the taxicab because he is getting
income from it. But, if he sells it, he will not have an insurable interest
left in that taxicab. From above example, we can conclude that, ownership plays
a very crucial role in evaluating insurable interest. Every person has an
insurable interest in his own life. A merchant has insurable interest in his
business of trading. Similarly, a creditor has insurable interest in his
debtor.
The
classical definition of insurable interest was given by Lawrence, J., in Lucena
v. Craufurd which is as under:
“The having some relation to,
or concern in, the subject of the insurance.
CAUSA PROXIMA:-
More than one causes: Principle of Causa Proxima (a Latin phrase), or
in simple English words, the Principle of Proximate (i.e Nearest) Cause, means
when a loss is caused by more than one causes, the proximate or the nearest or the closest cause should be
taken into consideration to decide the liability of the insurer. General
Principles and Concepts of Insurance The
principle states that to find out whether the insurer is liable for the loss or
not, the proximate (closest) and not the remote (farest) must be looked
into.
For example:
A cargo ship's base was punctured due to rats and so sea water entered and
cargo was damaged. Here there are two causes for the damage of the cargo ship -
(i) The cargo ship getting punctured beacuse of rats, and (ii) The sea water
entering ship through puncture. The risk of sea water is insured but the first
cause is not. The nearest cause of damage is sea water which is insured and
therefore the insurer must pay the compensation. However, in case of life
insurance, the principle of Causa Proxima does not apply. Whatever may be the
reason of death (whether a natural death or an unnatural death) the insurer is
liable to pay the amount of insurance.
DOCTRINE OF SUBROGATION:-
The doctrine of subrogation is a result to the
principle of indemnity and as such applies only to fire and marine insurances.
In the case of Simpson Vs. Thomson 22, Lord Cairns defined
subrogation thus: "a right founded on the well known principle of law that
where one person has agreed to indemnify
another,
Example:
the owner of a motorcar having a comprehensive insurance cover, has got two
alternative in case of an accident with another car or person (third party) who
caused the accident. Firstly, he can claim for the damages from the Insurance
Co. or from the third party. If the
car owner decides to collect compensation from the Insurance Co., his right
against the third party is subrogated to the Insurance Co. so that the company
can afterwards claim the damages from the third party.
Reinsurance
Two or more insurance companies: Reinsurance is a contract between two or more
insurance companies by which a portion of risk of loss is transferred to
another insurance company called the reinsurer. Usually, an insurance company
insures a profitable venture that comes in its way, even if the risk involved
is beyond the capacity. But if at a particular stage it feels that the risk undertaken
by it is beyond its capacity, then
it may retain the risk which it can bear and transfer the balance.
Under the
reinsurance method, if an insurance company receives an insurance proposal
worth Rs. 10 crore, where its risk bearing capacity is of Rs. 5 crore only, it
has two options either to reject the proposal or to accept it. After accepting
the proposal, the insurer can limit his liability by getting re-insured for Rs.
5 crore with another insurer. In case of complete loss the original insurer makes
the payment of claim to the insured for Rs. 10 crore and then claims Rs. 5
crore from the re-insurer(s).
Double Insurance
Double insurance
refers to the method of getting insurance of same subject matter with more than one insurer or with same insurer
under different policies. This means that a person may get two or more policies
on same subject matter and can claim the amount of all these policies. However,
the insured cannot profit from this arrangement because the insurers are
legally bound only to share the actual loss in the same proportion in which
they share the total premium. It is also called dual insurance. Double
insurance is possible in all types of insurance contract. A person can insure
his life in different policies for different sums. In life insurance the
assured can claim the sum insured with different policies on maturity or to his
nominee after his death. This becomes possible in life insurance because life
insurance is not indemnity insurance.
Indemnity PR
INCIPLE OF INDEMNITY
Indemnity means guarantee or assurance to put
the insured in the same position in which he was immediately prior to the
happening of the uncertain event. The insurer undertakes to make good the loss.
It is applicable to fire, marine and other general insurance. Under this the insurer agreed to compensate
the insured for the actual loss suffered. Indemnity means security, protection
and compensation given against damage, loss or injury. According to the
principle of indemnity, an insurance contract is signed only for getting
protection against unpredicted financial losses arising due to future
uncertainties. Insurance contract is not made for making profit else its sole
purpose is to give compensation in case of any damage or loss.
In an insurance contract, the amount of
compensations paid is in proportion to the incurred losses. The amount of
compensations is limited to the amount assured or the actual losses, whichever
is less. The compensation must not be less or more than the actual damage.
Compensation is not paid if the specified loss does not happen due to a
particular reason during a specific time period. Thus, insurance is only for
giving protection against losses and not for making profit. However, in case of
life insurance, the principle of indemnity does not apply because the value of
human life cannot be measured in terms of money.
Definition
of Condition
Certain terms, obligations, and
provisions are imposed by the buyer and seller while entering into a contract
of sale, which needs to be satisfied, which are commonly known as
Conditions. The conditions are indispensable to the objective of the contract.
There are two types of conditions, in a contract of sale which are:
Expressed Condition: The
conditions which are clearly defined and agreed upon by the parties while
entering into the contract.
Implied Condition: The
conditions which are not expressly provided, but as per law, some conditions
are supposed to be present at the time making the contract. However, these conditions
can be waived off through express agreement. Some examples of implied
conditions are:
The condition relating to the title of
goods.
Condition concerning the quality and
fitness of the goods.
Condition as to wholesomeness.
Sale by sample
Sale by description.
Definition
of Warranty
A warranty is a guarantee given by the
seller to the buyer about the quality, fitness and performance of the product.
It is an assurance provided by the manufacturer to the customer that the said
facts about the goods are true and at its best. Many times, if the warranty was
given, proves false, and the product does not function as described by the
seller then remedies as a return or exchange are also available to the buyer
i.e. as stated in the contract.
A warranty can be for the lifetime or a
limited period. It may be either expressed, i.e., which is specifically defined
or implied, which is not explicitly provided but arises according to
the nature of sale like:
Warranty related to undisturbed
possession of the buyer.
The warranty that the goods are free of
any charge.
Disclosure of harmful nature of goods.
Warranty as to quality and fitness.
