Complete information on insurance, its kinds and characteristics of contract of insurance are described in detail as follows :
Man is exposed to losses. For instance, the time of the death of a person is not certain, and in the case of his premature death a man’s dependant may find themselves deprived of all means of existence. Similarly, the property of a person is open to all risks of its being destroyed by fire. Every prudent man will carefully consider how best he can prevent such risks or minimize or provide against its effects. It is difficult for an individual or even a large business enterprise to invest millions of rupees in the huge factory buildings and equipment or joint ships unless the arrangement for covering the risk is possible. This arrangement is made possible by insurance.
Insurance steps in to transfer such risks and dangers to the shoulders of the persons who are willing to accept the burden for monetary considerations. Insurance is a device by which the loss likely to be caused by an uncertain event is spread over a number of persons who are exposed to it and who propose to insure themselves against such an event. The essence of insurance is the elimination of risk and the substitution of certainty for uncertainty. Insurance is thus a cooperative way of spreading risks.
In modern times, this co-operation is brought about by means of contract between each one of those who subject to risks and the company organizations who are prepared to assume the risk. A contract of insurance may be defined as a contract between two parties where by a person undertakes, in consideration of a fixed sum to pay to the other a fixed amount of money on the happening of a certain event (death or attaining a certain age in case of human life) or to pay the amount of actual loss when it takes place through a risk insured, (in case of property).
The instrument containing the contract of insurance is called a policy. The instrument containing the contact of insurance is called a policy. The person whose risk is insured is called insured or assured, and the person or the company which insures is known as insurer, assurer or underwriter. The consideration in return for which the insurer agrees to make good the loss is knows as premium. The thing or property which forms the basis of insurance is called the subject-matter of insurance. The interest of the assured in the subject-matter is called the insurable interest.
A contract of insurance whether it is marine, fire or life insurance very closely resembles a gaming or wagering contract. A gaming or wagering contract is one in which A promises to pay B a certain sum of money on such a contract is that one party is to win and the other is to lose upon a future event which at the time of the contract is of uncertain nature. In a contract of insurance also there is a fair amount of uncertainty involved. According to lord Bramwell, in salt v. Northampton, “All life assurance is a sort of wager.” The contract of insurance since the early stages had been recognized as a gaming or wagering contract.
A contract of insurance is not a wagering contract as it is the exact opposite of gambling. There is no possibility of any gain because the underlying principle of an insurance contract is to indemnify the individual from loss whether by fire, accident or death. A contract of insurance is an absolutely valid contract because the assured has an insurable interest in the life or property sought to be insured, while in a wager no insurable interest exists. Insurable interest takes the venom of wager out of a contract of insurance.
Kinds of insurance:
Insurance contracts have been classified in various ways. The chief forms of insurance comprise life, fire and marine. Many other risks are also covered by insurance for example, accidents, sickness, bed debts, motor vehicles, burglary.
Contract of insurance – essential elements
Basically, insurance is a contract; therefore, the general principles relating to the law of contracts apply to the policy of insurance. Contracts of insurance have all the features of a simple contract. Like every other contract a contract of insurance comes into existence when there is offer or proposal on one side and acceptance of the same by the other. The contract of insurance must be made by competent parties in order to be valid. The object of the contract must not be immoral or illegal. Thus, insurance taken by a thief against being caught while attempting a burglary would be illegal and therefore not enforceable at law. It must be supported by consideration.
Characteristics of a contract of insurance
1. Aleatory contract :
Most contracts are commutative, i.e., each party gives up goods or services presumed to be of equal value. The insurance contract, however, is aleatory i.e., the contracting parties know that the amount to be paid by each party is not equal. In the insurance policy, the insured pays the amount of the premium. If he suffers loss he may receive a much larger amount from the company than he paid in premiums, and if he suffers no loss, he will collect nothing.
All gambling contacts are aleatory, but not all aleatory contracts are gambling contracts. Insurance is not gambling as the requirement of insurable interest removes insurance from the category of gambling.
2. Utmost good faith:
Most ordinary contracts are bona fide or good faith contracts. Insurance contracts, however, are contracts uberrimae fidei, or contracts of utmost good faith. It is a condition of every insurance contract that both the parties should display the utmost good faith towards each other in regard to the contract. This duty continues up to the time the negotiations for the contract are completed and is equally applicable to both the parties.
The insured is bound to disclose all material facts known to him but unknown to the insurer. Every fact which is likely to influence the mind of the insurer in deciding whether to accept the proposal or in fixing the rate of premium is material for this purpose. Similarly, the insurer is bound to exercise the same good faith in disclosing the scope of insurance which he is prepared to grant. The duty of disclosure is absolute. It is positive and not negative.
Non-disclosure or misrepresentation of any material fact gives the insurer an option to avoid the contract.
3. Insurable interest:
The insured must have an insurable interest in the subject-matter insured. Without such interest the contract will be regarded as a wagering contract and thus void. It means some pecuniary interest in the subject-matter of the insurance. A person has an insurable interest in the subject matter insured where he will derive pecuniary benefit from its preservation or will suffer pecuniary loss or damage by the happening of the event insured against. But mere expectation does not constitute insurable interest. Similarly, mutual love and affection is not sufficient to constitute insurable interest.
A person has an insurable interest in property even though he may not be the owner of it, for example, a person who has advanced money on the security of a house has an insurable interest in the house. Again every person has an insurable interest in his own life, since the law presumes that each one desires to remain alive. A person has an insurable interest in the life of another if he can expect to receive pecuniary gain from the continued life of the other person or will suffer financial loss from the latter’s death. Thus, a creditor has an insurable interest in the life of the debtor. A business firm has an insurable interest in the life of an executive or a key employee because his death would inflict a financial loss upon the firm.
A contract of life assurance requires interest at the time of the contract and not at the date of the death. In the case of fire insurance, it is necessary for the assured to prove that he had as insurable interest in the subject-matter both at the date of the policy and at the time of loss. In the case of marine insurance, the insurable interest must exist at the time the loss occurs.
All contracts of insurance are contracts of indemnity, except those of life assurance and personal accident insurance. It means that the assured in the case of loss against which the policy has been made shall be fully indemnified but never more than fully indemnified. It would be against public policy to allow persons who insure their goods to make any profits out of the goods insured.
All policies on property are contracts of indemnity and law would not permit them to be otherwise construed. Thus, if the value of the goods insured increased after the date of the policy, the insurers are not liable to make good the loss in respect of the increase in value. A contract of insurance ceases to be a contract of indemnity where the insurer promises to pay a fixed sum whether the insured has suffered any loss or not. Contracts of life and accident insurance belong to this class and in their cases indemnity is not the governing principle.
5. Causa proximal:
Under the law of insurance, an insured can recover from the insurer for the loss of the subject-matter only if it is caused by an event insured against. If there is only one cause of damage or loss, there is no difficult in fixing the liability of the insurer. But sometimes the loss or damage result on account of a series of causes. In such a case, the principle of causa proximal is applied. By the term proximate cause is not meant the latest, i.e., proximate in time, but the direct, dominant and efficient one. If this cause is within the risk covered, the insurer is liable in respect of loss. If it is otherwise, the insurers are not liable. Proximate cause is the cause which sets other causes in motion. It is often the earliest in point of time. Where there is insurance against fire, loss caused by smoke arising out of the fire or damage caused by water escaping from pipes, melted in the course of fire is covered by the policy. In such cases the connection between the fire and the loss is so close that the relation of cause and effect is established.
6. Risk must attach:
Premium is the consideration for the risk run by the insurance companies and if there is no risk, there should be no premium. It is general principle of law of insurance that where the insurers have never been on the risk. They cannot be said to have earned the premium. Thus, where a policy is declared to be void ab initio or where the policy is avoided before the risk began to run, the assured is entitled to a repayment of the premium that may have been paid. But if once the risk has begun to run the premium cannot be recovered.
7. Mitigation of loss:
When the event insured against occurs it is the duty of the insured to take all such steps to mitigate or minimize the loss as if he was uninsured. The insured should not become negligent or inactive in the event of the occurrence merely because the property which is getting damage is insured. He must instead act like any uninsured prudent man would act under similar circumstances. But this does not mean that while doing his best for the insurer he should risk his own life.
8. Subrogation :
The term subrogation literally means substitution i.e. substitution of the insurer in place of the insured in respect of the latter’s rights and remedies. According to the principle of subrogation, the insurer who has agreed to indemnify the assured will, on making good the loss, be entitled to step into the shoes of assured, i.e. the rights of the assured pass on to the insurer. The doctrine of subrogation is a corollary of the principle of indemnity and as such this principle does not apply to personal assurance. The right of the insurer to be subrogated arises only after the payment of the policy money. The principle of subrogation does not authorize the insurers to sue the third parties in their own names; they can only enforce their rights in the name of the assured.
9. Contribution :
There is nothing in law to prevent a person from effecting two or more insurances in respect of the same subject-matter. But in case there is a loss, the insured will have no right to recover more than the full amount of his actual loss. If he recovers the full amount of the actual loss from one insurer, he will have no right to obtain further payment from the other insurers. In such a case, the principle of contribution will apply according to which the insurer who has paid the insured the full amount of compensation will recover the proportionate contribution from the other insurer. In order to apply the right of contribution between or more companies, the following factors must exist:
a) The subject-matter of insurance must be the same. It is not necessary that the amount of insurance in each policy should be the same.
b) The event insured against must be the same:
c) The insured must be the same.
10. Term of policy :
An insurance policy specifies the term or period of time it covers. Often the nature of the risk against which insurance is sought determines the period or life of the policy. A life insurance policy may cover a specified number of years or the balance of the insured’s life. A contract of fire insurance is normally for a period of one year. A contract of marine insurance may be either for a particular period or for a particular voyage. In case it is for a particular period and the voyage has not come to an end, the liability of the insurer comes to and end on the expiry of the period. If the contract is for a particular voyage, the liability of the insurer comes to an end only after the completion of voyage.
Premium can be defined as “ a price paid adequate to the risk.” It is the consideration receivable by the insurers from the insured in exchange for their undertaking to pay the sum insured in case the event insured against happens. The contract of insurance must define the rate of premium. Actual payment of the premium is not necessary to the creation of a complete and binding contract of insurance. In practice, however, payment of the premium in advance is generally made a condition precedent to any liability attaching to the insurers.
The usual mode of payment of premium is cash, though it is acceptable through cheques as well. The parties may make any agreement for the payment of premium, both as to the amount and frequency of the payment. In the case of life insurance, premiums may generally be paid annually, half-yearly, quarterly or monthly at the option of the insured. In the case of property insurance the entire premium may be paid at the beginning of the life of the policy. The insurance policies usually provide that they lapse unless the premium is paid on the due date or within the days of grace allowed.
The rate of premium is calculated upon the average of losses as compared with profits. All circumstance affecting the risk like locality, the construction and use of the property are taken into consideration. In life assurance, the premium is calculated on the average rate of mortality.
After the policy has become binding the insured cannot ordinarily recover the premiums paid the insurer. In a few instances the insured may recover them, as for example, when the payments were made under a mistake or when they were they were induced by fraud. Similarly, if the risk has not started running, the insured may recover the premiums.
Reinsurance is an insurance of insurance. The insurer in as much as he is liable on a policy of insurance may insure against the risk which he has taken upon himself. The second contract of insurance is called reinsurance. More shortly reinsurance is defined as a “contract which insures the thing originally insured”. Reinsurance consists new insurance, effected by a new policy on the same risk which was before insured, in order to indemnify the under writer for his previous subscriptions and both policies are in existence at the same time. Reinsurance is in fact insurance by the original insurer of his interest in the risk created by his contract to insure. In case of reinsurance the liability of the insurer is shifted to the reinsurer, and the liability of the reinsure is shifted to the reinsurer, and the liability of the reinsurer is contingent upon the liability of the insurer.
When an insured insures the same property with more than one insurer and the total sum insured exceeds the value of the subject-matter the insured is said to make a double insurance. In such a case the insured cannot recover more than the amount of the indemnity due to him. But the insured may sue on whichever policy he desired, and recover the whole sum to which he is entitled. The insurer who is so made liable can claim contribution from the co-insurers.