Unit 3
1.Principles of Insurance
2.Essential of contract acts
3. Distinct Legal Characteristics of Insurance Contract
OR,
(Difference between insurance contract and other contract)
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The main objective of every insurance contract is to give financial security and protection to the insured from any future uncertainties. Insured must never ever try to misuse this safe financial cover. Seeking profit opportunities by reporting false occurrences violates the terms and conditions of an insurance contract. This breaks trust, results in breaching of a contract and invites legal penalties. An insurer must always investigate any doubtfull insurance claims. It is also a duty of the insurer to accept and approve all genuine insurance claims made, as early as possible without any further delays and annoying hindrances.
Principles of Insurance
1. Utmost Good Faith
2. Insurable Interest
3. Proximate Cause
4. Indemnity
5. Subrogation
6. Contribution
7. Loss Minimisation
The Principle of Utmost Good Faith:
Both parties involved in an insurance contract—the insured (policy holder) and the insurer (the company)—should act in good faith towards each other.The insurer and the insured must provide clear and concise information regarding the terms and conditions of the contract. It is important that the insured disclose all relevant facts to the insurance company. Any facts that would increase his premium amount, or would cause any prudent insurer to reconsider the policy must be disclosed. If it is later discovered that some such fact was hidden by the insured, the insurer will be within his rights to void the insurance policy.
The Principle of Insurable Interest:
This means that the insured must have some pecuniary interest in the subject matter of the insurance.This means that the insured need not necessarily be the owner of the insured property but he must have some vested interest in it.If the property is damaged the insured must suffer from some financial losses.
For example:- The owner of a bus has insurable interest in the bus because he is getting income from it. But, if he sells it, he will not have an insurable interest left in that bus.
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 Principle of Indemnity:
Indemnity is a guarantee to restore the insured to the position he or she was in before the uncertain incident that caused a loss for the insured. The insurer (provider) compensates the insured (policyholder).The insurance company promises to compensate the policyholder for the amount of the loss up to the amount agreed upon in the contract. 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.
The Principle of Contribution:
This principle applies if there are more than one insurers. In such a case, the insurer can ask the other insurers to contribute their share of the compensation. If the insured claims full insurance from one insurer he losses his right to claim any amount from the other insurers. So, if the insured claims full amount of compensation from one insurer then he cannot claim the same compensation from other insurer and make a profit. Secondly, if one insurance company pays the full compensation then it can recover the proportionate contribution from the other insurance company.
For example: Imagine that you have taken out two insurance contracts for same property. Let’s say you have a policy with Sagarmatha Insurance that covers Rs.30,00,000 in property damage and a policy with Shikhar Insurance that cover Rs.50,00,000 in property damage. If you end loss of Rs.50,00,000 worth on your property. Then about Rs.19,00,000 will be covered by Sagarmatha and Rs.31,00,000 by Shikhar.
The Principle of Subrogation:
Subrogation means substituting one creditor for another.After the insured (policyholder) has been compensated for the incurred loss on a piece of property that was insured, the rights of ownership of this property go to the insurer. So lets say you are in a car wreck caused by a third party and your file a claim with your insurance company to pay for the damages on your car and your medical expenses. Your insurance company will assume ownership of your car and medical expenses in order to step in and file a claim or lawsuit with the person who is actually responsible for the accident (i.e. the person who should have paid for your losses).
For example: Mr. Krish insures his house for 20 lakhs. The house is totally destroyed by the negligence of his neighbor Mr. Vikas. The insurance company shall settle the claim of Mr. Krish for 20 lakhs. At the same time, it can file a law suit against Mr. Vikas for 22 lakhs, the market value of the house. If insurance company wins the case and collects 22 lakhs from Mr. Vikas, then the insurance company will retain 20 lakhs (which it has already paid to Mr. Krish) plus other expenses such as court fees. The balance amount if any, will be given to Mr. Krish, the insured.
The Principle of Proximate Cause:
Principle of proximate 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. The loss of insured property can be caused by more than one incident even in succession to each other. Property may be insured against some but not all causes of loss. When a property is not insured against all causes, the nearest cause is to be found out. If the proximate cause is one in which the property is insured against, then the insurer must pay compensation. If it is not a cause the property is insured against, then the insurer doesn’t have to pay.
For example : If you buy a fire insurance for your building and later the building caught by a fire. And you put the water in the fire to control it. But due to water other loss also happened. In this situation Insurance company provide you the compensation for the loss caused by water.
The Principle of Loss Minimisation:
In an uncertain event, it is the insured’s responsibility to take all precautions to minimize the loss on the insured property. According to the Principle of Loss Minimisation, insured must always try his level best to minimize the loss of his insured property, in case of uncertain events like a fire outbreak or blast, etc. The insured must take all possible measures and necessary steps to control and reduce the losses in such a scenario. The insured must not neglect and behave irresponsibly during such events just because the property is insured. Hence it is a responsibility of the insured to protect his insured property and avoid further losses.
Essentials of contract act
1. Offer and Acceptance:
In life insurance, offer can be made either by the insurance company or the applicant that is, the proposal and the acceptance will follow. Offer is the kind of the advertisement which the company puts into the newspaper and floats the new policies in the market. And if people generally get interested then they enter into registration, this is acceptance. Offer is you offer something to the client.
2. Consideration:
There is no validity of the contract if there is no consideration, which is the act or promise which is offered by one party and accepted by the other as the price of his promise. Generally, consideration has to be there, one has to offer a promise and other has to pay the price for it. There could be no contract if there was no promise or no price.
3. Premium payment:
In insurance contracts, the consideration is the premium that the insured pays to the insurer, as the price of the promise that the insurer has made, that he shall indemnify the insured. Hence premium payment is the consideration on part of the insured and the promise to indemnify is the consideration on the part of insurer. Premium is the kind of the installment or the money which you pay to the company. The obligations of the company can only start if you pay something. The promise cannot crystallize if the money is not paid to the company.
4. Legal capacity to contract or competency: For an agreement to be binding on all parties, the parties involved must have the legal capacity to enter into a contract. With respect to the insurer, if the company is formed as per laws of the country and empowered to solicit insurance, then insurer is capable of entering into an agreement. This is legal competency, that is the company must have a license and registration and then only the offer can float in the market. The competency is built up by the legality of the act.
5. Qualifications of the persons to enter into contract:
with respect to the insured, the person should be of legal age, that is 18 years and of sound mind. Thus he must have sound mind and he must be of 18 years of age. That is mentally retarded people or people who are mentally not well or they are admitted into the hospital, they cannot enter into the contract.
6. Agreement to the contract:
Both parties of the contract should be of the same mind and there might be consent arising out of the common intention. Both parties should be clear about what the other is saying.
Distinct Legal Characteristics of Insurance Contract
OR,
(Difference between insurance contract and other contract)
Insurance contracts have distinct legal characteristics that make them different from other legal contracts. Several distinctive legal characteristics have already been discussed. As we noted earlier,most property and casualty insurance contracts are contracts of indemnity: all insurance contracts must be supported by an insurable interest; and insurance contracts are based on utmost good faith. Other distinct legal characteristics are as follows:
1.Aleatory contract
2.Unilateral contract
3.Conditional contract
4.Personal contract
5.Contract of adhesion
Aleatory Contract:
An insurance Contact is aleatory rather than commutative. An aleatory contract is a contract where the values exchanged may not be equal but depend on an uncertain event. Depending on chance, one party may receive a value out of proportion to the value that is given. For example, assume that Pooja pays a premium of Rs.6000 for a Rs.200,000 homeowner's policy. If the home were totally destroyed by fire shortly thereafter, she would collect an amount that greatly exceeds the premium paid. On the other hand, a homeowner may faithfully pay premiums for many years and never have a loss.
In contrast, other commercial contracts are commutative. A commutative contract is one in which the values exchanged by both parties are theoretically equal. For example, the purchaser of real estate normally pays a price that is viewed to be equal to the value of the property.
Unilateral Contract:
A unilateral contract means that only one party makes a legally enforceable promise. In this case, only the insurer makes a legally enforceable promise to pay a claim or provide other services to the insured. After the first premium is paid, and the insurance is in force, the insured cannot be legally forced to pay the premiums or to comply with the policy provisions.
In contrast, most commercial contracts are bilateral in nature. Each party makes a legally enforceable promise to the other party.
Conditional Contract:
Conditional contract insist that the insurer's obligation to pay a claim depends on whether the Conditions are provisions inserted in the policy that quality or place limitations on the insurers promise to perform.The insurer is not obligated to pay a claim if the policy conditions are not met. For example, under a homeowner's policy, the insured must give immediate notice of a loss. If the insured delays for an unreasonable period in reporting the loss, the insurer can refuse to pay the claim on the grounds that a policy condition has been violated.
Personal Contract:
In property insurance, insurance is a personal contract, which means the contract is between the insured and the insurer. Strictly speaking, a property insurance contract does not insure property, but insures the owner of property against loss. A property insurance contract normally cannot be assigned to another party without the insurer's Consent.
In contrast, a life insurance policy can be freely assigned to anyone without the insurer's consent because the assignment does not usually alter the risk or increase the probability of death.
Contract of Adhesion:
A contract of adhesion means the insured must accept the entire contract, with all of its terms and conditions.The insurer drafts and prints the policy, and the insured generally must accept the entire document and cannot insist that certain provisions be added or deleted or the contract rewritten to suit the insured. Although the contract can be altered by the addition of endorsements and riders or other forms, the contract is drafted by the insurer. Courts have ruled that any ambiguities or uncertainties in the contract are constructed (Interpreted) against the insurer. If the policy Is ambiguous, the insured gets the benefit of the doubt.
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