The Insurance Act, 1938Act was passed to control the working and activities of the companies carrying on business of life, fire, marine and accident insurance.Apart from the above Act, the Indian insurance business is governed by the following special Acts.1. The Life Insurance Corporation Act, 19562. The Marine Insurance Act, 1963 and3. The General Insurance Business (Nationalization) Act 1972
Why insurance?To provide against the risk and insecurityBut, it does not avert or eliminate loss arising from uncertain eventsIt only spreads the loss over a large number of peopleContract of InsuranceA contract of insurance is a contract by which a person, in consideration of a sum of money, undertakes to make good the loss of another against a specified risk e.g. fire or to compensate him or his estate on happening of a specified event, e.g. accident or death.
Essential elements1. Insurer and insured2. Premium : The consideration for which the insurer undertakes to indemnify the insured against the risk – may be single or periodical3. Policy4. Subject matter of insurance5. Perils insured against.
Kinds of insurance1. Life insurance2. Fire insurance3. Marine insurance4. Personal accident insurance
Nature of the contract of insurance The contract of insurance is called an aleatory contract At first sight, this would seem to be a wagering agreement, because insurer betting with the insured that his house will not be burnt But, modern view is that insurance contracts are not speculative or wagering In actual practice, it is a valid contract, because the insured is only indemnified for his loss and he dose not gain by the happening of the event insured against. Plus he must have an insurable interest in the subject matter
Contract of insurance is a species of the general contract Comes into existence by the process of offer by insured to insurer Insurer should communicate its acceptance Object of insurance must be lawful and consent must be free and genuine Contract must be supported by consideration
Differences between insurance and wagerInsurance WagerContract of indemnity No question of indemnityObject is to make good the loss Object is to earn speculative gainsHas pecuniary or insurable No pecuniary or insurable interestinterestUtmost good faith to be observed Good faith need not be observedLegally enforceable Void ab initioScientific calculation of risk and Mere gamblepremiumCause varying degrees of loss or Either won or lostdamage
Fundamental principles of insurance contracts1. Utmost good faith2. Insurable interest3. Indemnity4. Causa Proxima5. Mitigation of loss6. Risk must attach7. Doctrine of subrogation8. Doctrine of contribution9. Period of insurance
Utmost good faith (uberrimae fidei ) Utmost good faith must be observed by either party – otherwise Whole truth must be told about the subject matter Fraud, concealment or misrepresentation of the material facts is fatal to the contract Material facts: needed to judge (a) whether he should accept the risk and (b) what premium he should charge Proposer should disclose at the time of making the proposal and must continue to do so till the negotiations are completed but need not after the contract Principle of caveat emptor is not applicable Exceptions:
Insurable interest• Insured must be in a legally recognized relationship to what is insured so that he will suffer a direct financial loss on the happening of the event insured ( or benefit from the existence of the subject matter)• It is the legal right of the person to insure• It is not the owner alone, but every person who would suffer direct financial loss from the destruction• Existence of insurable interest for different types of insurance Life insurance : at the time of insurance Fire insurance : both at the of insurance and loss Marine insurance : at the time of loss
Causa proxima Insurer is liable only for those losses which have been proximately caused by the peril insured against Maxim is : Causa Proxima Non remota Spectatur ( the proximate or immediate and not the remote cause is to be looked to) The question, which is the causa proxima of a loss arises only when there is a succession of causes When a loss has been brought about by two or more causes, one has to look to the nearest cause, although the loss would no doubt not have happened without the remote or other causes Commonsense is to be used Loss if brought about by a cause attributable to the misconduct of the insured - insurer is not liable Cases: read out
Risk must attach The insurer receives the premium for running a certain risk If risk is not run, the consideration for which the premium was given fails Then, insurer must return the premium The premium is also to be returned even where the risk is not run or could not be run due to the fault, will or pleasure of the insured
Mitigation of loss The insured must take all necessary steps for the purpose of averting or minimizing loss He must act as an uninsured prudent person If insured dose not do so, the insurer can avoid the payment of loss attributable to his negligence He is not bound to do so at the risk of his life
Doctrine of contributionNo person is prevented from effecting two or more insurances in respect of the same subject matterBut, in case of there is a loss or damage the insured will have no right to recover more than the full amount of his actual lossTo apply principle between two or more companies :1. There are different policies which relate to the same subject matter2. The event insured must be the same3. The insured must be the same4. All the policies are in force at the time of loss5. One of the insurer has paid to the insured more than his share of lossIn case of loss, any one insurer may pay and he is entitled to contribution from coinsurersIn proportion to the amount which each has undertaken to pay in case of loss
A insures his house against fir for Rs. 10000/ with insurer X andFor Rs.20000 with insurer YA loss of Rs.12000X is liable for Rs.4000/ and Y for Rs.8000/Formula:Sum insured with an individual insurer X 100Total sum insured
Doctrine of subrogation Applies only to fire and marine insurances The insurer, on making good the loss, is entitled to be put into the place of insured So, whenever an insured has received full indemnity in respect of his loss, all rights and remedies which he has against the third persons must be held and exercised for the benefit of the insurer.
Limitations:1. The insurer is subrogated to only the rights and remedies available to the insured in respect of the thing2. The insurer’s right of subrogation arises only when he pays the loss for which he is liable under policy3. The insurer is not entitled to the benefit of what is recovered until the insured has recovered a full indemnity
Period of insurance : period or time for which the insurance contract has been entered into Life insurance Fire insurance Marine insurancePremium The consideration paid by the insured to the insurer for the risk undertaken by the latter Determined by taking into : average of losses, total premium he receives, overhead and other expenses and profit
Illustration Suppose there are 10,000 houses in a locality Owners of 8000 of them decide to get their houses insured Experience shows ( and sometime on the basis of probability models) : every year average 2 houses catch fire Each house is valued at Rs. 2,00,000 – So average loss Rs. 4,00,000 Assume premium of Rs.100/ per house So, total premium Rs.8,00,000 Now, Rs. 8,00,000 – Rs. 4,00,000 = Rs. 4,00,000 Deduct overhead expenses and left with profitIn case of fire and marine on similar considerations but in life : mortality rate
Return of premium1. Where the consideration for the premium has totally failed2. Where the policy is void ab initio3. Where the assured has no insurable interest4. Where the assured bona fide over-insures
Re-insuranceInsuring the same risk either wholly or partially with other insurers to safeguard his own interestThe re-insurer is not liable to the insuredThe policy of re-insurance is co-extensive with the original policyAll principles are applicable between original insurer and re-insurer
Double insuranceWhere the insured insures the same risk with two or more independent insurersOver-insuranceWhere the insured insures the same risk with two or more independent insurers and the total sum insured exceeds the value of the subject matterIf no express contract, both are valid
Rules applicable1. Recovery of actual loss2. Excess amount recovered to be held in trust3. Liability of insurers – contribution4. No limit on life insurances
Life insuranceThe contracts are governed by:1.The insurance Act, 19382.The Life Insurance Corporation Act, 1956Contract of life insurance:A contract by which the insurer, in consideration of the payment