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FUNDAMENTAL PRINCIPLES OF INSURANCE
PRINCIPLES OF INSURANCE
SHASHI AGGARWAL ECONOMICS AND LAW CLASSES
MEANING
·
AN ARRANGEMENT BY WHICH A COMPANY OR THE STATE
UNDERTAKES TO PROVIDE A GUARANTEE OF COMPENSATION FOR SPECIFIED
LOSS,DAMAGE,ILLNESS OR DEATH IN RETURN FOR PAYMENT OF A SPECIFIED PREMIUM.
·
INSURANCE CAN BE DEFINED IN BOTH FINANCIAL AND
LEGAL TERMS
·
THE FINANCIAL DEFINITION FOCUSES ON AN
ARRANGEMENT THAT REDISTRIBUTES THE COST OF UNEXPECTED LOSSES,THAT IS,THE
COLLECTION OF A SMALL PREMIUM PAYMENT FROM ALL EXPOSED AND DISTRIBUTE TO THOSE
SUFFERING LOSS.
·
LEGAL DEFINITION FOCUSES ON A CONTRACTUAL
ARRANGEMENT WHERE ONE PARTY AGREES TO COMPENSATE ANOTHER PARTY FOR LOSSES
ALL CONTRACT
OF INSURANCE EXCEPT LIFE INSURANCE CONTRACTS ARE CONTRACTS OF INDEMNITY.
FEATURES
1. PROTECTION
FROM LOSSES
2. PRESENCE OF
UNCERTAINTIES
3. SPREADING OF
RISK
4. COLLECTION OF
CONTRIBUTION IN ADVANCE
5. MONETARY
BENEFIT TO DEPENDENTS
6. REDUCE THE
IMPACT OF LOSS
7. PROTECT FROM
INTANGIBLE LOSS
8. PROTECT FROM
LOSSES BUT EXCLUDING PROFITS FROM THE OCCURRENCE OF THE EVENT
FUNDAMENTAL PRINCIPLES OF INSURANCE
1. INSURABLE
INTEREST
2. UTMOST GOOD
FAITH
3. INDEMNITY
4. SUBROGATION
5. CONTRIBUTION
6. PROXIMATE
CAUSE
7. MITIGATION OF
LOSSES
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PRINCIPLE OF INSURABLE INTEREST
a. A PERSON CAN
ENTER INTO VALID CONTRACT OF INSURANCE ONLY IF HE HAS A INSURABLE INTEREST IN
THE SUBJECT MATTER TO BE INSURES
b. IN THE
ABSENCE OF INSURABLE INTEREST,NO CONTRACT OF INSURANCE CAN COME INTO EXISTENCE
c.
IT MEANS THE INSURED MUST POSITIVELY STAND BENEFITED FINANCIALLY DUE TO ITS EXISTENCE AND HE WILL SUFFER A FINANCIAL LOSS
BY ITS NON EXISTENCE
d. AN EMPLOYER
HAS INSURABLE INTEREST IN THE LIVES OF EMPLOYEES
e. LIFE
INSURANCE POLICY:AT THE TIME OF TAKING POLICY,HE MUST HAVE INSURABLE INTEREST
IN THE LIFE OF THE INSURED PERSON.
f.
FIRE INSURANCE POLICY:-INSURABLE INTEREST EXIST
BOTH AT THE TIME OF TAKING AND ALSO AT THE TIME WHEN THE LOSS OCCURS
g. IN CASE OF
MARINE INSURANCE:- INSURABLE INTEREST MUST BE PRESENT AT THE TIME OF OCCURRENCE
OF LOSS
PRINCIPLES OF UTMOST GOOD FAITH
a. ACCORDING TO
THE PROVISIONS OF THE INDIAN CONTRACT ACT 1872,ALL COMMERCIAL CONTRACTS REQUIRE
THAT GOOD FAITH MUST BE OBSERVED OTHERWISE THE CONTRACT SHALL BE NULL AND VOID
b. GOOD
FAITH:ABSENCE OF FRAUD/DECEIT ON THE PART OF PARTIES
c.
THE CONTRACT OF INSURANCE RE FIDUCIARY IN
NATURE
d. IT IS A
CONTRACT OF UBERRIMAE FIDIE THE CONTRACT WHICH REQUIRES UTMOST GOOD FAITH ON THE
PART OF ALL THE PARTIES CONCERNED WITH THE CONTRACT.
e. DISCLOSE ALL RELEVANT MATERIAL FACTS WHICH HELP THE INSURER TO DECIDE WHETHER TO ACCEPT OR
NOT TO ACCEPT THE RISK
f.
IF ACCEPTED AT WHAT RATE OF PREMIUM AND ON WHAT
TERMS AND CONDITIONS
PRINCIPLE OF INDEMINITY
THE
PRINCIPLES OF INDEMNITY ALSO APPLIES TO ALL CONTRACTS OF INSURANCE EXCEPT THE
CONTRACT OF LIFE INSURANCE.
THE PRINCIPLE
OF INDEMNITY APPLIES:-
1. WHERE LOSS
SUFFERED CAN BE MEASURED IN MONEY TERMS
2. A MODE OF
PUTTING THE INSURED AFTER OCCURRING OF LOSS IN WHICH HE WAS PLACED JUST BEFORE
THE OCCURRENCE OF LOSS
3. CAN BE INDEMNIFIED ONLY UP TO THE EXTENT OF ACTUAL LOSS
4. THE SUM OF INDEMNITY CAN NEVER EXCEED THE VALUE OF THE POLICY TAKEN OUT
PRINCIPLE OF SUBROGATION
THE INSURER
STEPS INTO THE SHOES OF THE INSURED AFTER SETTLING THE CLAIM OR AFTER
COMPENSATING THE LOSS
UNDER THE
COMMON LAW IF THE INSURED SUBJECT MATTER IS DESTROYED DUE TO THE NEGLIGENT ACTS
OF THIRD PARTY,THE INSURED PARTY SHALL BE ENTITLED TO BE INDEMNIFIED BY THE
THIRD PARTY. BUY UNDER THE PRINCIPLE OF SUBROGATION,THE INSURER AFTER
INDEMNIFYING THE INSURED SHALL BE ENTITLED TO GET INSURED RIGHT OF
INDEMNIFICATION AGAINST THIRD PARTY
PRINCIPLE OF SUBROGATION:-
a. IT DOES NOT
APPLY TO LIFE INSURANCE
b. THE INSURER
ASSUMES THE RIGHTS OF THE INSURED ONLY AFTER THE SETTLEMENT OF THE CLAIM
c.
SUCH RIGHT CAN BE EXERCISED IN THE NAME OF THE
INSURED
d. BENEFIT IS
LIMITED TO THE ACTUALLY PAID AMOUNT
e. INSURED IS
TRUSTEE FOR THE INSURER IN RESPECT OF ANY COMPENSATION RECEIVED FROM THIRD
PARTY
EXAMPLE
SUPPOSE TRUCK OF MR X IS INSURED WITH ABC INSURANCE CO AND IT IS DAMAGED DUE
TO NEGLIGENCE OF MR Y WHICH IS INSURED WITH DEF CO.
MR X WILL BE INDEMNIFIED BY ABC INSURANCE CO AND SUIT AGAINST DEF WILL BE
FILED BY INSURANCE COM ABC UNDER THE PRINCIPLE OF SUBROGATION
PRINCIPLE OF CONTRIBUTION
a. ALL CONTRACT OF INSURANCE EXCEPT THE LIFE INSURANCE AND PERSONAL ACCIDENT INSURANCE
b. SOME TIMES A
PERSON GETS A SUBJECT MATTER INSURED WITH MORE THAN ONE INSURER IS CALLED THE
DOUBLE INSURANCE
c.
WHERE BY IN THE EVENT OF DAMAGE,INSURED CAN NOT
CLAIM ANYTHING MORE THAN THE TOTAL LOSS FROM ALL THE INSURER TO
d. TOTAL LOSS
CONTRIBUTED BY THE INSURED IS CONTRIBUTED
BY DIFFERENT INSURER IN THE RATION OF THE VALE OF POLICIES ISSUED BY
THEM FOR SAME SUBJECT MATTER
e. CAUSA PROXIMA
OR PRINCIPLES OF PROXIMATE CAUSE
f.
THE TERM CAUSA PROXIMA IS A LATIN PHRASE WHICH
MEANS NEAREST OR PROXIMATE CAUSE
g. IT IS
ESPECIALLY APPLICABLE TO MARINE INSURANCE
h. IT IS HELPFUL
IN DECIDING THE ACTUAL CAUSE OF LOSS WHEN NUMBER OF CAUSES HAVE CONTRIBUTED TO
THE OCCURRENCE OF LOSS. WHILE DETERMINING THE LIABILITY OF THE INSURER THE
NEAREST OR PROXIMATE CAUSE AND NOT THE REMOTE CAUSE OF THE LOSS IS TO BE
TAKEN.CAUSE PROXIMA MEANS THE DIRECT MOST DOMINANT,MOST EFFECTIVE OR EFFICIENT
CAUSE WHICH RESULT INTO A DEFINITE LOSS.
AN INSURED A SUFFERED INJURIES IN AN ACCIDENT AND WAS ADMITTED TO THE
HOSPITAL AND WHILE TAKING TREATMENT HE CONTRACTED AN INFECTIOUS DISEASE. AND
DIED
THE COURT HELD PROXIMATE CAUSE OF THE DEATH WAS THE DISEASE AND THE ORIGINAL
ACCIDENT WAS REMOTE
PRINCIPLS OF MITIGATION OF LOSSES
a. IN THE EVENT
OF LOSS,THE LOGIC BEHIND THE PRINCIPLE OF MITIGATION OF LOSS IS THAT THE
INSURED SHOULD NOT BECOME CARELESS AND
PASSIVE AT THE TIME OF LOSS OF SIMPLY BECAUSE HIS PROPERTY IS INSURED.
b. UNDER THIS DOCTRINE IT IS PRESCRIBED THAT WHENEVER THE INSURED EVENT OCCURS,IT SHALL BE THE
DUTY OF THE INSURED TO TAKE ALL SUCH STEPS TO MINIMIZE THE LOSS.
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