Principles of Insurance The basic principles which are applicable to various kinds of contracts of insurance are: (i) Utmost good faith (ii) Insurable interest (iii) Indemnity, (iv) Contribution (v) Subrogation (vi) Causa proxima and (vii) Mitigation of loss. A brief description of these principles are given below: (1) Principle of Utmost Good Faith. A contract of insurance is a contract Uberrimae Fidei, i.e. of utmost good faith. It is a basic condition of every contract of insurance that the insurer and insured should display the utmost good faith towards each other in regard to the contract. In other words, each party must reveal to the other party all information which would influence the other party’s decision to enter into the contract whether such information is asked or not. If a material fact is not disclosed or if there is a misrepresentation or fraud, the insurer can avoid the contract. What is a material fact depends on the circumstances of each case. Ordinarily, material fact is one which affects the nature or incidence of risk and the character of the insured. Two examples of material facts are: (i) Facts which tend to render a risk proposed to be greater than normal and (ii) facts necessary to explain the exceptional nature of risk proposed for insurance where in their absence the insurer would justifiably believe the risk to be normal. A policy of life insurance cannot be called into question on the ground of non-observance of good faith after it has run for two years from the date when it was taken except when the insurer proves that: (a) the policy-holder suppressed facts or made a wrong statement of facts which were material to the contract, (b) he did it with fraudulent intention and (c) he had the knowledge about the untruth of the facts when he asserted them to be true. (2) Principle of Insurable Interest. This principle requires that the insured must have an insurable interest in the subject matter of insurance. Insurable interest means some pecuniary interest in the subject matter of contract of insurance. The insured must be so situated with regard to the subject insured that he would benefit from its existence and lost from its destruction. Without insurable interest, the contract will be merely a gambling policy and not valid in the eyes of law. Existence of insurable interest is the sense of insurance which distinguishes it from wager policy because insurance can be effected only when there exists an insurable interest. A man cannot get the life of a stranger insured as he has no insurable interest in him but he can get insured the life of himself and of persons in whose life he has a pecuniary interest. It has been held that for the purposes of life insurance, interest exists in the following cases; husband in the life of his wife and wife in the life of her husband, parent in the life of a child if there is any pecuniary benefit derived from the life of a child, creditor in the life of a debtor; employer in the life of an employee; surety in the life of a principal debtor. In life insurance, insurable interest must be present at the time when insurance is effected. In fire insurance, it must be present at the time of insurance and at the time of loss of subject matter. In marine insurance, it must be present at the time of loss of the subject matter. (3) Principle of Indemnity. The insurer undertakes to compensate insured for the loss caused to him by the damage or destruction of the property insured. The compensation payable and the loss suffered are to be measured in terms of money. This principle is applicable in case of fire and marine insurance only. It is not applicable in case of life, personal accident and sickness insurance. Thus, in case of fire and marine insurance, the insurer will compensate the insured for the loss caused to him by the damage or destruction of the property insured. But in case of personal insurance, the insurer is required to pay the fixed amount agreed upon in advance in the event of an accident, death, or on the expiry f the fixed term of policy. The amount so fixed remains constant and invariable as no money can indemnify loss of life or bodily injury. Thus, a contract of life insurance is a contingent contract and not a contract of indemnity. The purpose of all the contracts of indemnity is to put the insured in the same position after the event happened in which he was immediately before that event. Suppose, a house is insured against fire for Rs 50,000. It is burnt down and it is found that an expenditure of Rs 30,000 will restore it to its original condition. The insurer is liable to pay only Rs 30,000 unless otherwise agreed under the contract of insurance. It would be against public policy to allow an insured to make a profit out of the happening of the loss or damage insured against. Moreover, in the absence of the principle of indemnity, there might be a tendency in the direction of over insurance. (4) Principle of Contribution. The principle of contribution is a corollary of the doctrine of indemnity. It applies to any insurance which is a contract of indemnity. A particular property may be insured with two or more insurers against the same risk. In such cases the insurers must share the burden of payment in proportion to the amount insured by each. If one of the insurers pays the whole loss, he is entitled to contribution from the other insurers. Suppose B gets his house insured against fire for Rs 10,000 with insurer P and for Rs 20,000 with insurer Q. A loss of Rs 15,000 occurs, P is liable for Rs 5,000 and Q Rs 10,000. If the whole amount of loss is paid by Q, he can recover Rs 5,000 from P. The liability of P and Q will be determined as under: Sum insured with individual insurer (P or Q) x Actual loss Total sum insured Liability of P = 10,000 x 15,000 = Rs 5,000 30,000 Liability of Q = 20,000 x 15,000 = Rs 10,000 30,000 The right of contribution arises when: (i) There are different policies which relate to the same subject matter (ii) The policies cover the same period which caused the loss. (iii) All the policies are in force at the time of loss and; (iv) One of the insurers has paid to the assured more than his share of loss. (5) Principle of Subrogation. The doctrine of subrogation is another corollary of the principle of indemnity. It applies to all insurance contracts which are contracts of indemnity. According to the doctrine of subrogation, after the insured is compensated for the loss caused by the damages to the property insured by him, the right of ownership of such property passes on to the insurer. If the damaged property has any value left or the lost property is recovered, that cannot be allowed to remain with the insured because in that case he will realilse more than the actual loss which is against the principle of indemnity. Thus the doctrine of subrogation means in effect the substitution of the insurer in place of the insured as the rightful claimant of the rights, possession, etc. Following points may be noted in regard to subrogation: (i) The insurer is subrogated to the rights of the insured only after he has settled the claim. (ii) The insurer has to exercise such rights in the name of insured. (iii) The insurer is entitled to the benefit out of such rights only to the extent of the amount he has paid to the insured as compensation. (iv) If the insured receives any compensation for the loss, after he has already been indemnified by the insurer from any third party, he holds the amount of such compensation as the trustee of the insurer. (v) The principle of subrogation does not apply to personal insurance such as life, accident etc. (6) Principle of Causa Proxima. Causa proxima is a Latin phrase which means proximate cause or causes which in a natural and unbroken series of events, is responsible for a loss or damage. According to this principle, the insurer is liable for loss only when such a loss is proximately caused by the peril insured against. If the risk insured is the remote cause of the loss, then the insurer is not bound to pay compensation. This problem arises when there is a succession of causes. Thus, the proximate or the nearest cause should be taken into account to determine the liability of the insured. The insurer is liable to pay if the proximate cause is insured against. For instance, if the loss is the result of two causes, it is necessary to look into the nearest cause and not the remote one. If the nearest cause is insured, the insurer is liable for the loss. In Pink v Fleming, a ship was insured against loss arising from collision. A collision took place resulting in a few days delay. Because of the delay, a cargo of oranges became unsuitable for human consumption. It was held that the insurer was not liable for the loss because the proximate cause of loss was delay and not the collision of the ship. (7) Principle of Mitigation of Loss. An insured must take all reasonable care to reduce the loss i.e. to maintain it. We must act as if the property was not insured. If a house is insured against fire, and there is accidental fire, the owner must take all reasonable steps to keep the loss to the minimum. He is supposed to take all steps which a man of ordinary prudence will take under the circumstances. Importance of Life Insurance. Life Insurance renders a variety of services to individuals, to groups, to business houses and to society in general. The important contributions made by life insurance are as follows: 1. Protection against untimely death - The value of life insurance is very great to an individual. Every man of family, rich or poor, wishes his wife and children to be happy. He plans elaborately for them with respect to their education, marriage and general welfare because if his death takes place untimely, his dependents will be compelled to put up with unthinkable hardships. But if he has taken a whole life or family protection policy, there will be a considerable relief to the dependants. Thus, life insurance is a good measure of protection against an early death. 2. Provision for Old age – Life insurance also makes a good provision for old age. Many persons might be earning quite a good income during their youth and enjoying a high standard of living but with the coming of old age, the earning capacity dwindles and they find it too difficult to maintain the same standard. Endowment insurance affords a comfortable support in old age and money is available just when it is most urgently required. The insured can provide for the higher education of children, marriage of daughters, pilgrimage in retired life etc, by this policy at the same time providing for full protection against early death. 3. Promotion of Thrift – Life insurance is one of the most important agencies for the promotion of savings. An individual planning for regular voluntary savings will discover that either he fails to hold himself rigidly to the plan or in the times of slight financial stringency he consumes the entire savings. Life insurance fosters compulsory savings as the premium assumes the characteristic of a debt or an obligation to be met. If any premium is not paid on the due date, the policy may lapse and this fear makes the insured pay the premium regularly. 4. Social Value – Apart from the value of Life insurance to individuals, its social value reflects in the benefits to the community at large. The dawn of industrial era with its backbone of money economy has created a large number of wage earning labourers cut off from the old family life and drifted to adopt strictly an individualistic mode of living. These labourers in their old age being unable to earn and having lacked the foresight to make adequate provision for old age become destitute or at least practically dependant. They become a social problem and no amount of security measures by state or private charities can prevent their malady. If they are induced to purchase life insurance according to their means, it will not only relieve society of a great problem but create self reliant and economically independent civilians which is very important for a progressive nation. 5. Funds for Investment - The life insurance companies accumulate vast sums in forms of premium. This fund has rightly been called a vast economic reservoir which furnishes a good means of investment for the economic development of the country. Life insurance fosters the production on which our economy depends by serving as a huge investment pool from which business and industry can obtain the savings of the small man at an economical cost. Thus life insurance has been an important institutional mobilizer and investor of individual savings. 6. Commercial Value - The use of life insurance in the field of business and commerce has increased considerably in recent years. It serves as a basis of credit. When a life policy after remaining in force for a good time acquires a cash value, it can be furnished as a collateral security to get a bank loan in times of stringency. Again, a creditor can take a policy on his debtor’s life for the purpose of safeguarding a loan specially where the loan is advanced on personal security only, so that if the debtor dies before the repayment of debt, the creditor may realize it from the insurance company.
Posted on: Sun, 26 Jan 2014 01:31:12 +0000
Trending Topics
© 2015