Insurance

In financial sense It is a social device in which a group of individuals (insured) transfer risk to another party (insurer) in order to combine loss experienced, which permits statistical prediction of losses and provides for payment of losses from funds contributed (premium) by all members who transferred risk In legal sense It is a contract by which one party (Insurer) in consideration of price paid to him proportionate to risk provides security to the other party (Insured) that he shall not suffer loss, damage or prejudice by the happening of certain specified events. Insurance is meant to protect insured against uncertain events which may cause disadvantage to him

Legal Principles of Insurance

1. Principle of indemnity
To Compensate Two fundamental purposes: a. To prevent the insured from profiting from a loss b. To reduce moral hazard Actual cash value in property insurance - Replacement cost less depreciation - Fair market value - Broad evidence rule 2. Principle of insurable interest The insured must be in a position to lose financially if the loss occurs Purposes: a. To prevent gambling b. To reduce moral hazard c. It measures the amount of insureds loss in property insurance Examples of insurable interest In property and liability insurance: a. Ownership of property b. Potential legal liability c. Secured creditors d. A contractual right In life insurance: a. Own life b. Life of close family ties c. Pecuniary interest in life of third person

3. Principle of subrogation
Substitution of the insurer in the place of the insured to claim indemnity from a third person for a loss covered under insurance Purposes: Prevents insured from collecting twice for the same loss It is used to hold the guilty person responsible for the loss Helps to hold down insurance rates Corollaries to the principle of subrogation The insurer is entitled to recover only the amount it has paid under the policy The insured cannot impair the insurers subrogation rights The insurer can waive its subrogation rights in the contract

a. b. c.

 Subrogation does not apply to life insurance and to most individual health insurance contracts The insurer cannot subrogate against its own insureds 4. Principle of Utmost good faith Imposes high degree of honesty on the applicant for insurance This principle is supported by 3 important legal doctrines representations, concealment and warranty a. Representations statement made by applicant for insurance. The insurance contract is voidable at the option of the insurer if the representation is a. Material b. False c. Relied on by the insurer 5. Causa proxima Proximate cause 6. Contribution In case of double insurance, the insurers are to share the loss in proportion to the amount insured by each of them. Conditions: The subject matter of insurance must be same The event insured must be same The insured must be the same 7 Mitigation of loss The insured must make necessary effort to minimise the loss

How Insurance Works

Insurance

Providing Protection to all

Whether Big or Small

In legal terms, insurance is a contractual agreement whereby one party agrees, for a consideration called premium, to compensate another party for losses. Thus an insurance transaction involves the following: Insurer: The party agreeing to pay for the losses of the insured. Insured: The party who insured his risk with the insurer. Premium: the payment to the insurer received from the insured for indemnifying the losses. Policy: is the contract between the insurer and insured that sets the contractual obligation between the two. Exposure to loss: The insureds possibility of incurrence of loss is called the insureds exposure to loss.

How Insurance works The mechanism of insurance is very simple. People who are exposed to the same kind of risks come together and agree that, if any one of them suffers a loss, the others will share the loss and make good to the person who lost. In other words, the risk is spread among the community and the likely big impact on one or few is reduced to smaller manageable impacts on all. There are certain principles also, which make it possible for insurance to remain a fair arrangement. The first being sharing of risk as it is difficult for any one individual to bear the consequences of the risks that he is exposed to. It will become bearable when the community shares the burden. The second is that the peril should occur in an accidental manner. The occurrence of loss has to be random, accidental, and not the deliberate action of the insured person(s). The manner in which the loss is to be shared can be determined beforehand. average, may suffer losses. The following illustrations make the concept of insurance clear. Example 1 In a particular colony there are 600 houses each having a worth of Rs 30000. Every year there is a probability of 3 houses getting burnt. The resultant loss per

house is Rs 30000 and total loss being Rs 90000. If all the 600 home owners pool Rs 150 each to the pool the unfortunate people whose houses were burnt can be easily paid. Example 2 There are 10000 persons in a city who all are aged 40 and are healthy. It is expected that of these , 10 persons may die during the year . If the economic value of the loss suffered by the family of each dying person is taken to be Rs. 30000 , the total loss would work out to Rs. 3,00,000/- . If each person in the group contributed Rs. 100/- a year , the common fund would be Rs.10,00,000/-. This would be enough to pay Rs. 30,000/- to the family of each of the ten persons who die . Thus, 10000 persons share the risk of 10 persons. The surplus if any after payment of claims remains in the fund which is utilized to meet future excess losses or returned back to policyholders in one or the other form. Human being Is it an asset? A human being is an income-generating asset. Ones manual labour, professional skills are the assets. Human asset can also be lost like other assets due to causes like -early death , fatal sickness and death caused by accidents. Insurance -Is it a Business? Insurance companies are called insurers. The business of insurance is to Bring together the persons with common insurance interests (sharing the same risks) Collect the share or contribution (called premium) from all of them and Pay out compensations (called claims) to those who suffer. Rights and responsibilities of the insurer Right to collect premium from the insured Right to specify the rules and conditions that govern the Promise made under the policy Responsibility to pay for the losses occurred and claimed by the insured

Rights and responsibilities of insured Obligation to pay premium to the insurer Right to collect payment from the insurer if a covered loss occurs Obligation to comply with the terms and conditions prescribed by insurer: In an insurance contract, one should remember that a right created for one party represents a duty for the other party. In the event of default of premium or non-compliance of conditions by insured, an insurer may cancel the insurance or refuse to pay claims/payment of losses.