INSURANCE

MANAGEMENT

SUBMITTED TO: Professor Paramjit Kaur

SUBMITTED BY:

NAME ROLL NO.

Ankita Singla 3
Manpreet Kaur 12
Nidhi 15
Nikita 16
Swatika 31
TOPIC COVERED:

 INTRODUCTION TO INSURANCE
 HISTORY AND DEVELOPMENT OF INSURANCE
 PRINCIPLES OF INSURANCE
 CLASSIFICATION OF INSURANCE
 INSURANCE CONNTRACT
ACKNOWLEDGEMNET

We would like to express our special thanks of gratitude to our professor DR. PARAMJIT
KAUR who gave us the golden opportunity to do this wonderful project on the topic
“INSURANCE: AN OVERVIEW” which also helped us in doing a lot of Research on this
topic and we came to know about so many new things. We are extremely thankful to our
professor DR. PARAMJIT KAUR for providing such a nice support and guidance. We are
really thankful to them.
 INTRODUCTION

Insurance industry is an important and integral component of the macro economy. It has emerged
as a dominant institutional player in the financial market impacting the health of economy. It has
multi-dimensional role in savings and capital market, while the primary role of an insurance
company is to provide insurance coverage for managing financial risks, it plays a very crucial
role in promoting savings by selling a wide range of products and also actively contributes in
promoting and sustaining the capital market of a country. Insurance sector has micro and macro
effects on the economy. The micro effects are on individual safety, investments, savings
perspective, and contribution to growth of economy. The macro effects are financing
infrastructure, promoting investments, contribution to capital formation, financial leveraging and
accessing resources.

In the emerging economy, characterized by the reduced role of state and declining state
supported social security, the importance and the role of the insurance industry has increased
significantly not only as a risk manager but also as retirement security and annuity provider.
Moreover, growing institutionalization of the financial market has also provided a momentum to
boost the insurance companies. There is phenomenal growth resulting from both micro and
macro effects of insurance. If the insurance sector is not regulated, then it will go to affect
adversely the insurance growth, like in the micro sense people will lose their savings and in the
macro sense the financial market will destabilize and collapses. Therefore, there is a need to
regulate insurance in the context of the changing market and economic environment is required
for managing insurance companies effectively.

The function of insurance is to spread the loss over a large number of persons who are agreed to
cooperate each other at the time of loss. The risk cannot be averted but the loss occurring due to
certain risk can be distributed amongst the agreed persons. They are agreed to share the loss
because the chances of loss, i.e., the time, amount, to a person are not known. Anybody of them
may suffer loss to a given risk, so, the rest of the persons who are agreed will share the loss. The
larger the number of such persons, the easier the process of distribution of loss. In fact, the loss is
shared by them by payment of premium which is calculated on probability of loss.

MEANING OF INSURANCE
Each and every individual in the world has to deal with risks of various kinds and degrees which
involve exposure to losses. To overcome this situation and to minimize the loss arising out of
occurrence of these risks a device had been developed known as insurance. Insurance is defined
as a contract whereby one person, called the insurer, undertakes to make good for the loss of
another, called the insured, on payment of a specific sum of money, called premium, to him on
the happening of a specified event. Thus insurance is a cooperative device to spread the loss
caused by a particular risk over a number of persons who are exposed to it and who agree to
insure themselves against the risk.

It is a commonly acknowledged phenomenon that there are countless risks in every sphere of
life. For property, there are fire risks: for shipment of goods, there are perils of sea: for human
life there are risks of death or disability: and so on. The chances of occurrences of the events
causing losses are quite uncertain because these may or may not take place. Therefore, with this
view in mind, people facing common risks come together and make their small contributions to
the comp fund. While it may not be possible to work out how many persons on an average out of
the group, may suffer losses. When risk occurs, the loss is made good out of the common fund.
In this way, each and every one shares the risk. In fact they share the loss by payment of
premium, which is calculated on the likelihood of loss. In olden time, the contribution by the
persons was made at the time of loss, the following make clear the above-stated notion of
insurance.

Example 1: in a town, there are 2000 persons who are aged 60 and are healthy. It is expected that
of these 20 persons may die during the year. If the economic value of the loss suffered by the
family of each dying person were taken to be Rs.. 50000,the total loss would work out to Rs.
1000000. This would be enough to pay Rs. 50000 to the family of each of the 20 dying persons.
Thus, the risks in cases of 20 persons are shared by 2000 persons.

Example 2: in a village, there are 250 houses, each valued at Rs. 200000if all the 250 owners
come together and contribute Rs.800 each, the common fund would be Rs.200000. this is enough
to pay Rs. 200000 to the owner whose house got burnt. Thus, the risk of one owner is spread
over 250 house-owners of the village.

TERMINOLOGY USED IN DEFINITION OF INSURANCE

- INSURER OR INSURANCE COMPANY – The agency involved in Insurance business is

known as insurer

- INSURED/ ASSURED – The person who gets his property/life insured is known as insured

- POLICY - The agreement or contract which is put in writing is known as a Policy

- PREMIUM – The consideration in return of which the insurer undertakes to make goods the
loss or give a certain amount in case of life insurance is known as premium

DIFFERENT AUTHORS HAVE DEFINED THE TERM INSURANCE DIFFERENTLY.

SOME OF THE IMPORTANT DEFINITIONS OF INSURANCE ARE AS FOLLOWS:
Prof. D.S. Hansell: “A social device providing financial compensation for the effects of
misfortune, the payments being made from the accumulated contributions of all parties
participating in the scheme”.

Dr. W.A. Dinsdale: “Insurance is a device for the transfer of risks of individual entities to an
insurer, who agrees, for a consideration (called the premium), to assume to a specified extent
losses suffered by the insured”.

Prof. John H. Magee: “Insurance is a plan by which large number of people associate themselves
and transfer, to the shoulders of all, risks that attach to individuals”.

A.H. Willett: “Insurance is a social device for making accumulations to meet uncertain losses of
capital which is carried out through the transfer of risks of many individuals to one person or to a
group of persons”.

Justice Lawrence: “Insurance is a contract by which the one party, in consideration of a price
paid to him adequate to the risk, becomes security to the other that he shall not suffer loss,
damage, or prejudice by the happening of the perils specified to certain things which may be
exposed to them”.

Prof. Allan L. Mayerson: “Insurance is a device for the transfer to an insurer of certain risks of
economic loss that would otherwise be borne by the insured”.

Professor Robert Mehr: “Insurance is a special device for reducing risk by combining a sufficient
number of exposure units to make their individual losses collectively predictable. The
predictable loss is then shared proportionately by all those in the combination”.

Dictionary of Business and Finance: “A form of contract or agreement under Introduction which
one party agrees in return for a consideration to pay an agreed amount of money to another party
to make good for a loss, damage, or injury to something of value in which the insured has a
pecuniary interest as a result of some uncertain event”.

Thus insurance is a contract whereby:

a) Certain sum, termed as premium, is charged in consideration,

b) Against the said consideration, a large amount is guaranteed to be paid by the insurer who
received the premium,
c) The compensation will be made in a certain definite sum, i.e., the loss or the policy
amount whichever may be, and
d) the payment is made only upon a contingency.
NATURE OF INSURANCE
On the basis of the definition of insurance discussed above, one can observe its following
characteristics:

1. RISK SHARING AND RISK TRANSFER

insurance is a mechanism adapted to share the financial losses that might occur to an
individual or his family on the happening of a specified event. The event may be death of
earning member of the family in the case of life insurance, marine perils in marine
insurance, fire in fire insurance and other certain events in miscellaneous insurance, e.g.,
theft in burglary insurance, accident in motor insurance, etc. the loss arising from these
events if insured are shared by all the insured in the form of premium. Hence, the risk is
transferred from one individual to a group.

2. CO-OPERATIVE DEVICE
Insurance is a cooperative device under which a group of persons who agree to share the
financial loss may be brought under one common platform ,to compensate all the losses
from his own capital. So, by insuring a large number of persons, he is able to pay the
amount of loss. Like all cooperative devices, there is no compulsion here on anybody to
purchase the insurance policy.

3. RISK ASSESSMENT IN ADVANCE

Insurance companies are risk bearers. Therefore, the risk is evaluated before insuring to
charge the amount of ahre of an insured, herein called, consideration, or premium. The
probability theory is used to evaluate the risks. Probability theory is that body of
knowledge concerned with measuring the likelihood that something will happen and
making estimates on the basis of this likelihood. The likelihood of an event is assigned a
numerical value between 0 and 1, with those that are impossible assigned a valued of 0
and those that are inevitable assigned a value of 1. The higher values are assigned to
those events estimated to have a greater likelihood or probability of occurring.

4. COMPENSATION AT THE OCCURRENCE OF CONTINGENCY

The compensation is made at a certain contingency insured, if the contingency occurs,
payment is made. Since the life insurance contract is a contract of certainty, because the
contingency i.e., the death or the expiry of term, will certainly occur, the payment is
certain.

5. AMOUNT OF PAYMENT
On the occurrence of the contingency, the insurer is legally bound to make good the
financial loss suffered by the insured, the amount of payment depends upon the value of
 loss occurred due to the particular insured risk provided insurance is there up to that
amount.

6. HUGE NUMBER OF INSURED PERSONS

To make the insurance cheaper, it is essential to insure large number of persons or
property because the ladder would be cost of insurance and so, the lower would be
premium. In past years, tariff associations or mutual fire insurance associations were
found to share the loss at cheaper rate. In order to function successfully, the insurance
should be joined by a large number of insured.

7. INSURANCE MUST NOT BE CONFUSED WITH CHARITY OR GAMBLING

The uncertainty is changed into certainty by insuring property and life because the insurer
promises to [pay a definite sum at damage or death. In the absence of insurance, the
property owners could at best practice only some form of self-insurance, which may not
give him absolute certainty. Insurance is not possible without premium. Charity is give
without consideration. In gambling , by bidding the person exposes himself to risk of
losing, in the insurance, the insured is always opposed to risk, and will suffer loss if he is
not insured.

8. INVESTMENT PORTFOLIO
Since insurers collect premiums initially and make payment late when (e.g., the insured
person’s death) or if (e.g., an automobile accident) an insured event occurs, insurance
companies maintain the initial premiums collected in an investment portfolio, which
generates a return. Thus, the insurers have 2 sources of income: the insurance premium
and the investment income, which occurs over time.

FUNCTIONS OF INSURANCE

The function of insurance is to spread the loss over a large number of persons who are agreed to
co-operate each other at the time of loss. The risk cannot be averted but the loss occurring due to
certain risk can be distributed amongst the agreed persons. They are agreed to share the loss
because the chances of loss, i.e., the time, amount, to a person are not known. Anybody of them
may suffer loss to a given risk, so, the rest of the persons who are agreed will share the loss.
Following are the main functions of insurance:

• CERTAINTY
The main function of insurance is to provide certainty of payment against the occurrence of
sudden loss arising due to happening of uncertain event. Thus insurance removes uncertainty.
The function of insurance is primarily to decrease the uncertainty of events.
 • PROTECTION
Insurance also provides protection against the probable chances of loss. The time and amount of
loss are uncertain and at the happening of risk, the person will suffer loss in absence of
insurance. The insurance guarantees the payment of loss and thus protects the assured from
sufferings. Although insurance cannot check the happening of risk but can provide for losses at
the happening of risk and thereby creates security to the insured
.
•RISK SHARING
Insurance involves sharing of risk which implies that insurance spreads the financial losses of
insured members over the entire community by compensating the unfortunate few from the funds
built up from the contribution of all members.

• ASSISTS IN CAPITAL FORMATION

The insurance provides capital to the business houses and industrialists by way of lending the
funds to them or making contribution to their share capital. In other words, the funds
accumulated by insurance companies by way of premiums are invested in productive channels.

•PREVENTION OF LOSS
The insurance minimizes the worries and miseries of losses arising due to death of insured or
destruction of property. The carefree person can devote himself in a better manner towards the
achievement of objectives which results in enhancing his efficiency and rapid economic growth.

BENEFITS OF INSURANCE
Insurance benefits individuals, organizations and society in more ways than the average person
realizes. Some of the benefits of insurance are obvious while others are not.
Benefit of insurance can be divided into these categories -
1. Benefits to Individual
2 Benefits to Business or Industry
3. Benefits to the Society

It can be explained as under -

1. BENEFITS TO INDIVIDUAL

(a) Insurance provides security & safety : Insurance gives a sense of security to the policy
holder. Insurance provide security and safety against the loss of earning at death or in old age,
against the loss at fire, against the loss at damage, destruction of property, goods, furniture etc.
Life insurance provides protection to the dependents in case of death of policyholders and to the
policyholder in old age. Fire insurance insured the property against loss on a fire. Similarly other
insurance provide security against the loss by indemnifying to the extent of actual loss.
(b) Encourage Savings : Life insurance is best form of saving. The insured person must regularly
save out of his current income an amount equal to the premium to be paid otherwise his policy
get lapsed if premium is not paid on time.

(c) Providing Investment Opportunity : Life insurance provide different policies in which
individual can invest smoothly and with security; like endowment policies, deferred annuities
etc. There is special exemption in the Income Tax, Wealth Tax etc. regarding this type of
investment

2 BENEFITS TO BUSINESS OR INDUSTRY

(a) Shifting of Risk : Insurance is a social device whereby businessmen shift specific risks to the
insurance company. This helps the businessmen to concentrate more on important business
issues.
(b) Assuring Expected Profits : An insured businessman or policyholder can enjoy normal
expected profits as he would not be required to make provisions or allocate funds for meeting
future contingencies.

(c) Improve Credit Standing : Insured assets are easily accepted as security for loans by the
banks and financial institutions so insurance improve credit standing of the business firm

(d) Business Continuation – With the help of property insurance, the property of business is
protected against disasters and chance of closure of business is reduced.

3. BENEFITS TO THE SOCIETY

(a) Capital Formation : As institutional investors, insurance companies provide funds for
financing economic development. They mobilize the saving of the people and invest these saving
into more productive channels

(b) Generating Employment Opportunities : With the growth of the insurance business, the
insurance companies are creating more and more employment opportunities.

(c) Promoting Social Welfare : Policies like old age pension scheme, policies for education,
marriage provide sense of security to the policyholders and thus ensure social welfare.

(d) Helps Controlling Inflation : The insurance reduces the inflationary pressure in two ways,
first, by extracting money in supply to the amount of premium collected and secondly, by
providing funds for production narrow down the inflationary gap
HISTORY OF INSURANCE IN WORLD
History of insurance around the globe is as old as ancient civilization. The history and growth of
insurance business into modern form around the globe could be studied under following four
heads:

 Marine insurance
 Fire insurance
 Miscellaneous insurance
 Life insurance

MARINE INSURANCE:

Early Historical Background: Marine Insurance, the oldest of the many forms of protection
against losses, has a long history of great interest. The ancient Phoenicians, the Greeks, the
Romans were in the habit of guarding themselves against some of the risks of maritime
enterprise by various systems of insurance, whether in the shapes of loans or mutual guarantee. It
is believed that, the loan form known under the name of ‘Bottomry’ is one of the oldest. It may
be defined as the mortgage of a ship, i.e. her bottom or hull, in such a manner that if the ship be
lost, the lender likewise loses the money advanced on her; but, if she arrives safely at the port of
destination, he, not only gets back the loan but in addition, receives a certain premium previously
agreed upon. It is probable that the system of insurance arising out of Bottomry came to be not
only the oldest but also the most wide-spread form of marine insurance, principally for two
reasons i.e. the extreme simplicity of the transaction and the desire to escape the penalties of the
laws against usury. The form of marine insurance, known as Bottomry, soon grew out and
developed into the modern system of insurance.

The Lombard: Over the centuries, various forms of marine insurance have flourished in
Europe. The Hanseatic merchants of northern Europe had an insurance centre based at Bruges,
best known as the first ‘Chamber of Insurance’ and in 1432, the city of Barcelona also laid down
the first recorded statute for insuring ships. Meanwhile, the first form of marine insurance in
Britain had been started by a group of Hanseatic merchants and was later carried on by some
German colonists who were the first known London underwriters to have exercised marine
insurance almost exclusively with no apparent sign of competition for many years. It was only
until the late years of their existence that they were faced with competition from another group of
foreign immigrants, ‘the Lombards’ - who took their name from the name of the street where
their businesses and trading firms were established i.e. Lombard Street – who begun marine
insurance by advancing sums on Bottomry loans. The activity of the Lombards came to an end
when England’s foreign trade came to the hands of Englishmen. Although gone, they are
memorable for they are the ones who brought marine insurance practice into general use, making
it acceptable to the trading community at large by the introduction of proper rules and
regulations.

Early English Marine Insurance: The commencement of the 17th century formed the starting
point of a new period in the history of marine insurance in Great Britain. During the first period,
dating back to the beginnings of foreign commerce and ending within the 16th century, marine
insurance was carried on chiefly, if not entirely, by foreigners; while during the second and
subsequent period it fell into native enterprise. A distinct line and division between the two
periods was formed by the Elizabethan Act of 1601 which is the first statute prepared by the
English Government and passed by the Parliament. It was titled ‘An Act Concerning Matters of
Assurances Amongst Merchants’ and it is highly memorable as the first in the statute-book
regarding marine insurance. The Act of 1601 also established the Court of Insurance. The Court
was unfavourably looked upon both by the mercantile community and the courts of common law
and as a result had very little function.

The Founder of Lloyd’s and the Rise of Lloyd’s Coffee House: Until 1666, the business of
underwriting is not known to have been carried in any other specific fixed localities other than at
the private offices of bankers, money-lenders and others who also pursued their own avocations
besides. After this period, numerous coffee houses were gradually established in the City of
London for the purpose of underwriting. Within a few years they sprung all over London, and
merchants visited them chiefly, if not entirely, for business purposes. The first London coffee
house was opened in 1652, by a Mr. Bowman, in St. Michael’s Alley, Cornhill, London. The
‘Lloyd’s Coffee House’ originally located in Tower Street, moved to Lombard Street around
1691 or 1692. This, together with the fact that its owner was responsible for the issuing of the
weekly newspaper ‘Lloyds News’- furnishing commercial and shipping news - made it the place
of resort for persons connected with the shipping business. In 1771, a Committee was elected to
represent the underwriters and payment of a subscription, the first significant movement of
underwriters themselves towards assumption of responsibility for the organisation of the market
and in 1871 - via the first Lloyd’s Act – it became a structured organisation regulated by a
constitution.

The Growth and Evolution of the System and the Law of Marine Insurance: Over a hundred
years passed after the enactment of the 1601 Act, before any other statute related to marine
insurance was adopted. The Marine Insurance Act of 1745 was a breakthrough Act .The 1745
Act required those procuring marine policies to be interested in the subject-matter, and similarly
prohibited the practice of insuring on the basis of “policy proof of interest”. The Act of 1788 laid
down that all policies made out in blank, were void and the Act of 1795, required all policies of
marine insurance to be in writing and to be stamped. In 1894 ‘The Marine Insurance
Codification Bill’ was introduced in the House of Lords, by Lord Herschell, and it is its content
- slightly altered - which provided the basis for the 1906 Act, namely ‘An Act to Codify the Law
Relating to Marine Insurance’. The early marine insurance legislation chiefly left it to the market
and the Courts to develop the principles of marine insurance law which have been ultimately
codified in the Marine Insurance Act 1906 ( MIA 1906). The MIA 1906 is mainly a codification
of around 200 years of judicial decisions and still nowadays there is no equivalent to it
codification. The Act in many points is presumptuous in that its wording is binding and will
operate in the absence of any contrary party agreement. More over, the marine insurance
contracts which are underwritten in England are governed by the various sets of Standard Marine
Clauses which frequently eliminate the power of the presumptions set by the Act. In addition,
many post-Act decisions help refine the meaning of the Act.

Fire Insurance In World:

Fire Insurance came second in the list of development. Losses caused by fires increased as
people began to move from the country into the towns. The development of fire Insurance can be
traced back to 1601 A.D. when the Poor Relief Act was passed in England. Vide this act, letters
called “briefs” were read from the church asking for collections from the public to help those
who suffered losses from fire. There was a great fire in London–a historical disaster–in which
within span of three days from 2nd to 5th Sept. 1666, 80% of the city was destroyed which
sowed the seeds of fire Insurance as we know it now. First, only buildings were insured and the
first Fire Office was established by a builder Nicholas Barbon in 1680.

NICHOLAS BARON’S INFLUENCE:

Mr. Nicholas Barbon, a physician, founded in1680 the Fire Office in London, the first joint-stock
company for fire insurance in London and perhaps the world. Renamed the Phoenix Office in
1705, initially it insured buildings but not furniture, fittings, or goods. He conceived the idea of
founding an insurance company to protect owners of homes and buildings against losses by fire.
Appalled by the loss of property and the human suffering that grew out of the Great Fire of
London, he had the courage and imagination to develop an institution whereby losses could be
shared by those purchasing protection in his organization. He recognized that service of an
insurer should reach beyond the mere provision of indemnity in case of loss. He instituted the
practice of maintaining a number of "water men in livery with badges" who would assist in
extinguishing fires. His office originated the use of fire marks where properties it insured could
be identified when fires occurred. He deserves the title, "father of fire insurance", because his
office was the first private enterprise fire insurance company in the world. His signature appears
on early policies issued by his company.

19th Century: But due to the introduction of newer types of hazards arising out of Industrial
Revolution of the 19th century and because of the increased demand for such type of insurance,
some more companies had to come into the picture. The Toole Street Fire, 1861 had an influence
in improving the business of fire insurance as it demonstrated that classification of risk was
necessary for the sound rating system. In 1868 the Fire Offices Committee (FOC) was formed
which has multifarious responsibilities like, uniform rating, statistics, and various technical
advice to member companies. Subsequently also developed various other bodies, such as Joint
Fire Research Organization, Salvage Corporations and more who are directly and indirectly
helping the fire insurance business on a sound scientific line.

UNITED STATE OF AMERICA: Insurance was a latecomer to the American landscape,

largely because there were just too many known risks, and even more unknown ones. It wasn’t
until 1732 that an insurance company in the United States issued a fire insurance policy—and it
still didn’t really catch on. In 1752, the Philadelphia Contributionship for the Insurance of
Houses from Loss by Fire became the first mutual fire insurance company in America. Benjamin
Franklin was a huge proponent of fire insurance and, in 1752 he created Philadelphia
Contributionship for the Insurance of Houses from Loss by Fire, a company that refused to offer
fire insurance to owners of buildings that were high risk. Unfortunately, that included wooden
houses, which left a huge portion of the population—those with the most risk and who actually
needed the insurance—without protection. Things changed in the 1820s when Aetna wrote fire
insurance policies by area rather than construction type, and spread their risk out by limiting the
number of policies they wrote and making sure they wrote them for both high and low risk
properties. This followed the more modern form of underwriting that is still in use today.
Eventually, as regulation of the insurance industry grew, and safety standards in both residential
and commercial buildings improved, the risks of fire decreased while the amount of policies that
could be issued increased. As fire departments became increasingly less voluntary and their
services more dependable, risks fell even more allowing rates to stabilize until fire insurance
became a standard part of a home owners insurance policy.
MISCELLANEOUS INSURANCE:
Owing to increasing demand, different forms of insurance have been evolved. Industrial
Revolution of 19th century had facilitated the development of accidental insurance, theft and
dacoity, fidelity insurance etc. In 20th century, many types of social insurance started operating
like unemployment insurance, crop insurance, cattle insurance etc. This way business of
insurance developed simultaneously with human and social development.

LIFE INSURANCE:

It might seem like a relatively modern idea, but once you know a little about the history of life
insurance, you’ll realize that it’s anything but modern. In fact, it’s older than Christianity.
LIFE INSURANCE IN ANCIENT GREECE AND ROME
The concept of life insurance began with the rise of so-called “benevolent societies” 600 years
before Christ. These organizations provided rudimentary forms of health insurance and life
insurance. But the history of life insurance as we might recognize it begins in the military–the
ancient Roman military, in fact. Gaius Marius, “the third founder of Rome”, started the first
“burial club”. He was still a general in the Roman army at that time (100 years before
Christ).Here’s how the burial club worked: Soldiers could opt into the burial club. If you were a
member of the club, the other soldiers in the club paid for your funeral. If you outlived them, you
chipped in toward their funeral. Burials in Roman times were possibly even more important than
they are today. The ancient Romans believed that failure to bury someone properly would result
in a miserable ghost.
THE EVOLUTION OF “BURIAL CLUBS”
The concept of a burial club in Rome evolved over time until it included a stipend for the
deceased’s next of kin. This original form of life insurance was common until the fall of the
Roman Empire almost 5 centuries later. Things have changed a lot since then. Marijuana use had
no effect on whether you were eligible for membership in those days, for example. No one had to
take any kind of medical exam, either. All of that came later.
THE HISTORY OF LIFE INSURANCE DURING THE MIDDLE AGES
Most of what we might recognize as insurance coverage during the Middle Ages was handled by
the various guilds. These were organizations of skilled laborers that combined elements of a
modern-day labor union and a secret society. In the mid-1300s, we saw the first insurance
contracts and maritime insurance policies. Modern insurance has deep roots in the tradition of
maritime insurance.
MODERN INSURANCE IN THE LATE 17TH AND 18TH CENTURIES
The first company to offer the kind of life insurance we’re used to today was the Amicable
Society for a Perpetual Assurance Office. Sir Thomas Allen and William Talbot founded the
company in London in 1706.
Here’s how one of those policies worked: You would choose 1, 2, or 3 shares of life insurance.
You’d then make an annual payment per share. A percentage of that contribution was paid to the
widows and/or children of the dead members. That amount was divided up based on how many
shares the member had owned during his life.
ACTUARIAL TABLES AND THE BEGINNINGS OF MODERN LIFE INSURANCE
Of course, once you learn a little more about modern life insurance, you realize that it has a lot to
do with math and tables. The goal of a modern life insurance company is to offset risk with
appropriately sized premium payments. Edmund Halley compiled some statistics, but they
weren’t detailed enough for such a purpose. James Dodson put together what we would consider
more modern and useful actuarial tables. His goal was to launch a new life insurance company,
because he was too old to get life insurance through Amicable. He died in 1757 before he was
able to get a government charter. Edward Rowe More was a student of Dodson’s, and he
established The Society for Equitable Assurances on Lives and Survivorship 5 years after
Dodson’s death. They were the first company to charge premiums based on age and mortality
rates. The manager of that company was called an actuary, which is now a commonly-used term
in the industry. The first actuary at the company was William Morgan, who ran the company for
55 years.
THE LIFE ASSURANCE ACT OF 1774
The industry became large enough in Great Britain that Parliament enacted The Life Assurance
Act of 1774. The goal was to prevent abuse. Life insurance beneficiaries were required to have a
financial interest in the life of the deceased. This law and a similar law in Ireland (The Life
Insurance Act of 1866) are still in place.
THE HISTORY OF LIFE INSURANCE IN EARLY AMERICA AND THE
INVOLVEMENT OF CHURCHES
The history of life insurance begins in Rome and England, but it was also available in North
America. Multiple churches, most notably the Episcopalians and the Presbyterians, also offered
life insurance type coverage in the late 1750s. Not everyone believed in life insurance as a
legitimate financial decision, though. Some clergymen criticized life insurance as a form of
gambling.
THE HISTORY OF LIFE INSURANCE DURING THE 19TH CENTURY
The United States lacked financial regulations and protection for consumers during the 19th
century. As a result, during financial crises, life insurance companies often were under-
capitalized and went out of business. In the 1830s, 1840s, and 1850s, it was common for life
insurance companies to form with little or no starting capital. During the 1870s, when the
country faced an economic depression, dozens of life insurance companies went out of business.
Policyholders lost over $35 million. That might sound small compared to some of the more
modern financial crises the country has faced, but a dollar then was worth about $20 today.
That’s $700 million in today’s dollars.
THE HISTORY OF LIFE INSURANCE IN THE 20TH CENTURY
Group life insurance is probably the most common type of coverage today, but it didn’t exist
until 1911. That’s the year AXA Equitable (then called the Equitable Life Assurance Society)
wrote a policy covering over 100 Pantasote Leather Company employees. Since this was a group
policy, the company didn’t require medical exams. The concept was so popular that the company
started an entire department devoted to selling this type of insurance. Soon their biggest clients
were the employees of Montgomery Ward. The concept and the business continued to grow. By
1930, the United States could boast of over 120 million policies. These were enough insurance
policies to cover the entire population of the country. This is not to imply that everyone had
coverage. Some people had multiple policies, while others had no coverage at all.
THE HISTORY OF LIFE INSURANCE AND THE UNITED STATES FEDERAL
GOVERNMENT
By 1935, the federal government had gotten involved in some areas formerly dominated by
insurance companies. For example, The Social Security Act provided benefits for the elderly and
the unemployed. Insurance companies took this as a clear signal that if they didn’t start getting
their houses in order, the federal government would regulate them. In spite of the insurance
companies’ efforts, the Supreme Court found that insurance should be federally regulated.
Congress disagreed and passed the McCarran-Ferguson Act the following year. This law
returned oversight of the insurance companies to the states.
SERVICEMAN’S GROUP LIFE INSURANCE
By 1965, the federal government of the United States got involved in providing policies for
members of the military. Serviceman’s Group Life Insurance was the result of a federal law. The
government pays the administrative fees and a premium over normal rates. (Soldiers are at a
greater risk of dying than the average citizen.) The life insurance available through this law is
still provided by multiple private companies, though. By the 1970s, life insurance was common
throughout the United States. 90% of married couples had at least some type of basic coverage,
although single people were still less likely to have coverage.
LIFE INSURANCE IN THE 21ST CENTURY (AND BEYOND)
On September 11, 2001, the terrorist attacks that resulted in the fall of the World Trade Center
killed 2977 people. This resulted in over $1.2 billion in life insurance claims.
Life insurance has become less popular as the century has progressed. Almost 1/3 of American
households have no life insurance at all. This is the worst coverage in the country in half a
century. This is perhaps surprising, as the rise of the Internet has made competition for life
insurance products more robust than ever before. When you have access to dozens–even
hundreds–of companies competing for your business, prices go down.

HISTORY OF INSURANCE IN INDIA:

The insurance sector is a colossal one and is growing at a speedy rate of 15-20%. Together
with banking services, insurance services add about 7% to the country’s GDP. A well-developed
and evolved insurance sector is a boon for economic development as it provides long- term funds
for infrastructure development at the same time strengthening the risk taking ability of the
country.
EARLIER HISTORY:

The early history of insurance in India can be referred to as Manu (Manusmrithi), Yagnavalkya
(Dharmasastra) and Kautilya (Arthasastra). The pooling of resources can be redistributed in
cases of flood, fire and other emergencies. Later, it was practiced in the form of trade loans or
marine or carrier’s contracts .During the colonial period, the Oriental Life Insurance was the first
British company established in 1818. Later, the Bombay Assurance Company and Madras Life
Insurance were established in 1823 and 1829 respectively. In the case of general insurance,
Triton Insurance Company Ltd., which is British owned, was established in 1850. In 1907, the
first Indian general insurance company, namely Indian Mercantile Insurance was set up. In 1905,
the Swadeshi Movement which propagated, “Be Indian Buy Indian Movement” led to the
establishment of many life insurance companies. However, until 1912, the insurance industry
was yet to be regulated. Two legislations, i.e. the Indian Life Insurance Companies Act and the
Provident Insurance Societies Act were then passed in 1912. However, both legislations did not
cover general corporate insurance. Furthermore, these acts placed restriction on the activities of
Indian insurance companies but not on foreign insurance companies. With World War I, all the
progress of the Indian legislations is disrupted. In 1928, the Indian Insurance Companies Act was
passed to allowing the Indian government to gather the data of Indian insurance companies
operating in India as well as overseas and foreign insurance companies in India. There was no
comprehensive act for the insurance industry until The Insurance Act passed in 1938. This act
covers both life and general insurance.

After Colonization until Nationalization of the Insurance Industry:

The Insurance Act (1938) has been widely used as a reference by the insurance industry until the
industry was nationalized. The life insurance industry was nationalized in 1956 and general
insurance industry nationalized in 1972.

Life Insurance Industry:

The life insurance industry was nationalized in 1956. The main reasons are: (a) insurance
companies should be “cooperative enterprises” under the socialist form of government, (b) the
insurance products are expensive, (c) there is no improvement in services delivered to the
policyholders in particular and the society at large, (d) the lapse ratios are very high and hence it
leads to the waste of economic resources, (e) there is no improvement in protecting public health,
medical check-up and hazard prevention activities and (f) failure of many insurance companies
due to the mismanagement is not healthy for the country’s financial system.
Nationalization took place with the hope that with the economies of scale, the cost can be cut
down and the lower premium can be offered to the market. In addition, the government can
promote the life insurance products to the rural areas, which are not the interest of the private
insurance companies due to non-profitability. The main purpose of nationalization of the life
insurance industry is to meet the social objective of insurance and introduce it to the neglected
rural areas. Due to the nationalization in 1956, 245 companies including foreign own companies
were taken over by the government. Henceforth, life insurance operated under the publicly
owned Life Insurance Corporation (LIC) of India based on the Life Insurance Corporation Act
1956.

General Insurance Industry:

General insurance is under the Tariff Committee under the control of the General Insurance
Council of the Insurance Association of India. Under this committee, the insurance related to
motor, fire, marine and miscellaneous are covered. In 1968, the Tariff Committee was replaced
with the Tariff Advisory Committee, as validated with the amendment of Insurance Act 1839.
The main task of this committee is to set the floor price and it should be periodically reviewed to
suit the current market situation. Based on the price set by this committee, the general insurance
companies set their own prices. This advisory committee is working independently until the
nationalization of general insurance companies in 1972. Nationalization of general insurance is
enforced by the General Insurance Business (Nationalization) Act 1972. Before 1973, there are
107 companies, including foreign companies offering general insurance. They were
amalgamated and formed into four subsidiaries under the General Insurance Corporation of
India, which are as follow:

 National Insurance Company Limited at Kolkata,

 The New India Assurance Company Limited at Mumbai,

 The Oriental Insurance Company Limited at New Delhi and

 The United India Insurance Company Limited at Chennai.

After Nationalization until Liberation of the Industry:

After nationalization of the insurance industry, the Malhotra Committee was established in 1993.
The Chairperson of this committee is R.N. Malhotra who is the retired Governor of the Reserve
Bank of India. The aims of this committee are (a) to suggest the structure of insurance industry
by assessing the strength and weakness of the industry, coverage of the insurance products,
quality of insurance services, efficiency and variability, (b) to recommend for changes in the
structure of insurance industry and changes in general policy framework, (c) to suggest LIC and
GIC to improve their functioning, (d) make recommendation on regulation and supervision of the
insurance sector (e) to make recommendation on the role and functioning of the agents and (f) to
recommend on any matter for the development of the insurance industry in India examining the
impact of nationalization.
For life insurance, LIC was able to provide a satisfactory level of service according to the
customers’ satisfactory survey. LIC managed to attract 60 to 70 million policyholders and
expanded into rural areas. However, in the case of general insurance, a few unfavorable issues
were faced after nationalization of the general insurance companies. In 1972, General Insurance
Corporation (GIC) of India was incorporated under the Companies Act 1965 to control and
operate the business of general insurance of India after nationalization. GIC is re-organized with
four fully owned subsidiary companies: National Insurance Company Limited, New India
Assurance Company Limited, Oriental Insurance Company Limited and United India Insurance
Company Limited. The performance of GIC was criticized by the Malhotra Committee by
pointing out the unavailability of complete and up-to-date data. In addition, with the amendment
of the Motor Vehicles Act 1939, there as an increase in third party liability and hence, the
premium should be higher. However, due to political pressure, the premium cannot be increased
and thus it does not reflect the market price.
Therefore, GIC incurred huge losses in motor insurance. This led to the abolishment of the Tariff
Advisory Committee on 1st April 2006. Moreover, the efficiency of four subsidiaries is
questioned and it has been suggested that these subsidiaries should be independent companies
and GIC should not be the holding company and should focus solely on reinsurance.
Interestingly, the report from Price Waterhouse Coopers was contrary to the suggestions of the
Malhotra Committee. Price Waterhouse Cooper’s recommended merging the four subsidiaries
for greater efficiency. These companies came out with the “voluntary retirement scheme” to
reduce the number of staff since they were overstaffed .In 1995, the Mukherjee Committee was
set up. The purpose of this committee is to provide a concrete plan for newly formed insurance
companies. The report of this committee is not disclosed to the public. This committee also
focuses on the transparent disclosure of the financial information .After the report from the
Malhotra Committee, the political instability slowed the process to liberalize the insurance
industry. The Indian Cabinet approved the Insurance Regulatory Authority (IRA) Bill on 16th
March 1999. After the new government came into existence, the Insurance Regulatory and
Development Authority Act (which is now called the Insurance Regulatory and Development
Authority) was passed on 7th December 1999, aimed at liberalizing the insurance industry.
Starting from early 2000, private companies are given licenses for insurance, according to life,
general and reinsurance.

After Liberalization until Present:

This section explains Indian insurance in the global context and the evolution of insurance in
India.
Indian Insurance in the Global Context

According to Annual Report of Insurance Regulatory and Development Authority India (2012-
13), 56.8% of the total insurance premium worldwide belongs to life insurance premium. From
that percentage, Indian life insurance premium contributes 80.2% of the entire Indian insurance
market premium. In addition, Indian life insurance is ranked 10th among 88 countries. During
2012, India’s share in the global life insurance market was 2.03% and in 2011, its share was
2.30%. In 2011, the Indian life insurance penetration rate was 3.4% while the global rate was
3.8%. In 2012, the Indian life insurance penetration rate was 3.2% while the global rate was
3.7%. In the case of general insurance, 43.2% of the total insurance premium worldwide belongs
to the general insurance premium. From that percentage, Indian general insurance premium
contributed 19.8% of the entire Indian insurance market premium. It saw significant growth of
10.25% in 2012. Its performance is much better than the growth of global general premium
which was only 2.6%. However, in terms of market share, Indian general insurance premium had
only 0.66% of global general insurance and ranked 19th in the global general insurance market.
Indian non-life insurance penetration rate was 0.7% while the global rate was 2.8%. In 2012, the
Indian non-life insurance penetration rate was 0.8% while the global rate was 2.8% (Annual
Report of Insurance Regulatory and Development Authority India (2012-13).

Number of Insurance Companies and Offices (2001- 2013)

Graph 1 shows the number of life insurance companies over the period of 13 years (2001-2013).
The trend shows that the number is increasing over the period of 10 years (2001-2010) with the
same number of life insurance companies from 2011 until 2013.
 Graph 2 shows the number of general insurance companies over the period of 13 years (2001-
2013). The trend shows that the number is increasing over the period of nine years (2001-2009)
except in 2002, with the same number of general insurance companies for 2010 and 2011 as well
as 2012 and 2013.

Insurance Density and Penetration (2001-2013) Insurance penetration is measured as ratio of

premium (in USD) to GDP (in USD). Graph 5 shows the insurance penetration as a percentage
of USD for life insurance over the period of 12 years (2001-2012). The trend is showing that the
penetration of life insurance is not stable since there is an increase from 2001 to 2002, decrease
in 2003 and then increase in 2004 and in 2005; it has the same penetration rate as 2004. From
2005 to 2006, there is a big jump in penetration since it increases from 2.53% to 4.1%. In 2007,
there is a slight decrease to 4% and it maintains the same penetration in 2008. In the case of
2009, it increases to 4.6%. However, starting from 2010 until 2012, life insurance penetration is
decreasing.
Graph 6 shows the general insurance penetration over the period of 12 years (2010-2012). The
trend shows that the number is steadily increasing over the period of 12 years except in 2003 and
2011. In addition, the trend over the period of four years (2006-2009) is constant.

Insurance density is measured as ratio of premium (in USD) to total population.

Graph 7 shows the life insurance density over the period of 12 years (2010-2012). The trend
shows that the number is steadily increasing over the period of five years (2001-2005) and from
2005 to 2006; there is a rapid growth in density from 18.3% in year 2005 and 33.2% in 2006.
There is a steady growth from 2007 until 2008 and again in 2009 and 2010 which saw a big jump
in density. However, from 2011 until 2012, there is a decreasing trend in terms of insurance
density.
 Graph 8 shows the general insurance density over the period of 12 years (2001-2012). The trend
shows that the number is steadily increasing over the period of five years (2001-2005) and from
2005 to 2006 and 2007; there is a rapid growth in density with 22.7% in 2005 and 38.4% in 2006
and 46.6% in 2007. There is a steady growth from 2007 until 2008 and rapid growth in 2009 and
2010. However, from 2011 until 2012, there is a decreasing trend in terms of insurance density.

Therfore, insurance industry is marching on the path of growth and development. The insurance
industry in India is expected to reach US$ 280 billion by 2020. Life insurance industry in the
country is expected grow by 12-15 per cent annually for the next three to five years.( SOURCE:
IBEF REPORT)

PRINCIPLES OF INSURANCE
Insurance is defined as the equitable transfer of the risk of a loss, from one entity to another, in
exchange for payment. An insurer is a company selling the insurance; the insured, or policy
holder, is the person or entity buying the insurance policy. The mechanism of insurance involves
a contractual agreement in which the insurer agrees to provide financial protection against a
specified set of risk for a price called the premium. It is hence essentially an intangible product.
The insurance customer cannot see or feel the product he or she is buying. And though the policy
document does give the comfort that the coverage is on; generally, no real service is delivered
until a claim occurs.

In normal commercial transactions, the legal maxim “Caveat Emptor” Latin for “Let the buyer
Beware”operates. This means that the buyer takes the risk regarding the quality or condition of
the property purchased. This in turn, implies that the buyer has the opportunity to examine the
product before purchase since, in view of what is stated in the preceding paragraph, the insurance
customer has no such opportunity, insurance transactions need be governed by special principles
in order to protect the interests of the contracting parties, particularly the customer. It should be
made sure that the contracts are governed by certain special basic legal principles, which make
insurance contracts very unique and different from other kinds of commercial contracts. There
are mainly seven kinds of principles which are being followed in the insurance agreements.
These principles are explained in detail below.

1. PRINCIPLE OF UTMOST GOOD FAITH

This principle states the duty of insured and the insurer to disclose all the relevant facts as
required by the contract. This principle is relevant to both types of insurance that is life and
general insurance. Under this, a higher degree of honesty is imposed on both parties to an
insurance contract than is imposed on parties to other contracts. The principle of utmost good
faith is supported by three important legal doctrines – representations, concealment and
warranty. Representations are statements made by the applicant for insurance. The legal
significance of a representation is that the insurance contract is voidable at the insurer’s option if
the representation is material, false and relied on by the insurer.

Let us say that you go to a shop to buy an electrical appliance. You simply will not enter, pay
and pick up any sample piece but will check two, three or even more pieces. You may be even
ask the shopkeeper to give a demonstration to ensure that it is in working condition and also ask
several questions to satisfy yourself about what you are buying. Then when you go home you
find it does not work or is not what you were looking for exactly so you decide to return the item
but the shopkeeper may well refuse to take it back saying that before purchasing you had
satisfied yourself; and he is possibly right.

The common law principle “Caveat Emptor” or let the buyer beware is applicable to commercial
contracts and the buyer must satisfy himself that the contract is good because he has no legal
redress later on if he has made a bad bargain. The seller cannot misrepresent the item he has sold
or deceive the buyer by giving wrong or misleading information but he is under no obligation to
disclose all the information to the buyer and only selective information in reply to the buyer’s
queries is required to be given. But in Insurance contracts the principles of “Uberrima fides” i.e.
of Utmost Good Faith is observed and simple good faith is not enough. This is because, Firstly,
in Insurance contracts the seller is the insurer and he have no knowledge about the property to be
insured. The proposer on the other hand knows or is supposed to know everything about the
property. The condition is reverse of ordinary commercial contracts and the seller is entirely
dependent upon the buyer to provide the information about the property and hence the need for
Utmost Good Faith on the part of the proposer. It may be said here that the insurer has the option
of getting the subject matter of Insurance examined before covering the risk. This is true that he
can conduct an examination in the case of a property being insured for fire risk or of getting a
medical examination done in the case of a health policy. But even then, there will be facts which
only the insured can know e.g., the history of Insurance of the property whether it has been
refused earlier for Insurance by another company or whether it is also already insured with
another company and the previous claim experience. Similarly, a medical examination may not
reveal the previous history i.e. details of past illness, accidents etc. Therefore, Insurance
contracts insist on the practice of Utmost Good Faith on the part of the Insured. Secondly,
Insurance is an intangible product. It cannot be seen or felt. It is simply a promise on the part of
Insurer to make good the loss incurred by the Insured if and when it occurs. Thus, the Insurer is
also obliged to practice Utmost Good Faith in his dealings with the Insured. He cannot and
should not make false promises during negotiations. He should not withhold information from
the Insured such as the discounts available for good features e.g., fire extinguishing Appliances
discount in fire policies or that Earthquake risk is not covered under the standard fire policy but
can be covered on payment of additional premium.

In the recent Earthquake disaster in Gujarat a number of Insured failed to get any relief from
Insurance Companies as Earthquake risk was not covered. Utmost Good Faith can be defined as
“A positive duty to voluntarily disclose, accurately and fully all facts material to the risk being
proposed whether requested for or not”. In Insurance contracts Utmost Good Faith means that
“each party to the proposed contract is legally obliged to disclose to the other all information
which can influence the others decision to enter the contract”.

For example, information about one’s property or person including one’ health, habits, personal
history, family history, etc., are known only to the person taking insurance and rarely are public
knowledge. Yet these issues are important for assessing the risk and deciding the rate of
premium to be charged. The insurance company can know most of these facts only if the
prospect comes forward to disclose them truthfully.

The following can be inferred from the above two definitions:

(1) Each party is required to tell the other, the truth, the whole truth and nothing but the truth.
(2) Unlike normal contract such an obligation is not limited to any questions asked and

(3) Failure to reveal information even if not asked for gives the aggrieved party the right to
regard the contract as void.

MATERIAL FACT: Those circumstances which influence the insurer decision to accept or
refuse the risk or which effect the fixing of the premium or the terms and conditions of the
contract must be disclosed.

FACTS TO BE DISCLOSED:

1.Facts, which show that a risk represents a greater exposure than would be expected from its
nature e.g., the fact that a part of the building is being used for storage of inflammable materials.

2.External factors that make the risk greater than normal e.g. the building is located next to a
warehouse storing explosive material.
3. Facts, which would make the amount of loss greater than that normally expected e.g. there is
no segregation of hazardous goods from non-hazardous goods in the storage facility.

4. History of Insurance:

(a) Details of previous losses and claims

(b) if any other Insurance Company has earlier declined to insure the property and the
special condition imposed by the other insurers; if any.

5. The existence of other insurances vi. Full facts relating to the description of the subject matter
of Insurance.

FACTS NEED NOT BE DISCLOSED:

1.Facts of Law: Everyone is deemed to know the law. Overloading of goods carrying vehicles is
legally banned. The transporter cannot take excuse that he was not aware of this provision.

2. Facts which lessen the Risk: The existence of a good firefighting system in the building.

3. Facts of Common Knowledge: The insurer is expected to know the areas of strife and areas
susceptible to riots and of the process followed in a particular trade or Industry.

4. Facts which could be reasonably discovered: For e.g. the previous history of claims which the
Insurer is supposed to have in his record.

5. Facts which the insurers representative fails to notice: In burglary and fire Insurance it is often
the practice of Insurance companies to depute surveyors to inspect the premises and in case the
surveyor fails to notice hazardous features and provided the details are not withheld by the
Insured or concealed by him them the Insured cannot be penalized.

6. Facts covered by policy condition: Warranties applied to Insurance policies i.e. there is a
warranty that a watchman be deployed during night hours then this circumstance need not be
disclosed.

BREACH OF UTMOST GOOD FAITH:

(1) Misrepresentation, which again may be either innocent or intentional. If intentional then they
are fraudulent.

(2) Non-Disclosure, which may be innocent or fraudulent. If fraudulent then it is called

concealment.

It is important to distinguish between the two: Misrepresentation and Non-Disclosure.

Breach of Utmost Good Faith

Misrepresentation Non-Disclosure

Innocent Intentional Innocent Intentional

(Fraudulent) (Concealment)

The individual head is explained in brief as follows.

MISREPRESENTATION

Innocent: This occurs when a person states a fact in the belief or expectation that it is right but it
turns out to be wrong. While taking out a Marine Insurance Policy the owner states that the ship
will leave on a specific date but in fact the ship leaves on a different date.

Intentional: Deliberate misrepresentation arises when the proposer intentionally distorts the
known information to defraud the insurer. The selfish objective is somehow to enter the contract
or to get a reduction in the premium e.g., If an applicant for motor Insurance stated that no one
under 18 would drive the vehicle when in fact his 17 years old son drives frequently. Such a
misrepresentation would be material as it would affect the decision of the insurer.

NON-DISCLOSURE

Innocent: This arises when a person is not aware of the facts or when even though being aware of
fact does not appreciate its significance e.g. A proposer at the time of effecting the contract has
undetected cancer therefore does not disclose it or A proposer had suffered from Rheumatic
fever in his childhood but he does not disclose this not knowing that people who have this are
susceptible to heart diseases at a later age.

Deliberate: This is done with a deliberate intention to defraud the insurer entering into a contract,
which he would not have done had he been aware of that fact. A proposer for fire Insurance
hides the fact knowingly by not disclosing that he has an outhouse next to his building, which is
used as a store for highly inflammable material.

How to Deal with Breaches:

How breaches are dealt with depends upon whether the breaches are
(1) Innocent

(2) Deliberate

(3) Material to the risk

(4) Immaterial to the risk

When Breach of Utmost Good Faith occurs, the aggrieved party gets the right to avoid the
contract. The contract does not become automatically void and it must decide on the course to be
taken. The options available are on case-to-case basis like:

1) The contract becomes void from the very beginning if deliberate misrepresentation or non-
disclosure is resorted to with the intention of misleading the insurer to enter into a contract.

2) To consider the contract void, the bereaved party, must notify the offending party that breach
has been noticed and as per the conditions of the contract he is no longer governed with the terms
of the contract agreed upon in covering the risk. In case the breach is discovered at the time of
claim he will refuse to honour his promise and will not pay the claim. This again occurs when
there has been a deliberate breach.

3) When the breach is innocent but it is material to the fact then the insurer may impose a
penalty in the form of additional Premium.

4) Where the breach is found to be innocent and is not material the insurer can choose to ignore
the breach or waive off the breach.

2. PRINCIPLE OF INSURABLE INTEREST

The test for a valid insurance contract is the existence of the insurable interest. The ‘insurable
interest’ is nothing but an interest of such a nature that the occurrence of the event insured
against would cause financial loss to the insured and such an interest which can be or is protected
by a contract of Insurance. This interest is considered as a form of property in the contemplation
of law. The insurable interest should exist at the time of happening of an event in the general
insurance contracts, but is not necessarily so in the case of the life insurance contracts. This is
because the former is a contract of indemnity and the latter is a contract of assurance.

Taking an example of fire insurance, it is clear that an insured person suffers no loss under a
policy if at the time of loss or damage to the property; he has no interest in it either as full or
partial owner. In this context of insurable interest, life insurance stands on different ground. No
value can be assigned to human life in the same way as is done in respect of tangible property.
But all the same, it is possible to measure the extent of loss that would be caused by the failure of
a particular life. An insurable interest of some kind is necessary to every contract of insurance of
whatever kind and any insurance made without such interest is illegal and void. The guiding
factor in this regard is that an insurable interest is a reasonable expectation of financial benefit
from the continued life of the subject or an expectation of loss if the subject dies. For instance, a
parent has a clear insurable interest in the life of a minor child, since he is entitled to the services
and earnings of that child.

The concept of insurable interest primarily appears to be an invention of the courts. It may be
necessary for the assured to show interest but common law contains no general prohibition of
contracts in which no insurable interest exists. It was perhaps introduced to curb insurances by
way of wager, and obtained statutory recognition. The presence of insurable interest is insisted
for two reasons.

(1) An assured cannot be taken to have suffered any damage if he has no interest in the property
insured at the time of loss.

(2) Secondly, if the interest of the assured is limited to something less than the full value of the
subject matter, no greater damage than his interest in the subject matter will result.

In both the cases; the interest in the subject-matter is required by the terms of the contract itself,
since the promise of the insurer will be only to compensate the actual loss. To have insurable
interest, it is essential that there should be some contractual or proprietary right, whether legal or
equitable so long as it is enforceable in the courts. Accordingly, the main principles determining
the existence of insurable interest are

(a) the interest must be enforceable at law

(b) the continued existence of the interest will be beneficial to the assured.

Strict legal or pecuniary interest is not necessary. Under the contract of life insurance, the
assured has insurable interest in his own life to an unlimited extent. But, where a person takes
insurance on the life of another, the criteria applied in assessing the insurable interest are of great
importance. It is not the legal or beneficial interest as in the case of marine and fire insurance,
but the person ensuring the life of the other must stand in such relationship as will justify a
reasonable expectation of advantage or benefit from the continuance of the life of the person on
whom the insurance is affected. The test applicable is whether there was actual dependence of
the person affecting the insurance, whose life is insured, or he had an expectancy of some
advantage from the continued existence of the person insured.

The effect of the requirement of insurable interest in all contracts of insurance seems to be two-
fold. Its absence makes a contract of insurance equivalent to a wager. Also, the principle of
indemnity cannot be applied unless there be some interest in the subject-matter, because, the
actual loss alone will be indemnified. Thus, it became a preventive of wagering policies and also
limited the amount recoverable to the loss sustained by the assured.
 3. PRINCIPLE OF INDEMNITY
Indemnity according to the Cambridge International Dictionary is “Protection against possible
damage or loss” and the Collins Thesaurus suggests the words “Guarantee”, “Protection”,
“Security”, “Compensation”, “Restitution” and “Reimbursement” amongst others as suitable
substitute for the word “Indemnity”. The words protection, security, compensation etc. are all
suited to the subject of Insurance but the dictionary meaning or the alternate words suggested do
not convey the exact meaning of Indemnity as applicable in Insurance Contracts. In Insurance
the word indemnity is defined as “financial compensation sufficient to place the insured in the
same financial position after a loss as he enjoyed immediately before the loss occurred.”
Indemnity thus prevents the insured from recovering more than the amount of his pecuniary loss.
It is undesirable that an insured should make a profit out of an event like a fire or a motor
accident because if he was able to make a profit there might well be more fires and more vehicle
accidents. As in the case of Insurable Interest, the principle of indemnity also relies heavily on
the financial evaluation of the loss but in the case of life and disablement it is not possible to be
precise in terms of money.

An Insurance may be for less than a complete indemnity but it may not be for more than it. To
illustrate let us take the example of a person who insures his car for Rs.4 lacs and it meets with
an accident and is a total loss. It is not certain that he will get Rs.4 lacs. He may have over valued
the car or may be the prices of cars have fallen since the policy was taken. The Insurer will only
pay an amount equal to the value of the car at the time of loss. If he finds that a car of the same
make and model is available in the market for Rs.3 lac then he is not liable to pay more than this
sum and payment of Rs.3 lacs will indemnify the Insured. Similarly, in the case of partial loss if
some part of the car needs to be replaced the Insurer will not pay the full value of the new part.
He shall assess how much the old part had run and after deduction of a proportionate sum he
shall pay the balance amount. An insured is not entitled to new for old as otherwise he would be
making a profit from the accident.

However, there are two modern types of policy where there is a deviation from the application
of this principle. One is the agreed value policy where the insurer agrees at the outset that they
will accept the value of the insured property stated in the policy (sum insured) as the true value
and will indemnify the insured to this extent in case of total loss. Such policies are obtained on
valuable pieces of Art, Curious, Jewellery, Antiques, Vintage cars etc. The other type of policy
where the principle of strict indemnity is not applied is the Reinstatement policy issued in Fire
Insurance. Here the Insured is required to insure the property for its current replacement value
and the Insurer agrees that in the event of a total loss he shall replace the damaged property with
a new one or shall pay for the replacement in full. Other than these there are Life and Personal
Accident policies where no financial evaluation can be made. All other Insurance policies are
subjected to the principle of strict Indemnity. In most policy documents the word indemnity may
not be used but the courts will follow this principle in case of any dispute coming before them.
HOW IS INDEMNITY PROVIDED?

The Insurers normally provide indemnity in the following manner and the choice is entirely of
the insurer:

1) Cash Payment 2) Repairs 3) Replacement 4) Reinstatement

1. Cash Payment: In majority of the cases the claims will be settled by cash payment (through
cheques) to the assured. In liability claims the cheques are made directly in the name of the third
party thus avoiding the cumbersome process of the Insurer first paying the Insured and he in turn
paying to the third party.

2. Repair: This is a method of Indemnity used frequently by insurer to settle claims. Motor
Insurance is the best example of this where garages are authorized to carry out the repairs of
damaged vehicles. In some countries Insurance companies even own garages and Insurance
companies spend a lot on Research on motor repair to arrive at better methods of repair to bring
down the costs.

3. Replacement: This method of Indemnity is normally not preferred by Insurance companies

and is mostly used in glass Insurance where the insurers get the glass replaced by firms with
whom they have arrangements and because of the volume of business they get considerable
discounts. In some cases of Jewellery loss, this system is used specially when there is no
agreement on the true value of the lost item.

4. Reinstatement: This method of Indemnity applies to Property Insurance where an insurer

undertakes to restore the building or the machinery damaged substantially to the same condition
as before the loss. Sometimes the policy specifically gives the right to the insurer to pay money
instead of restoration of building or machinery.

Reinstatement as a method of Indemnity is rarely used because of its inherent difficulties e.g., if
the property after restoration fails to meet the specifications of the original in any material way
or performance level then the Insurer will be liable to pay damages. Secondly, the expenditure
involved in restoration may be much more than the sum Insured as once they have agreed to
reinstate, they have to do so irrespective of the cost.

Limitations on Insurers Liability:

1. The maximum amount recoverable under any policy is the sum insured, which is mentioned
on the policy. The amount is not the agreed value of the property (except in Valued policies) nor
is it the amount, which will be paid automatically on occurrence of loss. What will be paid is the
actual loss or sum insured whichever is less.

2. Property Insurance is subjected to the Condition of Average. The underlying principle behind
this condition is that Insurers are the trustees of a pool of premiums from which they meet the
losses of the few who suffer damage, so it is reasonable to conclude that every Insured should
bring a proper contribution to the pool by way of premium. Therefore, if an insured deliberately
or otherwise underinsures his property thus making a lower contribution to the pool, he is not
entitled to receive the full benefits.

The application of this principle makes the insured his own Insurer to the extent of under-
insurance i.e. the pro-rata difference between the Actual Value and the sum insured. The amount
of loss will be shared between the Insurer and the insured in the proportion of sum insured and
the amount underinsured. The formula applicable for arriving at the amount to be paid by the
Insurance Co. is Claim = Loss X (Sum Insured / Market Value)

Example: Mr. Sudhir Kumar has insured his house for Rs.5 lacs and suffers a loss of Rs.1 lac due
to fire. At the time of loss, the surveyor finds that the actual market value of the house is Rs.10
lacs. In this case applying the above formula the claim will be as under:

Loss = 1 lac sum insured = 5 lacs Market Value = 10 lacs Therefore, 1 lac X 5 lacs / 10 lacs
= 50,000/Claim = Rs 50,000/-.

4. PRINCIPLE OF SUBROGATION
A corollary of the indemnity principle and again exclusively applicable to general insurance,
refers to the rights that an insurer has paid him an indemnity. This principle of subrogation
strongly supports the principle of indemnity. Subrogation means substitution of the insurer in
the place of the insured for the purpose of claiming indemnity from a third person for a loss
covered by insurance. The insurer is therefore entitled to recover from a negligent third part any
loss payments made to the insured.

EFFECTS

Insurance can have various effects on society through the way that it changes who bears the cost
of losses and damage. On one hand it can increase fraud, on the other it can help societies and
individuals prepare for catastrophes and mitigate the effects of catastrophes on both households
and societies. Insurance can influence the probability of losses through moral hazard, insurance
fraud, and preventive steps by the insurance company. Insurance scholars have typically used
morale hazard to refer to the increased loss due to unintentional carelessness and moral hazard to
refer to increased risk due to intentional carelessness or indifference.

CASE STUDY

Why Subrogation is called a corollary of Indemnity and not treated as a separate basic Principle
of Insurance can be traced to the judgement given in the case of Casletlan V Preston (1883) in
U.K.
 “That doctrine (Subrogation) does not arise upon any terms of the contract of Insurance, it is
only the other proposition, which has been adopted for the purpose of carrying out the
fundamental rule i.e. indemnity. Which I (Judge) have mentioned “it is a doctrine in favour of
the underwriters or insurers, in order to prevent the insured from recovering more than a full
indemnity; it has been adopted solely for that reason.”

Subrogation does not apply to life and personal accidents as these are not contracts of
Indemnity. In case death of a person is caused by the negligence of another than the legal heirs of
the deceased can initiate proceedings to recover from the guilty party in addition to the policy
proceeds. If the insured is not allowed to make profit the insurer is also not allowed to make a
profit and he can only recover to the extent he has indemnified the Insured.

Subrogation – How?

Subrogation can arise in 4 ways:

 Tort: When an insured has suffered a loss due to a negligent act of another then the Insurer
having indemnified the loss is entitled to recover the amount of indemnity paid from the
wrongdoer. The Insured has a right in Tort to recover the damages from the individuals
involved. The Insurers assume these rights and take action in the name of the insured and
take his permission before starting legal proceedings. Another reason for seeking permission
of the insured is that the Insured may be having another claim which was not insured arising
from the same incident which he may wish to include because the law allows one to sue a
person only once for any single event.
 Contract: This can arise when a person has a contractual right to compensation regardless of
a fault then the Insurer will assume the benefits of this right.
 Statute: Where the Act or Law permits, the insurer can recover the damages from
Government agencies like the Risk (Damage) Act 1886 (UK) gives the right to insurers to
recover damages from the District Police Authorities in respect of the property damaged in
Riots which has been indemnified by them.
 Subject Matter of Insurance: When the Insured has been indemnified and the property treated
as lost, he cannot claim salvage as this would give him more than indemnity.

Therefore, when Insurers sell the salvage as in the case of damaged cars it can be said that they
are exercising their right of subrogation.

Subrogation – When?

According to common law the right of subrogation arises once the Insurers have admitted the
claim and paid it. This can create problems for the Insurers as delay in taking action could at
times hamper their chance of recovering the damages from the wrongdoer or it could be
adversely affected due to any action taken by the Insured. To safeguard their rights and to ensure
that they are in control of the situation from the beginning Insurers place a condition in the
policy giving themselves subrogation rights before the claim is paid.

The limitation is that they cannot recover from the third party unless they have indemnified the
insured but this express condition allows the insurer to hold the third party liable pending
indemnity being granted. Many individuals having received indemnity from the Insurer lose
interest in pursuing the recovery rights they may have. Subrogation ensures that the negligent do
not get away scot free because there is Insurance. The rights which subrogation gives to the
Insurers are the rights of the Insured and it places certain obligations on the Insured to assist the
Insurers in enforcing their claims and not to do anything which would harm the Insurers chances
to recover losses.

5. PRINCIPLE OF CONTRIBUTION
Contribution is another corollary of Indemnity. An individual may have more than one policy on
the same property and in case there was a loss and he were to claim from all the Insurers then he
would be obviously making a profit out of the loss which is against the principle of Indemnity.
To prevent such a situation the principle of contribution has been evolved under common law.
The principle is exclusively applicable to general insurance. It tells us how the liability is to be
met when the insured has taken insurance with more than one insurer.

Contribution may be defined as the “right of Insurers who have paid a loss to recover a
proportionate amount from other Insurers who are also liable for the same loss”.

The common law allows the insured to recover his full loss within the sum insured from any of
the insurers. Condition of Contribution will only arise if all the following conditions are met:
1) Two or more policies of Indemnity should exist

2) The policies must cover a common interest

3) The policies must cover a common peril which is the cause of loss

4) The policies must cover a common subject matter

5) The policies must be in operation at the time of loss It is not necessary that the policies be
identical to one another.

What is important is that there should be an overlap between policies, i.e. the subject matter
should be common and the peril causing loss should be common & covered by both. As said
earlier common law gives the right to the insured to recover the loss from any one insurer who
will then have to effect proportionate recoveries from other insurers, who were also liable to pay
the loss. To avoid this the Insurers, modify the common law condition of contribution by
inserting a clause in the policy that in the event of a loss they shall be liable to pay only their
“Rate-able proportion” of the loss. It means that they will pay only their share and if the Insured
wants full indemnity, he should lodge a claim with the other Insurers also.

Rateable Proportion

The accepted way to interpret the term Rate-able Proportion is exhibited. First being that the
Insurers should pay in the proportion to the sum insured for example,

Sum Insured Policy A = 10,000

Sum Insured Policy B = 20,000

Sum Insured Policy C = 30,000

Total = 60,000/

In case of a claim of Rs.6000/- the three insurers would be liable to pay in the proportion 1:2:3
i.e. ‘A’ pays Rs.1000/- ‘B’ pays Rs.2000/- and ‘C’ pays Rs.3000/-.

However, the drawback of this simplistic method is that the terms and conditions of the policies
may be different and it would not be prudent to ignore these terms and conditions. For example,
the condition of average may apply to one or more policies or there may be an excess clause in
one policy which may affect their share of contribution to the loss. It would therefore be correct
to assess the loss as per the terms and conditions of the individual policy and pay the claims
accordingly. If by following this method the total sum of the liability of the Insurers is more than
the claim amount then the Insurers shall pay in proportion to the amount of liability of each.

6. PRINCIPLE OF MITIGATION OF LOSS

Mitigation in law is the principle that a party who has suffered loss (from a tort or breach of
contract) has to take reasonable action to minimize the amount of the losssuffered.

In law, the term “mitigation” refers to the principle that a party who has suffered loss must take
reasonable action to ensure that no further loss is suffered. This “loss”, and the accompanying
“reasonable action”, will vary depending on the nature of the case. For example, an individual
involved in a car crash will suffer “loss” as a result of the injuries they sustain. Yet if the
individual refuses medical treatment, they will have failed to take “reasonable action” to
minimise the amount of loss suffered. This will make it difficult to assess the amount of loss that
can be attributed to the defendant, which means that the plaintiff might be denied compensation.

Damage mitigation is intended to protect defendants from having to pay for damages for which
they were not responsible. Unfortunately, we’ve seen countless examples of insurance firms
relying on damage mitigation law to either severely reduce the amount of compensation they
pay, or even to avoid paying it outright.
For both businesses and homeowners alike, damage mitigation is vitally important to ensure
that insurance claims proceed as smoothly as possible. Whether you’re a victim of fires, floods,
theft, or storm damage, the law holds you accountable for ensuring that no further harm comes to
your property. This can include anything, from securing yourself against break-ins, to
undertaking repair work to safeguard your property’s structural integrity.
EXAMPLE:

Assume, Mr. John’s house is set on fire due to an electric short-circuit. In this tragic scenario,
Mr. John must try his level best to stop fire by all possible means, like first calling nearest fire
department office, asking neighbours for emergency fire extinguishers, etc. he must not remain
inactive and watch his house burning hoping, ‘why should I worry? I have insured my house’.

7. PRINCIPLE OF PROXIMATE CAUSE

The proximate cause can be defined as “the active efficient cause that sets in motion a train of
events which brings about a result, without the intervention of any force started and working
actively from a new independent force.” In other words, it specifies the indemnification of
losses concurrent with the perils specified under insurance contracts and not in genera.
Properties are exposed to various perils like fire, earthquake, explosion, perils of sea, war, riot,
civil commotion and so on, and policies of insurance covering various combinations of such
perils can be procured. Policies of insurance usually afford protection against some of these
perils, expressly exclude certain perils from the cover, and by implication other perils are
covered. The insurer’s liability under the policy arises only if the cause of the loss is a peril
insured against and not as expressly excluded or other peril.

There are three types of perils related to a claim under an Insurance policy

(1) Insured Perils: These are the perils mentioned in the policy as being insured e.g. Fire,
lightening, storm etc. in the case of a fire policy

(2) Excepted Perils: These are the perils mentioned in the policy as being excepted perils or
excluded perils e.g. Riot strike, flood etc. which may have been excluded and discount in
premium availed.

(3) Uninsured Perils: Those not mentioned in the policy at all either in Insured or excepted perils
e.g. snow, smoke or water as perils may not be mentioned in the policy.

Insurers are liable to pay claims arising out of losses caused by Insured Perils and not those
losses caused by excepted or Uninsured perils.

Example: If stocks are burnt then the cause of loss is fire which is an Insured Peril under a fire
policy and claim is payable. If the stocks are stolen the loss would not be payable as Burglary is
not an Insured peril covered in fire policy Burglary policy is needed to take care of ‘theft’.
 It is therefore important to identify the cause of loss and to see if it is an Insured peril or not
before admitting a claim.

Need to Identify Proximate Cause

If the loss is brought about by only one event then there is no problem in settlement of liability
but more often than not the loss is a result of two or more causes acting together or in tandem i.e.
one after another. In such cases it is necessary to choose the most important, most effective and
the most powerful cause which has brought about the loss. This cause is termed the Proximate
Cause and all other causes being considered as “remote”. The proximate cause has to be an
insured peril for the claim to be payable.

The following illustration may help in distinguishing between the proximate cause and the
remote cause.

I. “A person was injured in an accident and was unable to walk and while lying on the
ground he contracted a cold which developed into pneumonia and died as result of this.
The court ruled that the proximate cause of death was the accident and Pneumonia
(which was not covered) was a remote cause and hence claim was payable under the
Personal Accident Policy.”
II. “A person injured in an accident was taken to a hospital where he contracted an
infection and died as a result of this infection. Here the court ruled that infection was the
proximate cause of death and the accident was a remote cause and hence no claim was
payable under the Personal Accident Policy.

The doctrine of proximatecause is based on the principle of cause and effect, which states that
having proved the effect and traced the cause it is not necessary to go any further i.e. cause of
cause. The law provided the rule “Cause Proxima non-Remote spectator”. The immediate cause
and not the remote one should be taken into consideration. Therefore, the proximate cause
should be the immediate cause. Immediate does not mean the nearest to the loss in point of time
but the one most effective or efficient. Thus, if there are a number of causes and the proximate
cause has to be chosen the choice should be of the most predominant and efficient cause i.e. the
cause which effectively caused the result.

It is important to note that in Insurance Proximate has got nothing to do with time even though
the Dictionary defines Proximity as ‘The state of being near in time or space’ (period or
physical) and the Thesaurus given the alternate words as “adjacency of” “closeness”, “nearness”
“vicinity” etc. But in Insurance Proximate cause is that which is Proximate in efficiency. It is
not the latest but the direct, dominant, operative and efficient cause.

Losses can occur in the following manners:

i. Loss due to a single cause.

ii. A series or chain of events one following and resulting from the other causing the loss
iii. A series or chain of events which is broken by a new event independently from a
different source causing the loss – Broken sequence and
iv. A contribution of two or more events occurring simultaneously and resulting in loss 1)
In the case of a single cause being the cause of loss then if that peril is covered the claim
is payable and if not covered claim is not payable.

2) Loss due to a series or chain of events.

This can be illustrated by the following example event. a) A driver of a car meets with an
accident. As a result of the accident he suffers from concussion. Because of the concussion he
strayed around not aware where he was going. While straying he fell into a stream and died of
drowning in the stream. It is clear that the above is a chain of events one leading to the other.
The proximate cause would be accident (covered under PA Policy) which resulted in concussion
(Disease – not covered) and hence the claim would be payable. Irrespective of the fact that
subsequent causes are covered or not if it is established that the event starting the chain is a
covered peril then claim is payable. However, if reverse were the case and the chain was started
by an excepted or excluded peril then the claim would not be payable.

For e.g. A person suffers a stroke and falls down the steps resulting in his death. He will not be
entitled to any claim under his personal accident policy as the chain was started by a stroke
which is an excepted peril.

In case of the Broken sequence or Interrupted chain of events if the chain of events is started by
an Insured peril but interrupted by an excepted or excluded peril then the claim is paid after
deducting the damage caused by the excluded peril.

For example, the burglars enter the house and leave the gas stove on leading to a fire and the
house is damaged in the fire. The “burglary Insurance” will only pay for the loss due to theft but
exclude loss due to fire, which is accepted peril under the burglary policy.

In case the sequence of events started by an excluded peril is broken by an Insured peril, as a
new and independent cause then there is a valid claim for even the damage caused by exempted
peril. The burglars enter the house and after carrying out thefts put the house on fire. The fire
policy will pay for the damages due to theft as well (which is an excluded peril). In the case of
loss due to concurrent causes or two or more causes occurring simultaneously then all the causes
will have to be Insured perils only then the claim would be payable but even if one of the causes
is an excluded peril the claim will not be payable.

Example: A house collapses due to an earthquake, which results in fire. Under the fire policy
earthquake is not a covered risk, hence the claim will not be payable.

CASE STUDY:
In an incident where stocks of potatoes kept in a cold storage got damaged due to leakage of
ammonia gas. The stock was insured against contamination / Deterioration / putrefaction due to
rise in temperature in the refrigeration chamber caused by any loss or damage due to an
accident. The Insurance company did not pay the claim saying that the leakage of gas was not
accidental and hence the risk was not covered. The aggrieved approached the consumer forum
which held that the leakage of gas was not foreseen or premeditated or anticipated and loosening
of the nuts and bolts of the flanges. The consequential escape of gas was within the meaning of
the word accident and hence ordered the Insurance Co. to pay the claim.

CLASSIFICATION OF INSURANCE
The Hazards which can be insured has been amplified in number and extent due to
complexities of present day economic system. Insurance thus played an important place in
modern world . It plays a vital role in the life of every citizen and has developed on
enormous scale leading to evolution of different types of insurance. Every risk can be subject
matter of contract of insurance. Different types of insurance has come about by practice
within insurance companies and by the influence of legislation controlling transaction of
business. By and large insurance can be classified as follows:-

Classification

Classification on the Classification on the Classification from risk

basis of nature of basis of business point of point of view
business view
A. CLASSIFICATION ON THE BASIS OF NATURE OF BUSINESS:-

Life insurance

Fire insurance

On the basis of nature

Marine insurance

Social insurance

Miscellaneous insurance

1. LIFE INSURANCE

'Life Insurance is a contract between two persons one person agreeing to pay a given sum on
the happening of an event, contingent upon the duration of human life the other person
agreeing to pay the prescribed amount in installments or in a lump sum the period of payment
being death or the efflux of the agreed period whichever is early' -Benson

• In other words It is a contract in which the insurer in consideration of a certain premium,

either in lumpsum or periodical payments, agrees to pay to assured,or to the person for
whose benefit the policy is taken, the assured sum of money, on the happening of a
specified event contingent on the human life or at the expiry of certain period. For life
insurance risk ensured against is death. the life insurance company pays the sum assured
to the insured in the event of death.

• At present life insurance enjoys maximum scope because the life is most important
property of the society or an individual. Each and every person requires the insurance.
This insurance provides protection to family at premature death or gives adequate amount
at old age when earning capacities reduced. The insurance is not only a protection but is a
sort of investment because a certain sum is returnable to the insured at the death or at the
expiry of a period.

• Classification of Life insurance policies :-

 Whole life insurance

Limited payment Whole-Life

Policy
Life insurance
Convertible whole Life Policy

Term insurance

Endowment policy
•
 Whole-life insurance: Whole life plan, premiums payments are made during the life time
of the Life Assured and the sum assured is payable only on death. It could be seen that
the whole life assurance is exactly a Term Assurance Plan for an in-definite term, the
term being linked to the duration of human life.
 Limited payment Whole-Life Policy :-A modification of the whole-life plan, premium
payments are restricted to a fixed term decided by the Life Assured, the Sum Assured
being payable only on death. Premium under this plan is higher than the premium
payable under a whole-life plan. With Profit-Policies, the policy continues to participate
in profits even though premium payments have ceased. This plan is suitable for persons
in whose case the need for money would arise only on the happening of the death, but
who either on account of personal and family history are not eligible of a whole life plan
or do not want to extend the premium paying period beyond their earning years
 Convertible whole Life Policy :-Convertible whole Life Policy is originally issued as
whole life-limited payment plan with premium ceasing at age 70 with an option to
convert into an Endowment Plan after five years. This plan will be ideally suited for
young person with a limited income to start with and possibility of increase in later years.
If the policy is converted into endowment, the premium is suitably increased
 Term insurance is a type of life insurance policy that provides coverage for a certain
period of time or a specified "term" of years. If the insured dies during the time period
specified in the policy and the policy is active, or in force, a death benefit will be paid
 An endowment policy is essentially a life insurance policy which, apart from covering the
life of the insured, helps the policyholder save regularly over a specific period of time so
that he/she is able to get a lump sum amount on the policy maturity in case he/she
survives the policy term. A life insurance endowment policy pays the full sum assured to
the beneficiaries if the insured dies during the policy term or to the policy holder on
maturity of the policy if he/she survives the term.
 Fundamental principles of Life insurance are:-
 The contract of life insurance is a contract of utmost good faith. The insured should be
honest and truthful in giving information to the insurance company.
 Insured must have insurable interest in life assured. Insured must have insurable interest
at the time when insurance is affected as well as at the time of maturity also. No proof is
required if insurance is taken for own life, husband in the life of wife and vice versa.
 Life insurance is not a contract of indemnity. The loss of life cannot be compensated
and only a specified sum of money is paid. Therefore sum assured is fixed in advance.

2. FIRE INSURANCE

It is a contract whereby the insurer, in consideration of premium paid, undertakes to make

good any loss or damage caused by fire during a specified period. Normally, policy is for a
period of one year after which it is to be renewed from time to time. A claim for loss must
satisfy two conditions:-

 there must be actual loss

 fire must be accidental and non intentional
The risk covered by fire insurance contract is the loss resulting from fire or somecause, which is the
proximate cause of the loss. If the damage is caused by overheating without ignition, it will not be
regarded as a fire loss within the meaning of fire insurance and loss will not be recoverable from
insurer.

Fundamental principles of fire insurance are :-

 In fire insurance assured must have insurable interest in subject matter both at the time of
insurance and at the time of loss. In case of goods insurable interest arises on account of
ownership, possession, and contract
 Similar to life insurance the contract of fire insurance is a contract of utmost good faith.
 Contract of fire insurance is contract of indemnity. The assured in the event of loss, recover
the actual amount of loss from the insurer. This is subject to maximum amount for which
subject matter is insured. The value of policy undertaken is fixed at the time of contract. The
actual amount of loss is compensated and the sum insured is reduced by the amount paid. The
value of policy is only the maximum limit.

Types of fire insurance policies :-

 Specific policy

Valued Policy

Fire insurance
Restatement policy

Comprehensive policy

Floating policy
 Specific policy:- is a policy which covers the loss up to a specific amount which is less than
the real value of the property. The actual value of the property is not taken into consideration
while determining the amount of indemnity. Such a policy is not subject to 'average clause'.
'Average clause' is a clause by which the insured is called upon to bear a portion of the loss
himself. The main object of the clause is to check under-insurance, to encourage full
insurance and to impress upon the property owners to get their property accurately valued
before insurance. If the insurer has inserted an average clause, the policy is known as
"Average Policy".
 Comprehensive policy:- is also known as 'all in one' policy and covers risks like fire, theft,
burglary, third party risks, etc. It may also cover loss of profits during the period the business
remains closed due to fire.
 Valued policy: - is a departure from the contract of indemnity. Under it the insured can
recover a fixed amount agreed to at the time the policy is taken. In the event of loss, only the
fixed amount is payable, irrespective of the actual amount of loss.
 Floating policy:- is a policy which covers loss by fire caused to property belonging to the
same person but located at different places under a single sum and for one premium. Such a
policy might cover goods lying in two warehouses at two different locations. This policy is
always subject to 'average clause'.
 Replacement or Re-instatement policy:- is a policy in which the insurer inserts a re-
instatement clause, whereby he undertakes to pay the cost of replacement of the property
damaged or destroyed by fire. Thus, he may re-instate or replace the property instead of
paying cash. In such a policy, the insurer has to select one of the two alternatives, i.e. either to
pay cash or to replace the property, and afterwards he cannot change to the other option.

3. MARINE INSURANCE

A marine insurance is a contract whereby the insurer undertakes to indemnify insured in the
manner and to the extent thereby agreed against marine losses. Marine insurance is an
 arrangement by which the insurer undertakes to compensate the owner of a ship or cargo for
complete or partial loss at sea.

This insurance provides protection against loss of marine perils. The marine perils are
collision with rock or ship attacked by enemies, fire and capture by pirates, etc. These perils
cause damage destruction or disappearance of the ship and cargo and non payment of freight.
So marine insurance insures ship(hull), cargo and freight.

Fundamental principles

 Unlike life insurance the contract of marine insurance is a contract of indemnity. The
assured can in the event of loss recover the actual amount of loss from the insurer. Under
no circumstances the insured is allowed to make profits, so far hull insurance is
concerned. However in marine cargo policies the principle of indemnity is modified since
it is not possible to adhere to strict indemnity in these policies due to fluctuations in
market. Cargo policies provide commercial indemnity rather than strict indemnity.
 In case of hull policy the amount insured is fixed at a level rather above current market
value. In case of cargo policy the amount insured also includes an amount for certain
charges and profit when policy is taken on CIF basis.
 Similar to life and fire insurance this insurance is contract of utmost good faith . Both
the parties must disclose accurately all the factual information.

4. SOCIAL INSURANCE

It has developed to provide economic security to weaker sections of society who are unable
to pay the premium for adequate insurance. With the increase of Socialistic ideas the social
insurance is an obligatory duty of the nation. Pension plans, Disability benefits,
unemployment benefits, sickness insurance , industrial insurance are the various forms of
social insurance.

5. MISCELLANEOUS INSURANCE

The process of fast development in the society gave rise to a number of risks or hazards. To
provide security against such hazards many other types of insurance also have been
developed. The important one are:-

MOTOR INSURANCE

It can be classified according to types of vehicles(Scooter,Private cars, commercial vehicles,

Passenger vehicles). No motor vehicle or any mechanically propelled vehicle can ply in a
public place unless it is insured in third party liability under motor vehicle Act, 1988. After
the amendment in the Act in 1988the liability in personal injury or death to any person is
unlimited and third party property damage is limited to rupees 6000. This liability can be
 increased on payment of extra premium.The Insured has the option to cover his vehicle
against own damage to the extent of market value. In case of Motor Insurance the liability
incurred is in respect of :-

 Death or personal injury to owner of goods or his authorized representative in a goods

vehicle.

 Liability incurred in respect of death or bodily injury of any passenger of public service
vehicle

 Liability arising under workmen compensation Act 1923 in respect of death or bodily
injury of
• paid driver

• conductor or ticket examiner in public service vehicle

• workers carried in a goods vehicle

 Liability in respect of death injury to passenger who are carried for hire or by reason of or in
pursuance of contract of employment.

ACCIDENT INSURANCE

An accident is an unanticipated event, which brings forth unfortunate consequences. An accident

may happen with respect to self, property or where an unanticipated liabilty is imposed. It covers
three kinds of coverage:-

Personal Accident Insurance:- A contract of personal accident insurance is contract whereby a

sum of money is payable to the assured or his legal representatives in the event of his
disablement or death resultant from accident. It may be regarded as variant of life insurance. It is
an annual policy renewable from year to year. These do not cover death due to natural causes.

Property insurance:-The risk insured by insurance is damage caused to various properties.

Specially it is a insurance against financial loss caused by damage, destruction or loss to property
as a result of an identifiable event that is sudden, unexpected or unusual. The policies of
insurance against burglary, house breaking theft provide for indemnity of damage caused by
specified events. A policy of such nature would exclude damage or loss which are capable of
being covered by any other insurance.

Liability Insurance :-With liability insurance the risk insured is litigation or the risk of law suits
against the insured due to actions of the insured or others. Any lawful liability arising out of an
incident may take a person by surprise. Liability arises when a defective product is sold or a
person is injured by motor vehicle or where industrial accident occurs. Liability insurance may
be prescribed by law or be subscribed voluntarily. it is form of accident insurance.
DUTY INSURANCE

This policy is normally taken by an importer to cover the payments of actual duty on the
imported goods. When imported cargo arrives in India certain duty is leviable by custom
authorities. This duty can be insured either by including it in the marine cargo policy's sum
insured or by purchasing a separate duty policy. It forms a part of cargo policies and also agreed
value policies but claim is payable 75% of the assured claim.

ERECTION ALL RISK INSURANCE (EAR)

It has become an indispensable part of progress in all indusrialised countries. Large projects such
as the erection of thermal power stations, fertilizer plants ,oil refineries or installation of
complete factory facilities bring many risks for both contractors and principal that is only
possible to bear these risks in economical manner by taking out an EAR insurance.

It is an insurance on property against accidents resulting in damage to machinery and steel

structures while normal course of erection or construction. It offer comprehensive and adequate
insurance protecting against all risks involved in erection of machinery and plant as well as steel
structures.

CASH INSURANCE

It protects banks and industrial business establishments against loss of money which may be
carried by messengers and which may be in transit from one place to another.It is essentially a
modified version of burglary insurance. Cash unless otherwise stated means current coin, bank
currency notes, cheques, postal orders and current postage stamps.

B. CLASSIFICATION OF INSURANCE FROM RISK POINT OF VIEW

From risk point of view insurance can be classified into four categories:
 Personal insurance

Property insurance
Insurance from risk point of view

Liability Insurance

Fidelity guarantee Insurance

The description of each is as follows:

1. PERSONAL INSURANCE

Personal insurance refers the loss to life or sickness to individual, which iscovered by the policy.
The insurer undertakes to pay the sum insured on the happening of certain event or on maturity
of the period of insurance, and sickness insurance. Life insurance contains the element of
investment and protection, while the accidental, sickness or health insurance contains the
element of indemnity only.

2. PROPERTY INSURANCE
Contract of property insurance is a contract of indemnity. Proof by the assured of loss is an
essential element of property insurance. The policies of insurance against burglary, home
breaking or theft etc. fall under this category. The assured is required to protect the insured
property . After the loss has taken place, the assured usually required notifying the police as
to losses.

3 LIABILITY INSURANCE

Liability insurance is the major field of general insurance whereby the insurer promises to pay
the damage of property or to compensate the losses to a third party. The amount of compensation
is paid directly to third party. The fields of liability insurance includes: workmen compensation
insurance, third party motor insurance, professional indemnity insurance. There may be various
reasons for the arising of liability, viz., Accident of a worker at the workplace, defective goods,
explosion in the factory during the process of production and formation of poisonous gas within
the factory due to the uses of chemicals and other such substances in the manufacturing process.
4.FIDELITY GURANTEE INSURANCE

In this type of insurance, the insurer undertakes to indemnify the assured (employer) in
consideration of certain premium, for losses arising out of fraud, or embezzlement on the part of
employees. This type of insurance is frequently adopted as a precautionary measure in cases
where new and untrained employees are given position of trust and confidence.

C. CLASSIFICATION FROM BUSINESS POINT OF VIEW :-

Classification

General
Life insurance insurance

GENERAL INSURANCE:- General insurance business refers to fire, marine and

miscellaneous insurance business whether carried on singly or in combination with one or more
of them. It covers insurance of property against fire, burglary, theft; personal insurance covering
health, travel and accidents; and liability insurance covering legal liabilities. This category of
insurance virtually covers all forms of insurance except life. Other covers may include insurance
against errors and omissions for professionals, credit insurance etc. Common forms of general
insurance are motor, fire, home, marine, health, travel, accident and other miscellaneous forms of
non - life insurance.

INSURANCE CONTRACT

A contract is an agreement between parties, enforceable at law. The provisions of the Indian
Contract Act, 1872 govern all contracts in India, including insurancecontracts.

An insurance policy is a contract entered into between two parties, viz., the company, called the
insurer, and the policy holder, called the insured and fulfils the requirements enshrined in the
Indian Contract Act, 1872.

Insurance involves a contractual agreement in which the insurer agrees to provide financial
position against certain specified risks for a price or consideration known as the premium. The
contractual agreement takes the form of an insurance policy.

The insurance contract involves:

1.The elements of general contract

2.The elements of special contract relating to insurance

1.GENERAL CONTRACT
The valid contract, according to Section 10 of Indian Contract Act, must have the following
essentials:

1.Agreement (offer and acceptance)

2.Legal Consideration

3.Competent to make contract

4.Free consent

5.Legal object

OFFER AND ACCEPTANCE

When one person signifies to another his willingness to do or to abstain from doing anything
with a view to obtaining the assent of the other to such act, he is said to make an offer or
proposal. Usually, the offer is made by the proposer, and acceptance made by the insurer.

When a person to whom the offer is made signifies his assent thereto, this is deemed to be an
acceptance. Hence, when a proposal is accepted, it becomes a promise.

The acceptance needs to be communicated to the proposer which results in the formation of a
contract.

When a proposer accepts the terms of the insurance plan and signifies his assent by paying the
deposit amount, which, on acceptance of the proposal, gets converted to the first premium, the
proposal becomes a policy.

If any condition is put, it becomes a counter offer.

The policy bond becomes the evidence of the contract.

LEGAL CONSIDERATION
The promisor to pay a fixed sum at a given contingency is the insurer who must have some
return or his promise. It need not be money only, but it must be valuable.

It may be summed, right, interest, profit or benefit Premium being the valuable consideration
must be given for starting the insurance contract.

The amount of premium is not important to begin the contract. The fact is that without payment
of premium, the insurance contract cannot start.

COMPETENT TO MAKE CONTRACT

Every person is competent to contract;

1.Who is off is an age of majority according to the law,

2.Who is of sound mind, and

3.Who is not disqualified from contracting by any law to which he is subject

A minor is not competent to contract. A contract by a minor is void excepting contracts for
necessaries. A minor cannot sign a contract.

A person is said to be of sound mind for the purpose of making a contract if, at the time when he
makes it, he is capable of understanding it and of forming a rational judgment as to its effect
upon his interests.

A person who is usually of unsound mind, butoccasionally of sound mind may make a contract
when he is of sound mind. Alien energy, an un-discharged insolvent and criminals cannot agree.
A contract made by incompetent party/parties will be void.

FREE CONSENT
Parties entering into the contract should enter into it by their free consent.

The consent will be free when it is not caused by—

(1) coercion,
(2) undue influence,
(3) fraud, or
(4) misrepresentation, or
(5) mistake.
When there is no free consent except fraud, the contract becomes voidable at the option of the
party whose consent was so caused. In case of fraud, the contract would be void.

The proposal for free consent must sign a declaration to this effect, the person explaining the
subject matter of the proposal to the proposer must also accordingly make a written declaration
or the proposal.

LEGAL OBJECT
To make a valid contract, the object of the agreement should be lawful. An object that is,

(i) not forbidden by law or

(ii) is not immoral, or
(iii) opposed to public policy, or
(iv) which does not defeat the provisions of any law, is lawful.

In the proposal from the object of insurance is asked which should be legal and the object should
not be concealed. If the object of insurance, like the consideration, is found to be unlawful, the
policy is void.

2. SPECIAL CONTRACT

INSURABLE INTEREST
For an insurance contract to be valid, the insured must possess an insurable interest in the subject
matter of insurance.

The insurable interest is the pecuniary interest whereby the policy-holder is benefited by the
existence of the subject-matter and is prejudiced death or damage of the subject- matter. The
essentials of a valid insurable interest are the following:

1. There must be a subject-matter to be insured.

2. The policy-holder should have a monetary relationship with the subject-matter.
3. The relationship between the policy-holders and the subject-matter should be recognized
by law. In other words, there should not be any illegal relationship between the policy-
holder and the subject-matter to be insured.
4. The financial relationship between the policy-holder and subject-matter should be such
that the policy-holder is economically benefited by the survival or existence of the
subject-matter and or will suffer economic loss at the death or existence of the subject-
matter.

The subject-matter is life in the life insurance, property, and goods in property insurance,
liability, and adventure in general insurance.
No emotional or sentimental loss, as an expectation or anxiety, would be the ground of the
insurable interest. The event insured should be one that if it happens, the party suffers financially
and if it does not happen, the party is benefited by the existence.

But a mere hope or expectation, which may be frustrated by the happening of some extent, is not
an insurable interest.

UTMOST GOOD FAITH

The doctrine of disclosing all material facts is embodied in the important principle ‘utmost good
faith’ which applies to all forms of insurance.

Both parties to the insurance contract must be of the same mind (ad idem) at time of contract.
There should not be any misrepresentation, non-disclosure or fraud concerning the material.

In case of insurance contract, the legal maxim ‘Caveat Emptor” (let the buyer beware) docs not
prevail, where it is regard of the buyer to satisfy himself of the genuineness of the subject-matter
and the seller is under no obligation to supply information about it.

Material Facts
A material fact is one which affects the judgment or decision of both parties in entering into the
contract.

Facts which count materially are those which knowledge influences a party in deciding whether
or not to offer or to accept such risk and if the risk, is acceptable, on what terms and conditions
the risk should be accepted.

These facts have a direct bearing on the degree of risk about the subject of insurance.

In case of life insurance, the material facts or factors affecting the risk will be age, residence,
occupation, health, income, etc., and in case of property insurance, it would make he use design,
owner, and situation of the property.

Full and True Disclosure

The utmost Good Faith says that all the material facts should be disclosed in true and fill the
form. It means that the facts should be disclosed in that form in which they exist.

There should be no concealment, misrepresentation, mistake or fraud about the material facts.
There should be no false statement and no half-truth nor nay silence on the material facts.

The duty of Both the Parties

The duty to disclose the material facts lies on both the parties the insured as well as the insurer,
but in practice the assured has to be more particular, about the; observance of this principle
because it is usually in full knowledge of facts relating to the subject-matter which, despite all
effective inspections of the insurer, would not be disclosed.

Facts need not be disclosed by the insured

The following facts, however, are not required to be disclosed by the insured (0 Facts which tend
to lessen the risk.

1. Facts of public knowledge.

2. Facts which could be inferred from the information disclosed.
3. Facts waived by the insurer.
4. Facts governed by the conditions of the policy.

PRINCIPLE OF INDEMNITY
As a rule, all insurance contracts except personal insurance are contracts of indemnity.

According to this principle, the insurer undertakes to put the insured, in the event of loss, in the
same position that he occupied immediately before the happening of the event insured against, in
the certain form of insurance, the principle of indemnity is modified to apply.

Conditions for Indemnity Principle

The following conditions should be fulfilled in full application of the principle of indemnity.

1. The insured has to prove that he will suffer a loss on the insured matter at the time of
happening the event and the loss is an actual monetary loss.
2. The amount of compensation will be the amount of insurance. Indemnification cannot be
more than the amount insured.
3. If the insured gets more amount than the actual loss, the insurer has right to get the extra
amount back.
4. If the insured gets some amount from the third party after being fully indemnified by the
insurer, the insurer will have right to receive alt the amount paid by the third party.

The principle of indemnity does not apply to personal insurance because the amount of loss is
not easily calculable there.

WARRANTIES
There are certain conditions and promises in the insurance contract which are called warranties.

According to Marine Insurance Act, “A warranty is that by which the assured undertakes that
some particular thing shall or shall not be done, or that some conditions shall be fulfilled, or
whereby he affirms or negatives the existence of a particular state of facts.”

Warranties which are mentioned in the policy are called express warranties. There are certain
warranties which are not mentioned in the policy.

These warranties are called implied warranties. Warranties which are answers to the question arc
called affirmative warranties. The warranties fulfilling certain conditions or promises are called
promissory warranties.

Warranty is the very important condition in the insurance contract which is to be fulfilled by the
insured. On the breach of warranty, the insurer becomes free from his liability.

Therefore insured must have to fulfill the conditions and promises of the insurance contract
whether it is important or not in connection with the risk.

The contract can continue only when warranties are fulfilled. If warranties are riot followed, the
contract may be canceled by the other party whether risk has occurred or not or the loss has
occurred due to other reason than the waiving of warranties.

However, when the warrant is declared illegal, and there is no reverse effect on the contract, the
warranty can be waived.

PROXIMATE CAUSE
The rule; is that immediate and not the remote cause is to be regarded. The maxim is “sed causa
proximo non-remold-spectator”; see the proximate cause and not, the distant cause.

The real cause must be seen while payment of the loss. If the real cause of loss is insured, the
insurer is liable to compensate the loss; otherwise, the insurer may not be responsible for a loss.

Proximate cause is not a device to avoid the trouble of discovering the real ease or the common
sense cause.

Proximate cause means the actual efficient cause that sets in motion a train of events which
brings about result, without the intervention of any force started and worked actively from a new
and independent source.

The determination of real cause depends upon the working and practice of insurance and
circumstances to losses. A loss may not be occasioned merely by one event.
There may be concurrent causes or chain of causes. They may occur in a sequence or broken
chain. Sometimes, certain causes arc excepted by (the insurance contract and the insurer is not
liable for the accepted peril.

The efficient cause of a loss is called the proximate cause of the loss.

For the policy to cover the loss must have an insured peril as the proximate cause of the loss or
also the insured peril must occur in the chain of causation that links the proximate cause with the
loss.

The proximate cause is not necessarily, the cause that was nearest to the damage either in time or
place but is rather the cause that was responsible for the loss.

Determination of Proximate Cause

If there is a single cause of the loss, the cause will be the proximate cause, and further, if the
peril (cause of loss) was insured, the insurer will have to repay the loss.

If there are concurrent causes, the insured perils and excepted perils have to be segregated. The
concurrent causes may be first, separable and second, inseparable. Separable causes are those
which can be separated from each other. The loss occurred due to a particular cause may be
distinguishing known. In such a case if any cause, is excepted peril, the insurer will have to pay
up to the extent of loss which occurred due to insured perils. If the circumstances are such that
the perils are inseparable, then the insurers are not liable at all when there exists any excepted
peril.

If the causes occurred in the form of the chain, they have to be observed seriously.

If there is an unbroken chain, the excepted and insured peril has to be separated. If an excepted
peril precedes the operation of the insured peril so that the loss caused by the latter is the direct
and natural consequences of the excepted peril, there is no liability. If the insured peril is
followed by an excepted peril, there is a valid liability.

If there is a broken chain of events with no excepted peril involved, it is possible to separate the
losses. The insurer is liable only for that loss which caused by an insured peril; where there is an
excepted peril, the subsequent loss caused by an insured peril will be a new and indirect cause
because of the interruption in the chain of events. The insurer will be liable for the loss caused by
insured peril which can be easily segregated. Similarly, if the loss occurs by an insured peril and
there is, subsequently loss by an excepted peril, the insurer will be liable for loss occurred due to
the insured peril.

In brief, if the happening of an excepted peril is followed by the occurrence of an insured peril,
as a new and independent cause there is a valid claim. If an insured peril is followed by the
happening of an excepted peril, as a new and independent cause, there is a claim excluding loss
or damage; caused by the excepted peril.

ASSIGNMENT OR TRANSFER OF INTEREST

It is necessary to distinguish between the assignment of (a) the subject-matter of insurance, (b)
the policy, and (c) the policy money when payable.

Marine and life policies can be freely assigned but assignment under fire and accident policies,
are not valid without the prior consent of the insurers—except changes of interest by will or
operation of law.

Moreover, assignments under fire and accident policies must be made before tine insured parts
with his, interest. Once he has lost the interest, the policy is void and cannot be assigned.

The life policies can be assigned whether the assignee has an insurable interest or not.

Life policies are frequently charged, assigned or otherwise dealt with, for they are valuable
securities. A marine policy is freely assignable unless it contains terms expressly prohibiting
assignment.

It assigned either before or after a loss. A marine policy may be assigned by endorsement
thereon or in another customary manner.

In practice, a marine cargo policy is frequently endorsed in blank and becomes in effect a quasi-
negotiable instrument.

Thus, it will be appreciated, adds considerably to the convenience of mercantile transactions as

the policy can be negotiated through a bank along with other documents of title.

Assignment in fire insurance cannot be recognized without the prior consent of the insurer,
change of interest in fire policies (unless by will or operation of law) are not valid unless and
until the consent of the insurer has been given.

The fire policies are not like assignment nor intended to be assigned from one person to another
without the consent of the insurer. Assignment in fire insurance constitutes a new contract.

RETURN OF PREMIUM
Ordinarily, the premium once paid cannot be refunded. However, in the following cases, the
refund is allowed.
By Agreement in the Policy

The assured may pay a full premium while affecting the insurance but it may be agreed to return
it wholly or partly in the happening of certain events. For example, special packing may reduce
the risk.

For Reasons of Equity

Non-attachment of risk: Where the subject-matter insured or part thereof, has never ten
imperiled, for example, term insurance with returnable premium where the premium is returned
to the policy-holder if death does not occur during the period of insurance.

The undeclared balance of on open policy: The policy may be canceled and premium may be
returned for short interest allowed provided there was no further interest in the policy.

Payment of Premium is apportionable. The apportioned part of -the consideration is refundable

when a part of policy interest is not involved. For example, insurance may be taken for a voyage
in stages, each stage being rated separately. In such a case if some stages are not completed the
premium relating to the incomplete stage is returnable.

Where the assured has no insurable interest throughout the currency of the risk, the premium is
returnable provided the policy was not attached by way of wagering.

Unreasonable delay in commencing the voyage may also entitle the insurer to cancel the
insurance by returning the premium.

Where the assured has over-insured under an unvalued policy a proportionate part of the
premium is returnable.

DIFFERENCE BETWEEN DIFFERENT TYPES OF INSURANCE CONTRACT

1. FORMS

The insurance contract may be divided inti two forms- life insurance contract and contract of
indemnity.

2. OCCURING OF EVENT

The event, the death, in life insurance is certain, but the only uncertainty is the time when the
death will occur.
In indemnity insurance {in fire and marine insurances) the event may not take place at all or may
take place in part.

Therefore, in life insurance, ordinarily every piece will become a claim sooner or later but it is
not certain in indemnity insurance.

3. SUBJECT-MATTER

The subject-matter in life insurance is life.

Chances of death would increase along with the advance in age whatever precautionary measures
may be taken for improvement of health whereas the property in other insurance can be repaired
and replaced and may remain usually in good condition.

4. VARIANCE IN PREMIUM

In life insurance premium is not much variable whereas in other insurance premium is variable in
numerous forms.

5.CLASSIFICATION OF RISK

The classification of risks is generally simpler in life insurance than in other types of the
insurance contract.

In life contract, it would be standard, sub-standard and un-insurable but in other insurance, it
may be several.

6. PERIOD OF INSURANCE

Generally, the life insurance is taken for a longer period. Whereas the other forms of insurance
are taken for not more than one two years.

7.PROTECTION AND INVESTMENT

The life insurance contract provides protection against loss of early death and investment to meet
the old age requirement.
Other forms of insurance do not provide investment because the premium paid is not returnable
if the contingencies (hazards) do not occur within the period.

Other forms of insurance provide only protection against loss of the damage of the property
against the insured perils.

8. PREMIUM PAYMENT

The mode of premium payment in life insurance is generally level premium whereas, in other
forms of insurances, it is a single premium.

9.INSURABLE INTEREST

Insurable interest must be at the time of proposal in insurance but in property insurance, it must
be present at the time of loss.
REFERENCES:

RESEARCH PAPERS

Noussia, K. (2005). The History , Evolution and Legislative Framework of Marine Insurance in
England. Revue Juridique Neptunus, 11(1), 1–5. Retrieved from http://www.droit.univ-
nantes.fr/labos/cdmo/centre-droit-maritime-
oceanique/cdmo/neptunus/nept/nep31/nep31_1.pdf

Salman, S. A., Majdi, H., Rashid, A., Nu, S., & Htay, N. (2016). The Progressive Development
of India ’ s Insurance Industry from Ancient to Present Times. 6(4), 91–98.
https://doi.org/10.5923/j.hrmr.20160604.02

A Study on Structure of Insurance Sector In India by R.Vijaya Naik International Journal of

Business and Management Invention (IJBMI)

Gopinathan , Nathan(2017) A critical study of life insurance with their legal aspects
https://shodhganga.inflibnet.ac.in/bitstream/10603/200432/7/07_%20chapter-1.pdf

BOOKS

 Insurance Management: Principles And Practices By Karam Pal, B.S Bodla, M. C. Garg
 M.n.mishra, Insurance Principles and Practice

SITES
 https://economictimes.indiatimes.com/tdmc/your-money/what-is-an-endowment-policy-and-
when-should-you-go-for-it/tomorrowmakersshow/48465113.cms
 https://niilmuniversity.in/coursepack/Insurance/Principles_&_Practices_of_Fire_Insurance.p
df