Law of Insurance

Insurance is a means of transferring insurable risk of a potential loss to insurance company

against a premium. Hence insurance can be defined as pooling of losses by transferable of risk to

insurer, who promises to indemnify insured for losses, which are unforeseen and accidental in

nature. Now a day’s uncertainties and uncalled problem are on rise in this fast moving world.

They put us in a doom and make us wish that there was someone who could protect us during

these un- called problems. Insurance agency acts as a Genie to their uncalled problem and

indemnifies the losses incurred to the insurer. Insurance is a type of indemnity contract whereby

the offer (Insurer) protects the offeree (Insured) against the risk of contingent loss; the offeree

pays a premium against this loss.

A contract of insurance is a contract by which one party undertakes to make goods the loss of

another, in consideration of a sum of money, on the happening of a specified event, e.g. fire

accident or death. Law recognizes insurance as a system of sharing risk too great to be borne by

one individual.

Definition

Insurance is a contract between two parties whereby one party agrees to undertake the risk of

another in exchange for consideration known as premium and promises to pay a fixed sum of

money to the other party on happening of an uncertain even (death) or after the expiry of a

certain period in case of life insurance or ton indemnity the other party on happening of an

uncertain event in case of General insurance.

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 Related Laws: -

1. The Insurance Act 1938

2. Life Insurance Act 1956

3. General Insurance Business (Nationalization ) Act 1972

4. Insurance Regulatory and Development Authority (IRDA) Act 1999: - till 1999, there

were not any private insurance sector. The Govt. of India then introduced the Insurance

Regulatory and Development Authority act in 1999, thereby de-regulating the insurance

sector and allowing private companies into the insurance. Further, foreign investment

was also allowed and capped at 26% holding in the Indian insurance companies. In recent

years many private players entered in the insurance sector of India.

Types of Insurance: -

1. Life Insurance: - Life insurance may be defined as a contract in which the Insurer in

consideration of a certain premium, either in a lump sum or by other periodical payments, agrees

to pay the 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 on the expiry of

certain period. Thus the insurance company undertakes to insure in exchange for a sum of money

called premium.

2. General Insurance: - Any other insurance except life insurance comes under this head

like:

(A) Fire Insurance: -

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

good any loss or damage caused by fire during a specified period up to the amount specified in

the policy. Normally it is for a period of one year after, and which is renewed from time to time.

A claim for loss by Fire must be satisfying the two following conditions: -

1. There must be actual loss

2. Fire must be accidental and non intentional

(B) Marine Insurance: -

A Marine insurance contract is an agreement whereby the insurer undertakes to indemnify the

insured in the manner and to the extent thereby agreed against marine losses. Marine insurance

protection against loss by marine perils or perils of the sex. There are three types of marine

insurance: -

1. Ship of hull insurance

2. Cargo insurance

3. Freight insurance

Characteristics of Insurance: -

1. Transfer of Risk: - The risk is transferred from the Insured Party to the Insurer Party.

2. Indemnification: - The Insurer Party is restored to his or her approximate financial

position prior to the occurrence of the loss.

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 3. Payment of Unforeseen and unexpected and accidental loss. Insurance does not cover

intentional loss.

4. Pooling of losses: - this means sharing of losses incurred by few over the entire group, so

that prices average loss is substituted for actual loss.

Principles of Insurance: - Following points can be list down as Principles of Insurance

business: -

1. Principle of Indemnity

2. Principle of Utmost god faith

3. Principle of Causa Proxima

4. Principle of Mitigation of loss

5. Principle of Subrogation

6. Principle of Contribution

Principle of Indemnity: - This means in case of loss against which the policy has been issued,

shall be paid the actual amount of loss not exceeding the amount of the policy, i.e. he shall be

fully indemnified. The object of every contract of insurance is to place the insured in the same

financial position, as nearly as possible, as nearly as possible, after the loss, as if loss had not

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taken place at all. It would be against public policy to allow an insured to make a profit out of his

loss or damage.

Utmost Good Faith: - Since insurance shifts risk from one party to another, it is essential that

there must be utmost good faith and mutual confidence between the insured and the insurer. In a

contract of insurance the insured known more about the subject matter of the contract than the

insurer. Consequently, he is duty bound to disclose accurately all material facts and nothing

should be withheld or concealed. Any fact is material, which goes to the root of the contract of

insurance and has a bearing on the risk involved.

Causa Proxima: - the rule of causa proxima means that the cause of the loss must be proximate

or immediate and not remote. If the proximate cause of the loss is a peril insured against, the

insured can recover. When a loss has been brought about by two or more causes, the question

arises as to which is the causa proxima, although the result could not have happened without the

remote cause, but if the loss is brought about by any cause attributable to the misconduct of the

insured, the insurer is not liable.

Mitigation of Loss: - In the event of some mishap to the insured property, the insured must take

all necessary steps to mitigate or minimize the loss; just as any prudent person would do in those

circumstances. If he does not do some the insurer can avoid the payment of loss attributable to

his negligence. But is must be remembered that through the insured is bound to do his best for

his insurer; he is not bound to do so at the risk of his life. So in nutshell the insured should not

become negligent or inactive in the event of the occurrence merely because the property which is

being damaged is insured. Example: - Mr. A has got his Activa insured. Alter it caught fire fie

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some uncontrollable cause. But here if Nr, A does not make any effort to save Activa or to

minimize its loss then he cannot claim the insurance money later on.

Subrogation: - The doctrine of subrogation is a corollary to the principle of indemnity and

applies only to fire and marine insurance. According to it, when an insured has received full

indemnity in respect of his loss, all rights and remedies which he has against third person will

pass on to the insurer and will be exercised for his benefit until he (the insurer) recoups the

amount he has paid under the policy. It must be clarified here that the insurer’s right of

subrogation arises only when he as paid for loss for which he is liable under the policy and this

right extend only to the right and remedies available to the insured in respect of the thin to which

the contract of insurance relates.

Contribution: - where are two or more insurance on one risk, the principle of contribution

comes into play. The aim of contribution is to distribute the actual amount of loss among the

different insurers who are liable for the same risk under different policies in respect of the same

subject matter.

Functions of Insurance: - Following are function of insurance: -

1. Primary Function: -

(A) Provide protection against future risk

(B) Collective bearing of risk

(C) Assessment of risk

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 (D) Provide certainty

2. Secondary Functions: -

(A) Prevention of losses by observing safety instructions

(B) Small capital to cover larger risks

(C) Contributes towards the development of larger industries

3. Other Functions: -

(A) Means of Saving and Investment

(B) Source of Foreign exchange by the way of Marine Insurance

(C) Provide Risk free trade

Importance of Insurance: -

Relevance and usefulness for Individual: -

1. Provide safety and security

2. Acts as motivator for saving against uncertain losses

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3. Eliminates dependency

4. Helpful in raising loans

5. Helpful for Welfare of employees

6. Helpful in economic growth

7. Protection of wealth

8. Uncertainty of business losses is calculated

Short notes: -

1. Reinsurance: - A reinsurance contract is one by which an insurer contract with a third

person to insurer against loss or liability by reason of an original insurance contract made

by the insurer. Here the motive is spreading of risk. Sometimes an insurance company

may get a profitable opportunity to insure a huge property. In the process it can be a

major risk, which it may not be in a position to bear. In that case it can resort to

reinsurance with other companies. Thus a part of the risk gets transferred to other

companies.

2. Double Insurance: - A double insurance exists when the same person is insured by

several insurers’ separately in respect to the same subject matter or it may happen that the

insurer has purchased more than one policy from the same insurer.

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Difference between Insurance and Assurance: -

1. Term of Insurance is used for General Insurance business or for Contract of Indemnity.

But the term of Assurance is used for Life contract business.

2. Insurance means indemnity, on the other side Assurance means loss cannot be estimated

but the payment is certain.

3. Insurance is kind of a practice, but Assurance is a Principle.

4. In case of Insurance claim is uncertain, but in the case of Assurance always claim is

certain.