3.

Scope of this chapter : i. ii. iii. iv. v.

Principles of Life Assurance

Understanding fundamentals of commercial contract The commercial contract norms being applied to insurance contract Principle of Utmost Good Faith Insurable Interest Situations creating need for insurable interest.

Life Insurance Contract To describe life insurance, this is the branch of insurance, in which, the designated beneficiaries of an insured the compensation claimed after his death. Otherwise, the insured person himself receives the money he paid a the years plus interest. Interest gets compounded over the years, through investments made by the insurance c of premium plus interest becomes a substantial amount when compensation is paid.

FUNDAMENTALS OF COMMERCIAL CONTRACTS The Indian Contract Act, 1872 governs all Indian commercial contracts. Section 2 (h): A contract is defined enforceable by law. Section 2 (e) defines agreement as every promise and every set of promises forming the co each other. Thus a contract may be defined as an agreement between two or more parties to do or to abstain fro which is intended to create a legally binding relationship. A commercial contract to be enforceable must have following essentials: i) Intention to create legal relations - All the parties entering into the contract should be legal in nature ii) Offer and acceptance - One party has to offer and other has to give its acceptance. iii) Consensus-ad-idem - This is a Latin phrase which means agreement on the same thing. iv) Lawful consideration - There has to be a consideration involved in the contract. v) Capacity to contract - Parties involved should have the capacity to contract. vi) Certainty of terms - Terms of contract should be clear without a scope of ambiguity. vii) Legality of object - Purpose of contract should be legal in nature. viii) Capable of performance - Contract should be such which can be carried out.

INSURANCE CONTRACT Vis-a-vis COMMERCIAL CONTRACT All the above essential ingredients of a commercial contract exist in the insurance contract also. Since the insur two parties, the proposer and the insurer(i) the intention of the insurer is to assure families, hence the intention Proposer offers and insurer accepts, (iii) both agree to the terms of policy, (iv) Premium needs to be paid in tim contract is valid, this is the consideration, (v) Insured is a major with sound mind and Agent is licensed, workin Insurance company, hence both have the capacity to contract (vi) All terms, like sum assured, premium payable clear and certain (vii) Object of the contract is legal in nature Apart from the usual essentials of a valid contract, insurance contracts are subject to additional principles viz. p good faith and principle of insurable interest. These apply to both life and non-life classes of Insurance. In the c

business two additional principles viz. indemnity and proximate cause are also applicable. PRINCIPLE OF UTMOST GOOD FAITH (Uberrima Fide) Both parties, the insurer (insurance company) and the proposer (person to be insured) must disclose all mater other. Whatever the proposer discloses regarding his personal history, family history, habits, medical history, e be true by the insurer. It is based on these facts that the insurer knows exactly how much risk is taken so that th decided. For example, the risks of a smoker and a non-smoker are different, hence, premium also must differ. high blood pressure, diabetes, and other known genetic disorders must be declared, so that the proposer can be group which is sharing the same type of risk. Insurance company, which acts as a trustee on behalf of all the insured members, has to ensure that each memb sharing group are benefited equally.

Non-disclosure of such facts would put the insurer taking high risk at low premium. The community of polic affected, as sub-standard lives will enter in the same scheme of standard lives. GOOD FAITH - from the Insurer Insurance company also is supposed to disclose facts.

It is easy to identify the breach on proposer's part, but it is difficult to identify breach of the insurer. Few breac light till now.

i) Not telling the proposer the fact that if water sprinkler system is installed in his premises, then he is entitled discount on his fire insurance premium. ii) Non-smoker's discount in the life insurance premium payable by a non-smoker. iii) Accepting an insurance which the insurer knows can not be legally enforced, for which it is not registered iv) Making false statements during the negotiations for a contract.

MATERIAL FACTS Material fact is that fact, which would influence the judgement of a prudent underwriter in fixing the premium whether he should take the risk. Therefore, facts regarding age, height, weight, build, previous medical histo smoking, drinking, operations, occupation, previous losses or claims, must be disclosed. There are certain circumstances, which need not be disclosed. For example: i. ii. iii. iv. v. vi.

Facts of law, which is understood that every one knows. Fact of common knowledge. Facts which lessen the risk Facts which a survey can easily discover Facts covered by policy conditions. Facts which could be reasonably discovered, by referring to previous policies of the proposer, available

When to disclose material facts When an insurance policy starts, i.e., when the risk commences, and risk commences when the first premium is all the material facts, which are material to the insurer, must be disclosed. If after sometime, a material fact crop somebody who took a life insurance policy at the age of 25 was not having hypertension, but later in life when of 45, he becomes hypertensive, this fact may not be told to the insurance company. But, if there has been such the policy has lapsed and it is being revived, or a surrendered policy is reinstated, then the insured must declare facts, as the contract is understood to be new. If there is any such requirement in the policy itself that continuou to be made, then such requirement needs to be fulfilled by the insured. Breach of Utmost good faith arises due t misrepresentation or non-disclosure.

A clause is always inserted in all contracts, and life insurance contracts are no exception, which contains a decl proposer that all the statements mentioned in the proposal form are true in every respect and if any statement is the insurer would be entitled to treat the contract as null and void and forfeit all the moneys paid therefore. This declaration actually becomes a guarantee from the proposer. The insurer's right to cancel the contract is lim provisions of Section 45 of Indian Insurance Act, 1938. This section stipulates that a policy cannot be called in years, on the grounds of inaccuracy or false statement, unless it is proved to be material and fraudulent. INSURABLE INTEREST The Insurance Act, 1938, does not define insurable interest; but, the requirement of a life insurance contract is t who gets the benefits of an insurance contract, must have an insurable interest in the life of the insured. Insurab described as the right to insure, having a financial relationship recognized under law, between the insured and of insurance. Insurable interest is said to exist when the person insuring stands to lose if the event insured against occurs. The have consistently held that an insurance on the life of a person, in which the person effecting the insurance, has void as a wagering contract under Section 30 of the Indian Contract Act. Insurable Interest is thus a legal pre-re insurance. For a risk to be insurable, following pre-requisites are required. i. ii. iii. iv. v. Financial measurement. Statistical estimation. Risk Pooling Public Policy. Reasonable Premium

FINANCIAL MEASUREMENT Whatever is insured, whether a life or a property, i.e., the risk attached to it, has a monetary value. Every life value. This means that the proposer's interest in getting life or property insured is monetary and the subject financially measurable. STATISTICAL ESTIMATION For the insurer to work out the cost of premium to be charged, sufficient statistical information about the risk m POOLING OF RISKS Insurance business is fundamentally pooling of risks, where law of large numbers applies. Sufficient numbe similar risk must exist to allow pooling of risk, so that those struck with adversity can be helped by the rest o group members, where, each insured makes a contribution i.e., the premium. PUBLIC POLICY The Indian Contract Act mentions some of the agreements which are opposed to public policy, li i. ii. iii. iv. Agreements in restraint of marriage Agreements in restraint of parental rights Agreements in restraint of trade. Agreements to broker marriage

REASONABLE PREMIUM The premium should be reasonable, having a small margin of profit for the insurer after meeting the expenses a be sufficient to sustain the contingencies which have to be met under the policy. (page 1 of Chapter 3)

3.

Principles of Life Assurance

CONTINGENT CONTRACT VS. WAGER Insurance is a contingent contract. Indian Contract Act, defines contingent contract as a contract to do or not to do something, if some event collateral to such contract does or does not happen. Wagering contract, is a promise to pay money or transfer property upon the determination or ascertainment of an uncertain event. In wagering agreement each party stands to lose or win on the conclusion of the event. There is no mutual gain or loss as in a valid contract. A wagering contract is rarely seen being done as it is either void or illegal. INSURABLE INTEREST IN LIFE INSURANCE BUSINESS Situations in which insurable interest may exist are as follows: OWN LIFE : Every person has insurable interest in his own life. Restriction is how he is going to finance the premium, whether from his own earnings or financed by somebody else . While finalizing a proposal, insurer looks into the proposer's capacity to pay and need for insurance. If the sum assured is refused by the insurer, then it is due to such reasons as his premium being disproportionate to his income, or, moral hazard. If someone else is financing the premium, then there is no insurable interest. LIFE OF SPOUSE: Husband and wife have unlimited insurable interest in each other's lives which arises automatically. LIFE OF EMPLOYEES : Employers have insurable interest in the life of employees. Group Insurance where both employee and employer contribute premium is also based on the same principle. LIFE OF CHILDREN: Parents have insurable interest in the life of a minor child. The legal position about children's assurances is not quite clear. It is assumed that parents have insurable interest in the life of a child till he is a minor. Hence, mostly we see that insurers incorporate a vesting clause, whereby the policy vests in the child when he becomes a major. Other situations where insurable interest is created, which are not life insurance business related, may be : COMMON LAW : Ownership of any property, vehicle, etc. can be insured. Here, due to the ownership element, insurable interest is automatically existing. LEGAL CLAUSE IN ANY CONTRACT : A person may be made to be liable for something through legal provisions in a contract, for which he would not have otherwise had any interest. For example, a lease agreement might make the tenant responsible for maintenance of the

property, which he would not have done if not legally bound. STATUTE : Sometimes an Act of the Legislature will create an insurable interest. Statute may be such that insurable interest will be created where it was totally non-existent, or to a limited extent. ASSIGNMENT AND INSURABLE INTEREST (SEC 38 OF INSURANCE ACT OF 1938 ) The assured, under a life policy, does not himself receive the benefit of the policy until it matures. This is termed a reversionary interest. Hence, the assured can assign the policy to anyone. The assignee may or may not have insurable interest in the life assured. The assignee automatically acquires all the right of the original assured. Reassignment is required if the original assured wants to get back his right. Sometimes, the assignment is conditional. A life policy is assigned to the spouse if the assured dies; otherwise, the policyholder remains the assignee till the time he is live. NOMINATION (SEC 39 OF INSURANCE ACT OF 1938 ) It is advisable and most insurers make it mandatory for the policyholder to appoint a nominee to receive the policy proceeds becoming payable if assured dies before policy matures. The nominee has limited rights. Policyholder is free to revise nominee and does not need to consult anybody. The nominee has right to receive the claim amount from the insurer in the sense that he can give a discharge to the insurer. In case a policyholder does not mention a nominee, then all his legal heirs become nominees and to claim the money, they have to submit succession papers etc. Insurance company has no obligation to the legal heirs otherwise, if nominee is mentioned and he claims and receives the payment. (End of Chapter 3) Previous Next Revision Test Revision Test Question 1. Which of the following is not a material fact. Answer : Smokes about half a pack of cigarettes per day. Has a hobby of bungee jumping Likes to see comedy movies Father has diabetes, well within control.

Question 2. All Indian commercial contracts are governed by :

Answer : Companies Act, 1956 Indian Contract Act, 1872 Insurance Act, 1938 All of the above

Question 3. Definition of contract is: Answer : Understanding between two parties An agreement enforceable by law. A Government order None of the above

Question 4. Consensus-ad-idem means: Answer : agreement on the same thing consentiously thinking continuously improving insurance business None of the above

Question 5. By 'Uberrima Fide', we understand : Answer : Principal of good understanding Principal of establishing good relations Principal of utmost good faith None of the above.

Question 6. Utmost good faith exists between : Answer : Agent and insured Insurer and insured Insurer and Agent Insured and nominee

Question 7. Breach of utmost good faith by insured is when : Answer : Insured is not available at the appointed time. Insured talks to one agent and finalizes deal with another. Insured fills up proposal form but does not pay premium. Insured does not declare all facts to the insurer

Question 8. Utmost good faith is expected from : Answer : Only the insured Both insurer and insured Insurance company and its agents. Only the insurer

Question 9. Material fact, as understood in insurance sector refers to : Answer : Facts which influence the judgement of a underwriter in fixing the premium Facts which help in determining whether the risk should be taken. Facts which help in putting the proposer in the proper risk group. All of the above.

Question 10. Which of the following is a material fact Answer : Born on 12th August, 1965. Working as a mining engineer Had a gall bladder operation two years back. All of the above

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