PRINCIPLES OF

INSURANCE

BASICS OF INSURANCE
WHAT IS INSURANCE:
FUNCTIONAL DEFINITION : Method whereby
the uncertain risks of individuals are
combined in a group through small
individual combinations out of which
those who suffer losses are reimbursed.

BASICS OF INSURANCE
WHAT IS INSURANCE:
LEGAL DEFINITION : Contract between
Insurer and insured whereby, in
consideration of payment of premium by
the insured, the insurer agrees to make
good any financial loss the insured may
suffer due to the operation of a peril
insured.

BASICS OF INSURANCE
INSURANCE

LIFE INSURANCE
INSURANCE

GENERAL

BASICS OF INSURANCE
LIFE INSURANCE
INSURANCE

GENERAL

Benefit policy
policy

Indemnity

Renewal cannot be denied

Can be denied

Not duty to inform any

informed
change

Changes to be

Constant Premium
every yr.

Premium varies

BASICS OF INSURANCE
RISK:
Uncertainty about a Loss.
PERIL :
Cause of Loss
HAZARD :
Conditions which may create or increase
the chance of loss arising from any peril.

INSURABLE RISK

Risk must be fortuitous in nature

Risk must be Pure risk
Loss caused must be capable of being
measured.
Risk must not be of illegal nature
Insurance must not be against public
policy.

FUNCTIONS OF INSURANCE

Insurance provides financial security to

an individual
Insurance provides assistance to
business enterprise
Insurance provides financial stability to
commerce, industry, and the community.
Insurance serves as a basis of credit
Insurance plays a vital part in the
reduction of losses
Insurance provides fund for investments
Insurance earns foreign exchange

Insurance Contracts
Involves two parties Insured & Insurer
Governed by Indian Contract Act, 1872.
Elements for legal validity of contract:
Offer and Acceptance
Consideration
Agreement between parties consensus
ad idem
Capacity of the parties
Legality of the contract

Principles of Insurance

Insurable Interest
Utmost Good faith
Indemnity
Subrogation and Contribution
Proximate Cause

Insurable Interest

There must be property, right, interest,

life or potential liability capable of being
insured.
Such property should be the subject
matter of insurance.
The insured must bear a legal
relationship to the subject matter
Insurable interest must exist at the time
of loss.

Insurable Interest

Interest
Interest
Interest
Interest
Interest
Interest

arising from ownership

arising from law
arising from contract
arising from legal liability
of a person in life
arising out of insurance

Utmost Good Faith

Duty of Utmost Good faith implies that a
proposer must disclose to the insurer all
material facts in regards to the proposed
insurance. The duty applies not only to the
material facts that he knows but also
extends to the facts that he ought to know.
Material Fact : Fact which would affect the
decision of a prudent underwriter w.r.t
acceptance of risk.

Utmost Good Faith

Excepted Material Fact :

Facts

which diminish the risk

Facts which are presumed to be known by
underwriter
Facts which could be ascertained from
information provided.
Matters of law.
Facts in regard to which insurer is indifferent
Facts possible of discovery during
inspection.

Utmost Good Faith

A breach of utmost good faith is by :
Non disclosure
Mis-representation.

Principle of Indemnity

Compensation for loss or injury sustained

Security or protection against loss or
damage.

Object:
Loss or damage must be made good in such
a manner that financially the insured
should be neither better off nor worse off
as a result of loss.
To place the insured in the same financial
position as he was before a loss.
Prevent insured from making a profit out of

Principle of Indemnity
Methods :
Cash Payment
Repairs
Replacement
Reinstatement

Subrogation & Contribution

Subrogation:
Transfer of rights and remedies of insured
to the insurer who has indemnified the
insured in respect of the loss.
This arises from the principle of indemnity.
Collecting claim as well as money/ goods
from the person responsible for loss will be
against indemnity principle.

Subrogation & Contribution

Contribution :
The right of an insurer who has paid a loss
under a policy to recover a proportionate
amount from other insurers who are liable
for loss.
Arises from the principle of indemnity as
the insured is prevented from claiming
from all insurers separately.
The foll. are reqd.:
Subject matter must be the same.
Peril which causes the loss should be
common to all policies.
Policies must be in force at the time of loss.

Proximate Cause

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 source.
Cause of causes not to be looked into but
for the immediate cause.
Immediate does not mean the cause
nearest to the loss in point of time. It
should be understood in terms of
effectiveness and efficiency.

Pure & Speculative

Pure Risk :
Pure Risk always produce losses. In Pure
risks, there is no possibility of gain.
Speculative Risk:
Speculative risks can result into a gain or
loss.

Offer & Acceptance

Offer from proposer made orally, in

paper, over telephone or by completing a
Proposal form.
Acceptance by Insurer usually by
issuance of cover note

Consideration

Act or Promise offered by one party and

accepted by the other as the price of the
promise. In Insurance, consideration from
the insured is known as Premium and
that from the Insurer is the Promise to
Indemnify.

Capacity of the parties to

contract
Insured:
Should have attained age of majority
Is sound of mind
Insurer:
Must have legal capacity to contract.
Authorisation by the Government.

Legality of contract
Subject matter should be legal.
Object is not lawful if:
it is forbidden by law
Is of such a nature that if permitted
would defeat the provisions of any law.
Involves or implies injury to the person
and property of another.
The court regards it as immoral or
opposed to public policy.