PRINCIPLES OF INSURANCE
THE INDIAN CONTRACTS ACT,1872
ALL CONTRACTS IN INDIA,INCLUDING INSURANCE CONTRACTS ARE GOVERNED BY THIS ACT
DEFINITION OF A CONTRACT
An agreement between one or more parties to do or to abstain from doing an act,and which is intended to create a legally binding relationship.
ESSENTIALS OF A VALID CONTRACT
• • • • • • • • Intention to create legal relations Offer and acceptance Consideration Capacity to contract Certainty of terms Consensus ad adem(agreement) Legality of purpose Possibility of performance
PRINCIPLES OF INSURANCE
• Utmost good faith • Insurable interest • Indemnity -Subrogation -Contribution • Proximate cause
UTMOST GOOD FAITH
• This is the doctrine of ‘Uberrimae Fides’ wherein in an insurance contract, the concerned contracting parties must rely on each other’s honesty • Most commercial contracts are subject to the doctrine of ‘Caveat Emptor’ or ‘let the buyer beware’
DEFINITION
Utmost good faith-A positive duty voluntarily to disclose, accurately and fully, all facts material to the risk being proposed,whether requested or not.
MATERIAL FACT
• Every relevant fact or information which has a bearing on the decision-making of the contract
• Binding on both parties
• Duty of full disclosure rests on insurer and insured
FACTS THAT MUST BE DISCLOSED
• • • • • Full description of subject-matter Previous losses/claims Existence of other policies Any previous declinatures /special terms Facts regarding risk indicating that it represents a greater than normal exposure • External factors
FACTS THAT NEED NOT BE DISCLOSED
• Facts of law • Facts of common knowledge to all • Facts which can be reasonably discovered by the insurer • Facts that a survey should have revealed • Facts that reduce the risk • Facts that have been covered by policy condition(s)
BREACH OF PRINCIPLE
• NON-DISCLOSURE of material fact;may be innocent or fraudulent-if fraudulent called CONCEALMENT • MISREPRESENTATION-An untrue statement of fact • Both non-disclosure and misrepresentation of material facts can render the insurance contract VOID
INSURABLE INTEREST
DEFINITION:The legal right to insure arising out of a financial relationship recognized by law,between the insured and the subject-matter of insurance
IMPORTANCE OF INSURABLE INTEREST
• Adds legal validity-otherwise contract is a wager/bet • Prevents fraudulent practices-otherwise person with no interest can buy insurance and deliberately inflict losses without losing financially himself • Provides the right to take insurance and claim ‘indemnity’
CREATION OF INSURABLE INTEREST
• By common law-eg.ownership,duty of care resulting in liability • By contract-eg.specific clause in lease • By statute-could create/restrict insurable interest
APPLICATION OF INSURABLE INTEREST
• LIFEself,spouse,partners,creditors,guarantor, employer,key employee • PROPERTYownership,mortgagee,trustee,bailee,lessee • LIABILITYany potential liability damage and costs
INDEMNITY
• Financial compensation sufficient to place the insured in the same financial position after a loss as he enjoyed immediately before it occurred • Insured should not derive any unwarranted benefit from loss • Principle is generally applicable to property and liability insurance contracts • Aims to control moral hazard like deliberate/false/ exaggerated claims
METHODS OF INDEMNIFICATION
• Cash/cheque/DD payment of loss or damage • Repair • Reinstatement
• Replacement
LIMITING FACTORS
• Sum insured or maximum limit of liability • Specific limits within policy • Condition of ‘average’-where the insured is his own insurer to the extent of ‘underinsurance’ • Excess/deductible-compulsory or as stated in policy by insurer/voluntary as selected by insured
COROLLARIES OF INDEMNITY
SUBROGATION
CONTRIBUTION
SUBROGATION
DEFINITION-The right of one person,having indemnified another under a legal obligation to do so,to stand in the place of that other and avail himself of all the rights and remedies of that other, whether already enforced or not
SUBROGATION…
• Avoids situation where an insured might profit from insurance • Right of subrogation arises for insurer only after claim settlement • Punish the ‘negligent’ • No subrogation under PA and Life insurance contracts,as they are not contracts of indemnity
CONTRIBUTION
• DEFINITION-The right of an insurer to call upon others similarly, but not necessarily equally liable to the same insured to share the cost of an indemnity payment • CONDITIONS-2 or more policies,common interest,cover common perils,common subject matter,liability for loss must exist
PROXIMATE CAUSE
• Doctrine based on cause and effect • PROXIMATE CAUSE Direct Most dominant Most effective Closely connected to loss in efficiency and effectiveness Common sense
TYPES OF CAUSES
• SINGLE • CONCURRENT • DIRECT CHAIN OF EVENTSUNBROKEN SEQUENCE(SUCCESSIVE CAUSES) • INTERRUPTED CHAIN OF EVENTSBROKEN SEQUENCE
NATURE OF PERILS
1. Insured perils-named in policy
2. Excluded/excepted perils- stated in policy
3.Uninsured or other perils-not stated in policy Losses proximately caused by 1. only covered
IMPORTANCE OF DOCTRINE
• Defines scope of insurance contract
• Protects the relative rights of the parties to the contract
• Allows for application of common sense to interpretation of insurance contracts