goa 03

7/29/2019 Goa 03

http://slidepdf.com/reader/full/goa-03 1/43

Principles Of Insurance

7/29/2019 Goa 03


Indian Contract Act 1872

An Agreement: Every promise ( and set of

promises) made by one party to another

forming consideration for each other is anAgreement.

7/29/2019 Goa 03


Contract

An agreement made with an intention to

create a legally binding relationship between

two or more parties to do an act or toabstain from doing an act is a Contract.

7/29/2019 Goa 03


Contract – Essentials

- Offer and Acceptance.

- Consideration.

- Capacity to contract.- Consensus – “ad-idem”

- Legality of the object.

- Capable of performance.

- Create a legal relationship.

7/29/2019 Goa 03


Offer & Acceptance

- In Insurance contracts, generally the offer

is made by the Proposer/Life to be insured.

- The Insurer is the Acceptor.

7/29/2019 Goa 03


Legal Consideration

Exchange of values between the

contracting parties.

Consideration for the insurer is payment of

premium by the policyholder.

Consideration for the insured is the

promise of the insurer to make the

payment on the happening of the insured

event.

7/29/2019 Goa 03


Capacity to contract

Who are not competent to contract :

- Minors.

- People under the influence of intoxicants.

- Persons of unsound mind.

- Un-discharged insolvents.

7/29/2019 Goa 03


Factors that can vitiate a contract

- Consent obtained by

coercion/undue influence/threatening

- Fraud

- Mis-representation

- Illegality

- Against public policy (e.g Wagering

contract)

7/29/2019 Goa 03


Principle of Utmost Good-Faith

- In commercial contracts the parties to thecontract are governed by the Principle of Caveat

Emptor ( Let the buyer beware).

- However in insurance contracts the product sold

is intangibles.

- The Principle of Caveat Emptor is not applicable,

instead the Principle of Utmost Good Faith is

applicable.- This imposes a duty on the proposer to fully

disclose all material facts which are necessary for

the insurer to assess and accept the risk.

7/29/2019 Goa 03


-This duty to disclose begins at the time of

proposing for insurance and ends after the

contract has been concluded.

-In case the terms of the contract are sought

to be altered then there is again this duty todisclose all material facts relating to

alteration.

- In case of a lapsed policy, at the time of

revival there would be a fresh duty to

disclose all material facts for revival.

7/29/2019 Goa 03


Material Facts

In Insurance every circumstance that wouldhave a bearing on the judgement of a

prudent insurer in fixing the premium or

determining the acceptability of the proposalfor insurance is a material fact.

e.g Age, Build, Occupation, Health, HabitsPersonal history, Family history etc..

7/29/2019 Goa 03


Facts which need not be disclosed

- Facts of law.- Facts of common knowledge.

- Facts which a survey would have

revealed.

- Facts covered by policy conditions whetherexpressed or implied.

- Facts which are not within the knowledge

of the proposer.- Facts which lessen the risk.

7/29/2019 Goa 03


BREACH OF UTMOST GOOD FAITH

Misrepresentation (innocently, or accidentally or unintentionally giving anincorrect information that misrepresents a

material fact)Non-disclosure (intentional or unintentional

because the proposer thinks it isinconsequential)

Concealment ( intention to cheat theinsurer to get cheaper insurance cover)

7/29/2019 Goa 03


Sec 45 of the Insurance Act 1938

- The doctrine of warranty will not apply after a period of Two years from the date of

acceptance of the risk on grounds of

inaccurate or false statement unless it isproved to be material and fraudulent.

- In case a party enters into a contract by

mistake the contract does not become void,

unless the mistake is sufficiently

fundamental or fradulent in nature.

7/29/2019 Goa 03


INSURABLE INTEREST

Legal right to insure.

There should be a subject matter to be insured.

There should be a monetary relationship with

the subject matter to be insured.

Relationship between policy holder and subject

matter should be recognized by law.

7/29/2019 Goa 03


Insurable Interest is created by:

OwnershipRenting / leasing a property

Power of attorney

Legal custody By law

7/29/2019 Goa 03


Insurable Interest

Wagering contract-no insurable interest- not valid-

not insurable

Insurable interest is deemed to exist in the following: • Self

• Husband-Wife • Parent-Child

• Business Partners

• Employer-Employee • Creditor – Debtor • Surety- Co- Surety

7/29/2019 Goa 03


Husband and Wife

Inter dependent relationship involving monetary interest.

Neither would gamble on the other’s life and hence

the condition of insurable interest is satisfied.

7/29/2019 Goa 03


Parent- Child

Parent/Guardian-Proposer Minor Child- Life Insured Risk is on the Child’s Life

Parents can insure their children but vice-verse isnormally not allowed.

Creditor- Debtor

A Creditor has an insurable interest on the life of the Debtor only to the extent of the outstanding

loan amount.

7/29/2019 Goa 03


Employer – Employee

Even if there is no relationship by blood or

marriage but there is a pecuniary interest, as suchthe insurable interest requirement conditions are

fulfilled.

An Organization/ Corporation can insure the life of a valuable employee since the organization’s profits

may be affected adversely due to the employees’

death. An employee may take out a life insurance policy on

the life of his/her employer to safeguard theemployee’s salary in the event of the employer’s

death.

7/29/2019 Goa 03


Business Partners

One business partner can insure the life of theother partner and use the life insurance proceeds

to purchase the deceased partner’s interest if he orshe dies.

Existence of insurable interest only differentiates

an insurance contract from a wagering contract.

7/29/2019 Goa 03


Key – Man Insurance

Key- Man insurance is an insurance purchased by a

company or firm on the life of its most importantemployee [key-man] in order to protect the company or firm against financial loss which may occur from

the said employee’s premature death. Object is to indemnify the company/firm from the loss of

earnings.

Immediate replacement may not be possible.

Training people to fill in his place may take time.

7/29/2019 Goa 03


Insurable interest should exist:

At the time of contract / inception in Life

insurance. At the time of inception and claim in Non-

life insurance other than Marine Cargo.

At the time of losses only in case of Marine Cargo insurance.

7/29/2019 Goa 03


7/29/2019 Goa 03


USES OF INDEMNITY

To discourage over-insurance

To avoid an anti-social act

To maintain the premium at affordable &appropriate level

7/29/2019 Goa 03


CONDITIONS FOR INDEMNITY

PRINCIPLE

The insured has to prove that he will suffer an

actual monetary loss from an event.

The amount of compensation will be the actual

loss or the amount of insurance whichever isless.

Indemnification cannot be more than the insured

amount.

If the insured gets more than the actual loss, the

insurer has right to get that extra amount back.

7/29/2019 Goa 03


If the insured gets some amount from third

party after being fully indemnified by

insurer, the insurer will have the right to

receive the entire amount paid by the thirdparty.

Indemnity does not apply to personal

insurance because the amount of loss isnot easily measurable.

7/29/2019 Goa 03


Methods of Indemnity

- Payment of Cash.

- Repairs.

- Replacement.

- Reinstatement.

7/29/2019 Goa 03


ExceptionsRe-instatement Value

The reinstatement amount would

normally consist of the indemnity

amount, an amount equivalent towear, tear and depreciation and a

value equivalent to any increase due

to inflation from the date of the lossuntil the reinstatement date.

7/29/2019 Goa 03


Exceptions

Coverage for additional cost

Compensation in respect of

additional cost incurred (e.g ) cost

of debris removal, surveyor’s /

architect’s fees etc….,

7/29/2019 Goa 03


Valued Policy

- Items like art work and jewellery.

- Sum Insured.

- Maximum amount to be payable as

stated in the policy.

7/29/2019 Goa 03


Excess and Deductibles

A fixed amount that the insured must

bear and the insurer’s liability is over

and above this fixed amount.

7/29/2019 Goa 03


7/29/2019 Goa 03


Amount payable =

S.A X Amount of loss

Full Value at risk

Principle of Average

7/29/2019 Goa 03


7/29/2019 Goa 03


SUBROGATION

- Not applicable to Life or Personal Accident

policies.

- Insurer’s can not delay the claim.

- If the insurance is inadequate to provide

full indemnity then the insured is entitled to

retain the amount received from any thirdparty up to full indemnity value and any

excess received can be passed on to the

insurer.

7/29/2019 Goa 03


Contribution

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.- Arises where a risk is covered by more

than one policy.

- Can not apply to benefit policies likeLife and Personal Accident insurance

policies.

7/29/2019 Goa 03


7/29/2019 Goa 03


COROLLARIES OF INDEMNITY

Contribution: Insurers sharing the losses inproportion to the amount insured with them.

Average clause: Payment of losses in proportionwith insurance.

Salvage: Recovering the salvage amount fromthe claims paid.

Proximate cause: The insured peril should be

the proximate cause. Subrogation: Rights of recovering from the third

party.

7/29/2019 Goa 03


REPRESENTATION AND WARRANTY

Declaration signed at the end of the

proposal form, to promise that the

personal statements and questionnaires

are true and complete.

Warranties in insurance contract are

imposed by the insurers to ensure that the

risk remains same throughout the policyterm and does not increase.

7/29/2019 Goa 03


Warranties which are in the nature of answers to the questions are called

Affirmative Warranties.

Warranties fulfilling certain conditions or promises are called Promissory

Warranties.

On breach of warranty the insurer becomes free from his liability.

7/29/2019 Goa 03


LEGAL CHARACTERISTICS OF INSURANCE

CONTRACT

Additional unique characteristics of insurance

contracts are:

Aleatory contract

Unilateral contract Conditional contract

Personal contract

Contract of adhesion

7/29/2019 Goa 03


Aleatory – The values exchanged are

not equal.

Unilateral - One side makes a promise

Conditional - Limits are placed on the

promise

Personal - Cannot be transferred

without permission

Contract of adhesion - Unequal

bargaining power

goa 03

Documents