PRINCIPLES OF INSURANCE CONTRACTS-ALL YOU NEED TO KNOW
The Contract of Insurance is a contract whereby a person undertakes to indemnify another against a loss arising on the happening of an event or to pay a sum of money on the happening of an event. The person who insures is called “Insurer”. The person who effects the insurance is called the “Insured” or “Assured”. The price for the risk undertaken by the insurer and paid by the insured to the insurer is called “Premium” and the document which contains the contract of insurance is called “Policy
“Insurance is a contract in which one party , known as the insured or assured , insures with another person, known as the insurer , assures or underwriter, his property of life or the life of another person in whom he has a pecuniary interest, or property in which he is interested , or against some risk or liability, by paying a sum of money as a premium. Under the contract, the insurer agrees to indemnify the insured against a loss which may accrue to the other on the happening of some event.
Following are the general principles of contract of insurance:
Principle of Indemnity
Every contract of insurance such as life insurance and personal accident and sickness insurance, is a contract of indemnity. So, the insurer pays the actual loss suffered by the insured. He does not pay the specified amount unless this amount is the actual loss to the insured.
Principle of Utmost Good Faith
GOOD FAITH; The contract of insurance must me on good faith. The insured is of the obligation to declare full and true disclosure of facts to the insurer. The insurance company on the facts declared by the insured will decide the type of insurance and the liability and as well as the premium. So the true disclosure of all facts is necessary. The insurance company may declare any contract as void, if later found that the facts declared by the insured are not true. So all contracts of insurance are the contracts “ Uberrimae fidei”, i.e., the contracts of utmost good faith and therefore non disclosure of a material fact entitles other party to avoid the contract.
Principle of Insurable interest
This principle says that the individual (insured) must have an insurable interest in the subject matter. Insurable interest means that the subject matter for which the individual enters the insurance contract must provide some financial gain to the insured and also lead to a financial loss if there is any damage, destruction or loss.
Example – the owner of a vegetable cart has an insurable interest in the cart because he is earning money from it. However, if he sells the cart, he will no longer have an insurable interest in it.
To claim the amount of insurance, the insured must be the owner of the subject matter both at the time of entering the contract and at the time of the accident.
Principle of Contribution
Where there are two or more insurances on one risk, the principle of contribution applies as between different insurers. 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. In case of loss, any one insurer may pay to the assured the full amount of the loss covered by the policy. Having paid this amount, he is entitled to contribution from his coinsurers in proportion to the amount which each has undertaken to pay in case of loss of the same subject-matter.
Contribution principle applies when the insured takes more than one insurance policy for the same subject matter. It states the same thing as in the principle of indemnity, i.e. the insured cannot make a profit by claiming the loss of one subject matter from different policies or companies.
Example – A property worth Rs. 5 Lakhs is insured with Company A for Rs. 3 lakhs and with company B for Rs.1 lakhs. The owner in case of damage to the property for 3 lakhs can claim the full amount from Company A but then he cannot claim any amount from Company B. Now, Company A can claim the proportional amount reimbursed value from Company B.
Principle of Subrogation
According to the rule of subrogation, when the loss is caused to the insured by the conduct of a third party, the insurer shall have to make good such loss and then have a right to step into the shoes of the insured and bring an action against such third party who caused the loss to the insured. This right of subrogation is enforceable only when there is an assignment of cause of action by the insured in favour of the insurer. The doctrine of subrogation does not apply to life insurance.
Principle of Proximate Cause
This is also called the principle of ‘Causa Proxima’ or the nearest cause. This principle applies when the loss is the result of two or more causes. The insurance company will find the nearest cause of loss to the property. If the proximate cause is the one in which the property is insured, then the company must pay compensation. If it is not a cause the property is insured against, then no payment will be made by the insured.
Example –
Due to fire, a wall of a building was damaged, and the municipal authority ordered it to be demolished. While demolition the adjoining building was damaged. The owner of the adjoining building claimed the loss under the fire policy. The court held that fire is the nearest cause of loss to the adjoining building, and the claim is payable as the falling of the wall is an inevitable result of the fire.
In the same example, the wall of the building damaged due to fire, fell down due to storm before it could be repaired and damaged an adjoining building. The owner of the adjoining building claimed the loss under the fire policy. In this case, the fire was a remote cause, and the storm was the proximate cause; hence the claim is not payable under the fire policy.
Principle of Loss Minimisation
You must take all the necessary steps to limit the loss when it happens. You must take all the necessary precautions to prevent the loss even after purchasing the insurance. This is the principle of loss minimization.