What is insurance ---
Insurance is a term in law and economics. It is something people buy to protect
themselves from losing money In exchange for this, if something bad happens to the
person or thing that is insured, the company that sold the insurance will pay money back.
Insurance is a means of protection from financial loss. It is a form of risk management,
primarily used to hedge against the risk of a contingent or uncertain loss.
Insurance defined as a contract---
An insurance contract is a legal agreement that spells out the responsibilities of both the
insurance company and the insured, as well as the specific conditions of coverage and
the policy term and cost. Standard features of an insurance contract include the offer and
the acceptance, consideration, legal capacity and purpose, and indemnification.
Insurance defined as a contract between two parties whereby one party called insurer
undertakes, in exchange for a fixed sum called premiums, to pay the other party called
insured a fixed amount of money on the happening of a certain event.
The insurance, thus, is a contract whereby
1.certain sum. called premium, is charged in consideration
2.Against the said consideration, a large sum is guaranteed to be paid by the insurer who
received the premium
3.The payment will be made in a certain definite sum. I.e., policy amount and
4.The payment is made only upon a contingency
Since Insurance is a contract, & sections of the Contract Act are applicable.
---In contract act we studied all agreements are contracts if they are made by the free
consent of the parties, competent to contract, for a lawful consideration and with a
lawful object and which are not hereby declared to be void, all those principal also
applies on insurance contracts.
Definitions of Insurance Contract-
Insurance contract means that contract by which a sum of money is paid to the assured
in consideration of insurer’s incurring any event of paying a large sum upon a given
contingency.
Some definitions of Insurance contract are as follows
(1) “Insurance is a contract by which a sum of money is paid to the assured in
consideration of insurer’s incurring the risk of paying a large sum upon a given
contingency.” -JUSTICE TINDALL
(2) “In its legal aspect, it is a contract, the insurer agreeing to make good any financial
loss the insured may suffer within the scope of the contract, and insured agreeing to pay
a consideration (the premium).”-RIEGEL AND MILLER
(3) “Insurance is a contract whereby the insurance company agrees to make payments to
a party, generally called the insured, should the event insured against in the contract
occur.” -FRANK JOSEPH ANGELL
(4) “A contract of insurance is a contract whereby one person, called the ‘insurer’
undertakes in return for the agreed consideration called the ‘premium’, a sum of money
or its equivalent on the happening of a speciiied event.” --JUSTICE CHANNELL in
Prudential Insurance Company vs Inland Revenue Comissioner, (1904) 2 KB 658.
(5) “Insurance is a contract by which one party for a consideration called the premium,
assumes particular risks of other party and promises to pay to his nominee a certain or
ascertainable sum of money on a specified contingency.”
-E. W. PATTERSON
(6) “Any contract by which one of the parties for a valuable consideration, known as
premium, assumes a risk of loss or liability that rests upon the other is a contract of
Insurance.” -WILLIAM R. VANCE
Thus, we can say that.- Insurance is a contract by which a sum of money is paid to
the insured in consideration (Premium) of insurer’s incurring the risk or losses of paying
a large sum of money upon a given contingency. .
The contrast of insurance may cover interest of persons other than having insuring
interest in property.
Case laws--In united india insurance company V/S Mrs parmeshwari sawhney AIR
2010 The contract of insurance is valid as long as there is insurable interest in property.
What Does Elements of an Insurance Contract Mean?Or
Elements of Insurance Contract--
The elements of an insurance contract are the standard conditions that must be satisfied
or agreed upon by both parties of the contract (the insured and the insurance company).
In terms of insurance, these are the fundamental conditions of the insurance contract that
bind both parties, validate the policy, and make it enforceable by law.
By signing the insurance contract, you have essentially agreed to follow the different
elements. Without all of the elements of an insurance contract present, the policy may
not be valid, and that means the obligations of both parties may not be enforceable in
court.
The elements of an insurance contract are very similar to the elements required for any
other legally binding contract with a few extra elements that are special to insurance
contracts. We need both types of elements to be present before a valid and proper
insurance policy is produced.
Elements of Insurance Contract can be classified into two parts;
1. The elements of general contract also applies on contact of insurance, as per
contract act 1872--( Section 10)
2. The elements of special contract relating to Insurance act 1938 :
1. General Contracts Elements-The valid contract", according to Section 10 of ‘Indian
contract Act, 1872, Ins. contracts must have the following essentials-----
1. Agreement (Offer and Acceptance) 2. Legal Consideration
3. Competence to make contract 4. Free consent 5. Legal object
In general, an insurance contract must meet these conditions in order to be legally valid:
it must be for a legal purpose; the parties must have a legal capacity to contract; there
must be evidence of a meeting of minds between the insurer and the insured; and there
must be a payment or consideration.
Insurance Contract Requirements--
Legal Capacity --
The insurance agreement must be made between two competent and legal parties. If you
are a minor, or if someone else is legally responsible for your decisions due to a mental
illness or restriction, you are not eligible to enter into an insurance contract by yourself.
You do not have the legal capacity to make this agreement.
Offer And Acceptance
In order for the insurance contract to be valid, you must make an offer to buy an
insurance policy through a signed or electronic application accompanied by an
appropriate premium, and the insurance company must accept your offer by issuing the
policy. The contract is not valid without this step, even if the other factors exist.
The requirement of meeting of minds in insurance contracts--
The requirement of meeting of minds is met when a valid offer is made by one party and
accepted by another. The offer is generally made on a written application for insurance.
Meetings of minds Sometimes relates with the doctrine of "utmost good faith," the
meeting of the minds means that each party to the contract agrees to be honest with the
other and gives personal attention to the details of the contract. In good faith you agree
not to misrepresent material information to the insurer and it agrees not to unfairly
cancel your contract as a result.
Competent to make contract-Every person is competent to contract (a) who is of the
age of majority according to the law, (b) who is of sound mind. and (c) who is not
disqualified from contracting by any law to which he is subject.
The payment or consideration in insurance contracts--
The payment or consideration is generally made up of two parts—the premiums and the
promise to adhere to all conditions stated in the contract. These may include, for
example, a warranty that the insured will take certain loss-prevention measures in the
care and preservation of the covered property.
Each party to the insurance contract, typically you and the insurance company, must
have considerations in the policy. This is what determines the value each party brings to
the contract. For you, the consideration is the premiums paid throughout the contract
term. For the insurance company, it is the potential money paid to you when you file a
claim.
In the field of property and liability insurance(Liability insurance is critical for those
who are liable and at fault for injuries sustained by other people or in the event that the
insured party damages someone else's property. As such, liability insurance is also called
third-party insurance. Liability insurance does not cover intentional or criminal acts even
if the insured party is found legally responsible) the agent generally has the right to
accept the insured’s offer for coverage and bind the contract immediately. In the field of
life insurance, the agent generally does not have this power, and the contract is not valid
until the home office of the insurer has examined the application and has returned it to
the insured through the agent.
Free Consent-Parties entering into the contract should enter into it by their free consent.
The consent will be free when it is not caused by-“ (1) coercion, (2) undue influence, (3)
fraud, (4) misrepresentation, or (5) mistake l When there is no free consent except fraud
the contract becomes voidable at the option of the party whose consent was so caused. In
case of fraud the contract would be void. The proposer for free consent must sign a
declaration to this effect. The person explaining the subject-matter of the pmposal to the
proposer must also accordingly make a written declaration on the proposal.
Legal Object-In order to make a valid Insurance contract, the object of the agreement
should be lawful. An object that is (i) not forbidden by law, or (ii) is not humeral, or (iii)
not opposed to public policy, or (v) which does not defeat the provisions of any law, is
lawful. In proposal form the object of insurance is asked which should be legal and the
object should not be concealed. If the object "of an insurance, like the consideration, is
found to be unlawful, the policy is void.
and
3. The elements of special contract relating to Insurance act 1938 :
The special contract of insurance involves principles: insurable interest, utmost good
faith, indemnity, subrogation, warranties. Proximate cause, assignment, and nomination,
the return of premium.
Special elements-There are some special elements of a valid insurance contract
according to the Insurance Act, 1938. These are as follows
1. Insurable interest 2. Utmost good faith 3.1ndemnity
4. Subrogation 5. Warranties 6. Proximate cause
The Principle of Insurable Interest---
Insurable interest just means that the subject matter of the contract must provide some
financial gain by existing for the insured (or policyholder) and would lead to a financial
loss if damaged, destroyed, stolen, or lost.
Insurable interest-For an insurance contract to be valid, the insured must possess an
insurable interest in the subject matter of insurance. The insurable interest is the
pecuniary interest whereby the policy holder is benefited by the existence of the
subject-matter and is prejudiced by the death or damage of the subject-matter.
The essentials of a valid insurable interest are the following :
(i) There must be a subject-matter to be insured.
(ii) The policy-holder should have monetary relationship with the subject matter.
(iii) The relationship between the policy-holders and subject-matter should be
recognised by law.
(iv) The financial relationship between the policy-holder and subjectmatter should be
such that the policy-holder is economically beneiited by the survival or existence of the
subject-matter and/or will suffer economic loss at the death or existence of the
subject-matter.
he insured must have an insurable interest in the subject matter of the insurance
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contract.
he owner of the subject is said to have an insurable interest until s/he is no longer
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the owner.
In life insurance the insurable interest must exist at the time of the contract. Continued
insurable interest, however, need not be demonstrated. A divorced woman may continue
life insurance on the life of her former husband and legitimately collect the proceeds
upon his death even though she is no longer his wife.
In the field of property insurance, on the other hand, the insurable interest must be
demonstrated at the time of the loss. If an individual insures a home but later sells it, no
recovery can be made if the house burns after the sale, because the insured has suffered
no loss at the time of the fire.
Utmost Good Faith--
This phrase "utmost good faith" means that both parties in any insurance contract have
acted without any type of deception, omission or other form of misrepresentation and
that all pertinent facts have been disclosed by both parties.
Material Facts
Material facts are the factors that affect the risk that is being taken. They consist of the
factors that the insurance company needs to know about in order to decide whether to
insure the risk or reject it. If an insured applies for life insurance, then the insurer will
need to know all about the insured:'
Age.
Height.
Weight.
Health.
Occupation.
For car insurance, the insurer needs to know:
The insured's age.
Driving record.
the kind of car that is being insured.
Full and True Disclosure
This means that both parties are required to completely disclose all material facts
pertinent to the insurance policy. There can be no omissions, misrepresentations or
twisting of the facts when filling out the application or providing the policy.
Duty of Both the Parties
Both the insured and the insurer have a legal obligation, or duty to disclose all material
facts accurately and correctly. The insured does this when they fill out the application,
and the insurance company does this by adhering to all of the laws and rules that apply
to it.
Indemnity Contracts --
Most insurance contracts are indemnity contrcts. Indemnity contracts apply to insurances
where the loss suffered can be measured in terms of money.
Principle of Indemnity.This states that insurers pay no more than the actual loss
suffered.
he purpose of an insurance contract is to leave you in the same financial position
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you were in immediately prior to the incident leading to an insurance claim.
or Example -When your old Maruti Alto is stolen, you can't expect your insurer
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to replace it with a brand new Audi Q5 or Mercedes-Benz. In other words, you
will be remunerated according to the total sum you have assured for the car.
In simple words we say that, all insurance contracts except Life insurance are
contracts of indemnity.
According to this principle, the insurer undertakes to put the insured, in the event of loss,
in the same position that he occupied immediately before the happening of the event
insured against, in a certain form of insurance, the principle of indemnity is modified to
apply.
Example, in marine or fire insurance, sometimes, a certain profit margin which would
have earned in the absence of the event, is also included in the loss. In a true sense of the
indemnity, the insured is not entitled to make a profit from his loss.
Doctrine of Subrogation---
The doctrine of subrogation refers to the right of the insurer to stand in the place of the
insured, after the settlement of a claim, in so far as the insured’s right of recovery from
an alternative source is involved.
If the insured is in a position to recover the loss in full or in part from a third party due to
whose negligence the loss may have been precipitated, his right of recovery is
subrogated to the insurer on the settlement of the claim.
The insurers, after that, recover the claim from the third party. The right of subrogation
may be exercised by the insurer before payment of loss.
Subrogation is the Substitution--
The insurer, according to this principle’, becomes entitled to all the rights of insured
subject matter after payment because he has paid the actual loss of the property.He is
substituted in place of other persons who act on the right and claim of the property,
insured.
Subrogation only up to the amount, of payment--
The insurer is subrogated all the rights, claims, remedies and securities’ of the damaged
insured property after indemnification, but he is entitled to gel these benefits only to the
extent of his payment.The insurer is, thus, subrogated to the alternative rights and
remedies of the insured, only up to the amount of his payment to the insured.
The Subrogation be applied before Payment
If the assured got certain compensation, from the third party before being fully
indemnified by the insurer, the insurer could pay only the balance of the loss.
Warranties--
There are certain conditions and promises in the insurance contract which are called
warranties.
According to Marine Insurance Act, “A warranty is that by which the assured undertakes
that some particular thing shall or shall not be done, or that some conditions shall be
fulfilled, or whereby he affirms or negatives the existence of a particular state of facts.”
Warranties that are mentioned in the policy are called express warranties. Certain
warranties are not mentioned in the policy.
These warranties are called implied warranties. Warranties which are answers to the
question arc called affirmative warranties. The warranties fulfilling certain conditions or
promises are called promissory warranties.
Warranty is a very important condition in the insurance contract which is to be fulfilled
by the insured. On the breach of warranty, the insurer becomes free from his liability.
Therefore insured must have to fulfill the conditions and promises of the insurance
contract whether it is important or not in connection with the risk. The contract can
continue only when warranties are fulfilled.
Proximate rules--
The rule; is that immediate and not the remote cause is to be regarded. The maxim is
“sed causa proximo non-remold-spectator”; see the proximate cause and not, the distant
cause.
The real cause must be seen while payment of the loss. If the real cause of loss is
insured, the insurer is liable to compensate for the loss; otherwise, the insurer may not be
responsible for a loss.
Proximate cause is not a device to avoid the trouble of discovering the real ease or the
common sense cause.
Proximate cause means the actual efficient cause that sets in motion a train of events
which brings about result, without the intervention of any force started and worked
actively from a new and independent source.
The determination of real cause depends upon the working and practice of insurance and
circumstances to losses. A loss may not be occasioned merely by one event.
There may be concurrent causes or chain of causes. They may occur in a sequence or
broken chain. Sometimes, certain causes arc excepted by (the insurance contract and the
insurer is not liable for the accepted peril.
The efficient cause of a loss is called the proximate cause of the loss.
For the policy to cover the loss must have an insured peril as the proximate cause of the
loss or also the insured peril must occur in the chain of causation that links the
proximate cause with the loss.
The proximate cause is not necessarily, the cause that was nearest to the damage either
in time or place but is rather the cause that was responsible for the loss.
