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                                       Insurance and
                                     Risk Management
                                       Lecture Slides
Chapter
                                    Chapter Contents
                               2.1 Nature of Insurance Contract
                               2.2 Elements of Insurance Contract
                               2.3 Principles of Insurance
 Insurance                             2.3.1 Insurable Interest
                                      2.3.2 Utmost Good Faith
                                      2.3.3 Principles of Indemnity
Contract and                          2.3.4 Doctrine of Subrogation
                                      2.3.5 Warranties
                                      2.3.6 Proximate Cause
 Principles                           2.3.7 Assessment or Transfer of Interest
                                      2.3.8 Return of Premium
                                      2.3.9 Contribution
                    Prepared By:
               Md. Moulude Hossain
  Faculty Member, Department of Business Administration
Insurance as Contract
• As we earlier define (contractual definition) insurance 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.
• It is good news for me that you are studying
  Commercial Law in the same semester, so I can hope
  that you certainly know about the fundamental law of
  contract.
     May I have the Pleasure……….
 Or I need to have my footstep on the Law of Contract
Insurance as Contract
• According to the Law of Contract
    “All agreement are contracts if they are made by free
   consent of the parties, competent to contract, for a lawful
     consideration and with a lawful object and which are
                   hereby declare to be void.”
• Thus for a insurance contract:
    free consent of the parties – free consent of insurer and the insured
    competent to contract – are legally eligible to enter into the contract
    for a lawful consideration – the consideration is said to be exchange of
     risk in exchange of premium
    a lawful object – it may be someone’s life or property
    declare to be void – both to declare all the material facts with utmost
     good faith
Distinct Legal Characteristics of
             Insurance Contracts
• Aleatory Contract: where the values exchanged may not
  be equal but depend on an uncertain event . For e.g..-
  ?????????? (Commutative Contract?)
• Unilateral Contract: only one party makes a legally
  enforceable promise. Only the insurer makes a legally
  enforceable promise to pay a claim . After the first
  premium is paid, the insured can not be legally forced to
  pay the premiums (Bilateral Contract?)
• Personal Contract: the contract is between the insured
  and the insurer
Distinct Legal Characteristics of
            Insurance Contracts
• Conditional Contract: Insurer’s obligations to
  pay a claim depends on whether the insured has
  compiled with all policy conditions
• For e.g. In a homeowner’s policy , the insured
  must give immediate notice of loss. If the insured
  delays for an unreasonable period in reporting the
  loss, the insurer can refuse to pay the claim
• Contract of Adhesion: means the insured must
  accept the entire contract, with all of its terms and
  conditions
Insurance as Contract
• The insurance contract involves
    A. The elements of General Contract
    B. The elements of special contract relating to
       insurance
General Parts of Contract
A. General parts of a contract :- The general
 parts of a insurance contract contain the
 following parts-
       – Offer & acceptance
       – Free consent
       – Legal consideration (Premium)
       – Competency
       – Legal object
General Parts of Contract
1. Offer   & acceptance
     • Generally comes from the insured
     • Insurer may also propose to make the contract
     • Any act precedes it is an offer or counter-offer
     • All that precede the offer or counter-offer is an
       invitation to offer
     • In insurance, the publication of prospectus, the
       canvassing of the agents are invitation to offer
General Parts of Contract
2. Free   consent
  – The consent will be free when it is not
    caused by
          1.   Coercion
          2.   Undue influence
          3.   Fraud or
          4.   Misrepresentation
  – 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.
General Parts of Contract
3. Legal   consideration
  – As we know form the law of contract that, “no
    consideration no contract.”
  – Thus in case insurance there need to be a
    consideration for the validity of the contract.
  – The promiser (insurer) pay a sum at given
    contingency
  – It need not to be money only but it must be valuable, it
    may be sum, rights, interest or benefits
General Parts of Contract
– On the other side (insured), premium is a valuable
  consideration for starting an insurance contract.
– The fact is that without payment of premium
  (consideration) the insurance contract cannot be start.


       For Insured: Payment of     For insurer: Promise to
        first premium plus an        do certain things as
      agreement to abide by the   specified in the contract.
        conditions specified in   For e.g.: paying for a loss
               the policy           from the insured peril
General Parts of Contract
4. Competency
•   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
•   Thus the competency to contract implies that,
      a) A minor is not competent to contract
      b) A person of sound mind means, he/she is capable to understand it
         and forming a rational judgment about it and the effects upon
         his/her interests.
      c) A person of unsound mind occasionally can enter into contract
         when he/she is in sound mind
      d) An alien enemy, undercharged insolvent and criminals cannot enter
         itno a contract.
General Parts of Contract
5. Legal   object
• In order to make a valid contract, the object
  of the agreement must be lawful. An object
  is lawful if it is-
     Not forbidden by law, or
     Is not immoral, or
     Opposed to public policy, or
     Which does not defeat any provision of any law
Principles of Insurance
B. Principles of Insurance/Special parts
 of the contract :- The special parts of a
 insurance contract are described as the
 fundamental principles of Insurance. The
 principles of insurance are as follows:

 1. Insurable Interest    5. Warranties
 2. Utmost Good Faith     6. Proximate Cause
 3. Principles of         7. Assignment or transfer
    Indemnity                of interest
 4. Doctrine of           8. Return of Premium
    Subrogation
Principles of Insurance
1. Insurable interest:-Insurable interest means pecuniary
  relationship. There must be a pecuniary or monetary relation
  between insured and the insured object.
      • The principle of insurable interest is a pre-condition for a valid contract
        of insurance. The person getting an insurance policy must have an
        insurable interest in the subject matter to be insured.
      • The insured must positively stand benefited financially due to existence
        or continuance of life.
      • Ex – An employer has insurable interest in lives of his employees. A
        banker has an insurable interest in properties mortgaged to it against a
        loan.

                Insured                          Insured object

                           Pecuniary relation
Principles of Insurance
• Importance of Insurable Interest
   – If the insurer has not insurable interest in property insured, the
     contract of insurance would amount to a gambling or
     speculative contract.
   – Most clear and common case of existence of insurable interest
     is ownership of property being insured.
• Essentials of Insurable Interest
    Subject matter of insurance must be certain. There must exist
     some property, rights, interest, like or potentially liability.
    The policy holder should monetary relationship with the
     subject-matter.
    The insured must bear a legal relationship to subject matter or
     he must be owner. He stands to benefit by safety.
    The insured must be owner or may posses the legal rights or
     interest in subject matter to be insured.
Principles of Insurance
2. Utmost good faith :- The concept of utmost good faith
    describe that the contract of insurance is a contract of
    uberrimae fidei i.e. of absolute good faith where both parties
    of the contract must perform the following responsibility,
    these are,
              a) Material disclose
              b) Full & true disclose
              c) Duties of both parties
 Under the contract of insurance, the insured’s duty is bound
  to disclose all material facts relating to the risk to be covered.
  Without good faith, it shall be null and void.
Principles of Insurance
– Materiality of Facts
   • A material fact is a fact which would influence the mind
     of prudent underwriter in deciding whether to accept a
     risk for insurance and on what terms. Examples:
      –   Motor – details of young drivers
      –   Household – details of commercial use of private dwelling
      –   Commercials – previous hazards / loss
      –   Life – details of heart disease
– Ubereimae Fidei
   • It means the contracts which require absolute and utmost
     good faith on part of all the parties concerned with the
     contract.
Principles of Insurance
• Material Information
  – Material information which enables the insurance company to
    decide whether to accept or not to accept any risk
  – If accepted, at what rate of premium and on what terms of
    and conditions.
  – The legal binding applies to insured, who is in possession of
    all material facts relating to subject matter.
• Duty of Disclosure
  –   Duty of disclosure applies to both proposer and insurer.
  –   Duty of disclosure operates at inception,
  –   Until the data cover is confirmed by insurers renewal
  –   Up to the renewal date mid term alternation
  –   Until the insurer confirm cover in respect of alternation.
Principles of Insurance
• Facts need not be disclosed by the insured
  The following facts, however, are not required to be
   disclosed by the insured:
     • Facts which tend to lessen the risk
     • Facts of public knowledge
     • Facts which could be inferred from the information
       disclosed
     • Facts waived by the insurer
     • Facts governed by the conditions of the policy
Principles of Insurance
3. Principle of indemnity :- Insurance contract is a
  contract of indemnity. Insurer will pay the claim just
  as the loss suffered by the insured, not more or less.
    • Indemnity means that the insured person is placed
      financially in the same position as he was before the loss.
      The principles of indemnity also applies to all contracts of
      insurance except life insurance where
         – Loss suffered by insured can be measured in monetary terms
    • The measure of indemnity is decided at the time of
      entering into contract itself in events of insured:
         – Prove that he has sustained a monetary loss
         – Prove the extent and value of his loss
Principles of Insurance
** Use of indemnity Principles:-
      Claim not more than the actual loss
      To avoid the anti-social act
      To minimize the premium
** Conditions of indemnity Principles :-
     1.    How to suffer loss
     2.    Claim not more than the actual loss
     3.    If claim>loss, residual to insurer
     4.    Third party compensation
     5.    Principle of indemnity does not apply to personal
           insurance
Principles of Insurance
• Features
  – All contracts of insurance, except life insurance and personal
    accident insurance are contracts of indemnity.
  – There exists indirect relationship between principle of
    indemnity and principle of insurable interest, because insured
    has to prove amount of actual loss.
  – The amount of compensation shall never exceed the amount
    of actual loss or value of policy.
  – Valued policies are not covered under scope of principle of
    indemnity.
Principles of Insurance
                                 Methods of Indemnity
A. Cash payment:
    – It’s the claim of insurance in easiest and common method. After receiving the claim
      form, make analysis of the surveyor’s report, and evaluate the amount of actual loss
      to be compensated.
B. Repairs:
    – The subject matter may be partially damaged or not fully destroyed in such case, the
      insurer instead of cash payment prefers to settle claim of damage to get repair.
    – Ex – motor vehicle insurance, machine and building insurance
C. Replacement:
    – In case of fully destroyed or loss, there is no chance of repair, the insurer many
      arrange replacement.
    – Ex – Theft or burglary insurance.
D. Reinvestment:
    – It is a rarely used method, where subject is destroyed is placed in its former position
      or condition as it existed just before loss.
    – Ex – Destroyed by fire
Principles of Insurance
4. Doctrine of subrogation :- It means the
  substitution at a certain occurrence , of the
  insured by the insurer for the scrape value.
     Subrogation is, “Transfer of rights and remedies of
      insured to the insurer who has indemnified the insured in
      respect of loss.”
     Ex – Insurer of an importer of electrical goods receives a
      claim in respect of a faulty toaster. The insurer pays the
      claim but takes over insured’s right to claim back against
      manufacturer.
     Subrogation rights only apply where there is a “legal
      liability”
Principles of Insurance
** Essentials of doctrine of subrogation :-
    1. Corollary to the principal of indemnity
    2. Subrogation is the substitution
    3. Subrogation only up to the amount of
       loss
    4. Subrogation may be applied before
       payment
    5. Not applied in personal insurance
Principles of Insurance

5. Warranties :- It is a commitment to do
  , or not to do something , by the insured
  to the insurer. It may be any of the
  following figure.
                       Warranties

  Express    Implied
                              Affirmative
                                            Promissory
Principles of Insurance
• Expressed Warranties
  – Warranties which are mentioned in the policy
• Implied Warranties
  – Warranties which are not mentioned in the policy
• Affirmative Warranties
  – Warranties which are answer to the questions
• Promissory Warranties
  – Warranties fulfilling certain conditions or promise
Principles of Insurance
6. Proximate cause :- The proximate cause
describe the rule that immediate and not the
remote cause is to be regarded i.e. see the
proximate cause not the distant cause.
    • The real cause must be seen while payment the
      loss.
    • It must be clearly mentioned in the contract only
      in what case payment will be made, otherwise the
      insurer will not responsible for a certain loss.
Principles of Insurance
• Determination of Proximate Cause
  – If there is a single cause of the loss, the cause will be the
    proximate cause and further if the peril was insured insurer will
    have to indemnify the loss
  – If there are concurrent causes, the insured perils and expected
    perils have to be segregated. The concurrent cause may be first,
    separable and second, inseparable.
  – If the causes occurred in from of chain, they have to be
    observed seriously
     • If there is unbroken chain the expected and insured perils have to be
       separated
     • If there is a broken chain of events with no expected perils involved, it is
       possible to separate the loss.
Principles of Insurance

7. Return of premium :- Ordinarily the
   premium once paid cannot be refund. How
   ever , the following cases the refund is
   allowed. These are
          1.By agreement in the policy
          2.For reasons of Equity
          3.Over insurance by double insurance
Principles of Insurance
** For reasons of Equity has the
  following points:-
    • Non-attachment of ris
    • Undeclared balance of an open account
    • Payment of premium is apportionable
    • Assured has no insurable interest
    • Assured has over-insured under an unvalued
      policy
Principles of Insurance
8. Assignment           or transfer of interest :- It is
  necessary to distinguish between the assignment
  of
       a) The subject matter of insurance
       b)The policy
       c) The policy money when payable
• The marine and life insurance can be freely assigned but
  assignment under fire and accident policies are not valid without
  the prior consent of the insurer- except change interest by will or
  operation of law. Moreover, assignment under fire and accident
  policies must be maid before the insured parts with his interest.
  Once he has loss the interest, the policy is void and cannot be
  assigned.
Difference Between-
            Insurance and Wager
       Insurance                      Wager
1.Contract of insurance(     1.In case of wagering
except life, accident and    agreement, however, there is
sickness insurances) is a    no question of indemnify as
contract of indemnity.       the parties do not intend to
                             cover any risk.
2. A contract of insurance   2. In the wagering
is a contract requiring      agreement good faith need
utmost good faith by the     not be observed.
parties of the contract.
Difference Between-
            Insurance and Wager
       Insurance                         Wager
3. A contract of insurance is   3. A wagering agreement is
legally enforceable and is      void, because it is against
encouraged as it benefits       the public policy.
the community as a whole.
4.The object of contract of     4.Where as, the object of
insurance is to protect the     wagering agreement is to
assured against the losses on   earn speculative gains.
the happening of some
uncertain events.
Difference Between-
           Insurance and Gambling
• To most people, Insurance is Gambling. Some
  even see Insurance as legalized form of fraud. The
  question is: Is Insurance Not the same as
  Gambling?
  – Gamblers are risk-seekers whilst insurance policy holders are risk-
    averse. Whereas Gamblers seek risk in attempt to get more
    money, insurance policy holders buy insurance to reduce risk
  – Risk in gambling is Speculative but insurance is Pure risk.
    Gambling involves a risk situation of Gain or Loss whilst
    Insurance deals with Pure risk i.e. there is the possibility that the
    event (e.g injury to person) will occur.
Difference Between-
         Insurance and Gambling
–   Gambling is entertainment; insurance is business. People
    engage in gambling mostly for excitement and enjoyment.
–   In Gambling, the parties are only interested in the money
    earned or lost (stakes) and not the occurrence of the event
    whereas in insurance, parties are interested in the occurrence
    of the event since this is the main focus of attention.
–   The insurable interest is in the event in Gambling; in
    insurance, the insurable interest is in the non-occurrence of the
    event. The parties in a Gambling contract choose an arbitrary
    event on the occurrence of which one party wins whilst the
    other loses.
–   Gambling is unenforceable in court whereas Insurance is a
    valid contract.
Difference Between-
            Insurance and Gambling
• An insured must have an insurable interest in the subject matter of
  a contract of insurance, which is not required in the case of a
  wager, where the interest is only restricted to the stake won or lost.
• An insurance contract is guided by the principle of utmost good
  faith, which is not required in the case of a wager.
• The insured event may or may not take place in the case of
  insurance (except life insurance). But in case of a wagering
  agreement the event takes place at a fixed future date.
• Insurance is based on mathematical predictions but gambling is
  highly speculative in nature.
• Insurance is enforceable by law whereas in gambling none of the
  parties has any legal remedy.
Insurance and hedging
• Hedging is a process where risk is transferred to a
  speculator through ways like purchasing a futures
  contract. Though insurance is not hedging, one similarity
  that can be drawn between the two is that an insurance
  contract is used to transfer the risk, without creating any
  new risks.
• Some distinctions that can be drawn between the two are:
   – the risk that can be transferred in insurance is an insurable risk;
     in the case of hedging, the risks are uninsurable.
   – by application of the law of large numbers, the insurer can
     reduce the risk, whereas in hedging risk can only be transferred
     and not reduced.
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Lecture slide chapter 2 insurance and risk management

  • 1. 2 Insurance and Risk Management Lecture Slides Chapter Chapter Contents 2.1 Nature of Insurance Contract 2.2 Elements of Insurance Contract 2.3 Principles of Insurance Insurance 2.3.1 Insurable Interest 2.3.2 Utmost Good Faith 2.3.3 Principles of Indemnity Contract and 2.3.4 Doctrine of Subrogation 2.3.5 Warranties 2.3.6 Proximate Cause Principles 2.3.7 Assessment or Transfer of Interest 2.3.8 Return of Premium 2.3.9 Contribution Prepared By: Md. Moulude Hossain Faculty Member, Department of Business Administration
  • 2. Insurance as Contract • As we earlier define (contractual definition) insurance 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. • It is good news for me that you are studying Commercial Law in the same semester, so I can hope that you certainly know about the fundamental law of contract. May I have the Pleasure………. Or I need to have my footstep on the Law of Contract
  • 3. Insurance as Contract • According to the Law of Contract “All agreement are contracts if they are made by free consent of the parties, competent to contract, for a lawful consideration and with a lawful object and which are hereby declare to be void.” • Thus for a insurance contract:  free consent of the parties – free consent of insurer and the insured  competent to contract – are legally eligible to enter into the contract  for a lawful consideration – the consideration is said to be exchange of risk in exchange of premium  a lawful object – it may be someone’s life or property  declare to be void – both to declare all the material facts with utmost good faith
  • 4. Distinct Legal Characteristics of Insurance Contracts • Aleatory Contract: where the values exchanged may not be equal but depend on an uncertain event . For e.g..- ?????????? (Commutative Contract?) • Unilateral Contract: only one party makes a legally enforceable promise. Only the insurer makes a legally enforceable promise to pay a claim . After the first premium is paid, the insured can not be legally forced to pay the premiums (Bilateral Contract?) • Personal Contract: the contract is between the insured and the insurer
  • 5. Distinct Legal Characteristics of Insurance Contracts • Conditional Contract: Insurer’s obligations to pay a claim depends on whether the insured has compiled with all policy conditions • For e.g. In a homeowner’s policy , the insured must give immediate notice of loss. If the insured delays for an unreasonable period in reporting the loss, the insurer can refuse to pay the claim • Contract of Adhesion: means the insured must accept the entire contract, with all of its terms and conditions
  • 6. Insurance as Contract • The insurance contract involves A. The elements of General Contract B. The elements of special contract relating to insurance
  • 7. General Parts of Contract A. General parts of a contract :- The general parts of a insurance contract contain the following parts- – Offer & acceptance – Free consent – Legal consideration (Premium) – Competency – Legal object
  • 8. General Parts of Contract 1. Offer & acceptance • Generally comes from the insured • Insurer may also propose to make the contract • Any act precedes it is an offer or counter-offer • All that precede the offer or counter-offer is an invitation to offer • In insurance, the publication of prospectus, the canvassing of the agents are invitation to offer
  • 9. General Parts of Contract 2. Free consent – The consent will be free when it is not caused by 1. Coercion 2. Undue influence 3. Fraud or 4. Misrepresentation – 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.
  • 10. General Parts of Contract 3. Legal consideration – As we know form the law of contract that, “no consideration no contract.” – Thus in case insurance there need to be a consideration for the validity of the contract. – The promiser (insurer) pay a sum at given contingency – It need not to be money only but it must be valuable, it may be sum, rights, interest or benefits
  • 11. General Parts of Contract – On the other side (insured), premium is a valuable consideration for starting an insurance contract. – The fact is that without payment of premium (consideration) the insurance contract cannot be start. For Insured: Payment of For insurer: Promise to first premium plus an do certain things as agreement to abide by the specified in the contract. conditions specified in For e.g.: paying for a loss the policy from the insured peril
  • 12. General Parts of Contract 4. Competency • 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 • Thus the competency to contract implies that, a) A minor is not competent to contract b) A person of sound mind means, he/she is capable to understand it and forming a rational judgment about it and the effects upon his/her interests. c) A person of unsound mind occasionally can enter into contract when he/she is in sound mind d) An alien enemy, undercharged insolvent and criminals cannot enter itno a contract.
  • 13. General Parts of Contract 5. Legal object • In order to make a valid contract, the object of the agreement must be lawful. An object is lawful if it is- Not forbidden by law, or Is not immoral, or Opposed to public policy, or Which does not defeat any provision of any law
  • 14. Principles of Insurance B. Principles of Insurance/Special parts of the contract :- The special parts of a insurance contract are described as the fundamental principles of Insurance. The principles of insurance are as follows: 1. Insurable Interest 5. Warranties 2. Utmost Good Faith 6. Proximate Cause 3. Principles of 7. Assignment or transfer Indemnity of interest 4. Doctrine of 8. Return of Premium Subrogation
  • 15. Principles of Insurance 1. Insurable interest:-Insurable interest means pecuniary relationship. There must be a pecuniary or monetary relation between insured and the insured object. • The principle of insurable interest is a pre-condition for a valid contract of insurance. The person getting an insurance policy must have an insurable interest in the subject matter to be insured. • The insured must positively stand benefited financially due to existence or continuance of life. • Ex – An employer has insurable interest in lives of his employees. A banker has an insurable interest in properties mortgaged to it against a loan. Insured Insured object Pecuniary relation
  • 16. Principles of Insurance • Importance of Insurable Interest – If the insurer has not insurable interest in property insured, the contract of insurance would amount to a gambling or speculative contract. – Most clear and common case of existence of insurable interest is ownership of property being insured. • Essentials of Insurable Interest  Subject matter of insurance must be certain. There must exist some property, rights, interest, like or potentially liability.  The policy holder should monetary relationship with the subject-matter.  The insured must bear a legal relationship to subject matter or he must be owner. He stands to benefit by safety.  The insured must be owner or may posses the legal rights or interest in subject matter to be insured.
  • 17. Principles of Insurance 2. Utmost good faith :- The concept of utmost good faith describe that the contract of insurance is a contract of uberrimae fidei i.e. of absolute good faith where both parties of the contract must perform the following responsibility, these are, a) Material disclose b) Full & true disclose c) Duties of both parties  Under the contract of insurance, the insured’s duty is bound to disclose all material facts relating to the risk to be covered. Without good faith, it shall be null and void.
  • 18. Principles of Insurance – Materiality of Facts • A material fact is a fact which would influence the mind of prudent underwriter in deciding whether to accept a risk for insurance and on what terms. Examples: – Motor – details of young drivers – Household – details of commercial use of private dwelling – Commercials – previous hazards / loss – Life – details of heart disease – Ubereimae Fidei • It means the contracts which require absolute and utmost good faith on part of all the parties concerned with the contract.
  • 19. Principles of Insurance • Material Information – Material information which enables the insurance company to decide whether to accept or not to accept any risk – If accepted, at what rate of premium and on what terms of and conditions. – The legal binding applies to insured, who is in possession of all material facts relating to subject matter. • Duty of Disclosure – Duty of disclosure applies to both proposer and insurer. – Duty of disclosure operates at inception, – Until the data cover is confirmed by insurers renewal – Up to the renewal date mid term alternation – Until the insurer confirm cover in respect of alternation.
  • 20. Principles of Insurance • Facts need not be disclosed by the insured The following facts, however, are not required to be disclosed by the insured: • Facts which tend to lessen the risk • Facts of public knowledge • Facts which could be inferred from the information disclosed • Facts waived by the insurer • Facts governed by the conditions of the policy
  • 21. Principles of Insurance 3. Principle of indemnity :- Insurance contract is a contract of indemnity. Insurer will pay the claim just as the loss suffered by the insured, not more or less. • Indemnity means that the insured person is placed financially in the same position as he was before the loss. The principles of indemnity also applies to all contracts of insurance except life insurance where – Loss suffered by insured can be measured in monetary terms • The measure of indemnity is decided at the time of entering into contract itself in events of insured: – Prove that he has sustained a monetary loss – Prove the extent and value of his loss
  • 22. Principles of Insurance ** Use of indemnity Principles:-  Claim not more than the actual loss  To avoid the anti-social act  To minimize the premium ** Conditions of indemnity Principles :- 1. How to suffer loss 2. Claim not more than the actual loss 3. If claim>loss, residual to insurer 4. Third party compensation 5. Principle of indemnity does not apply to personal insurance
  • 23. Principles of Insurance • Features – All contracts of insurance, except life insurance and personal accident insurance are contracts of indemnity. – There exists indirect relationship between principle of indemnity and principle of insurable interest, because insured has to prove amount of actual loss. – The amount of compensation shall never exceed the amount of actual loss or value of policy. – Valued policies are not covered under scope of principle of indemnity.
  • 24. Principles of Insurance Methods of Indemnity A. Cash payment: – It’s the claim of insurance in easiest and common method. After receiving the claim form, make analysis of the surveyor’s report, and evaluate the amount of actual loss to be compensated. B. Repairs: – The subject matter may be partially damaged or not fully destroyed in such case, the insurer instead of cash payment prefers to settle claim of damage to get repair. – Ex – motor vehicle insurance, machine and building insurance C. Replacement: – In case of fully destroyed or loss, there is no chance of repair, the insurer many arrange replacement. – Ex – Theft or burglary insurance. D. Reinvestment: – It is a rarely used method, where subject is destroyed is placed in its former position or condition as it existed just before loss. – Ex – Destroyed by fire
  • 25. Principles of Insurance 4. Doctrine of subrogation :- It means the substitution at a certain occurrence , of the insured by the insurer for the scrape value.  Subrogation is, “Transfer of rights and remedies of insured to the insurer who has indemnified the insured in respect of loss.”  Ex – Insurer of an importer of electrical goods receives a claim in respect of a faulty toaster. The insurer pays the claim but takes over insured’s right to claim back against manufacturer.  Subrogation rights only apply where there is a “legal liability”
  • 26. Principles of Insurance ** Essentials of doctrine of subrogation :- 1. Corollary to the principal of indemnity 2. Subrogation is the substitution 3. Subrogation only up to the amount of loss 4. Subrogation may be applied before payment 5. Not applied in personal insurance
  • 27. Principles of Insurance 5. Warranties :- It is a commitment to do , or not to do something , by the insured to the insurer. It may be any of the following figure. Warranties Express Implied Affirmative Promissory
  • 28. Principles of Insurance • Expressed Warranties – Warranties which are mentioned in the policy • Implied Warranties – Warranties which are not mentioned in the policy • Affirmative Warranties – Warranties which are answer to the questions • Promissory Warranties – Warranties fulfilling certain conditions or promise
  • 29. Principles of Insurance 6. Proximate cause :- The proximate cause describe the rule that immediate and not the remote cause is to be regarded i.e. see the proximate cause not the distant cause. • The real cause must be seen while payment the loss. • It must be clearly mentioned in the contract only in what case payment will be made, otherwise the insurer will not responsible for a certain loss.
  • 30. Principles of Insurance • Determination of Proximate Cause – If there is a single cause of the loss, the cause will be the proximate cause and further if the peril was insured insurer will have to indemnify the loss – If there are concurrent causes, the insured perils and expected perils have to be segregated. The concurrent cause may be first, separable and second, inseparable. – If the causes occurred in from of chain, they have to be observed seriously • If there is unbroken chain the expected and insured perils have to be separated • If there is a broken chain of events with no expected perils involved, it is possible to separate the loss.
  • 31. Principles of Insurance 7. Return of premium :- Ordinarily the premium once paid cannot be refund. How ever , the following cases the refund is allowed. These are 1.By agreement in the policy 2.For reasons of Equity 3.Over insurance by double insurance
  • 32. Principles of Insurance ** For reasons of Equity has the following points:- • Non-attachment of ris • Undeclared balance of an open account • Payment of premium is apportionable • Assured has no insurable interest • Assured has over-insured under an unvalued policy
  • 33. Principles of Insurance 8. Assignment or transfer of interest :- It is necessary to distinguish between the assignment of a) The subject matter of insurance b)The policy c) The policy money when payable • The marine and life insurance can be freely assigned but assignment under fire and accident policies are not valid without the prior consent of the insurer- except change interest by will or operation of law. Moreover, assignment under fire and accident policies must be maid before the insured parts with his interest. Once he has loss the interest, the policy is void and cannot be assigned.
  • 34. Difference Between- Insurance and Wager Insurance Wager 1.Contract of insurance( 1.In case of wagering except life, accident and agreement, however, there is sickness insurances) is a no question of indemnify as contract of indemnity. the parties do not intend to cover any risk. 2. A contract of insurance 2. In the wagering is a contract requiring agreement good faith need utmost good faith by the not be observed. parties of the contract.
  • 35. Difference Between- Insurance and Wager Insurance Wager 3. A contract of insurance is 3. A wagering agreement is legally enforceable and is void, because it is against encouraged as it benefits the public policy. the community as a whole. 4.The object of contract of 4.Where as, the object of insurance is to protect the wagering agreement is to assured against the losses on earn speculative gains. the happening of some uncertain events.
  • 36. Difference Between- Insurance and Gambling • To most people, Insurance is Gambling. Some even see Insurance as legalized form of fraud. The question is: Is Insurance Not the same as Gambling? – Gamblers are risk-seekers whilst insurance policy holders are risk- averse. Whereas Gamblers seek risk in attempt to get more money, insurance policy holders buy insurance to reduce risk – Risk in gambling is Speculative but insurance is Pure risk. Gambling involves a risk situation of Gain or Loss whilst Insurance deals with Pure risk i.e. there is the possibility that the event (e.g injury to person) will occur.
  • 37. Difference Between- Insurance and Gambling – Gambling is entertainment; insurance is business. People engage in gambling mostly for excitement and enjoyment. – In Gambling, the parties are only interested in the money earned or lost (stakes) and not the occurrence of the event whereas in insurance, parties are interested in the occurrence of the event since this is the main focus of attention. – The insurable interest is in the event in Gambling; in insurance, the insurable interest is in the non-occurrence of the event. The parties in a Gambling contract choose an arbitrary event on the occurrence of which one party wins whilst the other loses. – Gambling is unenforceable in court whereas Insurance is a valid contract.
  • 38. Difference Between- Insurance and Gambling • An insured must have an insurable interest in the subject matter of a contract of insurance, which is not required in the case of a wager, where the interest is only restricted to the stake won or lost. • An insurance contract is guided by the principle of utmost good faith, which is not required in the case of a wager. • The insured event may or may not take place in the case of insurance (except life insurance). But in case of a wagering agreement the event takes place at a fixed future date. • Insurance is based on mathematical predictions but gambling is highly speculative in nature. • Insurance is enforceable by law whereas in gambling none of the parties has any legal remedy.
  • 39. Insurance and hedging • Hedging is a process where risk is transferred to a speculator through ways like purchasing a futures contract. Though insurance is not hedging, one similarity that can be drawn between the two is that an insurance contract is used to transfer the risk, without creating any new risks. • Some distinctions that can be drawn between the two are: – the risk that can be transferred in insurance is an insurable risk; in the case of hedging, the risks are uninsurable. – by application of the law of large numbers, the insurer can reduce the risk, whereas in hedging risk can only be transferred and not reduced.