In this chapter, we shall learn about the basic principles that govern the working of insurance. The chapter is divided into two sections. The first section deals with the elements of insurance and the second section deals with the special features of an insurance contract.
This chapter will cover:-
1. The various elements of insurance
2. The features of an insurance contract
3. The special features of an insurance contract
*We have seen that the process of insurance has four elements
*Asset Example:- A machine used to manufacture biscuits, or a cow that yields milk, both generate income for their owner. A healthy worker is an asset to an organisation.
*Risk Example:- One in a thousand chances that a house will catch fire = 1/1000 = 0.001.
Three in a thousand chances that Ram will have a heart attack = 3/1000 = 0.003
Examples of perils are fire, earthquakes, floods, lightning, burglary, heart attack etc.
*Risk Pooling Example:- Suppose there are 100000 houses exposed to the risk of fire that can cause an average loss of Rs 50000. If the chance of a house catching fire is 2 in 1000 [or 0.002] it would mean that the total amount of loss suffered would be Rs 10000000 [=50000 x 0.002 x 100000].
If an insurer were to get the owners of each of the hundred thousand houses to contribute Rs 100 and if these contributions were to be pooled into a single fund, it would be enough to pay for the loss of the unfortunate few who suffered from the fire.
The required amount of individual contribution is evident from the calculation below
100000 x 100 = Rs 10000000
* The Indian Contract Act, 1872 govern all contracts in India, including insurance contracts.
*Elements of Valid Contract:-
*Subrogation follows from the principle of indemnity.
Subrogation means the transfer of all rights and remedies, with respect to the subject matter of insurance, from the insured to the insurer.
*Contribution
This principle is applicable to only non-life Insurance. Contribution follows from the principle of indemnity, which implies that one cannot gain more from insurance than one has lost through the peril
*Uberrima Fides or Utmost Good Faith:- Insurance contracts stand on a different footing. The proposer has a legal duty to disclose all material information about the subject matter of insurance to the insurers who do not have this information.
*Insurable interest
The existence of „insurable interest. is an essential ingredient of every insurance contract and is considered as the legal pre-requisite for insurance. Let us see how insurance differs from a gambling or wager agreement.
You can only insure things that effect your pocket.
Ownership, Banks, Partners... If there are four partners in a company... They can take insurance on the life of the partners...
*Proximate Cause:- Proximate cause is a key principle of insurance and is concerned with how the loss or damage actually occurred and whether it is indeed as a result of an insured peril.
Excluded perils:- All the things that are excluded from the contract will not be paid.
Insured perils:- The perils that you have insured.
Uninsured perils:- The medical expenses on Accident or Sickness. Medical Policies.
Q. Mr. Pinto contracted pneumonia as a result of lying on wet ground after a horse riding accident. The pneumonia resulted in death of Mr. Pinto. What is the proximate cause of the death?
I. Pneumonia
II. Horse
III. Horse riding accident
IV. Bad luck
SUMMERY
a) The process of insurance has four elements (asset, risk, risk pooling and an insurance contract).
b) An asset may be anything that confers some benefit and is of economic value to its owner.
c) A chance of loss represents risk.
d) Condition or conditions that increase the probability or severity of the loss are referred to as hazards.
e) The mathematical principle, that makes insurance possible is known as principle of risk pooling.
f) The elements of a valid contract include offer and acceptance, consideration, legality, capacity of the parties and the agreement between parties.
g) Indemnity ensures that the insured is compensated to the extent of his loss on the occurrence of the contingent event.
h) Subrogation means the transfer of all rights and remedies, with respect to the subject matter of insurance, from the insured to the insurer.
i) The principle of contribution implies that if the same property is insured with more than one insurance company, the compensation paid by all the insurers together cannot exceed the actual loss suffered.
j) All insurance contracts are based on the principle of Uberrima Fides.
k) The existence of „insurable interest‟ is an essential ingredient of every insurance contract and is considered as the legal pre-requisite for insurance.
l) Proximate cause is a key principle of insurance and is concerned with how the loss or damage actually occurred and whether it is indeed as a result of an insured peril.
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KEY TERMS
a) Asset
b) Risk
c) Hazard
d) Risk pooling
e) Offer and acceptance
f) Lawful consideration
g) Consensus ad idem
h) Uberrima fides
i) Material facts
j) Insurable interest
k) Subrogation
l) Contribution
m) Proximate cause
________________________________________________________________________________
TEST YOU SELF
Question 1
Moral hazard means:
I. Dishonesty or character defects in an individual
II. Honesty and values in an individual
III. Risk of religious beliefs
IV. Hazard of the property to be insured
Question 2
Risk indicates:
I. Fear of unknown
II. Chance of loss
III. Disturbances at public place
IV. Hazard
Question 3
______________ means spreading one‟s investment in different kinds of assets.
I. Pooling
II. Diversification
III. Gambling
IV. Dynamic risk
Question 4
_____________ is not an example of an asset.
I. House
II. Sunlight
III. Plant and machinery
IV. Motor car
Question 5
______________ is not an example of risk.
I. Damage to car due to accident
II. Damage of cargo due to rain water
III. Damage to car tyre due to wear and tear
IV. Damage to property due to fire
Question 6
Earthquake is an example of:
I. Catastrophic risk
II. Dynamic risk
III. Marginal risk
IV. Speculative risk
Question 7
Select the most appropriate logical equivalence for the statement.
Statement: Insurance cannot protect an asset from loss or damage.
I. True
II. False
III. Partially true
IV. Not necessarily true
Question 8
__________________ means transfer of all rights and remedies, with respect to the subject matter of insurance, from insured to insurer.
I. Contribution
II. Subrogation
III. Legal hazard
IV. Risk pooling
Question 9
An example of a fact which need not be disclosed unless asked for is ______________ by the insurer.
I. Age of the insured
II. Presence of fire extinguisher
III. Heart ailment
IV. Other insurance details
Question 10
________________ is a wrong statement made during negotiation of a contract.
I. Misrepresentation
II. Contribution
III. Offer
IV. Representation
________________________________________________________________________________
Answers to Test your self
Answer 1
The correct option is I.
Moral hazard means dishonesty or character defects in an individual.
Answer 2
The correct option is II.
„Risk‟ indicates a chance of loss.
Answer 3
The correct option is II.
Diversification means spreading one‟s investment in different kinds of assets.
Answer 4
The correct option is II.
Sunlight cannot be classified as asset as it fails the test of scarcity and ownership.
Answer 5
The correct option is III.
Damage as a result of wear and tear cannot be treated as risk.
Answer 6
The correct option is I.
Earthquake is an example of catastrophic risk.
Answer 7
The correct option is I.
Insurance cannot protect an asset from loss or damage.
Answer 8
The correct option is II.
Subrogation means transfer of all rights and remedies, with respect to the subject matter of insurance, from insured to insurer.
Answer 9
The correct option is II.
Presence of fire extinguisher need not be disclosed while buying insurance, unless asked for.
Answer 10
The correct option is I.
Misrepresentation is a wrong statement made during negotiation of a contract.
________________________________________________________________________________
________________________________________________________________________________
This chapter will cover:-
1. The various elements of insurance
2. The features of an insurance contract
3. The special features of an insurance contract
*We have seen that the process of insurance has four elements
- Asset :- An asset may be defined as „anything that confers some benefit and has an economic value to its owner‟.
- Risk :- The second element in the process of insurance is the concept of risk. We shall define risk as the chance of a loss.
- Risk pooling :- The third element in insurance is a mathematical principle that makes insurance possible. It is known as the principle of risk pooling.
- Insurance contract :- The fourth element of insurance is that it involves a contractual agreement in which the insurer agrees to provide financial protection against specified risks for a price or consideration known as the premium. The contractual agreement takes the form of an insurance policy.
*Asset Example:- A machine used to manufacture biscuits, or a cow that yields milk, both generate income for their owner. A healthy worker is an asset to an organisation.
*Risk Example:- One in a thousand chances that a house will catch fire = 1/1000 = 0.001.
Three in a thousand chances that Ram will have a heart attack = 3/1000 = 0.003
Examples of perils are fire, earthquakes, floods, lightning, burglary, heart attack etc.
*Risk Pooling Example:- Suppose there are 100000 houses exposed to the risk of fire that can cause an average loss of Rs 50000. If the chance of a house catching fire is 2 in 1000 [or 0.002] it would mean that the total amount of loss suffered would be Rs 10000000 [=50000 x 0.002 x 100000].
If an insurer were to get the owners of each of the hundred thousand houses to contribute Rs 100 and if these contributions were to be pooled into a single fund, it would be enough to pay for the loss of the unfortunate few who suffered from the fire.
The required amount of individual contribution is evident from the calculation below
100000 x 100 = Rs 10000000
* The Indian Contract Act, 1872 govern all contracts in India, including insurance contracts.
*Elements of Valid Contract:-
- Offer and Acceptance :- Usually, the offer is made by the proposer, and acceptance is made by the insurer.
- Consideration:- This means that the contract must involve some mutual benefit to the parties. The premium is the consideration from the insured, and the promise to indemnify, is the consideration from the insurers.
- Agreement between the parties:- Both the parties should agree to the same thing in the same sense.
- Capacity of the parties:- Both the parties to the contract must be legally competent to enter into the contract. For example, minors cannot enter into insurance contracts.
- Legality:- The object of the contract must be legal, for example, no insurance can be had for smuggled goods.
*Principals and Fundamentals of Insurance/ Special Features of Insurance
Indemnity
Utmost Good Faith
Average Clause
*Indemnity:- All the Policy are Indemnity Policies accept of Life insurance and P.A. Policy. Where After the Loss, The insurance company will take you back to the situation where you were before the loss by Cash Payment, Repair, Replacement or Reinstatement.
*Subrogation follows from the principle of indemnity.
Subrogation means the transfer of all rights and remedies, with respect to the subject matter of insurance, from the insured to the insurer.
*Contribution
This principle is applicable to only non-life Insurance. Contribution follows from the principle of indemnity, which implies that one cannot gain more from insurance than one has lost through the peril
*Uberrima Fides or Utmost Good Faith:- Insurance contracts stand on a different footing. The proposer has a legal duty to disclose all material information about the subject matter of insurance to the insurers who do not have this information.
*Insurable interest
The existence of „insurable interest. is an essential ingredient of every insurance contract and is considered as the legal pre-requisite for insurance. Let us see how insurance differs from a gambling or wager agreement.
You can only insure things that effect your pocket.
Ownership, Banks, Partners... If there are four partners in a company... They can take insurance on the life of the partners...
*Proximate Cause:- Proximate cause is a key principle of insurance and is concerned with how the loss or damage actually occurred and whether it is indeed as a result of an insured peril.
Excluded perils:- All the things that are excluded from the contract will not be paid.
Insured perils:- The perils that you have insured.
Uninsured perils:- The medical expenses on Accident or Sickness. Medical Policies.
Q. Mr. Pinto contracted pneumonia as a result of lying on wet ground after a horse riding accident. The pneumonia resulted in death of Mr. Pinto. What is the proximate cause of the death?
I. Pneumonia
II. Horse
III. Horse riding accident
IV. Bad luck
SUMMERY
a) The process of insurance has four elements (asset, risk, risk pooling and an insurance contract).
b) An asset may be anything that confers some benefit and is of economic value to its owner.
c) A chance of loss represents risk.
d) Condition or conditions that increase the probability or severity of the loss are referred to as hazards.
e) The mathematical principle, that makes insurance possible is known as principle of risk pooling.
f) The elements of a valid contract include offer and acceptance, consideration, legality, capacity of the parties and the agreement between parties.
g) Indemnity ensures that the insured is compensated to the extent of his loss on the occurrence of the contingent event.
h) Subrogation means the transfer of all rights and remedies, with respect to the subject matter of insurance, from the insured to the insurer.
i) The principle of contribution implies that if the same property is insured with more than one insurance company, the compensation paid by all the insurers together cannot exceed the actual loss suffered.
j) All insurance contracts are based on the principle of Uberrima Fides.
k) The existence of „insurable interest‟ is an essential ingredient of every insurance contract and is considered as the legal pre-requisite for insurance.
l) Proximate cause is a key principle of insurance and is concerned with how the loss or damage actually occurred and whether it is indeed as a result of an insured peril.
________________________________________________________________________________
KEY TERMS
a) Asset
b) Risk
c) Hazard
d) Risk pooling
e) Offer and acceptance
f) Lawful consideration
g) Consensus ad idem
h) Uberrima fides
i) Material facts
j) Insurable interest
k) Subrogation
l) Contribution
m) Proximate cause
________________________________________________________________________________
TEST YOU SELF
Question 1
Moral hazard means:
I. Dishonesty or character defects in an individual
II. Honesty and values in an individual
III. Risk of religious beliefs
IV. Hazard of the property to be insured
Question 2
Risk indicates:
I. Fear of unknown
II. Chance of loss
III. Disturbances at public place
IV. Hazard
Question 3
______________ means spreading one‟s investment in different kinds of assets.
I. Pooling
II. Diversification
III. Gambling
IV. Dynamic risk
Question 4
_____________ is not an example of an asset.
I. House
II. Sunlight
III. Plant and machinery
IV. Motor car
Question 5
______________ is not an example of risk.
I. Damage to car due to accident
II. Damage of cargo due to rain water
III. Damage to car tyre due to wear and tear
IV. Damage to property due to fire
Question 6
Earthquake is an example of:
I. Catastrophic risk
II. Dynamic risk
III. Marginal risk
IV. Speculative risk
Question 7
Select the most appropriate logical equivalence for the statement.
Statement: Insurance cannot protect an asset from loss or damage.
I. True
II. False
III. Partially true
IV. Not necessarily true
Question 8
__________________ means transfer of all rights and remedies, with respect to the subject matter of insurance, from insured to insurer.
I. Contribution
II. Subrogation
III. Legal hazard
IV. Risk pooling
Question 9
An example of a fact which need not be disclosed unless asked for is ______________ by the insurer.
I. Age of the insured
II. Presence of fire extinguisher
III. Heart ailment
IV. Other insurance details
Question 10
________________ is a wrong statement made during negotiation of a contract.
I. Misrepresentation
II. Contribution
III. Offer
IV. Representation
________________________________________________________________________________
Answers to Test your self
Answer 1
The correct option is I.
Moral hazard means dishonesty or character defects in an individual.
Answer 2
The correct option is II.
„Risk‟ indicates a chance of loss.
Answer 3
The correct option is II.
Diversification means spreading one‟s investment in different kinds of assets.
Answer 4
The correct option is II.
Sunlight cannot be classified as asset as it fails the test of scarcity and ownership.
Answer 5
The correct option is III.
Damage as a result of wear and tear cannot be treated as risk.
Answer 6
The correct option is I.
Earthquake is an example of catastrophic risk.
Answer 7
The correct option is I.
Insurance cannot protect an asset from loss or damage.
Answer 8
The correct option is II.
Subrogation means transfer of all rights and remedies, with respect to the subject matter of insurance, from insured to insurer.
Answer 9
The correct option is II.
Presence of fire extinguisher need not be disclosed while buying insurance, unless asked for.
Answer 10
The correct option is I.
Misrepresentation is a wrong statement made during negotiation of a contract.
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Very Informative,Thanks for sharing
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