Insurance

BANKING & INSURANCE:

INSURANCE• Insurance is a contract to pay compensation

in certain eventualities (e.g., death, fire, theft, motor accident) in return for a premium.

The premiums are so calculated that on average, in total, they are sufficient to pay compensation for policy holders who will make a claim, together with a margin to cover administration costs and profit.

- ECONOMIST” DICTIONARY OF BUSINESS

BANKING & INSURANCE:

INSURANCE• Risk and uncertainty are incidental to life. Man may meet untimely death.

• He may suffer from accident, destruction of property, fire, floods, earthquakes and other natural calamities.

• Whenever there is uncertainty, there is risk as well as insecurity. It is to provide against risk and insecurity that insurance came in to being.

i n s u r a n c e ...

• The main principle underlying insurance is the pooling of risks. It is thus a co-operative devise to spread the loss caused by a risk ( which is covered by insurance) over a large number of persons who are also exposed to the same risk and themselves against that risk.

CONTRACT……OF I N S U RANCE

• CONTRACT OF INSURANCE:

A contract of insurance is a contract by which a person, in consideration of a sum of money , undertakes to make good the loss of another against a specific risk, e.g., fire, or to compensate him or his estate on happening of a specified event, e.g., accident or death.

INSURER & INSURED

• The person undertakes the risk is called the insurer , assuror or underwriter.

• The person whose loss is to be made good is called the insured or assured.

PREMIUM

• The consideration for which the insurer undertakes to indemnify the assured against the risk is called the premium.

POLICY

• The instrument in which the contract of insurance is generally embodied is called the ‘policy’.

•The policy is not the contract;

..it is the evidence of the contract.

Subject matter of insurance and insurable interest

• The thing or property insured is called the ‘subject matter of insurance ’, and the interest of the assured in the subject-matter is called his ‘insurable interest’.

PERILS INSURED AGAINST

• That which insured against is the loss arising from uncertain events or casualties, i.e., destruction of or damage to the property or the death or disablement of a person, and these are called ‘perils insured against.’

Insurance as a contract

• It is governed by the same general principles of law as other contracts.

• It comes in to existence by the process of OFFER in the form of proposal and it’s ACCEPTANCE (by the issue of a policy).

• The proposal is made by one party (assured or insured)

to the other party (insurer ,assuror or underwriter) for insurance against some loss should it occur on the happening of an uncertain event, within a limited time.

The object of contract must be lawful.

The Kinds of Insurance

• 1.Life Insurance:

In this case certain fixed amount becomes payable on the death of the assured or on the expiry of a certain fixed period, whichever is earlier.

• 2.Fire Insurance:

It covers the losses caused by fire.

………..The Kinds of Insurance

• 3.Marine Insurance:

It covers all marine losses, that is to say, the losses incidental to marine adventure.

• 4.Personal Accident Insurance:

In this case, the amount payable is a compensation for any personal injury caused to the assured.

………..The Kinds of Insurance

• 5.Health Insurance: Health insurance is becoming an important form of insurance. It provides benefit for medical expenses.

• 6.Property Insurance:Property insurance takes various forms like theft or burglary insurance, fire insurance, liability insurance etc.

Nature of Contract of Insurance

• Insurance is the law’s attempt to socialize responsibility.

• Lord Mansfield described it as a ‘contract on speculation”, which in legal sense means a wagering agreement.

• Wagering agreement is one in which a person promises to pay money or transfer property upon the happening or non happening of an uncertain event.

Difference Between- Insurance and Wager• 1.Contract of insurance( except

life, accident and sickness insurances) is a contract of indemnity.

It seeks to indemnify the assured for the loss suffered by him on the happening of an uncertain event.

In life insurance , the amount payable in case of death of the assured is ascertained and fixed in advance.

• 1.In case of wagering agreement, however, there is no question of indemnify as the parties do not intend to cover any risk.

Difference Between- Insurance and Wager• 3.A contract of insurance

is a contract requiring utmost good faith by the parties of the contract.

• 4.A contract of insurance is legally enforceable and is encouraged as it benefits the community as a whole.

• 3.In the wagering agreement good faith need not be observed.

• 4.A wagering agreement is void

ab initio because it is against the public policy.

…………….Difference Between- Insurance and Wager• 5.The object of

contract of insurance is to protect the assured against the losses on the happening of some uncertain events.

• 5.Where as, the object of wagering agreement is to earn speculative gains.

FUNDAMENTAL ELEMENTS OF INSURANCE OR PRINCIPLES OF INSURANCE

1.UTMOST GOOD FAITH: [UBERRIMAE FEDEI]

Insurance is a contract of uberrimae fidei. The assured must disclose to the insurer

all material facts known to him. A mis-statement or withholding of any material information is fatal to the contract of insurance. Both the parties are under obligation for the full disclosure of material information. The rule ‘ caveat emptor ’ does not apply to them.

• Where the assured does not make a complete disclosure of everything which it was material for the insurer to know in order to judge, (a) whether he should accept the risk, and

(b) what premium he should charge, the insurer can avoid the contract.

Any fact is material if it has a bearing on the risk and would materially affect the insurer in deciding to make the contract or not.

• If the assured has knowledge of a fact which the insurer cannot ordinarily have, then he should not indulge himself in suppressio veri (suppression of truth) by making a suggestion which is false or suppressing a matter which is true [Srinivasa Pillai vs.L.I.C. of India,1977]. [Example…..

[Cont’d]……. 1. UTMOST GOOD FAITH: [ UBERRIMAE FEDEI ]

Example…1.Utmost good faith[London Insurance Co. vs. Mansel (1879)]

• In making a proposal for insurance, M, in reply to a question asking whether previous proposals on his life had been made to any other office, and if so whether they had been accepted at the ordinary rates. He omitted to disclose that his proposal for life insurance had been declined by several other offices. Held, this was a material failure to disclose and the policy could be set aside.

A proposer should disclose all material facts at the time of making the proposal for insurance and must continue to do so till the negotiations are completed. [Looker vs.Law Union &Rock Insurance Co. Ltd.(1928)].

• L made a proposal to an insurance company for an insurance on his life for.50,000 sterling pounds.He trustworthily answered various questions on the proposal form and disclosed all relevant facts. A few days later but before the proposal was accepted by the insurance company, L was taken ill with pneumonia.Two days later, he died of pneumonia and the company learned about his illness for first time.Held, the company was not liable to pay the claim, as the notice of illness which amounted to material alteration in the risk between the date of the proposal and it’s acceptance was not given. [Looker vs.Law Union &Rock Insurance Co. Ltd.(1928)].

2.Indemnity

• A contract of insurance (except life, personal accident and sickness insurances) is a contract of indemnity.In case of loss the assured is paid the actual amount of loss not exceeding the amount of the policy.

• Indemnity is the controlling principle in contracts of fire, marine, and burglary insurances.

[Cont’d]………2.Indemnity

• The object of every contract of insurance is to place the assured in the same financial position, as nearly as possible, after the loss as if the loss had not taken place at all.

• It would be against he public policy to allow an assured to make a profit out of the happening of the loss or damage insured against. This is because, if that were so, the assured might be tempted to bring about the event insured against in order to get the money.

• Moreover, in the absence of principle of indemnity, there might be a tendency in the direction of over insurance.

Example…2.Indemnity

[ Castellion vs. Preston(1883) ]

• P insured his house against fire.Subsequently he agreed to sell his house to R for 3,100 sterling pounds. Before the sale could be completed the house was destroyed by fire and P received his value from the insurance company.P then received the price from R as per the contract of sale. Held, the insurance company could recover from P the money they had paid. [Castellion vs.Preston(1883)].

3.Insurable interest:

• Insurable interest is necessary to support every contract of insurance. It is the legal right of a person to insure.

• It means that the assured must be so situated with regard to the thing insured that he would benefit from it’s existence and suffer loss from it’s destruction.

• It means that, the assured must be in a legally recognized to relationship so that he will suffer a direct financial loss on the happening of the event insured.

…..3.Insurable interest:

• It is the existence of insurable interest in a contract of insurance which distinguishes it from a wagering agreement.

• In life insurance, insurable interest must be present at the time when the insurance is effected.

• In fire insurance, it must be present at the time of insurance and at the time of loss.

• In marine insurance, it must be present at the time of loss of the subject matter.

Cont’d………..[3.Insurable interest:]

• It is not the owner alone, to take the case of fire or marine insurance, but every person who would suffer direct financial loss if the property or goods were damaged or destroyed, who has insurable interest.Thus A has no insurable interest in the house belonging to B and as such cannot insure it.

• But if the house is mortgaged with A, he can insure it, if he desires, in order to protect his interest.

• Like wise, A cannot insure the life of B .But if he has some pecuniary interest in the life of B , he can insure B’ s life.

4.Causa Proxima:

• The assured can recover the loss only if it is proximately caused by any of the perils insured against. This is called the rule of “causa proxima”.

• The rule is causa proxima non remota spectatur, i.e., the proximate or immediate and not the remote cause is to looked to and if the proximate cause of the loss from the insurer.Every loss that clearly and proximately results, whether directly or indirectly, from the event insured against is within the policy.

Example… [4.Causa Proxima: ]

• The cargo of rice in a ship was destroyed by sea-water flowing in the ship through a hole made by rats in bathroom lead pipe.Held, the underwriter was liable as the damage was due to a peril of the sea.The proximae causa of the damage in this case is sea water.If however ,

the loss is caused directly by rats or vermin, the underwriter will not be liable. [Hamilton Fraser & Co. vs.Pandroff(1887)]

Another Example… [4.Causa Proxima: ]

• A ship carrying meat was delayed by a storm in consequence of which it became decomposed and had to be thrown overboard.Held, the loss of meat was not a loss by perils of the sea.

[Taylor VS.Dunbar(1869)]

5.Risk must attach:

• The insurer receives the premium in a contract of insurance for running a certain risk.If for any reason the risk is not run, the consideration fails, and the insurer must return the premium.

6.Mitigation of loss:

• In the event of some mishap to the insured property , if the assured does not take all necessary steps to mitigate the loss , the insurer can avoid the payment of loss which is attributable to the assured’ s negligence.

He must act as an uninsured prudent person would act under similar circumstances in his own case.

[British & Foreign Marine Insurance Co. vs. Grant(1921)]

7.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 under different policies in respect of the same subject-matter.

The contribution arises when (1) there are different policies which relate to the same subject-matter,(2)the policies cover the same peril which caused the loss,(3) all the policies are in force at the same time of the loss;and (4) one of the insurer has paid to the assured more than his share of loss.

Example…………………....[7.Contribution]

EXAMPLE: A insures his house against fire for Rs.10,000 with insurer X, and for Rs.20,000 with insurer Y .

A loss of Rs 12,000 occurs. X is liable for Rs.4,000 and Y for Rs.8,000.

If the whole amount of the loss is paid by Y, he can recover Rs.4,000 from X.

8.Subrogation:

• The doctrine of subrogation is a corollary to the principle of indemnity. According to it, the insurer who has agreed to indemnify the assured on making good the loss, is entitled to succeed to all the ways and means by which the assured might have protected himself against the loss.

Example…………………….[8.Subrogation]

• A insures his goods with B for

Rs 1,000. The goods are damaged by fire caused by C , a miscreant . A recovers the loss from B and subsequently he succeeds in recovering this loss from C also. He must hold the amount recovered from C in trust for B.

The Principle of Subrogation is subject to the following three limitations…………………

• 1.The insurer is subrogated to only the rights and remedies available to the assured in respect of the thing to which the contract of insurance relates.

example: (a) M owned two vessels, R and S, which were insured with different insurers.The two vessels collided due to the fault of the vessel R.The insurer of vessel S indemnified the owner,M, under the Policy, and then proceeded against M as the owner of vessel R by virtue of doctrine of subrogation for claiming the amount paid in respect of ship R .Held, he could not recover as the insurer is subrogated to only the rights of M, the insured, and as no person will succeed against himself , the insurer of vessel S did not get any right as both the ships were owned by M. [Simpson vs.Thomson(1887)].

The Principle of Subrogation is subject to the following three limitations…………………

• 2. The insurer’s right of subrogation arises only when he pays the loss for which he is liable under the policy.

• 3.The insurer is not entitled to benefit of which is recovered until the assured has recovered a full indemnity.

9.Period of Insurance:

• A contract of life insurance is a continuing contract with a condition that the premium is to be paid at regular intervals. If the premium is not paid regularly, the contract lapses and can be revived subject to the fulfillment of certain conditions.

• An insurance policy specifies the terms or period of time it covers, often the nature of risk against which insurance is sought determines the period or life of the policy.

10.Nature of contract :

• A contract of insurance like all other valid contracts , must have all the essential elements of contracts.

1.Offer and Acceptance2.Intention to create legal relationship3.Lawful Consideration4.Lawful object

5.Free and Genuine Consent

6.Certainty and possibility of performance

7.Competency of the parties

8.Agreement not declared to be void

9.Legal Formalities

RE-INSURANCE

• If an insurer has has insured a venture in which the risk involved is beyond his capacity, he may insure the same risk either wholly or partially with other insurers.This is called re-insurance.

• Re-insurance can be resorted to in all kinds of insurance.The insurer has an insurable interest in the subject-matter insured to the extent of the amount insured by him because a contract of re-insurance is also a contract of indemnity.

DOUBLE INSURANCE

• Where the assured insures the risk with two or more independent insurers and the total sum insured exceeds the actual value of the subject-matter, the assured is said to be over-insured by double insurance.

• But in case of loss the assured cannot recover more than the actual amount of loss.This is because a contract of insurance( other than life and personal accident insurance) is a contract of indemnity.

PRACTICAL PROBLEMS: CASE.1

• A ship insured against marine losses is sunk.The insurer pays the value in full.The ship is subsequently salvaged.

Who is entitled to the sale proceeds of the salvaged ship.?

Solution to Case.1

• The insurer is entitled to the sale proceeds of the salvaged ship.[Subrogation]


• A house is insured against fire for Rs.50,000.It is burnt down but it is estimated that Rs.30,000 will restore it to the original condition.

How much is the insurer is liable to pay ?

Solution to Case.2

• Insurer is liable to pay Rs.30,000 only.(Indemnity)


• A insures his house against fire for Rs.40,000 with B and for Rs.60,000 with C.A fire occurs and a loss is estimated at Rs. 14,000.A recovers Rs.14,000 from B.

What are the rights of B against C ?

Solution to Case.3

• B can claim Rs. 8,400 from C as the loss of Rs.14,000 will be borne by B and C in the ratio of 40,000: 60,000 [Contribution].


• A, to meet the claims of his creditors, borrows Rs.10,000 from B.To protect his interest, B takes out an insurance policy on the life of A.A pays the entire amount to B and then dies.

Can B recover on the policy ?

Solution to Case.4

• B can recover on the policy.

[Insurable interest].


• A contracted to build a house for B for which he was to be paid Rs.2,00,000.All the materials were to be supplied by B.

Can A insure the materials for the period during which the building is being constructed.?

Solution to Case.5

• A can insure the materials .

(Insurable interest).


• A’s goods in a warehouse are insured.B is the insurer.The goods are burnt.A recovers their full value of Rs.1,000 from B.Then A sues the warehouse keeper and recovers Rs.1,000 from him.B claims this amount from A but A refuses to make over the amount to B. How would you decide the dispute between A and B ?

Solution to Case.6

• A is bound to pay Rs.1,000 to B.

(Castellain vs.Preston)


• A firm of contractors assured a lorry against fire.In reply to a question in the proposal form, “ state the address at which the lorry will be usually garaged” a wrong address was given.The policy contained a clause that answers to the queries in the proposal form were the basis of the contract.The risk of fire was the same as the address given and at the correct address.

If the lorry is damaged by fire, are the insurers liable ?

Solution to Case.7

• The insurers are not liable.

[ Dawsons Ltd. Vs.Bonnin (1922) ]

LIFE INSURANCE

The contracts of life insurance in India are governed by the Insurance Act,1938 and Life Insurance Corporation Act,1956.

The life insurance business was nationalized on January 19, 1956. And on Sept 1st, same year, under Sec.3 of the Life Insurance Corporation Act, 1956, the LIC came in to being as an important step towards mobilizing savings.

LIFE INSURANCE CONTRACT

A contract of life insurance is a contract by which the insurer, in consideration of the payment of certain sums,called premiums, undertakes to pay a certain sum of money on the death of a person whose life is insured, or on the expiry of a certain period, whichever is earlier.

The premium may be paid in a lump sum or by periodical installments.

Distinction Between Fire & Marine Insurance on the one hand, and Life Insurance on the other.

Fire Insurance and Marine Insurance Life Insurance1.Certainty of event:

* In case of Fire and Marine Insurance the event insured may or may not happen at all

1.Certainty of event:

* The event (death) is bound to happen sooner or later.

2.Indemnity:

* The contract of fire and marine insurance are contracts of indemnity.

2.Indemnity:

* The sum assured is payable irrespective of any proof of loss and to the full extent of the amount assured in the event of death of the assured.


3.Valuation of Insurable interest:

*In fire and marine insurance, the insurable interest of the assured must be capable of valuation in terms of money

3.Valuation of Insurable interest:

*In case of Life insurance,this is not just possible

4.Time of Insurable Interest:

*In fire insurance, the insurable interest must be present both at the time of insurance and at the time of loss.

In marine insurance, it must be present at the time of loss.

4.Time of Insurable Interest:

*In Life insurance, it must exist at the time of the contract.It need not be present at the time when the policy falls due.


5.Duration of Contract of Insurance:

*A contract of fire insurance is a contract from year to year.It comes to an end after the expiry of the year.Though it can be renewed if the insured expresses his willingness to do so and pays the premium.

*A contract of marine insurance is for a particular voyage.

5. Duration of Contract of Insurance:

*A contract of life insurance is a continuing contract.It lapses if premium is not paid regularly at the specified times.

INSURABLE INTEREST

In life insurance, the assured must have insurable interest in the life insured, otherwise the contract of insurance is void.

A person has insurable interest in the life of another if he will sustain some pecuniary loss on the death of the person whose life is insured.

The insurable interest must exist at the time of contract of insurance.

Cont’d……………..[INSURABLE INTEREST]

In life insurance, there are three cases in which insurable interest is presumed.

Every person is presumed to have insurable interest in his own life up to any amount.

Likewise, a husband is presumed to have insurable interest in the life of his wife and vice versa.

A person is deemed to have an insurable interest in the lives of those who are dependent upon him.

The following persons have been held

to have insurable interest :

1.A person has an insurable interest in the life of a relative by whom he is supported.

It is interesting to note that although a son has an insurable interest in the life of his supporting father a father does not have insurable interest in the life of his son unless he is dependent on the son.

Similarly, an elder brother does not have any insurable interest in the life of his younger brother.



2.A proprietor of a dramatic company has insurable interest in the lives of actors and actresses engaged by him.

Likewise, a servant engaged for a term of years has insurable interest in the life of his employer to the extent of salary for the term of service.



3.A creditor has insurable interest in the life of his debtor up to the amount of the debt at the time of the issue of policy.He has also insurable interest in the life of the surety, to the extent of the amount guaranteed.



4.A surety has an insurable interest in the life of his co-surety and principal debtor .

5.A partner has insurable interest in the life of other partners.

Right of Insurer….. to Avoid Insurance Policy

Contract of life insurance, like other contracts of insurance, is a contract of Uberrmae fedei, and therefore full disclosure must be made to the insurer of every material circumstance which is known to the assured and which would influence the judgment of a prudent insurer in fixing the premium, or determining whether to take risk.

….Right of Insurer….. to Avoid Insurance Policy

In the event of failure to disclose any such circumstance, the insurer can avoid the policy [Mithoolal Nayak vs. L.I.C of India(1962)].

“The deceased knowing that he had suffered from heart suffered, had stated in the proposal that he did not suffer from any ailment.Held, this was a statement on a material matter and that he had fraudulently suppressed the fact which was material be disclosed and the insured knew the statement to be false when he made it.Held, the insurer(Life Insurance Corporation of India) were entitled to avoid the claim on the policy on the grounds available to them under Section 45.

[Krishnawanti vs L.I.C.of India(1975)]

Surrender Value

Surrender value is the amount which insurer is prepared to pay to the assured in case he does not continue a policy for the agreed period of time and surrenders his right, title and interest under the policy to the insurer.Before the policy acquires any surrender value it should have run for a certain number of years.The surrender value of the policy goes on increasing as more and more premiums are paid.

Loan on Policies

The insurers usually offer the assured a facility of loan on the life policies on which a certain number of premiums have been paid.

The loan is granted on the security of the policy, and is limited by the amount of surrender value.It may be paid back within a certain period.

If it is not paid during the term of the assurance, it is recovered from the payment due at the time of the maturity of the policy.

Proof of Age and Death

The rates of premium for most life policies depend upon the age of the life assured at the time of effecting the policy.

It is, therefore, essential that the correct age should be stated in the proposal form. Proof of age may be given at the time of the proposal or subsequent to the issue of the policy.When it is given, the insurer writes the words “age admitted” on the policy.

Age can be proved by production of a certified copy of an entry in the Register of Births kept by the local bodies or other available evidences.

SUICIDE

The life policies usually contain a clause that no payment shall be made in case the assured commits suicide.If such a clause is there in the policy and the assured commits suicide, the insurer is not liable to pay.The onus of providing suicide is upon the insurer.

In India, suicide in itself is not a crime but an attempt at suicide is.A policy in India cannot be avoided on the ground of suicide unless there is a specific clause to that effect in the policy.

[Northern India Assurance Company Ltd vs Kanhaya Lal(1938) Lah.]

SUICIDE

All life policies issued by the

Life Insurance Corporation contain ‘suicide clause’.According to this clause, if the assured commits suicide within one year of the commencement of the risk under the policy, no liability shall attach to the LIC.

Assignment & Nomination: Distinction

ASSIGNMENT:

1.Assignment may be made by an endorsement on the policy itself or by a separate instrument.

2.On assignment, the property in the policy passes to the assignee.

NOMINATION:1.Nomination may be made

by mentioning the name of the nominee in the policy or endorsement thereon.

2.In case of nomination, the policy continues to be at the disposal of the assured during his lifetime.


3.An assignee gets the right of the owner of the policy and he may deal with the policy in any manner he likes.

4.In case of assignment, the money is to be paid to the assignee.

3.A nominee gets only beneficial interest in the policy. He gets a right in the policy only on the death of the assured.

4.In case of nomination, money is to be paid to the nominee , if he survives the assured.


5.An assignment is made for the purpose of transferring the rights, etc. under the policy to the assignee.

6.Assignment is irrevocable.

5.A nomination is made so that the beneficiary may recover the amount when the policy matures after the death of the assured.

6.Nomination can be revoked at any time before the maturity of the policy by giving a notice to the insurer.

Types of Policies:

The two basic elements in a life insurance cover are (a) death cover and (b) risk cover.

The insurance plans that provide only the death covers i.e., the benefits are paid on the death of the insured person are called as Term Assurance Plans, else, the plans under which the benefits are paid on the survival of the insured within a specified period are called as Pure Endowment Plans. All insurance covers are a mix of these basic elementary plans. …….. [Cont’d]

Types of Policies:

1.Classification based on time:

a.Whole life: Whole term,Limited Term, Convertible

b.Limited, Convertible,Renewable 2.Classification based on investment objective:

a.Endowment Plans: Pure, Joint, Double, Anticipated

b.Participating plans: Money back policies 3.Classification based on premium payment:

a.Single premium policies

b.Level premium policies

Types of Policies:

4.Classification based on claim payment:

a. Fixed Sum Policies

b. Annuity Policies 5.Classification based on number of persons assured:

a.Single life

b.Multiple Life

c.Last survivorship policy

Issue of Duplicate Policy

A duplicate policy confers on it’s owner the same rights and privileges as the original policy.

GENERAL INSURANCE:

• Introduction: The object of all laws is to protect the person and property of all individuals in any society. Risk is inherent in various facets of human life and there is an incessant urge among human beings to lead a protected and secured life.– According to Abraham Maslow, a famous psychologist,

next to survival comes ‘safety and security’ in the hierarchy of needs of any human being.

GENERAL INSURANCE:

• One of the ideal devices for avoiding such exigencies of insecurity is the concept of insurance.

• Whereas, life insurance takes care about the contingencies that affect life, general insurance embraces a wide range of risks pertaining to subject matters other than life.

• General Insurance embraces within it’s fold insurance of different kinds of property, which include fire, marine, contingency, liability, motor and accident insurances etc.

FIRE INSURANCE

• There are specific enactments dealing with life and marine insurance.No such enactment is passed in India in respect of fire insurance.

• The Insurance Act,1938 enunciates general principles and legal requirements in all insurance contracts including fire insurance.

• Whenever there is any gap in Indian law and practice, Indian courts generally follow precedents of Common Law courts in England.

• This module covers definitions, nature and scope, characteristics and formation of fire insurance contracts.

DEFINITION OF FIRE INSURANCE BUSINESS

• ‘Fire Insurance’ has not been defined in the Insurance Act,1938 instead, fire insurance business is defined, as “the business effecting, otherwise than incidentally to some other class of insurance business, contracts of insurance against the risks insured against in fire insurance policies”

Insurance Act,1938[Sec.2(6)(a)].

History of Fire Insurance

• Disastrous fire accidents rendering incalculable losses of life and wealth occurred in various parts of the globe prompted people to seriously ponder the possible remedy for evading such losses.

• ENGLAND:Historically speaking, as early as 1666, an oven in the King’s bakeshop became overheated resulting in a massive destruction of the whole city of London rendering a spectacular number of people shelter-less in a short span of five days and causing an extensive loss of life and property.Another landmark incident is Tooley Street fire,1861.The unimaginable losses of great magnitude paved path for the proposition of insurance.

History of Fire Insurance

• Nicholas Barbon could be considered as as the founder of this concept of fire insurance.He offered fire insurance against loss to dwellings and business buildings.The concept of corporate insurance emerged in the year 1720.

• The Royal Charter restricted the recognition to only two companies, London Assurance Corporation and the Royal Exchange Corporation.Today the number of fire insurance companies have increased.

History of Fire Insurance in U.S.A

• The history of fire accident and their drastic consequences is not unknown to America and dates back to as early as 1630 when a major fire broke in Boston.Boston tried to combat the same with muncipal fire fighting equipment.A ghastly fire in Philadelphia, prompted the formation of the Union Fire Company.

• Benjamin Franklin who was the founder of that company was Instrumental in the formation of the Philadelphia Contributionship for the Insurance Houses from loss by fire.Subsequently in 1794, the Board of the Insurance Company of North America started insuring contents as well as buildings, thus becoming the first in America to insure contents.Later, the Insurance Company of North America(INA) made it available on properties anywhere in the United States.That marked the beginning of fire insurance business in America.

Fire Insurance

• The law relating to fire insurance in India is contained in the Insurance Act,1938 and the General Insurance Business Nationalization Act, 1972.This is subject to the provisions of the Indian Contract Act,1872 and the Indian Stamp Act,1899.Wherever the law is silent the English Law and the principles established by Indian decisions apply.The general insurance business was nationalized on 13 th May, 1971.

FIRE INSURANCE CONTRACT

• A contract of fire insurance is a contract whereby the insurer undertakes, in consideration of the premium paid to make good of any loss or damage caused by fire during a specified period.

Characteristics of Fire Insurance Contract

• 1.It is a contract of indemnity:The assured can in the event of loss recover the actual amount of loss from the insurer.This is subject to the maximum amount for which the subject matter is insured.

• 2.It is a contract of uberrimae fedei: The assured and the insurer have to disclose everything which is in their knowledge and which will affect the contract of insurance.


• 3.The assured must have insurable interest in the subject matter both at the time of insurance and at the time of loss.This insurable interest must be capable of valuation in terms of money.

• 4.The risk covered by fire insurance contract is the loss resulting from fire or some cause which is the proximate cause of loss.


• 5.It is subject to the principles of subrogation and contribution.

• 6.It is a contract from year to year:It can, however, be renewed if the assured pays the premium during the days of grace.

Formation of Contract

• A contract of Insurance is entered in to by the process of proposal by one party and it’s acceptance by the insurer.The proposal is made in writing by filling up a printed form, and paying the premium or a part of it to the insurer.On the receipt of the proposal and premium, the insurer issues a deposit receipt usually called a cover note.Subsequently if the proposal is accepted, the insurer issues a regular policy.

Average Clause in Fire Policy

• The subject mater of fire insurance, I.e., property or goods, may be over-insured or under-insured.Over-insurance is automatically checked in case of loss, the insurer is liable to pay the actual amount of loss subject to the maximum amount for which the policy is taken.For example, where, a building worth Rs.5,00,000 is insured for Rs.8,00,000 and is completely destroyed by fire, the insurer is liable to pay only Rs.5,00,000.

Average Clause in Fire Policy

• The effect of this clause in a fire policy is that the subject matter is under-insured, the assured is considered his own insurer for the difference in the actual value of the subject matter and the value for which it is insured.If in such a case, a part of the subject matter, is destroyed, the insurer pays only a rate-able proportion of loss.

Example:

• Property worth Rs.1,00,000 is insured for Rs.80,000.The policy contains an average clause.If half the property is burnt down, the assured can recover only Rs.40,000.This is worked out as follows;

Value of policy

Sum to be recovered= X Actual Loss

Full value of subject matter

80,000

= …………… x 50,000 = Rs. 40,000 1,00,000

INSURABLE INTEREST

• In case of fire insurance, the assured must have insurable interest in the subject matter both at the time of the contract and at the time of the loss.Every person has an insurable interest in the goods or property equal to the pecuniary interest he has in it.

• In case of goods, pecuniary interest may arise on account of (a) Ownership,(b) Lawful possession, and © Contract.

Insurance

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