Principles Insurance

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General Principles of

INSURANCE

-Dr. P. Sree Sudha



Significance of Insurance:

In the words of Ivamy, General Principles of Insurance,

“ A contract of insurance in the widest sense of the

term may be defined as a contract whereby one person called the insurer undertakes in return for theagreed consideration called the premium, to pay tothe other person called the assured, a sum ofmoney or its equivalent on the happening of a

specified event” .



Definition of Insurance:

In the words of John Birds, Modern Insurance Law, Pg13,

“It is suggested that a contract of insu rance isany contract whereby one party assures the r isk

of an uncer tain event which is n ot w i th in hiscontrol happening at a future t ime. In whichevent the other party has an in terest and underwhich con tract the fi rs t par ty is bound to paymoney o r prov ide its equivalent i f the uncertain

event occurs .”



Distinction between Insurance and Wagering Contracts

1. Wagers are generally unenforceable whilst insurance contracts areenforceable.

2. The fundamental distinction between insurance and a wager is the riskin that whereas in insurance risk exists a priori, in a wager there is adeliberate assumption of risk.

3. In wagering contracts neither of the contracting parties has the interestother than the sum to be won or loss depending on the outcome.Payment is dependant upon the event as agreed to by the parties andis not paid by way of indemnity or otherwise. In insurance, the insured

has an interest of the subject matter in respect of which he may sufferloss.



Contd…

4. The uncertain event upon which the uncertain event depends is primafacie adverse to the insureds interest and insurance is effected so asto meet the loss or detriment which may be suffered on the happeningof the event. In the words of Blackburn J in Wilson Vs. Jones [1867]L.R. 2 EX 139.

5. In wagers it is essential that either party may win or lose depending onthe outcome of the uncertain event. In insurance, the insured pays apremium to furnish consideration, it is not dependant upon the eventinsured against and the insured cannot be called upon to contributeanything more, whether or not the event occurs.



NATURE OF INSURANCE

Sharing of risk – Insurance

Co-operative device

Value of risk

Payment at contingency

Amount of payment

Large number of insured persons

Insurance is not a gambling Insurance is not charity



PURPOSE AND NEED

Indemnifies loss

Reduces worry and fear

Makes available funds for investment

Provides employment to a large number of people

Educates people about loss prevention

Insurance enhances credit worthiness

Social benefits



Insurable Interest means

“A relation between the insured and the event

insured against, such that the occurrence of

the event will cause substantial loss or injury

of some kind to the insured”.



Insurable Interest

1. The interest should not be a mere

sentimental right or interest, for example, love

& affection alone cannot constitute insurable

interest.2. It should be a right in property or a right

arising out of a contract in relation to the

property.



Contd.,

3. The interest must be pecuniary, that is, capable ofestimation in terms of money. -

-In other words, the peril must be such that itshappening may bring upon the insured an actual or

deemed pecuniary loss. Mere disadvantage orinconvenience or mental distress cannot beregarded as an insurable interest.

4. The interest must be lawful, that is, it should not be

illegal, unlawful, immoral or opposed to public policy.



When Insurable Interest must

Exist?

i. Life Insurance: at the time of

beginning/inception

ii. Fire Insurance: both at the time of beginning

and at the time of loss

iii. Marine Insurance: at the time of loss



FUNDAMENTAL PRINCIPLES OF INSURANCE.

1. INSURABLE INTEREST.

2. UBERRIMAE FIDEI.

3. INDEMNITY.

4. SUBROGATION.

5. CONTRIBUTION

6. CAUSA PROXIMA

7. MITIGATION OF LOSS

8. ABANDONMENT

9. AVERAGE CLAUSE



1. The essentials of a valid insurable

interest are the following:

(a) There must be a subject matter to be insured.

(b) The insured should have monetary relationship withthe subject matter.

(c) The relationship between the insured and the subjectmatter should be recognised by law i.e. there shouldnot be any illegal relationship between the insured andthe subject matter.

(d) The financial relationship between the insured and

the subject matter should be such that the insured isfinancially benefited by its existence or survival andwill suffer economic loss at the destruction or death ofthe subject matter.



Contd…

In life insurance, insurable interest must exist at the

time of making the contract.

In fire insurance, it must exist both at time of making

contract and time of loss of subject matter. In marine insurance, it must be present at time of loss

of the subject matter.

The case of Lucena Vs. Craufurd (1806) gives

meaning to insurable interest as follows: “A man isinterested in a thing to whom advantage may arise or

prejudice happen from the circumstances which may

attend it…



2. UBERRIMAE FIDEI.

A contract of insurance is a contract based

upon the utmost good fai th , and,

if the utmost good faith be not observed by

either party, the contract may be avoided bythe other party.



LIC v. G.M.CHannabsemma,

AIR 1991 SC 392

In a landmark decision the SC has held that the onus

of proving that the policy holder has failed to disclose

information on material facts lies on the corporation.

In this case the assured who suffered from

tuberculosis and died a few months after the taking of

the policy, the court observed that it is well settled that

a contract of insurance is contract uberr imae fides ,

but the burden of proving that the insured had made

false representation or suppressed the material facts

is undoubtedly on the corporation.



Sec.45 of Insurance Act 1938

The insurance contract is a contract of utmost goodfaith and therefore if the assured has not disclosedall the material facts, the insurance company canavoid the contract.

It has become the practice of the insurers to insert aclause in the policies and proposal forms as wehave already noted, to declare that all the answersstated in the proposal form shall form the basis and

form part of the terms of the contract in the policy.



New India Insurance Company v.

Raghava Reddy , AIR1961 AP 295

It was held that a policy cannot be avoided on the groundof misrepresentation unless the following areestablished by the insurer namely,

a. The statement was inaccurate or false.

b. Such statement was on a material matter or that thestatement suppressed facts which it was material todisclose.

c. The statement was fraudulently made

d. The policy holder knew at the time of making thestatement that it was false or that fact which ought tobe disclosed has been suppressed.



Cont..

By such a declaration, for any variation of the

state of things from the representations in the

proposal form, whether in fact is material or not, and

however slight the variation may be the insurer gets

a right to avoid the policy.

Section 45 of the Insurance Act 1938, modified this

rule materially and mitigated the rigour of the rule of

utmost good faith.



Cont…

It lays down that no policy can be challenged after twoyears from the date of the policy on the ground thatany statement made in the proposal or in any report ofthe medical officer or any document was inaccurate or

false unless it is material to disclose and it wasfraudulently made and the policy holder knows at thetime that it was false or he suppressed the factmaterial to be disclosed,

provided that nothing in that section prevents theinsurer from calling for proof of age of the assured orto adjust the rate of premium according to the correctage proved subsequently.



Special Doctrines

Reinstatement

Subrogation

Contribution



In Anderson v. Commercial Assurance Co,

(1955) 55 DJQB 146 (CA)

Lord Esher MR explained: we have come to theconclusion that the words „reinstate‟ and „replace‟ should thus be applied:

if the property is wholly destroyed, the company

may, if they choose, instead of paying the moneyreplace the things by others which are equivalent;or,

if the goods insured are damaged but not destroyed,

may exercise the option to reinstate them, i.e, torepair them and put them in a condition in whichthey were before the fire.



Right of Reinstatement

This right of the insurers to reinstate the propertyinstead of paying the money may spring up;

a. either from a contract in the form of a clause underthe policy, or

b. under a statute.

This type of clause is not inserted in all policies in allbranches of insurances, e.g, it is not and cannot beincluded in life policies.



Cntd…..

Only in indemnity insurances, in appropriate

branches of insurance, like fire, burglary,

steam boilers, or motor vehicle insurances,

this clause called the reinstatement clause,entitling the insurers to exercise an option, on

the happening of the insured event, either to

reinstate or to pay the insured money can be

incorporated.



Times Fire v Hawke , 1858

When once the option to reinstate is

expressly or by implication exercised in

favour or reinstatement, it amounts to a new

contract and they cannot go back and saythat they would pay money.

The selection of one alternative amounts to

an abandonment of the other.



In Brown v Royal Assurance co Ltd, 1859

CJ Campebell observed: “ On exercising the

option the case stands as if the policy had

been simply to reinstate the premises in case

of fire; because, where a contract providesfor an election, the party making the election

is in the same position as if he had originally

contracted to do the act which he has elected

to do”



In reinstatement, it is sufficient that a

substantially similar building is construed

although the new building is not identical in

all minute details with the destroyed one. But if the new building is by far less than the

original building, they have to make good the

loss.



In Brown v Royal Insurance Co

It has been held that if the new building is

costlier than the original building, on that

count they cannot go back from their duty nor

in the absence of a specific agreement,require the assured to contribute for the

balance.



Smith v Colonial Mutual Fire, 1880

It was held that if a fire occurs for a second

time during the reinstatement, they are their

own insurers and so cannot claim credit for

what they have already spent. They should replace a similar building.



Subrogation

Randal v. Cockran (1748) 1 Ves Sen 98

The doctrine of subrogation is a necessary

incident to a contract of indemnity and

therefore is applicable to a contract of fire

insurance and one of marine insurance.



Contd.,

Therefore, if a loss occurs under suchcircumstances that insured has an alternative rightto recover damages,

under common law, tort or statute and

if the loss is also covered by the policy and so hecan recover the entire loss from the insurer and if heso receives, the insurer is entitled to, or issubrogated to, the former alternative rights and

remedies of the insured and this is technically called„subrogation‟.



Limitation on the Doctrine

i. Does not apply to life and personal accident

policies;

Before the doctrine is applied, there must be

indemnity. Since life and personal accident policiesare not governed by strict principle of indemnity the

doctrine applies only to fire, marine and other non-

life policies;

ii. Insurer must pay before he claim subrogation;



iii. Assured must have been able to bring action.

For Example.

where two ships belonging to the same owner collided

by fault of one of them, the insurers of the ship not atfault have been held not to be entitled to make any

claim on the owner of the ship at fault, though the

insurers of cargo owned by a third party can claim

subrogation [Simpson v. Thompson, 1877 (3) AC 279].

Similarly, where the assured and the wrongdoer are

co-assures the doctrine does not apply [Petrofira v.

Magnaload, 1983 (2) Lloyd‟s Rep 91].



AIR 2001 SC 2630 "Savani Road Lines v.

Sundaram Textiles Ltd."

COPRA S.2(1)(d) – CONSUMER

PROTECTION - "Consumer" – Insurance

company compensating consignor for loss of

goods during transit – Insurance companytaking letter of subrogation, filed consumer

complaint for recovery of amount against

carrier of goods - Letter of subrogation was in

effect an assignment -



Therefore, insurance company being an assignee

was not beneficiary of services hired by consumer

from carrier - Insurance company not consumer vis-

a-vis the carrier - Consumer complaint by Insurance

Company, not maintainable - Insurance company

can file civil suit for recovery of amount.



Contribution

Like subrogation, contribution is also a

corollary to the principle of indemnity.

Therefore contribution generally arises only in

property insurance. The rule is of ancientorigin and was recognized by the chancery

courts.



For the right or contribution to be exercisable, the following

conditions are necessary:

1. There must have been more than one policy on the

same subject matter and risk.

2. The policies must have been taken out by or onbehalf of the same person.

3. The policies must have been taken out with different

insurers.



North British and Mercantile v. Liverpool

and London Globe, (1977)3 Ch.D 569

The doctrine is defined and explained in this judgment as:

Contribution exists where the thing is done by thesame person against the same loss, and to prevent

a man first of all recovering more than the wholeloss or if he recovers the whole loss from one whichhe could have recovered from the other, then tomake the parties contribute rateably. But that onlyapplies where there is the person insuring the sameinterests with more than one office.



Contribution arises because of the liberty of

the assured to insure the same property with

more than one insurer which is called „double

insurance‟. By mere double insurance and,over insurance, the right of contribution

springs up.



Essential conditions of Contribution

i. All the insurance must relate to the same subject-

matter.

ii. The policies concerned must all cover the same

interest of the same insured.iii. The policies concerned must all cover the same

peril which caused the loss.

iv. The policies must have been in force and all of

them should be enforceable at the time of loss.



Example

If a house is insured with company X for

Rs.5,000 and with company Y for Rs.10000

and the damage amounts to Rs.1200,

company X will apparently be liable tocontribute Rs.400 and company Y Rs.800.



Differences between the Doctrines

of Contribution and Subrogation

i. In contribution the purpose is to distribute theloss while in subrogation the loss is shiftedfrom one person to another

ii. Contribution is between insurers butsubrogation is against third party

iii. In contribution there must be more than oneinsurer but in subrogation there may be one

insurer and one policy.



Cont..

iv. In contribution the right of the insurer is

claimed but in subrogation the right of the

insured is claimed.

In modern fire policies we find the „contribution clause‟ which enables the insurer to claim

contribution from other co-insurers.



CAUSA PROXIMA

It means proximate cause. According to thisprinciple, the inured can recover the loss frominsurer only if the loss is caused by proximatecause. Proximate cause refers to the eventinsured against.

The principle of proximate cause is embodiedin the maxim causa prox ima non remo ta

spectatur- which means that the proximatecause of an event is the cause to which theevent is attributable.



DOUBLE INSURANCE.

It is deferent from over-insurance which occurswhere the total amount insured exceeds the value ofthe subject matter insured.

It is important to note that a contract of insurance isone of indemnity (replacement of loss) hence doubleor over insurance has no value or advantage to theinsured.

However, the question of double or over insurancedoes not arise in the case of life and personal

accident insurance because life is priceless.



RE-INSURACE.

- It guarantees the meeting of losses if the insurer is

not in a position to do so.

- It facilitates the spreading of economic benefit fromone company to another.

- It also inures that part of the funds polled locally by

insurance companies is invested locally.



T



INSURANCE AGENTS

However in cases of active fraud, the agent is deemed to be the agentfor the insurance company.

Harse Vs Pearl Li fe Ass urance Co. Ltd [ 1904] 1 KB 558 Held;

Where the policy is illegal, the premium cannot be recovered if theinsured is in pari delicto (i.e parties are in equal fault) with theinsurers. The plaintiff was induced to insure his mothers life by the

insurers agents innocent misrepresentation that the policy would be avalid one. The policy was illegal under the Life Assurance Act 1774,Sec 1 since the plaintiff had no insurable interest. The plaintiff sought torecover the premium which he had paid. It was held by the Court of Appeal, that the premium was not recoverable because the partieswere in pari delicto. Moreover it was found that there was neither mis-statement of fact nor fraud on the part of the agent. That there was non

greater impropriety on the part of the agent than there was on the partof the plaintiff.



-Thank You

Principles Insurance

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