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“All agreements 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 not hereby declared to be void.” The insurance contract involves – a) The element of general contract, b) The elements of special contract relating to insurance. a) The element of general contract i. Agreement (offer & acceptance) ii. Legal consideration. iii. Competent to make contract. iv. Free consent. v. Legal object. b) The 1) 2) 3) 4) special contract of insurance involves principles: Insurable Interest. Utmost Good Faith. Indemnity. Subrogation 5) Proximate Cause 6) Contribution 7) Warranties. 1. INSURABLE INTEREST
For an insurance contract to be valid, the insured must posses an insurable interest in the subject matter of insurance. The insurable interest is the pecuniary interest whereby the policy-holder is benefited by the existence of the subject-matter and is prejudiced by the death or damage of the subject-matter. The essential of a valid insurable interest are the following: There must be a subject-matter to be insured. The policy-holder should have monetary relationship with the subject-matter. The relationship between the policy-holders and the subject-matter should be recognized by law. The financial relationship between the policy-holders and subject-matter be such that the policy0holder is economically benefited by the survival or existence of the subject-matter and/or will suffer economic loss at the death or existence of the subject-matter. When a person fulfils the above criteria or when a person has such a relationship with the subject-matter, it is said that he has insurable interest and it is only then that he can insure. WHEN INSURABLE INTEREST EXISTS Insurable interest exists in the following cases: I. Owners: Owners have got insurable interest to the extent of full value.
2 II. Part owners or joint owners: They have insurable interest to the extent of their
part or financial interest.
III. Mortgagor/Mortgagee: Mortgagor, being the owner of the property, has got
insurable interest. Mortgagee though not owner, has got insurable interest to the extent of the money advanced, plus interest and an amount to cover up insurance premium. IV. Ballees: They have got insurable interest because of a potential liability being created if goods belonging to others get lost or damaged whilst in their custody. V. Carries: Like bailees, carries have also got insurable interest in view of potential liability that might devolve on them for any mishap to the goods belonging to others, but whilst in their custody. VI. Administrator, Executors & Trustee: They have insurable interest in view of responsibility put on them by law. VII. Life: A person has got insurable interest in his own life. A husband has also got insurable interest in the life of his wife and vice-versa. No other relationship as such merits existence of insurable interest. However, insurable interest has been created up to $30 on the lives or parents, step-parents and grand-parents, under the Industrial Assurance & Friendly Societies Act, 1984 & 1958 of U.K., for funeral expenses. VIII. Debtors and Creditors: A debtor has insurable interest in his own life, but he has no insurable interest in the life of his Creditor. A creditor on the other hand has insurable interest in his own life and he has also insurable interest in the life of his debtor to the extent of the loan, interest and something to cover up premium. This is because of the financial interest being created by advancing money. IX. Insurers: They have got insurable interest because of a potential liability undertaken from the insured under a policy, and this justifies taking out a reinsurance policy. X. Liability: The creation of a potential liability justifies existence of insurable interest. The best examples are third party motor insurance, public liability insurance etc. It should be remembered that a person in the lawful possession of goods of another has got insurable interest so long responsible for goods. More possession without responsibility does not carry any insurable interest. Similarly a person having illegal possession of goods has got no insurable interest, e.g., thieve. One important point with regard to insurable interest is that it must be capable of being valued in terms of money. Sentimental value is co criteria. WHEN INSURABLE INTERST MUST EXIST When insurable interest must exist varies depending on the type of insurance. The position is as follows: Marine: Insurable interest must exist at the time of claim although. It need not exist at the time of effecting the policy. Fire: Insurable interest must exist both at the time of effecting the policy and at the time of claim.
Life: Insurable interest must exist at the time of effecting the policy and it may not exist at the time of claim. Accident: Like fire, insurable interest must exist both at the time of effecting the policy and the time of claim. 2. UTMOST GOOD FAITH The doctrine of disclosing all material facts in embodied in the important principle ‘utmost good faith’ which applies to all forms of insurance. Both parties of the insurance contract must be of the same mind (ad item) at the time of contract. There should not be any misrepresentation, non-disclosure or fraud concerning the material facts. An insurance contract is a contract of uberrimae fidei, i.e., of absolute good faith where both parties of the contract must disclose all the material facts truly and fully. Material Facts A material fact is one which affects the judgment or decision of both parties in entering to the contract. Facts which count materially are those which knowledge influences a party in deciding whether or not to offer or to accept such risk and if the risk is acceptable, on what terms and conditions the risk should be accepted. In case of life insurance, the material facts or factors affecting the risk will be age, residence, occupation, health, income etc, and in case of property insurance, it would be use, design, owner and situation of the property. Full and True Disclosure The utmost Good Faith says that all the material facts should be disclosed in true and full form. It means that the facts should be disclosed in that form in which they really exist. There should be no concealment, misrepresentation, mistake or fraud about the material facts. There should be no false statement and no half truth nor any silence on the material facts. Duty of Both the Parties The duty to disclose the material facts lies on both the parties, the insured as well as the insurer. FACTS WHICH ARE REQUIRED TO BE DISCLOSED The following facts are required to be disclosed: (a) Facts which would render a risk greater than normal. In the absence of this information the insures would consider the risk as normal and deceived. (b) Facts which would suggest some special motive behind insurance, e.g., excessive over-insurance. (c) Facts which suggest the abnormality of the proposer himself e.g., making frequent claims. (d) Facts explaining the exceptional nature of the risk.
FACTS NEED NOT BE DISCLOSED BY THE INSURED The following facts, however, are not required to be disclosed by the insured: I. II. III. IV. V. 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 government by the conditions of the policy. 3. PRINCIPLE OF INDEMNITY Insurance is usually a contract of indemnity. The insurer agrees to pay for actual loss suffered by the insured, and no more. The purpose of the contact is to shift the burden of risk from the insured to the insurer. So, according to this principle, the insurer undertakes to put the insured, in the event of loss, in the same position that occupied immediately before the happening of the event insured again.
To avoid intentional loss: According to the principle of indemnity insurer will pay the actual loss suffered by the insured. If there is any intentional loss created by the insured the insurer’s is not bound to pay. The insurer’s will pay only the actual loss and not the assured sum (higher is higher in over-insurance). To avoid an Anti-social Act If the assured is allowed to gain more than the actual loss, which us against the principle of indemnity, he will be tempted to gain by destruction of his own property after it insured against a risk. So, the principle of indemnity has been applied where only the cash-value of his loss and nothing more than this, through he might have insured for a greater amount, will be compensated. To maintain the Premium at Low-level If the principle of indemnity is not applied, larger amount will be paid for a smaller loss and this will increase the cost of insurance and the premium of insurance will have to be raised. If premium in raised two things may happen –
First, persons may not be inclined to insure and Second, unscrupulous persons would get insurance to destroy he property to gain
from such act. CONDITIONS OF INDEMNITY PRINCIPLE The following conditions should be fulfilled in full application of principle of indemnity. The insured has to prove that he will suffer loss on the insured matter at the time of happening the event and the loss is actual monetary loss. The amount of compensation will be the amount of insurance. Indemnification cannot be more than the amount insured.
If the insured gets more amount then the actual loss; the insurer has right to get the extra amount back. If the insured gets more amount then from third party after being fully indemnified by insurer, the insurer will have right to receive all the amount paid by the third party. The principle of indemnity does not apply to personal insurance because the amount of loss is not easily calculable there.
METHODS OF PROVIDING INDEMNITY There are various ways through which indemnity may be provided. These are: Cash payment This is the usual way of making payment of a claim. This method is simpler, easier and less cumbersome. Repair This is also another way of providing compensation. Rather than making cash payment, the insurers will get the loss repaired to pre-loss condition as practicable. Replacement Usually in case of total loss the insurers may replace the subject-matter by another one of the same standard, age & quantity. Reinstatement The insurers may also reinstate the property by option. This is usually considered with regard to buildings damaged or destroyed by fire. 4. DOCTRINE OF SUBROGATION The principle of indemnity is also implemented by the principles of subrogation. This principle gives the insurance company whatever right against third parties the insured may have as a result of the loss for which the insurer paid him. So, the doctrine of subrogation refers to the right of the insurer to stand in the place of the insured, after settlement of a claim, in so far as the insured’s right of recovery from an alternative source is involved. ESSENTIALS OF DOCTRINE OF SUBROGATION Corollary to the Principle of Indemnity If the damaged property has any value left, or any right against a third party the insurer can subrogate the left property or right of the property because it the insured is allowed to retain, he shall have realized more than the actual loss, which is contrary to principle of indemnity. Subrogation is the Substitution The insurer, according to this principle, becomes entitled to all the rights of insured subject-matter after payment because he has paid the actual loss of the property. He is substituted in place of other persons who act on the right and claim of the property insured.
Subrogation only up to the amount of payment The insurer is subrogated all the rights, claim, remedies and securities of the damaged insured property after indemnification, but he is entitled to get these benefits only to the extent of his payment. The Subrogation may be applied before payment If the assured got certain compensation from third party before being fully indemnified by the insurer can pay only the balance of the loss. Personal Insurance The doctrine of subrogation does not apply to personal insurance because the doctrine of indemnity is not applicable to such insurance. The insurer has no right of action against the third party in respect of the damages. HOW THIS RIGHT OF SUBROGATION ARISES As already indicated, right of subrogation arises in the following ways: Under tort This is a wrongdoing to another. A person cannot be wrong to another thereby causing damage to another’s property of inflicting injury to the person of that another. If it is so done then a right of action accrues in favor of the wronged and to the determent of the wrong-doer. Under contract A contract may put some obligation on the person making breach of the contract to compensate the person who has been aggrieved as a result of the breach. As for example, obligation under contract of afferightment and contract of bailment etc. Under statute Statutes may also create liability, for making compensation, arising out of a breach thereof. Examples are, Factories Act, Occupies Liability Act, The Riot Act, and Carriage of Goods by Sea Act etc. 5. PROXIMATE CAUSE The rule is than immediate and not the remote cause in to be regarded. The maxim is sed causa proxima non-remote spectature i.e., see the proximate cause and not the distant cause. The real cause must be seen while payments of the loss. If the real cause of loss is insured, the insurer is liable to compensate the loss; otherwise the insurer may not be responsible for loss. So, Proximate cause means the active efficient cause that acts in motion a train of events which brings about result, without intervention of any force started and working activity from a new and independent source.
DETERMINATION OF PROXIMATE CAUSE The determination of real cause depends upon the working and practice of insurance & circumstances to loss. Also1. If there is a single cause of the loss, the cause will be the proximate cause and further if the peril (cause of loss) was insured insurer will have to indemnify the loss. 2. If there are concurrent causes, the insured perils and excepted perils have to be segregated. The concurrent causes may be first, separable and second, inseparable. Separable causes as those which can be separated from each other. The loss occurred due to a particular cause may be distinguish known. If the circumstances are such that the perils are inseparable, then the insurers are not liable at all when there exists any excepted peril 3. If the causes occurred in form of chain, they have to be observed seriously-a) If there is unbroken chain the excepted and insured perils have to be separated. If an excepted peril precedes the operation of the insured peril so that the loss cause by the latter is the direct and natural consequences of the excepted peril, there is no liability. b) If there is a broken chain of events with no excepted peril involved, it is possible to separate the losses. The insurer is liable only for that loss which caused by an insured peril; where there is an excepted peril, the subsequent loss caused by an insured peril will be a new and indirect cause because of the interruption in the chain of events. 6. PRINCIPLE OF CONTRIBUTION Contribution is a right that an insurer has, who has paid under a policy, of calling other interested insurers in the loss to pay or contribute ratably to the payment. This means that if at the time of loss it is found that there is more than one policy covering the same loss then all policies should pay the loss proportionately to the extent of their respective liabilities so that the insured does not get more than one whole loss from all these sources. If a particular insurer pays the full loss than that insurers shall have the right to call all the interested insurers to pay him back to the extent of their individual liabilities, whether equally or otherwise. CONDITIONS/WHEN CONTRIBUTION OPERATES Before contribution can operate the following conditions must be fulfilled:
be in force. II. All the policies must cover the same subject-matter. If all the policies cover the same insured but different subject-matters altogether then the question of contribution would not arise. III. All the policies must cover the same peril causing the loss. If the policies cover different perils, some common and some uncommon, and if the loss is not caused by a common peril, the question of contribution would not arise.
I. There must be more then one policy involved and all policies covering the loss must
IV. All the policies must cover the same interest of the same insured. It should be remembered that if any of the above four factors is not fulfilled, contribution will not apply. 7. WARRANTIES There are certain conditions and promises in the insurance contract which are called warranties. A warranty is that by which the assured undertakes that some particulars thing shall or shall not be done, or that some conditions shall be fulfilled, or whereby he affirms or negatives the existence of a particular state of facts. Warranties which are mentioned in the policy are called express warranties. There are certain warranties which are not mentioned in the policy. These warranties are called express warranties.
EX-GRATIA PAYMENTS Although not legally liable, insurers do sometimes make payments under their policies as a matter of grace or favor. May be, there has been minor breaches of policy terms for which the insurers could easily repudiate the claim. But considering the commercial aspect the breach, may be the insurers will not that much strict and will be willing to make some payment (whether in full or not) without admitting liability under the policy. Such payments are in fact known as ex-gratia payments and never create a precedence so as to give a right of claim to the insured in similar other cases. It should be noted that when ex-gratia payments are made insurers are not subrogated to the right of the insured. This is because payments are not made by admitting liability. When, however, one insurer makes a normal payment and the insured gets an extra ex-gratia payment from another insurer also, and then the former insurer shall stand subrogated to the ex-gratia money received from the latter insurer even though this money has not been received as a matter of legal right under that policy. SALVAGE This usually refers to remains of the property after a loss. Normally, as a result of a loss the whole property is not lost, damaged or destroyed. The rule is that when it is a case of partial loss, the insured can only claim to the extent of the loss or damaged sustained. He can not normally abandon the property and claim full. The situation may be different only if the insured surrenders the remains of the property and the insurer also agree to accept the salvage. In such a situation the claim shall be paid in full and the insurer shall become the owner of the salvage. In case of clear cut total losses, the insurers will pay in full and, therefore, shall be entitled to the benefit of the salvage. It should also be remembered that when full insurance exists (i.e. no under-insurance) and the loss is paid in full, the insurers become the absolute owners of the salvage, if any, and total sale proceeds belong to them even though the proceed may turn up to be more than the amount of the claim paid out. ABANDONMENT
Abandonment usually means surrendering by the insured the remains of the damaged property to the insurer and claiming total loss. DIFFERENCE BETWEEN SUBJECT-MATTER OF INSURANCE & SUBJECT-MATTER OF INSURANCE CONTRACT Difference between subject-matter of insurance & subject-matter of insurance contract are given below --Subject-matter of insurance is nothing but the property that is being insured. For example: it is life in life insurance; factory, machinery, stock, house, building etc. in fire insurance; ship cargo etc, in marine insurance and so and so forth. But the subject-matter of insurance contract is indeed not the property as such but the insurable interest of a in that property. It was, therefore, rightfully commented by the judge in the leading case of Castellain V. Preston (1883) that in a fire policy it is not the brick or materials of the house itself that a man insures, infact it is the interest of the man in that house that he insures.
Created by, Russel (DIIT) & Composed by, Sojib (DIIT)
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