PRINCIPLES OF INSURANCE

Introduction
According to law, insurance is a form of risk management primarily used to hedge against the risk of an uncertain loss. Insurance is defined as the unbiased transfer of the risk of a loss, from one entity to another, in exchange for payment.

The main objective of every insurance contract is to give financial security and protection to the insured from any future uncertainties. Insured must never ever try to misuse this safe financial cover. An insurer must always investigate any doubtable insurance claims. It is also a duty of the insurer to accept and approve all genuine insurance claims made, as early as possible without any further delays and annoying hindrances. However, insurance holds some basic principals which are to be followed by relevant parties. All factors would be discussed accordingly.

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The Rationale of Insurance
The advantages and the objectives of insurance are as follows:
• Cover risk

Insurance is a method of eliminating, reducing or covering risk. By insurance a person can protect himself (and his dependants) from loss arising by any uncertain incident in future (i.e. fire, accident, early death).

• Small loss

Insurance converts uncertain risks to a certain sum of money. The premium is determined less than the value of insured item that if it is lost or destroyed then a portion of amount can be retained from the insurance. Therefore, it is the mean of reducing the loss. By insurance, a person exchanges his uncertain, heavy loss for a certain, small loss.

• Expansion of insurance business

The great advantages of insurance have led in recent times to an enormous expansion of the volume of insurance business and the evolution of many different types of insurance.

• Small premium

The insurance is beneficent for both the insurer and the insured as because the amount of premium is determined by the insurer after a cautious research on the frequency of loss for the product to be insured. Here the potential loss is defined for a huge bunch and then that is converted for each segment of items that the insurer tends to insure. For such fixation of amount, insurer ensures own safety of not paying the whole price for future uncertain destruction, and the insured is also gets chance to get back a certain amount after any uncertain loss.

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It is also to be mentioned that through insurance one wants to protect him/ her against a significant monetary loss. Interest of people stays upon this are provided below:
 Protecting family after one's death from loss of income  Ensuring debt repayment after death  Covering contingent liabilities  Protecting against the death of a key employee or person in business  Protecting business from business interruption and loss of income  Protecting against unforeseeable health expenses  Protecting own home against theft, fire, flood and other hazards  Protecting own car against theft or losses incurred because of accidents  Protecting in the event of disability; and so forth.

The Contract of Insurance
In insurance, the insurance policy is a contract (generally a standard form contract) between the insurer and the insured, known as the policyholder, which determines the claims which the insurer is legally required to pay. In exchange for payment, known as the premium, the insurer pays for damages to the insured which are caused by covered risks under the policy language.

Insurance contracts are designed to meet specific needs and thus have many features not found in many other types of contracts. The insurance policy is generally an integrated contract, meaning that it includes all forms associated with the agreement between the insured and insurer. The characteristics of a Contract of Insurance are enlisted below:

• Essential requirements

A contract of insurance must fulfil al the essential requirements of a contract as laid down in the law of contract. Thus, there must be a proposal and an acceptance, the parties must be capable of contracting, the objective must not be illegal or immoral. Page | 3

• Indemnity

A contract of insurance is a contract of 'indemnity'. It means that the insured, in case of loss against which the policy has been issued, shall be paid the actual amount of loss not exceeding the amount of the policy, i.e. he shall be fully indemnified. The object of every contract of insurance is to place the insured in the same financial position, as nearly as possible, after the loss, as if the loss has not taken place at all. This is applicable to all types of insurance except life, personal accident and sickness insurance. A contract of insurance does not remain a contract of indemnity if a fixed amount is paid by the insurer to the insured on the happening of the event against, whether he suffers a loss or not. Like, in case of life insurance, the insurer is liable to pay the sum mentioned in the policy on the death, or expiry of a certain period.

• Good Faith

An insurance contract is known as a contract of 'Uberrimate Fidel' or a contract based on 'utmost good faith'. It means both the parties must disclose all material facts. Any fact is material which goes to the root of the contract of insurance and has a bearing on the risk involved. It is only when the insurer knows the whole truth that he is in a position to judge:
(i) (ii)

Whether he should accept the risk, and What premium he should charge.

Concealment of any fact will entitle the insurer to deprive the assured of benefits of the contract. As insurance shifts risk from one party to another, it is essential that there must be utmost good faith and mutual confidence between the insured and the insurer.

• Insurable interest

It means that the insured must have an actual interest in the subject matter of insurance. A contract of insurance affected without insurable interest is void. A person is said to have an insurable interest in the subject matter if he is benefited by its existence and is prejudiced by its destruction. For example: a person has insurable interest in the building he owns; Page | 4

employer can insure the lives of his employees because of his pecuniary interest in them; a businessman has insurable interest in his stock, plant and machinery etc. So, all these people have something at stake and all of them have insurable interest. It is the existence of insurable interest in a contract of insurance which distinguishes it from a mere wagering agreement. In case of life insurance, insurable interest must be present at the time when the insurance is affected. It is not necessary that the assured should have insurable interest at the time of maturity also. In case of fire insurance, insurable interest must be present both at the time of insurance and at the time of loss. In case of marine insurance, interest must be present at the time of loss. It may or may not be present at the time of insurance.

• Causa Proxima

The rule of 'causa proxima' means that the cause of the loss must be proximate or immediate and not remote. If the proximate cause of the loss is a threat insured against, the insured can recover. When a loss has been brought about by two or more causes, the real or the nearest cause shall be the “causa proxima”, although the result could not have happened without the remote cause. But, if the loss is brought about by any cause attributable to the misconduct of the insured, the insurer is liable.

• Commencement of Risk

In a contract of insurance the insurer undertakes to protect the insured from a specified loss and the insurer receives a premium for running the risk of such loss. Thus, risk must attach to a policy.

• Mitigation of loss

In the event of some mishap to the insured property, the insured must take all necessary steps to mitigate or minimise the losses, just as any prudent person would do in those of loss attributable to his negligence . But it must be remembered that though the insured is bound to do his best for his insurer, he is, not bound to do so at the risk of his life.

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• The principle of Subrogation

The doctrine of subrogation is a corollary to the principle of indemnity and applies only to fire and marine insurances. According to it, when an insured has received full indemnity in respect of his loss, all rights and remedies which he has against third person, will pass on to the insurer and will be exercised for his benefit until he(The insurer) recoups the amount he has paid under the policy. The insurer's right of subrogation arises only when he has paid for the loss for which he is liable under the policy and this right extends only to the rights and remedies available to the insured in respect of the thing to which the contract of insurance relates.

• Right to Contribution

When there are two or more insurances on one risk, the principle of contribution comes into play. The aim of contribution is to distribute the actual amount of loss among the different insurers who are liable for the same risk under different policies in respect of the same subject matter. Any one insurer may pay to the insured the full amount of the loss covered by the policy and then become entitled to contribution from his co-insurers in proportion to the amount which each has undertaken to pay in case of the loss of the same subject matter. In other words, the right of contribution arises when:There are different policies which relate to the same subject matter. The policies cover the same peril which caused the loss. All the policies are in force at the time of the loss. One of the insurers has paid to the insured more than his share of the loss.

   

• Payment of Premium

The policy holder must pay the premium according to the terms of the contract. Subject to certain conditions, the policy lapses if the premium is not paid.

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Types of Insurance
Any risk that can be quantified can potentially be insured. Specific kinds of risk that may give rise to claims are known as perils. As insurance can take a number of different forms, various kinds of insurance can be observed. Three most important types of insurances are:

Life insurance

Life insurance provides a monetary benefit to a decedent's family or other designated beneficiary, and may specifically provide for income to an insured person's family, burial, funeral and other final expenses. Life insurance policies often allow the option of having the proceeds paid to the beneficiary either in a lump sum cash payment or an annuity.

Fire insurance

Fire insurance provides protection against risks to property cause by fire. The owner of property may agree for such contract to minimize uncertain future loss occurrence by any accident from fire.

Marine insurance

Marine insurance and marine cargo insurance cover the loss or damage of vessels at sea or on inland waterways, and of cargo in transit, regardless of the method of transit. When the owner of the cargo and the carrier are separate corporations, marine cargo insurance typically compensates the owner of cargo for losses sustained from fire, shipwreck, etc., but excludes losses that can be recovered from the carrier or the carrier's insurance. Many marine insurance underwriters will include "time element" coverage in such policies, which extends the indemnity to cover loss of profit and other business expenses attributable to the delay caused by a covered loss.

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There are also other insurances like Vehicle insurance, Home insurance, Health insurance, Accident insurance and so forth. Formerly all types of insurance business were used to be carried on by private insurers and companies. The government of Bangladesh nationalised insurance industry in 1972 by the Bangladesh Insurance (Nationalisation) Order 1972. By virtue of this order, save and except postal life insurance and foreign life insurance companies, all 49 insurance companies and organisations transacting insurance business in the country were placed in the public sector under five corporations.1

The Insurance Act
The Insurance Act of 1938 was the first legislation governing all forms of insurance to provide strict state control over insurance business. It contains certain provisions regarding the laws of insurance (i.e. definition of insurer and insured person, proof of age, surrender value). The law also contained laws relating to the constitution and management of insurance companies in India. It is to be mentioned that, the Insurance Act of 1938 was adapted in pursuance of the Proclamation of Independence of Bangladesh, passing through the Provisional Constitution of Bangladesh Order, 1972.

1 http://www.bankersbd.com/bangladesh-insurance-company.html

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Obligations of Insurer
The obligations of the insurer are determined by the terms of the contracts of insurance. The most important obligations of the insurer are to pay the money due on the policy upon the happening of the contingency specified in it. The liability to pay is subject to the following conditions:

• Fulfilment of essentials

The insurer is liable to pay only if the contract of insurance fulfils the entire essential elements valid contract. If there is non-disclosure of material facts or fraud the contract is voidable.

• Commencement of risk

The risk of insurer commences after the contract of insurance is entered into, i.e., after the proposal to insure is accepted. Mere submission of a proposal to the insurer is not enough. The insurance agent usually has no authority to accept a policy.

• Causa proxima

The insurer is liable only for those losses which directly and reasonably follow from the event insured against. The insurer is not liable for remote consequences and remote causes. The principle is expressed in the maxim, “Causa proxima non remota spectatur”.

• Return of premia

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Under certain circumstances the insurer is bound to return the premia received, e.g., whenthe contract of insurance is set aside on the ground of non-disclosure of material facts or fraud by the insured person, the premia are not returnable.

Rights of Insurer
The insurer has the following rights:
• The Payment of Premium

The policy-holder must pay the premium according to the term of the contract. The policy lapses if it is not paid. In life insurance contracts, after the premia have been paid for two consecutive years, the policy acquires a surrender value and a certain proportion of the amount insured for is payable to the policy-holder.

• The Right to Contribution

A particular property may be insured with two or more insures against the same risk. In such cases the insurers must share the burden of payment is proportion to the amount assured by each. If any one of the insurers pays the whole loss, he is entitled to contribution from the insurers.

• The Principle of Subrogation

Subrogation is form of substitution. In marine and fire insurance contracts after the policyholder is indemnified in full, the insurer becomes entitled to the leftovers of the property insured and all rights and claims to the remnants of the property insured and all rights and claims which the policy-holder may have against third parties. The insurer is subrogated to the position of the insured. The principle of subrogation is based upon equity. If the insurer pays the indemnity in full, he ought to get whatever remains of the damaged property. The principle of subrogation applies only on payment of the whole loss. In case of partial losses Page | 10

the principle does not apply. The principle also does not apply in cases where the contract of insurance is not a contract of indemnity.

• No return of premiums paid

The Supreme Court has held that in case of fraud, the policy –holder cannot claim the refund of the premiums paid.

Obligations of Policy-Holder
The obligations of policy holder are determined by the terms of the contracts of insurance. The most important obligations are as follows:

• Disclosure

The policy-holder must disclose all material facts. The statement of facts made by him in the proposal form must be correct.

• Premium

The policy –holder must pay the premium on the due dates.

• Protection

In the case of fire, marine, burglary and other forms of insurance of property, the policyholder must take reasonable measures for the protection of the property. The duties of the policy-holder in cases of such insurance are usually written down in the policy and form part of the term and conditions of the contract of insurance.

• Mitigation of Loss

In case of accidents or mischance it is duty of the policy-holder to take steps for reducing the loss and much as possible. For example when fire occurs the policy-holder must safeguard the burnt properties. Page | 11

• No commission

Under Section 41 of the Insurance Act of 1938, the policy-holder is not allowed to receive any part of the commission payable on the policy or any rebate on the premium. If he accepts any such payment he may be punished with a fine which may extend to Rs.500.

Rights of Policy-Holder
• Payment

In cases of life insurance, policy-holders or their heirs, nominees and assignees are entitled to receive the money contingency. In the case of other forms of insurance, the policy-holder is entitled to be indemnified for all losses sustained from the peril insured against.

• Assignment

The policy-holder is entitled to assign the policy, whereupon the assignee becomes entitled to all the benefits of the policy.

• Bar to questions

After the lapse of two years from the date of contract, an insurance policy cannot be questioned on the ground of any misstatement unless such misstatement was fraudulent. – Sec.45.Insurance Act.

• Documents

Under the Insurance Act of 1938, policy-holders are entitled to get the following documentscopies of the proposal and the medical report; notice regarding default of premium; written acknowledgment from the insurer of transfer, assignment and nomination etc.

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• Surrender value

A life insurance policy does not lapse for non-payment of premium after it acquires a surrender value.-Sec.113.

Double Insurance
When the same risk and the same subject-matter is insured with more than one insurer, there is said to be double insurance. P, the owner of a house, insures it against fire for Rs. 30,000 with X and Rs. 10,000 with Y. This is double insurance. Rules: The following rules apply in cases of double insurance:
• Life-no limit

In case of life insurance there may be any number of policies for any amounts. A man is entitled to place any value he likes upon his life and therefore upon death, all the policies are payable whatever the total amount may be.

• Property- not more than actual loss

A person is free to insure his property with any number of insurers. But in case of loss from all the insurers together. Thus if in the above example the actual value of the house is found to be Rs. 20,000, the insurers will pay, in case of total loss by fire, only Rs.20,000. This amount will be shared between the insurers in proportion to the value of each insurer’s policy. If any one of the several insurers pays the whole loss, he is entitled to contribution from the others.

• No Profit

The insured is never allowed to make a profit out of a fire or any other mischance.

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• Trust

According to the Marine Insurance Act of 1963, where the assured receives any sum in excess of the indemnity allowed by the Act he is deemed to hold such sum in trust for the insurers, according to their right of contribution among themselves.

Reinsurance
Reinsurance means the transfer of a part of the risky by the insurer. Suppose that a ship has been insured for Rs. 10 lakhs. The insurer may feel that the risk is too heavy to be borne by him alone. If so, he can transfer a part of the risk to another insurer.

• Rights of reinsurers  Reinsurer is entitled to get a proportionate part of the premium.  Reinsurer gets the benefits of the conditions and terms of the original policy.  Reinsurer is entitled to subrogation.  If for any reason the original policy lapses, the reinsurance comes to an end.

• Liabilities of the reinsurer  Reinsurer is liable to pay the portion of the risk transferred to him.  Reinsurer is liable only to the first insurer because there is no privity to

contract between the insurer and the originally insured person.

Conclusion

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Lastly it can be mentioned that in our country, this business might get affected by the instable political condition of Bangladesh, and by the economical inconsistency running over the world as well. “Principles of Insurance” provides the primary initiative of the Insurance business. Hence, however the fact is, in some pasture Insurance is truly beneficial. To go for any kind of insurance, knowing about its principles has no other alternative. ==========================

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