1.

Risk, Hazard and Peril

2. Insurance v. wager
3. Theories of Insurance
Module 1
 Risk, Peril and Hazard

Risk- uncertainty of financial loss

Perils – is the cause of loss
Hazard- condition that influences the risk/increases the chance of loss

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 Class of Peril Hazard
Insurance
Life Cancer Excessive smoking

Factory (Fire) Fire Combustible

materials left
unattended

Car ( MV Car accident Careless driving

insurance)

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 Categories of Risk

Pure Risk Speculative Risk

There is possibility of loss or no loss There is possibility of profit or loss

No chance of gain

Property, Motor vehicle Investment in stock market

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Pure risks
• Can be insured/insurable risks
• Are capable of being forecasted and estimated/measurable in terms of
money

Speculative Risks
• Usually not insurable/non-insurable risks
• Loss cannot be ascertained / difficult to anticipate /quantify e.g. Risks
arising out of changes in market conditions such as price fluctuations
• Do not obey any statistical formula

5
Perils – immediate cause of loss
• E.g.- fire, collusion etc

Insurance covers the risk of fire- the word risk refers to the damages from the perils of
fire

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Hazard are conditions that create /increase the severity of losses
1. Physical Hazard- consists of those physical properties that increase the chance of
loss. E.g. stocking crackers in a building

2. Moral Hazard-relate to the character of persons proposing for insurance.

• Manmade hazards/losses intentionally created by human beings
• Dishonesty/fraudulent/inflated claims e.g. Setting fire to ones own property

3.Morale Hazard- attitude of indifference to take care of the property on the premise
that loss will be indemnified by the insurer. E.g. careless driving

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 Insurance and Wager

1.Insurance is not merely a contract where money is paid on the

happening of certain event but protects insured by compensating him for
the loss. Wagering contract- paid purely on the happening of event , not
as compensation

2. Insurance – risk already exists. Wagering contract – risk is not pre-

existing- created by the parties

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3. Insurance- the assured has pecuniary interest/insurable interest in the subject
matter of insurance, but wagering agreement parties has any monetary interest except
that is created by the contract itself

4. In insurance there is consideration by way of premium

5. Duty to observe utmost good faith- required in insurance

6. Wagering contracts void and unenforceable; insurance contracts legally binding

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 Theories of Insurance

Law of Insurance is based in the following two theories-

1. Theory of Co-operation
2. Theory of Probability

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1. Theory of Co-operation
• Basis of insurance
• Loss is shared by a group of persons who are willing to co-operate
• People provide security to one another collectively, against risks to which everyone of
them is exposed

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2. Theory of Probability

• Insurance is Co-operative device – wherein members contribute in the form of

premium.
• Higher the risk, higher the premium
• How the premium is to be fixed?- Theory of Probability- entire business of
insurance is carried on the application of this theory
• The theory of probability works on the basis of past experience of losses
1. Life Insurance- Mortality tables
2. Indemnity insurance – past records of volume and extent of loss occurrence
caused by similar risks
The affecting factors are analysed before determining the amount of loss.

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13
Underwriting- is not merely mathematical science, but involves an element of
judgement
Actuaries estimate various probabilities – insurers remain solvent even if the conditions
are relatively unfavourable – also premium low enough to attract the public

Pooling large number of risks – necessary for the successful operation of theory of
probability

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United India Insurance Co. Ltd v. M/s Pushpalaya Printers (2004) MLJ 182
"IN CONSIDERATION OF THE insured named in the Schedule hereto having paid to
United India Insurance Company Limited (hereinafter called THE COMPANY) the
premium mentioned in the said schedule. Till company agrees, (subject to the
condition and exclusion contained herein or endorsed or otherwise expressed
hereon) that if after payment of premium the property insured described in the
said schedule or any part of such property, be destroyed or damaged by the
following: -
1. .......
2. .......
3. .......
4. .......
5. Impact by any rail/road vehicle or animal.“

Damage caused due to vibration from the operation of bulldozer covered???

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• District Forum took a narrow view that the word "impact" contained in
clause 5 of the insurance policy covered risk of only contingent impact of
a road vehicle forcibly coming in contact with another.

• According to the State Commission the word "impact" has got meanings
more than one and the word "impact" not only means "coming forcibly
in contact with another", it also means "to drive close", "effective action
of one thing upon another" and "effect of such action"

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It is settled position in law that if there is any ambiguity or a term is capable
of two possible interpretations one beneficial to the insured should be
accepted consistent with the purpose for which the policy is taken, namely,
to cover the risk on the happening of certain event.( Rule of contra
proferentum)

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