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Session 6 & 7

Fundamental Principles of Insurance Utmost good faith, Insurable interest, Indemnity, Proximate cause, Contribution, Subrogation

Basic Principles of Insurance Utmost Goodfaith (uberrima fides)


A duty to disclose, accurately and fully, all facts material to the risk being proposed, whether requested or not. Specially applicable to insurance contracts, because In case of insurance, the product is intangible. Only the proposer knows the details of risk being proposed. (example: medical history of proposer)

Basic Principles of Insurance Utmost Goodfaith (uberrima fides)


As the Underwriter knows nothing,

and the man who comes to him to ask him to insure


knows everything, it is the duty of the assured to make a full disclosure to the underwriter of all material circumstances, without being asked.
Rozanne vs. Bowen (1928)

Basic Principles of Insurance Utmost Goodfaith (uberrima fides)


Reciprocal duty on the part of both parties
Insurer to disclose, fully, product features and benefits Insurer not to make untrue statement at the time of negotiating the contract

Material fact includes all information that would influence the judgement of a prudent insurer in fixing the premium or accepting the risk.

Basic Principles of Insurance Utmost Goodfaith (uberrima fides)


FACTS WHICH MUST BE DISCLOSED Facts which show that a particular risk represents a greater exposure Previous losses and claims under other policies Any declinature of proposals by other insurers Full facts relating to the subject matter of insurance

Basic Principles of Insurance Utmost Goodfaith (uberrima fides)


FACTS WHICH NEED NOT BE DISCLOSED
Facts of law - Everyone is supposed to know the law Facts of common knowledge - Insurer is deemed to know that certain occupations are hazardous Facts that lessen the risk - Existence of a fire extinguisher Facts which could reasonably be discovered when instead of giving previous policy particulars, the insured inserts the phrase see your records

Basic Principles of Insurance Utmost Goodfaith (uberrima fides)


BREACH OF UTMOST GOODFAITH
Misrepresentation
May be innocent or fraudulent If related to material facts, contract may be avoided by the aggrieved party Non-disclosure which may be innocent or fraudulent

If fraudulent, it is called concealment


If substantially false and material, then contract may be avoided

Basic Principles of Insurance Insurable Interest


Can everything be insured?
Must be capable of financial measurement There must be large number of similar risks

The person applying for insurance must be having insurable interest in the subject matter of insurance
Existence of insurable is an essential ingredient of any insurance contract

Basic Principles of Insurance Insurable Interest


Legal right to insure arising out of a financial relationship (recognised under law), between the insured and the subject matter of insurance. There must be certain property, right, interest or life capable of being insured. That property/right/interest etc. must be the subject matter of insurance. The insured must be having benefits from the safety or well being of the subject matter and would be suffering by its loss or damage. The relationship between the insured and subject matter of insurance must be recognised at law.

Basic Principles of Insurance Insurable Interest


Subject matter of insurance
In case of fire policy building, stock etc. In case of life assurance human life

In marine insurance ship or its cargo


It is not the property, but the pecuniary interest in the object of insurance, that is insured

Basic Principles of Insurance Insurable Interest


In case of Life Assurance Unlimited insurable interest in own life Unlimited insurable interest in the life of spouse

In the life of business partner up to the amount of share in partnership business


Creditor on the life of a debtor up to the amount of outstanding loan

Basic Principles of Insurance Insurable Interest


In case of Life Assurance Unlimited insurable interest in own life Unlimited insurable interest in the life of spouse

In the life of business partner up to the amount of share in partnership business


Creditor on the life of a debtor up to the amount of outstanding loan

Basic Principles of Insurance Insurable Interest


In case of Property Insurance Ownership Co-owner / Joint ventures

Mortgagors and mortgagees


Executers and trustees Bailees Agent

Basic Principles of Insurance Principle of Indemnity


Indemnity is a mechanism to provide financial compensation to place insured in the same pecuniary position as enjoyed immediately before the loss. May be in the form of cash payment, repair or replacement Applicable to non-life insurance

Basic Principles of Insurance Principle of Indemnity


Insurer agrees to pay not more than actual amount of loss. Insured not to be at a profit position out of insurance. Does not mean that all losses are paid. Amount paid might be less than the actual loss.

Corollaries of Indemnity Principle of Subrogation


Right of a person, having indemnified another under a legal obligation, to stand in the place of that other and avail himself of all the rights and remedies of that other.
Because, insured is entitled to indemnity only not more than that. Purpose of Subrogation
Prevents the insured from collecting twice (or more than the loss)

Corollaries of Indemnity Principle of Contribution


Right of an insurer, who has paid compensation, for loss under a policy, to recover proportionate amount from other insurers, who are liable for the same loss.
Claims from all the insurers, each of whom pays only his proportion of the loss. This principle has no relevance in case of life insurance contracts.

Basic Principles of Insurance Proximate Cause

Causa proxima or proximate cause is crucial at the time of claims settlement (particularly in non-life) Insurer is liable only when the loss is caused by the insured perils Example: loss by fire or lightning Limitation application life insurance claims (only in case of suicide or accident benefits)