You are on page 1of 57

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 the
agreed consideration called the premium, to pay to
the other person called the assured, a sum of
money or its equivalent on the happening of a
specified event.

Definition of Insurance:
In the words of John Birds, Modern Insurance Law, Pg
13,
It is suggested that a contract of insurance is
any contract whereby one party assures the risk
of an uncertain event which is not within his
control happening at a future time. In which
event the other party has an interest and under
which contract the first party is bound to pay
money or provide its equivalent if the uncertain
event occurs.

General terms in Insurance Contract:

Contract of insurance is one whereby a person called the insurer


undertakes to make good the loss on the happening of a specified
event.
The consideration for a contact of insurance is called premium i.e the
price mutually agreed between the assured and the underwriter for risk
undertaken by the latter.
The person who undertakes to indemnify the other against loss is
called Insurer.
The person who is given protection is called insured.
The document in which contract of insurance is contained is called
Policy. The policy itself is not the contract but it is the evidence of the
contact.
The thing or property insured is known as subject matter of insurance.

Distinction between Insurance and Wagering Contracts

1.

Wagers are generally unenforceable whilst insurance contracts are


enforceable.

2.

The fundamental distinction between insurance and a wager is the risk


in that whereas in insurance risk exists a priori, in a wager there is a
deliberate assumption of risk.

3.

In wagering contracts neither of the contracting parties has the interest


other than the sum to be won or loss depending on the outcome.
Payment is dependant upon the event as agreed to by the parties and
is 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 suffer
loss.

Contd
4. The uncertain event upon which the uncertain event depends is prima
facie adverse to the insureds interest and insurance is effected so as
to meet the loss or detriment which may be suffered on the happening
of 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 on
the outcome of the uncertain event. In insurance, the insured pays a
premium to furnish consideration, it is not dependant upon the event
insured against and the insured cannot be called upon to contribute
anything 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 of
estimation in terms of money. -In other words, the peril must be such that its
happening may bring upon the insured an actual or
deemed pecuniary loss. Mere disadvantage or
inconvenience or mental distress cannot be
regarded 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.
2.
3.
4.
5.

6.
7.
8.
9.

INSURABLE INTEREST.
UBERRIMAE FIDEI.
INDEMNITY.
SUBROGATION.
CONTRIBUTION
CAUSA PROXIMA
MITIGATION OF LOSS
ABANDONMENT
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 with
the subject matter.
(c) The relationship between the insured and the subject
matter should be recognised by law i.e. there should
not be any illegal relationship between the insured and
the subject matter.
(d) The financial relationship between the insured and
the subject matter should be such that the insured is
financially benefited by its existence or survival and
will suffer economic loss at the destruction or death of
the 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 is
interested in a thing to whom advantage may arise or
prejudice happen from the circumstances which may
attend it

Examples :
a. A creditor has an insurable interest in his debtor to the extent of
his debt.
b. A partner has an interest in his partners during the subsistence of
the partnership.
c. An employer has an interest in his employee while in his
employment.
d. A surety has an interest in the trust estate.
e. A husband has an insurable interest in his wifes life and viceversa.
f. A person has an insurable interest in his own life.

2. UBERRIMAE FIDEI.

A contract of insurance is a contract based


upon the utmost good faith, and,
if the utmost good faith be not observed by
either party, the contract may be avoided by
the other party.

This concept was explained in Rozanes Vs. Bowen


(1928) as follows

It has been for centuries in England the law in


connections with insurance of all sorts, marine
fire, life, guarantee and every kind of policy that,
as the underwriter knows nothing and the man
who comes to him to ask to be insured knows
everything, it is the duty of the assured- the man
who desires to have a policy, to make a full
disclosure to the underwriter without being asked
of all the material circumstances, because the
underwriter knows nothing and the assured knows
everything. This is expressed by saying that it is a
contract of utmost good faith Uberrima fides.

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 uberrimae 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 good


faith and therefore if the assured has not disclosed
all the material facts, the insurance company can
avoid the contract.
It has become the practice of the insurers to insert a
clause in the policies and proposal forms as we
have already noted, to declare that all the answers
stated 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 ground
of misrepresentation unless the following are
established by the insurer namely,
a. The statement was inaccurate or false.
b. Such statement was on a material matter or that the
statement suppressed facts which it was material to
disclose.
c. The statement was fraudulently made
d. The policy holder knew at the time of making the
statement that it was false or that fact which ought to
be 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 two


years from the date of the policy on the ground that
any statement made in the proposal or in any report of
the medical officer or any document was inaccurate or
false unless it is material to disclose and it was
fraudulently made and the policy holder knows at the
time that it was false or he suppressed the fact
material to be disclosed,
provided that nothing in that section prevents the
insurer from calling for proof of age of the assured or
to adjust the rate of premium according to the correct
age proved subsequently.

Special Doctrines

Reinstatement
Subrogation
Contribution

Reinstatement
Reinstatement literally means:
replacement of what is lost or
repairing the damaged property and
bringing it to its original value and utility.

In
Anderson
v.
Commercial
(1955) 55 DJQB 146 (CA)

Assurance

Co,

Lord Esher MR explained: we have come to the


conclusion 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 money
replace 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, to
repair them and put them in a condition in which
they were before the fire.

Right of Reinstatement
This right of the insurers to reinstate the property
instead of paying the money may spring up;
a. either from a contract in the form of a clause under
the policy, or
b. under a statute.
This type of clause is not inserted in all policies in all
branches of insurances, e.g, it is not and cannot be
included 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 say
that 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 provides
for 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.

subrogation

It is given statutory recognition in sec.79 of the


Marine Insurance Act 1906. Under this doctrine, as
applicable to fire insurance, the insurer has a right of
standing in the shoes of the insured and avail
himself of all the rights and remedies of the insured,
whether already enforced or not.
The principle of subrogation prevents an insured
who holds a policy of indemnity from recovering
from the insurer the sum greater than the economic
loss he has sustained.

Contd.,

Therefore, if a loss occurs under such


circumstances that insured has an alternative right
to recover damages,
under common law, tort or statute and
if the loss is also covered by the policy and so he
can recover the entire loss from the insurer and if he
so receives, the insurer is entitled to, or is
subrogated 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 policies
are not governed by strict principle of indemnity the
doctrine applies only to fire, marine and other nonlife 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 at
fault 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) Lloyds 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 company
taking 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 visa-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 ancient
origin 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 on
behalf of the same person.
3. The policies must have been taken out with different
insurers.

Contd
4. All the policies must have been legally
binding agreement.
5. All the policies must have been in force when
loss occurs.
6. None of the policies must have exempted
themselves form contribution.

North British and Mercantile v.


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

Liverpool

The doctrine is defined and explained in this


judgment as:
Contribution exists where the thing is done by the
same person against the same loss, and to prevent
a man first of all recovering more than the whole
loss or if he recovers the whole loss from one which
he could have recovered from the other, then to
make the parties contribute rateably. But that only
applies where there is the person insuring the same
interests 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 subjectmatter.
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 to
contribute Rs.400 and company Y Rs.800.

Differences between the Doctrines


of Contribution and Subrogation
i. In contribution the purpose is to distribute the
loss while in subrogation the loss is shifted
from one person to another
ii. Contribution is between insurers but
subrogation is against third party
iii. In contribution there must be more than one
insurer 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 this


principle, the inured can recover the loss from
insurer only if the loss is caused by proximate
cause. Proximate cause refers to the event
insured against.
The principle of proximate cause is embodied
in the maxim causa proxima non remota
spectatur- which means that the proximate
cause of an event is the cause to which the
event is attributable.

Illustration:

In the case of Hamilton Fraiser Vs. Pandroff


(1887), a cargo of rice in a ship was destroyed by
sea-water flowing through a hole dug by rats in a
bathroom. In the circumstances, the court held that
insurer was liable to pay because the damage was
due to a risk of sea-water. In this case sea-water
was the proximate cause while the rats were the
remote cause.

DOUBLE INSURANCE.

It is deferent from over-insurance which occurs


where the total amount insured exceeds the value of
the subject matter insured.
It is important to note that a contract of insurance is
one of indemnity (replacement of loss) hence double
or over insurance has no value or advantage to the
insured.
However, the question of double or over insurance
does 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 from
one company to another.
- It also inures that part of the funds polled locally by
insurance companies is invested locally.

ASSIGNMENT.

A contract of fire insurance may be assigned


only with the consent of insurers. If they
refuse to give the consent, no assignment
can take place. This was explained in
Saddles Company Vs. Badcock (1743) A
life policy may be assigned by endorsement
on the policy or by a separate instrument.
Written notice of the assignment must be
given.

INSURANCE AGENTS

However in cases of active fraud, the agent is deemed to be the agent


for the insurance company.
Harse Vs Pearl Life Assurance Co. Ltd [1904] 1 KB 558 Held;
Where the policy is illegal, the premium cannot be recovered if the
insured is in pari delicto (i.e parties are in equal fault) with the
insurers. The plaintiff was induced to insure his mothers life by the
insurers agents innocent misrepresentation that the policy would be a
valid one. The policy was illegal under the Life Assurance Act 1774,
Sec 1 since the plaintiff had no insurable interest. The plaintiff sought to
recover the premium which he had paid. It was held by the Court of
Appeal, that the premium was not recoverable because the parties
were in pari delicto. Moreover it was found that there was neither misstatement 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 part
of the plaintiff.

Judgment

Held: The broker was not liable in that, first, it is the duty of the
proposer for insurance to make sure that the information
contained in the proposal form is accurate and should not or
ought not to sign it if it is inaccurate. As it was the insureds duty
to confirm the contents of the form, the effective failure of the
loss is his failure to do so.
In Davis L.J. Said at 1421 It was the duty of the insured to read
this form. It was his application, he signed it and if he was so
careless as not to read it properly, then in my opinion, he has
himself to blame

-Thank You