BASICS OF INSURANCE

INTRODUCTION TO INSURANCE:
In the modern civilized world even after taking
proper
care at every step, life and property is continuously
exposed to loss or damage. A person moving on
road
can be killed by a car, a motor bike parked may be
stolen, a factory may be gutted, cargo may be
damaged while in transit by a ship ±what not - to
say
everything including life is exposed to risk and
there
is uncertainty every where despite taking necessary
 BASICS OF INSURANCE
CONTRACT OF INSURANCE : It is an agreement
between the Insurers and the insured where by the
Insurers, in consideration of having received the
premium, undertake to make good the financial loss,
subject to the limit of a specified amount, suffered by
the insured as a result of loss or damage of the
insured property by specified perils during the stated
period.
BASICS OF INSURANCE
INSURANCE

LIFE INSURANCE GENERAL INSURANCE

BASICS OF INSURANCE
LIFE INSURANCE GENERAL INSURANCE

Benefit policy Indemnity policy

Renewal cannot be denied Can be denied

Not duty to inform any Changes to be informed

change

Constant Premium Premium varies every yr.

INSURNCE AS A SOCIAL SECURITY TOOL
¢ General Insurance business was taken over by the
Government in 1972 with objective of severing
better the ´Needs of Economy´.
Hut insurance for poor people.
Crop Insurance for farmers.
Cattle and livestock insurance for the beneficiaries of IRDP
Workmen¶s compensation/Employees¶ State Insurance.
Solatium Scheme (hit and run cases) for road accident victims.
Third party insurance to protect the families of road accident
victims
Public liability insurance to compensate victims of hazardous
goods manufacturing industries.
BASICS OF INSURANCE

RISK:
Uncertainty about a Loss.

PERIL :
Cause of Loss

HAZARD :
Conditions which may create or increase the
chance of loss arising from any peril.
INSURABLE RISK

RISK

Pure risks Trade Risks

¢ Risk must be fortuitous in nature
¢ Loss caused must be capable of being measured.
¢ Risk must not be of illegal nature
¢ Insurance must not be against public policy.
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¢ Insurance provides financial security to an

individual
¢ Insurance provides assistance to business
enterprise
¢ Insurance provides financial stability to
commerce, industry, and the community.
¢ Insurance serves as a basis of credit
¢ Insurance plays a vital part in the reduction of
losses
¢ Insurance provides fund for investments
¢ Insurance earns foreign exchange
 

Involves two parties ± Insured & Insurer

Governed by Indian Contract Act, 1872.
Elements for legal validity of contract:
Offer and Acceptance
Consideration
Agreement between parties ± consensus ad idem
Capacity of the parties
Legality of the contract
 

¢ Insurable Interest
¢ Utmost Good faith
¢ Indemnity
¢ Subrogation and Contribution
¢ Proximate Cause
 

¢ There must be property, right, interest, life or

potential liability capable of being insured.
¢ Such property should be the subject matter of
insurance.
¢ The insured must bear a legal relationship to the
subject matter
¢ Insurable interest must exist at the time of loss.
 

¢ Interest arising from ownership

¢ Interest arising from law
¢ Interest arising from contract
¢ Interest arising from legal liability
¢ Interest of a person in life
¢ Interest arising out of insurance
 Ú

Duty of Utmost Good faith implies that a proposer

must disclose to the insurer all material facts in
regards to the proposed insurance. The duty
applies not only to the material facts that he knows
but also extends to the facts that he ought to know.

Material Fact : Fact which would affect the decision

of a prudent underwriter w.r.t acceptance of risk.
 Ú

¢ Excepted Material Fact :

¢ Facts which diminish the risk
¢ Facts which are presumed to be known by
underwriter
¢ Facts which could be ascertained from information
provided.
¢ Matters of law.
¢ Facts in regard to which insurer is indifferent
¢ Facts possible of discovery during inspection.
 Ú

A breach of utmost good faith is by :

¢ Non disclosure
¢ Mis-representation.
 

¢ Compensation for loss or injury sustained

¢ Security or protection against loss or damage.

Object:
¢ Loss or damage must be made good in such a
manner that financially the insured should be
neither better off nor worse off as a result of loss.
¢ To place the insured in the same financial position
as he was before a loss.
¢ Prevent insured from making a profit out of a loss.
 

Methods :
¢ Cash Payment
¢ Repairs
¢ Replacement
¢ Reinstatement
   

Subrogation:
¢ Transfer of rights and remedies of insured to the
insurer who has indemnified the insured in respect
of the loss.
¢ This arises from the principle of indemnity.
Collecting claim as well as money/ goods from the
person responsible for loss will be against
indemnity principle.
   
Contribution :
¢ The right of an insurer who has paid a loss under a
policy to recover a proportionate amount from other
insurers who are liable for loss.
¢ Arises from the principle of indemnity as the
insured is prevented from claiming from all insurers
separately.
¢ The foll. are reqd.:
¢ Subject matter must be the same.
¢ Peril which causes the loss should be common to
all policies.
¢ Policies must be in force at the time of loss.
   

¢ The active efficient cause that sets in motion a train

of events which brings about a result, without the
intervention of any force started and working
actively from a new independent source.
¢ Cause of causes not to be looked into but for the
immediate cause.
¢ Immediate does not mean the cause nearest to the
loss in point of time. It should be understood in
terms of effectiveness and efficiency.
Pure & Speculative

Pure Risk :
¢ Pure Risk always produce losses. In Pure risks,
there is no possibility of gain.

Speculative Risk:
¢ Speculative risks can result into a gain or loss.
Offer & Acceptance

¢ Offer from proposer made orally, in paper, over

telephone or by completing a Proposal form.
¢ Acceptance by Insurer usually by issuance of
cover note
Consideration

¢ Act or Promise offered by one party and accepted

by the other as the price of the promise. In
Insurance, consideration from the insured is
known as ³Premium´ and that from the Insurer is
the ³Promise to Indemnify´.
Capacity of the parties to contract

Insured:
¢ Should have attained age of majority
¢ Is sound of mind
Insurer:
¢ Must have legal capacity to contract.
¢ Authorisation by the Government.
Legality of contract

Subject matter should be legal.

Object is not lawful if:
¢ it is forbidden by law
¢ Is of such a nature that if permitted would defeat
the provisions of any law.
¢ Involves or implies injury to the person and
property of another.
¢ The court regards it as immoral or opposed to
public policy.