Banking and Insurance

Unit-2
Syllabus: life insurance products, contracts and nature
characteristics, parties, rights and duties conditions terms of
policies. Traditional insurance products-terms plan endowment
plan whole life plan, joint, child, group insurance health .
 Insurance
Introduction:
Life is full of uncertainties due to different types
of risks, like death, accidents, loss of health and property, floods, fire,
earthquakes and so on. Human beings always sought protections from
such risks. Hence insurance is a mean of protection from financial loss.
It is a form of risk management primarily used to
hedge against the risk of a uncertain event. Insurance is plan in which
one undertakes the responsibility of risks of others in lieu of premium.
It may also defined as a form of contract between
two parties whereby one party (insurer) agrees to compensate the
other party (insured) against a loss in lieu of payment/premium.
Definitions:
According to E.W.Patterson, “insurance is a contract by which one
party, for a compensation called the premium, assumes particular
risks of the other party and promise to pay to him or his nominee a
certain or ascertainable sum of money on a specified contingency”.
W.A Dinsdale, “ insurance is a device for transfer of risks of individual
entities to an insurer, who agrees, for a consideration to assume to a
specified extent losses suffered by the insured”.
Important terminology in insurance:
1. Insurer (company or firm) 2. Insured (policy holder)
3. Insurance policy or product 4. Insurance policy
5. Risk or loss 6. Premium
7. Compensation 8. Insured amount(price of policy)
9. Contingency (causes of loss)
Characteristics:
1. Contract(Indian contract act 1872) 2. Consideration
3. Sharing of financial loss 4. Co-operative mechanism
5. Risk evaluation in advance 6. Good faith
7. Contract of indemnity (except life insurance)
8. Amounts of payment depends upon value of loss/risks
9. Insurance is not gambling.
10 . Large number of insured persons (loss can be spread)
11. Insurable interest
12. Compensation at the occurrence of event or happening
13. Based upon certain principles
14. Protection against risks
HISTORY OF INSURANCE IN INDIA:
1818 Europeans started the Oriental Life Insurance Co. in Calcutta.
1870 The first Indian Insurance Company Bombay Mutual Life Insurance.
1870 The British Government enacted the Insurance Act.
1912 First Indian Insurance Act was passed with an enactment again in 1938.
The general insurance business in India, on the
other hand, can trace its roots to the Triton Insurance Company Ltd., the first
general insurance company established in the Year 1850 in Calcutta by the
British.
1907 The Indian Mercantile Insurance Ltd. set up the first company to transact
all classes of general insurance business.
1957 General Insurance Council, a wing of the Insurance Association of India,
framed a code of conduct for ensuring fair conduct and found business
practices.
1968 The insurance Act amended to regulate investments and set minimum
solvency margins and the Tariff Advisory Committee set-up.
1972 The General insurance Business (Nationalization) Act, 1972 nationalized
the general insurance business in India with effect from 1st January 1973.
Functions and objectives/purpose of insurance:

Primary functions Secondary functions Other functions

Provides certainty Prevention of loss Expansion of industrial

base
Provides protection Capital arrangement for Saving promotion
economy
Risk sharing Improve efficiency Investment options for
investors
Provides security Economic development Social security

Assistance to business Investment promotion Credit facility

in risky projects
Undertaking of Utilization of national Employment
responsibility resources
 Types of Insurance:
The different types of insurance have come about by practice within
insurance companies, and by the influence of legislations controlling the
transacting of insurance business. Generally insurance business is divided
in to two main branches;
(a) Life insurance business. Life insurance is insurance on human life. A
human being buys life insurance to make sure his dependents are
financially secured in the event of his untimely demise. Under life
insurance, the family of policyholder is financially compensated in case
the policyholder expires during the term of policy.
(b) General Insurance business.
Broadly, Insurance may be classified in to following categories:
(i) Classification on the basis of nature of insurance. These are as such;
(a) Life insurance
(b) Fire insurance
(c) Marine Insurance
(d) Social Insurance
(e) Miscellaneous Insurance
(ii) Classification from business point of view:
These are as such;
(a) Life insurance
(b) General insurance
(iii) Classification from risk point of view: These
may be classified as follows;
(b) Personal insurance
(c) Property insurance
(d) Liability insurance
(d) Fidelity Guarantee Insurance
 General Insurance

1. Fire Insurance: This is property insurance that covers damage and losses caused by
the fire. It helps to cover the risk of loss of property caused by fire accidently or
unintentionally.
2. Marine insurance: it covers the loss or damage of ships, cargo, terminals and any
transport by which the property is transferred, acquired or held between the points of
origin and the final destination. Marine insurance is an arrangement by which the
insurance company agrees to indemnify the owner of the ship or cargo against risks
involved in marine venture. It provides protection against loss of marine
perils/dangers. It involves:-
(A) ship/Hull insurance,-insurance against loss caused by damage and destruction of
ships to the owner.
(B) Cargo insurance- The goods sent through waterway is called cargo. It covers
physical damage of goods while in transit by land, sea and air
(C) freight insurance –the amount paid to the owner of the ship to transfer the goods
from one port to another is called freight. It provides the protection to merchant
vessels corporations. It stands for the change of losing freight amount in case cargo is
lost due to the ship meeting an accident.
(D) liability insurance-it is that type of marine insurance where compensation is bought
to provide liability occurring an account of a ship crashing. One ship may collide
with another ship. Goods of another ship may be lost. Marine insurance offers
compensation of such liabilities.
3. Motor insurance: this is also called automotive insurance is a contract by which
the insurer assumes the risk of any loss the owner of the vehicle may incur
through damage to property or persons as the result of an accident. It covers the
cars, motorcycles and road vehicles. It protect physical damage, theft of vehicle
or bodily injury resulting from traffic collisions.
4. Social insurance: it is public insurance that provides protection against economic
loss. Social insurance is considered to be part social security. It provides
economic security to weaker section who are unable to pay the premium for an
adequate insurance. It includes pension plans, disability benefits and insurance of
senior citizens.
5. Health insurance : this issuance is generally known as medical insurance. In this
insurance a person, or group of persons acquire health care coverage in advance
by paying premium.
6. Liability insurance : this is third party insurance, it is a part of general
insurance system of risk financing to protect the insured from the risk of
liabilities imposed by lawsuit and similar claims and protection of insured if the
buyer is sued for claims that come within the coverage of insurance policy.
Hence it is designated to offer particular protection against third party insurance
claims, for example payment is not made to insured but rather to someone
suffering from loss who is not a party of the contract
7. Personal insurance: insurance of human life values against the risks
of death, injury, illness or against expenses incidental to the latter.
 insurance purchased for personal or family protection purposes as
contrasted with insurance of business property or interests. For
example life insurance, disability insurance ,critical illness insurance
,health insurance and long term care insurance.
8. Property insurance as the name suggests provides cover against
damage and theft of property to the owner or tenant of the property.
It can be used to cover the structure of a building, or the contents
kept inside the building by its owner(s) or tenants.
This insurance policy will help the insured reduce the financial burden
of recovering from loss due to:
• Accidental damage to the structure of the property
• Theft or burglary of the contents inside the property
• Physical harm caused to a third party on the premises of the property
Examples: (Fire Insurance , Burglary Insurance, Flood & Earthquake
Cover, Office Insurance and All Risk Insurance.
9. Fidelity Guarantee Insurance:
Protect yourself against any fraudulent or
dishonest acts committed by your employees. Fidelity Guarantee
insurance covers the loss of money or other property belonging to
you or for which you are legally responsible for as a direct result of
their actions. The loss can be of money or goods, for the duration
of the policy. The cover may be required in respect of a single
employee or a group of employees.
 Difference between life insurance, fire insurance and marine insurance
Basis of Life insurance Fire insurance Marine insurance
Difference
Risk Risk is certain but the time The occurrence of risk is The happening of an
is uncertain uncertain event is uncertain
Period For longer period say 10,15 Generally for a year For a year or for a
to years voyage
Insurable Must be exist at the time of Both time policy taken Only when the loss is
interest policy taken and at the time of loss occur
Premium Based upon nature of risk Based upon the type of Based upon risk
and death tables prepared risk involved
scientifically
Payment of Can be paid monthly, One time payment One time payment
premium quarterly yearly
indemnity Not applicable applicable Applicable

object Security and investment Only risk protection Protection purpose

Difference between life insurance, fire insurance and marine insurance

Basis of Life insurance Fire insurance Marine insurance

Difference
Surrender Life policy can be Cannot be surrender Cannot be surrender
value surrendered
Double A person can purchase Double insurance can be Double insurance can be
insurance more than one policy for effected. But the actual effected. But the actual
the same cause. On loss cannot be claimed loss cannot be claimed on
death loss will be paid on all policies all policies
on all policies
Value of policy There will be on under The value of policy The value of policy
or excess valuation of cannot be taken more cannot be taken more
policy than the actual value of than the actual value of
property property

Determination Premium payable can be Determination of Determination of

of premium determined with premium is difficult on premium is difficult on
reference to life tables account of variety of risk account of variety of risk
easily involved involved
Principal of insurance: there is a body of doctrine or principles commonly
associated with the theory and procedures of insurance. All these principles
guide all stakeholders about the explanations of current policies and for
making the best choice among the available alternatives. These principles
may be defined as the rules of actions or code of conduct that are
universally accepted by the different stakeholders involved in the business
of insurance.
Essentials of insurance contract:
1. Offer and acceptance (buyer to seller for valid contract)
2. Intention to create relations
3. Parties competent to make contract(Major, Sound mind and not
disqualified by the law)
4. Free consent (without coercion, undue influence, fraud, misinterpretation
and mistake)
5. Lawful constitution ( consideration and compensation)
6. Lawful object ( object of insurance should be forbidden by law, object
should not opposed to public policy and not against the provision of law)
7. Certainty and possibility of performance( agreed on terms and conditions)
Fundamental principles of insurance:
1. Principle of utmost good faith:
 Both parties should have faith in contract
 Both parties should share accurate information
 It applies to all kind of insurance contract
2. Principle of insurable interest (insured must suffer from some financial loss)
 Specific subject matter
 Monetary benefit
 Legal relationship
 Insured must be owner of the subject matter
 Insured economically benefited with existence of subject matter)
3. Principle of indemnity
 Indemnity refers to the security, protection and compensation given against
damage, loss and destroy.
 Applicable to all kind of insurance except life insurance
 The amount of compensation cannot exceed the amount of actual loss or the value
of policy whichever is less
 After the compensation of loss the insured cannot hold the ownership right on the
subject.
 Valued policies are not covered under the principle of indemnity.
Principle of indemnity......
 Insured has to prove that he has suffered a loss
 The insurer has right to get back the extra amount, if any
paid to the insured.
 Insurer has right to get back all amount received by the
insured from third party, if the complete loss indemnified
by the insurer
 Actual amount is calculated with reference to his actual
loss or the sum insured, whichever is loss
 Excess or franchise clause means the liability of the insurer
is limited after a limit of value.
 Pro-rata average (for example if the value of property at
the time of loss 1,00,000 while the policy taken only for
75,000 (75%) and actual loss is 40,000 since in this case
insurer will have to pay only 75% of total loss 30,000
( actual loss × insurance policy taken/market value of
property)
Principle of indemnity......
 Salvage –the salvage or scrap left of the damaged or destroyed
goods and property to be reduced from the amount of
indemnity payable to the insured.
 Subrogation- remaining part of damaged property to be pass on
insurer
 Contribution if subject matter is insured from different insurer,
in this case only actual amount will be compensated according
to contribution by insurers.
Methods of indemnity:
1. Cash payment: (after inquiry insurer accept the claim of loss
and will compensation through cash)
2. Repairs: if loss is partial and only repair will be compensated by
insurer
3. Replacement: if repair is not possible in this case insurer will
replace the subject.
4. Reinstatement- this method is rarely used. In this case the
property managed is reinstated in its original position.
4. Principle of contribution: insured can claim the compensation only
to the extent of actual loss from any one insurer or all the insurers.
For example - Raj has a property worth Rs.5,00,000. He took
insurance from Company A worth Rs.3,00,000 and from Company B
- Rs.1,00,000. In case of accident, he incurred a loss of Rs.3,00,000
to the property. Raj can claim Rs. Rs.3,00,000 from A but after that
he can't make profit by making a claim from Company B. Now
Company A can make a claim from Company B to for proportional
loss claim value.
Prerequisites for the principle of contribution:
1. Common subject matter
2. Risk should also be common to all insurer
3. Legally enforceable
4. Enforce policy (it means policies should be enforceable at the time
of loss)
5. Insurable interest
5. Principle of subrogation: it is applicable to all kind of indemnified
contract, in this case after compensation of damaged property then
the right of ownership transfers to the insurance company.
Essentials:
 Extension of principle of indemnity
 Subrogation is the substitution
 Subrogation only up to amount of payment
 May be applied before payment
 Not applicable to personal insurance
 It is applicable only after indemnity
 The insured is required to provide all help to insurer while enforcing
the claim against defaulter
 The insurer has right to sue the third party in the name of insured
 The insurer will hold the amounts received from the third party
 Under this principle, insurer cannot recover anything more than
amount compensated to insured.
Areas of subrogation:
1. Torts (insured has sustained some damage, lost right or incurred
liability due to atrocious acts of some persons)
2. Contract ( subrogation relates to right arising out of certain
contracts)
3. Subject matter of insurance (once the claim compensated then
insured cannot claim the salvage)
6. Proximate Cause: The principle of proximate cause, or nearest cause, comes
into play when more than one event or bad actor causes an accident or injury.
An example would be if two separate landowners carelessly burn piles of
leaves, and the fires eventually join together and burn down your house. The
insurance principle of proximate cause dictates that nearest or closest cause
should be taken into consideration to decide the liability.
7. Principles of loss Minimization: Loss Minimization
As the owner of an insurance policy, you have an
obligation to take necessary steps to minimize the loss of your
insured property. The law doesn't allow you to be negligent or
irresponsible just because you know you're insured. For example,
if a fire breaks out in your kitchen, you have an obligation to take
reasonable steps to put it out, like using a fire extinguisher or
calling the fire department. You can't just stand back and allow the
fire to burn down your house because you know that insurance
will pay for it.
Contract of life insurance:
Life Insurance is defined as a contract between the policy
holder and the insurance company, where the life insurance company pays a specific
sum to the insured individual's family upon his death. The life insurance sum is paid
in exchange for a specific amount of premium. It is therefore important that you do
not leave anything to chance, especially ‘life insurance’. As death is the only certain
thing in life, apart from taxes, it pays to insure it well in advance. 
The significance of having a life insurance is to avail the "peace of mind" that it brings
along. However, having an adequate amount of life insurance effectively sets your
mind free of some important questions like:
What will happen to my family financially after I die?
How will my wife/husband and kids take care of their expenses after I am no more?
How will I provide for my family in case I lose my job after an accident?
How do I ensure that I am able to fund my children,s higher education?
How do I ensure an income after my retirement?
Now, in order to have a financially secured future, you (the insured)
have to pay the insurer (insurance company) a “life insurance premium”, which is
either a regular annual payment or a one-time payment as the case may be.
Contract of life insurance:
Characteristic of life insurance :
1. Outcome of an offer.
2. Payment of sum assured
3. Payment of premium
4. Contract of contingency
5. Insurable interest
6. Provides financially aid
7. Encouragement of savings
8. Wide scope.
Procedure for taking a life insurance policy:
9. Proposal: Like any other contract, proposal is the first step for entering into a Life
Insurance Contract. The L.I.C. provides printed proposal forms free of cost to the
prospects. This form consists of a number of questions. The proposer has to fill in
required information correctly and completely.
Information which is usually asked in the proposal form:
a. Name, address and occupation
b. Date of birth
c. Proposed Insurance scheme or plan
d. Purpose i.e. protection to family, old age provisions, etc.
e. Details of previous insurance, if any
2. Personal statement:
Along with the proposal form one more printed form is issued by
the the L.I.C. called the personal statement. In this form the proposer has to
submit his complete medical history and also the health of his family.

The acceptance or non-acceptance of the

proposal is based on the information submitted by the proposer in the
proposal form and personal statement. The L.I.C. can cancel the contract in
the case of concealment or fact or false and wrong information.

3. Medical examination:
On submission of the proposal and personal
statement, the L.I.C. directs the proposed assured to go through a medical
examination. This examination is to be conducted by the approved doctors
who are on the Official Panel of L.I.C. the proposer need not pay any
charge for this medical examination. The doctor then submits his report to
the L.I.C.
4. Proof of age:
The proposer has to mention the correct date of birth in the proposal
form. The proposer has to submit some evidence for the age proof like
leaving certificate or affidavit of court etc. because age is an important factor
for the fixing the amount of premium.
5. Reviewing stage/scrutiny of Reports:
The L.I.C. officers then fully examine the contents of the proposal form,
personal statement, medical report, agent's remarks and the certificate of
proof of age. This scrutiny is done for taking a decision for acceptance of the
proposal.
6. Acceptance of the proposal:
On scrutinizing all the reports and documents, if everything is
satisfactory the L.I.C. may accept the proposal. The L.I.C. then sends
intimation to the proposer about the acceptance of the proposal.
If the reports are completely un-satisfactory the proposal is refused and an
intimation about non-acceptance of the proposal.
7. Payment of premium:
The L.I.C. contract is completed when the first premium is
paid by the assured and the L.I.C. issues a valid receipt for it. The first
premium is paid, when the first premium notice is received by the
proposer.
When the first premium is paid along with the proposal only, the
receipt is issued after its acceptance. The L.I.C. runs the risk from the
date of issue of first premium receipt. After the first premium, the
assured has to pay agreed premiums at agreed intervals.
8. Issue of insurance policy:
Then the written agreement is prepared, this is called as an
insurance policy. In this document the name, address, occupation, age
of the proposer, policy number, type amount and term of policy, other
terms and conditions of the insurance contract etc. things are
mentioned.
 Nature and importance of life insurance contract
Economic nature legal nature
1. Family life depends on income. 1. Compensation
2. Current income on earning. 2. Annuities
3. Earnings will cease sometimes. 3. Allowances
4. To meet necessity
5. Savings and investment option.
Importance:
6. Covering the risk of death 2. minimize dependency
3. Encourages compulsory savings 4. profitable investment
5. Easy settlement and protection of creditors
6. Security and safety 7. facilitate liquidity
8. Tax exemption and loan facility
 Parties to Insurance Contract their Right and
Duties
Parties:
1. Insurer
2. The policyholder: Person who owns the policy
or Person whose life is insured.
3. The beneficiary: Person who collects the death
benefit when the insured person dies
 Rights and Duties of Insurer

Rights Duties

1. To obtain information 1. Terms and conditions

2. Investigation 2. Pros and cons of policy

3. Rejection of policy or claim 3. Policy bond and nomination for beneficiary

4. Receiving of Premium 4. Notice of premium

5. Rejection of proposal 5. Refund of amount

6. To know changed information 6. Payment of claim

7. Revival of policy 7. Fair deal

8. Investment of funds
 Rights and Duties of Insured

Rights

1. Right to return

2. Refund of premium

3. Right to claim

4. Right to modification

5. Right of switch funds

6. Partial withdrawal

7. Right to surrender
 Rights and Duties of Insured

Duties before buying of Duties after buying of Duties of maintenance

policy policy
Detail investigation Proper documentation Payment of premium

Terms and conditions Receipt of policy bond Intimate the change

Comparison of different Checking the policy Registration of nominee

policies document

Filling the application Clarification and Up to date information

form confirmation about health

Nomination Duplicate document

Co-operation
Terms and conditions of policy
 Life Insurance Policies
• An endowment policy is a life insurance and savings policy.
Through this policy you can insure your life as well as save
regularly. At the end of the tenure of the policy you get a lump
sum.
• Endowment policies are costlier than savings policy due to the
savings component and the regular premiums payable are higher
than sole life insurance policies.
• If the insured dies before the end of the tenure of the policy then
beneficiaries can claim the insurance amount as well as the lump
sum accrued amount. If the insured is alive at the end of the
tenure then the assured amount and the lump sum is given to
the insured.
• Endowment Policies can be ULIP linked or Non ULIP linked, the
former type is the unit linked insurance plan in which the policy is
linked to the profits of the insurance company and the insured
also receives bonuses if applicable.
 Features of endowment policy

Features and Benefits of Endowment Plans:

• Face value of policy is assured or guaranteed.
• Additional bonus is also paid if applicable.
• Risk is low as face value is guaranteed.
• Flexi and single premium plan policies are also available.
• Premium waiver benefit.
• Tax benefits can be availed under section 80 C and 10 D of the income tax act.
• Includes accidental death benefits.
• Accident permanent /total injury benefit or partial disability benefit.
• Critical illness benefit.
• Hospital cash benefit.
• Loans against policy can be availed in case of emergencies.
• Endowment policies can even be bought for minors (child plans for future) and
the minimum entry age can be 5 years whereas the maximum entry age can be 60
years.
• In case of minors the policy has to be under the guardianship of a mature person
who can be parents or guardians.
 Types of Endowment Policies
• Pure endowment policy (amount is payable only when insured surviving the endowment plan).
• Single or ordinary endowment policy (amount is payable on the expiry of policy or at any time
before maturity in case of death of the assured).
• Double endowment policy ( double amount of sum assured payable if the assured survives during
the time of policy, in case the assured dies during the endowment period, only the sum assured is
payable. Higher rate of premium is charged in this policy)
• Money back policy ( this is the most popular policy nowadays, under this type of policy, policies are
issued with profits by insurer for the terms of 12,15,20,25 years only. The main feature of this policy
is that after a number of installment, 25 to 40% of sum assured is payable in cash and the balance at
maturity
• Joint life endowment policy (this policy is one covers generally two lives in a single policy. The
assured amount is payable on the expiry of the terms or on the death of one of the two assured lives
during the term of policy)
• Educational endowment policy ( this is to finance the education of children whether or not the
parents alive after the endowment period. Premium is paid up-to the death of life assured or for an
agreed period whichever is earlier)
• Marriage endowment policy ( this policy provides funds for the marriage of the children. Premium
is paid till the death of the policyholder or for an agreed period, whichever is earlier)
• Single premium policies and Level premium policies
• Single life and joint life policy
• With and without profit policy
 Whole life policy
Whole Life Insurance has several features that make
it different from Term Life and other forms of life
insurance:
• Permanent Coverage.
• Level premiums.
• Pays a death benefit.
• Builds cash value (tax-deferred)
• Serves as an investment vehicle.
• Borrow against cash value.
 Types of Whole life policy
1. Single premium whole life policy (premium paid by policy
holder in one single installment )
2. Ordinary whole life policy (the premium is payable throughout
the life time of the assured)
3. Limited premium whole life policy ( under this the premium is
to be paid by the assured for a fixed period or up to the
attainment of certain age or till his/her death if it occurs within
that period)
4. Convertible whole life policy (such type of policy is convertible
into endowment plans and this is suitable to those persons whose
income will go up over a period of time)
Fire insurance policies:
Conditions of fire insurance
 FIRE INSURANCE POLICY:
Fires and other related perils, i.e. events which cause a financial loss, have become a common cause of losses in recent
times. These perils cause unspeakable loss to property as well as goods. That is why having a fire insurance policy
becomes important. The policy covers the financial loss that you face when assets are damaged due to fire or other
covered perils. You can buy a fire insurance plan under the following circumstances –
• If you are an owner of goods and/or property
• If you are a pawnbroker or pawnee (pawnbroker – an individual who lends money to another based on any asset pawned
by another; pawnee is an individual who lends money to another individual against an asset which is pawned)
• If you are a mortgagee (mortgagee is a financial institution which lends money based on the mortgage of an asset)
• If you are the assignee official receiver of assets where insolvency proceedings are involved
• If you are a warehouse owner and goods are stored in your warehouse for which you are responsible
• If you are an individual who has lawful possession of any goods or property
• Coverage under fire insurance policies
• Fire insurance plans not only cover losses suffered by fire but also losses suffered by other perils. The common perils
which are covered under fire insurance policies include the following –
• Fire, explosion or implosion
• Lightning
• Damage due to an aircraft
• Strikes, riots or any other type of malicious acts which cause damage
• Storm, typhoon, flood and inundation which is collectively called STFI
• Impact damage which occurs on impact with road or rail vehicles, animals, etc.
• Subsidence, rockslides or landslides
• Overflowing or bursting of water tanks, pipes and other apparatus
• Missile testing operations and the damages caused thereof
• Water leakage from automatic sprinkler installations which causes damage
• Bush fire
• The basic principles that govern Fire Insurance are:
(i) Utmost good faith – In insurance contracts, the legal doctrine of utmost good faith
applies. The insured has the duty to disclose all material facts, which have a bearing on
the insurance. A breach of this duty may make the contract void or voidable. The duty
of disclosure continues throughout the policy period. The fire proposal form also
includes a declaration by the insured saying that the statements declared by him are
true, and that they can form the basis of the insurance contract.
(ii) (ii) Insurable Interest – The requirement of insurable interest gives legal validity to
insurance contracts and distinguishes them from wagers. It may be defined as the legal
right to insure, where the right arises out of a pecuniary relationship between the
insured and the subject matter of insurance.
The destruction or damage to the latter involves the insured in financial loss. Absolute
legal ownership is a clear example of insurable interest. For e.g, a bank or a financial
institution which has advanced money on the security of a property, has insurable
interest in that property. In Fire insurance policy, the insurable interest should exist at
the time of taking the policy, throughout its currency period and also at the time of
loss/claim. Fire insurance policies are personal contracts.
(iii) Indemnity – The objective of the principle is to place the insured , as far as possible, in
the same financial position after a loss, as that occupied by him, immediately before the
loss. In simple words, the principle of indemnity means the insured is indemnified only
to the extent of his loss, no profit or undue benefit is extended. The indemnity is
subject to the sum insured and other terms of the policy. The sum insured can be fixed
on the basis of Reinstatement Value or Market Value.
• (iv) Subrogation – The principal of subrogation is the corollary of the principle of
indemnity. If the loss suffered by the insured can be recovered from third parties who
are responsible for the loss, the insured’s rights of recovery are transferred or
subrogated to the insurers , when they indemnify the loss.
(v) Contribution – The principle of contribution, which is also a corollary of the
principle of indemnity, provides that if the same property is insured under more than
one policy, the insured can recover a rate able proportion of the loss under each policy.
Under no circumstances can he recover more than his loss, and make a profit.
• (vi) Proximate cause – A cause which immediately precedes and produces the effect,
as distinguished from the remote, mediate, or predisposing cause. An act from which a
loss or injury results as a natural, direct, uninterrupted consequence and without
which the loss or injury would not have occurred.
It is the primary cause of a loss or injury. It is not necessarily the
closest cause in time or space nor the first event that sets in motion a sequence of
events leading to an injury. Proximate cause produces particular, foreseeable
consequences without the intervention of any independent or unforeseeable cause. It
is the active, direct, and efficient cause of loss in insurance that sets in motion an
unbroken chain of events which bring about damage, destruction, or injury without
the intervention of a new and independent force. It is also called legal or direct cause.