Law of Insurance
Fundamentals Elements of Insurance
The term insurance comes from the word insure, the dictionary meaning of which is ‘to guarantee’.
For the purpose of law of insurance it can be understood as an arrangement for the payment of a sum of money in the event of loss or injury.
Insurance does not mean that unforeseen circumstances will not occur but ensures that the person is ready to face them.
Importance of Insurance
Insurance has attained much popularity and importance these days.
Practically every type of risk to which a human being or property may be liable can be insured against.
Insurance prevents or minimises the hindrances due to risks of various kinds.
The essential requirements which must be present in insurance are as under:-
1. The insured is really subject to risk; otherwise it will amount to betting.
2. The time and occurrence of risk must involve some uncertainty.
3. Both the insurer and insured should not have any control over the happening of the event insured against.
4. The risk insured against should not be very minor one; otherwise the cost of insurance may be uneconomical.
5. The cost of insurance should not be prohibitive.
6. The risk must be capable of approximate mathematical estimation.
Insurance is a contract in which one party, known as the insured or assured , insures with another person, known as the insurer, assures or underwriters his property or life, or the life of another person in whom he has a pecuniary interest, or property in which he is interested or against some risk or liability, by paying a sum of money as the premium.
General Principles of Insurance
Indemnity- Contracts of insurance (except life and personal accident insurance) are contracts of indemnity.
· A typical contract of insurance involves an obligation on the part of the insurer to pay a sum of money to the insured upon the happening of some event.
· In no case however, can insurer recover more than the amount insured.
· The amount of depreciation is to be deducted from the loss suffered by the insured property.
Good Faith – There must be utmost good faith and frankness between the insured and insurer.
· The withholding of any relevant information or misstatement of material fact may give the insurer the legal ground to declare the contract void.
· A new material fact which arises at any time during negotiations, or a fact which though earlier not material, becomes material owing to change of circumstances, must be disclosed as soon as the insured comes to know of it.
Insurable interest – Insurable interest means some proprietary or pecuniary (monetary) interest.
· A person is said to have an insurable interest when is so situated with regard to the thing that he would have benefit from its existence and loss from its destructions.
Examples; Like car, car hypothecated, self insurance,
Wife or husband insurance in the life of both of them
Causa proxima – In case of marine and fire insurance we have principle of ‘causa proxima’ i.e. proximate cause.
· When damage has rustled due to more causes, we have to look to the proximate or the nearest cause of damage, although the damage might not have taken place without the remote cause.
· Thus, in the event of loss. It is proximate and not the remote cause.
Example : Rats make holes into the bottom of the ship where from the seawater enters the ship, thereby destroying the whole cargo of sugar. Since the insurance was against sea peril because the proximate cause is sea water.
Mitigation of loss – Another principle of insurance is mitigation of loss by the insured.
· In the event of mishap, the insured must act as though he was uninsured; that is, he must take all measures to minimise the loss that he would have taken if the properties were uninsured.
Risk must attach – The nest principle is that a contract of insurance can be enforced only if the risk has attached.
· If the risk is not run, the consideration fails and therefore the premium received by the insurer must be returned.
Subrogation – The principle of subrogation is corollary to the principle of indemnity and therefore applied only to fire and marine insurance.
· Subrogation is the right of the insurers to enforce their own benefits all the rights and remedies which the insured possesses against third parties in respect of subject matter.
· It means after satisfying the claim of the insured, the insurer stand in his place.
· The principle applied when there is complete loss not the partial loss.
Example – Ship X has collision with another ship called Y. The Insurer after satisfying the claim of owner of X ship and claim the amount of loss from the owner of Y ship, if it was due to negligence of the captain of Y. But one thing should be kept in mind that the owner should be different persons.
Contribution – Where a particular property is insured with two or more insurers against the same risk, it is called ‘double insurance’.
· In the event of loss the insured will get compensation only for the amount of actual loss.
· He will be compensated by the respective companies on the basis of ‘principle of contribution’.
· The insurer must share the burden of payment in proportion to the amount assured by each other.
· In case of total loss paid by one company, it can claim the proportionate amount from the other company.