Insurance contracts

TYPES OF INSURANCE CONTRACTS

1. INSURANCE CONTRACTS

2. Introduction An insurance contract is one through which an insurer (insurance company) promises to indemnify the insured for the losses and perils insured against a consideration knows as the premium Insurance contracts are contracts of indemnity. Indemnity is the exact compensation required to maintain the same financial position of the policy holder, which he had before the occurrence of the contingent event.

3. Insurance contracts are drafted by the insurer and the insured hardly has any room for altering the terms and conditions. Thus, they are also known as contracts of adhesion. The onus of any ambiguity in the contract lies on the insurer and these contracts are legally enforceable only on the insurer. Even though the insured has a duty to pay a timely premium amount in order to avail the insurance in the occurrence of an uncertain event, he/she cannot be legally forced to pay such amount. Thus insurance contracts are often called unilateral contracts

4. Components of insurance contract Offer and acceptance : the offer is made through an application by applicant to the insurer. The insurer then accepts the application thus binding the company to the contract. Both the parties then have to fulfill their contractual obligations that arise out of the insurance contract. Competent parties : The parties should be of sound mind, above 18 years of age, and should not be disqualified by any law in the country. Consideration : there is consideration from both sides in the contract- the insurer promises to compensate the insured for future losses and the insured must pay timely premium. Legal purpose : the intention of both the parties should be to enter into a legal relationship which is enforceable in court of law.

5. Need for insurance Promotes savings and investment : the lower income and middle class families are helped by insurance as it protects them from unforeseen risks in the future, thus providing a sort of financial security against losses. This promotes savings and investments and fuels economics growth. Sense of security : insurance provides a payback value to the insured when the assets meet contingent situations. Businesses can operate freely without having to worry about these situations. Protection against risk : by getting an insurance for an asset, the insurance company bears the loss and compensates the insured for losses and unpredictable events, thus reducing the element of uncertainty from the future

6. Nature of insurance contracts As per Section 10 of the Indian Contract Act of 1872, the characteristics of a valid contract are as follows- Agreement : Depicts the intentions of the parties to enter into a legal relationship. For a valid insurance contract, the parties involved should possess the intention to be bound by the legal contract. Competency to contract : The parties must possess sound mind, must not be minor, and should not be disqualified by any law of the country to enter into a contract.

7. Free consent : There should be no fraud, undue influence, coercion, mistake, and misrepresentation. There should be consensus ad idem i.e. Both the parties must agree to the same terms in the same sense. Consent should be free, independent and without any fear or pressure. Lawful object : The object of the contract must be lawful and should not be contrary to any active law in the country. Lawful consideration : there must be due and lawful consideration. In an insurance contract the premium works as the consideration to mitigate the loss in the occurrence of a contingent event Fulfill legal formalities : the contract must be duly written with all the terms and conditions, should be signed by both the parties involved, and properly attested and registered.

8. Principles of Insurance Law

9. Principle of utmost good faith This principle is based on the premises of the disclosure of Material Facts by both the parties. The law imposes a duty of uberrima fides on the insured wherein the one seeking the insurance is required to disclose all relevant facts. These facts are the basis of determining the amount of premium and the degree of risk. The insurer should also follow this principle because insurance treated as a commodity binds the insurer to fulfil the negotiations and terms of the contract, and will compensate for the loss incurred by the insured.

10. Material facts to be disclosed If any other insurance company declined to insure the property or some conditions that were imposed by the other insurance company If a second insurance has been taken simultaneously on the same asset If there is a greater exposure to risk than in normal circumstances ( For eg . If a part of the building is being used for storage of firecrackers) Facts which would make the amount of the loss greater than normally expected ( For eg . A product being stored in the building is hazardous in nature)

11. Two ways that lead to breach of utmost good faith Misrepresentation : This may be innocent or intentional. Intentional misrepresentation arises when the insured wilfully distorts material facts related to the insured object. For eg . The insured might intentionally overvalue the used car for which he seeks insurance. Non-disclosure : Deliberate intention to hide material facts so as to defraud the insurer into entering into the contract. For eg . The insured does not disclose that he is an alcoholic while taking a medical insurance.

12. Principle of Insurable Interest Insurable interest refers to any tangible object that the insured wishes to insure, and the insurance of which results in benefits. Also, in the absence of such insurance, the insured should have a sense of loss due to harm to the asset by occurrence of certain events. For eg . Any person would get insurance coverage for his own car and not his neighbour’s vehicle. In simpler terms, Insurable Interest arises due to the ownership of the said insured property and to reduce the risks that might harm or reduce the value of this asset

13. It should be remembered that a person in the lawful possession of goods of another has got insurable interest so long he is responsible for the goods. Mere possession without responsibility does not carry any insurable interest. Similarly a person having illegal possession of goods has got no insurable interest. One important point with regard to insurable interest is that it must be capable of being valued in terms of money. Sentimental value is no criteria. In the absence of insurable interest, the contract will be void ab inito

14. Statutes state that the presence of an insurable interest makes the contract valid, in its absence the contract will become a wagering contract which are unlawful in nature. For eg . A cab driver may want to get his car insured because that is his primary source of income, however if under certain circumstances he sells his car then the insurable interest also disappears from the contract and the driver will no longer have insurance coverage for the said car. For eg . In case of life insurance spouse and dependents have insurable interest in the life of a person. Corporations also have insurable interests in the life of it's employees. For eg . A person has got insurable interest in his own life. A husband has also got insurable interest in the life of his wife and vice-versa. No other relationship as such merits existence of insurable interest. 

15. Principle of Proximate Cause This refers to the closest cause of damage to the insured asset which is taken into account for determining the liability of the insurance company. There can be multiple causes at work in conjunction to each other which lead to damage. What is to be seen is which of those causes is the closest, most powerful and most impactful in causing destruction.

16. No insurance policy provides protection from all imaginable risks. In the terms and conditions of the contract, the risks which are covered are specified and it is for these risks only that insurance cover is granted. This risks are those which are potential Proximate Causes in case of damage to the asset. For eg . A ship was severely torpedoed and was in the process of sinking. Almost immediately there was a cyclonic storm and the ship sank. It was held that the proximate cause of the sinking of the ship was torpedo (Leyland Shipping Co. V. Norwich Union Fire Insurance Society, 1918). Although, the cyclone was nearer to sinking in time, nevertheless, a torpedo was the active efficient cause, because the ship was so hard hit by a torpedo that it would have definitely sunk.

17. Principle of Indemnity Indemnity in general means security, protection, and compensation given against damage or injury. the insured shall get neither more nor less than the actual amount of loss sustained. The compensation is limited to the amount assured or actual loss (whichever is less). This principle does not apply to life insurance policies and personal accident insurance because Indemnity seeks to compensate the insured for his losses in financial terms and the value of a human life or limb cannot be measured by money. This also does not apply to Reinstatement Policy issued under fire insurance under which the insurer agrees to give the insurance amount or replace the damaged asset with an exact or a close replica. This policy is taken for antiques, rare objects, artwork etc which are unique and have few copies

18. The principle of indemnity was well cared for in the leading case of Castellain V. Preston (1883) in the following way “A contract of insurance is necessarily a contract of indemnity (except life and personal accident insurance) and of indemnity only, and this means that in case of a loss the insured shall be fully indemnified, but shall never be more than fully indemnified.

19. Ways in which insurer provides indemnity Cash Payment : Indemnity is provided in cash or by cheques by the insurer. In case of liability claims wherein the insured has to pay for the loss to a third party, the amount is generally paid through cheques. Repair : This method is predominantly used for motor insurance and reinstated fire insurance policy. The insurer in this case repairs the damage to the asset and reverts the property back to its original form and value

20. Replacement and/or reinstatement : This method is used in glass insurance, reinstated fire insurance policies or property insurance where the insurer has to replace the damaged or old asset with a new one. This might often lead to the violation of the principle of indemnity as the insured may make profit out of the replacement- If the property couldn't be made as original then the insurer has to pay for the damages and in some cases the amount of monetary compensation exceeds the value of actual loss

21. Principle of Contribution This helps in the implementation of Principle of Indemnity. People may take insurance on the same risk from multiple insurer with a view to make profit. In case of actual loss, this principle disables the insured from making undue profit. If one of those insurers has paid the claim in full, it can recover a proportion of the payment from other insurers.

22. If the insurer suspects that the insured might have taken another policy where the subject could be the same or overlapping and covered by multiple insurers, then he can add clauses to the contract stating that in the event of actual loss he is liable to pay only a proportion of the damages. For eg . 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.

23. Principle of contribution arises when the following conditions are met Two or more insurance policies should exist The policies must cover a common risk The policies must cover a common subject matter The policies must be active and operational at the time of loss The policies must have been in force and all of them should be enforceable at the time of loss

24. Principle of Subrogation Also an extension of the principle of indemnity, it is generally applicable to contract of marine or fire insurance. According to this principle, if after the damage the damaged property still has value then ownership of that property will be of the insurer provided that the insured has been compensated for the loss occurred. Once the insured has received indemnity from the loss occurred, his rights get shifted to the insurer, disallowing insured to make profits. The insurer is unable to make profits too since he can recover only to the extent of the indemnified amount. Thus supplementing the principle of indemnity. For eg . Ram took a insurance policy for his Car. In an accident his car totally damaged. Insurer paid the full policy value to insured. Now Ram can't sell the scrap remained after the crash.

25. If the insurer has indemnified the insured for damage caused by a third party, then the insurer has the same rights against the said party as the insured i.e. The insurer now has the right to recover from the third party the amount of damages or part of the amount paid as indemnity. For eg . A had been to the market driving his car. After parking the car somewhere in front of the market he went inside, made some purchases, came back and found that B was damaging the car. In law A has a legal right of action against B for damages. Incidentally A may also have a comprehensive motor insurance which protects him against such losses. Here the principle of subrogation asserts that if the insurers pay the full loss then they (insurers) shall take over the right of ‘A’ (insured) for proceeding against B (third party) for their own (insurers) benefit.

26. Although this principle comes into effect only when the indemnity has been paid by the insurer, this rule is often modified by the insurers by adding a condition in the policy that gives them subrogation rights before the claim is paid. This gives the insurer the right to go after the third party right from the event of damage. However, claim from third party cannot be taken until insurer pays compensation to the insured

27. How the right of subrogation arises By tort : It is a breach of duty owed to a third party. A person cannot do wrong to another thereby causing damage to another’s property or inflicting injury to the person of that another. If it is so done then a right of action accrues in favour of the wronged and to the detriment of the wrong-doer. By contract : A contract may put some obligation on the person making a breach of the contract to compensate the person who has been aggrieved as a result of the breach. As for example, an obligation under the contract of bailment etc. By statutes : Statutes i.e. Laws may also create liability, for making compensation, arising out of a breach of duty owed. By subject matter of insurance : This arises out of the terms and conditions of the insurance contract

28. Principle of loss minimisation Insured must always try his level best to minimise loss to the insured property, even though it may be covered under the insurance claim. In case of uncertain events such as fire outbreaks, blasts etc, the insured must take all necessary steps to control the damage. The insured must not behave negligently and should not damage the insured property on purpose.

29. For eg . Ram took insurance policy for his house. In an cylinder blast, his house burnt. He should have called nearest fire station so that the loss could be minimised. For eg . Divya indulges in reckless driving, jumps red lights and does not care to take necessary/basic precautions while driving on a busy road. Shr meets with an accident in which even though she did not sustain injuries, her car was seriously damaged. In such a situation the motor insurance company may very well refuse to cover the loss incurred by her.

30. Fin.