Insurance contract is an agreement between two parties, in which one party agrees to compensate the other for any future loss suffered by him, he does so by accepting a premium.
The parties who promises to save other is known as Insurer” and the party in whose favour such promise was made is known as “Insured.”
The Contract of Insurance must be in writing, In India they are regulated / governed by Insurance Act, 1938. And rules made by “Insurance Regulatory and Development Authority (IRDA).”
Essentials of Insurance Contract
- Agreement = offer + Acceptance + Consideration
- Free Consent: without Coercion, fraud, undue Influence, mistake and misrepresentation.
- Competent Parties: who are sound mind and major.
- Lawful object and Lawful consideration.
- Section 23 of Indian Contract Act, 1872.
- Not expressly void.
General Principles of Insurance Contract
- Insurable interest,
- Utmost good faith – uberima fides.
- Contract go Indemnity,
- All contracts are contract of Indemnity except Life Insurance.
- Principle ge causa poroxima.
- Proximate cause
- Principle of subrogation
- Replace or substitute the liabilities.
Example: A Company give compensation to B and then can recover where B can also rust & for the H’s loss to C. Now, Company can take or recover its loss forem Compensation but the daim this loss to company. C
- Principle of loss minimization.
- It is the duty of Insured to minimise his loss if he can do so.
- Principle of Contribution.
Meaning of Insurance
The aim of insurance is to protect the insured from the variety of risks which he anticipates.
The fundamental functions of Insurance is to shift loss suffered by sole individual to a willing and capable professional risk bearers in consideration of a comparatively small contribution or premium.
Insurance is a process whereby risk of financial loss arising from death or disability of a person or damage, destruction or loss of property owing to “perils” of which they are by exposed, is assumed by another.
According to “Maclean”, insurance is a method of spreading over a large number of persons a possible financial loss too serious to be conveniently borne by individual.
Objectives of Insurance
- Immediate / Short Term Purpose,
- The immediate purpose is to spread over loss, risk or damage, large number of risk bearers and immediate beneficiary.
- Long Term Purpose
- The long term purpose is an economic growth of nation through investments by insurance company in the development of Commerce and industry of the nation.
Nature of Insurance
The Nature of Insurance depends on the nature risks to be protected and insurance Contract, makes available the-risk coverage to the insured.
The buyer of insurance pays a premium in exchange of financial risk to be covered.
Law of Insurance forms part of General law of Contract and whatever type of contract of Insurance may be, it always represents the agreement between the Insured and Insurer.
- The essential ingredients of a a Contract of Insurance
- Offer and acceptance,
- Consideration
- Capacity of the parties,
- Legality of the object and consideration.
Insurable Interest
The test for a valid insurance Contract is the existence of the Insurable Interest.
The insurable interest is nothing but an interest of such a nature that the occurrence of an event insured against, would cause financial loss to the insured and such interest can be protected by a Contract Insurance.
This interest is considered as a form of Property in the eyes of law. The insurable interest should exist at the time of happening of the event in the general insurance Contracts, But it is not necessary so in case of “Life Insurance Contracts.
This is because general Insurance is the Contract of Indemnity while life Insurance is the contract of assurance.
Example: In case of fire Insurance a person suffers more loss under a policy, if at time of loss or damage he has no interest in the property either full or partial.
If insured has no interest at the time when event happens, it is clear that he cannot recover any thing because he suffer no loss and therefore, indemnity has no claim to an indemnity.
Similarly, if the has an interest which is limited to something less than the full value of the subject matter.
The suffer no greater loss than the value of his interest at time of loss and therefore his claim to Indemnity cannot exceed the value of his interest.
Insurable Interest in Life Insurance
Life Insurance stands on different grounds as compare to general insurance. No value can be assigned to human life in the same way as it is done in respect of tangible property.
But, at the same time it is also possible to measure the extinct of loss that would be caused by the failure of the particular life.
The guiding factor in this regard is that an insurable Interest, In case of life insurance, is a reasonable expectation of financial benefit from the continue of life of the subject or an expectation of the loss of the subject dies.
Example: A father has a clear insurable interest in the life of minor child, because the life of the father is entitled to the services and earnings of the child.
What is Insurable interest in case Insurance Contract?
Reasons far Insurable Interest: It is important to note that on insurable Interest some kind is necessary in case of every contract of Insurance whether General or life.
Any Insurance made without such interest is illegal and void. The presence of insurable interest is required for two reasons:
- An insured cannot be taken to have suffered any damage if he has no interest in the property insured at the time of loss.
- If the interest of insured is limited to something less than full valve of the subject matter, no greater damage than his interest in the subject matter will result.
In both the cases, the interest in the subject matter is required by the terms of contract since, promise of the insurer will be only to compensate the actual loss.
“Contract of Insurance is different from Contract of Indemnity in Indian laws that in COI there is a loss with a person himself or any other person but in insurance there is compensation for any loss done by anything”
Utmost Good Faith / Uber ima Fides insurance contract
They must be discloses the terms and conditions to each other.
The observation of utmost good faith by the parties is vital to the contract of Insurance. The Contract Insurance is also known as Uberrima fides Contract.
Because the parties are required to confirm higher degree of good faith than in the general law of contract.
Good faith, although, equally applicable to every agreement, yet in contracts other than Insurance, the parties are free to settle their own terms.
In contract of sale of goods Caviat Emptor is the principle and seller is under no obligation to make known to the purchaser all the facts that might affect his decisions.
But in insurance their is something more than an obligation to treat the Insurer honestly and fairly.
Non-disclosure of a material fact by the insured whether fraudulent or innocent has the effect of avoiding the contract on the part of Insurer.
A duty is imposed upon the insured to provide all material fact which might influence the decision of the insurer.
Which information is material to the Contract is wide one?
In case of a dispute a court or committee of arbitrator may decide it but it cannot be left to the opinion of the proposer.
“Every fact or circumstances are material which would Influence the judgement of a prudent Insurer in fixing the premium or a determining whether he will take the risk or not.”
However, the proposer is excused from explicitely disclosing certain facts, these are:
- what the insurer already know
- something which the Insurer ought to know.
- what the insurer waves from being informed off
- situations which decreases the risks.