Q.1 Define Insurance. Discuss the basic principles of insurance according to insurance ordinance 2000?
Insurance is such a contract between the two parties in which insurance company promises with the assured that in case of any financial or life loss due to any reason, company will compensate the loss. The insured has to pay premium to insurance company in exchange for shifting of risk. The specific amount for which the policy is purchased from insurance company is called insured amount.
The Insurance Act, 1938 was passed to contract the working and the activities of the companies crossing on business of life, Fire marine and accident Insurance. On 19th January 1956 the Government nationalized life insurance and the fife insurance corporation Act 1956 was passed. Thereafter the provision of the Previous act of 1938 did not apply to life insurance. In 1963, the Marine insurance Act was passed to regulate the contracts of marine insurance and the affairs of the marine insurance companies.
Meaning of insurance is form of contract under which one party agrees in return for a consideration to pay an agreed sum of money to another party to make good for a less, damage, injury to something of va1ue in which the insured has a pecuniary interest as a result of some uncertain event.
Thus there are two parties to a contract of insurance the insure and the insured.
The person undertaking the risk or liability is called the insure (insurance Company).
CONSIDERATION OR PREMISES
The consideration in return for which the insure agrees to make good the loss is known as the premium. The premium is to be paid by the insured to the insurer (the insurance company).
Thing or property insured is called the subject matter of insurance. The interest of the insured in the subject mater is called the insurable interest.
Policy is a formed written document containing the terms of the contract of insurance. It is stamped, signed issued by insurer. Except in manner insurance, the existence of policy is not necessary for the validity of a contact of insurance.
PRINCIPLES / ELEMENTS OF INSURANCE
Following are the principles of insurance:
This principle applies to all types on insurance. It means some financial interest in the subject matter of insurance. Without such interest, the contract of insurance will be regarded as a gambling policy and therefore void. A man can insure his own life as he has insurable interest in it, but can’t insure the life of a stranger as he has no insurable interest.
A person has on insurable interest in the subject matter of insurance here he will derive pecuniary from its preservation or will suffer.
Pecuniary loss or damage by the happening of his event insured against. However, mere expectation does not constitute insurable Interest.
Following persons are said to have insurable interest:
A man in his own life.
Husband in the life of wife.
Son in the life of his father on whom he is dependent.
Creditor in the life of debtor for the debt.
Surety in the life of Principal debtor.
Employer in the life of employee during the course of employment.
In life insurance, insurable interest must be present at the time of taking the policy. In life insurance, it must be present at the time of the loss. In marine insurance, it must be present at the time of loss of the subject matter.
UTMOST GOOD FAITH
The insurance contract depends upon the utmost good faith. Both the parties should disclose all the fact to each other. Any false information makes the contract invalid.
A contract of insurance requires utmost good faith between the parties. A contact of insurance is said to be a contract ‘Uberrimae fidei’ (requiring utmost good faith of the parties).
It is the duty of insured to disclose all material facts relating to the subject matter of a contract of insurance to the insurer, so that the insurer may accurately estimate the extent of risk he is undertaking. The insurer can avoid the contract of insurance, if the insured has not disclosed any material information relating to the subject matter or if there is misrepresentation or fraud by the insured:
The duty of disclosure is absolute; it is positive and not negative.
Under Section 45 of the Insurance Act, a policy of life insurance cannot be called into question on the ground of non-observance of good faith after it has run for two years from the date when it was taken except when the insurer proves the following:
(i) That the policy holder suppressed facts or made a statement of facts which were material to the contract;
(ii) That he did it with fraudulent intention and
(iii) That he had Knowledge about the untruth of the facts when he asserted them to be true.
PRINCIPLES OF INDEMINITY
It means security against loss. The Principle of indemnity does not apply to life insurance. It applies to fire, marine and other types of insurance. As no money payment can indemnity for loss of life or bodily injury, life insurances (including accident insurances) are exceptions to the general rule that all contracts of insurance are contracts of indemnity”.
The Principle of indemnity means that the assured in the case of loss against which the policy has been made shall be fully indemnified but never more that fully indemnified, it is because it would be against public policy to allow persons who insure their goods to make any profits out of the goods insured.
Purpose of all the contracts of indemnity is to put the insured in the same position after the event happened in which he was immediately before the event.
For example, if a house insured for Rs.50, 000 is estimated at Rs.25000 the insurance company will only Rs.25, 000 and nothing more, unless otherwise agreed between the parties.
The principle of indemnity ties on the assumption that the insured shall not be allowed to make a profit out of the happening of the loss or damage insured against.
DOCTRINE OF SUBROGATION
This principle is applied only in marine and fire insurance. According to this principle where loss occurs and insurance company pays the total loss then company s entitled to all the rights against the third party in respect of loss so paid for, It lays down a principle, which is quiet equitable. Suppose Mr. Zafran has damaged the Motorcar of Mr. Nask. If he pays loss to Mr. Nasir Rs. 10,000 now if Mr. Nasir also claims the same amount from insurance company for the indemnity under his policy then he will not b allowed to collect the damages from Mr. Zafran. On the other hand insurance company will receive the amount that k collected from Mr. Zafran. It is called subrogation.
DOCTRINE OF CONTRIUTION
Sometimes one person gets his goods insured from more than one companies. In case of loss each company will contribute that proportion of the loss.
According to this principle, the insurance company will pay for the compensation of the incident that is the immediate cause of loss. In case of loss the proximate or the nearest cause should be considered.
Both parties can cancel the policy before its expiry date. On the date of cancellation period of the policy comes to an end.
ATTACHMENT OF RISK
An insurance contract cannot be in forced without the element of risk.
MINIMIZATION OF LOSS
The policyholder must do every thing to minimize the loss and to save what is left. This principle makes the insured more careful about his insured property.
The arbitration is to be appointed in writing by both the parties in case of differences. It reduces the litigation.
Carriage of goods by sea Next Post:
Note on Re-insurance, Double insurance and Warranty