Unit-5

Chapter-3
INSURANCE-CONTRACT
AND IMPORTANCE
Elements of Banking & Insurance
F.Y. B.Com
Introduction:
Risk is found everywhere. It cannot be eliminated together, only it can be
minimised. Human life is full of risk. There is risk when a man walks on
the road, travels in a bus, train or an aeroplane and when he is engaged in a
trade, profession or business. Also there is a risk when property is destroyed
by fire, flood, earthquakes, etc. Thus, the involvement of risk is
inescapable. This risk can be explained as follows:

1) Risk is a condition in which there is a possibility of an adverse

deviation from a desired outcome that is expected or hoped for.
2) Risk is used to describe any situation when there is uncertainty
about what outcome will occur. Life is obviously risk.
3) According to the dictionary, risk refers to the possibility that
something unpleasant or dangerous might happen.
 Methods of Handling Risks:

Methods of Handling
Risks

Prevention of Reduction of Shifting of

risks or risks (by risks or Accepting of Spreading of
avoiding of efforts of Risk transferring of risks. risks.
risks. Management) risks.
Shifting of risks or transferring of risks:
 Some type of risk involving loss can be shifted or transferred
to other’s shoulders. There are professional agencies which
can accept the risks as their responsibility.
 In business world there are uncertainties or losses. Generally
the business people are not willing to bear such risks which
create losses to the firm and so they went to transfer them.
 Many natural risks or losses can be avoided through
insurance. The importance of insurance marketing lies in fact
that it helps in eliminating uncertainty.
 Insurance companies cover many risks for the payment of a sum,
as premium, for instance Marine Insurance, Fire Insurance,
Credit Insurance, Burglary Insurance etc. A businessman can
easily transfer the risk to the Insurer.
 Insurance is a contract by which the assurer (Insurance
company) in consideration of the payment of a sum (premium),
agrees to pay the specified sum to the insured on the happening of
a certain event. The insurer undertakes to indemnify the assured
for the loss on the happening of the event.
What is an Insurance?
Definition: Functional Insurance
Insurance is a co-operative device to spread the loss caused by a
particular risk over a number of persons who are exposed to it and
who agree to insure themselves
against the risk.

Definition: Contractual Insurance

The insurance is a contract whereby one party agrees to pay a certain
specified sum, on the happening of a particular event, to the other
party, who in turn agrees to pay a sum in the form of premium for its
consideration.
What is Premium?
 This is the amount of money that you pay for an insurance policy.
 Premiums can be paid monthly, quarterly, semi-annually, or
annually.
 The premium is based on the type and amount of coverage you
choose and varies from one insurance company to another.

What is Insurance Contract?

Insurance is a contract between two parties in which one party i.e.
Insurer gives a guarantee to pay the loss incurred to the other party
that is insured. The insured agrees o pay in consideration thereof sum
which is called premium. Therefore, there are two parties to an
insurance contract:
1) The insurer: Who undertakes the responsibility to indemnify.
2) The insured: Whose risks is undertaken.
Characteristics or Elements of Insurance
Contract:
General Characteristics:

Agreement

Legal Competence of
Formalities the Contract

General
Certainty and Characteristics Legal
Possibility of Consideration
Performance
Free and
Lawful (Legal) Genuine
Object consent to the
Contract
Special Characteristics of Insurance Contract:

Special
Characteristics

Insurable Utmost
Indemnity Subrogation Warranty
Interest Good Faith
History of Insurance:
Although insurance may have been used by the Babylonians, the Greeks and the
Romans, insurance in the modern sense originated during the 13th or 14th century.
The earliest reference to insurance which have so far been traced appear in the
accounts of North Italian merchant-bankers who dominated the international trade
of Europe at that time.
Travellers by sea and land were very much exposed to the risk of loosing their
vessels and merchandise because the piracy on the open seas and highway
robbery of caravans were very common. Besides this there were several risks.
• The marine policies of the present form were sold in the beginning of 14th
century by the Brugians.
• On the demand of the inhabitants of Burges, the Court of Flanders permitted
in the year 1310, the establishment in this Town of a charter of Assurance,
by means of which the merchants could insure their goods, exposed to the
risk of the sea.
• The Lloyd’s coffee-house gave an impetus to develop the marine insurance.

• Marine insurance is the oldest form of insurance (1347), followed by life

insurance some 300 years later and fire insurance (1666).

• In India, Marine Insurance Act was enacted in 1963. There were four general
insurance companies i.e. National Insurance Company, Calcutta, New India
Assurance Company, Bombay, Oriental Fire and General Insurance Company,
New Delhi, United India Fire and General Insurance Company in 1818, who
had been authorized to carry on the general insurance business including marine
insurance.

• Fire insurance originated in Germany in the beginning of 16th century.

• The fire insurance gained momentum in England after the great fire in 1666
when the fire losses were tremendous.
• Fire Insurance Office was established in 1681 in England.
• In India, the general insurer started working since 1850 with the establishment
of the Triton Insurance, Calcutta.
• Life Insurance made its first appearance in England in 16th century, the first
recorded evidence in England being the policy on life of William Gybbons on
June 18, 1653.
• The first registered life office in England was the Hand-in Hand Society
established in 1696.
• In India, some Europeans started the first life insurance company in Bengal
Presidency, viz., the Oriental Life Assurance Company in 1818.
• The year 1870 was a year of landmark in the history of Indian Insurance
separating the early period of pioneering attempts at life insurance from the
subsequent period of steady development at the establishment of Indian Life
Office, viz., Bombay Mutual Life Assurance Society in 1871.
• The next important life office was Oriental Government Security Life
Assurance Co. Ltd., which started its operation since 1874.

• The Miscellaneous insurance took the present shape at the later part of 19th
century with the industrial revolution in England.
• Accident insurance, fidelity insurance and theft insurance were the important
form of insurance at that time.
• Lloyd’s Association was the main functioning institution.
• The scope of general insurance is increasing with the advancement of society.
 NATURE OF INSURANCE
1) Sharing of risk
2) Co-operative device
3) Value of risk
4) Payment at contingency
5) Amount of payment
6) Large number of Insured Persons
7) Insurance is not a gambling
8) Insurance is not a charity
9) Regulated by law
Functions of Insurance:

Primary
Functions

Insurance provides Insurance provides

Risk-Sharing
certainty protection
 Secondary
Functions

Prevention of Provides Improves Helps Economic

Loss Capital Efficiency Progress
Importance of Insurance:

Advantages of
Insurance

Advantages to an Advantages to Advantages to

Individual Business Society
(A)Advantages to An Individual:

1. Security and Safety

2. Provides Mental Peace
3. Fosters Economic development
4. Encourages Savings
5. Provision of Profitable Investment
6. Tax Exemption
7. Fulfilling the Needs of a Person
(i) Family Needs
(ii) Old-age Needs
(iii) Re-adjustment Needs
(iv) Special Needs
(B) Advantages to Business:

1. Safety Against Risk

2. Increase in Efficiency
3. Keyman Indemnification
4. Basis of Credit
5. Business Continuation
6. Employees Welfare
7. Development of Big Industries

(C) Advantages to Society:

1. Protection of Wealth of Society
2. Development of Employment Opportunities
3. Economic Growth of the Country
4. Acceleration in the Production Growth
5. Reduction in Inflation
Limitations of Insurance
 Insurance cannot protect against all kinds of risks. For ex- no
protection against risk in smuggling business.
 The loss which has been evaluated in money, that only is secured
by insurance.
 Insurance cannot offer protection in case of risk existing due to
unexpected events. For ex- economic instability due to trade
cycle, changes in govt. policy.
Double insurance:
When an insured insures a particular subject matter of
insurance with two or more insurers, it is known as double
insurance.
In case of life insurance also there can be double insurance. In case
of fire & marine insurance there can be double insurance. Of course
there is much difference regarding compensation in life insurance
and other types of insurances.
For example, an individual is taking 3 life policies of Rs. 50,000/-
each. This is the case of double insurance. On his death his heirs
will get 1.5lac as the principle of indemnity is not applicable in this
policy.
In the case of Fire-Example.
A the owner of the house insures it against fire for Rs.30,000/- with X
company and for Rs.20,000/- with Y company. Suppose A’s house is
burnt and loss estimated is Rs.15,000/-. So A shall get only
Rs.15,000/- from both the insurers X and Y but not that A shall get
Rs.15,000/- from both insures.

•It should be noted here that principle of indemnity is not applicable

to life insurance and other individual insurances. .
•In case of life insurance, the insurance company has to pay the
insured, amount of all policies after death which the individual has
taken.
•Whereas in case of marine and fire insurance, company pays only the
amount equal to the actual loss. In this way, an individual taking fire
insurance and marine insurance policy cannot get amount of all
policies even if his goods have been insured with different companies.
Over insurance:
When an insurance is taken of more amount than the price of
insured matter or thing, it is called over insurance. In case of over
insurance there is no importance of the number of policies. Policy may
be one or more than one but if the price of the insured subject matter is
more than its actual price, it is known as over insurance.
For example, A insures his house with B the insure for Rs.2 lakhs.
The actual price of this house is one lakh thirty thousand.

Re-insurance:
Re-insurance is a contract between two insurance companies. The
original person taking such policy has nothing to do with, when any
insurance company insures or enters into a contract the company has a
responsibility.
Sometimes the insurance company feels that its accepted risk is
more than the reasonable one, then the company makes another
company its partner in sharing the risk responsibility.

Example: Suppose a man wishing to insure his house for

Rs.50,000/- goes to insurance company which will accept the risk if
it is satisfied with the condition of the property. But if the company’s
own limit is only Rs.25,000/- it will arrange with another company
to reinsure, so the burden of Rs.25,000/- shall be on other insurer. If
the house is burnt the original insurer would pay the owner
Rs.50,000/-.
Thus, if one company is unable to bear the burden in case of big
policies, it invites other companies to share. Thus insurance is
insured, it is called re-insurance.
Cover Note:
The person wishing to be insured gives application form filling in
necessary matter and the insurance company after essential
investigation decides whether the proposal is to be accepted or not.
If the proposal is proper to be accepted, the company instructs the
person taking insurance to remit premium. Once the insured pays the
premium the responsibility of the company starts.
Atleast some days are required to prepare a policy covering all
conditions of insurance contract.
During this time the company issues temporary protection letter
against the risk, which is as good as policy. This temporary
protection letter is known as insurance cover note.
As soon as the policy is ready the company sends the insured his
policy.
Principles of Insurance:
Legal Principles

Utmost Good Faith

Insurable Interest

Indemnity

Subrogation

Contribution

Cause proxima

Mitigation of Loss
 Difference between Assurance and Insurance:
Sr. No. Basis Assurance Insurance
1. Use of The term assurance is used The term insurance is
the for life insurance contract. used for other classes of
Word insurance as fire or
burglary.
2. Risk Here the risk is bound to Risk is uncertain. It may
happen, i.e. Death. or may not happen.
3. Sum Here sum assured is bound Here the sum assured is
Assured to be paid by the insurer. paid only if the insured
For example, in life case event happens otherwise
either on death or at not.
maturity.
4. Term In life insurance the contract Here insurance contract is
period is a long term contract. usually for one year.
Sr. No. Basis Assurance Insurance
5. Subject Human life is the subject Generally items or property
matter matter of life insurance or any other types are the
contract. subject matter of non-life
insurance.
6. Indemnity Life insurance is not a Fire, marine insurance and
contract of indemnity other contracts are the
contracts of indemnity.
7. Surrender In the case of life insurance, In the case of fire and
before insurance policy can be marine insurance, the policy
maturity surrendered by the assured cannot be surrendered by the
before its maturity. insured before its maturity.
8. Elements Life insurance contains both In the case of fire and
the elements of security and marine insurance, the
investment. insurance contains only the
protection element.
Difference between Insurance and Gambling (Wagering)
Sr. No. Basis Insurance Gambling
1. Enforceable A contract of insurance A Wagering contract has
is legal and enforceable no legality or
by law. enforceability.
2. Utmost In every insurance No such duty is observed
good faith contact duty of utmost in a wagering contract.
good faith is to be
observed.
3. Protection Insurance contract A wagering contract does
provides protection. not provide any
protection.
4. Insurable Insurable interest must No insurable interest
Interest exist in every insurance exists in a wagering
contract. contract.
Sr. No. Basis Insurance Gambling
5. Indemnity The principle of No such principle is
insurance applies to all applied to a wagering
insurance except life contract.
insurance.
6. Happening An insured event may or The event is bound to
of event may not happen at all happen.
except in life insurance.
7. Immunity In an insurance contract In wagering contract either
the insured is immune party may win or loose.
from loss provided it is
adequate.
8. Scope Scope of insurance is Here the scope is
limited compared to a unlimited.
wagering contract.
9. Object The object of insurance The object is to win or to
is to provide protection. loose.
Meaning of Marine Insurance
 The marine insurance is a contract between the insured and the
insurer.
 The insured may be a cargo owner or a ship owner or a freight
receiver.
 The insurer is known as the underwriter. The document in which
the contract is incorporated is called “Marine policy”.
 The insured pays a particular sum, which is called premium, in
exchange for an undertaking from the insurer to indemnify the
insured against loss or damage caused by certain specified perils.
 Marine perils also known as perils of the seas means the perils
consequent on or incidental to the navigation of the sea or perils
of the seas such as fire, war peril, pirates, thieves, captures, etc.
Marine Insurance Contract
“A contract whereby one party for an agreed consideration,
undertakes to indemnify the other against loss arising from certain
perils and sea risks to which a shipment merchandised and other
interest in a maritime adventure may be exposed during a certain
voyage or certain period of time.” - Arnold
In India, Marine Insurance Act, 1963 regulates the marine
insurance since 1st August, 1963.
Procedure of Taking Marine Insurance Policy
1. Proposal slip: Firstly the insurance agent prepares a proposal slip
for the insured and he records every important details of the
insured, especially for which particular risk the insured desires to
cover.
2. Consent of Insurers: The insurance agent shows this proposal slip
to various insurers. He inquires about the insurance amount which
they are liable to compensate for the event. He takes their consent
with their signatures.
3. Closing slip: In this way when the complete amount of insurance is
reached, the insurance agent prepares the complete details minutely.
(Here, the agent makes the list of insurance amount of an object, its
quantity, weight, identification, sign and label, etc.)
4. Preparation of Marine Policy: After that the marine policy is
prepared. If it is a voyage policy then the liability of the insurer
starts with the beginning of the voyage. If it is the time policy
then the liability of the insurer starts at the specific time.
5. The risk remains open between the time interval of taking the
sign of the insurer on the proposal slip and of providing the
closing slip but the risk is acceptable on getting the closing slip
by the insurer and later the policy is issued.
6. The policy must be duly stamped properly as per the regulations
of the marine insurance act. The sign of the insurer on the
proposal slip does not become a binding and also the unstamped
policy is not a valid document. Still then the insurance company
bears the responsibility to indemnify is the event happens
immediately after signing of the proposal slip and pays the value
of the insurance.