1.

INSURANCE CONTRACT -

An Insurance contract is also known as a contract of Indemnity. The indemnity

contract follows are the rules pertaining to essentials of General Contract such as
offer and acceptance, consideration, free consent etc. It also follows the rules
applicable to specific indemnity contract. These rules (specific to indemnity
contract) are also known as principles of Insurance namely uberrima fidei,
insurable interest, indemnity, causa proxima, contribution, subrogation and
mitigation of loss.

In an insurance contract, the insured proposes to the insurer to indemnify ( make

good a loss) in case of an happening of an adverse event. In return he offers him
premium as a consideration. On the other hand the insurer, promises to indemnify
the insured, in case of a happening of any adverse event financially, for a
consideration (premium)

Point to be noted here is there, by meaning of indemnification we mean the insured

is put back in the same financial position as before. Not a rupee more is given to
him. At any cost, the insured cannot be put into a better financial condition.

1.2 ECONOMIC FUNCTIONS OF INSURANCE

Insurance is a boon to any growing economy. General Insurance products such as

marine and fire, help a businessman to take risks. Assume Mr. A wants to start an
industry but is always worried of fires and floods , he would never be able to do
business peacefully. He would always think, what would happen to the crores of
investment if there is a fire. How will he come back to the same financial position.
Hard earned property or property at loan if destroyed, the owner goes into deep
debts. Business closes down for months. Till the time money is arranged to buy a
new factory, the danger of going out of business persists. But assume if an owner
has taken insurance for his property, if there is fire, the insurance company will
give him money (whatever is the sum assured). With that money , he can start
another factory quickly. The best part is , even for the number of months the
factory is shut down, under insurance he can claim loss of business. Similarly, all
types of insurance have economic functions say liability insurance takes care of

Notes by Anusha Srinvasan Iyer Principles of Insurance Department of Commerce.

third party claims, motor takes care of the insured's vehicles , health insurance
takes care of employees health, Engineering insurance helps the Government take
huge building, dam, flyover projects. Marine helps in sending articles to one place
to another safely, if items are lost in transit the insurance company pays.

1.3 PREMIUM

Premium is the cost paid by Insured to the insurer. Premiums are either paid
monthly, quarterly, half yearly depending on the convinience of the insured. For
General Insurance policies , the policies are renewed each year and a new premium
is fixed. But for life insurance, premium is either fixed for whole life or for fixed
term, depending on the type of policy. A point to remember about premium is that ,
if premium is not paid, the contract becomes void for lack of consideration. A very
popular question by students is that, if we buy a motor insurance policy and pay a
yearly premium of say 15000 Rs and nothing happens to the motor vehicle and
insurance company pays nothing, in that case, will the insurance company return
back any thing. The answer is 'no'. The insurance company promised you that ,
they will pay in case of the happening of the even.t The premium si a cost of the
promise. The whole year they kept the promise. They assumed the risk. If the
motor was insured for 15 lakh rupees, and something would have happened, the
insurers would have ended up paying money . Thus for assuming this risk they
charge money. Remember, the insured is transferring the risk to insurer and the
insurer assumes the risk and asks for premium.

1.4 PRINCIPLES OF INSURANCE

Principles of insurance is the foundation on which the business of insurance is

built. If the understanding of priniciples or applicability of these principles go
wrong the whole concept of insurance is lost. Following are the principles in brief.
(Write examples with each principle clearly in your exam)

Utmost good faith/Uberima Fidei - This principle means that , both the insured
and insurer should not hide any details from each other. It is the insured who
knows everything about his subject matter and so he is responsible to tell

Notes by Anusha Srinvasan Iyer Principles of Insurance Department of Commerce.

everything to the insured. If the insured or insured do not reveal complete details,
the contract becomes voidable. For eg. The insured is suffering from an ailment
which he hides while buying a life insurance policy, then the insurer has every
right to repudiate the claim .

Insurable interest- This principle means that only the one who has
pecuiniary/financial interest in a particular subject matter can take an insurance
policy.

Indemnity- This principle says however big the sum insured is , only to the extent
of loss the insurance company is bound to indemnify. For eg- The sum insured is
50,000 for a Motor bike and if the motor bike meets with an accidents with repair
charges of 10,000, only 10,000 will be indemnified by the insurer.

Wherever , the principle of Indemnity applies, there principle of subrogation and

contribution also applies.

Subrogation - This principle says, that if there is a damage of subject matter and
the insurer is giving indemnifying the loss, the insured should inreturn surrender
the whole subject matter to the insurer. The insurer becomes the owner of the
damaged property, he can either sell of the scrap or can allow the insured to keep
the scrap and deduct the value of the scrap from the claim.

Contribution- Where the same subject matter is insured by two insurers , then
when there is a claim, both the insurers must contribute to indemnify in the ratios
of their sum insured. For eg - Sum insured from Company A is 5000 and Company
B is 10,000. If there is loss of Rs. 3000 then Insurance company A will give 1000
and Ins Co B will give 2000 Rs.

Mitigation of Loss - This principle says, the insured should at all times try to
minimize the loss . For eg, if there is a fire in a godown, the insured should try to
pull out things which are not yet burnt so as to damage greater damage. He has to
take steps so prevent from further losses. If it is proved that, he has not taken
proper steps for mitigation of loss then , then the claim can be repudiated by the
insurer.

Notes by Anusha Srinvasan Iyer Principles of Insurance Department of Commerce.

1.5 BROAD CATEGORIES OF INSURANCE

There are two broad categories of insurance -Life and General. While Life
insurance is all about insuring lives, General insurance is all about insuring
Properties against perils such as flood, fire etc

1.5.1 GENERAL INSURANCE

Fire Insurance - Where the properties insured are insured against perils such as
Fire, Flood, storm, Typhoon , Tempest, Earthquake etc. One must not think that
Fire means only Fire as a peril. Under the standard fire and all perils policy all the
above mentioned perils are covered.

MARINE - Marine policies can be divided into two categories, marine hull and
marine cargo. In marine hull, ships, ocean going vessels ,river vessels are insured
against fire, storm etc. In marine cargo policy, packages which are transported
from one place to another, either through air, sea , road or rail are covered.

MOTOR - Motor insurance policies cover the risks of vehicles meeting with
accidents and getting damaged. The own damage cover of motor vehicles give
claims when the owner's vehicle is damaged. Similarly, the third party cover ,
covers damages to other people's vehicles or damages to other persons caused by
the owner.

Liability Insurance - This insurance cover protects a person against third party
liabilities . For eg. A by mistake crashes into B's property and B's property gets
damaged. Now B will claim money from A for the damage that A has done to B. In
this case , had A been insured by a company, he would have been indemnified by
the insurance company in case B files a suit against . A fiduciary liability policy,
exclusively covers liabilities arising because of handling fiduciary liabilities. For
eg. If A is a trustee who manages properties entrusted to him, if something happens
to the property, the beneficiaries of the property would surely hold the trustee
responsible. In a such an event, the insurance company can pay on behalf of A, had
he taken a fiduciary liability insurance policy.

Notes by Anusha Srinvasan Iyer Principles of Insurance Department of Commerce.

HEALTH-- Here when a person falls sick all the medical expenses are taken care
off by insurance companies. They are insured against certain diseases.

PERSONAL ACCIDENT- This policy comes to rescue when a person meets with
an accident. This does not fall under health insurance. Under health insurance, a
person would have fallen sick by staying at home only, but here there has to be an
accident.

ENGINEERING - All big projects like, building constructions, dams, tunnel,

roads, flyover are risky projects. If while construction, if it falls it creates lots of
damages. Plus , again rebuilding process has to start. This policy can be taken by
Contractors and Principal both. If some damage happens during construction, the
insurance company can indemnify the money.

1.5.2 LIFE INSURANCE

There are primarily three types of life insurance plans -

1. Term plan - It is taken for a specific term. A person has to die within that term to
get money from the insurance company, This is the cheapest plan.

2. Pure endowment plan- A person has to survive a certain period to get the policy
money. This is more expensive than term plan

3. Endowment plan= This is a hybrid plan. It is acombination of both Term and

Pure endowement plan. So if a person dies within the term or a person survives a
term he gets the policy money. This is the most expensive of all the three plans.

Apart from these three, we have Unit linked Plans, where the premium money is
divided into two portions, investment and insurance. Every insured will get bare
minimum the insured amount but the investment money is invested in securities so
there is no gurantee of getting back the money.

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Notes by Anusha Srinvasan Iyer Principles of Insurance Department of Commerce.