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Characteristic features of an
insurance contract
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Characteristic features of an insurance contract

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CHARACTERISTIC
FEATURES OF AN
INSURANCE CONTRACT
The following are some of the
important features of an insurance
contract.

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1. Insurable interest
A person can enter into a contract of
insurance only when he has some
insurable interest on the life or
property which is insured. Insurable
interest basically means that the
non-existence or any injury or
damage caused to a property or life
should bring loss which can be
estimated in terms of money. So, a
person is said to have insurable
interest, on the property or life of
any person, provided the loss or
damage caused to the property or life
directly affects him. Thus, a person
cannot take insurance for an
unconnected property or for an
individual with whom he has no
connection as there is no insurable
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the time of taking the policy as well Meaning,
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as at the time of accident, and in the
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For example, a ship sailing from

Bombay may take a cargo worth Rs.
10 crores and it may unload it at
London and later from London, it
may take only Rs. 2 crores worth of
cargo. Now, if it meets with an
accident, after leaving London, the
loss of Rs. 2 crores alone will be
taken into consideration for settling
claims as the insurable interest at the
time of accident is only Rs. 2 crores.

2. Contract of ‘Uberrimae
fidei’ or Contract of Utmost
good faith

Both the parties to the contract, that

is the insured and the insurer have to
disclose all the facts connected with
the insurance contract. Non-
disclosure of facts or declaration of
false information will make the
contract null and void. A person
suffering from a major disease
cannot insure under the pretext of
having good health by concealing his
ailment. If he does so, later when the
insurer comes to know about his
disease, the contract will become
null and void and no compensation
can be claimed from the insurance
company.

Similarly, a ship may be having

defects and by concealing this fact,
the ship owner might have taken a
marine insurance policy. Later, if an
accident takes place, the insurance
company will refuse to pay
compensation on the ground that the
contract was not uberrimae fiedi.
Thus, all the facts connected with the
contract must be disclosed by both
the insured and the insurer, failing
which the contract becomes void.

3. Indemni0

Life insurance is different from

contract of indemnity. It is a
contingent contract where the event
death is certain to take place but it is
a question of time. Hence, the
insurance company cannot
guarantee against death or prevent
death but can agree to pay a
stipulated sum in the event of death
happening at an earlier date than
agreed upon. When a person takes
life insurance, he nominates his
dependents to receive the policy
amount in the event of his death,
prior to the stipulated or agreed
period.

For example, an insurance policy

may be taken on life for 25 or 30
years for a sum of rupees 25,000 for
which premium is paid monthly or
quarterly, half-yearly or even
annually. In the event of death prior
to 25 years, the insurance company
will pay rupees 25,000 to the
dependent of the insured whose
name appears as nominee. To claim
insurance, premium must have been
paid regularly as it forms the
consideration. In the case the policy
holder survives for the entire period,
then the policy amount of Rs. 25,000
along with profits earned by the
company will be paid to the policy
holder on the date of maturity of the
policy.

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4. Mitigation of Loss

Though insurance aims at

minimizing the loss, it is expected
that every party to the contract of
insurance should take adequate
steps to minimize the loss. Thus,
when a fire accident takes place in a
match factory, the insured should
minimize the loss by taking adequate
preventive measures. He cannot
allow the goods to be destroyed by
fire simply because he has insured
them. Thus, mitigation of loss
ensures that both the parties to the
insurance shall undertake measures
by which the risk is minimized and
the loss suffered is also mitigated.
5. Causa proxima
The cause for the accident should be
a direct cause for which an insurance
is taken and it should not be a
remote cause. In other words, the
insurance company will pay
compensation to the insured only
when the cause of accident is directly
related to the loss. If the loss is the
result of two causes, one must look
into the nearest cause and ascertain
whether that cause is insured. Only
then the insurance company will pay
compensation for the loss.

Example: A ship with oranges was

insured against the risk of collision.
And during the course of its voyage,
it collided with another ship,
resulting in delay in its voyage. Due
to this, the oranges became
unsuitable for consumption. When
the cargo owner claimed for the loss,
the insurance company refused to
pay on the ground that the oranges
were affected only due to the delay
which was a remote cause and not
due to collision which is a proximate
cause.

6. Subrogation
Subrogation means stepping into the
shoes of another person. When the
insurance company pays full
compensation to the insured, it takes
over the ownership of the goods
insured and will enjoy complete right
of taking necessary legal steps to
claim compensation from such
persons who are responsible for the
loss suffered.

For example, a cotton mill is

destroyed by fire which is caused by
sabotage. Here, the insurance
company after paying full
compensation to the extent of the
insured sum will step into the shoes
of the cotton company and initiate
criminal action against those persons
responsible for sabotage so that it
can claim due compensation.
Similarly, if a ship is totally
destroyed, the insurance company
will pay necessary compensation to
the shipping company and later the
insurance company will salvage the
items left in the ship.

7. Contribution

When an insurance company pays

compensation to the insured, it puts
back the insured in the same
position that he was prior to the
accident. If the insured has
undertaken insurance with more
than one insurance company, then
he cannot claim compensation from
every insurance company with which
he has insured. Under the doctrine of
contribution, when an insurance
company compensates the insured, it
will be indemnified by the other
insurance company to the extent of
the policy taken by insured.

8. Re-insurance

When an insurance company insure

with another insurance company, it
is called re-insurance. Here, the
original insurer becomes insured
when he insure with another
insurance company. The idea behind
undertaking re-insurance is that
each insurance company may
specialize in a particular type of risk.
Thus, a marine insurance company
may specialize in collision risks while
another company may specialize in
sea perils. Another company may
specialize in charter party
agreements. So, the original insurer
may insure with more than one
marine insurance company for a
lesser premium as they specialize in
particular risks.

9. Double insurance:

When the insured insure with more

than one insurance company, it is
called double insurance. However,
the insured cannot get more than the
actual value of the loss in case of
damage to the property insured.

10. Nomination

In life insurance policy, there will be

nomination by which the insurance
company is instructed by the policy
holder to pay the policy amount in
the case of death to that person
whose name is nominated at the
time of taking the policy. The
nomination can be altered later.

For example, when a person takes up

a life policy, he may nominate his
parents before his marriage. But
after the marriage, he may change
the nomination to his wife.

11. Assignment
A policy can be assigned to a creditor
as a security for the loan obtained.
Once a policy is assigned, the
nomination gets cancelled. When a
policy is assigned, the same is
informed to the insurance company
and in the case of accident or loss of
life, the policy amount is payable
only to the creditor to whom the
policy is assigned (assignee).

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