Q.

DEFINE PRINCIPLES OF INSURANCE WITH HELP OF

EXAMPLE?

ANS. 1) Principal of Utmost Good Faith

Both parties, insurer and insured should enter into
contract in good faith. Insured should provide all the
information that impacts the subject matter. Insurer
should provide all the details regarding insurance contract

For example - John took a health insurance policy. At the

time of taking policy, he was a smoker and he didn't
disclose this fact. He got cancer. Insurance company won't
pay anything as John didn't reveal the important facts.

2) Principle of Insurable Interest

Insured must have the insurable interest on the subject
matter. In case of life insurance spouse and dependents
have insurable interest in the life of a person.
Corporations also have insurable interests in the life of
it's employees

In case of life or marine insurance, insured must be the

owner both at the time of entering of entering into the
insurance contract and at the time of accident.

3) Principle of Indemnity
Insured can't make any profit from the insurance
contract. Insurance contract is meant for coverage of
losses only

Indemnity means a guarantee to put the insured in the

position as he was before accident

This principle doesn't apply to life insurance contracts

4) Principle of Contribution
In case the insured took more than one insurance policy
for same subject matter, he/she can't make profit by
making claim for same loss more than once

For example - Raj has a property worth Rs.5,00,000. He

took insurance from Company A worth Rs.3,00,000 and
from Company B - Rs.1,00,000.

In case of accident, he incurred a loss of Rs.3,00,000 to

the property. Raj can claim Rs. Rs.3,00,000 from A but
after that he can't make profit by making a claim from
Company B. Now Company A can make a claim from
Company B to for proportional loss claim value.

5) Principle of Subrogation
After the insured gets the claim money, the insurer steps
into the shoes of insured. After making the payment
insurance claim, the insurer becomes the owner of subject
matter.

For example :- Ram took a insurance policy for his Car. In

an accident his car totally damaged. Insurer paid the full
policy value to insured. Now Ram can't sell the scrap
remained after the scrap.

6) Principle of Loss Minimisation

This principle states that the insured must take all the
necessary steps to minimize the losses to inured assets.

For example - Ram took insurance policy fo his house. In

an cylinder blast, his house burnt. He should have called
nearest fire station so that the loss could be minimised.

7) Principle of Causa Proxima

Word "Cause Proxima" means "Nearest Cause"

An accident may be caused by more than one cause. In

case property insured for only one cause. In such case
nearest cause of the accident is found out.

Insurer pays the claim money only if the nearest cause is

insured.
Q. EXPLAIN FORMATION OF LIFE INSURANCE
CONTRACT?

ANS. Life insurance (or life assurance, especially in the

Commonwealth of Nations) is a contract between an
insurance policy holder and an insurer or assurer, where
the insurer promises to pay a designated beneficiary a sum
of money (the benefit) in exchange for a premium, upon
the death of an insured person (often the policy holder).
Depending on the contract, other events such as terminal
illness or critical illness can also trigger payment. The
policy holder typically pays a premium, either regularly or
as one lump sum. Other expenses, such as funeral
expenses, can also be included in the benefits.

Life policies are legal contracts and the terms of the

contract describe the limitations of the insured events.
Specific exclusions are often written into the contract to
limit the liability of the insurer; common examples are
claims relating to suicide, fraud, war, riot, and civil
commotion.

Life-based contracts tend to fall into two major

categories:

 Protection policies: designed to provide a benefit,

typically a lump sum payment, in the event of a
 specified occurrence. A common form—more common in
years past—of a protection policy design is term
insurance.

 Investment policies: the main objective of these

policies is to facilitate the growth of capital by
regular or single premiums. Common forms (in the
U.S.) are whole life, universal life, and variable life
policies.

FORMATION OF A LIFE INSURANCE

CONTRACT
Life Insurance is Legal Contract and its formation is
subject to fulfillment of the requisites of a valid contract
under Indian Contract Act 1872. Since Insurance is a
contract section 2(h) and Section 10 of the Indian
Contract Act 1872 are applicable.

I) Parties to a Contract :
To constitute a contract, there must be an offer/
proposal and acceptance. One person signifies to another
his willingness to do or to abstain from doing anything,
with a view to obtaining the assent of that other to such
act or abstinence, he is said to make a proposal. When a
person to whom the proposal is made, signifies his assent
thereto the proposal is said to be accepted. A proposal,
when accepted, becomes a promise. The person making the
proposal is called the “promisor”, and the person accepting
the proposal is called “promisee”.Therefore in every
contract, there must be two or more parties/persons at
least two parties/persons. For the Formation of Life
Insurance Contract, there must be two Parties.

II) Agreement -
Agreement between the parties is an essential element
for the formation of Valid Contract. Like other all
Contracts, a Contract of Life Insurance there must be
Agreement between the party. The people who wish to get
ensured intend to buy the policy make the 'offer' and the
other party who is ready to assume the risk stated, as
the acceptance. In case of life insurance offer is called
the proposal. If life insurance company accept the
proposal, it is converted into an agreement. Anyone who is
willing to buy life insurance policy proposes to enter into
the contract is an offer and when this offer is accepted
by another party who agrees to assume the risk stated, it
is an acceptance.

III) Competency of the parties or capacity to

contract -
According to Section 11 of the Indian Contract Act, 1872
To constitute a valid contract, contracting parties must be
competent. Every person is competent to contract who is
of the age of majority according to the law to which he is
subject, and who is sound mind and is not disqualified from
contracting by any law to which he is subject. That means
one who is Major, Sound Mind and not disqualified is
competent to enter into a contract. In the Contract of
Life Insurance, It (Competency of the Parties) is
essential.

IV) Free consent -

Free Consent is an essential element for formation of a
contract. According to Section 10 of the Indian Contract
Act, 1872, All agreements are contracts, if they are
made by the free consent. Section 13 and Section 14 of
the Indian Contract Act, 1872 defines 'Consent' and 'Free
Consent' respectively. According to Section 10 of the
Indian Contract Act, 1872, to constitute a valid contract,
parties should enter into the contract with their free
Consent. Consent is said to be free when it is not obtained
by coercion, or undue influence or fraud or
misrepresentation or mistake.

V) Legal Consideration -
Consideration is necessary for the formation of a
contract. It means "something return". It is the price paid
for the contract. It must be Lawful. A contract without
consideration is void. According to Section 2(d) of the
Indian Contract Act 1872, there are three kinds of
Consideration, viz Past, Present and Future Consideration.
In a contract of life insurance, the insured gives premium
as a consideration in return of which insurer undertakes to
pay a certain amount at a specified contingency. The
contract of life insurance cannot be termed as a valid
contract without the payment of the first premium.

VI) Lawful object -

To constitute a valid contract the object of the contract
must be lawful. It must not be against public policy.
According to Section 23 of the Indian Contract Act 1872,
the object is unlawful which is -

a) Forbidden by law

b) Opposed to public policy

c) Immoral

d) Which defeats the provision by any Law