Chapter Two

Principles of Life
Insurance
 Objectives
To Understand the

Fundamental Principles of Insurance

Concept of Utmost Good Faith
Material Fact
Facts that must be disclosed
Importance of Declaration and Section 45
Insurable Interest
 The Indian Contract Act 1872

A contract is an agreement between two or more parties to do or

to abstain from doing an act and which is
intended to create a legally binding relationship

An
Agreement
enforceable
by Law is a
contract
Essentials of a Valid Contract

Two or
more Free
parties Essentials of Consent
a valid
Contract

Lawful
Lawful Consideration
Objective Offer and
Acceptance
 The Life Insurance Contract

Insurer will Insured will

pay claims Agree pay Premiums
ment

On happening of insured event or survival to a specified term

Is Life Insurance a Legal Contract?

Intention is legal
Proposer offers-insurer accepts
Premium is consideration
Insured must be major with sound
mind-capacity to contract
Insured and Insurer are in
agreement of same mind and free
consent
Yes, since all essentials of valid contract are present
Principles of Life Insurance

Utmost Insurable
good
Interest
faith

Insurance Contract is based on Fair Play

 Insurance Contract Vs
Commercial Contracts
In Life Insurance
When one buys a
proposer has all
TV or Fridge he
the facts
examines the
quality/quantity
The Insurer Knows
only those facts
Buyer has no right
that the proposer
to come later and
discloses
ask for termination
of contract
Ordinary faith is
not sufficient-
Buyer Beware or
Utmost Good Faith
Caveat Emptor
is required
applies
 Utmost Good Faith
A Positive Duty to voluntarily
disclose,accurately and fully, all facts
material to risk being proposed,
whether requested or not.

Utmost Good Faith is also called Uberrimae Fides

What is a material Fact

The Mind of a
Which Prudent
Any Fact or Circumstance Influences Underwriter

In determining
In Fixing the whether to take
premium the risk
What must be disclosed?
Facts of higher Risk

External Factors that make the risk

higher

Any refusal/special terms imposed on

previous proposals

Existence of other policies

Facts relating to health

Materials facts that need not to be disclosed

Facts Of Common Knowledge Facts Of Law

Need not be
Material
Facts
Disclosed

Facts that can be discovered

With reasonable diligence Facts Which Lessen Risk
 Declaration

Proposal Form is the Basis Of Contract

If any statement/declaration by the

proposer is found untrue

The Contract can be made Null

and Void and Premiums
Forfeited

The Effect of declaration is to turn Representations in the proposal

form into warranties
Breach Of Utmost Good Faith

Breach Of Utmost Good Faith

Misrepresentation
Non-Disclosure
Section 45 of the Insurance Act,1938
Policy
Start
Date
2 years

If Material Facts discovered The policy cannot be called in

within question after 2 years, on the grounds
2 years of the policy then the of inaccurate or false statement
insurer unless it is proved to be material and
can declare the policy null fraudulent.
and void
 Insurable Interest
All risks are not Insurable

Insured must suffer a loss, if the risk is not covered

Financial interest in Subject matter of Insurance

The insured must be interested in the safety and

the well being of the subject of Insurance

He Should not benefit from loss or damage to it

 What is Insurable Interest ?
Insurable Interest is not defined
in Insurance Act 1938

If No Insurable Interest .A contract is a Wagering Contract

which is void Section
30
Indian
Contract
Act 1872
Insurable Interest is a Legal Pre Requisite
 What is Insurable Interest ?
Relationship with subject Recognized in Law and
Matter gives Legal Right to a
person

To insure that Subject Matter

Insurable Interest is the monetary interest

 Who have insurable interest in each
other

Any person in himself

Husband and wife in each other
Creditor on Debtor(To the Extent of
Outstanding Mortgage with Interest)
Surety on Principal(To the extent of Debt)
Partners in business
Employer on its employees
Parents in Lives of their Minor Children
When do these principles apply?

Insurable Interest interest is

required at the time of entering
the contract

Utmost Good Faith is required

Throughout the contract
Principle Of Indemnity

Insurance is meant to compensate the

losses
The Mechanism of Insurance cannot be
used to make profits
Amount of claim cannot exceed the
amount of loss incurred
Insurance makes good the loss
In Life Insurance, insurable interest on
own life is unlimited hence Principle of
indeminity does not apply but it does
apply in General Insurance
 Risk Management

Avoidance

Risk can Be managed Transfer

Retention
 Risks Management
You can avoid accidents by
driving safely
Avoidance

Retention You have your own resources

to take care of needs; (savings
for rainy days)

Transfer Buying insurance; transfer

your risk to insurer
 Classification of Needs
Protection of the standard of living
of family incase of early death

Future Expenses eg. Children

Education

Income incase of Retirement or

Disability

Helps by facilitating borrowing


Key Learnings
Life Insurance contract is also a legal
contract

The proposer must declare all the facts

properly in utmost good faith

Proposal Form is the basis of Contract

Section 45 of Indian Insurance Act,

stipulates that a policy cannot be called
for question after 2 years

Insurable Interest is a legal pre-requisite

Thank You