Insight Into Basics of General Insurance

Insight
Insight into
into Basics
Basics of
of General
General
Insurance
Insurance
1
Topics
 Introduction & Principles of General Insurance

 Insurance Documents & Regulatory Matters
 Fire Insurance
 Marine Insurance
 Motor Insurance
 Personal Accident Insurance
 Liability Insurance
 Engineering Insurance
 Claims
Oct 5, 2020 © Distribution Training, TATA AIG Gen Insurance Co, Bangalore 2
Introduction & Principles of
General Insurance
 Perils & Risks
 Insurance
 Principles of Insurance
– Contract
– Utmost Good Faith
– Insurable Interest
– Indemnity
– Subrogation
– Contribution
– Proximate Cause
Perils
 Possible/Accidental Occurrences that can destroy or make an
asset non-functional.
 Fire, Floods, Breakdowns, Lightning, earthquakes etc. are
perils
 The possible damage that these perils can cause on the asset
is known as the RISK that the asset is exposed to.
 UNCERTAINITY is the basic quality of a RISK. Risk means that
there is a possibility of Loss or Damage. It may or may not
happen.
 Insurance is required against this uncertainty of the
occurrence of an event
 If there is no uncertainty then Insurance cannot be there.
 A PERIL IS THE CAUSE OF LOSS – THE UNCERTAINITY/POSSIBILITY OF
THE OCCURRENCE OF SUCH A PERIL IS RISK
Risks
 To a Layman, Risk could mean “Exposure to Danger”
 In Insurance Risk is the possibility of loss that may arise out of
the occurrence of an event/peril.
 There could be Good Risks & Bad Risks.
 For e.g. Fire Insurance covers the Risks that arise out of Fire,
Explosion, Cyclone, Flood etc.
 Now if a Timber construction were to be considered for Fire
Insurance, It could be termed as a Bad Risk for the purpose of
Fire Insurance.
Insurance
 People exposed to the same risks come together and agree
that if any one of the “members” suffers a loss, the others will
share the loss and make good to the person who lost.
 All people who send their goods by ships are exposed to the
same risks related to water damage, ship sinking, piracy etc.
 Factory Owners may not be exposed to similar risks. Their risks
might be from Fire, hailstorms, earthquake, lightening,
Burglary, etc.
 Like this different risks can be identified and separate groups
made including those exposed to such risks.
 This way the risk is spread among the community and the
likely big impact on one is reduced to smaller manageable
impacts on ALL.
 This concept is known as INSURANCE…
How Insurance Works
 In a Village there are 400 houses each valued at Rs 20,000.
 Every year, on the average, 4 houses get burnt, resulting in a
total loss of Rs 80,000.
 If all the 400 owners come together and contribute Rs 200
each, the common fund would be Rs 80,000.
 This is enough to pay Rs 20,000 to each of the 4 owners whose
houses got burnt.
 Thus the risk of 4 owners is spread over 400 house owners of
the Village.
 While it is not possible to predict WHICH person would have
suffered, it IS POSSIBLE to tell, on the basis of past
experiences, HOW many persons, on an average, may suffer
losses. Thus people facing common risks come together &
contribute to the common fund.
Business of Insurance
(Pooling of Risks & resources)
 The Business of Insurance done by Insurance Companies, called Insurers is

to bring together persons with common insurance interests (SHARING
SAME RISKS) , collecting the share or contribution (CALLED PREMIUM)
from all of them, and paying out compensations (CLAIMS) to those who
suffer. The premium is decide as indicated in the example earlier with
some additions made for the expenses of administration.
 Thus, Insurance may be described as a method or a technique which

provides for collection of small amounts of premium from many
individuals and firms out of which losses suffered by the few are paid.
 Insurance is a contract between two parties under which one party, in

return for a payment known as the premium, agrees to pay compensation
for any financial loss or damage sustained by the other, providing such
loss or damage is covered by the agreement, known as the policy.
Principles of Insurance
 The Insurance Policy is ultimately a contract and as such
general law of contract would be applicable as modified by
specific enactments in India such as Stamp Act, Insurance Act,
etc.
 The basic aspects that exist for all contracts would also be
relevant here such as:
o Offer and Acceptance - There should be an offer by one of the parties to the contract with an
acceptance by the other party. This is usually embodied by the proposal form and when this is
accepted by the Insurer, the Policy is issued which forms a valid contract, enforceable by law.
o Capacity to Contract - Both the parties should be legally competent to enter into the contract.
Mentally unsound persons, minors, etc. are generally deemed incapable of entering into a
contract.
o Flow of Consideration - Consideration should flow for both parties. In the insurance policy, the
premium payment forms the consideration by the Assured and the promise for indemnification, in
the event of loss due to an insured peril forms the consideration by the Insurer.
o Absence of Fraud - Just as in case of normal contracts which can be rendered void due to any
fraud or misrepresentation, the Insurance Policy or contract also would similarly be rendered void
in the event of any fraudulent acts by either party. Misrepresentation may make it voidable at the
instance of the injured party.
o Legality - Any contract cannot be enforced if it violates any statute or public policy.
o The above are only some of the basic and important contract principles for all contracts in
general with some examples reflecting their application in case of Insurance Contracts or Policies.
 Uberrima Fides - This phrase is Latin for 'utmost good faith'.
faith This
means that the insured must fully disclose all material facts relating to
the risk. A material fact is one such as might influence the insurer in
either accepting the risk or not, or cause him to charge a higher
premium.
It is especially important to be aware that if the insured, or his
agent/broker, signs an insurance proposal form declaration stating that
the facts therein are true, that the policy can be declared void if there
are any inaccuracies, be they material facts or not.
 A summary of the Doctrine of Utmost Good Faith was given in the case
of Rozanes v. Bowen(1928) as follows:
As the underwriter knows nothing and the man who comes to him to ask him
to insure knows everything, it is the duty of the assured… to make a full
disclosure to the underwriter without being asked of all the material
circumstances. This is expressed by saying it is be contract of the utmost
good faith
A POSITIVE DUTY VOLUNTARILY TO DISCLOSE, ACCURATELY & FULLY, ALL FACTS MATERIAL TO THE RISK
BEING PROPOSED, WHETHER REQUESTED OR NOT.
EVERY CIRCUMSTANCE IS MATERIAL WHICH WOULD INFLUENCE THE JUDGEMENT OF A PRUDENT INSURER IN
FIXING THE PREMIUM OR DETERMINING WHETHER HE WILL TAKE THE RISK
 Insurable Interest - This means that no person can be effected by a
person on the life of another or against any other event, unless the
person seeking the insurance has such an interest in the subject matter
that he stands to be deprived in some way by its ceasing to exist. In
other words, the insured must benefit from the continued existence of what
is insured and suffer by its loss.
 The legal right to insure arising out of a financial relationship recognized

under law, between the insured & the subject matter of Insurance
ESSENTIALS OF INSURABLE INTEREST

 There must be some property, right, interest, life, limb or potential liability capable of
being insured
 It is this property, right, interest, etc. which must be the subject matter of insurance;
 The insured must stand in a relationship with the subject matter of insurance whereby he
benefits from its safety, wellbeing or freedom from liability & would be prejudiced by its
loss, damage or the existence of liability;
 The relationship between the insured & the subject matter of insurance must be recognized
at law.
 Indemnity - This means that the insurer will reimburse the
insured person to the extent of the loss sustained but no further.
The object of this principle is to prevent persons making a profit from loss.
 In Insurance, Indemnity may be looked upon as financial compensation

sufficient to place the insured in the same financial position after a
loss as he enjoyed immediately before it occurred.
LINK WITH INSURABLE INTEREST

It is the insured’s interest in the subject matter of insurance that is in fact
insured. In the event of any claim the payment made to an insured
cannot, therefore, exceed the extent of his interest.
 Subrogation - This means that an insurer who has sustained a
loss under a policy of indemnity is entitled to avail himself of
any rights the insured had against the third party who caused
the loss or damage. In other words, should a third party be
responsible for the events leading to the loss by the insured,
the insurance company having compensated him, is entitled to
make a claim against the third party, using the name of the
insured person in many cases.
Another aspect of subrogation is that the insurance company is
entitled to salvage any of the property or goods that were
damaged by the event, where possible, and where possible to
sue any third party who was responsible for the loss for the
balance of the compensation.
 Contribution - This means that if the risk was
over insured, either because the risk was
over estimated, the goods had depreciated
since effecting the policy or two policies
covered the particular risk, the principle of
indemnity still applies.
Where two insurance policies from separate
companies cover the same risk, and one
company has fully compensated the insured,
they are entitled to recover a proportion of
the compensation from the other company.
Coxe V. Employers Liability Assurance Corporation (1916):
“ An Army Officer while visiting sentries posted along the railway

line was killed by a passing train. The Policy excluded death or
injury ‘directly or indirectly caused by war, etc.’
The passing of the train was the proximate cause of the accident,
but the indirect cause was war, for that was the reason why the
officer was present on the railway line.
In view of the words used in the policy, the insurers were not
liable.
The active efficient cause that sets in motion a train of events
which bring about a result, without the intervention of any
force started and working actively from a new and
independent source.
 A person insured under a personal accident policy went out hunting and met with
an accident. Due to shock and weakness, he was unable to walk. While lying on the
wet ground he contracted cold which developed into pneumonia which caused his
death. The court held that the proximate cause of death was the original accident
and pneumonia (a disease which is not covered under the policy) only a remote
cause. Hence the claim was payable.
 An insured suffered accidental injuries & was taken to the hospital. While
undergoing treatment he contracted an infectious disease which caused his death.
In this case, the court gave a contrary ruling. The ‘proximate cause’ of death was
the disease and the original accident only a ‘remote cause’. Hence, the claim was
not payable under a personal accident policy.
See you next Saturday


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Insight

 Introduction & Principles of General Insurance

 The Business of Insurance done by Insurance Companies, called Insurers is

 Thus, Insurance may be described as a method or a technique which

 Insurance is a contract between two parties under which one party, in

 The legal right to insure arising out of a financial relationship recognized

ESSENTIALS OF INSURABLE INTEREST

 In Insurance, Indemnity may be looked upon as financial compensation

LINK WITH INSURABLE INTEREST

“ An Army Officer while visiting sentries posted along the railway

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