Insurance Law Unit 1
Insurance Law Unit 1
Insurance Law Unit 1
Law of Insurance:-
An Introduction: Insurance may be described as a social device to reduce or eliminate risks or loss to life
and property. It is a provision which a prudent man makes against inevitable contingencies, loss or
misfortune.
Insurance provides financial protection against a loss arising out of happening of an uncertain event. A
person can avail this protection by paying premium to an insurance company.
A pool is created through contributions made by persons seeking to protect themselves from common
risk. Premium is collected by insurance companies which also act as trustee to the pool. Any loss to the
insured in case of happening of an uncertain event is paid out of this pool.Insurance works on the basic
principle of risk-sharing. A great advantage of insurance is that it spreads the risk of a few people over
a large group of people exposed to risk of similar type.
Definitions:
Insurance is a contract between two parties whereby one party agrees to undertake the risk of another
in exchange for consideration known as premium and promises to pay a fixed sum of money to the
other party on happening of an uncertain event (death) or after the expiry of a certain period in case of
life insurance or to indemnify the other party on happening of an uncertain event in case of general
insurance.
The party bearing the risk is known as the ‘insurer’ or the ‘assurer’ and the party whose risk is covered
is known as the ‘insured’ or ‘assured’.
Risk - The concept is closely related to an uncertainty. Risk is defined as an uncertainty, related to
the occurrence of a loss.
Important features of risk are-
unpredictable,
uncertainty about the future event,
deviation from desired outcome &
not favorable.
In a competitive economy, risk bearing is essential. Since every one of us is exposed to some or
other risk, the best way is to accept the presence of risk and manage the affairs without being
affected.
Features of Insurance:
1. Principle of indemnity.
2. Pooling of risk principle.
3. Principle of spreading the risk.
Advantages of insurance:
Losses if occurred are compensated by insurer.
Uncertainty is reduced and business can be transacted without having the fear
of losing itsinfrastructure and capabilities.
Insurance premium is business expenditure. It reduces your income as well as
income tax liability.
In the case of certain insurances, especially in the nature of life insurance,
mediclaim insuranceetc.,( income tax concessions are available.)
You can also avail certain value added services from insurer like loss control
advice, exposure analysis, etc.
Benefits of Insurance:
It is one of the techniques of risk management process.
It reduces the fear and anxiety in the mind of an individual and also a business unit.
It is compensatory in nature. It restores the insured position.
When property or person is brought the umbrella of insurance cover, it adds to
the creditworthiness.
General principles:
Other legal formalities- The contract otherwise complete and valid in all other
aspect must also comply with any other formalities. Eg - All policy documents
must be duly stamped in accordance with the provisions of the Indian stamp Act.
Insurance is a contract-
“A contract is an agreement which is enforceable by law.” So we can say that:
Enforceability means, if one of the parties violates the terms and conditions, the other party has a
rightto take a legal action.Thus a contract essentially creates a set of mutual rights and obligations
between the parties, if one of the parties fails to fulfill his obligation, under a contract, the contract
is said to be breached. In such circumstance, the other party may knock the doors of court and ask
for relief.
IRDA ACT:
The office of controller of Insurance was replaced and a new authority, called as IRDA i.e.
Insurance Regulatory and development Authority came into existence. This act also put an
end to the monopoly of Life Insurance Corporation of India over life insurance business
and other nationalized insurance companies and opened the gates even to private sector
players. Entry norms have been prescribed under this act. The powers, functions of this
IRDA inter alia include all those powers necessary to promote and ensure an orderly
growth of this business and reinsurance business. It is also intended to protect the interest
of the policyholders in matters relating to nomination, assignment, insurable interest,
settlement of claims, surrender value of the policy, condition relating to insurance
contract, tosupervise the functioning of tariff advisory committee, etc.
f) Levying fees and other charges for carrying out vthe purposes of this act,
g) Calling for information, inspecting, conducting enquiries, investigation and audit of the
insurer, intermediaries, insurance agents and other organizations connected with the
insurance business,
h)Controlling and regulating the rates, advantages and terms and conditions that may be
offered by the insurers in respect of general insurance business which is not been done by the
insurance Act, 1938,
i) Specifying the forms and manner in which books of account shall be maintained and
statement of accounts shall be rendered by insurance and insurance intermediaries,
m) Specifying the percentage of life and non-life business to be done by the insurer in the rural
or social sectors, and
Principle of Indemnity:
The basic principle of Insurance is the compensation of the loss and not to earn profit. This
principle is applied to all other contracts of insurance except life Insurance, personal accident and
sickness Insurance. This principle is specially applied to fire, marine burglary or any other policy
of indemnity. Under the indemnity contract, the insurer undertakes to “indemnify “the insured
agenized loss suffered in the cases of non life Insurance the Insurance Company shall be liable to
pay only up to the extent of loss occurred and not more than that. Its basic intention is to restore
the position of the insured and to keep him in the same position which existed immediately before
the loss. In another word the intention of this principle is to compensate and restore the insured
and nothing more. In brief, this principle of indemnity applies to all types of insurance contracts
except Life Insurance.
Principle of subrogation- Basically this principle is applicable only in Non- life Insurance and
with specific reference to fire and marine Insurance. Subrogation means, after an event occurs
which resulted in the loss to insured, and insurer has paid the claim to insured,, then the
insurance company i.e. insurer get a right to step into shoes of the insured. Thus, after getting the
claim, the insured releases all his rights over the subject matter of insurance, in favour of
Insurance Company.
All the policies must be in force as on the date of event causing loss.
The insured (owner of asset) must be same.
The risk insured against (perils) must be the same in all policies.
The insured asset must be common in all policies.
The Insured perils are those for the protection of which, the subject matter is insured and
in case of any event happening during the period of Insurance gives loss to the subject
matter, the Insurer can be made liable. The perils that fall outside insured perils are called
excluded perils. The Insurer cannot be made liable for any type of loss that happens due to
other causes.
Where the loss happened to the subject matter of insurance directly due to insured peril,
the insurer can be made liable for the payment of claim. In such situations, no dispute
arises. But, the loss is caused by insured perils and others, both simultaneously or one
after another, it becomes difficult to lay the insurer liable for the indemnity. In such a
situation, it has to be seen that which one of those
perils is more important, effective and powerful, because of which the damages caused to
the subject matter. The causes that put no effect on the happening of losses, is known as
‘remote’ causes. This means proximate cause is the nearest cause.
Proximate does not mean “nearest in time”. The time that elapses between cause and
result may be long or short, but will not affect the cause and effect. The cause which is
truly proximate is that which is proximate in efficiency. It is not the latest, but direct,
dominant, operative and efficient cause.
Determination of the proximate cause-while determining the proximate cause for the loss,
care be given to the following-