INSURANCE

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Atharva Verma
Shourya Garg
Sarthak Vashist

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 Insurance Services
Insurance is a contact between the insurer and insured in which insuser agrees to make good the loss
of insured on happening of an event in consideration of a regular payment called premium. This
agreement or contract is in writing and is known as insurance policy

The important terms used in insurance contract are:

Insurer: The individual or firm (insurance company) that agrees to compensate tfor he loss of the insured.

Insured: The individual or firm who receives compensation for loss. The insured pays a regular amount of

premium.

Happening of the event: Refers to the subject matter of the policy or the types of losses covered under

the policy.

Premium: The amount paid quarterly, half-yearly, or annually by the insured to the insurer in return for

compensation in case of loss. 2

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Principles of insurance
Principle of Utmost Good Faith

According to this principle, insurance is a contract based on faith.

The insured and insurer must disclose all material facts to each
other, and neither party should hide any fact related to the
insurance policy from the other. If the insured hides any material
fact from the insurance company and the insurer later discovers it ,
then the insurer can refuse to pay compensation.
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 For Example

Arya has taken a life insurance policy by hiding the fact that he is a
heart patient and later on if the insured dies of a heart attack then the
insurance company can refuse to pay the compensation because a
material fact was hidden by the insured. Similarly, if a factory owner
takes a fire insurance policy hiding the fact that the electricity board
has issued him a statutory warning letter to get his factory's wiring
changed and later on if the factory catches fire due to short circuit of
wiring then the insurance company can refuse to pay the compensation
because insured has hidden the fact of statutory warning from the
insurance company.

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Principles of insurance
Principle of insurable interest

According to this principle, the insured must have an insurable interest in the subject
matter of the insurance policy. Without interest, taking an insurance policy is a gamble
and a fraudulent activity, and the law does not permit it. For example, a person can take
a life insurance policy for their spouse or for his/her children, but he/she cannot take an
insurance policy for a stranger. In case of fire insurance, the insured must suffer a
financial loss if the subject matter is damaged to prove the interest, or he must be the
owner of the subject matter.
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 For Example

Ubaid has taken a loan against the security of a factory premises, then the lender can
take a fire insurance policy of that factory without being the owner of that factory,
because he has a financial interest in the factory premises. In the case of a life insurance
policy, the interest must be present at the time of taking the policy. In case of fire
insurance, the insurable interest must be present at the time of taking the policy as well
as at the time of loss of the subject matter. In all other types of insurance, including
marine insurance, the insurable interest must be present at the time of loss of the
subject matter.

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Principles of insurance
Principle of Indemnity

According to this principle, insurance is not a contract of making a profit. The

purpose of insurance is to bring the insured back to the same financial
position as he was before the loss. The principle of indemnity does not apply
to a life insurance policy because one cannot estimate the loss due to the
death of a person.
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 For Example

Keshav insured his factory for 2 lakh against fire. Due to fire, he
suffered a loss of 1 lakh, then the insurance company will
compensate him 1 lakh only and not the policy amount that is 2
lakh, because the purpose of insurance is to compensate for
loss and not for earning profit.

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 Case Study
Ishita is a fashion designer based in Delhi. She recently got her new boutique insured against theft
and fire. A few days later, she also decided to take an insurance policy for her best friend's
boutique, which was located nearby, claiming it as a "precaution for emergencies." Three months
later, a fire broke out in her friend's boutique, causing damage worth ₹10 lakhs. Ishita approached
the insurance company to claim the amount, stating that she had paid the premium regularly and
held a valid insurance policy for that boutique. However, the insurance company rejected her claim,
even though she had a proper policy and had paid the premium on time.

Q1 Which principle of insurance was violated by ishita in this case?

Q2 Explain this principle

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Principles of insurance
Principle of Contribution

According to this principle, if a person has taken more than one insurance policy for the
same subject matter then all the insurers will contribute the amount of loss and
compensate him for the actual amount of loss. Separately, he cannot claim total loss
from each insurer. The insurer contributes to the total loss in proportion to the amount
assured by each.
The formula used to determine the compensation amount is
Sum assured with a particular insurer X Actual loss
Total sum insured 10
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Principles of insurance
Principle of Subrogation

According to this principle, after paying the compensation, the insurer steps into
the shoes of the insured. In other words, when the insured is compensated for
the loss or damage to the property insured by her/him, the right of ownership of
such property passes on to the insurer. This is also a corollary to principle of
indemnity because once the compensation is given later on if insured realises
some money by sale of damaged property that will bring profit for him and
insurance is not a contract of making profit.
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 For Example

Rishav has taken fire insurance policy for his factory, due to fire he suffered
a loss of ₹1,00,000 and he gets the compensation for the same. Later on,
half burnt goods were sold for ₹10,000 then these ₹10,000 will be kept by
insurance company and not by insured because insured has already got
full compensation for the loss.

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Principles of insurance
Principle of Proximate cause

According to this principle, the cause or reason for the loss must
be related to the subject matter of the insurance contract. If loss
is due to some other cause then the insurer can deny to pay the
compensation.
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 For Example

Mohit has taken marine insurance policy for sending the wheat bags and
on the way if a rat spoiled the wheat then no compensation will be given
because under marine insurance the cause of loss should be sea perils
and not the rat. On the other hand, if the rat makes a hole in the ship
through which water enters and spoils the wheat compensation will be
given because the loss of wheat is due to sea water.

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Principles of insurance
Principle of Mitigration of loss

According to this principle, the insured must take care of his property
or subject matter of insurance in the same way as he would take care
without taking the insurance policy. The insured should not become
careless of his property ater titns iesarre potor th auty oft make a
reasonable effort and take all available precautions to save the
insured property.
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 For Example

Sarthak has taken fire insurance policy for his house and
when fire breaks out he should take all the measures to
stop the fire and minimise the loss rather than watching
the fire because he will get compensation from insurance
company.

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 Case Study
A furniture shop owner, Ishant, took fire insurance from two companies -
Insure Co. A (₹5 lakhs) and Insure Co. B (₹5 lakhs). A fire caused damage
worth ₹4 lakhs. He claimed the full amount from both companies.

Q Which principle of insurance applies here?

Q Can Ishant recover 24 lakhs separately from both companies?
Q How will the compensation be shared?

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 Case Study
Anmol had insured his warehouse against fire. A fire broke out due to an
electric fault. Instead of taking any steps to reduce the damage (like
calling fire services or using extinguishers), he left the place, thinking
the insurer would cover the full loss.

Questions: [Link] principle was ignored by Anmol?

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 Insurance Services
Type of Insurance

Life Insurance Fire Insurance

Marine Insurance Health Insurance

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 Insurance Services
Life Insurance
The life insurance is related with two types of risks

Risk of dying too early Risk of dying too late

Generally people take the insurance policy when they have the fear of dying too early. Then to
provide financial support to their family they take life insurance policy. When people think of living
too late then to get some financial support during old age also the Insurance policy is taken. In life
insurance, the sum assured is paid at the death or on maturity period whichever comes earlier. If a
person dies early, his family gets compensation amount a person survives then he/she himself/herself
can get the policy amount. 20
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Life Insurance

In life insurance, the insured has to pay a fixed amount of premium in return.
Compensation is assured at his death or at the maturity period, whichever comes
earlier. In a life insurance contract, the premium can be paid monthly, quarterly, half-
yearly, or annually, and the insurer pays the policy amount the death or on expiry of a
specific time period, which is also called the maturity time of the policy. The principle
of indemnity, the principle of contribution, and the principle of subrogation do not
apply to a life insurance policy. 21
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Life Insurance
Main Elements of Life Insurance are:
The Contract of Life insurance is a contract of utmost good faith. The assumed
should be honest and must disclose all material facts about their health to the
insurer.
The Insurable Interest must be present at the time of taking the policy; an
insurable interest at the time of maturity is not necessary
. A Life Insurance contract is not a contract of Indemnity. The life of a human
being cannot be compensated.
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Fire Insurance

Fire insurance is a contract under which one party (the Insurer) in return for a
consideration (Premium) agrees to indemnify the other party (Insured) for the
financial loss which the latter may suffer due to damage to the property
insured by fire during a specific period of time and up to a specific amount.
The contract containing the terms and conditions is known as [Link]
the fire policy contains the name of the parties, description of the insured
property, the sum for which the property is insured,amount of premium
payable and the period insured against. Generally the period of insurance is 23
one year.
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Fire Insurance
Main Elements of Fire Insurance are:
The insurable Interest should be present at the time of taking policy as well as at the time of
loss.

The contract of Fire Insurance is also a contract of utmost good faith so insured must disclose
all material facts related to the property for which insurance is taken.

The Principle of Indemnity is strictly applicable to fire insurance, as the Insured gets only the
loss amount or the policy amount, whichever is less.
The compensation is paid only when the loss is due to fire. So, the doctrine of causa proxima is
also strictly followed. 24
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Marine Insurance
A contract of marine insurance can be defined as an arrangement under which the insurer
undertakes to indemnify the insured in the manner and to the extent thereby agreed against
marine losses. Marine risks are the perils of sea, e.g., storm, collision, capture, seizure, sinking of
a ship, etc.

Marine insurance is a contract between the insured and the insurer. The insured may be a
cargo owner or a ship owner, or a freight receiver. The insurer is known as the underwriter.
The insured pays a particular sum, which is called a premium, in exchange for an
undertaking from the insurer to indemnify the insured against the loss or damage caused
by the sea perils. 25
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Marine Insurance
The different types of marine insurance policies are:

Cargo Insurance: This form of marine insurance includes the cargo or the goods contained in the ship
and the personal belongings of the crew and passengers.

• Hull Insurance: Under this, the whole ship is insured., It covers the insurance of the vessel and its equipment,i.e., furniture
fittings, tools, machinery, fuel, engine, stores, etc. Generally owner of the ship undertakes Hull Insurance.

Freight Insurance: Such insurance provides protection against the loss of freight. In many cases, the
owner of the goods pays the freight only when delivery of goods is secured on the harbour. If the ship is
lost in the way or damaged or theft then shipping company loses the right of taking freight. 26
Insurance Services
Marine Insurance
Main Elements of Marine Insurance are:

The insurable interest should be present at the time of loss.

The contract of Marine Insurance is also a contract of utmost good faith, so the insured
discloses all material facts related to the property for which insurance is taken.
The Principle of Indemnity is strictly applicable to marine insurance as the Insured gets on
loss amount or the policy amount, whichever is less.

The compensation is paid only when the loss is due to sea peril. So, doctrine of causa
proxima is also strictly followed. 27
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Health Insurance
Health insurance provides for the payment of medical expenses in case of illness of the
insured person and their family.

It provides the following types of coverage:

Basic Medical Expenses: It covers the expenses of hospitalisation and doctor's services.
Major Medical Expenses: It covers the cost of catastrophic (sudden and unexpected) illnesses.
Long-term Hospitalisation: It covers nursing home charges for elderly people.
Medical Supplement: It fills gaps in medicare programmes of social security.
Disability Income: It replaces the income lost by the insured while they are unable to work.

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