Insurance

BY- Anya Gupta

and Abhie Gupta
of XI Aristotle
 Meaning of insurance
Insurance is a contract under which one party (Insureror Insurance Company) agrees in return of a consideration (Insurance premium) to
pay an agreed sum of money to another party (Insured) to make good for a loss, damage or injury to something of value in which the
insured has financial interest as a result of some uncertain event.

Features of Insurance

● Insurance is the exchange of a little monthly payment (premium) for the risk of a significant potential loss.
● The risk of loss still exists, but it is dispersed over a vast number of policyholders exposed to the same risk.
● The premium paid by them is pooled out of which the loss sustained by any policy holder is compensated.
● Risk is transferred from one party (Insured( to another party (Insurer).
● Insurance can be done for any type of risk, fire, threat, third party etc.
● Two parties are required namely the insured and the insurer for the insurance contract to take place.
 Benefits of Insurance
The insurance gives benefits to individuals and organisations in many ways. Some of the benefits are discussed below:

● The obvious benefit of insurance is the payment of losses.

● Manages cash flow uncertainty when paying capacity at the time of losses is reduced significantly.
● Complies with legal requirements by meeting contractual and statutory requirements, also provides evidence of financial
resources.
● Promotes risk control activity by providing incentives to implement a program of losing control because of policy requirements.
● The efficient use of the insured’s resources. It provides a source of investment funds. Insurers collect the premiums and invest
those in a variety of investment vehicles.
● Insurance is support for the insured’s credit. It facilitates loans to organisations and individuals by guaranteeing the lender
payment at the time when collateral for the loan is destroyed by an insured event. Hence, reducing the uncertainty of the lender’s
default by the party borrowing funds.
● It reduces social burden by reducing uncompensated accident victims and the uncertainty of society.
 Principles of Insurance
Principle of Utmost Good Faith

The fundamental principle is that both the parties in an insurance contract should act in good faith towards each other, i.e. they must
provide clear and concise information related to the terms and conditions of the contract.

The Insured should provide all the information related to the subject matter, and the insurer must give precise details regarding the contract.

Example – Jacob took a health insurance policy. At the time of taking insurance, he was a smoker and failed to disclose this fact. Later, he
got cancer. In such a situation, the Insurance company will not be liable to bear the financial burden as Jacob concealed important facts.

Principle of Proximate Cause

This is also called the principle of ‘Causa Proxima’ or the nearest cause. This principle applies when the loss is the result of two or more
causes. The insurance company will find the nearest cause of loss to the property. If the proximate cause is the one in which the property is
insured, then the company must pay compensation. If it is not a cause the property is insured against, then no payment will be made by the
insured.
Example – Due to fire, a wall of a building was damaged, and the municipal authority ordered it to be demolished. While demolition the
adjoining building was damaged. The owner of the adjoining building claimed the loss under the fire policy. The court held that fire is the
nearest cause of loss to the adjoining building, and the claim is payable as the falling of the wall is an inevitable result of the fire. In the
same example, the wall of the building damaged due to fire, fell down due to storm before it could be repaired and damaged an adjoining
building. The owner of the adjoining building claimed the loss under the fire policy. In this case, the fire was a remote cause, and the storm
was the proximate cause; hence the claim is not payable under the fire policy.

Principle of Insurable interest

This principle says that the individual (insured) must have an insurable interest in the subject matter. Insurable interest means that the
subject matter for which the individual enters the insurance contract must provide some financial gain to the insured and also lead to a
financial loss if there is any damage, destruction or loss.

Example – the owner of a vegetable cart has an insurable interest in the cart because he is earning money from it. However, if he sells the
cart, he will no longer have an insurable interest in it.

To claim the amount of insurance, the insured must be the owner of the subject matter both at the time of entering the contract and at the
time of the accident.
Principle of Indemnity

This principle says that insurance is done only for the coverage of the loss; hence insured should not make any profit from the insurance
contract. In other words, the insured should be compensated the amount equal to the actual loss and not the amount exceeding the loss. The
purpose of the indemnity principle is to set back the insured at the same financial position as he was before the loss occurred. Principle of
indemnity is observed strictly for property insurance and not applicable for the life insurance contract.

Example – The owner of a commercial building enters an insurance contract to recover the costs for any loss or damage in future. If the
building sustains structural damages from fire, then the insurer will indemnify the owner for the costs to repair the building by way of
reimbursing the owner for the exact amount spent on repair or by reconstructing the damaged areas using its own authorized contractors.

Principle of Subrogation

Subrogation means one party stands in for another. As per this principle, after the insured, i.e. the individual has been compensated for the
incurred loss to him on the subject matter that was insured, the rights of the ownership of that property goes to the insurer, i.e. the company.

Subrogation gives the right to the insurance company to claim the amount of loss from the third-party responsible for the same.
Example – If Mr A gets injured in a road accident, due to reckless driving of a third party, the company with which Mr A took the accidental
insurance will compensate the loss occurred to Mr A and will also sue the third party to recover the money paid as claim.

Principle of Contribution

Contribution principle applies when the insured takes more than one insurance policy for the same subject matter. It states the same thing as
in the principle of indemnity, i.e. the insured cannot make a profit by claiming the loss of one subject matter from different policies or
companies.

Example – A property worth Rs. 5 Lakhs is insured with Company A for Rs. 3 lakhs and with company B for Rs.1 lakhs. The owner in case
of damage to the property for 3 lakhs can claim the full amount from Company A but then he cannot claim any amount from Company B.
Now, Company A can claim the proportional amount reimbursed value from Company B.

Principle of Loss Minimisation

This principle says that as an owner, it is obligatory on the part of the insurer to take necessary steps to minimise the loss to the insured
property. The principle does not allow the owner to be irresponsible or negligent just because the subject matter is insured.

Example – If a fire breaks out in your factory, you should take reasonable steps to put out the fire. You cannot just stand back and allow the
fire to burn down the factory because you know that the insurance company will compensate for it.
 Types of Insurance
Life Insurance: Under life insurance the amount of Insurance is paid on the maturity of policy or the death of policy holder whichever is
earlier. If the policy holder survives till maturity he enjoys the amount of insurance. If he dies before maturity then the insurance claim
helps in maintenance of his family. The insurance company insures the life of a person in exchange for a premium which may be paid in
one lump sum or periodically say yearly, half yearly quarterly or monthly.

Types of Life Insurance:

1. Whole Life Policy: Under this policy the sum insured is not payable earlier than death of the insured. The sum becomes payable to the
heir of the deceased.

2. Endowment Life Insurance Policy: Under this policy the insures undertakes to pay the assured to his heirs or nominees a specified
summon the attainment of a particular age or on his death whichever is earlier.

3. Joint Life Policy: It involves the insurance of two or more lives simultaneously. The policy money is payable on the death of any one
olives assured and the assured sum will be payable to the survivor or survivors.
4. Annuity Policy: This policy is one under which amount is payable in monthly, quarterly, half yearly or annual installments after the
assured attains a certain age. This is useful to those who prefer a regular income after a certain age.

5. Children’s Endowment Policy: This policy is taken for the purpose of education of children or to meet marriage expenses. The insurer
agrees to pay a assured sum when the child attains a certain age.

6. ULIPS – Unit Linked Insurance Plans: same as endowment plans, a part of premiums go toward the death benefit while the remaining
goes toward mutual fund investments.

Fire Insurance: In exchange for the premium paid, the insurer guarantees to make good any loss or damage caused by fire over a specified
period of time, up to the amount specified in the [Link] fire insurance policy is usually for a year and must be renewed on a regular
basis. A claim for fire damage must meet the following two requirements:

● There must be a monetary loss.

● Fire must be unintended and accidental.

Motor Insurance: offers financial protection to motor vehicles from damages due to accidents, fire, theft, or natural calamities.

Home Insurance: compensates the damage caused to home due to man-made disasters, natural calamities, or other threats
Marine Insurance: Marine Insurance provides protection against loss during sea voyage. The businessmen can get his ship insured by
paying the premium fixed by the insurance company. The functional principles of marine insurance are the same as the general principles of
Insurance. Marine insurance protects against losses caused by marine perils, often known as sea perils. There are three factors to consider:

● Hull Insurance: Because the ship is exposed to several dangers at sea, this insurance policy is designed to compensate the insured
for losses incurred as a result of ship damage.
● Cargo insurance: Cargo or the goods in the ship is exposed to numerous dangers while being transported by ship, this insurance
covers the risk of voyage.
● Freight insurance: If the cargo is damaged or lost in transit, the shipping business is not reimbursed for the freight payments,
hence to avoid this scenario, the shipping company takes up this insurance policy.

Health Insurance: With a lot of awareness today, Health insurance has gained a lot of popularity. General Insurance companies provide
special health insurance policies such as Mediclaim for the general public. The insurance company charges a nominal premium every year
and in return undertakes to provide up to stipulated amount for the treatment of certain diseases such as heart problem, cancer, etc.

Travel Insurance: compensates the financial liabilities arising out of non-medical or medical emergencies during travel within the country
or abroad
 Questions
1. Which of the following is not a function of insurance?
(a) Risk sharing
(b) Assist in capital formation
(c) Lending of funds
(d) None of the above

2. Which of the following is not applicable in life insurance contract?

(a) Conditional contract
(b) Unilateral contract
(c) Indemnity contract
(d) None of the above
3. It is not a type of general insurance
(a) Marine Insurance
(b) Fidelity Insurance
(c) Fire Insurance
(d) Life Insurance
4. Which of the following is a contract of Indemnity
(a) Marine Insurance
(b)Fire Insurance
(c) Life Insurance
(d) all the above
THANK YOU