INTRODUCTION TO INSURANCE

- Meenu
Asstt. Professor, SRCC,
University of Delhi.

Every risk involves the loss of one or other kind. In older time, the
contribution by the person was made at the time of loss. Today, only one
business, which offers all walks of life, is insurance business. Owing to
growing complexity of life, trade and commerce, individual and business
firms and turning to insurance to manage various risks. Every individual in
this world is subject to unforeseen uncertainties which may make him and
his family vulnerable. At this place, only insurance helps him not only to
survive but also recover his loss and continue his life in a normal manner.

Insurance is an important aid to commerce and industry. Every

business enterprise involves large number of risks and uncertainties. It may
involve risk to premises, plant and machinery, raw material and other
things. Goods may be damaged or may be destroyed due to fire or flood.
Some risk can be avoided by timely precautions and some are unavoidable
and are beyond the control of a business. These unavoidable risks can be
protected by insurance.
What is Insurance
In D.S. Hamsell words, insurance is defined “as a social device
providing financial compensation for the effects of misfortune, the payment
being made from the accumulated contributions of all parties participating
in the scheme”
In simple terms “Insurance is a co-operative device to spread the loss
caused by a particular risk over a number of persons, who are exposed to it
and who agree to insure themselves against the risk”
Thus, the insurance is
(a) A cooperative device to spread the risk;
(b) the system to spread the risk over a number of persons who are
insured against the risk;
 (c) the principle to share the loss of the each member of the society on
the basis of probability of loss to their risk; and
(d) the method to provide security against losses to the insured
Insurance may be defined as form of contract between two parties
(namely insurer and insured or assured) whereby one party (insurer)
undertakes in exchange for a fixed amount of money (premium) to pay the
other party (Insured), a fixed amount of money on the happening of certain
event (death or attaining a certain age in case of life) or to pay the amount
of actual loss when it takes place through the risk insured (in case of
property)
Terminology used in definition of Insurance
- Insurer or insurance company – The agency involved in
Insurance business is known as insurer
- Insured/ Assured – The person who gets his property/life
insured is known as insured
- Policy - The agreement or contract which is put in writing is
known as a Policy
- Premium – The consideration in return of which the insurer
undertakes to make goods the loss or give a certain amount in case
of life insurance is known as premium

Assurance and Insurance

The two words were used synonymously at one time, but there is fine
distinction between the two. ‘Assurance’ is used in those contracts which
guarantee the payment of a certain sum on the happening of a specified
event which is bound to happen sooner or later, for example attaining a
certain age or death. Thus life policies comes under ‘assurance’.
Insurance, on the other hand, contemplates the granting of agreed
compensation of the happening of certain events stipulated in the contract
which are not expected but which may happen, for example risk relating to
fire, accident or marine.
Nature of Insurance
Following are the main characteristics of insurance which are applicable
to all types of insurance (life, fire, marine and general insurance).
1. Sharing of Risks - Insurance is a device to share the financial losses
which may occur to individual or his family on the happening of certain
events
2. Co operative Device – Insurance is a co-operative device to spread
the loss caused by a particular risk over a large caused by a particular
risk over a large number of persons who are exposed to it and who agree
to insure themselves against the risk.
3. Value of Risk – Risk is evaluated at the time of insurance. There are
several methods of valuing the risk. Higher the risks, higher will be
premium
4. Payment on Contingency -If the contingency occurs, payment is
made; payment is made only for insured contingency. If there is no
contingency, no payment is made. In life insurance contract, payment is
certain because the death or the expiry of term will certainly occur. In
other insurance contract like fire, marine, the contingency may or may
not occur
5. Amount of Payment of Claim - The amount of payment depends
upon the value of loss occurred due to the particular insured risk. The
insurance is there upto that amount. In life insurance insurer pay a fixed
sum on the happening of an event or within a specified time period.

Example – In fire insurance, if fire occurs and half the property is

destroyed, but the whole property is insured, then payment of claim
will be made only for that half building that is destroyed not the
whole amount of insured.

6. Insurance is different from Charity - In charity, there is no

consideration but insurance is not given without premium
7. Large number of Insured Person - Insurance is spreading of loss
over a large number of persons. Larger the number of persons, lower the
cost of insurance and amount of premium and incase lower the number
of persons, higher the cost of insurance and amount of premium.
8. Insurance is different from Gambling - In gambling, there is no
guarantee of gain, by bidding the person expose himself to risk of losing.
Whereas in insurance, by getting insured his life and property, he protect
himself against the risk of loss.

Functions of Insurance
Functions of insurance can be divided into parts;
I Primary functions.
 II Secondary functions.

I Primary Functions
1. Certainty of compensation of loss: Insurance provides
certainty of payment at the uncertainty of loss. The elements of
uncertainty are reduced by better planning and administration. The
insurer charges premium for providing certainty.
2. Insurance provides protection : The main function of
insurance is to provide protection against risk of loss. The insurance
policy covers the risk of loss. The insured person is indemnified for the
actual loss suffered by him. Insurance thus provide financial
protection to the insured. Life insurance policies may also be used as
collateral security for raising loans.
3. Risk sharing : All business concerns face the problem of risk. Risk
and insurance are interlinked with each other. Insurance, as a device
is the outcome of the existence of various risks in our day to day life.
It does not eliminate risks but it reduces the financial loss caused by
risks. Insurance spreads the whole loss over the large number of
persons who are exposed by a particular risk.
II Secondary Functions
1. Prevention of losses : The insurance companies help in
prevention of losses as they join hands with those institutions which
are engaged in loss prevention measures. The reduction in losses
means that the insurance companies would be required to pay lesser
compensations to the assured and manage to accumulate more
savings, which in turn, will assist in reducing the premiums
2. Providing funds for investment : Insurance provide capital
for society. Accumulated funds through savings in the form of
insurance premium are invested in economic development plans or
productivity projects.
3. Insurance increases efficiency : The insurance eliminates the
worries and miseries of losses. A person can devote his time to other
important matters for better achievement of goals. Businessman feel
more motivated and encouraged to take risks to enhance their profit
earning. This also helps in improving their efficiencies.
 4. Solution to social problems : Insurance take care of many
social problems. We have insurance against industrial injuries, road
accident, old age, disability or death etc.
5. Encouragement of savings : Insurance not only provides
protection against risks but also a number of other incentives which
encourages people to insure. Since regularity and punctuality pf
payment of premium is a perquisite for keeping the policy in force,
the insured feels compelled to save.
Principles of Insurance
The basic principles which govern the insurance are -
(1) Utmost good faith
(2) Insurable interest
(3) Indemnity
(4) Contribution
(5) Subrogation
(6) Causa proxima
(7) Mitigation of loss
1. Principle of utmost good faith : A contract of insurance is a
contract of ‘Uberrimae Fidei’ i.e., of utmost good faith. Both insurer
and insured should display the utmost good faith towards each other in
relation to the contract. In other words, each party must reveal all
material information to the other party whether such information is
asked or not. There should not be any fraud, non disclosure or
misrepresentation of material facts.
Example – in case of life insurance, the insured must revel the true
age and details of the existing illness/diseases. If he does not disclose
the true fact while getting his life insured, the insurance company can
avoid the contract.
Similarly, incase of the insurance of a building against fire, the insured
must disclose the details of the goods stored, if such goods are of
hazardous nature
A material fact means important facts which would influence the
judgment of the insurer in fixing the premium or deciding whether he
 should accept the risk, on what terms. All material facts should be
disclosed in true and full form
2. Principle of Insurable Interest: This principle requires that
the insured must have a insurable interest in the subject matter of
insurance. Insurance interest means some pecuniary interest in the
subject matter of contract of insurance. Insurance interest is that
interest, when the policy holders get benefited by the existence of the
subject matter and loss if there is death or damage to the subject
matter.
For example – In life insurance, a man cannot insured the life of a
stranger as he has no insurable interest in him but he can get insured
the life of himself and of persons in whose life he has a pecuniary
interest. So in the life insurance interest exists in the following cases:-
- Husband in the life of his wife and wife in the life of her husband
- Parents in the life of a child if there is pecuniary benefit derived
from the life of a Child
- Creditor in the life of debtor
- Employer in the life of an employee
- Surety in the life of a principle debtor
In life insurance, insurable interest must be present at the time
when the policy is taken. In fire insurance, it must be present at the time of
insurance and at the time if loss if subject matter. In marine insurance, it
must be present at the time of loss of the subject matter.
3. Principle of Indemnity : This principle is applicable in case of
fire and marine insurance only. It is not applicable in case of life,
personal accident and sickness insurance. A contract of indemnity
means that the insured in case of loss against which the policy has
been insured, shall be paid the actual cost of loss not exceeding the
amount of the insurance policy. The purpose of contract of insurance
is to place the insured in the same financial position, as he was before
the loss.
Example – A house is insured against fire for Rs. 50000. It is burnt down
and found that the expenditure of Rs. 30000 will restore it to its
original condition. The insurer is liable to pay only Rs. 30000.
 In life insurance, principle of indemnity does not apply as there is no
question of actual loss. The insurer is required to pay a fixed amount
upon in advance in the event of accident, death or at the expiry of the
fixed term of the policy. Thus, a contract of a life insurance is a
contingent contract and not a contract of indemnity.
4. Principle of Contribution: The principle of contribution is a
corollary to the doctrine of indemnity. It applies to any insurance which
is a contract of indemnity. So it does not apply to life insurance. A
particular property may be insured with two or more insurers against
the same risks. In such cases, the insurers must share the burden of
payment in proportion to the amount insured by each. If one of the
insurer pays the whole loss, he is entitled to contribution from other
insurers

Example – B gets his house insured against fire for Rs. 10000 with insurer
P and for Rs. 20000 with insurer Q. a loss of Rs. 15000 occurs, P is
liable to pay for Rs. 5000 and Q is labile to pay Rs 10000. If the whole
amount pf loss is paid by Q, then Q can recover Rs. 5000 from P. The
liability of P &Q will be determined as under:

Sum insured with Individual insurer (i.e. P or Q ) x Actual Loss =

Total sum insured

Liability of P = 10000 x 15000 =

Rs.5000
30000

Liability of Q = 20000 x 15000 =

Rs.10000
30000
The right of contribution arises when:
(a) There are different policies which related to the same subject
matters;
(b) The policies cover the same period which caused the loss;
 (c) All the policies are in force at the time of loss; and
(d) One of the insurer has paid to the insured more than his share
of loss.
5. Principle of Subrogation : The doctrine of subrogation is a
collorary to the principle of indemnity and applies only to fire and
marine insurance. According to doctrine of subrogation, after the
insured is compensated for the loss caused by the damage to the
property insured by him, the right of ownership to such property
passes to the insurer after settling the claims of the insured in respect
of the covered loss.
Example – Furniture is insured for Rs. 1 lacs against fire, it is burnt
down and the insurer pays the full value of Rs. 1 Lacs to the insured,
later on the damage Furniture is sold for Rs. 10000. The insurer is
entitled to receive the sum of Rs. 10000.
A loss may occur accidentally or by the action or negligence of third
party. If the insured suffer a loss because of action of third party and
he is in a position to recover the loss from the insurer then insured can
not take action against third party, his right is subrogated
(substituted) to the insurer on settlement of the claim. The insurer,
therefore, can recover the claim from the third party.
If the insured recovers any compensation for the loss (due to third
party), from the third party, after he has already been indemnified by
the insurer, he holds the amount of such compensation as the trustee
if the insurer.
The insurer is entitled to the benefits out of such rights only to the
extent of the amount he has paid to the insured as compensation
6. Principle of Causa Proxima : Causa proxima, means
proximate cause or cause which, in a natural and unbroken series of
events, is responsible for a loss or damage. The insurer is liable for
loss only when such a loss is proximately caused by the peril insured
against. The cause should be the proximate cause and can not the
remote cause. If the risk insured is the remote cause of the loss, then
the insurer is not bound to pay compensation. The nearest cause
should be considered while determining the liability of the insured.
The insurer is liable to pay if the proximate cause is insured.
 Example – In a marine insurance policy, the goods were insured
against damage by sea water, some rats on the board made a hole in a
bottom of the ship causing sea water to pour into the ship and damage
the goods. Here, the proximate cause of loss is sea water which is
covered by the policy and the hole made by the rats is a remote
cause. Therefore, the insured can recover damage from the insurer
Example – A ship was insured against loss arising from collision. A
collision took palce resulting in a few days delay. Because of the
delay, a cargo of oranges becomes unsuitable for human consumption.
It was held that the insurer was not liable for the the loss because the
proximate cause of loss was delay and not the collision of the ship.
7. Principle of Mitigation of Loss: An insured must take all
reasonable care to reduce the loss. We must act as if the property was
not insured.
Example – If a house is insured against fire, and there is accidental
fire, the owner must take all reasonable steps to keep the loss
minimum. He is supposed to take all steps which a man of ordinary
prudence will take under the circumstances to save the insured
property.
Benefits of Insurance or Role and Importance of Insurance
Benefit of insurance can be divided into these categories -
1. Benefits to Individual
2 Benefits to Business or Industry
3. Benefits to the Society
It can be explained as under -
1. Benefits to Individual
(a) Insurance provides security & safety : Insurance gives a
sense of security to the policy holder. Insurance provide security and
safety against the loss of earning at death or in old age, against the
loss at fire, against the loss at damage, destruction of property,
goods, furniture etc.
Life insurance provides protection to the dependents in case of death
of policyholders and to the policyholder in old age. Fire insurance
insured the property against loss on a fire. Similarly other insurance
 provide security against the loss by indemnifying to the extent of
actual loss.
(b) Encourage Savings : Life insurance is best form of saving. The
insured person must regularly save out of his current income an
amount equal to the premium to be paid otherwise his policy get
lapsed if premium is not paid on time.
(c) Providing Investment Opportunity : Life insurance provide
different policies in which individual can invest smoothly and with
security; like endowment policies, deferred annuities etc. There is
special exemption in the Income Tax, Wealth Tax etc. regarding this
type of investment
2 Benefits to Business or Industry
(a) Shifting of Risk : Insurance is a social device whereby
businessmen shift specific risks to the insurance company. This helps
the businessmen to concentrate more on important business issues.
(b) Assuring Expected Profits : An insured businessman or
policyholder can enjoy normal expected profits as he would not be
required to make provisions or allocate funds for meeting future
contingencies.
(c) Improve Credit Standing : Insured assets are easily accepted
as security for loans by the banks and financial institutions so
insurance improve credit standing of the business firm
(d) Business Continuation – With the help of property insurance,
the property of business is protected against disasters and chance of
closure of business is reduced
3. Benefits to the Society
(a) Capital Formation : As institutional investors, insurance
companies provide funds for financing economic development. They
mobilize the saving of the people and invest these saving into more
productive channels
(b) Generating Employment Opportunities : With the growth
of the insurance business, the insurance companies are creating more
and more employment opportunities.
 (c) Promoting Social Welfare : Policies like old age pension
scheme, policies for education, marriage provide sense of security to
the policyholders and thus ensure social welfare.
(d) Helps Controlling Inflation : The insurance reduces the
inflationary pressure in two ways, first, by extracting money in supply
to the amount of premium collected and secondly, by providing funds
for production narrow down the inflationary gap.
Type of Insurance
Insurance cover various types of risks and include various insurance
policies which provide protection against various losses.
There are two different views regarding classification if insurance:-
I. From the business point of view; and
II From the risk points of view
I. Business point of view
The insurance can be classified into three categories from business point of
view
1. Life insurance;
2. General Insurance; and
3. Social Insurance.
1. Life Insurance: The life insurance contract provide elements of
protection and investment after getting insurance, the policyholder
feels a sense of protection because he shall be paid a definite sum at
the death or maturity. Since a definite sum must be paid, the element
of investment is also present. In other words, life insurance provides
against pre-mature death and a fixed sum at the maturity of policy. At
present, life insurance enjoys maximum scope because each and every
person requires the insurance.
Life insurance is a contract under which one person, in consideration
of a premium paid either in lump sum or by monthly, quarterly, half
yearly or yearly installments, undertakes to pay to the person (for
whose benefits the insurance is made), a certain sum of money either
on the death of the insured person or on the expiry of a specified
period of time.
 Life insurance offers various polices according to the
requirement of the persons -
- Term Assurance
- Whole Life
- Endowment Assurance
- Family Income Policy
- Life Annuity Joint Life Assurance
- Pension Plans
- Unit Linked Plans
- Policy for maintenance of handicapped dependent
- Endowment Policies with Health Insurance benefits
2. General Insurance: The general insurance includes property
insurance, liability insurance and other form of insurance. Property
insurance includes fire and marine insurance. Property of the
individual and business involves various risks like fire, theft etc. This
need insurance Liability insurance includes motor, theft, fidelity and
machine insurance

Type of General Insurance policies available are -

- Health Insurance
- Medi- Claim Policy
- Personal Accident Policy
- Group Insurance Policy
- Automobile Insurance
- Worker’s Compensation Insurance
- Liability Insurance
- Aviation Insurance
- Business Insurance
- Fire Insurance Policy
 - Travel Insurance Policy
3. Social Insurance: Social insurance provide protection to the
weaker sections of the society who are unable to pay the premium. It
includes pension plans, disability benefits, unemployment benefits,
sickness insurance and industrial insurance.
II Risk Points of View
The insurance can be classified into three categories from Risk point
of view
1. Property Insurance
2. Liability Insurance
3. Other forms of Insurance
1. Property Insurance: Property of the individual and business is
exposed to risk of fire, theft marine peril etc. This needs insurance.
This is insured with the help of:-
(i) Fire Insurance
(ii) Marine Insurance
(iii) Miscellaneous Insurance
(i) Fire Insurance: Fire insurance covers risks of fire. It is
contract of indemnity. Fire insurance is a contract under which the
insurer agrees to indemnify the insured, in return for payment of
the premium in lump sum or by instalments, losses suffered by the
him due to destruction of or damage to the insured property,
caused by fire during an agreed period of time. It includes losses
directly caused through fire or ignition. There are various types of
fire insurance policies.
- Consequential loss policy
- Comprehensive policy
- Valued policy
- Valuable policy
- Floating policy
- Average policy
 (ii) Marine Insurance: Marine insurance is an arrangement by
which the insurer undertakes to compensate the owner of the ship
or cargo for complete or partial loss at sea. So it provides
protection against loss because of marine perils. The marine perils
are collisions with rock, ship attack by enemies, fire etc. Marine
insurance insures ship, cargo and freight.
The following kinds of marine policies are -
- Voyage policy
- Time policy
- Valued policy
- Hull Policy
- Cargo Policy
- Freight Policy
(iii) Miscellaneous Insurance: It includes various forms of
insurance including property insurance, liability insurance, personal
injuries are also insured. The property, goods, machine, furniture,
automobile, valuable goods etc. can be insured against the damage
or destruction due to accident or disappearance due to theft.
Miscellaneous insurance covers
- Motor
- Disability
- Engineering and aviation risks
- Credit insurance
- Construction risks
- Money Insurance
- Burglary and theft insurance
- All risks insurance
2. Liability Insurance: The insurer is liable top pay the damage of
the property or to compensate the loss of personal injury or death. It
includes fidelity insurance, automobile insurance and machine
insurance.
The following are types of liability Insurance:-
 - Third party insurance
- Employees insurance
- Reinsurance
3. Other forms of Insurance: It include export credit insurance,
state employee insurance etc. whereby the insurer guarantees to pay
certain amount at the happening of certain events.
The following are other form of Insurance-
- Fidelity Insurance
- Credit Insurance
- Privilege Insurance

The Contract of Insurance is a contract whereby a person undertakes to indemnify another against
a loss arising on the happening of an event or to pay a sum of money on the happening of an event.
The person who insures is called “Insurer”. The person who effects the insurance is called
the “Insured” or “Assured”. The price for the risk undertaken by the insurer and paid by the insured to
the insurer is called “Premium” and the document which contains the contract of insurance is
called “Policy”.

Following are the general principles of contract of insurance:

1. Uberrimae Fidei: A contract of insurance is a contract uberrimae fidei, i.e. a contract

requiring utmost good faith of the parties. So, all material facts which are likely to influence the
insurer in deciding the amount of premium payable by the insured must be disclosed by the
insured. Failure to disclose material facts renders the contract voidable at the option of the
insurer.
2. Insurable Interest: The assured must have, what is called “insurable interest” in the subject
matter of the contract of insurance. “He must be so situated with regard to the thing insured that
he would have benefit from its existence, loss from its destruction”.
3. Indemnity: Every contract of insurance such as life insurance and personal accident and
sickness insurance, is a contract of indemnity. So, the insurer pays the actual loss suffered by the
insured. He does not pay the specified amount unless this amount is the actual loss to the
insured.
4. Mitigation of Loss: The insured must take reasonable precautions to save the property, in the
event of some mishap to the insured property. He must act as a prudent uninsured person would
act in his own case under similar circumstances to mitigate or minimize losses.
5. Risk must Attach: The insurer must run the risk of indemnifying the insured. If he does not run
the risk, the consideration for which the premium is paid, fails and consequently, he must return
the premium paid by the insured.
6. Causa Proxima: The insurer is liable for loss which is proximately caused by the risk
insured against. The rule is “causa proxima non remota spectatur”, i.e. the proximate but not the
remote cause is to be looked to. So, the loss must be proximately caused in order that the insurer
is to become liable.
 7. Period of Insurance: Except in the case of life insurance, every contract of insurance comes to
an end of the expiry of every year, unless the insured continues the same and pays the premium
before the expiry of the year.
8. Subrogation: According to the rule of subrogation, when the loss is caused to the insured by
the conduct of a third party, the insurer shall have to make good such loss and then have a right
to step into the shoes of the insured and bring an action against such third party who caused the
loss to the insured. This right of subrogation is enforceable only when there is an assignment of
cause of action by the insured in favour of the insurer. The doctrine of subrogation does not apply
to life insurance.
9. Contribution: Where there are two or more insurances on one risk, the principle of
contribution applies as between different insurers. The aim of contribution is to distribute the
actual amount of loss among the different insurers who are liable for the same risk under different
policies in respect of the same subject-matter. In case of loss, any one insurer may pay to the
assured the full amount of the loss covered by the policy. Having paid this amount, he is entitled
to contribution from his coinsurers in proportion to the amount which each has undertaken to pay
in case of loss of the same subject-matter.

Meaning of Insurance : 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.

Definition : 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 'assurer' and the party whose risk is covered is known as the
'insured' or 'assured'.

Concept of Insurance / How Insurance Works

The concept behind insurance is that a group of people exposed to similar risk come together and make contributions
towards formation of a pool of funds. In case a person actually suffers a loss on account of such risk, he is
compensated out of the same pool of funds. Contribution to the pool is made by a group of people sharing common
risks and collected by the insurance companies in the form of premiums.

Lets take some examples to understand how insurance actually works:

Example 1 Example 2

SUPPOSE SUPPOSE

 Houses in a village = 1000  Number of Persons = 5000

 Value of 1 House = Rs. 40,000/-
 Houses burning in a yr = 5
 Total annual loss due to fire = Rs. 2,00,000/-
 Contribution of each house owner = Rs. 300/-
 Age and Physical condition = 50 years &
Healthy
 Number of persons dying in a yr = 50
 Economic value of loss suffered by family of
each dying person = Rs. 1,00,000/-
  Total annual loss due to deaths = Rs.
50,00,000/-
 Contribution per person = Rs. 1,200/-

UNDERLYING ASSUMPTION UNDERLYING ASSUMPTION

All 1000 house owners are exposed to a common risk, All 5000 persons are exposed to common risk, i.e. death
i.e. fire

PROCEDURE PROCEDURE
All owners contribute Rs. 300/- each as premium to the Everybody contributes Rs. 1200/- each as premium to
pool of funds the pool of funds
↓ ↓
Total value of the fund = Rs. 3,00,000 (i.e. 1000 houses Total value of the fund = Rs. 60,00,000 (i.e. 5000
* Rs. 300) persons * Rs. 1,200)
↓ ↓
5 houses get burnt during the year 50 persons die in a year on an average
↓ ↓
Insurance company pays Rs. 40,000/- out of the pool to Insurance company pays Rs. 1,00,000/- out of the pool
all 5 house owners whose house got burnt to the family members of all 50 persons dying in a year

EFFECT OF INSURANCE EFFECT OF INSURANCE

Risk of 5 house owners is spread over 1000 house Risk of 50 persons is spread over 5000 people, thus
owners in the village, thus reducing the burden on any reducing the burden on any one person.
one of the owners.

Xxxxxxxxxxxxxxx

Application of general rules of Law of Contracts to Life

Insurance
A contract of insurance is a contract of utmost good faith technically known as uberrimae fide. The
doctrine of disclosing all material facts is embodied in this important principles, which applies to all
forms of insurance. The Proposer, who is one of the parties to the contract, is presumed to have
means of knowledge, which are not accessible to the insurer, who is the other party to the contract.
Therefore, the proposer is bound to tell the insurer, everything affecting the judgement of the insurer.
In all contract of insurance, the proposer is bound to make full disclosure of all material facts and not
merely those which he thinks material. Misrepresentation, non-disclosure or fraud in any document
leading to acceptance of the risk automatically discharges the insurer from all liabilities under the
contract.
 Application of General Rules of Law of Contracts to Life Insurance

A contract of life insurance is in many respects governed by the general law of contracts. There are
also some peculiar aspects relating to life insurance contracts. As a general rule the terms of
contracts are ascertained from the document embodying the contract. In Life Insurance, the policy is
the document which expresses the contract between the insurer and the insured. The contract
comes into existence when the proposal from a party is accepted by the insurer and the terms of the
acceptance are complied with by the party. The contract will have to be interpreted according to the
policy document, though in certain circumstances, the life assured may rely on the prospectus
published by the insurer.

 Offer and Acceptance: A contract of Life Insurance, like any other contract, begins with the
proposal (offer). If the insurer, after considering the proposal and other related information, is
willing to issue a policy, he sends a letter termed “letter of acceptance”. In the letter it is stated that
he will grant a policy provided remittance of the premium is received within a specified period and
the state of health of the prosper remains unchanged till the date of remittance of premium or date
of the letter of acceptance whichever is later. The letter of acceptance is a counter offer and the
proposer accepts the counter offer by paying the premium within the stipulated time. Offer and
acceptance constitute an agreement and an agreement enforceable by law is a contract. The
communication of a proposal is complete when it comes to the knowledge of the person to whom
it is made.
 Consideration: Consideration is something which moves from one party to the other in return for
what the other party give. In Life Insurance contract, the payment of the premium is consideration
for the contract on the part of the life assured and the undertaking of the insurer to pay a sum of
money when the claim arises is consideration on the part of the insurer.
 Capacity to Contract: The parties to an assurance contract must be capable of entering into
contracts. Every person is competent to contract who is of the age of majority, who is of sound
mind and is not disqualified from contracting by any law to which he is subject.
 Consent of the Parties to the Contract: Two or more persons are said to consent when they
agree upon the same thing in the same sense. Similarly, the parties to contract of Insurance, must
agree the terms of agreement in the same sense.
 Legality of Consideration and Object: Every agreement wherein the consideration or object is
unlawful is void. Therefore, for a valid contract there should be proper consideration and legally
valid object.

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Difference between Insurance Contract and Wagering
Contract
Insurance and wagering contracts are not one and the same. They both are different. When
the concept of insurance came into being, it was decided that the insurance is same as the
wagering contract. However, it was later viewed as a separate contract. Finally, it was clearly
said both the contracts, insurance and the wagering, are not the same and they are different.

Insurance Contract

The insurance contract is an indemnity contract. The insurance contract in here is not the
insurance contract of life, accident and any sickness. Here the contract of insurance seeks to
compensate the loss faced by the insured on happening of an event which is uncertain. In
case of life insurance, the amount payable on happening of death of the insured is agreed
and decided in advance.

Covering the loss occurred due to happening of an uncertain event of the insured is the main
aim behind the contract of insurance.

Insurable interest or pecuniary interest of the insured on the subject-matter is important in

the contract of insurance.

Utmost good faith is a fundamental element of insurance and this is most important in the
insurance contract.

It is legally enforceable. The aim behind this contract is pooling of risk and hence this is
encouraged legally.

Scientific calculations are performed to arrive at the premium amount.

Wagering Contract
The contract of indemnity can never be seen in a wagering contract. There is no scope of
covering any risk by the parties.

The aim of the contract of wagering is always to gain through speculation.

There is no pecuniary interest from the parties.

Good faith is never observed in here neither need to be observed.

This is void ab initio (from the beginning). It is against the public policy as it deals with the
speculative gains.

No scientific calculations are involved, this is just gambling.

Contract of Insurance

1. A contract of insurance is a contract to make good the loss of property (or life) of another person
against some consideration called premium.

2. In a contract of insurance the insured must have insurable interest. Without insurable interest it
will be a wagering agreement.

3. In a contract of insurance both the parties are interested in the protection of the subject matter,
i.e., there is mutuality of interest.

4. Except life insurance, a contract of insurance is a contract of indemnity, i.e. a contract to make
good the loss.

5. Contracts of insurance are based on scientific and actuarial calculation of risks.

Wagering Agreement

1. A wagering agreement is an agreement to pay money or money's worth on the happening of an

uncertain event.

2. No insurable interest is necessary in case of a wagering agreement.

3. In a wagering agreement there is conflict of interest and in reality there is no interest at all to
protect.

4. In case of a wagering agreement there is no question of indemnity. On the happening of the event
fixed amount becomes payable.

Wagering agreements are not based on such calculations and are in the nature of gambling.

Distinctions between an
insurance contract and a
wagering contract
A contract of insurance is a contract of indemnity and not a wagering, or gambling contract.(Sec.
25) White it is based on a contingency, it is not a contract of chance and is not used for profit. The
distinctions are the following:

Insurance Gambling
Contract contract
Parties seek to distribute loss by reason of Parties contemplate gain through mere chance or
mischance the occurrence of a contingent event.
Insured avoids misfortune. Gambler courts fortune
Tends to equalize fortune. Tends to increase the inequality of fortune.
What one insured gains is not at the expense of Essence is whatever one person wins from a
another insured. The entire group of insureds wager is lost by the other wagering party.
provides through the premiums paid, the funds
which make possible the payment of all claims;
Purchase of insurance does not create a new and As soon as a party makes a wager, he creates a
non-existing risk of loss to the purchaser. In risk of loss to himself where no such risk existed
purchasing insurance, the insurer faces an previously.
already existing risk of economic loss.
Similarities between an insurance
contract and a gambling contract?
They are similar in only one respect. In both, one party promises to pay a given sum to the other
upon the occurrence of a given future event, the promise being condition upon the payment of, or
agreement to pay, a stipulated amount by the other party to the contract.

In either case, one party may receive more, much more, than he paid or agreed to pay.
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Know your Rights and Duties

Print eMail

As a smart consumer, you should be aware of your duties and rights about your policy coverage and claims.

Duties:

When you buy a policy:

 Fill the proposal form yourself correctly and truthfully, it is the basis of the insurance contract
 Do not leave any column blank, do not sign a blank proposal form
 You will be responsible for any information in this document as it bears your signature. Disclose “all material
information” about the risk you want to cover
 Select the term of the policy as per your needs
 Select the amount of premium you can afford to pay
 Choose between Single Premium or Regular Premium
 Choose your premium paying frequency such as annual, half-yearly, quarterly or monthly
  Opt for electronic payment of your premium (ECS) for your convenience, safety and records
 Ensure to register nomination under your policy. Fill the nominee’s name correctly

After you buy the policy:

 Once the proposal is submitted, you should hear from the insurance company in 15 days
 If not, take up the matter in writing
 If any additional documents are asked for, comply immediately
 Once the proposal is accepted by the insurance company, the policy bond should reach you within a
reasonable amount of time
 If not contact the insurance company about it
 When policy bond is received, check it and be sure that the policy is the one that you wanted.
 Go through all the policy conditions and be sure that these are the same that were explained to you by the
intermediary/ insurance company official at the time of sale
 In case of doubts, contact the intermediary/ insurance company official immediately for clarification.
 If necessary contact the insurance company directly

Maintaining the policy:

 Pay your premium regularly on the due dates/ within the grace period
 Do not wait for a premium notice. It is only a courtesy. It is your duty to pay the premium to avoid lapsation
or other penalties
 Do not wait for your intermediary or anyone to pick your cheque up. Make your own arrangement for paying
the premium on time
 If there is a change of address, please intimate the insurance company immediately.

Nomination:

 After the policy is issued, you can change the nomination by:
 Filling a notice of change of nomination and
 Sending them to the insurance company for them to register it in their records
 If the nominee is a minor, appoint an appointee to receive any claim paid while the nominee is still a minor
 Get the appointee to sign in the endorsement showing consent to act as an appointee

If your policy lapses:

 If you fail to pay the premium in time, your policy may lapse. Contact the insurance company for reviving it.

If you lose your policy:

 If you lose your policy bond, report it to the insurance company immediately
 Get a duplicate policy by complying with the formalities
  The duplicate policy confers the same rights as the original policy bond

At the time of a claim:

 Comply with all the requirements of the insurance company

 Whenever required, you should help the insurer in a prosecution or for recovery of claims which the insurer
has against third parties

Rights:

You have the right to

 Cancel a life insurance policy within 15 days from the date of receipt of the policy document. If you disagree
to any of the terms or conditions in the policy
 You can
o Return the policy stating the reasons for objection
o You will be entitled to a refund of the premium paid
o A proportionate risk premium for the period on cover and the expenses incurred by the insurer on
medical examination and stamp duty charges will be deducted
o If it is a unit linked insurance policy (ULIP) in addition, the insurer can repurchase the units at the
price on the cancellation date

ULIPs

 You have the right to partial withdrawal

 You have the right to switch funds
 You can surrender the policy after the lock-in period from the date of commencement of the policy
 The nominee/assignee under a life insurance policy has the right to the death claim amount
 You can ask for alterations in the policy such as:
o Mode of payment of premium
o Term of the policy
o Increase in sum assured and
o Premium redirection

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What is the Role and Importance of Insurance?

Advertisements:
The process of insurance has been evolved to safeguard the interests of people from uncertainty by
providing certainty of payment at a given contingency. The insurance principle comes to be more and
more used and useful in modern affairs.

Not only does it serve the ends of individuals, or of special groups of individuals, it tends to pervade
and to transform our modern social order, too. The role and importance of insurance, here, has been
discussed in three phases: (i) uses to individual, (ii) uses to a special group of individuals, viz., to
business or industry, and (iii) uses to the society.

Uses to an individual :
1. Insurance provides Security and Safety:

The insurance provides safety and security against the loss on a particular event. In case of life
insurance payment is made when death occurs or the term of insurance is expired. The loss to the
family at a premature death and payment in old age are adequately provided by insurance. In other
words, security against premature death and old age sufferings are provided by life insurance.

Similarly, the property of insured is secured against loss on a fire in fire insurance. In other
insurance, too, this security is provided against the loss at a given contingency.

The insurance provides safety and security against the loss of earning at death or in golden age,
against the loss at fire, against the loss at damage, destruction or disappearance of property, goods,
furniture and machines, etc.

2. Insurance affords Peace of Mind:

The security wish is the prime motivating factor. This is the wish which tends to stimulate to more
work, if this wish is unsatisfied, it will create a tension which manifests itself to the individual in the
form of an unpleasant reaction causing reduction in work.

The security banishes fear and uncertainty, fire, windstorm, auto-mobile accident, damage and death
are almost beyond the control human agency and in occurrence of any of these events may frustrate
or weaken the human mind. By means of insurance, however, much of the uncertainty that centers
about the wish for security and its attainment may be eliminated.

3. Insurance protects Mortgaged Property:

At the death of the owner of the mortgaged property, the property is taken over by the lender of
money and the family will be deprived of the uses of the property. On the other hand, the mortgagee
wishes to get the property insured because at the damage or destruction of the property he will lose
his right to get the loan replayed.

The insurance will provide adequate amount to the dependents at the early death of the property-
owner to pay off the unpaid loans. Similarly, the mortgagee gets adequate amount at the destruction
of the property.

4. Insurance eliminates dependency:

At the death of the husband or father, the destruction of family needs no elaboration. Similarly, at
destruction of, property and goods, the family would suffer a lot. It brings reduced standards of living
and the suffering may go to any extent of begging from the relatives, neighbors or friends.

The economic independence of the family is reduced or, sometimes, lost totally. What can be more
pitiable condition than this that the wife and children are looking others more benevolent than the
husband and father, in absence of protection against such dependency? The insurance is here to
assist them and provides adequate amount at the time of sufferings.

5. Life Insurance encourages saving:

The elements of protection and investment are present only in case of life insurance. In property
insurance, only protection element exists. In most of the life policies elements of saving
predominates. These policies combine the programs of insurance and savings.

The saving with insurance has certain extra advantages

(i) Systematic saving am possible because regular premiums are required to be compulsorily paid.
The saving with a bank is voluntary and one can easily omit a month or two and then abandon the
program entirely.

(ii) In insurance the deposited premium cannot be withdrawn easily before the expiry of the term of
the policy. As contrast to this, the saving which can be withdrawn at any moment will finish within
no time.

(iii) The insurance will pay the policy money irrespective of the premium deposited while in case of
bank-deposit; only the deposited amount along with the interest is paid. The insurance, thus,
provides the wished amount of insurance and the bank provides only the deposited amount,

(iv) The compulsion or force to premium in insurance is so high that if the policy-holder fails to pay
premiums within the days of grace, he subjects his policy to causation and may get back only a very
nominal portion of the total premiums paid on the policy.

For the preservation of the policy, he has to try his level best to pay the premium. After a certain
period, it would be a part of necessary expenditure of the insured. In absence of such forceful
compulsion elsewhere life insurance is the best media of saving.

6. Life Insurance provides profitable Investment:

Individuals unwilling or unable to handle their own funds have been pleased to find an outlet for
their investment in life insurance policies. Endowment policies, multipurpose policies, deferred
annuities are certain better form of investment.

The elements of investment i.e., regular saving, capital formation, and return of the capital along
with certain additional return are perfectly observed, in life insurance.

In India the insurance policies carry a special exemption from income-tax, wealth tax, and gift tax
and estate duty. An individual from his own capacity cannot invest regularly with enough of security
and profitability. The life insurance fulfils all these requirements with a lower cost. The beneficiary of
the policy-holder can get a regular income from the life-insurer; if the insured amount is left with
him.

7. Life Insurance fulfils the needs of a person:

The needs of a person are divided into (A) Family needs, (B) Old-age needs, (C) Re-adjustment
needs, (D) Special needs, (E) The clean-up needs.

(A) Family Needs:

Death is certain, but the time is uncertain. So, there is uncertainty of the time when the sufferings
and financial stringencies may be fall on the family. Moreover, every person is responsible to provide
for the family.

It would be a more pathetic sight in the world to see the wife and children of a man looking for
someone more considerate arid benevolent than the husband or the father, who left them
unprovoked.

Therefore, the provision for children up to their reaching earning period and for widow up to long
life should he made. Any other provision except life insurance will not adequately meet this financial
requirement of the family. Whole life policies are the better means of meeting such requirements.

(B) Old-age heeds:

The provision for old-age is required where the person is surviving more than his earning period. The
reduction of income in old-age is serious to the person and his family.

If no other family member starts earning, they will be left with nothing and if there is no property, it
would be more piteous state. The life insurance provides old age funds along with the protection of
the family by issuing various policies.

(C) Re-adjustment Needs:

At the time of reduction in income whether by loss of unemployment, disability, or death,

adjustment in the standard of living of family is required. The family members will have to be
satisfied with meager income and they have to settle down to lower income and social obligations.

Before coming down to the lower standard and to be satisfied with that, they require certain
adjustment income so that the primary obstacles may be reduced to minimum. The life insurance
helps to accumulate adequate funds. Endowment policy anticipated endowment policy and
guaranteed triple benefit policies are seemed to be a good substitute for old age needs.

(D) Special Needs:

There is certain special requirement of the family which is fulfilled by the earning member of the
family. If the member becomes disable to earn the income due to old age or death, those needs may
remain unfulfilled and the family will suffer.

(i) Need for Education. There are certain insurance policies, and annuities which are useful for
education of the children irrespective of the death or survival of the father or guardian.

(ii) Marriage. The daughter may remain unmarried in case of father's death or in case of inadequate
provision for meeting the expenses of marriage. The insurance can provide funds for the marriage if
policy is taken for the purpose.

(iii) Insurance needs for settlement of children. After education, settlement of children takes time
and in absence of adequate funds, the children cannot be well placed and all the education go to
waste.

(E) Clean-up funds:

After death, ritual ceremonies, payment of wealth taxes and income taxes are certain requirements
which decrease the amount of funds of the family member. Insurance comes to help for meeting
these requirements. Multipurpose policy, education and marriage policies, capital redemption
policies are the better policies for the special needs.
Uses to business :

The insurance has been useful to the business society also. Some of the uses are discussed below:

1. Uncertainty of business losses is reduced:

In world of business, commerce and industry a huge number of properties are employed. With a
slight slackness or negligence, the property may be turned into ashes. The accident may be fatal not
only to the individual or property but to the third party also. New construction and new
establishment are possible only with the help of insurance.

In absence of it, uncertainty will be to the maximum level and nobody would like to invest a huge
amount in the business or industry. A person may not be sure of his life and health and cannot
continue the business up to longer period to support his dependents. By purchasing policy, he can be
sure of his earning because the insurer will pay a fed amount at the time of death.

Again, the owner of a business might foresee contingencies that would bring great loss. To meet such
situations they might decide to set aside annually a reserve, but it could not be accumulated due to
death. However, by making an annual payment, to secure immediately, insure policy can be taken.

2. Business-efficiency is increased with insurance:

When the owner of a business is free from the botheration of losses, he will certainly devote much
time to the business. The care free owner can work better for the maximisation of the profit. The new
as well as old businessmen are guaranteed payment of certain amount with the insurance policies at
the death of the person; at the damage, destruction or disappearance of the property or goods.

The uncertainty of loss may affect the mind of the businessmen adversely. The insurance, removing
the uncertainty, stimulates the businessmen to work hard.

3. Key Man Indemnification:

Key man is that particular man whose capital, expertise, experience, energy, ability to control,
goodwill and dutifulness make him the most valuable asset in the business and whose absence will
reduce the income of the employer tremendously and up to that time when such employee is not
substituted.

The death or disability of such valuable lives will, in many instances, prove a more serious loss than
that by fire or any hazard. The potential loss to be suffered and the compensation to the dependents
of such employee require an adequate provision which is met by purchasing adequate life-policies.

The amount of loss may be up to the amount of reduced profit, expenses involved in appointing and
training, of such persons and payment to the dependents of the key man. The Term Insurance Policy
or Convertible Term Insurance Policy is more suitable in this case.

4. Enhancement of Credit:

The business can obtain loan by pledging the policy as collateral for the loan. The insured persons
are getting more loans due to certainty of payment at their deaths. The amount of loan that can be
obtained with such pledging of policy, with interest thereon will not exceed the cash value of the
policy. In case of death, this value can be utilised for setting of the loan along with the interest.

If the borrower is unwilling to repay the loan and interest, the lender can surrender the policy and
get the amount of loan and interest thereon repaid. The redeemable debentures can be issued on the
collateral of capital redemption policies. The' insurance properties are the best collateral and
adequate loans are granted by the lenders.

5. Business Continuation:

In any business particularly partnership business may discontinue at the death of any partner
although the surviving partners can restart the business, but in both the cases the business and the
partners will suffer economically.

The insurance policies provide adequate funds at the time of death. Each partner may be insured for
the amount of his interest in the partnership and his dependents may get that amount at the death of
the partner.

With the help of property insurance, the property of the business is protected against disasters and
the chance of disclosure of the business due to the tremendous waste or loss.

6. Welfare of Employees:

The welfare of employees is the responsibility of the employer. The former are working for the latter.
Therefore, the latter has to look after the welfare of the former which can be provision for early
death, provision for disability and provision for old age.

These requirements are easily met by the life insurance, accident and sickness benefit, and pensions
which are generally provided by group insurance. The premium for group insurance is generally paid
by the employer. This plan is the cheapest form of insurance for employers to fulfill their
responsibilities.

The employees will devote their maximum capacities to complete their jobs when they are assured of
the above benefits. The struggle and strife between employees and employer can be minimised easily
with the help of such schemes.

Uses of society :

Some of the uses of insurance to society are discussed in the following sections.

1. Wealth of the society is protected :

The loss of a particular wealth can be protected with the insurance. Life insurance provides loss of
human wealth. The human material, if it is strong, educated and care-free, will generate more
income.

Similarly, the loss of damage of property at fire, accident, etc., can be well indemnified by the
property insurance; cattle, crop, profit and machines are also protected against their accidental and
economic losses.

With the advancement of the society, the wealth or the property of the society attracts more
hazardous and, so new types of insurance are also invented to protect them against the possible
losses.

Each and every member will have financial security against old age, death, damage, destruction and
disappearance of his wealth including the life wealth. Through prevention of economic losses,
instance protects the society against degradation.

Through stabilization and expansion of business and industry, the economic security is maximised.
The present, future and potential human and property resources are well-protected. The children are
getting expertise education, working classes are free from botherations and older people are guiding
at ease. The happiness and prosperity are observed everywhere with the help of insurance.

2. Economic Growth of the Country:

For the economic growth of the country, insurance provides strong hand and mind, protection
against loss of property and adequate capital to produce more wealth. The agriculture will experience
protection against losses of cattle, machines, tools and crop.

This sort of protection stimulates more production hi agriculture, in industry, the factory premises,
machines, boilers and profit insurances provide more confidence to start and operate the industry
welfare of employees create a conducive atmosphere to work: Adequate capital from insurers
accelerate the production cycle.

Similarly in business, too, the property and human material are protected against certain losses;
capital and credit are expanded with the help of insurance. Thus, the insurance meets all the
requirements of the economic growth of a country.

3. Reduction in Inflation:

The insurance reduces the inflationary resource in two ways. First, by extracting money in supply to
the amount of premium collected and secondly, by providing sufficient funds for production narrow
down the inflationary gap.

With reference to Indian context it has been observed that about 5.0 per cent of the money in supply
was collected in form of premium.

The share of premium contributed to the total investment of the country was about 10.0 per cent.
The two main causes of inflation, namely, increased money in supply and decreased production are
properly controlled by insurance business, Insurance Need and Selling.