WELCOME

Contract of
Insurance…..
 INSURANCE
Insurance is a contract to pay
compensation in certain eventualities
(e.g., death, fire, theft, motor
accident) in return for a premium.
The premiums are so calculated that
on average, in total, they are
sufficient to pay compensation for
policy holders who will make a claim,
together with a margin to cover
administration costs and profit.
- ECONOMIST” DICTIONARY OF BUSINESS
• Risk and uncertainty are incidental to
life. Man may meet untimely death.

• He may suffer from accident, destruction

of property, fire, floods, earthquakes and
other natural calamities.

• Whenever there is uncertainty, there is

risk as well as insecurity. It is to
provide against risk and insecurity that
insurance came in to being.
i n s u r a n c e ...
• The main principle underlying
insurance is the pooling of risks.
It is thus a co-operative devise to
spread the loss caused by a risk
( which is covered by insurance)
over a large number of persons who
are also exposed to the same risk
and themselves against that risk.
 PREMIUM

• The consideration for which

the
insurer undertakes to
indemnify
the assured against the risk
is
called the premium.
 INSURER & INSURED

• The person undertakes the risk is called

the insurer , assuror or underwriter.

• The person whose loss is to be made

good is called the insured or assured.
 POLICY

• The instrument in which the

contract of insurance is generally
embodied is called the ‘policy’.

• The policy is not the

contract;
..it is the evidence of the
contract.
Subject matter of insurance and
insurable interest
• The thing or property insured is
called the ‘subject matter of
insurance ’, and the interest of the
assured in the subject-matter is
called his ‘insurable interest’.
PERILS INSURED AGAINST

• That which insured against is the

loss arising from uncertain events
or casualties, i.e., destruction of or
damage to the property or the death
or disablement of a person, and
these are called ‘perils insured
against.’
 HISTORY
• Over 4,000 years ago
• Hammurabi, King of ancient
Babylon.
• The Romans.
• The Greeks
• Indian Insurance
 INTRODUCTION &
INSURANCE CONTRACT
 INTRODUCTION
The Indian insurance law is the product of
•
various legislations made on the basis of the
English law of insurance.
The enactment of Indian Life Assurance
•
Companies Act, 1912 based on the English
Act of 1909 to deal with life insurance
 In the initial stages, the insurance
•
business was governed by the
provision of the Companies Law.
Later a draft bill was introduced with
•
an aim to consolidate the laws of
insurance, applicable to all the types of
insurance business.
•Marine Insurance Act,
1963.
•Public Liability Act,
1991
•Motor Vehicle Act, 1988.
 Wagering Agreement
• Insurance is the law’s attempt to socialize
responsibility.
• Lord Mansfield described it as a ‘contract on
speculation”, which in legal sense means a
wagering agreement.
• Wagering agreement is one in which a person
promises to pay money or transfer property
upon the happening or non happening of an
uncertain event.
 Difference Between-
Insurance and Wager
1.Contract of insurance 1.In case of wagering
(except life, accident and agreement, however,
sickness insurances) is a there is no question
contract of indemnity. of indemnify as the
It seeks to indemnify the parties do not intend
assured for the loss to cover any risk.
suffered by him on the
happening of an
uncertain event.
 Difference Between-
Insurance and Wager
• 3.A contract of • 3.In the wagering
insurance is a agreement good
contract requiring
faith need not be
utmost good faith by
the parties of the observed.
contract. • 4.A wagering
• 4.A contract of agreement is void
insurance is legally ab initio because
enforceable and is
encouraged as it
it is against the
benefits the public policy.
community as a
whole.
 …………….Difference Between-
Insurance and Wager
• 5.The object of • 5.Where as, the
contract of object of
insurance is to wagering
protect the assured agreement is to
against the losses earn speculative
on the happening gains.
of some uncertain
events.
CONTRACT……OF I N S U RANCE
• CONTRACT OF INSURANCE:

A contract of insurance is a contract by

which a person, in consideration of a sum
of money , undertakes to make good the
loss of another against a specific risk,
e.g., fire, or to compensate him or his
estate on happening of a specified event,
e.g., accident or death.
 Insurance as a contract
• It is governed by the same general principles of law as
other contracts.
• It comes in to existence by the process of OFFER in the
form of proposal and it’s ACCEPTANCE (by the issue of a
policy).
• The proposal is made by one party (assured or insured)
to the other party (insurer ,assuror or underwriter) for
insurance against some loss should it occur on the
happening of an uncertain event, within a limited time.
The object of contract must be lawful.
Elements of General Contract
• Agreement (offer & acceptance)
• Legal consideration.
• Competent to make contract.
• Free consent.
• Legal object.
Elements of special contract
relating to insurance.
1. Insurable Interest
• For an insurance contract to be valid, the
insured must posses an insurable interest in
the subject matter of insurance.
• The insurable interest is the pecuniary
interest whereby the policy-holder is
benefited by the existence of the subject-
matter and is prejudiced by the death or
damage of the subject-matter.
Essentials of valid insurable interest
• There must be a subject-matter to be insured.
• The policy-holder should have monetary
relationship with the subject-matter.
• The relationship between the policy-holders and the
subject-matter should be recognized by law.
• The financial relationship between the policy-
holders and subject-matter be such that the
policyholder is economically benefited by the
survival or existence of the subject-matter and/or
will suffer economic loss at the death or existence
of the subject-matter.
Existence of insurable interest
• Owners
• Part owners or joint owners
• Mortgagor/Mortgagee
• Bailees
• Carries
• Administrator, Executors & Trustee
• Life
• Debtors and Creditors
• Liability
When Insurable Interest
should exist
• Marine
• Fire
• Life
• Accident
2. Utmost Good faith and
principle of indemnity
2. UTMOST GOOD FAITH: [UBERRIMAE
FEDEI]
Insurance is a contract of uberrimae fidei.
The assured must disclose to the insurer
all material facts known to him. A mis-
statement or withholding of any material
information is fatal to the contract of
insurance. Both the parties are under
obligation for the full disclosure of
material information. The rule ‘ caveat
emptor ’ does not apply to them.
 [Cont’d]……. 1. UTMOST GOOD FAITH:
[ UBERRIMAE FEDEI ]

• Where the assured does not make a

complete disclosure of everything which it
was material for the insurer to know in order
to judge, (a) whether he should accept the
risk, and (b) what premium he should
charge, the insurer can avoid the contract.
Any fact is material if it has a bearing on the risk and
would materially affect the insurer in deciding to make
the contract or not.
• If the assured has knowledge of a fact
which the insurer cannot ordinarily have, then
he should not indulge himself in suppressio
veri (suppression of truth) by making a
suggestion which is false or suppressing a
matter which is true [Srinivasa Pillai vs.L.I.C.
of India,1977]. [Example…..
FACTS WHICH ARE REQUIRED TO BE
DISCLOSED
• The following facts are required to be
disclosed:
• (a) Facts which would render a risk greater
than normal. In the absence of this
information the insuree would consider the
risk as normal and deceived.
• (b) Facts which would suggest some special
motive behind insurance, e.g., excessive
over-insurance.
• (c) Facts which suggest the abnormality of
the proposer himself, e.g., making frequent
claims.
• (d) Facts explaining the exceptional nature of
the risk.
FACTS NEED NOT BE DISCLOSED BY
THE INSURED
• The following facts, however, are not
required to be disclosed by the
insured:
• I. Facts which tend to lessen the risk.
• II. Facts of public knowledge.
• III. Facts which could be inferred from
the information disclosed.
• IV. Facts waived by the insurer.
• V. Facts governed by the conditions of
the policy.
3. PRINCIPLE OF INDEMNITY:

Insurance is usually a contract of

indemnity. The insurer agrees to pay for
actual loss suffered by the insured, and no
more.
 USES
• To avoid intentional loss;

• To avoid an Anti-social Act

• To maintain the Premium at Low-level:

 CONDITIONS OF INDEMNITY PRINCIPLE:

• The insured has to prove that he will suffer

loss on the insured matter at the time of
happening the event and the loss is actual
monetary loss.
• The amount of compensation will be the
amount of insurance. Indemnification cannot
be more than the amount insured
• If the insured gets more amount then the
actual loss; the insurer has right to get the
extra amount back.
• If the insured gets more amount then
from third party after being fully
indemnified by insurer, the insurer will
have right to receive all the amount paid
by the third party.
• The principle of indemnity does not apply
to personal insurance because the amount
of loss is not easily calculable there.
 METHODS OF PROVIDING INDEMNITY

• Cash payment:

• Repair:

• Replacement:

• Reinstatement:
4. DOCTRINE OF SUBROGATION

The doctrine of subrogation refers to the

right of the insurer to stand in the place of
the insured, after settlement of a claim, in
so far as the insured’s right of recovery
from an alternative source is involved.
 ESSENTIALS OF DOCTRINE OF SUBROGATION

• Corollary to the Principle of Indemnity

• Subrogation is the Substitution
• Subrogation only up to the amount of payment
• The Subrogation may be applied before
payment
• Personal Insurance
5. Causa Proxima
PROXIMATE CAUSE
• The rule is that immediate and not the
remote cause is to be regarded.
• The maxim is sed causa proxima non-
remote spectature
• Proximate cause means the active
efficient cause that acts in motion a rain of
events which brings about result, without
intervention of any force started and
working activity from a new and
independent source.
DETERMINATION OF PROXIMATE
CAUSE
• The determination of real cause depends upon the
working and practice of insurance & circumstances to
loss. Also-
• 1. If there is a single cause of the loss, the cause will be
the proximate cause and further if the peril (cause of
loss) was insured insurer will have to indemnify the loss.
• 2. If there are concurrent causes, the insured perils and
excepted perils have to be segregated.
• The concurrent causes may be first, separable and
second, inseparable.
• Separable causes as those which can be separated from
each other. The loss occurred due to a particular cause
may be distinguishing known. If the circumstances are
such that the perils are inseparable, then the insurers
are not liable at all when there exists any excepted peril
• 3. If the causes occurred in form of chain, they have to be observed
seriously--
• a) If there is unbroken chain the excepted and insured perils have to
be separated. If an excepted peril precedes the operation of the
insured peril so that the loss cause by the latter is the direct and
natural consequences of the excepted peril, there is no liability.
• b) If there is a broken chain of events with no excepted peril
involved, it is possible to separate the losses. The insurer is liable
only for that loss which caused by an insured peril; where there is
an excepted peril, the subsequent loss caused by an insured peril
will be a new and indirect cause because of the interruption in the
chain of events.
6.Principle of
contribution
Contribution is a right that an insurer has,
who has paid under a policy, of calling
other interested insurers in the loss to pay
or contribute ratably to the payment.
Example…………………....[7.Contribution]

EXAMPLE:A insures his house against fire

for Rs.10,000 with insurer X, and for
Rs.20,000 with insurer Y .
A loss of Rs 12,000 occurs. X is liable
for Rs.4,000 and Y for Rs.8,000.
If the whole amount of the loss is paid
by Y, he can recover Rs.4,000 from X.
CONDITIONS/WHEN CONTRIBUTION OPERATES

• Before contribution can operate the following

conditions must be fulfilled:
• 1.There must be more then one policy involved and
all policies covering the loss must be in force.
• 2. All the policies must cover the same subject-
matter. If all the policies cover the same insured but
different subject-matters altogether then the
question of contribution would not arise.
• 3. All the policies must cover the same peril causing
the loss. If the policies cover different perils, some
common and some uncommon, and if the loss is not
caused by a common peril, the question of
contribution would not arise.
• 4. All the policies must cover the same interest of the
same insured. It should be remembered that if any of
the above four factors is not fulfilled, contribution will
not apply.
WARRANTIES:

• There are certain conditions and promises in the

insurance contract which are called warranties.
• A warranty is that by which the assured
undertakes that some particulars thing shall or
shall not be done, or that some conditions shall be
fulfilled, or whereby he affirms or negatives the
existence of a particular state of facts.
• Warranties which are mentioned in the policy are
called express warranties. There are certain
warranties which are not mentioned in the policy.
These warranties are called implied warranties.
7.Risk must attach:

• The insurer receives the premium

in a contract of insurance for
running a certain risk.If for any
reason the risk is not run, the
consideration fails, and the
insurer must return the premium.
8.Mitigation of loss:
• In the event of some mishap to the
insured property , if the assured does
not take all necessary steps to mitigate
the loss , the insurer can avoid the
payment of loss which is attributable to
the assured’ s negligence.
He must act as an uninsured prudent
person would act under similar
circumstances in his own case.
[British & Foreign Marine Insurance Co. vs. Grant(1921)]
9.Period of Insurance:
• A contract of life insurance is a
continuing contract with a condition
that the premium is to be paid at
regular intervals. If the premium is not
paid regularly, the contract lapses and
can be revived subject to the
fulfillment of certain conditions.
• An insurance policy specifies the
terms or period of time it covers, often
the nature of risk against which
insurance is sought determines the
period or life of the policy.
 DEFINITION OF
FIRE INSURANCE BUSINESS
• ‘Fire Insurance’ has not been defined in the
Insurance Act,1938 instead, fir e insur ance
business is defined, as “the business
ef fecting, otherwise than incidentall y to
some other class of insur ance business,
contr acts of insur ance against the risks
insur ed a gainst in fir e insur ance policies”
Insurance Act,1938[Sec.2(6)(a)].
FIRE INSURANCE CONTRACT

• A contract of fire insurance is

a contract whereby the
insurer undertakes, in
consideration of the premium
paid to make good of any loss
or damage caused by fire
during a specified period.
 Characteristics of
Fire Insurance Contract
• 1.It is a contr act of indemnity:The assured
can in the event of loss recover the actual
amount of loss from the insurer.This is subject
to the maximum amount for which the subject
matter is insured.
• 2.It is a contr act of uber rimae fedei: The
assured and the insurer have to disclose
everything which is in their knowledge and
which will affect the contract of insurance.
 Characteristics of
Fire Insurance Contract
• 3.T he assur ed must have insur able
inter est in the subject matter both at the
time of insur ance and at the time of
loss.This insurable interest must be capable of
valuation in terms of money.
• 4.T he risk cover ed by fir e insur ance
contr act is the loss r esulting fr om fir e or
some cause w hich is the pr oximate cause
of loss.
 Characteristics of
Fire Insurance Contract
• 5 .It is subject to the principles
of subrogation and
contribution.
• 6.It is a contract from year to
year:It can, however, be
renewed if the assured pays
the premium during the days
of grace.
Kinds of Marine Insurance Policies
1. Valued policy:
This is the policy in which the agreed
value of the subject matter of
insurance is stated at the time of
taking out the policy.
2. Unvalued policy or open policy:
This is the policy in which the value
of the subject matter of insurance is
not stated at the time of taking out
the policy. The value of subject
matter of insurance is determined
subsequently.
3. Voyage policy:
This is the policy in which the value
of the subject matter of insurance is
specific voyage from one point to
another.
4. Time policy:
This is the policy in which the value of
the subject matter of insurance is
insured for a definite period of time,
generally, not exceeding one year.
5. Mixed policy:
This is the policy in which the value of
the subject matter of insurance is insured
for a specific voyage and definite period
of time.
6. Floating policy or Declaration policy:

This is the policy in which no

mention is made of the ship or the
cargo, but only the around sum is
mentioned at the time of taking
out the policy. Whenever the
shipment is made, he insured
makes a declaration about the
value of the shipment and other
particulars, and the total value of
policy is reduced by that amount.
7. Wager policy:

This is a policy under which the

insurance is effected without the
insured having any insurable interest
in subject matter of insurance. This
type policy is void and can’t be
enforced by law. But still it is issued
and obligations are honoured by the
parties, so it is called Honour policy.
Kinds of insurance policies
Kinds of policies

 1. Valued policies
 2. Specific policy
 3. Average Policy
 4. Floating Policy
 5. Reinstatement or Replacement Policy
1. Valued policies
 This is a policy in which the value of the property
insured is agreed upon at the time of taking out the
policy. Therefore, the insurer is required to pay to
the insured the amount agreed upon (i.e. the agreed
value) in the event of the destruction or the
destruction or damage of the property by fire. This
type of policy is usually issued where the value of
the property cannot be determined after the loss
occurs , e.g. works of art, jewellery, etc.
2. Specific policy

 This is a policy under which a specific amount is

insured on a specified property. Therefore, in the
event of the destruction or damage of the
specified property by fire, the insured is paid the
specific amount, if his loss reaches the specific
amount, whatever may be the actual value of the
property insured. In case the actual loss of the
insured is less than the specific amount, then, he
is paid only the actual loss suffered by him.
3. Average Policy

This is a policy under which the average clause

is included. Under this policy, the insurer is
required to bear only a ratable proportion of
the actual loss to the property. This type of
policy is intended to penalize the insured for
under-insurance of his property and to induce
him to take out a policy for the full or actual
value of his property.
4. Floating Policy

This is a type of policy under which

properties found in different localities are
covered by one policy. This type of policy
is useful to manufacturers and merchants
whose goods are found in warehouses
located in different places.
5. Reinstatement or Replacement
Policy

 This is a policy under which the reinstatement or

replacement clause is inserted. Under this policy, the
insurer undertakes to pay the cost of replacement of
the property destroyed or damaged by fire.
Alternatively, the insurer may reinstate or replace the
property destroyed or damaged by fire instead of
paying the compensation in cash. This type of policy
is intended to prevent the insured from making a
fraudulent(I.e. false) claim.
Distinction Between Fire & Marine Insurance on
the one hand, and Life Insurance on the other.

Fire Insurance and

Marine Insurance
1.Certainty of event:
* In case of Fire and Marine
Insurance the event insured
may or may not happen at all
Life Insurance
1.Certainty of event:
* The event (death) is
bound to happen sooner or
later.

2.Indemnity:
* The contract of fire and
marine insurance are
contracts of indemnity.
2.Indemnity:
* The sum assured is payable
irrespective of any proof of loss
and to the full extent of the
amount assured in the event of
death of the assured.
 Distinction Between Fire & Marine Insurance on
the one hand, and Life Insurance on the other.

3.Valuation of Insurable interest: 3.Valuation of Insurable

*In fire and marine insurance, the interest:
insurable interest of the assured
must be capable of valuation in *In case of Life insurance,this
terms of money is not just possible

4.Time of Insurable Interest: 4.Time of Insurable Interest:

*In fire insurance, the insurable
interest must be present both at
the time of insurance and at the
time of loss.
In marine insurance, it must be
present at the time of loss.
*In Life insurance, it must exist at the
time of the contract.It need not be
present at the time when the policy
falls due.
KINDS OF INSURANCE
Permanent life insurance

Permanent life insurance is a form of life insurance such

as whole life or endowment, where the policy is for the life
of the insured, the payout is assured at the end of the
policy (assuming the policy is kept current) and the policy
accrues cash value.
Whole life insurance/ Ordinary life insurance

Whole Life Insurance, or Whole of Life

Assurance (in the Commonwealth), is a
life insurance policy that remains in force
for the insured's whole life and requires
(in most cases) premiums to be paid every
year into the policy.
 Health insurance

• The term health insurance is generally

used to describe a form of insurance that
pays for medical expenses. It is
sometimes used more broadly to include
insurance covering disability or long-
term nursing or custodial care needs.
 Group insurance

• Group insurance is an insurance that

covers a group of people, usually who are
the members of societies, employees of a
common employer, or professionals in a
common group. Group insurance may or
may not be converted to individual
coverage.
Accidental death and dismemberment insurance

• Accidental death and dismemberment

insurance (also known as AD&D) is a
form of insurance covering death or
specific types of injury as a result of an
accident
 Dental insurance

• Dental Insurance in the United States is

insurance designed to pay the costs
associated with dental care. Dental
insurance pays a portion of the bills from
dentists, and other providers of dental
services
 Pet insurance

• Pet Insurance pays the veterinary costs if

one's pet becomes ill or is injured in an
accident. Some policies will also pay out
when the pet dies, or if it's lost or stolen.
 Terrorism insurance

• Terrorism insurance is insurance

purchased by property owners to cover
their potential losses and liabilities that
might occur due to terrorist activities
 Crop insurance

• Crop insurance is purchased by

agricultural producers, including
farmers, ranchers, and others to protect
themselves against either the loss of their
crops due to natural disasters, such as
hail, drought, and floods, or the loss of
revenue due to declines in the prices of
agricultural commodities.
 Home insurance

• Home insurance, also commonly called

hazard insurance or homeowners
insurance (often abbreviated in the real
estate industry as HOI), is the type of
property insurance that covers private
homes
 Property insurance

• Property insurance provides protection

against most risks to property, such as
fire, theft and some weather damage.
This includes specialized forms of
insurance such as fire insurance, flood
insurance, earthquake insurance, home
insurance or boiler insurance
 Vehicle insurance

• Vehicle insurance (also known as auto

insurance, car insurance, or motor
insurance) is insurance purchased for
cars, trucks, and other vehicles.
 Wage insurance

• Wage insurance is a form of proposed

insurance that would provide workers
with compensation if they are forced to
move to a job with a lower salary.
 Mortgage insurance

• It's more expensive than it's worth.

Besides, you could do better with another
policy -- one that you might already have.
These policies are designed to make your
mortgage payments if you die or become
disabled.
 Example…1.Utmost good faith
[London Insurance Co. vs. Mansel (1879)]
• In making a proposal for insurance, M, in reply
to a question asking whether previous proposals
on his life had been made to any other office, and
if so whether they had been accepted at the
ordinary rates. He omitted to disclose that his
proposal for life insurance had been declined by
several other offices. Held, this was a material
failure to disclose and the policy could be set
aside.
 A proposer should disclose all material facts at the time of making the
proposal for insurance and must continue to do so till the negotiations are
completed. [Looker vs.Law Union &Rock Insurance Co. Ltd.(1928)].

• L made a proposal to an insurance company for an

insurance on his life for.50,000 sterling pounds. He
trustworthily answered various questions on the
proposal form and disclosed all relevant facts. A few
days later but before the proposal was accepted by the
insurance company, L was taken ill with
pneumonia.Two days later, he died of pneumonia and
the company learned about his illness for first
time.Held, the company was not liable to pay the
claim, as the notice of illness which amounted to
material alteration in the risk between the date of the
proposal and it’s acceptance was not given.
[Looker vs.Law Union &Rock Insurance Co. Ltd.(1928)].
 Example…2.Indemnity
[ Castellion vs. Preston(1883) ]
• P insured his house against fire.Subsequently
he agreed to sell his house to R for 3,100
sterling pounds. Before the sale could be
completed the house was destroyed by fire
and P received his value from the insurance
company.P then received the price from R as
per the contract of sale. Held, the insurance
company could recover from P the money
they had paid. [Castellion vs.Preston(1883)].
 Example…………………….
[8.Subrogation]
• A insures his goods with B for
Rs 1,000. The goods are damaged by fire
caused by C , a miscreant . A recovers the
loss from B and subsequently he
succeeds in recovering this loss from C
also. He must hold the amount recovered
from C in trust for B.
The Principle of Subrogation is subject to the
following three limitations…………………

1.The insurer is subrogated to only the rights and remedies available to the assured in respect
of the thing to which the contract of insurance relates.
example: (a) M owned two vessels, R and S, which were insured with different insurers.The two vessels
collided due to the fault of the vessel R.The insurer of vessel S indemnified the owner,M, under the Policy,
and then proceeded against M as the owner of vessel R by virtue of doctrine of subrogation for claiming
the amount paid in respect of ship R .Held, he could not recover as the insurer is subrogated to only the
rights of M, the insured, and as no person will succeed against himself , the insurer of vessel S did not get
any right as both the ships were owned by M. [Simpson vs.Thomson(1887)].
 The Principle of Subrogation is subject to the following
three limitations…………………

• 2. The insurer’s right of subrogation arises

only when he pays the loss for which he
is liable under the policy.
• 3.The insurer is not entitled to benefit of
which is recovered until the assured has
recovered a full indemnity.
Example… [4.Causa Proxima: ]

The cargo of rice in a ship was destroyed by sea-

water flowing in the ship through a hole made by rats
in bathroom lead pipe. Held, the underwriter was
liable as the damage was due to a peril of the sea. The
proximae causa of the damage in this case is sea
water. If however ,
the loss is caused directly by rats or vermin, the
underwriter will not be liable. [Hamilton Fraser &
Co. vs.Pandroff(1887)]
 Another Example… [4.Causa
Proxima: ]
• A ship carrying meat was delayed
by a storm in consequence of which
it became decomposed and had to
be thrown overboard. Held, the loss
of meat was not a loss by perils of
the sea.
[Taylor VS.Dunbar(1869)]