The aim of all insurance is to compensate the owner against loss arising from a variety of risks, which he anticipates, to his life, property and business. Insurance is mainly of two types: life insurance and general insurance. General insurance means Fire, Marine and Miscellaneous insurance which includes insurance against burglary or theft, fidelity guarantee, insurance for employer's liability, and insurance of motor vehicles, livestock and crops.
The Insurance Act, 1972 and the General Insurance Business (Nationalisation) Act, 1972 govern Fire and Marine Insurance, while the Indian Marine Insurance At, 1963 governs marine insurance in our country. These laws contain provisions relating to the constitution, management and winding up of insurance companies and the conduct of insurance business of all types. All insurance business in India has been nationalised.
A Contract of insurance is a contract by which one party undertakes to make good the loss of another, in consideration of a sum of money, on the happening of a specified event, e.g. fire accident or death. Law recognises insurance as a system of sharing risk too great to be borne by one individual.
Fundamental Principles of Insurance
Some useful terms in Insurance:
A contract of insurance contained in a fire, marine, burglary or any other policy (excepting life assurance and personal accident and sickness insurance) is a contract of indemnity. This means that the insured, in case of loss against which the policy has been issued, shall be paid the actual amount of loss not exceeding the amount of the policy, i.e. he shall be fully indemnified. The object of every contract of insurance is to place the insured in the same financial position, as nearly as possible, after the loss, as if he loss had not taken place at all. It would be against public policy to allow an insured to make a profit out of his loss or damage.
UTMOST GOOD FAITH
Since insurance shifts risk from one party to another, it is essential that there must be utmost good faith and mutual confidence between the insured and the insurer. In a contract of insurance the insured knows more about the subject matter of the contract than the insurer. Consequently, he is duty bound to disclose accurately all material facts and nothing should be withheld or concealed. Any fact is material, which goes to the root of the contract of insurance and has a bearing on the risk involved. It is only when the insurer knows the whole truth that he is in a position to judge (a) whether he should accept the risk and (b) what premium he should charge.
If that were so, the insured might be tempted to bring about the event insured against in order to get money.
- Insurable Interest - A contract of insurance effected without insurable interest is void. It means that the insured must have an actual pecuniary interest and not a mere anxiety or sentimental interest in the subject matter of the insurance. The insured must be so situated with regard to the thing insured that he would have benefit by its existence and loss from its destruction. The owner of a ship run a risk of losing his ship, the charterer of the ship runs a risk of losing his freight and the owner of the cargo incurs the risk of losing his goods and profit. So, all these persons have something at stake and all of them have insurable interest. It is the existence of insurable interest in a contract of insurance, which distinguishes it from a mere watering agreement.
- Causa Proxima - The rule of causa proxima means that the cause of the loss must be proximate or immediate and not remote. If the proximate cause of the loss is a peril insured against, the insured can recover. When a loss has been brought about by two or more causes, the question arises as to which is the causa proxima, although the result could not have happened without the remote cause. But if the loss is brought about by any cause attributable to the misconduct of the insured, the insurer is not liable.
- Risk - In a contract of insurance the insurer undertakes to protect the insured from a specified loss and the insurer receive a premium for running the risk of such loss. Thus, risk must attach to a policy.
- Mitigation of Loss - In the event of some mishap to the insured property, the insured must take all necessary steps to mitigate or minimize the loss, just as any prudent person would do in those circumstances. If he does not do so, the insurer can avoid the payment of loss attributable to his negligence. But it must be remembered that though the insured is bound to do his best for his insurer, he is, not bound to do so at the risk of his life.
- Subrogation - The doctrine of subrogation is a corollary to the principle of indemnity and applies only to fire and marine insurance. According to it, when an insured has received full indemnity in respect of his loss, all rights and remedies which he has against third person will pass on to the insurer and will be exercised for his benefit until he (the insurer) recoups the amount he has paid under the policy. It must be clarified here that the insurer's right of subrogation arises only when he has paid for the loss for which he is liable under the policy and this right extend only to the rights and remedies available to the insured in respect of the thing to which the contract of insurance relates.
- Contribution - Where there are two or more insurance on one risk, the principle of contribution comes into play. 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. Any one insurer may pay to the insured the full amount of the loss covered by the policy and then become entitled to contribution from his co-insurers in proportion to the amount which each has undertaken to pay in case of loss of the same subject-matter.
In other words, the right of contribution arises when (i) there are different policies which relate to the same subject-matter (ii) the policies cover the same peril which caused the loss, and (iii) all the policies are in force at the time of the loss, and (iv) one of the insurers has paid to the insured more than his share of the loss.
Terms of Policy
Terms of policy mean the duration for which the policy will cover the risk. Except in case of life insurance, a contract of insurance is from year to year only and the insurance automatically comes to an end after the expiry of the years unless, of course, it is renewed.
RE-INSURANCE & DOUBLE INSURANCE
Every insurer has a limit to the risk he can undertake. If a profitable proposal comes his way he may insure it even if the risk involved is beyond his capacity. Then, in order to safeguard his own interest, he may insure the same risk, either wholly or partially, with other insurers, thereby spreading the risk. This is called -re-insurance. Re-insurance can be resorted to in all kinds of insurance and a contract of re-insurance is also a contract of indemnity. The re-insurers are liable to pay the amount to the original insurer only if the latter has paid to the insured. Re-insurance is subject to all the conditions in the original policy and the re-insurer is entitled to all the benefits, which the original insurer enjoys under the policy.
When the insured insures the same risk with two or more independent insurers, and the total sum insured exceeds the value of the subject matter, the insured is, said to be over insured by double insurance. Both double insurance and over-insurance are perfectly lawful, unless the policy otherwise provides. A man may insure with as many insurers as he pleases and up to the full value of his interest with each one of them. If a loss occurs, he may claim payment from the insurers in such order as he thinks fit; but in no case he shall be entitled to recover more than his loss, because a contract of insurance is a contract of indemnity only.
Fire insurance is a contract to indemnify the insured for destruction of or damage to property or goods, caused by fire, during a specified period. The contract specifies the maximum amount, agreed to by the parties at the time of the contract, which the insured can claim in case of loss. This amount is not, however, the measure of the loss. The loss can be ascertained only after the fire has occurred. The insurer is liable to make good the actual amount of loss not exceeding the maximum amount fixed under the policy.
It is a rule of law that in actions on fire policies, full regard must be had to the causa proxima. If the proximate cause of the loss is fire, the loss is recoverable. If the cause is not fire but some other cause remotely connected with fire, it is not recoverable, unless specifically provided for. Fire risks do not cover damage by explosion, unless the explosion causes actual ignition, which spreads into fire. The cause of the fire is immaterial, unless it was the deliberate act of the insured.
STEPS TO BE TAKEN IN FIRE INSURANCE CLAIMS
- It is the duty of the insured, or any other person on his behalf, to give immediate notice of fire to the insurance company so that they can safeguard their interest, such as, deal with the salvage, judge the cause and nature of fire and assess the extent of loss caused by the fire.
Failure to give notice may avoid the policy altogether.
The insured is further required by the terms of the policy, to furnish within the specified time, full particulars of the extent of loss or damage, proof of the value of the property and if it is completely destroyed, proof of its existence.
Delivery of all these details to the company is a condition precedent to the claim of the assured to recover the loss. If the assured prefers a fraudulent claim, whether for whole or part of the policy, he would forfeit all benefits under the policy, whether or not there is a condition to this effect in the policy. Generally, the fraud consists in over -valuation, but over-valuation due to mistake is not fraudulent. In a majority of fire insurance claims, the expert assessors of the company are able to arrive at mutually acceptable valuation.
Miscellaneous or Liability Insurance
'Miscellaneous Insurance' refers to contracts of insurance other than these of Life, Fire and Marine insurance. This branch of insurance is of recent origin and it covers a variety of risks.
- Personal Accident Insurance - This means insurance for individuals or groups of person against any personal accident or illness. In India this type of insurance is done by the General Insurance Corporation. The risk insured in personal accident insurance is the bodily injury resulting solely and directly from accident caused by violent, external and visible means.
- Property Insurance - Property risks relate to burglary, house breaking, theft, crop insurance, etc. Any property, movable or immovable, present or future, vested or contingent can be insured from my losses by accidents other than fire and marine adventure. The most popular in this branch is burglary insurance.
Liability Insurance - Just as a person can insure himself against the risk of death and personal injury, or damage, determination or destruction of property, there can also be an insurance against the risk of incurring liability to third parties. The risk of liability arising out of the use of property, comes under the category commonly called "liability insurance". It includes --
Public Liability Insurance: That is, insurance against a liability imposed by law. For example, a house owner may obtain an insurance against his liability to invitees or licensees, arising from body injury or damage to property.
Professional Negligence Insurance: These policies give professional indemnity cover to accountants, solicitors, lawyers, from any loss or injury due to any negligence in the conduct of their professional duties.
Compulsory Insurance: The ESI Act makes it compulsory for the employers (covered under that Act) to insure their workmen by providing certain benefits to them in the event of their sickness, maternity and employment insurance. The employees insured are entitled to (a) Sickness benefit, (b) Maternity benefit, (c) Disablement Benefit, and (d) Dependent's benefit.
Employer's Liability Insurance: The liability of an employer under the modern labour laws, has considerably extended and the employers are tempted to take out insurances against such liabilities. For examples, when the employees retire, substantial amount become immediately payable by way of gratuity, commuted pension, leave salary, compensation, etc. and also the uncommuted pension becomes payable in future. Employers often take insurance policies which assure payment of such amounts, as and when these becomes payable.
Guarantee Insurance: The main types of policies included in guarantee insurance are a) insurance for performance of contract, policies, the guarantor/underwriter insures the promisee or employer against the loss arising by non-performance by the promisor or the dishonesty of the employee.
Fidelity policies are the most common type of guarantee policies, taken under contracts of employment where the employee has an opportunity to be dishonest. Such policies cover the risk of losses arising by theft or embezzlement of money or securities, or by fraud, on the part of employees.
- Motor Vehicle Insurance - A policy for motor vehicle insurance is, ordinarily, a combined insurance against the damage to the motor vehicle and its accessories, death of or injury to the, occupant of the vehicle and also against the risk of liability for injury to, or the death of, third parties caused by the driver's negligence.
Kind of Insurance Policies
Characteristics of various types of insurance policies, prevalent today are:
- SHOPKEEPER'S INSURANCE POLICY
This is most comprehensive policy that covers almost every risk. The insured may not, however, opt for all risks except -those compulsory. The risks covered are :
- Fire and Allied Perils : The insurer will indemnify in respect of loss of or damage to the building and / or contents whilst contained in the insured premises, by--
Fire, lightning, explosion of gas in domestic appliances,
Bursting and overflowing of water tanks apparatus or pipes,
Aircraft or articles dropped therefrom,
Riot, strike or malicious act,
Earthquake, subsidence and landslide,
Flood, inundation, storm, tempest, typhoon, hurricane, tornado or cyclone,
It, however, does not cover loss of or damage to livestock, motor vehicles, pedal cycles, money, securities, stamps, bullion, deeds, bonds, bills of exchange, promissory notes, stock and share certificates, business books, manuscripts, documents, unset precious stones and jewelry and valuables.
Average Clause - If the sum insured under this risk is less than 85% of the collective value of the property insured, the insured will bear a ratable proportion of the loss
- Burglary and House breaking: The insurer will indemnity in respect of loss of or damage to the contents (except moneys and valuables) whilst contained in the insured premises by burglary and / or house - breaking.
- Money Insurance : the insurer will indemnify in respect of--
Loss of insured 's money in transit between any two places within a radius of fifteen miles from he insured premises,
Loss of money / valuables kept in safe steel cupboards/ cash box, etc. under lock and key, by burglary / housebreaking, and
Loss of money from cashier's till and / or counter during business hours, following assault, violence against the insured or his employee.
Neon Sign / Glow sign: the insurer will indemnify in respect of loss of or damage to Neon sign/glow sign, by
Accidental external means,
Fire, lightning or external explosion or theft,
Riot, strike or malicious act,
Floods, Inundation, storm, typhoon, hurricane, tornado or cyclone.
- Personal Accident: If the insured (or any named partner, director of member of managerial staff or employee permanently working with the insured) aged between 16 and 65 years, sustain bodily injury solely and directly caused by accidental, violent, external and visible means resulting in death or disablement, the insurance company shall pay to the victim or his assignee / legal representative, the specified sum.
- Fidelity Guarantee: If the insured sustains direct pecuniary loss caused by act of fraud or dishonesty committed by any of his employees in the insured premises, the insurer will indemnify in respect of such loss.
- Liability: The insurer will indemnify in respect of sums which the insured becomes legally liable to pay as
Compensation and litigation expenses incurred by the insured , in connection with accidental death of or bodily injury to any person other than an employee, and / or accidental damage to property caused by or through the fault or negligence of the insured or his family member,
Compensation to the insured employees under the Fatal Accident Act/Workmen's compensation Act,
Business Interruption: The insurer undertakes to indemnify for losses arising out of business interruption i.e. cessation of normal commercial activity on account of or as a direct result of fire and allied perils (covered in clause "a" above)
- FIRE POLICY "A"
Under this policy the insurer undertakes to indemnify in respect of any loss of, or damage to, the property insured, caused by --
Explosion / Implosion excluding damage to boilers, economisers or other vessels in which steam is generated,
Riot , strike and malicious damage,
Impact damage by any rail/road vehicle or animal,
Aircraft and other aerial and/or space devices and/or articles dropped there from,
Storm, cyclone, typhoon, tempest, hurricane, tornado, flood and inundation,
Subsidence and landslide ( including rockslide) damage,
Earthquakes fire and shock.
- FIRE POLICY "B"
This policy is similar to Fire Policy "A" and provides insurance from all risks enumerated therein except subsidence, landslide and earthquake.
CONTRACTOR'S ALL RISKS INSURANCE POLICY
- This policy provides insurance against -
Loss, damage or destruction of property insured in a manner necessitating replacement or repair,
Cost of clearance and removal of debris.
The risks covered under the policy are -
Earthquake -- fire and shock,
Water damage in contracts involving work in rivers, canals, lakes or sea.
Liability for accidental loss or damage caused property of other persons or for fatal or non-fatal injury to any person other than the insurer's own employees or the employees of the owner of the works or premises.
Cost and expenses of litigation recovered by any claimant from the insured or incurred by the insured.
- MOTOR CAR INSURANCE POLICY
This policy covers the same risks as stated under "Motor Cycle/Scooter Insurance Policy' in respect of cars used solely for private or professional purposes.
- COMMERCIAL VEHICLES INSURANCE B POLICY
This policy covers the same risks as stated under "Motor Cycle / Scooter Insurance Policy', in respect of motor vehicles used for carrying goods.
PERSONAL ACCIDENT INSURANCE POLICY
Under this policy the insurer pays the specified sum, if the insured sustains any bodily injury resulting solely and directly from accident caused by external violent and visible means.
The contract of marine insurance is generally effected through the agency of insurance brokers employed by the insured. The broker prepares a brief memorandum of the risks to be covered and takes it to a number of individual insurers, called underwriters, each of whom initial the note for the amount he is prepared to underwrite. The document, known as "The slip, " contain information such as the name of the ship, the date of voyage, the description of the risk, the sum insured and the rate of premium. "The Slip" is in practice a complete and final contract. However, a contract of marine insurance must be embodied in a marine policy in accordance with the Act.
KINDS OF MARINE POLICIES
The document containing the terms and conditions of the contract is called the Marine Policy. It must contain the names of the assured and the insurer or insurers. The subject-matter insured and the risk covered the voyage or period of time or both and the sums insured. It must be duly signed by the insurer and stamped under the Stamp Act, 1899. The Marine Insurance Act deals with the following types of policies:
When the contract is to insure the subject matter at and from one place to another, the policy is called a "Voyage policy". In this case the risk attaches only when the ship starts on the voyage.
Where the subject-matter is insured for a definite period of time, it is called a "Time Policy. The ship may pursue any course it likes; the policy would cover all the risks from perils of the sea for the sated period of time. A time policy cannot be for a period exceeding one year, but it may contain a continuation clause.
It is a combination of voyage and time policies and covers the risk during particular voyage for a specified period of time.
It is a policy, which specifies the agreed value of the subject-matter insured. If there is no fraud or mis-representation, the value in a valued policy is conclusive as between the insurer and the insured, whether the loss is partial or total.
Open or Un-valued Policy
In this policy the value of the subject-matter insured is not specified. Subject to the limit of the sum assured, it leaves the value of the loss to be subsequently ascertained.
The practice of taking out floating policies has come in vogue because of the difficulty of knowing by which ship or ships the goods are to be shipped. Such a policy therefore only mentions the amount for which the insurance is taken out and leaves the name of the ship(s) and other particulars to be defined by subsequent declarations.
A warranty in a contract of marine insurance is substantially the same as a condition in a contract of sale of goods. It gives the aggrieved party the right to avoid the contract. A warranty may be express or implied. These are discussed below in brief:
An express warranty is one, which is expressly stated in the policy of insurance it must be included in or written upon the policy. There is no limit to the number of express warranties, but those generally included in a marine policy are that the ship is seaworthy on a particular day, that the ship will sail on a specified day, that the ship will proceed to its destination without any deviation and that the ship is neutral and will remain so during the voyage.
Implied warranties are conditions not incorporated in a policy but assumed to have been included in the policy by law, custom or general agreement. These warranties are:
- Seaworthiness: A ship is deemed to be seaworthy when she is reasonably fit in all respects to encounter the ordinary perils of the sea or the adventure insured. This warranty attaches only up to the time of the sailing of the ship. In a time policy there is no implied warranty that the ship shall be seaworthy at any stage of the adventure. In a voyage policy where the voyage is to be performed in stage, the ship must be seaworthy at the commencement of each stage, it must be fit to encounter the ordinary perils of the part and if the voyage policy is on goods, it must be fit to carry the goods to the destinations contemplated by the policy:
- Legality of the Voyage: There is an implied warranty that the adventure insured is a lawful one and that the adventure shall be carried out in a lawful manner.
- Non-deviation: The warranty that the ship shall not deviate from its prescribed. Usual or the customary route is also an implied warranty. The risk does not attach if the places of departure or destination of the ship are hanged, or if the ship takes the ports of call by an order different from the one mentioned in the policy. The insurer is discharged from his liability as from the time of deviation, and also if there is unreasonable delay are excused under certain circumstances.
ASSIGNMENT OF POLICY
A marine policy is assignable by endorsement, or in any other customary manner, and the assignee can sue on it in his own name subject to any defence which would have been available against the person who effected the policy. The assignment may be made either before or after the loss, but an assured who has parted with or lost his interest in the subject-matter insured cannot assign.
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