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Tuesday, 15 March 2011

Essential of valid insurance contract or Basic principles of insurance

Definition of Insurance:-
Human life is exposed to many risks, which may result in heave financial losses. Insurance is one of the devices by which risks may be reduced or eliminated in exchange for premium In words of Chief Justice Tindal, "Insurance is a contract in which a sum of money is paid by the assured in consideration of the insurer's incurring the risk of paying larger sum upon a given contingency". In its legal aspects it is a contract whereby one person agrees to indemnify another against a loss which may happen or to pay a sum of money to him on the Occurring of a particular event. All contacts of insurance ( except marine insurance ) may be verbal or in writing, but particularly contracts of assurance are included in a document.

Basic Principles of Insurance

The following are the basis essentials or requirement of insurance irrespective of the type of insurance concerned.

1. Utmost good faith:-
All types of contracts of insurance depend upon the contracts of utmost good faith. Both parties ( insurer and insured ) in the contract must disclose all material facts for the benefit of each other. False information or non-disclosure of any important fact makes the contract avoidable. So the conditions to show utmost good faith is very strict on the part of the insured.

2. Insurable Interest:-
This insured must possess an insurable interest in the object insured. It may be defined as a financial interest in the subject matter of contract. The presence of insurable interest is a legal requirement. So an insurance contract without the existence of insurable interest is not legally valid and cannot be claimed in Court . The object of this principle is to prevent insurance from becoming a gambling contract.

3. Principle of indemnity:-
All types of contracts except life and personal accident insurance are contract of indemnity. According to them, the insurer undertakes to indemnify the insured against a loss of the subject matter of insurance due to insured cause. In life assurance the question of the loss and, and therefore, of its indemnification does not rise. Because the loss of life cannot be estimated in term of money. The principles of indemnity is based on the idea that the assured in the case of loss only shall be compensated against the actual total loss. But if no event happens, the insured has not to receive any amount, so in this case the premiums paid by him becomes the profit of the insurer.

4. Doctrine of subrogation:-
This principle applies to the contract of indemnity only i.e. marine and fire . It lays down a principle which is quite equitable. According to this doctrine, where a loss occurs and the insurer pays as for a total loss, he is entitled to all the rights and remedies which the insured has against a third party in respect of loss so paid for. It prevents the insured being indemnified from two sources in respect of the same loss. Suppose 'A' has damaged 'B' motor car negligently. If pays 'B' s loss in full.'B' cannot collect the same from the insurance company.On other hand if 'B' applied to his insurance company for indemnity under policy, he will not be permitted to collect the damages from 'A' . And the latter case the insurance company will be entitled to collect the amount.

5. Doctrine of proximate cause:-
This principle is found very useful when the loss occurred due to series of events. It means that in deciding whether the loss has arisen through any of the risk insured against, the proximate or the nearest cause should be considered. To take an illustration in one case where a policy holder sustain an accident while hunting. He was unable to walk after the accident and as a result of lying on wet ground before being picked up, he suffered pneumonia. There was an unbroken change of cause was the accident and the death, and the proximate cause of death, therefore, was the accident and not the pneumonia.

6. Cancellation:-
Both parties have right to cancel the policy before its expiry date. The period of the policy comes to an end on the cancellation of policy. So the protection provided by the insured to insurer stops from the date of such cancellation. The premium received by the insurance is also returnable to the insured.

7. Attachment of risk:-
Without the attachment of definite risk to the policy, the contract of insurance cannot be in force. So in this case consideration fails and the premium received by the insurance company must be returned.

8. Mitigation of loss:-
When the event insured against take place, the policy holder must do every thing to minimize the loss and to save what is left. This principle makes the insured more careful, in respect of this insured property.

9. Arbitration:-
Most fire and accident insurance policies contains an arbitration clause which provides for referring to differences to an arbitration. The arbitrator is to be appointed in writing by the parties in difference. The object of this clause is to reduce litigation.

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