2. Uncertainty, risk and insecurity are incidental to any
form of business.
This makes insurance indispensable for a business
organisation.
Insurance may be defined as a contract in writing
under which one party agrees to indemnify the other
party against a loss or damage suffered by it on
account of an uncertain future, in return for a
consideration called 'premium'.
The person/business who gets its life/property
insured is called 'Insured/Assured'.
The agency which helps in entering into an
insurance arrangement is called 'Insurer' or
'Insurance company'.
The agreement or contract which is put in writing,
is called a 'policy'.
3. An insurance policy provides the following
benefits to a business concern :-
Protection :- it provides protection against risk of
loss and a sense of security to the businessmen.
Diffusion of risks :- as the burden of loss is
spread over a large number of people.
Credit standing :- of the firm is enhanced as the
businessman can easily transfer some of his risks
to an insurance company.
Continuity and certainty of business :-if all the
risks were to be borne by the businessmen
themselves, the business operations would have
been uncertain and halting in character.
Better utilisation of the capital of the firms :- as
the Insurance companies take over the risk, it
enables the business firm to invest and optimally
utilise its capital.
4. Its aim is to compensate the owner against
the losses arising from a variety of risks
which he anticipates to his life, property and
business.
It is a means of pooling of risks, under which
a group of people who are subject to an
insurable risk contribute regularly to a fund.
The fund so created is utilised to compensate
those members of the group who actually
suffer a loss due to some unexpected
calamity.
Thus the loss of a few is shared by all the
members on an equitable basis.
5. In India, insurance is mainly of two types i.e. life
insurance and general insurance.
All issues relating to both the types of insurance
policies fall within the domain of Insurance
Division in the Ministry of Finance .
In order to protect the interests of holder of
insurance policy and to regulate, promote and
ensure orderly growth of the insurance industry,
the Government of India has set up the Insurance
Regulatory and Development Authority (IRDA).
The authority has been issuing regulations
covering almost the entire segment of insurance
industry including insurance agents, solvency
margins, re-insurance, registration of insurers,
obligations of insurers to rural and social sector,
accounting procedures,etc
6. Utmost Good Faith
An insurance contract is known as a contract of
'utmost good faith'.
It means both the parties must disclose all
material facts. 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:-
(i) whether he should accept the risk, and
(ii) what premium he should charge.
Concealment of any fact will entitle the insurer to
deprive the assured of benefits of the contract.
7. Indemnity
A contract of insurance is a contract of
'indemnity'.
It 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.
8. Insurable interest
It means that the insured must have an actual
interest in the subject matter of insurance.
A contract of insurance effected without
insurable interest is void.
A person is said to have an insurable interest
in the subject matter if he is benefited by its
existence and is prejudiced by its destruction.
For example:- a person has insurable interest
in the building he owns; employer can insure
the lives of his employees because of his
pecuniary interest in them; a businessman
has insurable interest in his stock, plant and
machinery, building, etc.
9. In case of life insurance, insurable interest
must be present at the time when the
insurance is affected.
It is not necessary that the assured should
have insurable interest at the time of maturity
also.
In case of fire insurance, insurable interest
must be present both at the time of insurance
and at the time of loss.
In case of marine insurance, interest must be
present at the time of loss.
It may or may not be present at the time of
insurance.
10. Cause 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 real or the nearest cause
shall be the causa proxima, although the
result could not have happened without the
remote cause.
11. Risk
In a contract of insurance the insurer
undertakes to protect the insured from a
specified loss and the insurer receives a
premium for running the risk of such loss.
12. Mitigation of loss
In the event of some mishap to the insured
property, the insured must take all necessary
steps to mitigate or minimise the losses, just
as any prudent person would do in those 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.
13. Subrogation
The doctrine of subrogation is a corollary to the
principle of indemnity and applies only to fire
and marine insurances.
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 .
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 extends only
to the rights and remedies available to the
insured in respect of the thing to which the
contract of insurance relates.
14. Contribution
when there are two or more insurances 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 the loss of the same subject matter.
15. In other words, the right of contribution
arises when:-
There are different policies which relate
to the same subject matter.
The policies cover the same peril which
caused the loss.
All the policies are in force at the time
of the loss.
One of the insurers has paid to the
insured more than his share of the loss
16. Insurance business in India is broadly divided
into four types, which include, life insurance; fire
insurance; marine insurance and miscellaneous
insurance.
Life Insurance is the contract between the
insurer and the person who is insured against the
risks to his life.
A fire insurance is a contract under which the
insurer in return for a consideration (premium)
agrees to indemnify the insured for the financial
loss which the latter may suffer due to
destruction of or damage to property or goods,
caused by fire, during a specified period.
17. Marine insurance is an agreement
whereby the insurer undertakes to
indemnify the assured, in the manner and
to the extent agreed, against losses
incidental to marine adventure.
'Life insurers' transact life insurance
businesses while 'General insurers'
transact the rest.
No composites are permitted as per law.
But, a person can take as many insurance
policies as he likes and all the policies can
be realised on their maturity.
Hence, a policy of 'double Insurance' is
offered by the insurance companies.
18. A fire insurance is a contract under
which the insurer in return for a
consideration (premium) agrees to
indemnify the insured for the financial
loss which the latter may suffer due to
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.
19. 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.
A fire insurance policy cannot be
assigned without the permission of the
insurer because the insured must have
insurable interest in the property at the
time of contract as well as at the time
of loss.
20. The insurable interest in goods may
arise out on account of
(i) ownership,
(ii) possession, or
(iii) contract.
A person with a limited interest in a
property or goods may insure them to
cover not only his own interest but also
the interest of others in them.
21. Under fire insurance, the following
persons have insurable interest in the
subject matter:-
Owner
Mortgagee
Pawnee
Pawn broker
Official receiver or assignee in
insolvency proceedings
Warehouse keeper in the goods of
customer
A person in lawful possession e.g.
common carrier, wharfinger,
commission agent.
22. In the fire insurance policy, 'Fire' means
the production of light and heat by
combustion or burning.
Thus, fire, must result from actual
ignition and the resulting loss must be
proximately caused by such ignition.
The phrase 'loss or damage by fire'
also includes the loss or damage
caused by efforts to extinguish fire.
23. The types of losses covered by fire
insurance are:-
Goods spoiled or property damaged by
water used to extinguish the fire.
Pulling down of adjacent premises by
the fire brigade in order to prevent the
progress of flame.
Breakage of goods in the process of
their removal from the building where
fire is raging e.g. damage caused by
throwing furniture out of window.
Wages paid to persons employed for
extinguishing fire.
24. The types of losses not covered by a fire
insurance policy are:-
loss due to fire caused by earthquake,
invasion, act of foreign enemy, hostilities
or war, civil strife, riots, mutiny, martial
law, military rising or rebellion or
insurrection.
loss caused by subterranean
(underground) fire.
loss caused by burning of property by
order of any public authority.
loss by theft during or after the occurrence
of fire.
loss or damage to property caused by its
own fermentation or spontaneous
combustion e.g. exploding of a bomb due
to an inherent defect in it.
25. A claim for loss by fire must satisfy the
following conditions:-
The loss must be caused by actual fire or
ignition and not just by high temperature.
The proximate cause of loss should be fire.
The loss or damage must relate to subject
matter of policy.
The ignition must be either of the goods or
of the premises where goods are kept.
The fire must be accidental, not
intentional. If the fire is caused through a
malicious or deliberate act of the insured
or his agents, the insurer will not be liable
for the loss.
26. Life Insurance is the contract between the
insurer and the person who is insured
against the risks to his life.
Under this,the insured person pays the
premium regularly to insurance
company,once a policy is taken,and in lieu
of this, the insurer promises to pay a fixed
sum of money at the time of the death of
insured or on the expiry of a specified
period of time,whichever is earlier.
The payment for life insurance is certain
but the event for which insurance is taken
is not very certain.
27. Life insurance is of utmost importance
for all individuals, businesses,
communities, society and general
public at large.
It offers protection against loss of
income and compensate the titleholders
of the policy.
It provides many benefits, some of
which are as follows:-
It provides protection to the family
members or dependents against
untimely death of an insured person.
28. It facilitates savings for old age to enjoy
secured and peaceful life as the earning
capacity of a person is reduced after
retirement.
It helps to mobilise savings of the public to
channelise it for investment and thus
promote economic development of the
country.
It (policy) can be used as a security to raise
loans and thus improves credit worthiness
of an individual or a business.
It also has tax benefits as under Income Tax
Act, premium paid is allowed as a deduction
from the total income.
29. A contract of marine insurance is an
agreement whereby the insurer undertakes
to indemnify the assured, in the manner
and to the extent agreed, against losses
incidental to marine adventure.
There is a marine adventure when any
insurable property is exposed to maritime
perils i.e. perils consequent to navigation
of the sea.
The term 'perils of the sea' refers only to
accidents or causalities of the sea, and
does not include the ordinary action of the
winds and waves.
Besides, maritime perils include, fire, war
perils, pirates, etc.
30. Hull Insurance:- covers the insurance of
the vessel and its equipment i.e.
furniture and fittings, machinery, tools,
fuel, etc. It is effected generally by the
owner of the ship.
Cargo Insurance:- includes the cargo or
goods contained in the ship and the
personal belongings of the crew and
passengers.
31. Freight Insurance:- provides protection
against the loss of freight. In many cases,
the owner of goods is bound to pay
freight, under the terms of the contract,
only when the goods are safely delivered at
the port of destination. If the ship is lost
on the way or the cargo is damaged or
stolen, the shipping company loses the
freight. Freight insurance is taken to guard
against such risk.
Liability Insurance:- is one in which the
insurer undertakes to indemnify against
the loss which the insured may suffer on
account of liability to a third party caused
by collision of the ship and other similar
hazards.
