Introduction to Insurance - Part 2

Introduction to Insurance - Part 2

CLASSIFICATION OF INSURANCE

Generally insurance can be classified as follows:

1. Life
2. Non Life

Life insurance includes all risks related to the lives of human beings and General Insurance covers the rest.

General Insurance has three classifications

(a) Fire (dealing with all fire related risks)
(b) Marine (dealing with all transport related risks and ships)
(c) Miscellaneous (dealing with all others like liability, fidelity, motor, crop, personal accident etc.)

PRINCIPLES OF INSURANCE

There are some basic principles which apply to Insurance. The principles are as follows:

1. Utmost Good Faith – Most of the facts relating to health, habits, personal history, family history etc. which form the basis of the contract are known only to the proposer. The insurer cannot know them, if the proposer does not disclose them. The underwriter can ask for a medical report. Yet there may be certain aspects which may not be brought out even by the best medical examination. For example a person suffering from diabetes, blood pressure can hide this by certain medications from examining doctor. History of past sicknesses, operations, injuries can be suppressed. Some of this may affect the life expectancy of the proposer. This constitutes material information from the underwriter’s point of view.

Similarly in general insurance, an inspection of the premises may not disclose that the contents of the godown have been temporarily relocated. Non disclosure of such facts would put the insurer as well as the community of policyholders, at a disadvantage. The contract is unfair, because one of the parties to the contract is in a more advantageous position.

The duty of full disclosure is of both the parties. The insurer also needs to disclose facts.

In insurance contract in the event of failure to disclose material facts, the contract can be held to be void ab initio.

Every circumstance that would have a bearing on the judgment of prudent insure in fixing the premium or determining the acceptability of the proposal for insurance, is a material fact. Therefore, facts regarding age, height, weight, nature of occupation, smoking/drinking habits, medical history, surgeries, earlier insurances etc must be disclosed.

2. Insurable Interest – An insurance contract is different from the wagering contract because of the principle of Insurable Interest. A wager is a bet.

Insurable Interest means that the proposer must have a stake in the continuance of the subject insured and could suffer a loss, if the risk is not covered through insurance. Financial or pecuniary interest in the subject matter is insured. The insured must be in relationship with the subject of insurance, where he benefits from the well being and safety and would be prejudiced by its loss or damage.

Who can have insurable interest?
Ø A husband has insurable interest in life of his wife and vice-versa.
Ø An employer has insurable interest in his employee to the extent of the value of his services.
Ø An employee has insurable interest in the life of his employer to the extent of his remuneration for the period of his notice.
Ø A creditor has an insurable interest in the life of the debtor, to the extent of the debt.
Ø Partners have insurable interest in the lives of each other.
Ø A surety has an insurable interest in the life of his co surety to the extent of the debt and also on the life of principal debtor.
Ø A company has an insurable interest in the life of a key valuable employee.

3. Causa Proxima – It means that proximate not the remote cause will be taken as the cause of loss. The insurer is thus has to make good the loss of the insured that clearly and proximately results, whether directly or indirectly, from the event insured against in the policy. The burden of proof that the loss occurred on account of the proximate cause lies on the insured. An insurer would therefore be exempted from liability when the cause of loss falls within the exceptions of the policy.

4. Indemnity – Insurance is meant to compensate losses. It cannot be used to make profit. This is broadly the concept of Principle of Indemnity. The amount paid out as claim cannot exceed the amount of loss incurred. Insurance should place the insured in the same financial position after loss as he enjoyed before it, not better. There is a link between Principle of Indemnity and insurable interest. The amount of claim cannot exceed the extent of interest.

In case of Life insurance the insurable interest is assumed to be unlimited therefore the principle of indemnity does not apply.

Note:
Please pour in your comments and suggestions to improve my writing and grammatical capabilities.
In the Part 3 post we will keep learning about Insurance Basics Concepts and its type.

Disclaimer: This post is from point of view of Elizabeth, if anyone feels hurt or disrespected by any post please revert back, Elizabeth will try to correct her ways of expressing. This is her first attempt to writing.

Regards,

Eliz
(Motto of Life - Mast Raho)