The Law of Insurance-1938

The Law of Insurance-1938

The contract of Insurance

 

1.Definition:

 The contract of insurance is a contract between two parties whereby one party agreed to pay to the other party a certain sum of money on the happening of a specified contingency.

  a) The party that agreed to pay to the other party is called ‘Insurer’.

  b) The other party is called ‘Insured’ or ‘Assured’.

  c) The consideration is called ‘Premium’. 

 

The Rationale of Insurance:

The advantage and the objects of Insurance are as follows:

a)Covers risk-Insurance is the method of reducing risk. By insurance a person can protect himself from loss arising in the future.

b)Small loss-By insurance a person exchanges an uncertain heavy loss for a certain small loss in the form of premium. If a ship is insured and sank in the sea the owner will recover the value and if it is not then

the amount of premium will be regarded as ‘loss’. 

Characteristics of a contract of insurance:

a)(a) Essential requirements

b)(b) Good faith

c)(c) Indemnity

d)(d) Insurable interest

e)(e) Commencement of risk

f)(f) Causa Proxima

g)(g) Payment of premium

h)(h) Right to contribution

i)(i) The Principle of Subrogation

j)(j) Mitigation of Loss 

 

Characteristics of a contract of insurance:

a)(a) Essential requirements-a contract of insurance must fulfils all the essential elements of a contract. The contract must not be illegal or immortal. 

b)(b) Good faith- a contract of insurance is a contract uberrimae fiedei (i.e., one based on good faith). It is the duty of the insured person to disclose all the material facts concerning the subject matter of the insurance. The disclosure must be full and fair. If a material fact is not disclosed, or if there is misrepresentation or fraud, the insurer can avoid the contract. 

Material Fact: 

What is a material facts depends on the circumstances of the case. Generally speaking, a material facts is one which affects the nature or incidence of the risk.

Example-The deceases knowing that he has suffered from a heart disease, stated in the proposal that he did not suffer any heart disease. Held, that this was a statement on a material matter and that he had fraudulently  suppressed the fact which was material to be disclosed and the insured knew the statements to be false when he made them. Under the above circumstances the insurer is entitled to avoid the policy. Krishna Wanti Puri Vs. L.I.C 

 

(c) Indemnity-life insurance is a contingent contract. The money is payable on the happening of a contingency i.e., the death or the specific time.

Other forms of insurance are contract of indemnity. The insurer in this cases promises to indemnify the insured person against the consequence fire, accident or some misfortune.

Suppose that a house is insured against fire for Tk 20,000. If it burns down and found that Tk 15,000 will restore it to its original condition. The insurer is liable to pay only Tk 15,000, unless otherwise agreed upon the contract of insurance. 

 (d) Insurable interest-in every contract of insurance the policy-holder must posses an insurable interest. Insurable interest means some proprietary or monetary interest. The object of insurance is to protect the insurable interest. If there is no insurable interest, there can no insurance.

X can not insure Y’s house. But if Y’s house is mortgaged to X, X has an interest to protect and he may insure the house.

A man can not insure the life of a stranger. But he can insure the life of himself and of persons in whose life he has a pecuniary interest.

In the case of life insurance, insurable interest must exists at the time when the insurance is effected.

In the case of fire or marine insurance, the insurable interest must exists at the time when the claim is made. A contract of insurance entered into without any insurable interest is a wagering agreement and is void.

It has been held that for the purposes of life insurance insurable interest exists in the following cases:

i)Husband in the life of his wife and wife in the life of her husband;

ii)Parent in the life the children if there is any pecuniary benefit derived from the life of the child;

iii)Creditor in the life of the debtor;

iv)Employer in the life of an employee;

v)Surety (money given as a promise that you will pay a debt) in the life of the principal debtor; etc. 
 

e) Commencement of Risk- the risk of insurer commences after the contract of insurance is entered into i.e., after the proposal to insure is accepted.

f) Causa Proxima- the insurer is liable only for those losses which directly or reasonably follow from the event insured against. The insurer is not liable for remote consequences and remote causes.

g) Payment of premium-the policy holder must pay the premium according to the terms of the contract. 

h) Right to contribution-if a property is insured by several insurers against the same risk, the insurers must share the burden of payment in proportion to the amount assured by each. If any of the insurer pays the whole loss, he is entitled to contribution from the other insurer.

i) The principle of subrogation-in marine and fire insurance contract after the policy-holder is indemnified in full, the insurer becomes entitled to the remaining of the property insured. The insurer is subrogated to the position of the insured. 

j) Mitigation of loss-in case of accident and mischance, it is duty of policy-holder to take steps for reducing the loss as much as possible. For example, when fire occurs the policy-holder must safeguard the remaining property.