Insurance

INSURANCE
INTRODUCTION
Insurance is a dynamic and exciting business! This may not be the view shared by most people in the county but than most
people probably do not fully understand all that is involved in insurance. For many people, the limit of their knowledge will
actually purchase. There is of course much more to insurance than that.
The starting point for any course on insurance practice must be the concept of risk itself and our understanding of it. What
exactly is meant by the word risk? The word is certainly used frequently in everyday conversation and seems to be well
understood by those using it.
To most people, risk implies some form of uncertainty about an outcome in a given situation. Leaving aside for a moment
what we might mean by the word uncertainty, we are usually reasonable clear as to what we mean when we include risk in
our conversation. An event might occur and if it did, the outcome might not be favourable to us, not an outcome we would
look forward to. The word risk implies both doubt the future and the fact that the outcome could leave us in a worse position
than we are in at the moment.
It is interesting to contract this with the use of the word chance. Chance also implies some doubt about the outcome in a
given situation. The difference is that the outcome is normally a favourable outcome. We talk about risk of an accident, the
risk of losing our job, but we talk about the chance of winning a bet, the chance of passing an examination. Risk is reserved
for those events where the outcome could leave us in a worse rather than a better position, it is the doubt about something
we really do not want to happen.
For many people the analysis of what we mean by risk stops there. In fact we have probably gone beyond the level of
consideration which most people give to the word. However, as students of insurance and practitioners in the insurance
market place, we cannot be content with this relatively brief analysis of the concept, there is much more which can and
should be said. After all, risk is probably the primary motivator in the purchase of insurance.
MEANING AND CONCEPT OF RISK AND UNCERTAINTY

Writers have produced a number of definitions of risk. These are usually accompanied by lengthy discussions in support of
the particular views expressed. A selection of these definitions is listed below:-
Risk is the possibility of an unfortunate occurrence
Risk is a combination of hazards.
Risk is unpredictability – the tendency that actual results may differ from predicted results.
Risk is uncertainty of loss
Risk is the possibility of loss
PERIL AND HAZARD

The term peril and hazard are sometimes used interchangeably with each other and with ‘Risk’. The Three terms (Peril,
Hazard and Risk) are however very different in insurance. The term risk is often used to mean both peril and hazard.
A peril is a cause of loss. In Insurance we talk of the peril of fire, theft, hailstorm, earthquake etc. A hazard on the other hand
is a condition which may increase or decrease the effect of a peril for example the nature of construction in fire insurance.
WAYS IN WHICH RISK IS CLASSIFIED

We turn our attention now to the classifications into which risk can be placed.
1. Financial and non-financial
2. Pure and speculative
3. Fundamental and particular
1. FINANCIAL AND NON

We have already said that risk implies a situation where there is uncertainty about the outcome. A financial risk is one where
the outcome can be measured in monetary terms, and where it is possible to place some value on the outcome. The term
financial risk in this context relates to the out-come rather than the nature of the risk itself.
This is easy to see in the case of material damage to property, theft of property and loss of business profit following a fire. It
is also possible to measure the loss in financial terms where there has been personal injury. The measurement may be done by
a court when damages are awarded or could be the result of negotiation among lawyers and insurers. In any of these cases,
the outcome of the risky situation is capable of financial measurement.
1 Prepared by Mr. Johnbosco M. Kisimbii

There are other situations where this kind of measurement is not possible. Take the case of the choice of a new car or the
selection of an item from a restaurant menu. These could be construed as risky situations, not because the outcome will cause
financial loss but because the outcome could be uncomfortable or disliked in some other way. We could even go as far as to
say that the great social decisions of life are examples of non-financial risks, the selection of a career, the choice of a
marriage partner, having children. There may or may not be financial implications but, in the main, the outcome is not
measurable financially but by other, more human criteria.
In the world of business we are primarily concerned with risks which have a financially measurable outcome.
2. PURE AND SPECULATIVE RISKS

The second risk classification also concerns the outcome. It distinguishes between those situations where there is only the
possibility of loss and those where a gain may also result.
Pure risks involve a loss or at best, a break even situation. The outcome can only be unfavourable to us or leave us in the
same position as we enjoyed before the event occurred. The risk of a motor accident, fire at a factory, theft of goods from a
store, injury at work are all pure risks. There is no element of gain in any of these situations. There will either be an accident,
fire, theft, injury or not. Should the event not take place then the position is unaltered, no one has gained.
The alternative to this is the speculative risk where there is the chance of gain. Investing money in shares is a good example.
The investment may result in a loss or possibly a break-even position but the reason it was made was the prospect of gain.
The reason for stressing the difference between pure and speculative risks is to highlight the fact that pure risks are
normally insurable while speculative risks are not normally insurable. It is difficult to be dogmatic about this as practice
is changing and the division between pure and speculative is becoming more blurred as time passes. Take the case of the
credit risk which we listed under the heading of speculative risks. The goods have been sold on credit in the hope that a gain
will result but a form of credit insurance is available which will meet some of the consequences should the debtor default.
However, as a general statement, we could say that insurance is not normally available for those risks where the outcome can
be a gain. It is easy to see why this should be so. Speculative risks are entered into voluntarily in the hope that there will be
gain. There would be very little incentive to work towards achieving this gain if it was known that an insurance company
would pay up regardless of the effort expended by the individual. Using the terminology of hazard, we could say that there
would be a very high risk of moral hazard.
However, we should be clear that the pure risk consequences of speculative risk are capable of being insured and that more
and more people involved in insurance are being asked to handle speculative risks.
iii) FUNDAMENTAL AND PARTICULAR RISKS

The final classification relates to both the cause and effect of risk. Fundamental risks are those which arise from causes
outside the control of any one individual or even a group of individuals. In addition, the effect of fundamental risks is felt by
large numbers of people. This classification would include earthquakes, floods, famine, volcanoes and other natural
‘disasters’. However, it would not be accurate to limit fundamental risk to naturally occurring perils. Social change, political
intervention or war are all capable of being interpreted as fundamental risks.
In contrast to this form of risk, which is impersonal in origin and widespread in effect, we have particular risks. Particular
risks are much more personal both in their cause and effect. This would include many of the risks we have already mentioned
such as fire, theft, work related injury and motor accidents.
All of these risks arise from individual causes and affect individuals in their consequences.
In the main, particular risks are insurable while fundamental risks are not. Once again it is difficult to be dogmatic as the
views of the insurance market change from time to time. We could say that fundamental risks are normally so uncontrollable,
widespread and indiscriminate that it is felt they should be the responsibility of society as a whole. The geographical factor is
often important, particularly for natural hazards such as flood and earthquake. In many parts of the world these risks would
be regarded as fundamental and not insurable.
INSURANCE AS A RISK TRANSFER MECHANISM

Insurance is a risk transfer mechanism by which an organization can exchange its uncertainty for certainty. The uncertainty
experienced would include whether a loss will occur, when it will take place, how severe it will be and how many there might
be in a year. This uncertainty makes it very difficult to budget and so the organization seeks ways of controlling the financial
effect of the risk. Insurance offers the opportunity to exchange this uncertain loss for a certain loss; the insurance premium.
The organization agrees to pay a fixed premium and in return, the insurance company agrees to meet any losses which fall
Prepared by Mr. Johnbosco Kisimbii
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within the terms of the policy. This is a risk transfer mechanism and one which is of immense value not only to industry, but
also to individuals.
SELF-INSURANCE
As an alternative to purchasing insurance in the market, or as an adjunct to it where the first layer or proportion of a claim is
not insured in the commercial market, some public bodies and large industrial concerns set aside funds to meet insurable
losses. As the risk is retained within the organization, there is no market transaction of buying and selling, but such
arrangements have an overall effect on the funds of the market in general and on premium levels where the organization is
carrying the first layer.
These organizations have made decisions to self insure because they feel they are large enough financially to carry such
losses, and because the cost to them, by way of transfers to the fund, is lower than commercial premium levels as they are
saving the insurer’s administration costs and profit.
This could happen where an organization decides that it has an exposure to loss involving a large number of incidents all of
which are of fairly low severity. This high frequency and low severity profile implies that the losses are predictable. If the
organization considers them to be predictable then the insurer, with its much larger pool to draw on, would certainly find the
losses predictable. Were the organization to insure such losses, there would be a kind of pound swapping exercise with the
organization paying a pound to an insurer only to get it back when the losses which both parties knew would occur, actually
take place. The problem for the insuring company is that the insurer would also have to recover its costs and so the amount
paid to the insurer would probably exceed the cost of the predictable claims.
In such cases fund could be created, out of which the losses will eventually be met. The reader should note the difference
between ‘self-insurance’ where a conscious decision is made to create a fund, and ‘non-insurance’ where either no conscious
decision is made at all, or where no fund is created
Self-insurance schemes, while having certain advantages, also have some serious disadvantages.
ADVANTAGES OF SELF-INSURANCE
The advantages of such a scheme may be summarized as follows:-
i. Premiums should be lower as there are costs in respect of broker’s commission, insurers, administration and profit
margins;
ii. Interest of the investment of the fund belongs to the insured. This can be used to increase the fund or to reduce future
premium contributions;
iii. The insured’s premium costs are not increased due to the adverse claims experience of other firms;
iv. There is a direct incentive to reduce and control the risk of loss;
v. No disputes will arise with insurers over claims;
vi. As the decision to self-insure is likely to be limited to large organizations, they will already have qualified insurance
personnel on their staff to administer the fund.
vii. The profits from the fund accrue to the insured.
DISADVANTAGES OF SELF-INSURANCE
The drawbacks to self-insurance arrangement are as follows:-
i. A catastrophic loss, however remote, could occur, wiping out the fund and perhaps forcing the organization into
liquidation.
ii. While the organization may be able to pay for any individual loss, the aggregate effect of several losses in one year could
have the same effect as one catastrophic loss, particularly in the early years after formation of the fund,
iii. Capital has to be tied up in short-term, easily realizable investments which may not provide as good yield as the better
spread of investments which may not provide as good a yield as the better spread of investments available to an
insurance company.
iv. It may be necessary to increase the number of insurance staff employed at an extra cost,
v. The technical advice of insurers on risk prevention would be lost. The insurers’ surveyors would have a wider experience
over many firms and different trades and this knowledge could be advantageous to the insured.
vi. The claims statistics of the organization will be derived from too narrow a base for predictions to be made with
confidence as to future claims costs.
vii. There may be criticism from shareholders and other departments;
▪ At the transfer of large amounts of capital to create the fund and at the cost to dividends that year, and
▪ At the low yield on the investment of the fund compared with the yield obtainable if that amount of capital
were invested in the production side of the organization.
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viii. In times of financial pressure, there may be a temptation to borrow from the fund, thus defeating the security which it
had created.
ix. Pressure may be brought to bear on the managers of the fund, to pay losses which are outside the cover (i.e. make ex
gratia payments), with the resultant depletion of the fund for its legitimate purposes, and thus making statistical analysis
more difficult;
x. The basic principle of insurance that of spreading the risk, is defeated.
xi. The contributions made to the fund do not qualify as a charge against corporation tax, whereas premium payments are
allowable.
TERMS USED IN INSURANCE

There are certain common terms which are used very often in insurance. These terms need some explanation.
1. Insurer:-This is the party who agrees to pay money on the happening of a contingency is known as insurer. Usually, the
insurers are the insurance companies. Insurer gives protection against loss according to his promise. In India insurers
are LIC and GIC.
2. Insured:-This person faces a particular risk. He is a part to insurance agreement. He seeks protection against risk by
paying premium. Insured claims and receives money as compensation in the event of the happening of the stated
contingency. The insured is sometimes termed as assured.
3. Premium:- It is the amount which is paid by the insured to the insurer. It is the consideration for which the insurer gives
protection to the insured. It is the price of the insurance cover.
4. Policy:- It is the stamped document which contains the terms and conditions of the insurance contract. Usually it is
issued by the insurer (insurance company). This is an acknowledgement of the liability.
5. Insured Amount:- It is the money value of the risk. This is also the maximum amount the insured may get. This is also
called the insured amount or policy money or face value of the policy.
6. Peril:- It is an event that causes a personal or property loss.
7. Insurance and Assurance:- In insurance literature one finds these two words. There is no difference in the meaning of
the term. However, there are some who say that assurance be used in cases where the contingency like death is sure to
occur. This means assurance applies to contract of life. The word insurance should be used in those cases where the
happening of an event is uncertain. The event of contingency may or may not take place. This is possible in case of
marine and the fire insurance. Both the terms are being used interchangeably. As such both the words will be used as
having the same meaning.
8. Insurance:- It is contract in which there are two parties at least. One party transfers some of his risk to the other. The
man who takes over the risk, (insurer) pays a certain sum to the insured if the risk really takes place, and insured suffers
a loss.
9. Risk:- It refers to uncertainty about loss. Let us suppose that one house out of 1000 will catch fire. One house out of
1000 belongs to X, X’s house may be burnt or may not be. X faces an uncertainty of loss.
10. Contingency:- This is the actual happening of an event or not happening of an event on which the loss depends. In the
example above catching fire of the house of X is the contingency on which the payment of insured money depends.
11. Loss:- Loss is an unintentional fall in value or disappearance of value in property. It arises out of contingency.
12. Double Insurance:- When a subject matter (life/property) is insured twice either with two different companies or with
the same company under two policies, it is a case of double insurance. In case of life insurance the person can take as
many policies as he wishes. On the maturity of the policies, he can realize the whole amount from the insurer. For
example, a person has taken three life policies at Rs. 10,000, and Rs. 5,000. On maturity he will get Rs. 30,000.
However, in case of fire and marine insurance the problem is different. When the subject matter is i9nsured with more
than one insurer, the insured can claim his loss from any one or both the insurers. But the total claim should not exceed
the amount of total loss or the total insured value whichever is smaller. For example, one has taken three fire policies at
Rs. 15,000, Rs. 10,000, and Rs. 5,000 on a particular building. He suffers an actual loss by fire of Rs. 6,000. Here the
insured can realize only Rs. 6,000. The insurers will distribute the loss between them rateably. That is according to the
proportional the individual insured sum bears to aggregate of all the insurers promise. In the example the total sum
assured is Rs. 30,000. The first insurer is responsible for 1/2 , the second 1/3, and the third 1/6 of the total. These insurers
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will share the loss in that way. The first has to pay Rs. 3,000; the second Rs. 2,000 and the third Rs. 1,000. It he suffers a
loss of Rs. 30,000 then he can realize the full amount.
Here let us bear in mind that double insurance is taken where the insured thinks that the insurer (original one) is
financially not sound. He cannot make a profit by over insurance. He cannot realize more money than the loss. Insured in
no case is financially more benefited from double insurance.
BASIC PRINCIPLES OF LAW GOVERNING GENERAL INSURANCE

1. UTMOST GOOD FAITH
Definition:-‘Uberrimae fides’ means utmost good faith. The law compels the parties to the contract (insurer and
insured) to make full disclosure of all material facts. What is a material fact?
Material facts are those informations which may affect the decision of parties to enter or not to enter into an agreement.
The insurer calculates the risk of the insurance and fixes the price. The insured knows the nature of risk he is
transferring. Full or partial concealment of fact by any one of the parties makes the contract void
This is something special and different from ordinary agreement of sale. In sale of goods, the principle is let the buyer
beware of what he buys. That means buyer examines the goods and decides to buy or not to buy. But in insurance facts
about subject matter (life of a person or nature of material used in house) is known only to the insured. At times insurer
also knows privately, about subject matter. These facts known to one but not known to the other party must be disclosed.
As for example, how many times a person has suffered from asthma or tuberculosis is not known to the insurer. Though
both the parties have a duty of disclosure the insured has more responsibility.
a. Who decides?:- What is a material fact? The parties are not the best judges of the materiality. The law courts
decide what material fact is. From past judgements we find that those facts which influence are:-
i. Nature of risk i.e. make the risk more dangerous or less and
ii. The character of the insured i.e. who suppresses the actual degree of risk by concealing facts are material.
Some examples of material facts may be given. In life insurance history of past diseases, in marine insurance repair
and maintenance of ship, in fire the surrounding and the material stored, in motor insurance the model and make of
the car are material facts.
b. Effect of Concealment:- The general rule for disclosure is the same for all types of insurance contracts. But the
responsibility of parties differ from one type to other. As for example, in UK the insured in marine contract is
supposed to know everything about the ship. If he does not disclose some matters innocently or because of
ignorance then also it is in law becomes concealment. The contract is cancelled. In USA also the rule does not
excuse innocent concealment. But in India rules are lenient. The insured is not punished for his non-disclosure in
some cases:-
i. Facts which he does not know, and
ii. Facts which he cannot know with reasonable effort.
c. Exceptional cases of non-disclosure:- When concealment does not effect a contract? There are material facts
which even if concealed will not make a contract void. Some of these material facts are given below:-
i. Facts which are public knowledge or very common as the fats of breaking out of war,
ii. Facts which reduce the degree of risk, as the fire extinguishing arrangements,
iii. Facts which are quite apparent from information already supplied
iv. Facts which are mentioned in the Policy as a condition like a specific licking measure.
v. Facts which were surveyed or inspected by insurer.
d. Time of disclosure:- The material facts must be disclosed at the time of giving a proposal for insurance by the
insured. He should also inform about facts which he knew later on but before completing the contract. Insured
needs to inform other changes after the contract is made. The insured has a major responsibility under insurance
contract. If it is proved that he has intentionally concealed facts about subject matter then the contract can be
declared void. The insurer has no liability under such a contract.
2. INSURABLE INTEREST
We have discussed the essentials of a valid contract. Insurance contract requires some other conditions also. The insured
may enter into a contract but if he has no insurable interest in the subject-matter then the contract is invalid. Insurable
interest is a necessity for insurance contract. What is insurable interest? Interest means a relationship between policy
holder and the subject-matter of insurance. It refers to monetary loss or gain. An interest is an interest of such a
nature that the event insured against might cause loss to the insured (Mowbray and Blanchard). If the insured does
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not suffer a loss out of the destruction of the subject-matter of insurance he has no interest, he cannot make a
contract. Interest means financial involvement. Professor Mehr says, ‘If the happening of the event insured against
cannot cost the insured money, then there is no insurable interest’. Insurance does not insure a property or life but it
insures your monetary interest in that property. As for example, one house is worth Rs. 1,000,000 in the market. If you
are not the owner of the house your interest in the house is zero. Another case may be seen. A scooter is stolen by ‘A’
which belongs to ‘B’, ‘A’ has no insurable interest. Some examples of insurable interest are:-
i. Every person has an insurable interest on his or her life, or on life of the person on whom he/she depends,
ii. Owner of a dwelling house on the house,
iii. Businessmen on the debtor up to the amount of loan.
Insurance underwriters examine the presence or absence of insurable interest for two reasons:-
i. For them this is the maximum amount of compensation the insured may get and
ii. The gamblers are not allowed to benefit out of insurance contract.
In our example of stolen scooter the thief has no interest but if he gets money for destruction of the scooter it is pure
wager.
The following are the conditions for valid insurable interest:-

i. There must be a physical object like life or property as the subject-matter of insurance which is likely to be
destroyed.
ii. The person desiring to insure (insured) must lose or gain money if the subject-matter is lost or saved from
future events (like death or fire etc.).
iii. The monetary relationship between subject-matter and the insured is recognized in law.
iv. There must be possibility or chance of a loss due to uncertain future event.
Who are the persons having insurable interest? We can make a list of persons and their insurable interest as follows:-
Persons Insurable Interest

1. Whole undisputed owner On house or property
2. Agent On property of his master
3 Trustee On trust property
4 Bailees (temporary possessors) On the property in which he has worked and not yet paid
(on ornament)
5 Mortgage (who has lent money against security of On the security
property)
6 -Husband/Wife -On wife/husband’s life.
-Father depending on Son/Daughter -On son/Daughter.
7 Creditor On Debtor’s life
8 Partners On other partners’ lives
9 Employer On skilled and trained employees
10 Surety (who stands guarantee to a debtor) On Debtor
11 Owner of ship On ship
12 Crew of ship On ship (up-to salaries)
13 Cargo owner On cargoes
When should insurable interest exist? Insurable interest must be proved at the time of payment of insurance money.
The practice differs from one form of insurance to other. In life insurance it is sufficient if the insured has an insurable
interest in the life insured at the time of contract. It does not matter if the interest is absent at the time of paying insured
amount. In fire insurance, the insurable interest in the subject-matter must be present at the time of entering into contract
and also when the event takes place. This is done to prevent moral hazard of setting fire to property. This is very easy if
the insured has no interest in the property. Suppose A takes an insurance against fire on a godown. After sometime sells it
to B. A cannot get insured amount or compensation for loss and he has no suffer. In all other insurance contracts like
marine and accident insurable interest must exist in the subject-matter at the time of event causing the loss.
3. INDEMNITY
a. Scope:- This principle is applicable to all insurance contracts except personal insurance
contracts (life, personal accident and sickness). This is a regulating principle. This principle is observed more strictly
in property insurance than in life insurance. Ordinarily a property owner may not recover more than the actual cash
value of the property destroyed, whereas a person may insure his own life for any sum within reason. (Regel and
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Miller). The principle states that payment of loss under an insurance contract is enforceable only to the extent of the
actual loss to the insured resulting from a peril insured against. (Mowbray and Blanchard).
b. Meaning:-Indemnity means security against loss or damage or compensation for loss. It is

equal to an exact financial compensation. The loss must be estimated in money value. The compensation will be
equal but never more than the value of loss or he is reinstated in his position before loss. There may be some
exceptions.
i. In fire and marine insurance amount of loss plus a certain amount of profit that the
insured might have earned if there was no loss is taken as amount of compensation,
ii. In some lines of insurance valued policies are written. The value fixed by agreement
becomes a part of contract. Such cases arise where correct amount of loss is difficult to calculate. Insurance of
antiques and works of arts come in this line.
c. Purpose:- The principle sets a limit to compensation.

i. It says that even if an insurer promises to pay a sum of money in the event of a loss, it
cannot be enforced above the actual values of loss. The compensation over and above the actual loss is a profit
of gamble or wager.
ii. It is against public interest, because the temptation to destroy one’s own property will
increase and so also the risk. It is against ethics of insurance. It will encourage anti-social acts.
iii. In the absence of this principle of indemnity overpayment for loss i.e. a larger than actual
loss will be made. So premium rates will go up. Honest persons will leave insurance for dishonest to come in.
Insurance companies may fail and ultimately it will be a great social loss.
iv. We give two examples of over and under insurance. As for example, Suppose A insures
his house for Rs. 30,000 with an insurer, The loss comes to Rs. 40,000. It is a case of under insurance. If the
actual loss is Rs. 20,000, then it is over insurance. In first case A can get only Rs. 30,000 and in the second case
only Rs. 20,000 as compensation. The insured suffers both due to over and under insurance. In over insurance
he pays higher premiums. He does not recover the entire value of loss in case of under insurance.
d. Application of the principle:- The conditions for application of the principle of Indemnity
are given below:-
i. Insured has to prove that he actually suffers monetary loss in the event of loss taking
place.
ii. Compensation must be measured by comparing with value of loss or insured value. It is
either equal to or less than insured amount, but never more than loss. It punishes over or under insurance.
iii. The insurer takes over all rights and duties of the insured after paying compensation. It
includes any extra money earned as profit on sale of property destroyed and so on.
iv. The insurer has a right to claim against third party if the insured has a right after it pays
compensation. As for example A’s house is burnt. The loss is valued at Rs.30,000. The cause of fire was known.
It was due to carelessness of X, A’s neighbour. The insurance company can recover money for negligence from
X after paying for A’s loss.
4. DOCTRINE OF SUBROGATION
This principle of insurance, is applicable to property insurance only. Life insurance and third party liability in accident
insurance come under this principle. Subrogation is a combination of two Latin words: Sub and rogare Meaning under
and asking respectively. This means stepping into the shoes of other. By this principle one party to a contract gets the
power to exercise all the rights of another party against a third party. This is very clear if we look to a fire insurance
contract. ‘A’ suffer a loss of Rs. 10,000 by fire, B the insurer indemnifies A up-to Rs. 10,000. A has another alternative to
seek compensation. He may claim damage from the person for whose negligence the fire occurred. If A prefers to take
compensation from insurer, he cannot ask third party for compensation. But the insurance company can recover damage
fro the third party because he gets the rights of A after paying him compensation. But insurance company cannot sue in
its own name. It is a settled principle of law. It has also been incorporated in all policies that the insurance company ,
upon payment of the loss to the insured, is entitled to his insured’s legal, equitable, and (perhaps) contractual rights
against third parties. (Riegel and Miller). But insured’s right does not include or allow insurer to sue the offender.
a. Purpose:- The principle supplements or helps to apply the principle of indemnity. Indemnity
means recovery of actual value of loss. The insured is not allowed to make a profit out of misery. This is explained
by L.J. Bratt (in Castellain Vs. Preston) that if a person wants to recover compensation for loss he can do so by
insurance. The insurance company may pay for the total loss that the insured cannot take with both hands. If he has a
means of diminishing the loss, the result of the use of these means belongs to the insurers. There are two purposes
behind the principle. The are:-
i. The insured may recover his loss but not more than that,
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ii. The insurer, after paying for loss should avail of the ways and means open to insured to reduce his liability.
Lord Blackburn says that it becomes an equity that the person who has already paid the full indemnity is entitled to
be recouped by having that amount back. (Burnard Vs Rodocanach). The insurer is allowed to recover as much as
possible from third party by taking actions which insured might have taken.
b. Essentials of the Doctrine

i. It arise out of indemnity, compensation should be up-to the value of loss. The value if any in the damaged
property and any right of the insured against third party will belong to insurer.
ii. Insurer automatically displaces insured after paying for latter’s loss. Thereafter insurer becomes the proxy
or substitute for the insured. He will exercise all the rights of insured.
iii. Subrogation is limited in value. The insurer who steps into the insured’s position can get benefits upto his
payment. As for example, A, a ship owner gets compensation of Rs. 80,000 from insurer. The insurer by
exercising subrogation rights, recovers Rs. 120,000 from another ship owner for his negligence. The Insurer
will repay Rs. 40,000 minus his expenses to A.
iv. Subrogation may be applied before paying compensation. This happens, if the assured gets compensation
from third party. The insurer will pay the balance of loss. As for example, A sustains a loss of Rs. 20,000, he
recovers from the party responsible for loss Rs. 10,000. This insurer who agreed to compensate up-to Rs.
20,000 will now pay only Rs. 10,000. That is total loss minus compensation from third party.
v. Subrogation does not apply to life contract. The person (insured) will get policy money, and also the
compensation from third party, in the event of an incident insured against.
The doctrine of subrogation is based upon two principles:-

i. The insured is not entitled to profit from the loss, but should be reimbursed (paid the exact amount of loss)
only of the amount of loss sustained.
ii. The wrong doer (for whom the loss occurred) should suffer the loss, which is applicable only to cases
involving fault. Wrong doing are mainly civil wrongs. The common forms are negligence and nuisance. The
insured gets compensation and insurer proceeds to recover damage from wrong doer to insured. This is a settled
principle in insurance. So much so that the insured forfeits the right of claim under the insurance contract, if he
settles the claim against the third party and so cuts the rights of the insurer. It means that the insurer has certain
rights in an insurance contract, to reduce his liability is such a right. If insured does something by which insurer
is not able to recover anything from a wrong doer than the insured is punished. He cannot claim any
compensation for his loss.
5. CONTRIBUTION
This refers to sharing of loss between co-insurers. Sometimes one insured takes more than one policies, against one loss
and one interest in a property. This is quite legal. There are more than one insurers for a particular property or the insured
has insured the same property with many insurers. If one of them pays for the loss will bear the expense along? Can
he invite other to share his burden of payment?
The insurer paying the claim has a right upon other insurers to pass or transfer part of his burden. This is called principle
of contribution. How is the share of insurer fixed? The shares are equal or are equitable (determined on some fair
basis). The total loss will be shared by insurers rateably (according to the proportion one insurer’s promise bears to
aggregate of all insurers’ promise). The first claim payer can compel all others to contribute. This right arise only after
paying the insured for his loss.
Essential Requirements of the Doctrine of Contribution:-

i. The insured should be the same for all contracts.
ii. The policies should cover the same peril which caused the loss
iii. They all try to protect the same interest of the one insured.
iv. Policies must be in force when loss arose.
Calculation:- Generally there are two ways of fixing the insurer’s shares:-
a. Independent Liability:-
i. The money payable by each insurer is found out,
ii. The sums are added together,
iii. If the loss is smaller than amount payable, the individual share of each is reduced rateably.
b. Sum insured:- The insurers pay according to the proportion their shares bear to total sum insured
respectively.
8
Individual sum Insured . X Loss = Individual Insurer’s share of compensation to insured.
Total Sum Insured by All insurers
Example:- An insurer covers Rs. 10,000, and B another insurer covers Rs. 20,000 of a property. The actual loss is Rs.
9,000. A paid the sum of Rs. 9,000. What would be the loss, A can recover from B?
Total Insurance = A Rs. 10,000 + B Rs. 20,000 = Rs. 30,000.
A. 10,000 X 9,000 = 3,000

30,000
A. 20,000 X 9,000 = 6,000

30,000
 Rs. 9,000 – Rs. 3,000 (A’s share) = Rs. 6,000.
A can get back Rs. 6,000 from B. so B has to contribute Rs. 6,000 towards the loss which A has already paid on his
behalf.
6. PROXIMATE CAUSE
Causa proxima:- This principle is the most fundamental for deciding payment of compensation to the insured. Insurance
is taken against risk of happening one or more events. The insurer pays compensation to insured only if the insured
shows that the cause of loss was insured. This is an additional principle besides insurable interest and subrogation.
If loss is caused by one event then is easy to say whether it is insured or not. Compensation is paid if the cause if insured
against. But when loss is produced by more than one cause it is difficult to say which one of them produced the loss:-
i. The events may be complimentary or dependent upon one another and come one after the
other,
ii. The events may be quite independent of one another but some must happen first and others
next. All or only some of these events may be insured. In these situations the cause of loss is found out by applying
the principle of causa proxima.
The principle of determination of the cause of loss in latter case is Causa Proxima non remota spectatur. It directs the
parties look at the most proximate (the nearest) but not at the remote (distant or indirect) cause of loss. That means first
pick up the proximate cause and then verify if it is included in the insurance. If the two conditions are fulfilled
compensation must be paid.
In fire policy ignition was insured against, the store was covered by fire insurance. The radiators of the store had heating
arrangements by steam. They became too hot and spoilt the candy in the store. There is no fire so no compensation. Fire
means ignition that spoils the subject matter. Fire here is the remote (not direct contact with fire) reason or cause.
In one case, oranges and lemons were insured as cargo against collision of ship. Actually the ship collided and was put
into the port for repairs. For convenience of repairs the cargo was unloaded onto lighter and reloaded on the ship after
repairs. The fruits when reached destination were destroyed. Find out which is the nearest cause of loss? (Collision or
Loading and unloading?) The perishable nature of loading and unloading of cargoes were the proximate causes. This is
not insured so no damage paid.
A CHARACTERISTICS OF INSURABLE RISKS

`The picture we will paint in this chapter is one of a valuable service to individuals and industry. The provision of this
service results in a number of direct benefits to those who purchase protection and also leads to a number of other, more
general benefits to the nation as a whole.
However, there must be limits on the availability of the risk transfer mechanism. For example, it would not be wise to
allow people to benefit from their own criminal actions. This could happen if it was possible for a person to insure their
neighbour’s house and then burn it down, in order to collect the claim money. Even where no criminal intent is present, it
does not seem proper for a person to benefit from a fire at a neighbour’s house, where they themselves had no financial
interest at all in the house which was destroyed.
It is therefore necessary to have some idea of what can and cannot be insured. We will do this by looking at the
characteristics or nature of insurable risks.
9
There is one important point to note at this point; it is not possible, or indeed wise, to be dogmatic about these
classifications of insurable risk. The world of business is not static environment. It changes in order to adjust to
circumstances as they are perceived, and what may be an uninsurable risk today could very well be insurable tomorrow.
Figure 2.1
Fortuitous
2 3
Financial Insurable
Value interest
Pure
risks
4
6
Homogene
Particular
ous
risks
exposure
Public
policy
1. FORTUITOUS (HAPPENING BY CHANCE)

The happening of the event must be entirely fortuitous (accidental) as far as the insured is concerned. (The insured is
the person, company or organization insured by an insurance company). It is not possible to insure against an event
which will definitely occur since it involves no uncertainty of loss and therefore no transfer of risk would be taking
place.
This would rule out inevitable events such as damage caused by wear, tear and depreciation. Any damage or loss
inflicted on purpose by the insured would also be ruled out. Purposeful acts by other people would not automatically
be ruled out, provided that they were entirely fortuitous as far as the insured was concerned
The one example which may seem to fall outside this rule, and yet is insurable, is the risk of death itself,. We all
know that it is possible to purchase life assurance even though death is probably one of the few certainties there are,
However, the timing of death is what is fortuitous and it is with this that life assurance is primarily concerned.
1. FINANCIAL VALUE
The essence of insurance, as we have seen, is to act as a risk transfer mechanism and provide financial compensation
for loss. Insurance does not remove the risk, but it does endeavour to provide financial protection against the
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consequences. If this is the case then the risk which is to be insured must result in a loss which is capable of being
measured in financial terms.
In the case of property loss or damage, this is easy to see. The monetary value of property lost can be established
and subject to terms of the insurance policy, compensation can be provided. The exact value of the loss will not be
known at the outset, but only after the event has occurred. All material damage to, or theft of, property would fall
into this category.
In life assurance, the level of financial compensation is agreed at the beginning of a contract. It is impossible to
place values on the life of a wife, husband or child, but the financial sum assured can be determined at the
commencement of the insurance.
3. INSURABLE INTEREST
The practice of insurance is governed by a number of basic doctrine or principles. One of these doctrines is that of
insurable interest. We have already said that one requirement of an insurable risk is that there must be some loss
which is capable of being measured in financial terms. It is easy to anticipate situations where a person could insure
the property of someone else so that when the property was lost or damaged he, in addition to the owner of the
property, would receive compensation. At the extreme, we could even anticipate people visiting local hospitals and
effecting life assurance on the lives of people who were very ill. In both of these cases there would be a financially
measurable loss, in terms that we have described. However, both situations seem quite unacceptable. What is
missing is any kind of legally recognizable relationship between the insured and the financial loss.
4. HOMOGENEOUS EXPOSURES(Formed of parts that are of the same type)

In the absence of a large number of similar, homogeneous exposures the task is much more difficult and the
calculation of required premiums becomes more of a ‘guesstimate’ than a mathematical calculation. With these
cases, the insurers may or may not be accurate in the setting of a premium but inevitably will want to protect
themselves by charging a premium which should cover even the worst case. Competition will be much less
important, as there are not large numbers of the exposure all seeking protection.
While having a large number of similar exposures is a characteristic of an insurable risk, it is possible to cite
examples where this was not the case and insurance was still provided. Occasionally there are reports of unusual
risks being insured, normally at Lloyd’s, we will look at the operation of Lloyd’s later. Film stars’ legs or pianists’
fingers have featured in such reports and these are possibly news worthy in some sense, but in practical terms they
have little to teach us. A much more topical and realistic illustration of very low numbers of similar exposures would
be space satellites. We are seeing more launched every year, but they are still relatively rare and have certainly not
been around long enough to enable insurers to build up any kind of statistical base.
5 PURE RISKS
Insurance is concerned primarily with pure risks. Speculative risks are normally taken in the hope of some gain and
the provision of insurance may act as a distinct disincentive to effort. For example, if it was possible to insure the
profit that a person hoped to gain from an enterprise, then there would be little incentive for some people to do
anything to generate the profit. Making no personal effort to secure the profit would still result in profit, because the
policy would pay up in the event that no profit was generated. The pure risk consequences of speculative risks are
certainly insurable, but not the speculative risk itself.
Take as an example the marketing of a new line in clothing. The risk that the new line will sell or not is clearly a
speculative one. It is a risk knowingly entered into in the hope of financial gain. This after all, is the very essence of
business activity. However, the risk that the line will not sell is not the only risk to which the enterprise is exposed:
The factory in which the garments are to be made could be damaged.
Designs could be stolen;
Suppliers of essential materials could suffer fires or other damage, resulting in them being unable to
Supply the raw material.
All of these risks are pure risks which are insurable, but they arose directly from the decision to take the speculative
risk in the first place. We are not saying that all pure risks are insurable, just that speculative risks are normally not
6. PARTICULAR RISKS
We looked at the division of risks into particular and fundamental in chapter one. The widespread and indiscriminate
nature of fundamental risks has resulted in them traditionally being uninsurable. It is not accurate to say that all
fundamental risks can not be insured, but insurers are very selective in the risks of this type that they are prepared to
insure.
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What we could say is that those fundamental risks which arise out of the nature of society itself are not usually
insurable. This would include war, changing customs and inflation. Fundamental risks arising out of some physical
causes such as typhoons, earthquakes and hurricanes may be insurable. The decision would depend, in these cases,
on the geographical location of the property which had to be insured against these risks. In the main, fundamental
risks are looked upon by the insurance industry as the responsibility of society as a whole and not simply those who
choose to insure.
7. PUBLIC POLICY
We have already seen that the insured must have a financial interest in the loss and that the loss must be fortuitous.
This rules our the possibility of insuring the property of other people, or inflicting damage or loss on purpose in
order to benefit form an insurance policy. However, there are still risks which we might all agree should not be
insurable.
It is a common principle in law that contracts must not be contrary to what society would consider being the right
and moral thing to do Contracts to kill a person are unacceptable, as are contracts to inflict damage on the property
of people, or steal from them. In terms of contracts of insurance, the same principle applies. It would be
unacceptable to insure against the risk of a criminal venture going wrong. For example, society could not accept the
idea that thieves could effect a policy which would pay them the expected gain from a theft, if they were caught by
the police and therefore unable to complete the deed. This may seem a little farfetched, but what about the risk of
incurring a fine? A person could be caught speeding or, worse, could be charged with dangerous or drunken driving.
The risk run is that a large fine could be imposed. The person certainly has a financial relationship with the loss, and
it could be argued that the loss is fortuitous as far as he is concerned. However, society would not find it acceptable
for a person to be able to avoid the punishment implicit in the fine, simply by taking out insurance. One company
did at one stage offer a policy which provided a chauffeur in the event of the insured being convicted of a drink
driving offence and banned from driving. This policy had to be withdrawn fro the reasons discussed above.
Figure 2.1illustrates the various characteristics of insurable risks which we have looked at. In the fast changing
world of risk and insurance, it would not be possible or even wise to create hard and fast rules regarding those risks
which can and cannot be insured. The list serves to highlight and underline a philosophy of insurability, rather than
provide a code of practice.
Insurance is a service industry, it is there to serve the needs of its customers and these needs do change. The
underlying service is that of providing a risk transfer mechanism, but the nature of the risks for which this may be
necessary will alter as time passes. New products, processes and industrial systems terms all bring new forms of risk
for which consumers, be they corporate or private, will need protection.
B FUNCTIONS OF INSURANCE
The main function of any organization is to meet the objectives laid down for it by its owner. In industry, the owners
will normally be a large number of shareholders, and objectives are usually measured in terms of monetary return on
their investment. This is true for many insurance organizations. There are also other forms of insurance organization
which are not answerable to share holders, but which nevertheless have objectives to meet. Rather than discuss the
functions of individual organizations, this chapter concentrates on the function of insurance itself. What is the role
of insurance? What function does it perform?
1. RISK TRANSFER
The primary function of insurance is to act as a risk transfer mechanism. We can see this by considering two
examples, the individual and the industrial buyer.
Example 1
Think of the car owner, He has a car valued at £12,000, which probably represents one of the largest
investments he is ever likely to make. A considerable amount of his savings has been invested in its purchase
and even the least risk conscious person would recognize that they are at risk in such a situation. The car could
be stolen, damaged in an accident or catch fire. There could be an accident, resulting in serious injury to
passengers or other people.
How will the owner of the car cope with all of these potential risks and their financial consequences? He has no
knowledge of whether or not any of them will ever materialize and, if they do what the cost is likely to be. He
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could get to the end of the year completely free of incident or his car could be totally destroyed tomorrow!
Insurance will not, in itself, prevent any of the above risks from occurring but what it will do is provide some
form of financial security. The owner of the car can transfer the financial consequences of the risk to the insurer,
in return for paying a premium.
Example 2
Industry is in exactly the same position. The managing director of a company knows that his firm is exposed to
a whole range of risks. We have looked at many of them in the previous chapter. He does not know if any of
them will materialize and if they do, what the cost is likely to be. How will he be able to manage his business?
If he has a loss of some kind, he will have to recover the cost from his customers by increasing the price of the
product he manufactures, or the service he provides. What cost will he pass on? He has no idea whether he will
have a loss or not or the cost of any loss which might occur. The function that insurance performs in this
situation is to be a risk transfer mechanism.
The managing director can exchange his uncertainty of a potentially much larger loss. Which is the premium, he
is relieved from the uncertainty of a potentially much larger loss. The risks themselves are not removed, but the
financial consequences of some are now known with greater certainty and can be budgeted for accordingly.
A whole range of benefits flow from this primary function of risk transfer and these are detailed later. Before
moving on to examine each one in detail, there are two other functions which we should look at the Common
pool and equitable premiums. In one sense, we could say that the common pool and equitable premiums
represent the way in which the main function of risk transfer is provided. However, the provision of a risk
transfer mechanism could be made without the need for either a common pool or equitable premiums and so
they are functions in their own right.
2. CREATION OF THE COMMON POOL

Insurance company gathers together people who want insurance protection and sets itself up to operate a pool. It
take contributions, in the form of insurance premiums, from many people and pays the losses of the few. The
pool idea can work because not everyone in the pool will have a loss in any one year. In fact, not many will
have a loss but the premiums of all who contributed will be sufficient to pay any claims.
The contributions have to be enough to meet the total losses in any one year but in addition will have cover the
other costs of operating the pool, including an element of profit for the insurer. Even after taking all these costs
into account, insurance is still a very attractive proposition in most cases.
3. EQUITABLE PREMIUMS
It is clear that there can be several of these pools, one for each main type of risk. The people who have a house
to insure would not contribute to the same pool as those insuring a car. Operating in this way allows an insurer
to identify which types of insurance are profitable and which are not. In reality there may be some transferring
of funds across the pools, but at this stage is simpler for us to imagine individual pools for different types of
risk.
Even when risks of a similar type are brought together in a common pool, they do not all represent the same
degree of risk to the pool itself. That is, the probability of a loss having to be met by the pool is not equal over
all those in the pool. For example, a timber built house represents a different risk from one of standard brick
construction , an 18 year old driver, with a fast sports car, is quite at different risk from a 40 year old married
man, driving a family saloon; an employee using woodworking machinery is probably at greater risk of
personal injury than someone who spends their working days in an office.
In each of these examples, the insurer is faced with risks of differing magnitude or hazard. The probability of an
event occurring is quite different for each of the pairs, in the examples that we quoted. This will have to be
reflected in the contributions which each will make to the pool. It would not be equitable to expect the driver of
the family saloon to subsidies those who choose to drive fast sports cars. Each person or company wishing to
join the pool must be prepared to make an equitable contribution to that pool
Hazard I is not the only factor which is important. We could have risks which represent much the same hazard,
but would still merit different contributions to the pool. This would happen where the value at risk was
different. For example, a person with a house worth £250,000 would have to pay more to the pool than someone
with a flat worth £35,000. This may seem fairly obvious, but is still necessary to point it out at this stage. Value,
in addition to hazard, plays its part in determining what contribution each risk must make to the pool.
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C BENEFITS OF INSURANCE
The existence of a sound insurance market is an essential component of any successful economy and the proof of
this can be seen in many parts of the world.
1. PEACE OF MIND
The knowledge that insurance exists to meet the financial consequences of certain risks provides a forms of a
peace of mind. This is important for private individuals when they insure their car, house, possessions and so
on, but it is also of vital importance in industry and commerce.
Why should a person put money into a business venture when there are so many risks which could result in the
loss of the money? Yet, if people did not invest in businesses then there would be fewer jobs, less goods, the
need for even higher imports and a general reduction in wealth. Buying insurance allows the entrepreneur to
transfer at least some of the risks of being in business to an insurer in the manner we have described earlier.
Insurance also acts as a stimulus for the activity of businesses which are already in existence. This is done
through the release of funds for investment in the productive side of the business, which would otherwise need
to be held in easily accessible reserves to cover any future loss. Medium sized and larger firms could certainly
create reserves for emergencies such as fires, thefts or serious injuries. However, this money would have to be
accessible reasonably quickly and hence the rate of interest which the company could obtain would be much
less than normal rate. Quite apart from this is the fact that the money would not be available for investment in
the business itself. Because of the effects of the common pool, the business is able to purchase insurance at a
premium which is less than the fund that the company itself would have to retain, even assuming it could retain
anything in the first place. The premium can be looked upon as a certain loss to the business, but the firm is now
free to continue its business and invest in the knowledge that certain risks are now provided for. With this peace
of mind it can develop its business activities.
2. LOSS CONTROL
Insurance is primarily concerned with the financial consequences of losses, but it would be fair to say that
insurers have more than a passing interest in loss control. It could be argued that insurers have no real interest in
the complete control of loss, as this would inevitably lead to an end to their business. This is a rather short-
sighted view. Insurers do have an interest in reducing the frequency and severity of losses, not only to enhance
their own profitability, but also to contribute to a general reduction in the economic waste which follows from
losses. We looked at the cost of risk in chapter one and it would be fair to say that insurers have played a major
role in loss control over the years.
In the case of fire insurance, we can trace the involvement of insurers in loss control right back to the provision
of fire brigades. We will say a little more on this later in the chapter, but at this point it is sufficient to say that
insurance companies provided the only form of fire fighting for many years and this is certainly evidence of an
active interest in loss control. In modern times, the insurance industry pools its resources and funds continuing
research work into the prevention and control of may forms of loss. A number of individual insurance
companies have developed considerable expertise in the technology of different forms of loss control and are
regarded as being at the forefront of research in this field.
In a practical way, buyers of insurance will normally come into contact with the loss control services offered by
an insurer, when they meet the surveyor. The surveyor may be employed by the insurer, or indeed the insurance
broker, and part of his job is to give advice on loss control. Many insurers employ specialists surveyors in fire,
security, liability and other types of risk; others will employ people with broader, but less detailed, knowledge.
The surveyor will assess the extent of the risk to which the insurance company is exposed. In doing so he will
also offer advice, which could take the form of pre-loss control (minimizing the chance that something will
happen) or post-loss control (after an event has occurred).
3. SOCIAL BENEFITS
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The fact that the owner of a business has the funds available to recover from a loss provides the stimulus to
business activity which we noted earlier. It also means that jobs may not be lost and goods or services can still
be sold. The social benefit of this is that people keep their jobs, their sources of income are maintained and they
can continue to contribute to the national economy. We all know the effects on a community when a large
employer moves or ceases operation; the area runs the risk of being depressed, people have less money to spend
and the consequences of this can be far reaching.
To a lesser extent, a major loss resulting in the closure of a business can have the same impact on a community.
It may not be as noticeable as the shut down of a coal mine or large factory, but when losses are aggregated
throughout the country the effect is considerable. It is not suggested that insurance alone keeps people in jobs,
but is does play a significant role in ensuring that there are not unnecessary economic hardships.
The three benefits that we have looked at all follow on from the protection offered by insurance. These benefits
may be to the buyer of insurance or to the economy as a whole, but they relate in some way to the basic idea of
providing a risk transfer mechanism. The final two benefits that we shall consider are in a slightly different
category. Firstly, they are benefits which are enjoyed by the overall, national economy and therefore only
indirectly affect individual people or enterprises. Secondly, they are not benefits which arise out of the provision
of the risk transfer mechanism.
Peace of mind, loss control and the social benefits that we have looked at do seem to arise directly form the
effect of the risk transfer mechanism itself, which is that the financial consequences of certain losses can be met
by an insurer. Vast sums of money are involved, by way of total insurance premiums, to bring about this risk
transfer and the management of that money then brings its own benefits. The two main benefits derived in this
way, which we are going to examine, are the investment of funds and the effect on the balance of payments. We
could say that these two benefits arise as a result of there being an insurance market, rather than the existence of
any particular form of insurance.
4. INVESTMENT OF FUNDS
Insurance companies have, at their disposal, large amounts of money. This arise from the fact that there is a time
gap between the receipt of a premium and the payment of a claim. A premium could be paid in January and a
claim may not occur until December, if it occurs at all. The insurer has this money and can invest it. In fact, an
insurer will have the accumulated premiums of all insured’s, over long period of time.
5. INVISIBLE EARNINGS
We have already said that insurance allows people and organizations to spread risk among themselves. In the
same way, we can also say that countries spread risk. A great deal of insurance is transacted in the UK in respect
of property and liabilities incurred overseas. London is still very much the centre of world insurance and large
volumes of premium flow into London every year, these are described as invisible earnings.
As a trading nation we have to import goods which we need for our people and by the same token we export
goods which other people want to buy.
Where the goods are tangible, a visible trade exists; for example, when goods are shipped to a foreign country
and are paid for by that country, these are visible exports. In the case of insurance, goods are invisible but the
principle remains the same. Whether goods concerned are visible or invisible, exports are bringing money into
the UK and imports are sending money out.
From an economic point of view, is wise to have a balance between the volume of what we export and import.
Importing a much higher amount than we export, means that we are spending money which we have not earned.
This difference between the value of visible exports and imports is called the balance of trade, and this is often
referred to in newspapers and on television. When we export more than we import we have a surplus and when
imports exceed exports we have a deficit on our balance of trade.
In addition to this physical balance, we also have the invisible trade for which the UK is well known. This
includes trading in such things as tourism or banking and we have already considered insurance, which is one
form of invisible earning. Overseas risks are insured in the UK and the money earned on these transactions,
once all costs have been met, represents a substantial volume of earning. In fact, of all the UK financial
institutions, insurance represents the largest single earner, at £3,925m in 1994. (Source: British Invisibles, The
‘City’ Table 1994)
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AN OVERVIEW OF TYPES OF INSURANCE
INTRODUCTION
Over the centuries as insurance has developed, the various types of cover have been grouped into several classes. These
classifications have come about by practice within insurance company offices, and by the influence of legislation controlling
the financial aspects of transacting insurance.
Insurance offices are generally split up into departments or sections, each of which will deal with types of risk which have an
affiliation with each other. There is a very wide variety in the way in which companies organize their business but the
following divisions are not unusual.
Fire, including business interruption

Accident, including theft, ‘all risks’ goods in transit, glass, money, credit, fidelity guarantee.
Liability, including employers’ liability, public liability, products and professional indemnity
Motor
Engineering
Marine and aviation
Life and Pensions
Many of these terms will mean little to you at this point but we will be looking at the classes of insurance available in this
topic. Depending on the amount of business transacted, some branches may split, say the accident department into several
distinct sections or departments, while on the other hand if the amount of business written is relatively small then the accident
and liability departments may b combined. There is also a tendency to create ‘personal’ departments handling all non life
business for the private individual, thus leaving the other departments to concentrate on the more intricate commercial and
industrial risks. Some insurers also have special branches or areas of branches, for the use of brokers. In this way the broker
can meet and build up a working relationship with the same insurance official.
A ORDINARY LIFE ASSURANCE

The term ordinary life assurance is used to describe a particular style of doing business. The other style is Industrial (home
service) life assurance. Ordinary business is what many people will recognize as being life assurance. Industrial or home
service life assurance relates to smaller values and normally involves collection of the premiums from the home of the
assured person.
1. TERM ASSURANCE
This is the simplest and oldest form of assurance and provides for payment of the sum assured on death, provided death
occurs within a specified term. Should the life assured survive to the end of the term then the cover ceases and no money
is payable. Depending on the age of the assured this is a very cheap form of cover and suitable, for example, in the case
of a young married man with medium to low income who wants to provide a reasonable sum for his wife in the event of
his death.
2. DECREASING TERM ASSURANCE

This modification of term assurance is designed to cover the outstanding balance of a monthly repayment building
society mortgage. As the borrower gradually repays the capital sum, so the sum assured diminishes year by year until
exhausted at the end of the mortgage period.
3. CONVERTIBLE TERM ASSURANCE

This is similar to term assurance but a clause in the contract allows the assured to convert the policy into an endowment
or whole of life contract at normal rates without medical evidence. A young person can therefore purchase low cost life
cover and convert it into the more expensive types as his career progresses and he can afford more suitable contracts.
4. FAMILY INCOME BENEFITS

In its basic form this is a type of decreasing term assurance with the benefit on death paid out by instalments every
month or quarter. Frequently it is coupled to an endowment assurance like those sometimes linked to decreasing term
16
assurances. It is intended to replace the income which the life assured would have produced for his family if he or she
were still alive.
In each case, under the basic term, decreasing term convertible term or family income policy, the benefit is only paid if
the life assured dies within the term of the policy. In the case of those with an endowment element the benefit will be
paid on death within the policy period, or the endowment part on survival to the end of the period.
5. WHOLE LIFE ASSURANCE

The sum assured is payable on the death of the life assured whenever it occurs. Premiums are payable either throughout
the life of the assured or can cease at a certain age, often 80 or 85. If premiums do cease at a certain age, the policy
remains in force until the life assured dies.
6. ENDOWMENT ASSURANCE
The sum assured is payable in the event of death within a specified period of years, say 15, 20, 25 or 30. However, if the
life assured survives until the end of this period, until the ‘maturity date’, the sum assured will also be paid. For the same
amount of cover, the endowment has the highest premium, because the life assurance company is guaranteeing to pay out
the sum assured at a given date, or before it if the person dies. The maturity date is usually no later than the date when
the life assured will reach 65. The whole life assurance mentioned earlier will be slightly cheaper than a long-term
endowment because the average policy will not become a claim by death until a person is in his or her seventies. The
company have the premiums to invest for a longer period and can charge lower premiums. The shorter the term of an
endowment policy the more expensive per £1,000 it becomes since the company has fewer years in which to collect
premiums.
Endowment assurance is very popular with those buying houses. The assurance policy is taken out for the amount of the
loan, or mortgage if a building society is involved and written in such a way that the sum assured is payable to the lender
or society. The borrower then pays the interest and the premium. At the end of the term of the loan the endowment policy
matures and repays the amount borrowed (the capital sum) to the lender. In the unlooked for event of the borrower dying
prior to the end of the repayment period then he has paid up the interest to date and as there is an endowment policy in
force it will mature and repay the capital sum.
This can be an expensive method of protecting a loan for house purchase and many building societies accept
modifications involving convertible or decreasing term and endowment combination which are considerably less
expensive but still provide the same security.
7. ASSURANCES FOR CHILDREN

Many people wish to make special arrangements for their children and two common schemes are the child’s deferred
assurance and the school fees policy.
Under a child’s deferred assurance a policy is effected on the life of a parent with an option date normally coinciding
with the child’s eighteenth or twenty-first birthday. Should the parent survive until the option date the child has the
option of continuing the policy in his own name from then on, as either an endowment or whole life. The policy can be
continued without further medical examination and this can be extremely important where a child has contracted an
illness which would otherwise make effecting a policy difficult or extremely expensive. A lump sum can also be taken at
the option date rather than continue cover. In the event of the parent dying before the option date the policy is continued,
without payment of premiums until the option date. Should the child die before the stated age the premiums can be
returned to the parent or the policy continued.
Provision for school fees can be made by effecting an endowment policy, on the life of the parent payable in instalments
over the period of schooling.
8. MORE THAN ONE LIFE

Policies may be effected on more than one life, the sum assured being payable either on the death of the first life or on
the death of the last survivor. Another special type of policy, a contingent assurance, provides for payment of the sum
assured on the death of one life if that takes place during the lifetime of another.
9. GROUP LIFE ASSURANCES

Employers sometimes arrange special terms for life assurance for their employees with the sum assured being payable in
the event of death of an employee during his term of service with the employer. Membership of the scheme is open to all
employees working on the inception date or the anniversary date in future year.
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One policy is issued to the firm and each employee is given a certificate of membership.
10. SPECIAL FEATURES OF LIFE ASSURANCE

The provision of life assurance is a quite different process from the provision of non-life assurance. The main distinction
is that in life assurance the event being assured is certain to happen in the case of those policies paying on death, or
scientifically calculable in the event of policies not paying a benefit on death.
There are a number of special features which are worth mentioning at this stage.
a. A PREMIUM PAYMENTS
Life assurance premiums are usually payable by ‘level’ amounts throughout the period of the policy. This means that
each person pays the same (i.e. level) amount throughout, that amount being determined by his or her age at the time
of arranging the policy.
Some life assurance companies have chosen to market policies with escalating premiums where by the premium
gradually increases in line with the age of the life assured. Thus the premium payable at year one of, say, a 25 year
policy, will be very much less than the premiums which in due course will have to be paid towards the end of the 25
year policy term.
Premiums can be paid annually, half yearly, quarterly or (more likely) monthly and are often met by standing order
or by direct debit which permits the bank to pass payment to the life assurance company automatically at the correct
date.
b. PARTICIPATION IN PROFITS
Life assurance companies value their assets and liabilities at regular intervals, some every year and others every
three years. This valuation of their operation allows them to determine if any surplus exists calculating all future
liabilities and other contingencies. Should such a surplus exist it is distributed among those policyholders who have
‘with-profits’ or ‘participating’ policies. Such policies allow the policyholder to participate in any profit the
company makes. It does not guarantee a bonus to each policyholder, as the company may not have a surplus, but it
does mean that any available surplus will be distributed.
The policyholder pays an additional amount for the privilege of participating in profits and the bonuses are added to
the sum assured and payable at the maturity date. The bonuses themselves are either simple reversionary bonuses
that are computed at a rate percent on the sum assured, or compound reversionary bonuses, calculated on sum
assured plus any existing bonus payments that had already been declared.
An increasingly popular way to allow policyholders to enjoy the benefits of a life assurance company’s investment
growth is to offer endowment policies on a unit-linked basis. Under the traditional type of policy, the life assurance
company invested premiums as it saw fit, without any element of choice being given to policyholders. Under a unit-
linked policy the premiums are invested in a unit linked fund chosen by the policyholder.
c. SURRENDER VALUES
When a person no longer wants his policy or for some reason cannot continue the premiums he can ask for the
surrender value. He ceases payment and receives, not a proportion of the sum assured, but a proportion of the
premiums. Not all policies allow a surrender value. Surrender within the first few years of the existence of a policy
will not normally produce any amount for the policy holder. This is due to the fact that expenses have been incurred
in issuing and renewing the policy and also life assurance cover. These two factors have to be paid for and therefore
in the early years in view of the level premium system, any surrender value will be low if in fact any accrues at all.
The practice of life assurance is always changing to keep pace with the demand of modern living many of these
changes have involved life assurance companies in issuing policies which are combinations of different types of
contracts. In some of these cases it may well be possible for the surrender value to exceed the premium paid this is a
complicated topic but one to which those who specialize in life assurance will return.
d. PAID-UP POLICIES
Some policies provide for the policy to become paid-up, rather than for a surrender value to be available. In this case
the premiums cease and the policy continues, but on maturity a smaller sum than would originally have been paid
will be due to the policyholder. Depending on the policy and the company concerned, these paid-up policies may or
may not continue to participate profits.
B. INDUSTRIAL LIFE ASSURANCE

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There are many more industrial life assurance policies in force than ordinary life policies, but they are for smaller amounts.
Endowment and whole life assurances are the most popular forms of contract in the industrial assurance sector, normally with
low sums assured, as we have said. It is also common to see recurring endowments which provide whole life cover and the
payment of small amounts at regular intervals, say every five years.
The function of industrial life assurance as distinct from that of ordinary life assurance is to bring life assurance to those who
by reasons of circumstances would not normally be interested in carrying assurance cover. They are of the lower income class
and it has been recognized that once a life policy has been effected the best way of maintaining it in force is to collect
premiums from the homes of the policyholders. As there are many other demands on the income of the family, it is often
difficult to save for yearly, half-yearly or quarterly premium payments. These are therefore made at more frequent intervals
under industrial assurance contracts than under ordinary life assurance contracts – each premium payment is smaller and a cll
on the policyholder is made for it.
It would be accurate to say that the number of industrial life policies in force has been decreasing steadily over recent past.
C. PERSONAL ACCIDENT INSURANCE

The intention of the basic policy is to provide compensation in the event of an accident causing death or injury. What are
termed capital sums are paid in the event of death or certain specified injuries, such as the loss of limbs or sight as may
be defined in the policy.
The policy is usually extended to include a weekly benefit up to 104 weeks, or compensation if the insured is temporarily
totally disabled due to an accident, and a reduced weekly benefit if he is temporarily only partially disabled from
carrying out his normal duties.
In the event of permanent total disablement (other than loss of eyes or limbs) an annuity is paid.
In addition to the purchase of personal accident insurance by individuals it is also possible for companies to arrange
cover on behalf of their employees and many organizations arrange group schemes to this end.
Personal accident cover can be extended to provide a weekly benefit of up to 104 weeks if the insured is temporarily or
totally disabled from engaging in his usual occupation due to sickness. Personal accident and sickness policies are
renewable annually and if a claim has occurred which could be of a recurring nature, the cover may be restricted at
renewal or in severe cases renewal may not be offered.
1. PERMANENT HEALTH INSURANCE

This type of cover has been devised to overcome the limitation of 104 weeks maximum benefit under the personal
accident and sickness policies and provide benefits for those who are disabled for longer period or who because of
accident or illness, have to change to a lower paid occupation. It may also be called long term disability insurance.
It is usual to arrange cover to exclude the first month, six month or twelve months of disablement with appropriate
discounts in the premium rates, since many people will receive a substantial part of their salaries for a certain period
when off work. Cover cannot continue beyond age 65 and in order to save premium some people elect for cover to
cease at age 55 or 60. The maximum benefit payable is usually between 50% and 60% of earnings.
2. CRITICAL ILLNESS OR DREAD DISEASE

The intention of this cover is to pay out a lump sum of money upon the policyholder being diagnosed as having
certain forms of major illness. Typical diseases specified include Cancer, Heart attack, Stroke, Kidney failure,
Multiple sclerosis, Alzheimer’s Disease. Parkinson’s Disease and Motor Neurone Disease. Greater underwriting
knowledge and experience will gradually extend the range of illnesses. Some of the most problematical illnesses
which are already being considered include heart valve surgery and AIDS (by transfusion or other such accidental
means). To be covered, a disease has to be capable of careful definition.
Pre-existing medical conditions are excluded as are industry-related exclusions such as asbestosis. Other typical
exclusions relate to war, riots, alcohol and drugs, and self-inflicted HIV/AIDS.
D. MOTOR INSURANCE
The minimum requirement by law (Road Traffic Act 1988) is to provide insurance in respect of legal liability to pay
damages arising out of injury caused to any person, unlimited in amount, and damage to the property of other people
subject to certain limits and exceptions. Policies with various levels of cover are available.
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 An ‘Act only’ policy covers the minimum required by the law. These are not common and usually reserved for a
situation where the risk is exceptionally high in effect. Act only policies are now the same as ‘third party only’
policies which only cover the insured’s liability in respect of third party injury, death or property damage.
 A ‘third party fire and theft’ policy would satisfy the minimum legal requirements and in
addition would include cover for damage to the car itself from fire or theft.
 The most common form of cover is the ‘comprehensive’ policy which adds accidental loss of
or damage to the vehicle to the third party, fire and theft cover.
Private car insurance relates to private cars used for social and domestic purposes and/or business purposes.
Comprehensive policies issued to individuals also include personal accident benefits for insured and spouse, medical
expenses and loss of or damage to rugs, clothing and personal effects.
All vehicles used for commercial purposes, lorries, taxis, vans, hire cars, milk floats, police cars etc. are not insured
under private car policies but under special contracts known as commercial vehicle polices.
Separate cover is available for motor cycles. The type of policy depends upon the machine, whether it is moped or a high
powered motor cycle and on the age and experience of the cyclist. The cover is comparatively inexpensive relative to
motor car insurance.
Special policies are offered to garages and other people within the motor trade to ensure that their liability is covered
while using vehicles on the road. Damage to vehicles in garages and showrooms can also be included under such
policies.
In addition to private cars, motor cycles and commercial vehicles there are a number of vehicles which fall under a
category known to insurers as ‘special types’. These will include forklift trucks, mobile cranes, bulldozers and
excavators. Such vehicles may travel on roads as well as building sites and other private ground. Where special type
vehicles are not used on roads, they are transported from site to site and it is more appropriate to insure the liability under
a public liability policy as the vehicle is really being used as a tool of trade rather than a motor vehicle.
E. MARINE AND AVIATION INSURANCE

Marine policies relate to three areas of risk namely the hull, cargo and freight. The risks against which these items are
normally insured are collectively termed, ‘perils of the sea’ and include fire, theft, collision and a wide range of other
perils. While hull and cargo are self-explanatory the word freight may not be. Freight is the sum paid for transporting
goods or for the hire of ship. When goods are lost by marine perils then freight, or part of it , is lost, hence the need for
cover.
Time Policy
This is for a fixed period usually not exceeding twelve months.
Voyage Policy
Operative for the period of the voyage. For cargo the cover is from warehouse to warehouse.
Mixed Policy
Covers the subject matter for the voyage and a period of time thereafter, e.g. while in port.
Building risk policy

Covers the construction of marine vessels
Floating Policy
This provides the policyholder with a large reserve of cover for cargo. A large initial sum is granted and each time
shipments are sent the insured declares this and the value of the shipment is deducted from the outstanding sum insured.
Nowadays, this basis is virtually a defunct type of presentation.
Slip Policy
In order to reduce administrative work, Lloyd’s underwriters and company members of the institute of London
Underwriters introduced a scheme under which provided that all the parties concerned are agreeable the traditional type
of policy is no longer issued for direct cargo business in its place the signing slop is used as the policy document having
been signed and sealed in accordance with s24 of the Marine Insurance Act 1906. The majority of direct cargo policies
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are never referred to after issue and therefore nothing is lost by the slip policy arrangement. On the other hand, the
system saves both time and storage space.
It must be emphasized that the system is not compulsory. If the assured, the broker, or the underwriter withes to have a
policy in traditional form, it will be issued in the usual way.
Open Cover
By far the most common form of cargo insurance contract is the open cover. Its purpose is to pre-establish an automatic
facility tailored to anticipate the permutations of a client’s future insurance needs over the full range of his ongoing
trading operations, whatever the variations in interests, voyages, conditions or rates. Once arranged, the insured is
guaranteed protection on the agreed basis for all shipments falling within its provisions, subject to declaration of full
shipping details of each dispatch. The client is relieved of the necessity to negotiate the insurance of every shipment
individually , whilst the insurer obtains prospective continuity of interest in the client’s global activities.
Small craft
The increasing leisure use of small boats brought about the introduction of a policy aimed at this form of craft. It is
comprehensive in style, covering a wide range of perils including liability insurance. Apart from small craft policies
which are written and issued by many companies, all marine policies are written on the standard MAR form. This is a
blank policy form and is added to by various clauses both for hull and cargo insurances.
1 MARINE HULL INSURANCE

Marine hull insurance covers the ship itself, together with its machinery and equipment.
There are various institute hull clauses in use, the most commonly used being the Institute Time Clauses – Hulls
1/10/83 (ITC – HULLS 1/10/83)
This set of clauses includes the standard policy cover, extensions and limitations of the cover. The standard policy cover
incorporates.
 Named perils covered by the policy,

 Pollution hazard which gives cover if the vessel is damaged or destroyed by a government
authority in order to mitigate pollution.
 ¾ ths collision liability which the assured may incur by way of damages to the owners of any
other ship or vessel and any cargo which it may be carrying (see section E3)
If optional extensions are required to extend the scope of risks or perils. It is necessary to attach other institute clauses to
the standard policy form.
The limitations of the clause include four paramount exclusions, namely:

 War exclusion,
 Strikes exclusion,
 Malicious acts exclusion,
 Nuclear exclusion.
2 MARINE CARGO
Cargo is usually insured on a warehouse (of departure) to warehouse (of arrival) basis and frequently covering all risks.
Terms of sale and conditions of carriage have important implications for cargo insurers where goods may change
ownership and pass through the hands of more than one shipper or hauler. It is vitally important in cargo insurance to
establish who is responsible for the insurance cover and to determine when the risk passes from the consignor to the
consignee.
Insurers often rely on inadequate packing/loading to modify claims under cargo covers. Where appropriate, insurers will
pay claims and then seek recoveries from carriers. To facilitate such recoveries, it is important that the insured takes care
of intimate a claim against the carrier within the time limits specified in the conditions of carriage.
3 AVIATION INSURANCE
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The use of aircraft as a means of transport is increasing each year and because of the specialist and technical nature of
the risks associated with it, and the high potential cost of accidents, all aviation risks, from component parts to complete
jumbo jets, are insured in the aviation insurance market.
In aviation, traffic volume is defined as the number of paying passengers multiplied by the distance they were
transported. By such a measure, commercial aviation has grown more than twice as rapidly as the overall world economy
in the period from 1971 to 1994 (source; Swiss Re, sigma no 1 1996). The main reasons for this above average growth
are:- the internationalization of economic activity; an increasing preference for long distance tourism; falling relative
prices for air travel, and increases in aviation safety. Even allowing for the substitution of electronic communication
(telephone, video conferencing, E-mail, fax or the internet) for a small percentage of business trips it is assumed that the
aviation industry, and therefore its insurance market, will continue to develop at a particularly dynamic pace.
Most policies are issued on an ‘all risks’ basis subject to certain restrictions. The buyers of these policies are the large
commercial airlines the corporate of business aircraft owners private owners and flying clubs. Usually a comprehensive
policy is issued covering the aircraft itself (the hull, the liabilities to passengers and the liabilities to others.
The complexity and the size of modern passenger jet aircraft results in multi-million dollar hull values. The maximum
agreed value for any one aircraft insured by an airline is over 200 million US Dollars. A concentration of several aircraft
on the ground at a major airport poses an extra risk for certain airlines. The hull risks are high but the real catastrophe
exposure is under the liability section.
A collision of two fully laden, wide-bodied passenger aircraft over a densely populated city could result in as many as
900 passengers dead or injured and extensive damage to people and property on the ground.
Liability for accidents to passengers is governed by a maze of international agreements and national laws around the
world. The main ones are the Warsaw Convention 1929 which made signatories liable to passengers without negligence
but subject to certain maximum amounts and the Hague Protocol 1955 which raised some of these limits. The national
laws may place higher limits on domestic flights. However, some countries, for example, the United States or Japan,
have unlimited liability for personal injury incurred on domestic flights. For domestic flights within the UK. the
provisions of the Carriage by Air Act 1961 apply together with orders made under it.
You will find reference to limits of liability in the small print which forms part of the standard airline ticket. The position
has bee made more complex by some governments imposing on their national airline’s increased limits of liability which
don not have worldwide approval. Although the appropriate rules for calculation of legal liability are normally
determined by reference to the county at point of departure and the country of destination recorded on the ticket, an
airline disaster may produce claims from passengers of many nationalities.
It is interesting to note that in Goldman V. Thai Airlines International (1981). It was held that the limit did not apply
when the aircrew were ‘reckless’ in flying the aircraft. In the aftermath of lockerbie disaster, there have been a number of
attempts at securing much higher compensation than the agreements lay down. Some claims have been settled for higher
amounts, especially when the limits have appeared low in relation to the earning capacity of the passenger.
There have been unsuccessful efforts to increase the Warsaw/Hague limits. Change will only be piecemeal without the
support of the major airline operating countries, notably the United States of America.
The two international agreements also place limits on liability for goods carried by air. Unless of special risk or value,
cargo is usually insured ‘all risks’ in the marine or general markets rather than the aviation market.
The following cases illustrate the scale of potential legal liabilities which insurers need to address, and also the injustices
that can occur under the present system (source: Swiss Re, sigma 1/1996)
 In 1989, a British widow with children was compensated for the loss of her husband, the
victim of a domestic flight in Bangladesh, with £913. The liable party was a Bengali airline. The £913 was the
maximum compensation provided for in Bangladesh’s 1934 Carriage by Air Act. It British law had been applicable,
her claim would have been limited to £83,763.
 An American court awarded 19 million US dollars to the widow of a businessman fatally
injured in the 1983 crash of PanAm Flight 103 over lockerbie. As the security measures of the airline allowed the
aircraft to take off with an unaccompanied piece of baggage on board (which then exploded), the court returned a
verdict of ‘willful misconduct’, meaning that treaty limitation on liability did not apply. A total of 270 persons died in
the mishap. It has only been possible to reach agreements on the compensation of individual passengers or their
familes.
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Insurers are reserving 750 million US dollars for pending judgments.
Other groups of persons requiring aviation liability cover are aircraft and aircraft component manufacturers, and
airport authorities.
F. FIRE AND OTHER PROPERTY DAMAGE INSURANCE

There are a whole number of different ways in which property can be damaged. You need only to think of a small factory
until to imagine all that can be damaged and all the ways in which damage can be sustained. Fire and theft probably
come to mind first but then there are very many different forms of accidental damage. Figure 4.1 outlines some of the
forms of property cover which are available.
Fire and other property damage Insurance
Fire Theft
Glass All Risks Engineering
1 FIRE INSURANCE
A standard five policy is used for almost all business insurances, with Lloyd’s of London also issuing a standard fire
policy that is slightly different in its wording.
The basic intention of the fire policy is to provide compensation to the insured person in the event of there being damage
to the property insured. It is not possible, in the commercial world, to issue a policy that will provide compensation
regardless of how the damage occurs. The insurance company, the insurer, have to know the perils they are insuring.
The standard fire policy covers damage to property caused by fire, lightning or explosion, where this explosion is
brought about by gas or boilers not used for any industrial purpose.
This is limited in its scope as property can be damaged in other ways and to meet this need a number of extra perils,
known as special perils, can be added on to the basic policy. These perils are:-
 Storm, tempest or flood,

 Burst pipes,
 Earthquake,
 Aircraft,
 Riot, Civil commotion,
 Malicious damage,
 Explosion,
 Impact.
It is important to remember that these additional perils must result in damage to the property and it is as well to precede
each by saying, ‘damage to the property caused by……….
In most commercial policies the insured will require cover for buildings, machinery and plant, and stock. These are the
three main headings under which property is insured and in some cases a list of such items can run to many pages,
depending upon the size of the insured company.
In addition to these areas it may be necessary to arrange cover for property while it is still being built (i.e. buildings in
course of erection) but this form of cover is gradually giving way to policy known as contractors’ ‘all risks’ which will be
referred to later.
THEFT INSURANCE
Theft policies have the same aim as the standard fire policy in that they intend to provide compensation to the insured in
the event of loss of the property insured.
The property to be insured, for a commercial venture, will be the same as under the fire policy except of course the
buildings. The theft policy will in addition, show a more detailed definition of the stock. The reason for this is that fire is
indiscriminate and a thief is not, so the insurers charge more for stock which is attractive to thieves.
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The law relating to theft was brought up to date by the Theft Act 1968. This had an immediate impact on insurance
companies as it defined the term ‘theft’. The legal definition was wider than that which the companies were prepared to
offer, especially for business premise, as the definition did not mention any need for there to be force and violence in
committing a theft. This meant that shoplifting, for example, was ‘theft and this kind of risk had traditionally been
uninsurable. To remedy the problem insurance companies included in their policies a phrase to the effect that theft,
within the meaning of the policy, was to include force and violence either in breaking into or out of the premises of the
insured.
2 ‘ALL RISKS’ INSURABLE

Uncertainty of loss is not restricted to events brought about by fire or theft, nor is it limited to events occurring on or
about the insured’s premises. This realization led, as we noted earlier to the development of a wider form of cover known
as ‘all risks’. The term all risks is unfortunate in the sense that is does not provide cover against all risks as there are a
number of exceptions, but it is an improvement on the scope of cover available.
3 PERSONAL EFFECTS
‘All risks’ policies are very popular with individuals who seek a wider protection than that afforded by the policies
available to cover household effects.
The ‘all risks’ policy can be taken out on particularly expensive items such as jewellery, cameras and fur coats, and can
also be arranged on unspecified goods for a lump sum. The twin objectives of such policies are to provide cover for the
whole range of accidental loss or damage and to do so wherever the goods themselves happen to be at the time of loss.
4 BUSINESS ‘ALL RISKS’

The use of ‘all risks’ policies in the commercial sector is becoming more popular as increasingly expensive and
sophisticated pieces of machinery are introduced to the factory and the office.
The advent of the micro-processor and the silicon chip mean that comparatively small machines often desktop
equipment, are replacing larger and bulkier apparatus. It would be quite easy for a small desktop computer to be
accidentally dropped or otherwise damaged. The small bulk conceals a high value and the owner may well consider an
all risks policy to be worthwhile if it assists in removing some of the uncertainty.
5 GOODS IN TRANSIT
This form of cover provides compensation to the owner of goods if the goods are damaged or lost while in transit.
Different policies can be taken out depending upon whether the goods are carried by the owners’ own vehicles or by a
firm of carriers in the same way the carrier can effect a policy as he is often responsible for the goods while they are in
his custody.
We depend to a great extent on the carriage of goods by road and this form of cover is an important aspect of industrial
activity.
Forms of goods in transit insurance are also available for those who send their goods by rail or by post. The
compensation provided by British Rail or the Post Office is often far less than the value of the goods being carried and
in such cases it is a wise precaution to have arranged adequate insurance.
6 CONTRACTORS ‘ALL RISKS’

This is one of the relatively newer forms of insurance that has been developed to meet the changing needs of industry.
When new buildings or civil engineering projects such as motorways or bridges are being constructed a great deal of
money is invested before the work is finished. The risk is that the particular building or bridge may sustain severe
damage and this would prolong the construction time and delay the eventual completion date. The risk is all the more
acute as the completion date draws near, and there are many examples of building and other projects sustaining severe
damage, and even total destruction, only days before they were to be handed over to the new owners.
Should damage occur than the contractor would have to start again, or at best repair the damage. This costs money and
cannot be added on to the eventual charge the contractor will make to the owner for having carried out the building. As a
result the need arose for some form of financial protection and this came with the development of contractors’ all risks
insurance. The intention of the policy is to provide compensation to the contractor in the event of there being damage to
the construction works from a wide range of perils.
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7 MONEY INSURANCE
The loss of money represents the final form of ‘all risk’ cover we will review. The policy provides compensation to the
insured in the event of money being stolen either from his business premises, his own home or while it is being carried to
or from the bank. Event for a person having a medium sized business this is an extremely important form of cover as
large sums of money are drawn from banks to meet wages and one only needs to look at the newspapers week by week
to note the regularity with which hold-ups occur.
One important addito0n to this cover is often the provision of some compensation to employees who may be injured or
having clothing damaged during a robbery.
8 GLASS INSURANCE
Cover is also available against accidental breakage of plate glass in windows and doors. In the case of shops this is often
extended to include damage done to shop window contents.
9 ENGINEERING INSURANCE
As we saw earlier, the provision of engineering cover had its beginnings with boiler explosions. This still forms a major
part of the work done by engineering insurers but the increasing sophistication of industry has resulted in them moving
on to cover other forms of engineering plant, particularly lifts, cranes, electrical equipment, engines and more recently,
computers.
The cover is intended to provide compensation to the insured in the event of the plant insured being damaged by some
extraneous cause or its own breakdown.
Engineering insurers still continue to provide an inspection service on a wide range of engineering plant, and this is a
service much sought after by industry, not only because many forms of inspection are compulsory by law but because
engineering insurers have built up a considerable expertise in this area.
Engineering cover can be summarized thus

a. Damage to or breakdown of specific items of plant and machinery,
b. An inspection service of those items,
c. Cost of repair of own surrounding property due to (a),
d. Legal liability for injury caused by (a),
e. Legal liability for damage to property of others caused by (a)
G. LIABILITY INSURANCE
We have already dealt with liability insurance arising under the specialist branches of motor, marine and aviation, and
engineering insurances. It remains to look at brief details of what is some times termed ‘general liability’ and which
comprises employers’ liability, public liability, products liability insurances and professional indemnity insurances.
1 EMPLOYERS’ LIABILITY INSURANCE

When an employer is held legally liable to pay damages to an injured employee or the representatives of someone
fatally injured, he can claim against his employers’ liability policy which will provide him with exactly the same
amount he himself has ha to pay out. In addition, the policy will also pay certain expenses by way of lawyers’ fees
or doctors’ charges where an injured man has been medically examined. The intention is to ensure that the employer
does not suffer financially but is compensated for any money he may have to pay in respect of a claim. The policy is
restricted to damages payable in respect of injury and does not apply where property of an employee is damaged.
Insurance is compulsory for all but a few employers and this has resulted in employers’ liability insurance forming a
large part of the liability insurance transacted in Britain. With each policy, an annual certificate is issued. Which
must be displayed at every place of business as evidence of the fact that the employer has complied with the law and
effected a policy.
The Employer’s Liability (Compulsory Insurance) Act 1969 requires than an employers’ liability policy may not
be issued with a limit of less than £2m in respect of all claims arising out of any one occurrence.
Until now (1994), insurers have almost invariably placed no limit on employers liability policies. However, recent
very large awards of damages to persons injured at work or to their dependants have caused problems to both
insurers and reinsurers, particularly where more than one employee had been killed or injured in the same accident.
Consequently, it is almost certain that, in the very near future, insurers will place a limit of £10m on employers’
liability policies.
25
2 PUBLIC LIABILITY INSURANCE
Members of the public may suffer injury or damage to their property due to the activities of someone else, and
public liability insurances have been designed to provide compensation for those who may have to pay damages
and legal costs for such injuries or for the damage to property. Particular types of policy are available for each
type of risk.
a. Business risks policy

Every business organization is exposed to the risk of incurring legal liability due to its operations. The
public may be in contact with the firm in its offices or the firm may be on the premises of others in the
street or on various site. The policy will indemnify the insured for liabilities thus incurred.
b. Products liability insurance

An exception on most business public liability policies is one relating to liability arising out of goods sold.
This is a very onerous liability and one that insurers would prefer to deal with separately. If a person is
injured by any product he purchases, foodstuff for example, and can show that the seller, or in some cases
the manufacturer was to blame he could succeed in a claim for damages.
We have already seen that liability arising out of products which are likely to find their way into the
construction of aircraft are dealt with by aviation insurance departments.
c. Professional liability
Another exception on the basic public liability policy is one relating to liability arising out of professional
negligence. This can arise where lawyers accountants, doctors, insurance brokers and a whole range of
professional people do or say things, with the result that others suffer in some sense. A lawyer may give
advice carelessly with the result that the person who was relying on the advice loses money. That person
would be able to sue the lawyer for an amount equal to what he had lost. The lawyer can effect professional
liability insurance, often known as professional indemnity insurance to meet the cost of any award against.
d. Personal public liability

Each individual owes a duty to his neighbour not to cause them injury or damage their property. Liability
may arise out of the ownership of a house, a pet, out of sporting activities or just in the simple act of
crossing the road without looking. The case of Clark –vs- Shepstone (1968) emphasizes the need for
personal public liability cover. Mrs. Shepstone stepped from the pavement without looking and caused a
motor cyclist to swerve. The bike crashed and the pillion passenger, Mr. Clark, suffered severe injury. He
sued Mrs. Shepstone and eventually accepted £28,500. In the absence of a personal public liability policy,
Mrs. Shepstone would have been in serious financial difficulties.
e. Directors’ and Officers liability

Over the past decade there has been an increasing tendency for courts to hold directors and officers of
companies, personally responsible for their negligence in operating a company legislation has also made
directors liable for the behaviour of a company and in this way, shareholders, creditors, customers,
employees and others can now take action against directors as individuals.
We have seen a number of these cases reach the national headlines when they have involved large, well
known companies.
The directors and officers policy will provide cover for defense costs as well as the amount of
compensation for which a director may be liable to pay.
26

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INSURANCE

MEANING AND CONCEPT OF RISK AND UNCERTAINTY

PERIL AND HAZARD

WAYS IN WHICH RISK IS CLASSIFIED

1. FINANCIAL AND NON

1 Prepared by Mr. Johnbosco M. Kisimbii

2. PURE AND SPECULATIVE RISKS

iii) FUNDAMENTAL AND PARTICULAR RISKS

INSURANCE AS A RISK TRANSFER MECHANISM

Prepared by Mr. Johnbosco Kisimbii

TERMS USED IN INSURANCE

6. Peril:- It is an event that causes a personal or property loss.

BASIC PRINCIPLES OF LAW GOVERNING GENERAL INSURANCE

The following are the conditions for valid insurable interest:-

Persons Insurable Interest

Prepared by Mr. Johnbosco Kisimbii

b. Meaning:-Indemnity means security against loss or damage or compensation for loss. It is

c. Purpose:- The principle sets a limit to compensation.

b. Essentials of the Doctrine

The doctrine of subrogation is based upon two principles:-

Essential Requirements of the Doctrine of Contribution:-

Prepared by Mr. Johnbosco Kisimbii

Total Insurance = A Rs. 10,000 + B Rs. 20,000 = Rs. 30,000.

A. 10,000 X 9,000 = 3,000

A. 20,000 X 9,000 = 6,000

A CHARACTERISTICS OF INSURABLE RISKS

Prepared by Mr. Johnbosco Kisimbii

1. FORTUITOUS (HAPPENING BY CHANCE)

Prepared by Mr. Johnbosco Kisimbii

4. HOMOGENEOUS EXPOSURES(Formed of parts that are of the same type)

2. CREATION OF THE COMMON POOL

Prepared by Mr. Johnbosco Kisimbii

Prepared by Mr. Johnbosco Kisimbii

Fire, including business interruption

A ORDINARY LIFE ASSURANCE

2. DECREASING TERM ASSURANCE

3. CONVERTIBLE TERM ASSURANCE

4. FAMILY INCOME BENEFITS

Prepared by Mr. Johnbosco Kisimbii

5. WHOLE LIFE ASSURANCE

7. ASSURANCES FOR CHILDREN

8. MORE THAN ONE LIFE

9. GROUP LIFE ASSURANCES

Prepared by Mr. Johnbosco Kisimbii

10. SPECIAL FEATURES OF LIFE ASSURANCE

B. INDUSTRIAL LIFE ASSURANCE

C. PERSONAL ACCIDENT INSURANCE

1. PERMANENT HEALTH INSURANCE

2. CRITICAL ILLNESS OR DREAD DISEASE

Prepared by Mr. Johnbosco Kisimbii

E. MARINE AND AVIATION INSURANCE

Building risk policy

Nowadays, this basis is virtually a defunct type of presentation.

1 MARINE HULL INSURANCE

 Named perils covered by the policy,

The limitations of the clause include four paramount exclusions, namely:

Prepared by Mr. Johnbosco Kisimbii

F. FIRE AND OTHER PROPERTY DAMAGE INSURANCE

Fire and other property damage Insurance