Risk Management and Insurance

Chapter 13 Risk Management and Insurance 195
Risk Management and Insurance
LEARNING OBJECTIVES
After studying this chapter, the student should be able to:
 Understand the concept, types and process of risk management
 Define insurance and trace the evolution of insurance
 Describe the essential elements of insurance contract
 Explain the importance of insurance
 Describe the principles of insurance
 Understand the concept of life insurance
 Define life insurance and explain different types of life insurance policies
 Know the procedures of effecting life insurance
 Describe essential features of life insurance contract
 Understand concept of fire insurance and fire insurance policy
 Know the essentials of fire insurance contract
 Understand and explain different types of fire insurance policy
 Describe the procedure of effecting fire insurance.
 Understand the concept of marine insurance
 Explain the importance of marine insurance
 Know the concept of marine insurance policy and its types,
 Identify different types of risks covered under marine insurance
 Describe the procedure for effecting marine insurance policy
 Describe the procedure for the settlement of claim for loss.
196 Business Studies
Risk Management
Risk means possibility of losses due to the uncertainty. Business organization is closely associates
with risk. Nobody can imagine the business without risk. It is the integral part of business. Generally
risk refers the uncertainty. There are various events of uncertainty in business which may causes of
losses in future. Business risk is a circumstance or factor that may have a negative impact on the
operation or profitability of an organization. The degree of risk may be varied as per different events
and nature of business. If business organization takes higher risk, the chance of getting profit will be
high. If business organization takes lower risk the volume of profit will be low.
Risk management has crucial role to achieve organizational goal. Risk management is the
branch of study that deals with identifying, assessing and monitoring threats or risk (any uncertainty)
for an organization. The main principle behind any type of risk management is to recognize and
minimize the upcoming problems, so as to decrease the losses that will be incurred in the near future.
Definition
Wheeler – Risk is the chance of loss due to some unfavourable occurrence.
George E. Rajda – Risk management is a process that identifies loss expenses faced by an
organization and selects the most management technique for treating such exposure.
Risk management becomes more important for any business organization. Various risks are
introduced from heavy uses of technology in business. Some risk may be come from external factors
and some from internal factors. Both types of risks should be carefully handled or properly managed.
Risk management, if not done properly, can lead to loss of opportunities.
Types of Business Risk

The types of risk involves in business is depends on the nature, size and others various factors. It is
very complex to list out all risk associate activities and particular risk of business. We can group the
business risk on following major categories.
1. Managerial risk : It is arises from managerial weakness. If management fails to make effective
plan and policies than such risk affect the organization. Wrong estimate of demand and supply,
poor management of employee grievances, biasness and unfair business activities are some
example of managerial risk.
2. Compliance risk: The risk which arises from the frequently changed in laws and regulation
related to business. Business must obey the rules and regulation issued by governing authority. If
such authority’s changed the rules and regulation on against of business environment than such
risk affect the business. Increasing tax and custom rate and prohibit the business activities are the
example of compliance risks .
3. Financial risk: Financial risk is one of the major risks of business. It is arises from various
financial transactions. Non-payment by debtors on time, increased interest on a business loan,
shortage of working capital is the example of financial risk.
4. Operational risk: Operational risk arises from weakness of people, internal process, system
and external events. Organization may suffer from different nature of operational. The causes
of such risk are Fraud, theft, human error from employees of an organization. Sometimes the
Internal process and uses technology may creates problem and incurred loss in organization.
Problems arise in computer software, leakage of electricity, gas, water, different types of
accident are the possible causes and event of the operational risk. Natural disaster, fire, flood,
tsunami are also included as the event of operational risks.
5. Other risks: Many other risks can be seen in the course of business operation which affects the
business performance. It is basically depend on nature and transaction of business. Basically in
banking business, there are many risk related terminology is introduced and practiced.
Following are the others main types of risks.
 Political Risk
 Liquidity Risk
 Market Risk
 Credit Risk
 Interest rate Risk
 Foreign currency Risk
 health and safety risks
Risk Management Procedure

Following procedure is to be followed for getting effective result from risk management.
Identify the
risk
Risk
Implement Assessment of
Management
and Control the risk
Process
Select the
technique
1. Identifying potential risk: Risk identification is an essential step in management of risk. In

this stage, the possible source of risk is identified and named. While identifying the risk, it is
obvious that the sources of the risk are also examined in order to analyze the possible impact.
2. Assessing risk: Organization evaluates the risk after identifying the potential risk associate
with concerned business. The basis of assessment is done in terms of probability. It is

calculated from previous data and event. If the possible chances of risk is high and it will
damage more, the primary attention is give . If the chances of occurring that event is low gives
minor attention. The possible risk is to be ranked as per their severity in terms of business loss.
3. Select appropriate technique: Various tools and technique are available for managing the risk.
In third stage management select the appropriate technique as on their requirement.
Management consider the following important factors while selecting the technique.
 Cost and benefit
 Appropriateness
 Health and safety
 Future Impact
4. Implementing and controlling risk: After assessment of risk, management implements the
appropriate action and use suitable technique and model. There are four techniques that can be
implemented; avoiding the risk (changing the plan), transferring the risk (to someone more
responsible to handle it effectively), mitigating the risk (doing something to minimize the
impact) or accepting the risk (applicable if the risk is negligible).
Risk management is regular process. I t is not one time task. Therefore management needs to
evaluate impact and control over the business risk. It is ongoing project and check for any new risk
(if present). Risk management is keeping control over the risk. Hence, it is quite possible that an
organization may suffer losses, even after risk management. But it can be minimized and
precautionary measures can be taken. It should be conducted by professionals, who are experienced
enough to bring forth ideas and promote practices for the benefit of the organization.
Insurance
Introduction
Human life is full of risks and uncertainties, which result in fear, anxiety and unpleasantness. Such
risks and uncertainties may cause the loss of life and properties. Newspapers tell the stories everyday
about bank robberies, bus looting, murders, decoitees, fire incidents, road accidents, and many other
events. Nobody knows beforehand when a loss will occur and how much serious that loss will be.
The uncertainties that may cause losses are known as risks. People always want protection against
such risks.
Risk to human beings can be

categorized into financial and non-financial
risks. The outcome of the financial risk can
be measured in monetary value. However,
the outcome of non-financial risk cannot be
measured in monetary value. Losses of
Pledge to protect. It is a slogan of Premier Insurance Company (Nepal)

Ltd. The company is giving a serious promise for the financial
protection of its clients' properties against the risks of losses
properties by fire, earthquake, flood and theft are the outcomes of financial risk. Dissatisfaction as a
result of selection of a marriage partner, field of education, career, or not having children are the
outcomes of non-financial risk.
Human beings always try to avoid and reduce the risk. Likewise, businesses also face numerous
kinds of risks. Hence, they need to have a good understanding of the causes of risks and the methods
of handling them. Risk cannot be completely eliminated, but there is a device to cover the loss of the
financial risk which is known as insurance. Insurance is a technique to swap the risk of financial
losses.
Meaning and Definition

Insurance is a legal contract between two parties which protects people from risks arising from loss
of life, or failure of business, or loss from other risks. It is the cooperative way of offering security
against the possible risks and losses that may occur in future. Financial losses may occur in future
due to unpredictable reasons. Insurance is a system which compensates the insured by transferring
the risks to an organisation known as the insurance company.
Insurance is based on the pooling system. A large number of people combine together to reduce
or to compensate the future losses of any one of them. They contribute smaller amounts of money
called premium. Pooling system helps in spreading out the risk over a large number of members.
Insurance companies act as channels for collecting premium and indemnifying the losses.
Insurance has become the most important risk-handling method in modern age. The party doing
insurance business is called the insurer. An insurer promises to indemnify the losses in return for a
consideration called premium. Insured is a party who takes insurance policy against the risk of life
and property. Premium is the expense for the insured and income for the insurer.
The following are some of the main definitions of insurance:
M. N. Mishra - Insurance is a cooperative device to spread the loss caused by a particular risk
over a number of persons, who are exposed to it and who agree to insure themselves against the
risk.
Encyclopaedia Britannica - Insurance may be described as a social device whereby a large

number of individuals through a system of equitable contributions may reduce or eliminate
certain measurable risks of economic loss common to all members of the group.
Edwin W. Peterson - Insurance is a contract by which one party, for a compensation called the
premium, assumes particular risks of the other party and promises to pay to him or his nominee
a certain or ascertainable sum of money on a specified contingency.
From the above definitions, it can be stated that insurance is a written contract or agreement
between the insured and the insurer according to which the future risks of the insured are transferred
to the insurance company or the insurer. For shifting the risk, the insured pays premium and the
insurer agrees to compensate in lump-sum for losses which may occur in future on account of the
risks of fire, accident, earthquake, theft, injury or death. Hence, the insurance is an organized and co-
operative device which stands against the risks and losses of human life and property.
Evolution and Growth of Insurance

There is no actual evidence of origin of insurance. Therefore, it cannot be said accurately when and
where it was first introduced. The insurance service was also in practice in ancient times but not in the
present form. Some people say that insurance is as old as human civilization. In Rigveda, the word
yogakshama is mentioned which means the security of people. The codes of Hummurabi and Manu
also give the idea that the provision for sharing the losses existed even at that time.
The history shows that the insurance system was developed in Babylonia around 3000 BC. The
merchants of the societies pooled their money to protect themselves on account of the loss of goods due
to robberies and bandits. Ocean-going traders from Phoenicia started using a system of insurance
known as bottomry around 1200 BC. During the 5th to 15th centuries, guilds of workers, in England
and Italy, provided benefits to their members and families in the event of illness or death.
During the 20th century, the insurance business had grown dramatically and undergone
tremendous changes. Different types of insurance companies were established. The historical
development of insurance can be described as follows:
Marine Insurance
Marine insurance appeared first in the history of insurance. Trade was done by sea in ancient times.
There were many types of risks associated with sea transportation for carrying goods and people. There
was fear of sea pirates. Ship could be lost or captured by pirates. For getting protection from all those
perils of the sea, marine insurance came into existence. Traders made an agreement among themselves
under which the loss caused to any person was compensated by dividing the loss among them, which
was named as General Average. Later, as security against such risks, a system of loan known as
Bottomry Bond came into practice. In this system, the loan taken had to be repaid if the ship and its
goods reached the destination safely but the loan was waived if the ship sank.
Jews were the forerunners in modern insurance business. In 1182, they were forced to leave
France. They then adopted marine insurance as their profession. Marine insurance flourished in Italy.
Commercial centres like Florence, Geneva, Venice and Lombard Street started the marine insurance
business. In 1310, a chamber of insurance was established in Belgium. During the regime of Queen
Elizabeth I, a number of insurance companies were established in England. In 1515, a chamber of
insurance was established in London for the purpose of registration of insurance companies. In 1601,
an act was passed in England to establish a Court of Arbitration in order to settle and reduce the
disputes in marine insurance business. The insurers used to gather at Lloyd’s Coffee House and
discuss on the issues relating to marine business. Finally, this was converted into an association
called Lloyd’s Association. In 1871, Lloyd’s Act was passed and Lloyd’s Corporation was
established to undertake marine insurance activities.
Fire Insurance
After the evolution of marine insurance, fire insurance was developed. The first scientific system of
obtaining funds to compensate the losses due to fire was developed after the great fire of London in
1666 which devastated 13,000 buildings. The city was in fire for four days and destroyed almost 85
percent of the houses. The amount of loss of property was estimated to be about 100 million pounds.
A system was developed in the following year by Nicholas Barbon, a London-based Merchant,
in which small sums of money were collected from many individuals and a fund was established.
The fund was utilized to give compensation for the losses sustained by the few whose properties
were destroyed considerably by fire.
Fire insurance office was established in London in 1681. Another fire insurance company, Sun
Fire Office, came into existence in 1710. The use of fire insurance became widespread during 19th
and 20th century. Later, many fire insurance companies came into being in many countries to
provide protection against the losses by fire.
Life Insurance
After marine and fire insurance, life insurance came into existence. The first registered life insurance
company was Hand-in-Hand Society which was established in 1696 in England. William Gybbons
was the first person who insured himself for one year with Hand-in-Hand Society.
Life insurance was popular among the wealthy people in the 17th century. Old Equitable
Organisation was established in 1762 and started issuing life insurance policies on the basis of
insurance table for the first time. Life insurance was then done for one year and had to be renewed
every year. Till the 17th century, life insurance was issued only to the rich and honourable people of
England. The first life insurance company in North America was established in 1759.
Life insurance in its modern form was developed in the 18th century only. Royal Exchange
Assurance, London Assurance, and British Insurance Company came into existence for life
insurance business. In the 19th century, a number of life insurance companies were established.
Mortality table was used for the determination of the amount of insurance premium. Today,
insurance companies are established all over the world as important means to provide financial
security against loss of life.
Essential Elements of Insurance Contract

The contract of insurance is very useful to indemnify any loss. In this light, contract of insurance is
also called as contract of indemnity in which on indemnifier (insurer indemnifies (compensates) the
loss incurred due to the happening or non-happening of any event depending upon contingency. The
person who is being indemnified is called indemnity holder and he receives an amount in
consideration of his promise to pay an amount of premium.
To make a contract of insurance valid in the eye of law, some essential elements must be
considered in its process of validity. The insurance contract, like any other contracts (ordinary
contracts) must satisfy the usual conditions of a contract. Thus, the essentials are:
1. Agreement (Proposal and Acceptance): Agreement means communication by the parties to

one another of their intensions to create legal relationship. For a valid contract of insurance,
there must be an agreement between the parties. i.e. one offerer making offer or proposal and
another acceptor accepting the proposal or signifying his acceptance upon the proposal.
2. Free consent: There must be free consent between the parties to contract. Consent means that
parties to an agreement must agree on the same thing in the same sense, it is called consensus-
ad-idem. Consent must be given by the parties thereto in a contract, freely, independently,
without any fear and favour. The consent is said to be free when it is not caused by coercion,
fraud, misrepresentation, undue influence and mistakes.
3. Components to contract: The parties is an agreement must be legally competent to enter into
the contract. It means both the parties in the contract must be of age of majority, posses sound
mind and not disqualified by any law of the country. It clears that a person who is minor,
lunatics, drunkard, idiot and alike cannot enter into a contract. The contract entered into by
these persons will be declared as void.
4. Lawful object: As is found in other contract, in insurance contract too, the object of the
contract must be lawful. The agreement must not relate to a thing which is contrary to the
provision of any law or has expressly been forbidden by any law. It must not be of such nature
that if permitted, it implies injury to the person or property of other or immoral or opposed to
public policy.
5. Lawful consideration: There must be due and lawful consideration in the contract of
insurance. The consideration, for which the contract is entered and created by the parties, must
be lawful. To establish legal relationship, to create obligation between them and to make it
enforceable by law there must be lawful consideration.
6. Compliance with legal formalities: To make an agreement valid, prescribed legal formalities
of writing, registration, etc., must have been observed. In the contract of insurance, the
agreement between the parties must be in written form and dully signed by both parties,
properly attested by witnesses and registered otherwise, it may not be enforced by the court.
Importance of Insurance
Insurance has now-a-days become a flourishing business and occupies an important place in every
country. The system of insurance provides safeguard against uncertainties and risks. Insurance has
now become the most important risk-handling method. Today, we cannot imagine the smooth
operation of economic activities without insurance. A bird's eye view of the need and importance of
insurance is given in the following diagram:
Im p ortance of
Insurance
Individual and
Business Com m unity Government
fam ily
Provides economic Financial security Safeguard of wealth Helps to maintain law

protection Collateral for loan Helps in maintaining and order in the country
Increases self-respect Employee welfare standard of living Source of income tax
Profitable investment Promotes foreign trade Creates employment Earns foreign currency
Improves standard of opportunities Carries welfare and
Smooth operation of
living business Reduces inflation development activities
Provision of loan Increases efficiency Helps to minimize social
Encourages saving problems
Helps for education and
marriage of children
Assures peace of mind
Eliminates dependency
Importance to Individual and Family

The importance of insurance to individual and family is due to the following reasons:
1. Provides economic protection: Insurance provides safety against the economic difficulties to
an individual and his family. In the case of pre-matured death, the dependents get a sum assured
by the insurer. Insurance provides protection for old age when an individual becomes unable to
do the work. Similarly, insurance provides safeguard during sickness, unemployment and
retirement. Additionally, the insurance compensates for the loss of properties due to theft, fire,
accidents and other natural calamities. Thus, insurance is an appropriate instrument to
safeguard an individual as well as his family from financial crisis and future uncertainties.
2. Increases self-respect: Self-respect is directly connected with independence of a person in the

society. Insurance provides economic support to an individual and his family due to which the
family can stand on its own. This helps to increase self-respect of a person and his family.
3. Profitable investment: Property is insured with the intention of providing security against the
risk of financial loss. On the other hand, life is insured with the intention of providing security
and making investment. In life insurance, the insured pays a small amount of money as
premium in different instalments and gets the full refund, if he is alive, at the time of maturity
of the policy. If the insured dies before the policy expires, the insured amount is paid to his
nominee. Since the insured or his nominee is paid the insured amount including the amount of
bonus on the maturity of the policy or on the death of the insured, life insurance is regarded as a
profitable investment.
4. Improves standard of living: Insurance has now become an instrument to provide protection
against unexpected risks. Due to the financial protection of life and property, insurance avoids
the unfortunate financial crisis of an individual and his family. Hence, the insured amount helps
the individual to maintain his standard of living even in old age.
5. Provision of loan: An insured person can also get the facility of loan from the insurance
company. Similarly, he can take loan from other financial institutions against the collateral of
insurance policy.
6. Encourages saving: An insured person should compulsorily pay the amount of premium in
time as stated in the agreement in order to avoid fine and lapse of the insurance policy. It
encourages the saving habit of the insured.
7. Helps for education and marriage of children: Insurance can also help for the education and
marriage of children. For this purpose, a specific amount is paid in different instalments as
premium. After the maturity of the policy, the assured amount is paid to the concerned party.
This amount helps parents to meet the financial requirements for education and marriage of
their children.
8. Assures peace of mind: Insurance removes tension, fear and anxiety associated with risk and
uncertainties. It results in improving the efficiency of people. A person can devote himself to
gainful economic activities due to the assured and peaceful state of mind.
9. Eliminates dependency: In the event of the death of the breadwinner or destruction of
properties, the family suffers from unbearable losses. The insurance protects against such
uncertainties and provides adequate financial support.
10. Income tax holiday: An individual is required to pay income tax to the government. The
amount of premium can be deducted from his income while determining the taxable amount.
Thus, the life insurance provides additional benefit by way of income tax holiday equal to the
sum of money paid as premium and the sum of money received after the maturity of the policy.
Importance to Business
The following points highlight the importance of insurance to business:
1. Provides financial protection: Insurance provides financial protection against the loss of
goods and properties in consideration to the payment of premium. It is worth noting that
premium is very small in comparison to the value of property at risk. Business activity can be
carried on without any hesitation because insurance provides certainty for making payment in
case of loss.
2. Provides collateral for loan: Insurance policy can be an important basis for obtaining loan
from the financial institutions. A businessman can obtain loan from banks and financial
institutions against the collateral of insurance policy or insured property. The creditors are
assured that even the insured assets are destroyed; the insurance company pays their value.
Thus, in the absence of insurance, bankers or financial institutions may hesitate to provide loan
against the uninsured collateral.
3. Promotes employees’ welfare: Employees’ welfare is one of the contemporary issues in
business. It can make a provision for the welfare of its employees through life insurance
policies covering the risks of their accidents and sickness. It is a sound way of motivating and
improving the morale of the employees.

4. Promotes foreign trade: Foreign trade is relatively more risky than domestic trade. Goods and
properties are transported from distant places by means of air, water or land transport, or a
combination of these modes. There are different types of risks in transit like marine perils,
explosion, terrorism, storm and tempest. Insurance provides protection against such
unpredictable risks.
5. Contributes to smooth operation of business: Insurance provides financial compensation in
case of loss or damage to the properties of the business. Insurance for the employees increases
their morale and motivation at work. Hence, the insurance plays a vital role to let the business
run smoothly even in the situation of unfavourable events.
6. Increases efficiency: Insurance provides financial protection to the entrepreneur. This
encourages the businessman to operate his business even in larger scales without fear and
anxiety. This helps to increase the working efficiency of the businessman.
Importance to Community
The following are some of the important benefits provided by insurance to the community:
1. Safeguards the properties: An insurance company organizes different types of programmes in

order to bring favourable changes in the behaviour and feeling of the people in the society.
Such positive feeling and behaviour of the people help to overcome the social evils, violent
demonstrations and other crimes. As a result, security of individual and protection of properties
are more assured.
2. Creates employment opportunities: Insurance companies need different types of personnel

having distinct skills, experiences and academic qualifications. Therefore, people get additional
employment opportunities in insurance companies.
3. Reduces inflation: In order to control inflation, the quantity of money in circulation should be
reduced. An insurance company takes away some portion of this money from the people in the form
of premium. This helps to control the inflationary situation in the country.
4. Helps to minimize social problems: Insurance is an effective measure to minimize such social
problems like unemployment and disability by way of financial compensation against such
risks.
Importance to Government
Insurance is beneficial to the government in respect of the following:
1. Helps to maintain law and order: The government always wants its people to be happy,
healthy and prosperous. Insurance assists the government by creating peaceful economic
environment in the society by offering financial protection for the loss of life and property.
Such financial protection reduces the volume of crime in the society. Peaceful and prosperous
economic environment ultimately helps the government in maintaining law and order
effectively.
2. Increases revenue: Insurance companies are established with the aim of maximizing profits. A
portion of the profit is contributed by them in the form of income tax. Hence, insurance
business helps to increase government revenue.
3. Earns foreign currency: Insurance companies perform their business in foreign countries as
well. Such business helps to earn foreign currency. The increased amount of earning helps the
government in maintaining the reserve of foreign currency and balancing international trade.
4. Minimizes financial burden: Insurance business helps to minimize the financial burden of the
government in the management of health facilities for the people by implementing medical
insurance scheme. Further, by insuring the buildings, vehicles, machinery and equipment, and
construction projects, the government can save its budget that could be allocated for their
replacement and reconstruction on account of the unexpected contingencies.
Principles of Insurance
An insurance is an agreement (contract) between the insurer and the insured. For the validity of
contract, certain basic elements should be considered. These elements of the agreement of insurance
are called principles of insurance. The following fundamental principles are involved in insurance
business:
Principle of Insurable Interest

Insurable interest is a basic element of insurance. The policyholder as a party to the insurance
contract must have a particular relationship with the subject-matter of the insurance, whether it is the
life or property or a liability to which he is exposed. The absence of the required relationship renders
the contract illegal, void or simply unenforceable, depending on the type of insurance.
The subject-matter of insurance can be any form of property, or an event that may result in the
loss of a legal right or the creation of a legal liability. Thus, the subject-matter of the insurance under
a fire policy can be buildings, stock or machinery, with a life insurance policy the subject-matter of
insurance is the life being assured, in marine insurance it can be the ship, its cargo or the ship
owner’s legal liability to third parties for injury or damage.
There are at least four features essential to insurable interest:
 There must be some property, right, interest, life, or potential liability capable of being
insured.
 Such property, right, interest, etc. must be the subject-matter of insurance.
 The insured must have relationship with the subject-matter of insurance whereby he
benefits from its safety, well-being, or freedom from liability and would be prejudiced by
its damage or the existence of liability.
 The relationship between the insured and the subject-matter of insurance must be
recognized at law.
Principle of Utmost Good Faith

Although the proposer can examine a specimen of the policy before accepting its terms, the insurer is
at a disadvantage because he cannot examine all aspects of the proposed insurance that are material
to him. Only the proposer knows all the relevant facts about the risk being proposed. The underwriter
can have a survey carried out but he must rely on information given by the insured in order to assess
those aspects of the risks that are not apparent at the time of a survey. In order to make the situation
more equitable, the law imposes a duty of utmost good faith on the parties to an insurance contract. It
means both the parties should provide true and actual information about the subject-matter. The
insured should disclose clearly about the terms and conditions and should give the true information
of a risk.
The main objective of this principle is to avoid cheating. Both the parities have to follow this
principle. If one party does not follow this principle, then another party can make insurance contract
void.
Principle of Indemnity
Indemnity may be defined as financial compensation. According to this principle, the insurer makes
compensation to the insured against the loss in financial terms. This principle clarifies that the
insurance is only for compensation of loss but not for any financial benefit. It means compensation
given to the insured can never be more than the actual loss of the property. The loss of the properties
should be measured in terms of money. This principle emphasizes that there must be actual loss; the
loss should occur within the risk of insurance, the insurer compensates and the payment must be
equal to the actual loss.
The principle of indemnity is not applicable to life insurance because the loss of life of a person
cannot be measured in terms of money and the money cannot compensate for the loss of life. This
principle is applicable only to property and asset. For example, a person insures his house for Rs.
2,00,000 against fire. The house is partially burnt and it is estimated that a sum of Rs. 1,00,000 will
be required to restore it to the original condition. The insurer is liable to pay Rs.1,00,000 only. The
compensation made by the insurer should be equal to the amount of loss.
Principle of Subrogation
If the insured is indemnified by the insurer, the insurer acquires a right to recover any possible
benefit due to the insured from the third party. It is known as the principle of subrogation. It means
by paying the amount of loss to the insured, the insurer gets right to recover any wastage properties
available with the insured. Suppose, a house is insured for Rs. 2,00,000 against fire. The house is
damage by fire and the insurer pays the full value of Rs. 2,00,000 to the insured. Later, the damaged
house is sold for Rs. 20,000. The insurer is entitled to receive the sum of Rs. 20,000 under this
principle.
The following points are significant in connection with the principle of subrogation:
 The insurer is subrogated to the rights only after he has compensated the insured,
 The insurer must exercise the rights in the name of the insured,
 Any amount received by the insured after getting compensation from the insurer will be
held in trust for the insurer,
 The insurer is entitled to the benefit to the extent of the amount he has paid as
compensation to the insured,
The principle of subrogation does not apply to personal insurance. It applies only to fire and
marine insurance.
Principle of Probability
According this principle, everything else remaining the same, the future risks or financial liability
and other expenses are calculated on the assumption that future will be like in the past. This principle
pays attention to the experience of previous years by considering some changes to calculate the
expenses. Thus, this principle takes into account the situation of previous years - risks, expenses,
number of deaths, paid claims, etc. - to forecast the probability of similar risks and expenses being
encountered in the future which is known as the principle of probability. Before insuring any
property or life, the insurance company must calculate the correct rate of premium. The amount of
premium is fixed after the estimation of the future risks.
The principle of probability is an important principle of insurance business. On the basis of this
principle, mortality table for life insurance, and hazard or risk table for fire insurance, marine
insurance and other types of insurance policies are prepared and premiums are fixed.
Principle of Contribution
The principle of contribution is a part of indemnity. A person can get insurance policies from more
than one insurance company for a single property. The intention of insuring with more than one
insurance company is to earn profit. This principle has restricted to do so because the insured can get
only the actual loss from an insurance company or from all insurance companies on the proportion of
the premium paid. This principle prevents the insured to make profit from insurance by making
artificial losses.
Suppose, a person gets his house insured against fire for Rs. 8,00,000 with Nepal Insurance
Company and Rs. 4,00,000 with Sagarmatha Insurance Company. A loss of Rs. 6,00,000 occurs to
the house due to a fire. Then, Nepal Insurance Company is liable to contribute Rs. 4,00,000 and
Sagarmatha Insurance Company is liable to contribute Rs. 2,00,000. In case Nepal Insurance
Company pays the whole amount of loss, it can recover Rs. 2,00,000 from Sagarmatha Insurance
Company. The liability of a particular insurer can be determined with the help of the following
formula:
The principle of contribution is not applicable to life insurance. Moreover, the right of
contribution arises under the following conditions:
 The same subject-matter has been insured under different policies;
 All the policies are in force at the time of loss;

 All the policies cover the same period during which the loss occurred; and
 One of the insurers has paid to the insured more than its share of the loss.
Principle of Mitigation of Loss

Another essential principle is the mitigation of loss. This principle assumes that it is the
responsibility of the insured to take necessary steps to reduce the losses of the subject-matter.
Though the insured is bound to do his best for the insurer, it does not mean that he should do so
at his own risk of life. Therefore, if reasonable efforts are made and precaution is taken to save the
property from the loss, the insurer is under an obligation to honour the contract. This principle
emphasizes that the reasonable efforts must be made by the insured to minimize the loss of subject-
matter of the insurance.
Principle of Proximate Cause

In an insurance contract, it is necessary to state the perils against which the cover is given so that the
intention of the parties is clearly defined. Under this principle, the insurer covers only the insured
cause.
All contracts are subject to conditions. Frequently, conditions in insurance contracts state that
certain causes of loss are excluded or that certain result of an otherwise insured peril are excluded.
The reasons for this are simple in that the additional cover may warrant an additional charge which
has not been agreed in the premium for the policy, or the peril may be one which insurers regard as a
fundamental risk and so more properly dealt with by the state. According to this principle, if the
cause of loss is insured, the insurer will pay; if the cause is not insured, insurer will not be liable to
pay.
For example, Ram purchased an insurance policy of his building against the fire. The building
is damaged due to the earthquake. The main reason of damage here is earthquake but not fire. Hence,
the compensation is not payable to Mr. Ram. Thus, the most effective cause is taken into account and
other causes are not considered.
Insurance Business in Nepal

Nepal does not have a long history of insurance business. Prior to 1960, Nepalese businessmen had
to insure with Indian and other companies. Hence, a huge amount of money was going outside the
country. Nepal Insurance and Transport Company was established with the ownership of Nepal Bank
Limited as the first insurance company in 2003 B.S. The objective of this Company was to provide
protection to the traders from certain types of risks. The Company covered only a limited coverage.
To meet the growing demands of business, foreign insurance companies got the opportunity to
operate in Nepal. Insurance companies such as Lloyd's Agent, Home Insurance and Great American
Insurance Company, United India, Hindustan General Insurance, Sterling Insurance, etc. operated in
Nepal through their branches or agents.
These insurance companies used to provide protection to big business houses and traders only.
The general public were not getting the insurance services. Realizing the growing need of a national
insurance company, Rastriya Beema Samsthan Pvt. Ltd. was established by the Government in 2024
B.S. In the following year, this company was converted into a public corporation with full
government ownership. The ground rules for the establishment of insurance companies were
formulated. The provision for the Beema Samiti was made to regulate insurance business in Nepal.
However, for many years, local companies were not established. Only Rastriya Beema Samsthan
operated in the country and provided different insurance services.
In 2044 B.S., National Life and General Insurance Company Ltd. was established. The
objective of this company was to transact both life and non-life insurance. It was supported by
Rastriya Banijya Bank. Nepal Insurance and Transport Company Limited established with the
ownership of Nepal Bank Ltd. was renamed as Nepal Insurance Company.
Rastriya Bima Sansthan. It is an old and the largest insurance business established in 2024
B. S. by the Government in the form of public corporation. It is the first insurance
corporation which has provided life insurance services to the general people of Nepal. It
collects about Rs. 35 crores as annual premium from life and non-life insurance services.
In 1988, Himalayan General Insurance Company was established. The objective was to provide
non-life insurance policies only. It was permitted to commence the insurance business from 1992. In
1995, three other companies were established, namely Credit Guaranteed Private Ltd., Everest
Insurance Company Ltd. and Premier Insurance Company Ltd. At present, there are 18 insurance
companies operating in the country. The companies offer various types of insurance services to all
types of customers and clients.
Life Insurance

Human lives are the most precious thing in this world. Safety and security of human lives are the
first and foremost concern of the human kind. Since life insurance provides financial security to
human lives, it is the most important form of insurance. This is perhaps the reason why life insurance
occupies more than eighty percent of the entire insurance business in the world.
Life insurance is a contract by which the insurer assures the insured to make payment of
insured amount either to the insured after the expiry of the period of the contract or to the nominee of
the insured after his death, whichever occurs earlier. It is a legal contract between the insurer and the
insured. The insurer being the insurance company and the insured being the person who seeks
financial security of his life.
The insurance company takes all the risks of the insured through this contract. It has to pay a
certain amount to the insured either after the expiry of the contract period, or after the death of the
insured before the expiry period. In the latter case, the insurer has to pay the amount to the nominee
of the insured person.
Under the contract, the insurer takes a vital responsibility of guaranteeing the financial security
of his future life, while the insured is required to pay premiums to the insurer either in lump-sum or
in convenient but agreed instalments until the expiry of the contract or the death of the insured. Thus,
the contract in which the insurer assures the insured or his nominee to pay a definite insured amount
under a given circumstance is known as life insurance.
The following definitions further highlight the meaning of life insurance:
C. A. Kulp and J. W. Hall - A contract in writing whereby insurer agrees, in consideration of

either a single or periodical payment called the premium, to pay insured amount to the insured
or on his death to the person nominated by him.
M. N. Mishra - Life Insurance contract may be defined as the contract, whereby the insurer in
consideration of a premium undertakes to pay a certain sum of money either on the death of the
insured or on the expiry of a fixed period.
D. H. Magee – Life insurance contract embodies an agreement, in which, broadly stated, the
insurer undertakes to pay a stipulated sum upon the death of insured, or at some designated
time to a designated beneficiary.
It is clear from the above definitions that life insurance contract is the most important form of
insurance contract in which the insurance company (insurer) assures to pay certain sum of amount on
the death of a person (insured) or after the expiry of a certain period. By life insurance, the insured
person is benefited if he remains alive; but if he dies, his nominee or the members of the family are
benefited.
Life Insurance Policy

Life insurance policy is also referred to as life assurance, because the event insured against is definite
to take place though the time of occurrence is uncertain. The life insurance policy combines the
elements of protection and investment. It provides financial protection to the insured and his family
members. Besides, it also provides investment benefits to the insured when he survives through the
insured period.
Life assurance policy is, thus, a contract between the insurer and the insured in which the former
receives the premium from the insured either in lump-sum or in periodical instalments, and the later
receives certain sum of money either upon his death or upon the maturity of the policy.
Types of Life Assurance Policy

There are several types of life assurance policies. The persons who want to be insured, can select any
of them. Selection of a type of policy depends on a person's desire and need for future. The life
assurance policy can be classified on several bases. They are:
On the Basis of Policy Duration

On the basis of the duration of policy, it can be of the following types:
1. Whole life policy. Whole life policy is also referred to as ordinary life policy. Under this
policy, the assured sum becomes due for payment to the successor or the nominee only after his
death. The rate of premium is usually lower, because the assured is required to pay the amount
of premium throughout the life. On the basis of the options included in it, it can be either:
 Limited payment whole life policy, under which the assured has a facility of making the
payment of the whole amount of premium in limited (as agreed upon) instalments, or
 Convertible whole life policy, under which the assured has an option to get the policy
converted into endowment type in 5 years. If it is not converted during the specified time,
the policy continues as an ordinary policy.
2. Term insurance policy. The term life policy is offered to cover the risk of loss of life for a short
period of time usually ranging from 3 months to 7 years. Under this policy, the assured sum is
payable to the nominees of the assured, if he dies during the term assured. The assurance comes to
an end, if the assured survives through the term insured. It has the cheapest rate of premium and is
usually paid throughout the insured term. Based on the accompanying options, it has the following
types:
 Straight term policy. It is issued at most for 2 years for a maximum insured amount of Rs.
2,000, without an option to convert it into any other type. The premium is charged from
the insured in lump-sum.
 Renewal term policy. If renewable, a term life policy can be renewed for an additional
term after the expiry of the assured term without fresh medical examination. In this policy,
the rate of premium is adjusted according to the age of the assured. It is thus useful for
people with deteriorating health.
 Convertible term policy. With an option to convert either into whole life or endowment
policy, a term life policy becomes convertible term policy. This policy is preferred by
those who, due to low income, could not offer whole life or endowment policy at the
outset but would like to expand the risk coverage later with increase in their income.
Under this policy, the premium has to be adjusted at the time of conversion.
3. Endowment policy. A life policy is an endowment policy when a fixed sum of money becomes
payable to the assured himself when he reaches the particular age, i.e., as agreed or on the death
of assured party, if it takes place earlier before maturity. This policy is the most popular type of
life insurance policy. In this policy, only a limited number of premiums are payable. However,
it has higher rates of premium payable in fixed instalments, but offers both the investment and
protection advantages.
Endowment policy is classified into the following types on the basis of its terms and conditions:
 Ordinary endowment policy. It is an endowment life policy, which is commonly

understood as an ordinary endowment policy. It is purchased for a specified number of
years with the particular sum being payable either on the event of death of the assured
during the assured period to his nominee, or on his survival to himself at the end of the
period. As agreed upon, the premiums are payable either throughout the term or till the
death of the assured, or in fixed number of instalments in fixed period of time.
 Double endowment policy. Under this policy, the amount payable is doubled the assured
amount, if the assured survives to the end of the term. If assured dies before the maturity
period, then the insurance company will make the payment of only the assured amount to
the nominee.
 Joint life endowment policy. This policy covers more than one life under a single policy.
Under this scheme, the sum assured is payable either on the expiry of the term or upon death
of either of the insured persons to the one who survives. The premium adjustment is done
considering the age of the assured persons.
 Pure endowment policy. In this policy, the assured sum is payable only to the policy
holder, if he survives through the period assured. On the event of death of the assured, the
successors do not receive the assured amount. If it is pure endowment with return policy,
then only the successors get refund of the premium paid to the insurer.
4. Survivorship policy. Two persons are involved in this type of life policy. One is the person
assured and another is a named person or counter-life. The sum assured is payable to the
counter-life, if the life assured dies before him. But, if the counter-life dies before the life
insured, nothing is payable to the life assured. For example, as a counter-life, a creditor may
insure the life of debtor (the life assured).
On the Basis of Premium Payment

On the basis of premium payment, life assurance policies can be classified into the following types:
1. Single premium policy. As its name suggests, the whole amount of premium in this type of
policy is paid in a single instalment. Under this scheme, the total premium is paid in lump-sum
in the beginning. As such, the policy-holder is entitled to receive certain rebates on the
payment of premiums.
2. Regular premium policy. Under this policy, premiums of equal amount are payable at regular
intervals (monthly, quarterly, half-yearly, or annually) as agreed upon by the insurer and the
insured.
3. Limited premium policy. In limited premium policy, the obligation of paying premium is
limited to a certain period of time only (5, 7, 10 or 12 years, for example). However, the
assured amount is payable only upon the death of the policy-holder. In case when the assured
dies during the premium term, the premium payment obligation does not exist, yet the assured
amount is payable to the nominee.
On the Basis of Participation in Profit

In this category, there are two types of policy - with profit or without policy.
1. With profit or participative policy. A life policy with profit is also called participative
insurance policy. As per the contract, if the policyholder has the right to participate in the profit
earned by the insurance company, the policy is called with profit or participative insurance
policy.
2. Without profit or non-participative policy. A life policy without profit is also called non-
participative policy. If the policyholder does not have the right to share the profit earned by the
insurance company according to the agreement, this policy is called non-participative policy in
which only the assured sum is payable to the policyholder.
On the Basis of Persons Covered

Based on insured persons covered by the policy, the insurance policy can be divided into the
following two types:
1. Single life policy. A single life policy covers the risk of life of only one person. Depending on
how it is administered, it may have two or three persons in the insurance contract. If someone is
taking it for himself, the insurance contract will be directly between the insured and insurer
with the nominee as the beneficiary.
2. Joint/multiple/last survivorship policy. In this policy, two or more lives are assured and
hence, is called a joint policy. Under this policy, the sum assured is payable to the survivor
when one of the assured person dies. Therefore, it is also called last survivorship policy.
On the Basis of Method of Payment of Assured Amount

On this basis, a life policy is classified into the following two types:
1. Lump-sum policy. A lump-sum policy is one in which the amount assured is payable in lump-
sum in one instalment either to the policyholder (assured) or his nominee upon his death
depending on the type of policy.
2. Annuity plan. An annuity plan is one in which the sum assured is paid to the policyholder
himself in the form of annuities (fixed periodical instalments) for a fixed number of years or till
his death whatever agreed upon.
Procedures for Effecting Life Insurance Policy

A life insurance policy is a legal contract between two persons. Therefore, the person who wishes to
successfully enter into the contract has to take a number of steps. These steps comprise the procedure
for effecting life insurance policy. The following are the important steps that are taken to effect the
life insurance policy:
1. Proposal. A life policy has to be proposed by an intending policyholder. Therefore, he has to

acquire printed proposal forms, which are available free of cost either with the insurance
company or its agents. The proposer is required to duly fill up the form and submit( propose) it
to the insurer along with required enclosures. While filling up the form, he must give accurate
and adequate information on all the material references (required only in India, but not in
Nepal).
There should not be any concealment of the fact and material information. Any concealment or
misrepresentation of the fact or mistakes committed in the subject-matter may cause the life
contract void. It means at the option of insurer the life contract is voidable. If the proposal form
is obtained through an agent, he is supposed to give remarks on the back-flap of the form.
2. Personal health statement and medical examination report. One of the sections of the
proposal form is designated as personal health statement and medical examination of the
prospective policyholder. Under this section, the proposer has to record his personal medical
history inclusive of bio-data. Usually, this section covers the following aspects:
 Bio-data,
 Physical measurement and identification marks such as height, weight and special
identification marks,
 Smoking, drinking and drug habits, if any,
 The disease that the proposer had in the past, the treatments undergone and the profile of
the doctor attended. Besides, the policyholder has to go to the doctor for his thorough
medical examination. While conducting medical check up, a doctor may ask the
policyholder many relevant questions regarding his health and then, he may conduct his
examination and try to find out the real health state. After medical examination of the
proposer, the doctor has to confidentially prepare a medical report and submit the same to
the insurer. The medical report is to be written by the doctor himself on a printed form
supplied by the insurance company. In his report, the authorized doctor details out the
policyholder's height, weight, condition of chest and lungs, blood-pressure level, state of
metabolism (resulting in energy production; it may be destructive or constructive
metabolism), nervous condition, and ENT, skin and bone conditions. Making declaration
at the end that the health status reported by the policyholder is true, the report is duly
signed by the authorized doctor and is sent directly or through the agent to the insurer.
3. Agent's confidential report. Since the insurer is not in direct touch with the proposer, the
agent's report is very important to it to decide whether or not to accept the proposed policy. The
agents are usually required by the insurer to supply information about socio-economic status of
the prospective policyholders together with their perception of the risk involved in the life of
the assured.
4. Proof of age/age certificate. The age certificate is an important document in life insurance
contract, because it is on its basis that the insurance company estimates probable risk and
ascertains the amount of premium to be charged to the proposer. In order to testify the age
declared in the proposal form, the personal health statement and the medical examination
report, the proposer is required to provide valid documentary evidence which may be either
school or college certificate, horoscope, municipal or village development committee's
recommendation, birth-certificate, or citizenship certificate.
5. Acceptance of proposal. The proposal form and the accompanying reports are thoroughly
scrutinized by the insurance company to take the decision on the proposal. If the proposal is
good and the medical report and agent’s confidential report are favourable, then only the
insurance company accepts the proposal. Thus, the insurance company sends a letter of
acceptance to the prospective policyholder directing him to make payment of the first
instalment of premium.
6. Payment of premium. The payment of the first instalment of premium is very important in the
life contract, because it is from this date that the risk of loss of life is insured. Upon the receipt
of the first instalment of premium, a receipt is sent to the policyholder which serves as the
acknowledgement of contract between him and the insurance company.
7. Issue of insurance policy. In due time, a formal document called life insurance policy is
prepared and sent to the policyholder properly sealed, signed and stamped. This contract of life
insurance describes all the particulars of life insurance and the terms and conditions of the life
insurance contract. In this document, the name and address of the insured and his nominee, the
type of policy, the insured amount, the date of commencement and maturity, the amount of
premium, the due dates for premium payments, and other important and relevant matters are
clearly written upon which both the parties have consented.
Essential Features of Life Insurance Contract

Since the life insurance contract is not an indemnity contract, the insurer, in his part, is required to
pay a definite sum of money agreed on maturity of policy at the death or an amount in instalment for
a fixed period or during the life. As such, contrary to other insurance policies, it has some distinct
features. The essential features of life insurance are as follows:
Nature of General Contract

Life insurance is a kind of legal contract. Hence, it has to be in conformity with Section 2 of the
Contract Act, 2000. The following conditions must be fulfilled to be a valid insurance contract:
1. Agreement (proposal and acceptance): An agreement means the communication between the
parties. It contains proposal and acceptance. This communication of the intentions for any work
to be done creates legal relationship. For valid life insurance contract, there must be an
agreement between the parties, i.e. one making offer or proposal and the other accepting the
proposal or signifying his acceptance upon the proposal. In the case of life insurance contract,
the insured is the offerer making the proposal and the insurance company as insurer accepting
the proposal of the party.
2. Capacity of the parties: The parties in the life insurance contract, i.e., insurer and insured, must
be legally competent to enter into the contract of life policy. It means both the parties in the
contract must be of age of majority, possess sound mind, and not disqualified by any law of the
country. It clears that a person who is minor, lunatic, drunkard, idiot and the like cannot enter into
a contract of life policy. The contract entered into by these persons will be declared as void.
3. Free consent of the parties: There must be free consent between insurer and insured to
contract. Consent means the parties to an agreement must agree on the same thing in the same
sense. It is called consensus-ad idem. Consent must be given by parties (insurer and insured) in
a contract of life insurance policy, freely, independently, without any fear and favour. The
consent is said to be free when it is not caused by coercion, fraud, misrepresentation, undue
influence and mistakes.
4. Legal considerations: There must be due and lawful consideration in the contract of life
insurance. The consideration must be lawful as well as consented by the insurer and insured.
There must be lawful consideration to establish legal relationship to create obligation between
them and to make the contract enforceable by law.
5. Lawful objectives: Like other contracts, life insurance contract too must have lawful objects.
The agreement must not relate to a thing which is contrary to the provisions of any law or has
expressly been forbidden by any law. It must not be of such nature that if permitted, it implies
injury to the person or property of other or immoral or opposed to public policy.
Insurable Interest
It is the pecuniary interest. The insured must have an insurable interest in the life to be insured for a
valid contract. Insurable interest arises out of pecuniary relationship that exists between the insurer
and the policyholder, the former stands to loose by the death of the latter and/or continues to gain by
his survival.
In life insurance contract, a person may have insurable interest for his own life as well as the
lives of his near relatives such as wife, son, daughter, etc. No person can purchase a life insurance
policy for a third person unless he has financial interest in his life. As such, a creditor may have
insurable interest to the extent of amount lent until the amount of debt is not recovered. Similarly,
partners may have insurable interest in each other's life to the extent of partnership capital. In life
insurance contract, the insurable interest has to be present in the beginning, that is, at the time of
taking a policy.
Utmost Good Faith

The life insurance requires that the principle of utmost good faith should be preserved by both the
parties - insurer and insured. Utmost good faith between the parties is necessary in all kinds of
contracts. The insured, in particular, must disclose all material facts accurately and completely with
respect to the object of life policy. No facts can be concealed. If so, the contract of life insurance is
null and void which cannot be enforced legally and the insurer may deny compensation.
Warranties
Warranties are the representations in life insurance which are embodied in the policy and expressly
or impliedly forming part of the basis of the contract. Warranties are an integral part of the contract.
These are the bases of the contract between insured and insurer and if any statement or information
or presentation, whether material or non-material, is untrue the contract shall be null and void and
the premium paid by insured may be forfeited by the insurer.
Causa Proxima
Literally, the efficient or effective cause which causes the loss is called Proximate Cause. It is the real
and actual cause of loss. If the cause of loss is insured, the insurer will pay, otherwise the insurer will not
compensate.
In life insurance, the doctrine of cause proxima is not applied because the insurer is bound to
pay the insured amount whatever may be the reason of death. It may be natural or unnatural.
Assignment and Nomination

The life insurance policy can be assigned freely for a legal consideration or love and affection. The
insured may assign to anybody on any ground. As such, the assignment shall be complete and effectual
only on the execution of such endorsement either on the policy itself or by a separate deed. However,
the notice of this purpose must be given to the insurer, who will, in turn, acknowledge this assignment.
Once the assignment is completed, it cannot be revoked by the insured (assignor) because he ceases to
be the owner of the policy. The holder of the policy, whether the first insurer or after assignment the
assignee, may either at the time of affecting policy or at any subsequent time before the policy matures,
nominates the person or persons to whom the money secured by the policy shall be paid in the event of
his death.
Return of Premium
Generally, the amount of premium paid cannot be refunded. However, for the reason of equity, the
premium may be refunded. If it is the case of misrepresentation or breach of warranty, the insured, in
the absence of any express condition to the contrary, can claim for return of premium paid. But, in
case of guilty of fraud in obtaining policy, the insured cannot claim the amount of premium to be
returned.
Fire Insurance

Fire is perhaps the most important gift of nature to human kind. It has important place in human life,
because fire increases human knowledge, health, happiness and prosperity. However, it has also been
a reason for the risk of human life and property. Therefore, fire insurance has evolved for protecting
human lives and properties from the risks of fire.
Fire insurance is a
contract of indemnity against
loss or damage of the
properties arising from fire
during an agreed period of
time and up to the specified
amount. It is such an
agreement whereby one
The fire insurance policy provides financial protection to the properties of a person or
organization against the risk of losses due to fire.
party, the insurer, in return for a consideration called premium, undertakes to indemnify another
party, the insured, against financial loss caused by an event of fire to the extent of actual loss or the
insured amount whichever is lower. The insured party has to pay the premium and the insurance
company agrees to indemnify the insured. The rate of premium depends on the level of estimated
risk. Premium will be high if the risk is higher and it will be low if the risk is low.
Fire insurance covers only the loss incurred due to fire. It cannot be for profit making. It
provides only protection. Therefore, the principles of investment and protection are not applied to
fire insurance. In the fire insurance contract, however, the doctrine of causa proxima or the
proximate cause is applied because only such loss is covered which directly arises through fire.
The following definitions clearly highlight the meaning of fire insurance:
F. G. Crane – Fire insurance is an agreement whereby one party, in return for consideration,
undertakes to indemnify the other party against financial loss which the latter may sustain by
reason of certain defined subject-matter being damaged or destroyed by fire upto an agreed
amount.
Julia Holyoake and Bill Weipers – Fire insurance policy is to provide compensation to the
insured person in the event of there being damage to the property insured.
M. N. Mishra – Fire insurance is a device to compensate for the loss consequent upon
destruction by fire.
It is obvious from the above definitions that fire insurance is a contract between an insurance
company called insurer and a person called insured for the compensation of loss of properties
caused by fire, in which the former pays the amount of loss to the latter as agreed upon by the two.
Essential features of Fire Insurance Contract

The following are the essential features of a fire insurance contract:
Insurable Interest
The insured must have insurable interest in the property which he wants to insure. It should exist
both at the time of taking the policy and also at the time of claiming loss. The insurable interest
means the insured is benefited by the survival of the things insured and suffers a loss by their
destruction. In fire insurance, the following persons have insurable interest under the principle of
indemnity:
 The owner of the goods, property and house has insurable interest in his goods, property and
house,
 The agent in his principal's goods,
 A trustee in the goods kept in his custody,

 The insured in his goods, and
 A partner in the property of firm.

Good Faith
A contract of insurance is understood as a contract of utmost good faith. The insured should make
clear all the important points with regard to the subject-matter of the insurance so that the insurer
may correctly estimate the risks involved. The insured should provide information regarding
construction of the house, environment, possibility of catching fire and possible measures that can be
taken in the case of any events. The insurance company may terminate the contract when it comes to
know that the facts are not disclosed.
Personal Contract
A fire insurance contract is a personal contract. The insured is involved in this contract with his
property. Therefore, the insurance company should have detailed and full knowledge about the
behaviour and character of the insured. As it is a personal contract, the insurance policy cannot be
transferred without the permission of the insurance company. If the possession of the insured goods
or property is transferred to a third person, the company has a right to terminate the contract of
insurance.
Fire Insurance Policy and its Types

A fire insurance policy is a contract in which the element of indemnification is applied. This
insurance policy is issued for one year and on the request of the policyholder it is renewed every
year. If, within the insured period, the property is damaged or lost due to fire, only then it will be
indemnified up to the loss not exceeding the insured amount. Further, the risk coverage is wider in
fire insurance to cover any loss caused by fire which is accidental and unintentional. In order to
receive indemnity in fire insurance, two conditions must be fulfilled. First, there must be an ignition
or actual fire, and secondly, the fire must be accidental, not intentional.
There may be different types of risk of loss caused by fire. To indemnify such risks of loss, the
insurer provides many types of services to the insured or the policyholder. Many schemes are
introduced and offered by insurance companies. On the bases of risks covered, values of the
properties, and kinds of indemnity provided, the fire insurance policy can be classified into the
following types:
Types of Fire Insurance Policy
On the Basis of Risk Covered

On the basis of the risk covered, the fire insurance policy can be divided into the following three
types:
1. Comprehensive policy. A fire insurance policy is called comprehensive policy, when it covers
other risks of loss caused by burglary, riots, arson, civil commotion, explosions, civil war,
accidents, strike and others in addition to the risk of loss caused by fire in one single policy.
2. Blanket policy. A blanket policy is that fire insurance policy in which a single policy is used to
insure properties located at one or different locations against the risk of fire. The insured may
have different properties at different locations. If one policy is taken for all the properties
located at different places, that is called blanket fire insurance policy.
3. Consequential loss policy. A consequential loss policy is meant for indemnifying the loss
caused not directly by fire but incidental to the event of fire. Under this policy, the insurance
company not only indemnifies the loss caused by fire, but also other indirect losses such as loss
of net profit due to expenses like salaries, interest, increased cost of advertising and hiring of
temporary premises.
On the Basis of Indemnity

On the basis of the extent of indemnification and coverage, there are following five types of fire
insurance policies:
1. Valued policy. A fire policy is valued when the insured amount payable as indemnity to the
policyholder is valued at the outset while issuing the policy. When the value of the property is
calculated and fixed by the value at the time of entering into contract and both the parties agree
upon, then the risk can be conveniently ascertained. Upon the happening of the event, the loss
can be easily valued.
2. Valuable policy. Contrary to valued policy, valuable fire policy is one in which the amount to
be indemnified is valued later after the event of fire. In this type of fire insurance policy,
property is not value at the time of taking policy. It is valued later when the incidence of fire
occurs and damage is caused.
3. Average policy. The fire policy which is termed with the average clause in its indemnification
is known as average policy. Under this policy, the insurer does not undertake to indemnify the
actual loss if the insured property is under-insured. Rather, it is the average value of the actual
loss relative to the actual value of the property insured, which is paid by the insurance company
as compensation. For example:
The amount of indemnity received will be Rs.25,000 when a property valued at Rs.1,00,000 is
insured for a value of Rs.50,000 and the actual loss caused by an event of fire is also Rs.50,000.
Hence, the amount of claim
= Rs. 25,000
4. Specific policy. Like the average policy, a specific fire policy defines the risk coverage when
under-insurance takes place. It is a specific policy in that it undertakes to indemnify the actual
loss only within the extent of value insured. Beyond that, even if the value of property and the
amount of actual loss are greater than the amount insured, the insurance company does not take
any liability whatsoever towards making the loss of goods. For example:
When a property valued at Rs.80,000 is insured for a value of Rs.40,000, the insurance company will
indemnify the actual loss if it is within the limit of insured value. But, if the entire property is
damaged, the company will not bear liability beyond Rs.40,000, which is the maximum value insured.
5. Reinstatement policy. Under a reinstatement policy, the insurance company undertakes to

replace the property damaged by fire. In this policy, the actual loss is not indemnified in
monetary terms, but insured goods or property is replaced.
On the Basis of Value of Stock

On the basis of value of stock, the fire insurance policy can be divided into the following four types:
1. Floating policy. A floating policy is one by which one or several kinds of goods lying at
different locations are insured under one policy and for one premium. The premium charged
under this policy is generally the average of the premium that would have been paid if each of
the goods has been insured under specific policies for specific amount.
2. Excess policy. An excess policy is supplementary fire insurance policy, which is purchased to
cover additional risks beyond the coverage of original first loss policy. This kind of fire policy
is purchased by such merchants whose stocks fluctuate from time to time. In such a case, a first
loss policy is purchased for minimum stock value and additionally an excess policy is
purchased for an anticipated increase in the total value of stock.
3. Declaration policy. This policy is issued for the maximum value of stock to be insured. At the
beginning of the contract, three-fourths of the premium payable is charged from the insured in
advance. Every month the policyholder is required to declare the value of present stock. In case
of loss by fire, the compensation is made on the basis of the declared value. At the end of the
insured period, based on the values of stock declared, the total of premium payable is worked
out as average.
4. Adjustment policy. When a fire policy offers an option to the policyholder to increase or
decrease the value insured, it is an adjustable fire policy. However, the policyholder must bring
his intention of increasing or decreasing the value insured to the knowledge of the insurer. As
such, it sounds like a declaration policy, but is significantly different. In case of the declaration
policy, the policyholder has to have it for a maximum value in the very beginning and every
month, he is required to make declaration of the stock value. In case of adjustment policy,
however, the policyholder is relieved of these requirements.
Procedures of Effecting Fire Insurance Policy

Like life insurance, a number of steps must be taken to enter into a contract between the insurance
company and the insured to indemnify the property of the latter from the risk of fire. These are called
the procedures for effecting fire insurance policy. The following are the important steps that must be
taken to buy a fire insurance policy:
1. Submission of proposal: An intending person must fill up the printed proposal form which is
distributed by the insurance company free of cost. The proposal form solicits, in addition to the
name and address of the proposer, other particulars concerning the object to be insured and the
physical and moral hazards involved in it. For example, to estimate the physical hazards, the
proposal form asks questions about the location and heating and lighting arrangements thereon.
Similarly, concerning the moral hazards, the policyholder might be asked to assert whether or
not the property was insured earlier or whether or not the earlier policy was rejected or
cancelled for any reason whatsoever.
2. Evidence of moral character or responsibility: Since a fire insurance contract involves moral
hazards, the insurance companies may ask for documentary evidence of moral character and
responsibility of the proposer issued in his favour by respected persons or agencies. Many
insurance companies do not ask for it these days, however. But if required, it must be enclosed
with the proposal form.
3. Survey and physical verification: After receiving the proposal, the insurance company sends
the surveyors for physical verification of the proposed insurable object. While verifying the
object physically, the surveyors have to see the location and the arrangements made for the
protection of the insurable object. The purpose of insurance company is to evaluate the proposal
in terms of physical and moral hazards involved in it. It is based on the survey report and the
particulars provided by the proposer on which basis the insurance company estimates probable
risks and determines the premium to be charged.
4. Acceptance of proposal: The insurance company accepts the proposal if the risks deem
insurable after the assessment of the survey report and the evidence of respectability.
Accordingly, a letter of acceptance is written to the proposer instructing him to pay the
premium.
5. Payment of premium: The proposer makes the payment of the specified premium at the
specified time. Upon receiving the premium, the insurance company issues the instalment
receipt together with a cover-note which acknowledges the acceptance of the proposal by the
insurance company. The cover-note is also called interim protection note.
6. Commencement of risk: The liability on the part of insurance company begins right from the
date of issue of interim protection note. It is usually written for a period of 30 days in lieu of the
policy-document according to which the fire risks of the insured are borne by the insurance
company. It is automatically cancelled from the date of the issue of policy-document.
7. Issue of fire insurance policy: The insurance policy takes some time to get it ready. After its
preparation during the period covered by the cover-note, it is sent to the policyholder. The
policy document includes everything concerning the terms and conditions of the contract and is
useful in ascertaining the mutual rights and duties of the insurer and the insured. The following
are the particulars included in it:
 Policy number
 Policyholder's name and address
 The insured amount
 The description of the property insured
 The policy-type and the risk covered
 The premium
 The policy duration
The structure and format of fire insurance policy used to differ in the past from one company to
another. In order to have uniformity and unambiguity, however, all insurance companies today
generally use standardized policy documents.
Marine Insurance

Marine insurance is the oldest form of insurance. Human beings have always been fascinated by sea
travel and therefore, exposed to dangers of storms, pirates and accidents at the sea. Historians suggest
that some sharing of losses existed among seafarers as early as the 9th century. The origin of modern
marine insurance is, however, associated with the evolution of trade through the sea. Originally, marine
insurance was designed to protect the shipping companies and owners of cargo against perils of the sea.
In modern times, however, it covers the risk of loss caused by perils on the land also.
In simple words, marine insurance is a legal contract between the insurer and the insured that
provides protection against marine losses. The insurer, also called the underwriter, is an insurance
company which indemnifies the insured against loss caused by perils of the sea.
The insured is generally a shipping company and merchants who hire ships for carrying their
goods from one port to the other. It is a contract that covers the ship, the cargo, the freight and other
liabilities, and protects them against the risk of loss caused by perils of the sea. The marine insurance
contract is valid for a specified voyage or for a specified time, or for a specified voyage and time.
The subject-matter of insurance may be either cargo, hull, or freight. The insurance taken on
goods is called cargo insurance. When the ship itself is insured, the insurance becomes hull
insurance. The shipping company lose the freight if the goods are not delivered at the destination
port. To protect itself from such risk, the shipping company can take an insurance policy on its
freight. Such an insurance is called freight insurance.
The marine insurance policy provides financial security to the ship and cargo against the
risk of losses due to ocean and inland perils.
The following definitions highlight the meaning of marine insurance more clearly:
J. L. Hanson - Marine insurance is a branch of insurance relating to ships and their cargoes, …
Policies can be taken out to cover (i) the ship, and (ii) cargo and they can be arranged to give
coverage either for a specified period of time or a particular voyage.
F.G. Crane – Marine insurance is a contract of indemnity in which the insurer agrees to
indemnify the insured in consideration of certain premium against loss or damage caused by
certain perils of the sea to the subject-matter insured.
M. N. Mishra - Marine insurance is a contract between insurer and insured whereby the
insurer undertakes to indemnify the insured in a manner and to the interest thereby agreed,
against marine losses incident to marine adventure.
It is clear from the above definitions that marine insurance is a branch of insurance and is
basically a contract of indemnity. It provides protection against the risk of loss that may be caused by
perils of the sea. Generally, it covers the ship, the cargo, or the freight money and protects them
against the marine loss for a certain period of time, voyage, or route.
Importance of Marine Insurance

In this age of globalization, the importance of marine insurance has increased more than ever before.
The following points highlight the importance of marine insurance:
1. Facilitates global trade: Due to tremendous growth of information and communication

technology, transportation, and multinational companies, the world has become a global
village today. As a result, the volume of trade in general and trade through the sea in particular
have tremendously increased, and so has the risk of loss at the sea. Therefore, marine insurance
plays significant role in facilitating the global trade by minimizing the risk thereof.
2. Ensures economic prosperity: The volume of marine insurance business is an indicator of the
economic prosperity of a country. There is a close link between a sound marine insurance
market and industrial development. For example, the rise of Britain as a great trading nation
and the Lloyd’s of London being the centre for the world’s marine insurance are examples of
prosperity.
3. Provides peace of mind: Marine insurance provides peace of mind to the businessmen by
meeting their financial losses from marine risks. It helps to reduce tension and fear, and takes
away anxiety from the businessmen and managers who are in the international business. As a
result, they are able to operate their businesses without any tension, fear and anxiety.
4. Improves quality of life: Marine insurance helps control losses that may arise from the marine
risks. As a consequence, people are encouraged to engage more in international business. This
means more investments, more jobs, more production, more income, and more consumption of
goods and services, which help to improve the people’s quality of life.
5. Provides social benefits: Marine insurance helps businessman to recover funds from a loss.
This keeps the business going, jobs are not lost, and goods and services continue to be sold. The
social benefit of this are that people do not loose their jobs and their sources of income are
intact This contributes to the unhindered growth of the national economy.
Marine Insurance Policy

A marine insurance policy is a contract whereby the insurer indemnifies the loss caused by perils of
the sea. The duration for its effectiveness, insurable interest of the insured, and the principle of
utmost good faith are, among others, necessary elements in a marine insurance policy. Besides, the
value of the object must be clearly described for the sake of indemnity. It is also necessary that
obligations and liabilities to be taken by the insurer must be declared in the policy.
The subject-matters of the marine insurance policy generally include ship, cargo, and freight.
However, two additional elements, i.e., terms of time factor and valuation of object are also
considered as legal requirements for the insurance policy.
Difference between life and general (fire and Marine) Insurance

Bases of difference Life insurance General insurance
Certainty of event Life insurance is the insurance of an event that is General insurance is the insurance of an event that is
certain to happen, that is death. not certain to happen such as accident, theft or fire
breakout.
Nature of contract It is an investment, not a contract of indemnity. It is a contract of indemnity, as such the insured can
claim actual amount of loss subject to the maximum
sum insured.
Insurable interest It requires that insurable interest must be present at the It requires that insurable interest must be present at
time of contract. both the times of contract and loss.
Period of contract It is for the whole life of the insured or for the specified It is for one year in case of fire insurance, and for the
age of the assured, whichever is earlier. specified period that is normally less than a year or for
a particular voyage or for both in case of marine
insurance.
Principle of It does not apply the principle of subrogation. It applies the principle of subrogation.
subrogation
Principle of It does not apply the principle of contribution. It applies the principle of contribution.
contribution
Surrender value It provides surrender value of policy. It does not provide the surrender value of policy at all.
Difference between life and general (fire and Marine) Insurance

Bases of difference Fire insurance Marine insurance
Insurable interest Fire insurance requires that insurable interest must be Marine insurance requires that insurable interest must
present at both the times of contract and loss. be present at the time of contract, but not necessarily
at the time of loss.
Profit It indemnifies the insured only the sum of actual loss It indemnifies the insured the sum of loss and 10 to
subject to the maximum sum insured. 15% extra as expected profit.
Transferability It can be freely transferred from one party to another. It cannot be transferred without the permission of
insurer.
Classification and Types of Marine Insurance Policy

Based on the subject-matter of insurance, the marine insurance policy can broadly be classified into
five types:
On the Basis of Hull

Loss may occur in or to the ship if any event happens in sea routes. The ship may be totally or
partially destroyed or damaged. In any case, the loss is very big one. Since the ship is very valuable,
it becomes necessary to insure it. The insurance of ship is called hull insurance policy. Generally,
hull insurance is entered for a specified period; and if any loss incurs within the period, the insurer
indemnifies the loss. The following are the types of marine insurance policy on the basis of hull:
1. Single vessel policy. Single vessel policy covers only one ship. Thus the shipping company
possessing many ships may enter into contract with the insurance company for each ship
separately. For example, if a shipping company has five ships and takes single vessel policy,
then it needs to have five policies for each ship separately.
2. Fleet policy. A shipping company may own a number of ships. The insurance company may
insure all the ships under a single policy, which is known as fleet policy. This type of policy
allows the shipping company to include several ships of a particular route under a single policy.
As the policy includes many ships, their premium is generally low and the shipping company,
unlike single vessel policy, does not need to enter into several contracts separately for all ships
it owns.
3. Construction policy. The ships under construction are insured under this policy. This policy
covers the ship that is under construction in the yard, and is not allowed for normal sailing in
the sea, except for trail sailing one or two times in water. If any loss occurs to the ship during
its construction and trial sailing, the insurance company indemnifies for the loss to the insured,
i.e., the shipping company.
On the Basis of Cargo

In marine insurance, not only ships but also the cargos are insured against the loss caused by sea
perils. When the owner, consigner or sender insures the cargo against the marine loss, it is called
cargo insurance. The cargo insurance is of three types:
1. Named policy. As its name suggests, the name and registration number of a particular ship, and
the quantity of each type of goods on board are written clearly in such a policy. If any loss
occurs to the goods on board as specified in the policy, the insurance company is liable to
indemnify for the loss; otherwise the insurance company is free from its liability. For example,
10,000 tea chests of 50 kg weight each were boarded on Jahaj Rani of Nepal Shipping
Company, Kathmandu. If the policy is taken and goods are boarded in any other ship of the
same company or of other companies, the insurer will be free from its liability.
2. Floating policy. This policy is also called running cargo policy. It describes the general terms
and leaves the amount of each shipment and particulars to be declared later on. This policy is
taken out for a round large sum, which is specified at each declaration and is attached to each
shipment. It provides protection for the risk of loss of cargoes, the value of which may change
from one shipment to another. It is applicable to a series of shipment of cargo. Generally, those
merchants who make regular shipments of goods through particular route purchase this policy.
Virtually, it is an ordinary cargo policy effected for round sum enough to cover a number of
shipments until the sum insured is exhausted.
3. All risk policy. This type of insurance policy covers all risks associated with the cargo from
godown to godown. Besides, the risk of sea perils, other risks of loss caused by out-break of
war, strikes, negligence and so on are also covered under this policy. For example, if the cargo
catches fire in the godown of the port before loading it on the ship or damaged by accident
while loading it on or unloading it from the ship, or stolen during the voyage, all such risks of
loss of the cargo are covered by this policy.
On the Basis of Freight

The freight is the carriage payable to the shipping company by the owners of the goods upon the
arrival of ship at the port of destination. The freight is lost directly, if the ship fails to reach the port
of destination due to any contingent cause, or indirectly as demurrage liability when the cargo does
not reach the port of destination within the stated period of time according to the freight contract. A
shipping company can purchase the freight policy in order to have protection against the loss of
freight and other contingent liabilities. Generally, the shipping company purchases either "with cargo
freight policy" or "without cargo freight policy".
1. With cargo freight policy. It is a contract between the shipping company and the insurance
company for the protection of cargo as well as freight from any unseen loss. Therefore, it is
called with cargo freight policy. Under this policy, the insurance company indemnifies the loss
of cargo as well as the loss of freight of the cargo to the shipping company.
2. Without cargo freight policy. If the contract between the shipping company and the insurance
company takes place only for the protection of freight of cargo from any contingent loss, such a
contract is called without cargo freight policy. Under the policy, the insurance company
indemnifies for the loss of freight of cargo to the shipping company.
On the Basis of Term

The marine insurance policy can also be classified on the basis of the term of period for the voyage.
1. Time policy. This type of policy provides the insured to cover all marine risks for a specified
period of time not exceeding 12 months. Under this policy, the subject-matter is insured for a
specified period of time such as from 5.00 a.m. of 1st July 2006 to 5.00 a.m. 1st July 2007.
Although this policy is normally taken for one year, it may also be used for a period less than a
year. This policy is more suitable for hull insurance than cargo insurance. Therefore, the policy
may cover the vessel during its sailing or under construction.
2. Voyage policy. A voyage policy covers all marine risks involved in a particular sea voyage,
irrespective of the time taken to accomplish the voyage. Therefore, the policy is issued to cover
the voyage from the port of origin to the port of destination, such as from the port of Kolkata to
the port of Singapore. Unlike time policy, it is suitable for cargo, as the ship does not sail through
only a particular route and cargo remains insured even if the ship halts at different intermediate
ports.
3. Mixed policy. Mixed policy is a combination of both time and voyage policy. This policy,
therefore, combines the elements of both time and voyage policy. Thus, mixed policy is taken
by the insured for specified time and voyage. This policy is suitable for both hull as well as
cargo, as it provides protection for the ship and cargo on board from all marine risks.
On the Basis of Valuation

Based on the valuation of objects being shipped, there are two types of insurance policy:
1. Valued policy. In this type of policy, the value of objects insured is fixed in advance at a time
when the contract is consented. If any loss occurs, the same will be indemnified on the same
basis.
2. Unvalued policy. Under this policy, the value of the object is not specified. The value of the
object is subject to be calculated after considering many expenses during the period. Thus, the
value for indemnity is ascertained if and when the loss actually occurs, i.e. losses to be assessed
afterwards.
Risks Covered Under Marine Insurance

Originally, the scope of marine insurance was very narrow covering the risks strictly relating to
voyage. As a result, no loss was indemnified which occurred before and after the voyage. However,
since risk of loss is always present before the shipment and after they reach the destination, modern
marine insurance covers the risk of loss even before and after the voyage. Thus, marine insurance
covers many risks. The types of risk covered by modern marine insurance are as follows:
1. Perils of the sea: Perils of sea mean any type of incident or contingent accidents or casualties
at the sea. In course of the voyage, the ship may be damaged due to sea storm, sea pirates,
tsunami, and accidents of any kind.
2. Fire: It is likely that fire may occur in the ship, when it is in its voyage. Causes of fire are
many. Inflammable items such as coal, oil, electricity and others are required in larger quantity
for the operation of ship. The natural events like lightning and thunder may also cause fire and
may damage the ship and cargo. While controlling the flame of fire, water may be used. That
too may damage the cargo or the ship. Thus, even fire may be included as risk in marine
insurance.
3. Theft: The goods may be stolen during a sea voyage. The goods may be stolen by the people in
the ship or outside the ship. Therefore, theft is one of the risks associated with the sea
transportation. For the purpose of marine insurance, however, the thieves must not be the captain
and his crew themselves or the other people travelling by the ship. They must be outsiders, who
use force for stealing goods.
4. War risks: The shipping companies may have to face many risks during the war period. There
may exist a risk of loss of ship, cargo and freight due to attacks and counter defensive
operations. The ship, cargo and other properties and even freight and liabilities may adversely
be affected and partially or totally damaged. The war may also give rise to many other perils.
The specified sea route may be changed and additional risks may occur. Therefore, war risks
are insurable under marine insurance.
5. Land risks: Originally, marine insurance was limited only to marine losses, but today it has
extended its scope even to land risks. Marine insurance indemnifies the subject-matter (cargo) of
the parties right from the godown of the exporting country to the godown of the importing country
against any risk of loss. Thus, the risks of loss associated with other means of transportation such
as railways, roadways and others, warehouses, ports of both the countries and others are included
and are covered under marine insurance.
6. Jettison: Jettison means throwing overboard a part of cargo or any other goods in order to
reduce the weight in the ship. Some of the cargo is deliberately thrown away with the object of
preventing the ship from further damage. Loss caused by this method is one kind of marine risk
and it can be covered under the policy.
7. Barratry: Barratry is a kind of mischievous and wilful action performed by the navigator,
captain, crews and employees of the ship to cause loss or damage to the ship and cargo of the
shipping company and the parties respectively. Here, mischievous act may be of any type and
nature, such as theft of ship or cargo, setting ship cargo on fire, fraudulent sale of cargo. These are
risks in addition to others. The insurance company provides protection even against these risks
and losses.
Procedure for Effecting Marine Insurance

A person who wishes to take marine insurance policy has to follow a detailed procedure, which
consists of the following steps:
1. Selecting an insurance company: To start with, the person who wishes to take marine
insurance has to select an appropriate insurance company that carries out such insurance. The
selection of an appropriate insurance company depends on a number of factors. These factors
include the history, financial soundness, and credibility of the insurance company being
considered. Besides, the insurance company that requires less formalities and time in issuing
marine insurance policy and claim settlement in case of loss may also be considered
appropriate.
2. Filling up a proposal form: The prospective person then should fill up a proposal form that is
available from the insurance company or its agent. The proposal form is a printed sheet in a
standard format that requires certain information filled regarding the name, address, and
occupation of the intended policyholder, nature and value of property or cargo, the type of policy
sought and the sum of premium to be paid. The proposal form needs to be carefully and correctly
filled up with all material information about the proposer, subject-matters, and the policy needed.
The filled up proposal can be handed over to the insurance company directly or through its agent.
3. Gathering evidence: After receiving the proposal form, the insurance company gathers
evidence of respectability of the prospective policyholder. The evidence of respectability
includes the information about honesty, credibility, and the financial position of the intended
policyholder. The insurance company gathers such information from third parties such as
banks.
4. Evaluating property: Once the insurance company gathers the evidence of respectability of
the proposer, it starts surveying and evaluating the subject-matters being insured. The subject-
matters are fully enquired, inspected, verified and evaluated by the surveyor or the evaluator.
Based on the survey and evaluation, the level of risk involved in the subject-matters is
ascertained and the sum of premium to be paid by the proposer is determined.
5. Accepting the proposal: After the scrutiny of the proposal by collecting the evidence of
respectability and the surveyor and evaluator’s report, the insurance company decides whether
to accept the proposal. If everything is acceptable and the officials of the insurance company
are satisfied with the details enquired, the insurance company accepts the proposal. The
information of the acceptance of the proposal is given to the proposer with a request for the
payment of the premium.
6. Issuing a cover note: Upon receipt of the premium from the proposer, the insurance company
issues a receipt for the payment. Such a receipt is called a cover note, which is like a temporary
policy as it covers and protects the subject-matters from any loss occurred before the issue of
the final marine insurance policy.
7. Issuing marine insurance policy: Finally, a marine insurance policy is prepared and issued to
the policyholder after it is duly stamped and signed by the official of the insurance company
and the policyholder. The insurance policy contains personal information of the policyholder,
details of the subject-matters and the terms and conditions which are agreed upon by the insurer
and the insured. Upon the issue of the marine insurance policy, it is fully operational and it
covers the loss that may occur in a sea voyage. The policy is valid for the voyage and /or
period specified in the policy.
Procedure for the Settlement of Claims

In case a loss occurs, the insured has to make a claim against the insurance company for the loss
according to the terms and conditions agreed upon in the marine insurance policy. The insured has to
take a detailed procedure for the settlement of the claim, which consists of the following steps:
1. Giving notice: If a loss occurs, the insured must gather the detailed information about the loss
and immediately serve a notice to the insurance company about the loss occurred. The insured
must give a notice in writing giving details of damage of the subject-matters.
2. Making a claim: Within a stated period after the loss has occurred, the insured must submit the
claim in writing to the insurance company. The claim must mention the details of damage, the
value of the damaged subject-matters at the time when loss occurred, and the particulars of
other insurance, if there is any. The value of damaged subject-matters mentioned in the claim
must not include any profit. While making the claim, the insured must also attach with it other
documents such as insurance policy, invoice of goods, bills of lading, and so on.
3. Providing evidence: Only making a claim for the loss occurred is not sufficient for the
compensation. The claim for the loss must be supported by adequate evidence of the loss and of
the value of the loss. Therefore, the insured must gather sufficient evidence and provide it to the
insurance company. The insured must always be ready to produce such evidence as and when
required.
4. Assessing claim: Upon the receipt of claim and supporting evidence from the insured, the
insurance company attempts to assess the true nature of damage, volume and value of the
damage based on the supporting evidence. Such an assessment is done by the surveyor and the
evaluator appointed by the insurance company on its behalf.

5. Settling the claim: After the scrutiny of the claim, supporting evidence, and assessment report
of the evaluator, the insurance company decides the amount of compensation for the actual loss.
The amount of compensation decided may be the same as per the claim made or less than that
depending on the true assessment of the value of the loss. Then, the insurance company sends a
letter to the insured for the settlement of the claim. The claim is settled by giving payment to
the insured. However, if the insured makes a false claim for the loss, the insurance company
may cease all the benefits offered to the insured as per the insurance policy.
Review Questions
1. What is risk? Explain the types of business risk.
2. Explain the various steps of risk management process.
3. What is risk management? Explain the four techniques of risk management.
4. What is insurance? Explain the essential elements of insurance contract.
5. Define insurance. Explain any two principles of it.
6. List out the principles of insurance and explain any four.
7. What is life insurance? Explain the procedure of effective life insurance policy in Nepal.
8. Explain the various forms of whole life policies.
9. Define insurance and highlights its important.
10. What is fire insurance? Explain the procedures of effecting fire insurance.
11. What is life insurance? Explain the types of life insurance policies.
12. What is fire insurance policy? Explain any three types of fire insurance policies.
13. What is marine insurance? Explain any two types of marine insurance policy.
14. Define marine insurance. Describe the subject matter covered by marine insurance.
15. Make a list of marine insurance policy and explain any four of them.

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Chapter 13 Risk Management and Insurance 195

Risk Management and Insurance

Types of Business Risk

 Interest rate Risk

 Foreign currency Risk

 health and safety risks

Risk Management Procedure

1. Identifying potential risk: Risk identification is an essential step in management of risk. In

with concerned business. The basis of assessment is done in terms of probability. It is

 Cost and benefit

 Health and safety

Risk to human beings can be

Pledge to protect. It is a slogan of Premier Insurance Company (Nepal)

Meaning and Definition

The following are some of the main definitions of insurance:

Encyclopaedia Britannica - Insurance may be described as a social device whereby a large

Evolution and Growth of Insurance

Essential Elements of Insurance Contract

1. Agreement (Proposal and Acceptance): Agreement means communication by the parties to

Provides economic Financial security Safeguard of wealth Helps to maintain law

Importance to Individual and Family

2. Increases self-respect: Self-respect is directly connected with independence of a person in the

improving the morale of the employees.

1. Safeguards the properties: An insurance company organizes different types of programmes in

2. Creates employment opportunities: Insurance companies need different types of personnel

Principle of Insurable Interest

There are at least four features essential to insurable interest:

Principle of Utmost Good Faith

 The same subject-matter has been insured under different policies;

 All the policies are in force at the time of loss;

Principle of Mitigation of Loss

Principle of Proximate Cause

Insurance Business in Nepal

Meaning and Definition

The following definitions further highlight the meaning of life insurance:

C. A. Kulp and J. W. Hall - A contract in writing whereby insurer agrees, in consideration of

Life Insurance Policy

Types of Life Assurance Policy

On the Basis of Policy Duration

 Ordinary endowment policy. It is an endowment life policy, which is commonly

On the Basis of Premium Payment

On the Basis of Participation in Profit

On the Basis of Persons Covered

On the Basis of Method of Payment of Assured Amount

Procedures for Effecting Life Insurance Policy

1. Proposal. A life policy has to be proposed by an intending policyholder. Therefore, he has to

recommendation, birth-certificate, or citizenship certificate.

Essential Features of Life Insurance Contract

Nature of General Contract

Utmost Good Faith

Assignment and Nomination

Meaning and Definition

Essential features of Fire Insurance Contract

 A trustee in the goods kept in his custody,

 A partner in the property of firm.

Fire Insurance Policy and its Types

Types of Fire Insurance Policy

On the Basis of Risk Covered

On the Basis of Indemnity

Hence, the amount of claim