Principles of Insurance

Chapter
Principles of Insurance
Principle of
Insurable Interest
SUBJECT-MATTER OF INSURANCE
CONTRACTS
• Insurance is a contract whereby one party(the
insurer) agrees in consideration of money paid to
him called the premium by another party(the
insured) to indemnify the latter against loss
resulting to him on the happening of certain events
or to pay a certain specified sum on the
happening of the specified event or events.
• The subject-matter of insurance may be any

property of intrinsic value, or any even the
happening of which will cause the loss of a legal
right or the creation of a legal liability.
The Essentials Of Insurable Interest Are As
Follows
(a) There must be property rights,interest,life or limb, or
potential liability developing upon the insured capable
of being covered.
(b) Such property rights,interest,life or limb, or liability must
be the subject-matter of the insurance.
(c) The insured must bear some relationship, recognized by
law, to the subject matter whereby he benefits by the
safety of the property, rights, interest, life, limb or free-
dom from liability and is prejudiced by any loss,
damage or injury, or creation of liability.
Property Insurance
• Part or joint ownership
• Mortgagees and Mortgagors
• Administrators, executors, trustees
• Bailees
• Carriers and innkeepers
• Agents
• Husband and Wife
Insurable Interest
• Insurance of the person
– The person himself
– Wife of a person
• Liability Insurance
INDEMNITY : GENERAL
FEATURES
•1.This means the object of insurance contracts
is to place the insured, as nearly as possible, in
the same financial position after a loss as that
occupied immediately before the happening of
the insured event.
•2.Indemnity is linked with insurable interest. Is
not necessarily provided by means of a money
payment, as reinstatement, repair or
replacement is sometimes convenient to both
parties.
INDEMNITY APPLIED TO VARIOUS
BRANCHES OF INSURANCE
• Marine
• The ship (hull) allows for a fair value to the ship owner,
and the cargo policy allows the merchant to insure his
profit as well as the actual cost price of the goods. In
other words, a commercial indemnity, instead of a strict
indemnity is provided.
• In the event of total loss, the measure of indemnity is the
value fixed by the policy. where there is a partial loss of
goods, a settlement is made of a proportion of the greed
value according to the amount of depreciation. In the
event of a partial loss of a ship, the indemnity is
represented by the cost of repairing the damage.
• Fire and accident ( other than personal accident)
• Life and personal accident:

The amount of life assurance that a man can effect is
normally controlled by his ability to pay premiums and is
thus roughly scaled to his position in life. In personal
accident insurance, insurers Endeavour to ensure that
the amount of weekly benefit provided in the event of
disablement is in line with the insured’s normal earning
capacity.
METHODS OF PROVIDING INDEMNITY
• (a) Cash payment

• (b) Repair
• (c) Replacement
• (d) Reinstatement
REINSTATEMENT OF SUM INSURED
AFTER LOSS
• Marine
• Fire
• Life
• Accident
SUBROGATION
• Subrogation is the right which one
person has of standing in the place of
another and availing himself of all the
rights and remedies of that other,
whether already enforced or not.
• It does not apply to personal accident

or life policies.
HOW SUBROGATION ARISES
(a)Rights arising out of tort
(b) Rights arising out of contract
(c) Rights arising by statute

WHEN SUBROGATION ARISES
• Fire and accident
• Marine
EXTENT OF SUBROGATION
• A policyholder is under insured and
more is recovered from a negligent
third party than the amount paid by
the insurer under the policy, the
balance belongs to the policyholder.
Principle of Contribution
• Contribution is the right of an insurer who
has paid under a policy, to call upon other
insurers equally or otherwise liable for the
same loss to contribute to the payment.
• It supports the principle of indemnity and

applies only to the contracts of indemnity.
• But in case of medical expenditure incurred

is subject to contribution.
When the doctrine operates
• When the same person insures same
interest with more than one office.
– The policies concerned must cover the same
peril, which caused the loss
– They must protect the same interest of the
same insured
– They must relate to the same subjectmatter
– They must have been in force at the time of
the loss
Order of contribution
Sum insurede with individual office

X Loss
Total sum insured
DIFFERENT INTERESTS: NO
CONTRIBUTION
• It is possible for Circumstances to arise in
which two insurers may each have to pay
the same loss in full because different
interests are involved.
• Where different interests are involved, one

insurance is usually effected in the joint
names.
Principle of UTMOST GOOD
FAITH
• Contracts of insurance are different because
one party to the contract alone-the prosper-
knows, or ought to know, all about the risk
proposed for insurance, and the other party-the
insurer has to rely largely upon the information
given by the prosper in his assessment of that
risk. For this reason, insurance contracts are
contracts of the utmost good faith.
• The failure of one party to exercise the utmost

good faith enables the aggrieved party to
repudiate the contract.
DUTY OF DISCLOSURE
• It is the duty of the proposer to disclose,

clearly and accurately, all material facts
relating to the proposed insurance. It is a
positive, not a negative duty. It is confined,
however to matters of fact; it does not
include matter of opinion.
• Material Fact
Duration of the duty of disclosure
• The duty must be observed throughout the
negotiations, and continues until they are
completed and the contract is operative.
• If an alteration is made to an existing
policy, the duty applies so far as that
alteration is concerned.
• Disclosure by agent effecting insurance

MATERIAL FACTS
• (a) Facts which tend to render a risk proposed
greater than normal.
• (b) Facts necessary to explain the exceptional

nature of a risk proposed for insurance.
• (c) Facts which appear to suggest some special

motive for insurance.
• (d) Facts which show that the proposer himself

is in some way abnormal.
Facts which need not to be
disclosed
• (a) Facts which lessen the risk proposed
for insurance.
• (b) Facts which could or should be
inferred by the insurer in the light of the
particulars actually disclosed.
• (c) Facts of public knowledge
• (d) Matters of Law
• (e) Facts possible of discovery
Facts which need not to be
disclosed
• (f) Facts which it can be reasonably
concluded are a matter of indifference to
the insurer.
• (g) Facts which it is superfluous to
disclose by reason of a warranty in the
proposed insurance.
Representation
• A representation is a statement, verbal or
in writing made by the proposer to the
insurer bearing on a risk to be insured.
• Every such representation, if material,

must be substantially true.
Warranty
• A warranty is an undertaking by the
insured to the effect that he shall or shall
not do a certain thing or that some
condition shall be fulfilled.
Distinction
• A representation must be substantially true
and a warranty must be strictly complied
with.
• Misrepresentation should relate to material
fact but breach of warranty can be material
or immaterial
• Representation does not appear in the
policy but warranty appear in the policy
Breaches of the duty
• Non disclosure
• Concealment
• Innocent misrepresentation
• Fraudulent misrepresentation
On discovery of a breach
• To overlook the breach
• To repudiate liability
• To bring an action for cancellation of the
policy
• If the policy is matured, the insurer may
make no payment and simply leave the
insured to take proceedings which the
insurer will defend
• Void Contract
• Voidable Contract
• Unenforceable Contract
Principle of Proximate Cause
Rules of Proximate Cause
• Single Cause
• Concurrent Cause
• Unbroken Sequence

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Chapter

• The subject-matter of insurance may be any

• Life and personal accident:

• (a) Cash payment

• It does not apply to personal accident

(a)Rights arising out of tort

(b) Rights arising out of contract

(c) Rights arising by statute

• Fire and accident

• It supports the principle of indemnity and

• But in case of medical expenditure incurred

Sum insurede with individual office

• Where different interests are involved, one

• The failure of one party to exercise the utmost

• It is the duty of the proposer to disclose,

• Disclosure by agent effecting insurance

• (b) Facts necessary to explain the exceptional

• (c) Facts which appear to suggest some special

• (d) Facts which show that the proposer himself

• Every such representation, if material,

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