A contract of insurance like any other contract must possess all the essential elements of a contract, e.g. existence of an agreement, free consent of parties, competence of parties to enter into an agreement, lawful consideration, etc. In addition to these, the following requirements (principles) are most essential for a contract of insurance to be valid :
1. Good Faith : The legal maxim caveat emptor (let the buyer beware) prevails in ordinary business contracts. However, the insurance contracts are an exception to the said principle of caveat emptor. A contract of insurance is a contract uberimae fidei (i.e. based on absolute good faith). It means that the insured must disclose all material facts concerning the subject matter of the insurance. If a material fact is not disclosed or if there is misrepresentation or fraud, it shall render the contract voidable at the option of the insurer. What is a material fact depends on the circumstances of each individual case. Hence it is a question of fact and not a question of law. It is for the law court to decide whether there has or has not been a failure to disclose material facts. Generally speaking, a material fact is one which the insurer shall take into account while considering whether to accept the risk or not to accept the risk. Further the fact is also material if it has a bearing on the amount of premium which the insurer will charge. It is important to remember that the onus of proof of concealment lies on the insurer. Further, the doctrine of good faith is not one-sided. Like the insured, the insurer is duty bound to disclose such material facts as are within his knowledge or that of his agents. For example, he must draw attention to any restrictions in his policy.
2. Indemnity : Life insurance is a contingent contract, i.e. the money becomes payable on the happening of an agreed event, e.g. in endowment policy the agreed sum becomes payable after a certain specified period of time or death whichever is earlier. Hence, the agreed sum becomes payable sooner or later.
Other forms of insurance (e.g. fire or marine) are not contingent contracts. They are contracts of indemnity. The insurer in these cases promises to indemnify the insured person for what he actually losses on account of some mischance or misfortune. “The contract of insurance contained in a marine or fire policy is a contract of indemnity and of indemnity only, and that this contract means that the assured, in case of a loss against which the policy has been made, shall be fully indemnified but shall never be more than fully indemnified”.
The considerations of public interest also dictate that the insured must not get anything more than the actual loss since otherwise the assured may be under constant temptation to destroy his property and commit a certain social act. Even in case of over-insurance (i.e. where policy is taken for a sum more than the real value of the property), the assured is entitled to only actual loss.
3. Subrogation : According to the principle of subrogation, the insurer becomes entitled to all the rights of the ensured as regards the subject matter of insurance. The principle has been expressed in an American case in the following words :
“Subrogation is the substitution of one person in place of another, whether as a creditor or as the possessor of any other rightful claim, so that he who is substituted succeeds to the rights of the other in relation to the claim, its rights remedies, or securities”.
The insured may have the rights against the third party on account of negligence of the third party or on account of some mischief of the third party or on account of an agreement between the insured or third party etc.
The following essential characteristics of the doctrine of subrogation deserve consideration :
(a) Contracts of Life and Personal Accident Insurance : The doctrine of subrogation applies only to contracts of indemnity (i.e. contracts of fire and marine insurance) since the principle is in itself a mere corollary of the ‘doctrine of indemnity’. It does not apply to contracts of life and personal accident insurance. Hence, the legal representative can get the insured sum from the insurance as well as the damages, if any, from the third party.
(b) Payment of the whole loss : The ‘doctrine of subrogation’ applies only upon payment of the whole loss by the insurer to the insured. In case of partial loss, the principle does not apply. However, the express provision may entitle the insurer to exercise his right of subrogation even before the payment has been made to the insured.
(c) The insured to surrender all his rights claims and remedies in favour of insurers : Upon payment of the whole loss by insurers to the insured, the insurers shall step into the shoes of the insured and shall avail themselves of all the rights-claims and remedies which the insured had against the third party/parties. If the insured himself receives compensation for the loss from the third party after he has been indemnified by his insurer, he holds that further compensation as a trustee for his insurer, to the extent that the latter is entitled to.
(d) Insurer entitled to benefit only to the extent of his payment : The insurer is, by virtue of subrogation, entitled to rights, claims and remedies only to the extent of his payment. It has been made quite clear in a U.S. case according to which if the insurer, upon payment of the claim to the insured, recovers from the defaulting third party more than the amount paid under the policy, he has to pay this excess to the insured, though he may charge the insured his share of reasonable expenses incurred in collecting the money.
(e) The insured to provide facility to the insurer : Any action taken by the insurer against the third party is usually in the name of the assured. However, the cost of any action taken is borne by the insurer. The insured is duty bound to give to the insurer all such reasonable facilities as the latter may require in enforcing his rights against the third parties.
(f) The insurer entitled to only such rights as are available to the insured : The insurer shall be entitled to only such rights as are available to the insured. He cannot acquire better rights against the parties at fault than what the insurer himself would have had.
4. Insurable Interest : The assured must possess an ‘insurable interest’ in the subject matter of insurance. For an insurance contract to be valid, ‘Insurable Interest’ is the legal right to insure. The legal right to insure is measured in terms of money and vests in a person to whom the law recognizes as a person who is interested in the preservation of a thing or the continuance of a life. Mere mutual love and affection is not considered in law as sufficient to an insurable interest for purposes of obtaining an insurance cover. A contract of insurance without an insurable interest is a wagering agreement and is void. ‘Insurable interest’ in different types of insurances is discussed below.
Some of the instances where a person has an insurable interest in the life of another are as follows :
1. A son may insure his father’s life on whom he is dependent. Similarly, the father can take an insurance policy on his son’s life when he is dependent on him. The sum recoverable under a life policy is limited to the amount or value of the insured’s insurable interest in the life insured at the date of the policy.
2. A creditor can take an insurance on the life of his debtor only upto the amount of his debt plus some additional charges on account of premiums and interest.
3. A partner can insure the life of another partner to the extent of the latter’s capital only. It is because in the event of his death, it is only his share in the business that needs to be paid out for running the business smoothly as far as money is concerned even after his death.
4. An employer has also an insurable interest in the life of his contractor, a corporation has an insurable interest in the life of a senior officer during the course of his employment in the company whose death might adversely affect the profits of the business.
5. A trustee has an insurable interest with regard to interest of which he is a trustee.
6. An insurer has an insurable interest in the subject matter of a policy, therefore, he can get re-insurable cover.
7. Surety in the life of his principal debtors to the extent of his guarantee only.
5. Causa Proxima : Causa proxima is a Latin phrase which means proximate cause (i.e. nearest cause). It means that when the loss arises on account of more than one cause, then the nearest cause is considered responsible for the loss. It is that cause which, in a natural and unbroken series of events, is responsible for loss or damage. It is the cause closest to the result in order of effect, though not necessarily in time. Thus such a cause is proximate in efficiency. The principle of causa proxima states that to ascertain whether the insurer is liable for the loss or not, the proximate and not the remote cause must be looked to.
If there is only one cause of damage or loss, there is no difficulty in fixing the liability of the insurer. However, usually the loss or damage arises on account of a series of causes. In such a case, the principle of causa proxima is applied. But too much stress must not be laid on the word ‘proximate’ in the sense as to lose sight or destroy altogether the idea of the cause itself. The true and over-ruling principle is to look at the contract as a whole and to ascertain what the parties to it really want, what was that which brought about the loss, the event the accident, and this is not in an artificial sense, but in the real sense which the parties to a contract have in mind, when they speak of cause at all.
6. Doctrine of Contribution : It is another corollary of the Doctrine of Indemnity. The insured can realize his loss from the insurance companies, in case he is having more than one policy on the same subject matter which has been destroyed, in any order he likes. Of course, he is not permitted to recover more than the actual loss. The recovery of loss by the insured according to his discretion usually creates inequities among different insurers. The doctrine of contribution ensures equitable distribution of loss as between insurers. The doctrine of contribution states that insurer/insurers who has/have paid more than his/their proportionate share to the insured shall have the right to recover the proportionate contribution from other insurer/insurers. For example, a person insures his house under two policies--with A for Rs.20,000 and with B for Rs.8,000. Now suppose the loss if for Rs.18,000, the contribution shall be as follows :
A shall pay 20,000
---------- X 18,000 = Rs. 12857.00 : 22 :
28,000
B shall pay 8,000
--------- X 18,000 = Rs. 5,143.00
28,000
The above discussion reveals the following characteristics of the doctrine of contribution :
(1) The subject-matter of insurance must be same to all the policies;
(2) The peril which is insured against must be the same in all the policies;
(3) The same insured must be there in all the policies; and
(4) All the policies must be in force when the loss occurs.
It may, however, be stated that the contribution clause is usually there in the policy. This clause limits liability of the insurance company to its retable proportion of the loss due to insured peril if there is any other insurance effected by or on behalf of the insured covering any of the property destroyed or damaged. This clause discourages multiple or over-insurance and thereby prevents unfair methods of competition. The doctrine of contribution like the principles of subrogation and indemnity is applicable to fire and marine policies only.
A contract of compensation for the loss or damage suffered on the occurrence of certain specified events by the insured is called insurance. Premium is payable for the period of insurance. An insurance contract is built on certain principles, such as good faith, insurable interest, compensation, subrogation, contribution etc. A life insurance contract serves the purpose of protection as well as an investment contract. It is a protection contract since it gives protection to the assured in the event of death by making a payment of the entire amount of sum assured. It is an investment contract too, as it gives the assured the advantage of returning the money with interest and bonus at the end of the policy. A contract of general insurance serves only as a protection contract and not as an investment contract, where the money paid as premium will come back to the insured, by way of claims, only on the occurrence of some specified events.
1. Good Faith : The legal maxim caveat emptor (let the buyer beware) prevails in ordinary business contracts. However, the insurance contracts are an exception to the said principle of caveat emptor. A contract of insurance is a contract uberimae fidei (i.e. based on absolute good faith). It means that the insured must disclose all material facts concerning the subject matter of the insurance. If a material fact is not disclosed or if there is misrepresentation or fraud, it shall render the contract voidable at the option of the insurer. What is a material fact depends on the circumstances of each individual case. Hence it is a question of fact and not a question of law. It is for the law court to decide whether there has or has not been a failure to disclose material facts. Generally speaking, a material fact is one which the insurer shall take into account while considering whether to accept the risk or not to accept the risk. Further the fact is also material if it has a bearing on the amount of premium which the insurer will charge. It is important to remember that the onus of proof of concealment lies on the insurer. Further, the doctrine of good faith is not one-sided. Like the insured, the insurer is duty bound to disclose such material facts as are within his knowledge or that of his agents. For example, he must draw attention to any restrictions in his policy.
2. Indemnity : Life insurance is a contingent contract, i.e. the money becomes payable on the happening of an agreed event, e.g. in endowment policy the agreed sum becomes payable after a certain specified period of time or death whichever is earlier. Hence, the agreed sum becomes payable sooner or later.
Other forms of insurance (e.g. fire or marine) are not contingent contracts. They are contracts of indemnity. The insurer in these cases promises to indemnify the insured person for what he actually losses on account of some mischance or misfortune. “The contract of insurance contained in a marine or fire policy is a contract of indemnity and of indemnity only, and that this contract means that the assured, in case of a loss against which the policy has been made, shall be fully indemnified but shall never be more than fully indemnified”.
The considerations of public interest also dictate that the insured must not get anything more than the actual loss since otherwise the assured may be under constant temptation to destroy his property and commit a certain social act. Even in case of over-insurance (i.e. where policy is taken for a sum more than the real value of the property), the assured is entitled to only actual loss.
3. Subrogation : According to the principle of subrogation, the insurer becomes entitled to all the rights of the ensured as regards the subject matter of insurance. The principle has been expressed in an American case in the following words :
“Subrogation is the substitution of one person in place of another, whether as a creditor or as the possessor of any other rightful claim, so that he who is substituted succeeds to the rights of the other in relation to the claim, its rights remedies, or securities”.
The insured may have the rights against the third party on account of negligence of the third party or on account of some mischief of the third party or on account of an agreement between the insured or third party etc.
The following essential characteristics of the doctrine of subrogation deserve consideration :
(a) Contracts of Life and Personal Accident Insurance : The doctrine of subrogation applies only to contracts of indemnity (i.e. contracts of fire and marine insurance) since the principle is in itself a mere corollary of the ‘doctrine of indemnity’. It does not apply to contracts of life and personal accident insurance. Hence, the legal representative can get the insured sum from the insurance as well as the damages, if any, from the third party.
(b) Payment of the whole loss : The ‘doctrine of subrogation’ applies only upon payment of the whole loss by the insurer to the insured. In case of partial loss, the principle does not apply. However, the express provision may entitle the insurer to exercise his right of subrogation even before the payment has been made to the insured.
(c) The insured to surrender all his rights claims and remedies in favour of insurers : Upon payment of the whole loss by insurers to the insured, the insurers shall step into the shoes of the insured and shall avail themselves of all the rights-claims and remedies which the insured had against the third party/parties. If the insured himself receives compensation for the loss from the third party after he has been indemnified by his insurer, he holds that further compensation as a trustee for his insurer, to the extent that the latter is entitled to.
(d) Insurer entitled to benefit only to the extent of his payment : The insurer is, by virtue of subrogation, entitled to rights, claims and remedies only to the extent of his payment. It has been made quite clear in a U.S. case according to which if the insurer, upon payment of the claim to the insured, recovers from the defaulting third party more than the amount paid under the policy, he has to pay this excess to the insured, though he may charge the insured his share of reasonable expenses incurred in collecting the money.
(e) The insured to provide facility to the insurer : Any action taken by the insurer against the third party is usually in the name of the assured. However, the cost of any action taken is borne by the insurer. The insured is duty bound to give to the insurer all such reasonable facilities as the latter may require in enforcing his rights against the third parties.
(f) The insurer entitled to only such rights as are available to the insured : The insurer shall be entitled to only such rights as are available to the insured. He cannot acquire better rights against the parties at fault than what the insurer himself would have had.
4. Insurable Interest : The assured must possess an ‘insurable interest’ in the subject matter of insurance. For an insurance contract to be valid, ‘Insurable Interest’ is the legal right to insure. The legal right to insure is measured in terms of money and vests in a person to whom the law recognizes as a person who is interested in the preservation of a thing or the continuance of a life. Mere mutual love and affection is not considered in law as sufficient to an insurable interest for purposes of obtaining an insurance cover. A contract of insurance without an insurable interest is a wagering agreement and is void. ‘Insurable interest’ in different types of insurances is discussed below.
Some of the instances where a person has an insurable interest in the life of another are as follows :
1. A son may insure his father’s life on whom he is dependent. Similarly, the father can take an insurance policy on his son’s life when he is dependent on him. The sum recoverable under a life policy is limited to the amount or value of the insured’s insurable interest in the life insured at the date of the policy.
2. A creditor can take an insurance on the life of his debtor only upto the amount of his debt plus some additional charges on account of premiums and interest.
3. A partner can insure the life of another partner to the extent of the latter’s capital only. It is because in the event of his death, it is only his share in the business that needs to be paid out for running the business smoothly as far as money is concerned even after his death.
4. An employer has also an insurable interest in the life of his contractor, a corporation has an insurable interest in the life of a senior officer during the course of his employment in the company whose death might adversely affect the profits of the business.
5. A trustee has an insurable interest with regard to interest of which he is a trustee.
6. An insurer has an insurable interest in the subject matter of a policy, therefore, he can get re-insurable cover.
7. Surety in the life of his principal debtors to the extent of his guarantee only.
5. Causa Proxima : Causa proxima is a Latin phrase which means proximate cause (i.e. nearest cause). It means that when the loss arises on account of more than one cause, then the nearest cause is considered responsible for the loss. It is that cause which, in a natural and unbroken series of events, is responsible for loss or damage. It is the cause closest to the result in order of effect, though not necessarily in time. Thus such a cause is proximate in efficiency. The principle of causa proxima states that to ascertain whether the insurer is liable for the loss or not, the proximate and not the remote cause must be looked to.
If there is only one cause of damage or loss, there is no difficulty in fixing the liability of the insurer. However, usually the loss or damage arises on account of a series of causes. In such a case, the principle of causa proxima is applied. But too much stress must not be laid on the word ‘proximate’ in the sense as to lose sight or destroy altogether the idea of the cause itself. The true and over-ruling principle is to look at the contract as a whole and to ascertain what the parties to it really want, what was that which brought about the loss, the event the accident, and this is not in an artificial sense, but in the real sense which the parties to a contract have in mind, when they speak of cause at all.
6. Doctrine of Contribution : It is another corollary of the Doctrine of Indemnity. The insured can realize his loss from the insurance companies, in case he is having more than one policy on the same subject matter which has been destroyed, in any order he likes. Of course, he is not permitted to recover more than the actual loss. The recovery of loss by the insured according to his discretion usually creates inequities among different insurers. The doctrine of contribution ensures equitable distribution of loss as between insurers. The doctrine of contribution states that insurer/insurers who has/have paid more than his/their proportionate share to the insured shall have the right to recover the proportionate contribution from other insurer/insurers. For example, a person insures his house under two policies--with A for Rs.20,000 and with B for Rs.8,000. Now suppose the loss if for Rs.18,000, the contribution shall be as follows :
A shall pay 20,000
---------- X 18,000 = Rs. 12857.00 : 22 :
28,000
B shall pay 8,000
--------- X 18,000 = Rs. 5,143.00
28,000
The above discussion reveals the following characteristics of the doctrine of contribution :
(1) The subject-matter of insurance must be same to all the policies;
(2) The peril which is insured against must be the same in all the policies;
(3) The same insured must be there in all the policies; and
(4) All the policies must be in force when the loss occurs.
It may, however, be stated that the contribution clause is usually there in the policy. This clause limits liability of the insurance company to its retable proportion of the loss due to insured peril if there is any other insurance effected by or on behalf of the insured covering any of the property destroyed or damaged. This clause discourages multiple or over-insurance and thereby prevents unfair methods of competition. The doctrine of contribution like the principles of subrogation and indemnity is applicable to fire and marine policies only.
A contract of compensation for the loss or damage suffered on the occurrence of certain specified events by the insured is called insurance. Premium is payable for the period of insurance. An insurance contract is built on certain principles, such as good faith, insurable interest, compensation, subrogation, contribution etc. A life insurance contract serves the purpose of protection as well as an investment contract. It is a protection contract since it gives protection to the assured in the event of death by making a payment of the entire amount of sum assured. It is an investment contract too, as it gives the assured the advantage of returning the money with interest and bonus at the end of the policy. A contract of general insurance serves only as a protection contract and not as an investment contract, where the money paid as premium will come back to the insured, by way of claims, only on the occurrence of some specified events.
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