FUNDAMENTAL PRINCIPLES OF INSURANCE: Utmost Good Faith, Insurable Interest, Indemnity: Corollaries of Indemnity - Subrogation , Contribution. Proximate Cause.
1.Utmost Good Faith : Utmost Good Faith Good faith- Let the buyer beware Declaration of all material Information about the subject mater of insurance Material Information is that information which enables the insurer to decide: whether he will accept the risk and; if so, at what rate of premium and subject to what terms and conditions Breach of duty of utmost good faith arises in two ways: Non-disclosure of material facts- oversight, proposer thought it¶s not essential etc. Misrepresentation- Intentional. 2.Insurable Interest : Insurable Interest The legal right enjoyed by the owner of a property to insure is called µInsurable Interest¶. The insurance will become null and void, without the insurable interest. 3.Indemnity : Indemnity The principle of Indemnity states that under the policy of insurance, the insured has to be placed after the loss in the same financial position in which he was immediately before the loss. Applicability: When the losses suffered by the insured can be measured in terms of money It is practicable to place the insured in the same financial position which he occupied before the loss In Marine Cargo where valued polices are issued, there is only commercial indemnity- the value declared for insurance is accepted at the time of loss. Limitation of Insurers liability: If the sum insured is less than the indemnity, only the sum insured is payable. Property insurancesCondition of average- If there is under insurance only proportionate value is payable. Excess/Franchise Exceptions for Indemnity: Personal Accident 3.1Subrogation : Subrogation Transfer of rights and remedies from the insured to the insurer who has indemnified the insured in respect of the loss. 3.2Contribution : Contribution The right of insurers who have paid a loss under a policy to recover a proportionate amount from other insurers, who are liable for the same loss. 4.Proximate Cause : Proximate Cause The active efficient cause that sets in motion a train of events which brings about a result without intervention of any force started and working actively from a new independent source.
Principle of Utmost Good Faith (uberrima fides) : 1. A duty to disclose, accurately accurately and fully, fully, all facts material to the risk being being proposed, proposed, whether requested requested or not. not. Specially applicable to insurance contracts, because- In case of insurance, the product is intangible. Only the proposer knows the details of risk being proposed. There are certain aspects of risk which are not apparent at the time of medical examination/survey (example: medical history of proposer) 2.
As the Underwriter knows knows nothing, and the man who comes to him to ask him to insure knows everything, everything, it is the duty of the assured« to make a full disclosure to the underwriter of all material circumstances, without being asked. Rozanne vs. Bowen (1928)
3.
Reciprocal duty on on the part of both parties Proposer to disclose all material facts relating to the subject subject matter of of the insurance Insurer to disclose, fully, product features and benefits Insurer not to make untrue statement at the time of negotiating the contract Material fact includes all information that would influence the judgement of a prudent insurer in fixing the premium or accepting the risk.
4.
FACTS WH ICH MUST MUST BE DISCLOSED Facts which show that a particular risk represents a greater exposure exposure Previous losses and claims under other policies The existence of other non-indemnity policies such as life and accident Any declinature of proposals by other insurers Full facts relating to the subject matter of insurance
5.
Fire Insurance: construction of the building, nature nature of use, existence of of fire fighting equipments and so on Motor Insurance: type of the vehicle, details of the regular driver etc. Personal Accident Insurance: age, occupation etc. Life Insurance: age, occupation, height, weight, medical history etc.
6.
Facts of law - Everyone is supposed supposed to know the law Facts of of common knowledge - Insurer is deemed to know that certain occupations are hazardous Facts that lessen the risk - Existence of a fire extinguisher Facts which could reasonably be discovered - when instead of giving previous policy particulars, the insured inserts the phrase ³see your records´
7.
Breach of good faith arises arises in case of of - Misrepresentation ± May be innocent or fraudulent If related to material facts, contract may be avoided by the aggrieved party Non-disclosure ± which may be innocent or fraudulent If fraudulent, it is called concealment If substantially false and material, then contract may be avoided
Principle of Insurable Interest : 1. Principle of Insurable Interest Can everything be insured? Must be capable of financial financial measurement There must be large number of similar risks The person applying for insurance must be having insurable interest in the subject matter of insurance Existence of insurable interest is an essential ingredient of any insurance contract
2.
Principle of Insurable Interest Legal right to insure arising out of a financial relationship (recognised under law), between the insured and the subject matter of insurance. There must be certain property, right, interest or life capable of being insured. That property/right/interest etc. must be the subject matter of insurance. The insured must be having benefits from the safety or well being of the subject matter and would be suffering by its loss or damage. The relationship between the insured and subject matter of insurance must be recognised at law.
3.
Principle of Insurable Interest Subject matter of insurance In case of fire policy ± building, stock etc. In case of life assurance ± human life In marine insurance ± ship or its cargo It is not the property, but the pecuniary interest in the object of insurance, that is insured
4.
Principle of Insurable Interest In case of Life Assurance Unlimited insurable interest in own life Unlimited insurable interest in the life of spouse In the life of business partner up to the amount of share in partnership business Creditor on the life of a debtor up to the amount of outstanding loan
5.
Principle of Insurable Interest In case of Property Insurance Ownership Co-owner / Joint ventures Mortgagors and mortgagees Executers and trustees Bailees Agent
Principle of Indemnity : 1. Principle of Indemnity Indemnity is a mechanism to provide financial compensation to place insured in the same pecuniary position as enjoyed immediately before the loss. May be, at the option of the insurer, in the form of cash payment, repair or replacement Applicable to property, liability and other non-life insurance Not possible to be precise in terms of monetary sums in case of human life / disablement 2.
Principle of Indemnity Concept of Average Insured treated as his own insurer to the extent of underinsurance In the event of claim, loss amount is shared between the insurer and insured in the ratio of sum assured and the amount of under insurance Amount of claim payable = (sum assured / value of the property) * amount of loss
Principle of Subrogation or Corollaries of Indemnity : Principle of Subrogation Corollaries of Indemnity Principle of subrogation is applicable to contracts of indemnity. Right of a person, having indemnified another under a legal obligation, to stand in the place of that other and avail himself of all the rights and remedies of that other. Insured is entitled to indemnity, not more than that. Subrogation avoids the situation where an insured might profit from an insured event. Not applicable to life and personal accident insurance as indemnity is not applicable in those cases. Example Mr. House Owner has his house worth Rs.5 lacs insured with M/s. Fire Insurer. Assume that the house is totally destroyed by fire due to the faulty wiring by Mr. Contractor. Fire Insurer has to pay to House Owner Rs.5 lacs. Fire Insurer can exercise its subrogation rights against Contractor, after fully indemnifying House Owner. Principle of Contribution: Principle of ContributionCorollaries of Indemnity Applicable in case of two or more insurers on one risk. Insurers to share the cost of indemnity. Right of the insurer, who has paid the claim, to recover a proportionate amount from other insurers. Insurers word their contribution conditions to state that they are only liable for their rateable proportion of the loss . Principle of Proximate Cause (causa proxima) : Principle of Proximate Cause (causa proxima) Latin word causa proxima means nearest cause When loss is a result of two or more causes, simultaneously or in succession, proximate cause becomes relevant Example: A house caught fire due to the air bombing of an enemy aircraft. The loss was due to fire, but the proximate cause is war (which in this case is excluded). Hence no claim is payable. In life insurance, proximate cause is significant in case of: Suicide clause Accident benefit War risk Principle of Proximate Cause (causa proxima) Law does not concern itself with the cause of causes Immediate cause, not the remote or distant one, should be considered ³Immediate cause´ should be understood in in terms of predominance Certain consequential losses, which may be suffered by the insured as a result of a peril which is not proximately caused by it, are customarily paid Example: damage of property by water used to extinguish fire
