Insurance By Strain Brain

Insurance

FUNDAMENTAL PRINCIPLES OF INSURANCE

Some useful terms in Insurance:

INDEMNITY
A contract of
insurance contained in a fire, marine, burglary or any other policy
(excepting life assurance and personal accident and sickness insurance)
is a contract of indemnity. This means that the insured, in case of
loss against which the policy has been issued, shall be paid the actual
amount of loss not exceeding the amount of the policy, i.e. he shall be
fully indemnified. The object of every contract of insurance is to
place the insured in the same financial position, as nearly as
possible, after the loss, as if he loss had not taken place at all. It
would be against public policy to allow an insured to make a profit out
of his loss or damage.

UTMOST GOOD FAITH
Since insurance
shifts risk from one party to another, it is essential that there must
be utmost good faith and mutual confidence between the insured and the
insurer. In a contract of insurance the insured knows more about the
subject matter of the contract than the insurer. Consequently, he is
duty bound to disclose accurately all material facts and nothing should
be withheld or concealed. Any fact is material, which goes to the root
of the contract of insurance and has a bearing on the risk involved. It
is only when the insurer knows the whole truth that he is in a position
to judge (a) whether he should accept the risk and (b) what premium he
should charge.

If that were so, the insured might be tempted to bring about the event insured against in order to get money.

 Insurable Interest
- A contract of insurance effected without insurable interest is void.
It means that the insured must have an actual pecuniary interest and
not a mere anxiety or sentimental interest in the subject matter of the
insurance. The insured must be so situated with regard to the thing
insured that he would have benefit by its existence and loss from its
destruction. The owner of a ship run a risk of losing his ship, the
charterer of the ship runs a risk of losing his freight and the owner
of the cargo incurs the risk of losing his goods and profit. So, all
these persons have something at stake and all of them have insurable
interest. It is the existence of insurable interest in a contract of
insurance, which distinguishes it from a mere watering agreement.

Causa Proxima - The
rule of causa proxima means that the cause of the loss must be
proximate or immediate and not remote. If the proximate cause of the
loss is a peril insured against, the insured can recover. When a loss
has been brought about by two or more causes, the question arises as to
which is the causa proxima, although the result could not have happened
without the remote cause. But if the loss is brought about by any cause
attributable to the misconduct of the insured, the insurer is not
liable.

Risk - In a
contract of insurance the insurer undertakes to protect the insured
from a specified loss and the insurer receive a premium for running the
risk of such loss. Thus, risk must attach to a policy.

Mitigation of Loss
- In the event of some mishap to the insured property, the insured must
take all necessary steps to mitigate or minimize the loss, just as any
prudent person would do in those circumstances. If he does not do so,
the insurer can avoid the payment of loss attributable to his
negligence. But it must be remembered that though the insured is bound
to do his best for his insurer, he is, not bound to do so at the risk
of his life.

Subrogation - The
doctrine of subrogation is a corollary to the principle of indemnity
and applies only to fire and marine insurance. According to it, when an
insured has received full indemnity in respect of his loss, all rights
and remedies which he has against third person will pass on to the
insurer and will be exercised for his benefit until he (the insurer)
recoups the amount he has paid under the policy. It must be clarified
here that the insurer's right of subrogation arises only when he has
paid for the loss for which he is liable under the policy and this
right extend only to the rights and remedies available to the insured
in respect of the thing to which the contract of insurance relates.

Contribution -
Where there are two or more insurance on one risk, the principle of
contribution comes into play. The aim of contribution is to distribute
the actual amount of loss among the different insurers who are liable
for the same risk under different policies in respect of the same
subject matter. Any one insurer may pay to the insured the full amount
of the loss covered by the policy and then become entitled to
contribution from his co-insurers in proportion to the amount which
each has undertaken to pay in case of loss of the same subject-matter.

In other words, the
right of contribution arises when (I) there are different policies
which relate to the same subject-matter (ii) the policies cover the
same peril which caused the loss, and (iii) all the policies are in
force at the time of the loss, and (iv) one of the insurers has paid to
the insured more than his share of the loss.