Contract of Insurance

A contract of insurance is a contract whereby

one party undertakes, in return of a
consideration called premium, to pay to the
other party a certain sum of money on the
happening of a certain event (death or
attainment of a certain age) or to indemnify
the other party against a loss arising from the
risk insured (in case of property).
Contract of Insurance
Insurance is a contract in which one party,
known as the insured or assured, insures with
another person, known as the insurer, assurer
or underwriter, his property or life, or the life
of another person in whom he has a pecuniary
interest, or property in which he is interested,
against some risk or liability, by paying a sum
of money called the premium.
Insurance Contract and Wagering Agreement
Insurance Contract
1. The object is to protect the
insured against losses on the
happening of some uncertain
future event
2. The insurd has an insurable
interest in the life and property
sought to be insured.
3. Except life, accident and
sickness, it is based on the
principle of indemnity.
4. Based on scientific calculation of
risks and premium is
ascertained after taking into
account various factors.
Wagering Agreement
1. The object is to gamble for
money and money only.
2. Neither party has any pecuniary
or insurable interest, except the
resulting gain or loss.
3. There is no question of
indemnity as it does not cover
any risk.
4. There is no question of any
calculation whatsoever. It is a
pure and simple gamble.
General Principles of
Insurance Contracts:
 1. Utmost good faith
– Ubberrimae fidei
 2. Indemnity.
 3. Insurable Interest
 4. Causa Proxima
– Proximate cause.
 5. Risk must attach.
 6. Mitigation of Loss
 7. Doctrine of subrogation.
 8. Doctrine of contribution.
 9. Terms of Policy.
Utmost good faith – Ubberrimae
fidei
Both the parties are dutybound to disclose all
material facts relating to the subject-matter.
A material fact is one which would affect the
judgment of a prudent person, in considering
whether he would enter into a contract at all or if
so, on what terms.
If utmost good faith is not observed by either
party, the contract becomes voidable at the
option of the party not at fault.
Indemnity:
All contracts of insurance, except those of life
and personal accident, are contracts of
indemnity.
The object of indemnity is to place the insured
after a loss in the same position as he
occupied immediately before the event. Under
no circumstances, the insured should benefit
more than the loss suffered.
Insurable Interest
“Insurable Interest” is an essential pre-requisite in a
contract of insurance, without which the contract
will be treated as a wager, and shall be void and
unenforceable.
A person is said to have an insurable interest when
he is so situated with regard to the thing insured
that he would have benefit from its existence and
loss from its extinction.
Insurable interest must be a pecuniary. A purely
sentimental interest would not be enough.
Insurable Interest
(Contd.)
In the case of fire insurance, insurable interest
must be present, both at the time of taking out
the policy and at the time of loss.
In the case of marine insurance, it must be
present at the time of loss; it may or may not be
present at the time of taking out the policy.
In the case of life insurance, it must be present
at the time of taking out the policy, but need not
be afterwards.
Causa Proxima – Proximate
Cause
Lord Esher in Pink v. Fleming observed:
“The question, which is the cause proxima of a
loss, can only arise where there has been a
succession of causes. When a result has been
brought about by two causes, you must, in
insurance law, look to the nearest cause
although the result would no doubt, not have
happened without the remote cause”. Thus in
deciding whether the loss has arisen through any of
the risks insured against, the proximate or the last of
the causes is to be looked into and others rejected.
Risk must attach
“If the insurers have never been on the risk, they cannot
be said to have earned the premium”.

For a valid contract of insurance, risk must attach.

Similarly, risk does not attach when the policy is declared

to be void ab-initio on account of some defect, such as
‘no insurable interest’ or incompetency of insured ,
illegality etc.
Mitigation of Loss:
In the event of a mishap, the insured must
act as though he was uninsured, that is, he
must take all those measures to minimize
the loss that he would have taken if the
properties were uninsured.

Of course, the insured is entitled to claim

compensation for the loss and expenses
suffered by him in taking such steps from
the insurer.
Doctrine of subrogation
Lord Cairns in Simpson v. Thompson:
Subrogation is “a right founded on the well
known principle of law that where one person
has agreed to indemnify another he will, on
making good the indemnity, be entitled to
succeed to all the ways and means by which
the person indemnified might have protected
himself against or reimbursed himself for the
loss.”
Doctrine of subrogation
(contd.)
1. The doctrine will not apply until the assured
has recovered a full indemnity in respect of
his loss from the insurer.
2. The insured should provide all such facilities
to the insurer which may be required by the
insurer for enforcing his rights against third
parties.
3. The insurer gets only such rights which are
available to the insured.
Doctrine of contribution:

This principle states that “in case of double

insurance, all insurers must share the burden
of payment in proportion to the amount
assured by each. If an insurer pays more than
his rateable proportion of the loss, he has a
right to recover the excess from his
coinsurers, who have paid less than their
rateable proportion”.
Terms of policy:
A contract of life insurance is not a contract
for a year only, but is a continuing contract
and covers either a specified number of
years or the balance of the insured’s life.
In the case of fire insurance, the policy is
usually for one year, and the liability comes
to an end on the expiry of that period.
In the case of marine insurance, it is for a
particular voyage or a certain period and the
policy liability ceases when the voyage is
completed or when the term expires.
Contract of Life Insurance
A contract of life insurance is a contract whereby
the insurer, in consideration of a certain
premium, undertakes to pay to the assured, or
to the nominee/assignee or the legal successor
(as the case may be ) of the assured in case of
his death, a stated sum of money or annuity (i.e.
payment in monthly, quarterly, half-yearly or
yearly instalments), on the death of the insured
(the person whose life is insured) or on the
expiry of a certain period, whichever is earlier,
in case of an Endowment Policy, and on the
death of the insured, under a Whole Life Policy.
Difference between Life Insurance
and Other forms of Insurance
Life Insurance Other forms of Insurance

1. Subject matter is 1. Subject matter is goods

human life. or property.

2. The event insured, 2. In the case of fire

namely death, is marine or accident
bound to happen, insurance, the event
sooner or later. insured may or may
3. Life insurance is a not happen.
valued contract. Not a 3. Any other form, is a
contract of indemnity. contract of indemnity.
Life Insurance and Other forms of
Insurance
4. In life insurance, 4.In fire insurance,
assured must have insurable interest both
an insurable at the beginning and at
the time of loss. In
interest, at the marine at the time of
time of effecting loss, not essential
the policy – need earlier.
not be afterwards. 5. Non-life insurance
contract is entered into
year to year.
5. Life insurance is a
longterm contract.
in the following three cases of life
insurance.
No proof required.

1. In one’s own life.

2. Wife in the life of her husband.
3. Husband in the life of his wife.

For other relations, proof is required.

Following cases allowed to limited
extent:
(life insurance)
1. Creditor in the life of debtor – to the extent
of the debt.
2. Creditor in the life of surety and surety in
the life of principal debtor and of co-surety,
to the extent of his guarantee.
3. Partner in the life of co-partner in a firm to
the extent of capital invested.
4. Employee in the life of employer, upto
wages or salaries for the term of service.
5. Employer in the life of his key employee –
until a man of equal calibre is found out.
Different types of Life Insurance
Policies:
These can be ‘with profit’ or ‘without
profit’1. Whole life policy.
2. Endowment policy.
3. Limited payment life policy.
4. Convertible whole life policy.
5. Joint life policy.
6. Annuity policy.
7. Education/Marriage endowment policy.
8. Children’s deferred endowment
assurance policy
9. Children’s anticipated policy.
Meaning of following
expressions:
1. Surrender value – 30% of premia paid less 1
year premium and premia for accident. –
available after 2 or 3 years.
2. Paid-up value.
3. Loan value.
4. Assignment of life policies.
5. Nomination by Policy holder.
6. Days of Grace – 30 days & 15 days.
7. Revival of lapsed policies.
8. Claims concession clause –
6 months (3 years run ) 12 months (5 years run)
.
Effect of Suicide:
1. No payment if suicide takes place within 1
year.
2. After one year, LIC pays as in the case of
ordinary death.
3. If policy assigned and recorded at least one
month before death, LIC pays even if death
takes place within 1 year.
Settlement of claims:
on production of proofs
1. Proof of title of the claimant.
Self if alive .
Nominee or assignee or
Legal Representative

2. Proof of death.

3. Proof of Age.
Contract of Fire
Insurance:
A contract of fire insurance is a contract
whereby the insurer, in consideration of the
premium paid, undertakes to indemnify the
insured against financial loss which the latter
may sustain by reason of certain defined
subject matter being damaged or destroyed
by fire during a specified period, subject to
the condition that the actual amount of
indemnity will never exceed the amount of
the policy.
Characteristics:
1. Contract of indemnity.
2. Utmost good faith.
3. From year to year.
4. Principles of subrogation and
contribution apply.
5. Loss by causa proxima.
6. Insurable interest both when insured
and at the time of loss.
FIRE
Fire which has broken bounds and is fortuitous
in its nature. There must be actual ignition or
burning, whether accidental or otherwise.
Heating unaccompanied by ignition is not fire.

Loss or damage by fire also includes damage

caused by efforts to extinguish the fire.
Types of Fire Policies:
1. Ordinary fire policy. – depreciated value at the
date of loss.
2. Specific policy: Under insurance without
‘average’ clause.
3. Average policy. “average clause”
4. Valued Policy.
5. Replacement Policy.
6. Floating Policy.
7. Consequential loss Or “Loss of Profits” policy.
Contract of Marine
Insurance
A contract of Marine Insurance is a contract
whereby the insurer (also called the
underwriter) undertakes to indemnify the
assured, in he manner and to the extent
thereby agreed, against Marine Losses, that is
to say, the losses incidental to marine
adventure. The contract may also be extended
to protect the assured against losses on inland
waters or on any land risk, which are incidental
to sea voyage.
Types of Marine
Insurance:
1. Hull Insurance – vessel and equipments.
Owner effects hull insurance.
2. Cargo Insurance.
3. Freight Insurance.
4. Liability Insurance – Liability to third party by
reason of collision etc.
Maritime Perils:
Maritime insurance policies protect the assured
against Maritime Perils.
“Maritime Perils” mean the perils consequent on,
or incidental to, the navigatioin of the sea, that
is to say, perils of the seas, fire, war perils,
pirates and rovers, thieves, captures, seizures,
restraints and detainments of princes and
peoples, jettisons, barratry, and any other perils
which are of the like kind or may be specified by
the policy.”
Perils of the seas cover losses caused by sea water, standing,
cyclone, storm, Lightning, fog, rough weather, collision with
other ship, striking upon a sunken rock or icebergs.

War perils cover loss sustained owing to histile acts of an enemy.

Pirates and rovers means sea robbers and rioters who attack
the ship from the shore.

Jettison refers to throwing a part of the goods overboard with a

view to lighten the ship in order to save the ship and residue of
the cargoes in an emergency.

Barratry means wrongful act wilfully committed by the captain or

crew in contravention of their duties, thereby causing prejudice
to the owners, for example, intentionally setting fire to ship or
running aground the ship.
Characteristics of Marine
Insurance
1. Indemnity except ‘valued policies”
2. Uberrimei fidei – utmost good faith
3. Subrogation and contribution
4. Average Policy with average clause.
5. Express and Implied Warranties.
6. Insurable Interest at the time of loss. Not
necessary at the time when policy effected.
Kinds of
1. Voyage Policy
Policies:
2. Time Policy – maximum time is 12 months.
3. Mixed Policy – Time and Voyage
4. Valued Policy.
5. Unvalued or open policy.
6. Floating Policy.
7. PPI (Policy Proof of Interest) or Honour Policy
Wagering Policy – ‘Interest or no interest’
8. Lost or not lost policy (retrospective effect)