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MY PROFESSION IS INSURANCE

IT IS MY DUTY TO EDUCATE AND EXPLAIN THE INSURED ( PERSON ) THE BASIC AND THE FUNDAMENTAL PRINCIPLES OF INSURANCE.

A Introduction
1. "The large print giveth . The small print taketh away" . This statement used to be made of contracts prepared for actor and actresses by Hollywood producers
2 In insurance policies also, many a time, the normal insured feels that he has been taken for a ride when he is told that a claim is not payable because even though the preamble to the policy says a loss will be made good, yet one of the exclusions in small print overrides the preamble
3 Also, very often, an insured finds that once the principle of under-insurance is taken into account as also excesses specified in the policy only a negligible portion of his actual loss is made good .
4 In fairness to the insurance companies, it has to be accepted that as a general

insurance policy is the evidence of a contract it is the duty of the insured to have at least a general understanding of the basic principles governing insurance.

5 The insured will then be aware of what exactly is covered, and what is expected of him if and when a claim arises .
6 Given below is a brief resume of the fundamental principles of insurance :
   
B Utmost Good Faith
1 It is a requirement of law that in all contracts, good faith shall be observed .

By good faith is meant absence of fraud or deceit . At law, a commercial

contracts, will be a nullity if one of the parties has committed breach of trust,

resulting in fraud or deceit .

2 But in regard to insurance, the law is different . It is a peculiar feature of insurance contracts that the insurer dose not have the same status of knowledge regarding the subject matter of insurance as the proposer for insurance.The insurer, in a majority of cases, has no opportunity of inspecting the risk and in almost all the cases there are bound to be certain facts which by their very nature are in the knowledge of the proposer only .
3 Therefore, insurance contracts are subjected by law to a higher duty, that is, of utmost good faith .
4 The duty of utmost good faith implies that a proposer must disclose to the insurer all material facts in regard to the proposed insurance. This duty applies not only to the material facts which he knows but also extends to material facts which he ought to know.
5 A material fact is defined as a fact which could affect the judgment of prudent underwriter in deciding whether to accept the risk and if so at what rate of premium and subject to what terms and conditions.
6 The principle of utmost good faith is more applicable to the insured. The insured will do well to scrutinize the document issued to him with care and satisfy himself that what he has received is really what he wanted.
7 The principle of utmost good faith can cause harassment to the insured if a proposal form is vaguely filled in and does not give the details which the insurer wants. As far as possible it is advisable to get the insurance companies’ representative / surveyor to inspect the risk and satisfy himself that what the proposer wants is acceptable to him. The policy should be issued to the extent possible on the basis of an inspection by the insurer. He will then not be able to content that there was any misrepresentation or concealment of facts.
C Insurable Interest
1 The second important principle of insurance is Insurable Interest. The insured must bear a legal relationship to the subject matter of the concerned insurance cover and he should stand to benefit by the safety of the property, rights, interets and lose by any loss, damage, injury or creation of liability. In other words, an insurable interest is of such a nature that the possessor would suffer financial loss on the occurrence of an insured peril.
2 Insurable interest is required throughout the period of contract in respect of all classes of insurance except Marine Insurance . In Marine insurance the existence of insurable interest is necessary only at the time of a claim.
3

4

The reason for the relaxation in marine insurance is based on practical necessities. When goods or properties are sold, the insurable interest stands altered automatically. But is not automatic in respect of the insurance contract governing such goods or properties.

Generally, insurance contracts are personal contracts and hence, unless the transfer of interest is advised to the insurer and is incorporated in the policy by way of a specific endorsement from the insurer, the policy becomes void from the date of such transfer of interest.

5 But marine insurance policies can be freely assigned. They can be assigned either before or after loss.
6 In Motor insurance in order to protect the rights of innocent third parties, it is sufficient to advise the insurer of the transfer of interest. If within a period of fifteen days the insurer does not specifically refuse to accept the transfer of interest the change of insurable interest is automatic.
D Indemnity
1 The third important principle is Indemnity. The insurance contract is one of indemnity. That is, it will make good a loss or damage in such a manner that financially the insured is neither better off nor worse off as a result of the loss. In other words, the insured is placed in the same position financially, as far as possible, as he occupied immediately before the loss. In effect, this principle aims to prevent the insured from making a profit out of his loss or gaining any benefit or advantage out of insurance.
2 Generally this principle is applied in insurance where the loss suffered by the insured is measurable in terms of money. It does not apply to insurance of persons where it is not possible to measure the financial loss caused by the death of the insured or bodily injury sustained by him.
3 Any loss or damage under an insurance contract is settled based on the sum insured under the policy. The insured cannot gain by over-insuring his property. But he will lose by under-insurance.
4 The insured cannot claim than what he has lost though he has insured the property for a higher value because of the operation of the principle of indemnity. Similarly, he cannot get full indemnity under the policy if he has insured the property for a lower value. So, it is essential that the value declared for insurance is adequate in respect of all types of insurance coverage’s.
5 This principle of indemnity is modified in certain classes of insurance.
6 Under fire insurance, a provision can be made to cover the building, plant and machinery on reinstatement value basis, that is, the cost of replacing or reinstating the destroyed property by new property which is neither superior to nor more extensive than the insured property when new.
7 Similarly in cases of wholesale merchants, in respect of goods only, by effecting contract price insurance, if due to operation of an insured peril any loss occurs, the settlement of losses is allowed on the basis of the contract price and not on market value.
8 Under Marine insurance, the indemnity principle in the manner and to the extent agreed. Marine policies are construed to be Agreed Value policies, i.e. when the basis of valuation of the consignment is agreed in advance and incorporated in the policy, settlement of claim is made accordingly. In other words, even incidentals and profit to a reasonable extent be included can be included in the marine cover.
9 As regards the customs duty element, it is one of pure indemnity and when a claim arises, claim settlement is made on the basis of either the insured customs duty or actual customs duty, whichever is less.
E Average
1 The principle of average is a natural corollary of the principle of indemnity. If at the time of a claim, it is found that the sum insured is less than the value of the property insured then the insured is presumed to be his own insurer for the difference.
2 In these days of continuous inflation, this principle needs the utmost attention of the insured. It must be remembered that the market value of the subject matter of insurance in its condition at the time of a loss will be taken by the insurer as the sum to be insured. ( Exceptions to this rule are related in paras D – 6, 7, 8 )
3 If the sum insured is less than the sum to be insured the principle of average will be applied and the claim settlement will be less than the loss actually suffered.
F Subrogation
1 This principle is also a corollary to the principle of indemnity. Subrogation may be defined as the transfer of rights and remedies of the insured to the insurer who has indemnified the insured in respect of the loss.
2 If subrogation rights are not given to the insurer, it is possible for the insured to get indemnity from two sources. That is, under the policy of insurance, the losses may be recovered from the insurer, and the person responsible for the loss, viz., carrier, bailee etc. may also be made to make good the loss to the insured. If this is allowed the insured stands to make a profit which defeats the very principle of indemnity.
3 Therefore, under subrogation rights, the insurer, after making good the loss, tries to recover the same from the person who was responsible for the loss. In other words, the insurer steps into the shoes of the insured for recovery of the loss amount from the concerned sources.
4 Under subrogation, the insurer gets the right only after indemnifying the insured. But by an express condition under fire insurance contracts the position is altered. The insurer gets the subrogation rights even before indemnifying the insured.
5 There are certain limitation under subrogation rights. Subrogation is applied only to the extent of indemnification by the insurer. He cannot recover more than what he has paid. In cases, where the insured has not been indemnified fully, any amount recovered from any third party in excess of the claim payment made by the insurer has to go insured
   
G Contribution
1 Contribution may be defined as the right of an insurer who has paid a loss under a policy to recover a proportionate amount from other insurers who are also liable for the loss.
2 If two insurances are effected on the same property, the insured cannot from both the insurers. By the contribution principle, each insurer will pay the loss to the extent of his ratable proportion. This principle is again a corollary to the principle of indemnity.
   
H Proximate Cause
1 Proximate cause can be defined as "The active efficient cause that sets in motion a chain of events which bring about a result, without the intervention of any new force started and working actively from a new independent source."
2 The practical effect of this principle is to keep the scope of the insurance within the limits intended by the insured and the insurer when the contract was made. It also helps in giving effect to the real meaning and intention of insurance contract. In the absence of this rule, every loss could be claimed by the insured and every loss could be rejected by the insurer
3 Thus, the principle serves not only to define the scope of coverage under the insurance contract but also to protect the rights of the parties to the contract.
I Consideration (payment of Premium)
1 Whilst the principle of utmost good faith, insurable interest, indemnity, average, subrogation, contribution and proximate cause are international in application there is anther principle which covers Indian insurance contracts. This principle can be termed consideration
2 The Insurance Act stipulates that the payment of premium in respect of any general insurance policy should be effected before assumption of the risk. It, therefore, casts an obligation on the part of the proposer and the insurance company to account for the premium before the date of commencement of insurance. The payment of premium can be effected either by cheque/cash before commencement date of the risk.
3 In order to ensure that there is no gap as between the time at which a policy is decided to be taken or renewed it is advisable to submit the proposal and effect payment of the bill well in advance.
4 It is habit of many commercial organization just to write a letter to the insurance company indicating the cover which they require, asking for a proposal form and requesting to be advised about the premium payable. It happens, in practice, that the letter reaches the insurance company late. The reply from the insurance company is also very often delayed
5 If a claim occurs during the interim period, the insurance company will only express its sympathy but will not pay the claim.
6 While insurance companies used to overlook late payment of premium in the past, in the last few years, they have become very rigid in regard to advance payment of premium.

The above extract have been taken from book of "Khothari’s Guide to General Insurance."