Life presents individuals and businesses with numerous risks. Insurance is a risk transfer mechanism whereby individuals and businesses attempt to transfer some of these uncertainties to another, for a known payment (i.e. premium). It should be noted that the price of transferring the risk is a known factor, whereas the measure of "risk" is unknown.Principles of Insurance
Insurance contracts are not only subject to the general principles of the Law of Contract, but also to particular legal principles.Insurance is a contract based on trust
Insurance contracts are unique in that the insurer holds no knowledge of the situation and is entirely dependent on the person who comes to be insured, who knows (or should know) everything about the situation. It is the duty of the insured to fully disclose all the material facts relating to the risk being proposed for insurance.
Material facts include all circumstances which would influence the judgment of an insurer in determining whether to provide the cover requested, and in fixing the premium and other terms. Intentionally withholding material facts that would affect the insurer's decision regarding a risk makes the contract null and void.
An insurance cover can be taken only where there is a legally recognised relationship between the policyholder and the subject matter of insurance. In different circumstances, this may be the owner, mortgagee, mortgagor, lessor, lessee, user, occupier, etc. In general insurance business, the subject matter of insurance may be any property, potential legal liability, life or limits insured under a policy.
Indemnity is the sum paid by an insurer to the insured by way of compensation for a particular loss suffered. Insurance contracts promise to offset the insured loss or damage. This promise is subject to the Principle of Indemnity, which states that an insured may not be compensated by the insurance company in an amount exceeding the insured's economic loss. Thus, it attempts to place the insured in the same financial position as he was before the loss. The measure of indemnity depends on the nature of insurance. Generally indemnity in property insurance is based on either replacement cost less depreciation (the sole measure of value at the time of loss) or the market value. In liability insurance, indemnity is measured by the amount of court award or negotiated out of court settlement.
When a loss is covered by more than one policy, the Principle of Contribution requires all insurers to contribute to the loss, usually in proportion to their respective liabilities.
An insured who recovers his loss under an insurance policy has the right to also recover from the third party responsible. However, by the Principle of Subrogation, the insurer takes over the right after payment of the claim. In other words, the insurer adopts the position of the insured. The Principle of Subrogation was developed to prevent the insured from getting more than indemnity when he has two or more avenues to recover his loss.
Before an insured can receive cover from his insurance for a loss sustained, the cause of the loss must be determined. To determine the exact cause of the loss it is necessary to ascertain what is known as the Proximate Cause of the loss. When a loss occurs, in making a claim, the insured is obligated to prove that the loss was caused by an insured peril. If the loss is the result of one cause, it will be easy to decide on the question of legal responsibility. An insurer is liable for a loss caused by an insured peril, but will not be liable for a loss caused by either an uninsured peril or excluded peril. Thus, when a loss is the result of many causes, the Proximate Cause (i.e. the dominant or effective cause) must be identified and attributed as the cause of the loss.
Excess: An excess is an amount of each and every claim that is not covered by the policy, and the insured is expected to bear the amount of excess to his account.
Deductible: This is used to describe very large excess.
Policy Limit: Some policies limit the amount to be paid for certain events in the wording of the contract itself. E.g. “Not more than Rs.______ will be paid in respect of any one item.”
The Sum Insured: In polices having a sum insured (value declared for insurance), the insured cannot recover more than the sum insured even where the indemnity is a higher figure. This often happens where the policies have not been updated over several years.
Average: At the time of a loss, if the actual value of the property insured is found to be greater than the value declared for insurance, by virtue of the fact that the insurer has received premium for only a proportion of the risk, settlement will be made using the following formula:
Sum Insured X Loss
Cover Note: Cover Note is a document issued by an insurer providing Interim Cover pending:
Additional information required:
Issue a Certificate of Insurance or the Policy Insurance