LIFE INSURANCE CONTRACT

 Utmost good faith: is a fundamental principle of an insurance contract. It simply means that all facts must be disclosed and there should be no fraud or deceit when giving information.

e.g. Ramesh applied for a policy at the age of 31 but did not disclose that he had diabetes and was receiving treatment for the same. When his health deteriorated and he passed away, a claim was raised. However the insurance company rejected the claim as when they investigated the case the got to know that he was already suffering from diabetes. Thus the insurance contract was declared null and void.

Material information that must be disclosed when making a proposal:

Life insurance:  Medical history, hereditary illnesses, habits like smoking, drinking, chewing of tobacco, age, financial details of income, occupation, life insurance policies, etc

Fire insurance: construction and usage of building, age of building, nature of goods in the premises etc

Marine insurance: Description of goods, methods of packing, etc

Motor insurance: Description of vehicle, date of purchase, driver details, etc

 

Material facts: are those that affect the judgment of an insurance underwriter in deciding whether to accept the risk and if so, the rate of premium and the terms and conditions. For e.g. Facts indicating that the particular risk represents a greater exposure than normal, past policies and their status, all questions in the proposal form, etc.

 

Insurable interest: Insurable interest is the basis of all insurance policies. Insurable interest can be an object which, if damaged or destroyed, would result in financial hardship for the policyholder. To exercise insurable interest, the policyholder would buy insurance on the item or entity in question. The policy must not create a moral hazard, in which a policyholder would have a financial incentive to allow or even cause a loss.

The interest that the insured has in his house or his money is termed as insurable interest. The presence of insurable interest makes an insurable contract valid and enforceable under law.

e.g. A football team may have an insurable interest on its star player.

 

Proximate cause: is defined as the active and efficient cause that sets in motion a chain of events which brings about a result, without intervention of any force started and working actively from a new and independent source. It is the immediate cause and not the remote cause. The maxim is, “Causa Proxima no remote spectator”. The insurer looks for the predominant cause which sets into motion the claim of events producing the loss. This may not be the last event that is immediately responsible for causing the loss.

For e.g. A fire might cause a water pipe to burst. Despite the resultant loss being water damage, the fire would still be the proximate cause of the incident. In the majority of claims, the cause is obvious and so it is relatively easy to establish whether it is a peril covered by the Policy.

 

Indemnity: principle is applicable to non life insurance policies. it means that the policy holder, who suffers a loss is compensated so as to put him or her in the same financial position as he / she was before the occurrence of the loss event.

E.g. Yogesh insured his office worth 40 lakhs for the full amount but suffered a loss because of a fire. The estimated loss was 90 thousand. The insurance will pay him 90 thousand and he cannot claim any further amount.

 

Subrogation: means the transfer of all rights and remedies with respect to the subject matter of insurance from insured to the insurer.

If the insured has suffered from loss of property caused due to negligence of a third party and has been paid indemnity by the insurer for that loss the right to collect damages from the negligent party would lie with the insurer. Note that the amount of damage that can be collected is only to the extent of amount paid by the insurance company.

E.g. Ms. Rekha dies in an air crash. Her family is entitled to collect the sum of 70 lakhs from the insurer who has issued a personal accident policy as well as compensation paid by the airline (10 lakhs)