irm - insurance contract

7/28/2019 IRM - Insurance Contract

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Session 8

Nature of Insurance Contract - Insurance &Wager, Re-insurance Need and Types,

Advantages, Double Insurance, Co-Insurance, Underinsurance


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Essential elements of

Insurance Contract Essential elements of a valid contract under Section 10 of

Indian Contract Act

Proposal and acceptance

Consideration

Capacity of parties: major, of sound mind and not

disqualified by any law

Consensus ad idem: not caused by coercion, undue

influence, fraud, misrepresentation or mistake

Legality of object: should not be speculative or wagering


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Basic Features of Insurance

Pooling of losses Actual loss is substituted by average loss

Payment of fortuitous loss

Accidental and occurs as a result of chance Risk transfer

Transfer of pure risk from the insured to the insurer, who

typically is in a stronger financial position

Indemnification

Insured is restored to the approximate financial position

prior to the occurrence of loss


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Insurance & Wager

There is a common perception that insurance is

wagering.

But there are some similarities and dissimilarities

between insurance and wagering.

They seem alike because there are uncertainty of events

and payment is made when that event occurs.

The time and the amount of loss is unknown in both

cases.


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Insurance & Wager

Insurance Wager

1 Risks are existing. Risks are created.

2 Occurring of incident is not certain. Occurring of incident is must.

3 The insurer indemnifies the amount of

loss suffered due to the insured peril.

In wagering contract, one party loses

while another earns profit.

4 Insurable interest is required. Insurable interest not required.

5 Valid. Illegal.

6 Utmost good faith essential. Not required.

7 For safety, security and investment. These elements not present.


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Double Insurance

Insurance covers from more than one insurer.

Insured has a right to claim from each of the insurer,

subject to application of the principle of indemnity (total

claim not to exceed the actual loss or aggregate insuredvalue, whichever is less).

In case of Double insurance, the Principle of Contribution

is applicable.

In case of life insurance (which is NOT a contract of

indemnity), the above does not apply.


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Co-Insurance

Often exists in case of property insurance

Requires the insured to insure the property for a stated

percentage of insurable value.

CLAIMS=ACTUAL AMOUNT OF INSURANCE * LOSS AMOUNT

AMOUNT OF INSURANCE REQUIRED


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Principle of Contribution

Right of an insurer, who has paid compensations for lossunder a policy, to recover a proportionate amount from

other insurers who are liable for covering the loss.

Insured can recover full loss under the sum insured from

any insurer he likes (in case of double insurance).

He has no right against any other insurer.

The insurer who has already indemnified, has a right to

proportionate contribution from other interestedinsurers.


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Principle of Contribution

Right of an insurer, who has paid compensations for lossunder a policy, to recover a proportionate amount from

other insurers who are liable for covering the loss.

Insured can recover full loss under the sum insured from

any insurer he likes (in case of double insurance).

He has no right against any other insurer.

The insurer who has already indemnified, has a right to

proportionate contribution from other interestedinsurers.


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Under-Insurance

The failure to insure the potential exposure to loss.

Example:

A plant worth Rs. 1 crore is insured only to the tune of

Rs.60 lacs

It implies that only 60% of the value is covered.

The insured bears the risk for the balance 40%.

In other words, the insured is presumed to be his own

insurer to the extent of 40% of the value of the property.


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Reinsurance


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Reinsurance

Reinsurance means insuring again.

The transfering insurer is known as principal or ceding

insurer.

The insurer to whom the business is transfered is knownas reinsurer.

Possible mostly in case of large risks that cause greatest

exposure to the insurer.

Breaking down an unbearable risk into bearable units.


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Treaty Reinsurance

An obligatory contract.

Ceding company has to cede and the reinsurer has to

oblige by accepting the business as per the treaty.

Reinsurer assumes part or all of a ceding companys risk

for certain classes of business in accordance with the

terms of the treaty.


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Facultative Reinsurance

Reduces the ceding companys exposure to risk ofindividual contract.

Considering a particular underlying risk of an individual

contract.

Reinsurance of all or part of a single policy after the

negotiation of terms.

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