Insurance

Definition

• “A social device providing financial compensation for the effects of misfortune, the payments being made from the accumulated contribution of all parties participating in the scheme.”

• “Insurance is a device for the transfer of individuals entities to an insurer , who agrees for a consideration , to assume to a specified extent losses suffered by the insured.”

Essential features for insurance

• There must be a large numbers of similar risks.• The loss caused by the risk must be definite• The occurrence of the loss must be accidental • The potential loss must be large enough to

cause hardship• The cause of insuring must be economically

feasible• It must be possible to calculate the chance of

loss• There must be an insurable interest to protect• It must be consistent with public policy

• Reinsurance

It is an agreement between two or more insurance companies by which the risk of loss is proportioned i.e. the risk of loss is spread and as disproportionately large loss under a single policy does not fall on the shoulder of one company.

Double insurance

• It implies that the same subject matter of insurance has been insured twice either with two different companies or with same company under two policy.

Fundamental principle of insurance

• Utmost good faith

• Insurable interest

• Indeminity

• Mitigation of loss

• Attachment of risk

• subrogation

Utmost good faith

• It means each party to a proposed contract is legally obliged to reveal to the other party all information which would influences the other’s decision to enter the contract , whether such information is required or not.

• Material facts are of two types• Those facts which affects the nature or

incidence of risk• Those facts which affects the character of the

insured.

• There are many facts concerning any proposed insurance contract which are not of vital consideration to the insurer and insured

• Facts of public, Common or professional knowledge .

• Facts which results in reducing the risk

• Facts embodied in the policy itself

Insurable interest

• It means that the insured stands in such a relation to the subject matter of insurance that he suffers loss by its destruction or damage and is benefited by its safety or existence

• It must satisfy some conditions like:• There must be a physical object• There must be potential liability• There must be legally recognized relationship

with the subject matter.

indemnity

• Indemnity restores the insured to the same financial position after a loss as he enjoyed immediately prior to the loss.

• Under the principle of indemnity, therefore , no profit can be made out of the insurance contract.

• Methods of providing an indemnity• Cash• Replacement• Repair• Reinstatement

Mitigation of loss

• The principle places a duty on the insured to make every effort and to take all such steps , in the event of some mishap to the insured property, to mitigate or minimize the loss, as would have been taken by an uninsured person.

Attachment of risk

• Under this principle a contract can be enforced only if the risk has attached.

subrogation

• It is defined as the right to which one person has to stand in the place of another and avail himself of all rights and remedies of that other.