Essential contracts of Fire insurance.

 NOTES; 

MEANING of insurance

DEFINITION of insurance

EXPLANATION OF THE BASIC ESSENTIALS OF VALID CONTRACTS WITH EXAMPLES

 

• Insurers: 

It is an individual or firm (an insurance company) that agrees to compensate for the insured's loss.

• Insured: 

It is an individual or firm that gets compensation for the loss. The insured pays a regular premium.

• Happenings of an event:

It is a contract between the insurer and the insured in which the insurer agrees to make good the insured's loss on the happening of an event in consideration of a regular payment called the premium. This agreement or contract is in writing and is known as an insurance policy.

• Definition: 

Insurance is a contract in which a sum of money is paid by the insured in consideration of the insurer incurring the risk of paying a larger sum in the event of a given contingency.

Principles of insurance

Fire insurance is essential for a valid contract

• Principal of the utmost faith

Insurance is a contract based on faith. The insured and insurer must disclose all material facts to each other, and both parties should not hide any facts related to the insurance policy from each other. If the insured hides any material fact from the insurance company and later on the insurer comes to know about it, he can refuse to pay compensation. Failure to disclose material facts by the insured makes the contract of insurance voidable at the discretion of the insurer.

• The principle of indemnity

Insurance is not a contract to make a profit. The purpose of insurance is to bring the insured back into the same financial position as he was before the loss.

For example, 

A person insured his factory for Rs 10,00,000 against fire, and due to the fire, he suffered a loss of Rs 5,00,000. Then the insurance company compensated him for Rs 5,00,000 only and not the policy amount of Rs 10,00,000 because the purpose of insurance is to compensate for loss and not to earn profit.

• Principle of insurable interest

The insured must have an insurable interest in the subject matter of the insurance policy. Taking out an insurance policy is a gamble and fraudulent activity, and the law does not permit it.

For example, a person can take out a life insurance policy for his spouse or his or her children but cannot take out an insurance policy for a stranger.

• The principle of contribution

If a person has taken out more than one insurance policy for the same subject matter, then all the insurers will contribute the amount of the loss and compensate him for the actual loss. A total loss cannot be claimed from each insurer separately, and each insurer cannot contribute to the total loss in proportion.

For example, if a person gets his house insured against fire loss for Rs 10,000,000 with insurer X and Rs 500000 with insurer Y, a loss of Rs 7.5 lakh occurs. Then Insurer X is liable to pay 5,00,000, and Insurer Y is liable to pay 2.5 lacks.

Formula 

Sum assured by a particular insurer's actual loss

Total sum assured

Compensation from the insurer: "X"" 

1000000×750000 

1500000 

=500000 

Compensation from the insurer: "Y"

500000 x 750000 

1500000 

=250000 

Please note that this principle does not apply to life insurance policies.

• The principle of subrogation

According to this principle, after paying compensation, the insurer steps into the shoes of the insured. In simple words, when the insured is compensated for the loss or damage to the property insured by him or her, the right of ownership of such property passes on to the insurer. Once compensation is given later, if the insured relies on some money for the sale of damaged property that will bring him a profit, insurance is not a contract for making a profit.

For example 

If a person has taken out a fire insurance policy for his factory due to fire, he suffers a loss of Rs. 10,00,000 and gets compensation for the same. Later, half the burned goods were sold for Rs. 2,000,000. Then these rupees 2,00,000 will be kept by the insurance company and not by the insured because the insured has already received full compensation for the loss.

• Principal of loss mitigation

The insured must take care of his property or the subject matter of insurance in the same way as he would take care of it without taking out an insurance policy. The insured should not become careless about his property after taking out an insurance policy. It is the duty of the insured to make a responsible effort and take all available precautions to save the insured's property.

• Principal of proximate cause

The cause or reason for the loss must be related to the subject matter of the insurance contract. If the loss is due to another cause, the insurer can deny paying compensation.

For example, 

If a person has taken a marine insurance policy for sending the wheat bags and on the way a rat spoils the wheat, then no compensation will be given because under marine insurance the cause of loss should be sea perils and not the rat. On the other hand, if the rat makes a hole in the ship through which water enters and spoils the wheat bags, no compensation will be given because the loss of wheat is due to seawater.

 

• THE END...