TYPES OF INSURANCE CONTRACTS

1. INSURANCE CONTRACTS

2. Introduction
• An insurance contract is one through which an
insurer (insurance company) promises to indemnify
the insured for the losses and perils insured against
a consideration knows as the premium
• Insurance contracts are contracts of indemnity.
Indemnity is the exact compensation required to
maintain the same financial position of the policy
holder, which he had before the occurrence of the
contingent event.

3. • Insurance contracts are drafted by the insurer and
the insured hardly has any room for altering the
terms and conditions. Thus, they are also known as
contracts of adhesion. The onus of any ambiguity in
the contract lies on the insurer and these contracts
are legally enforceable only on the insurer. Even
though the insured has a duty to pay a timely
premium amount in order to avail the insurance in
the occurrence of an uncertain event, he/she cannot
be legally forced to pay such amount. Thus
insurance contracts are often called unilateral
contracts

4. Components of insurance contract
• Offer and acceptance: the offer is made through an application
by applicant to the insurer. The insurer then accepts the
application thus binding the company to the contract. Both the
parties then have to fulfill their contractual obligations that
arise out of the insurance contract.
• Competent parties: The parties should be of sound mind,
above 18 years of age, and should not be disqualified by any
law in the country.
• Consideration: there is consideration from both sides in the
contract- the insurer promises to compensate the insured for
future losses and the insured must pay timely premium.
• Legal purpose: the intention of both the parties should be to
enter into a legal relationship which is enforceable in court of
law.

5. Need for insurance
• Promotes savings and investment: the lower income and middle
class families are helped by insurance as it protects them from
unforeseen risks in the future, thus providing a sort of financial
security against losses. This promotes savings and investments
and fuels economics growth.
• Sense of security: insurance provides a payback value to the
insured when the assets meet contingent situations. Businesses
can operate freely without having to worry about these
situations.
• Protection against risk: by getting an insurance for an asset, the
insurance company bears the loss and compensates the insured
for losses and unpredictable events, thus reducing the element
of uncertainty from the future

6. Nature of insurance contracts
As per Section 10 of the Indian Contract Act of 1872,
the characteristics of a valid contract are as follows-
• Agreement: Depicts the intentions of the parties to
enter into a legal relationship. For a valid insurance
contract, the parties involved should possess the
intention to be bound by the legal contract.
• Competency to contract: The parties must possess
sound mind, must not be minor, and should not be
disqualified by any law of the country to enter into a
contract.

7. • Free consent: There should be no fraud, undue influence,
coercion, mistake, and misrepresentation. There should be
consensus ad idem i.e. Both the parties must agree to the
same terms in the same sense. Consent should be free,
independent and without any fear or pressure.
• Lawful object: The object of the contract must be lawful
and should not be contrary to any active law in the
country.
• Lawful consideration: there must be due and lawful
consideration. In an insurance contract the premium
works as the consideration to mitigate the loss in the
occurrence of a contingent event
• Fulfill legal formalities: the contract must be duly written
with all the terms and conditions, should be signed by
both the parties involved, and properly attested and
registered.

8. Principles of Insurance Law
Utmost Good
Faith
Insurable
Interest
Proximate
Cause
Indemnity Contribution Subrogation
Loss
Minimisation

9. Principle of utmost good faith
• This principle is based on the premises of the disclosure
of Material Facts by both the parties.
• The law imposes a duty of uberrima fides on the insured
wherein the one seeking the insurance is required to
disclose all relevant facts. These facts are the basis of
determining the amount of premium and the degree of
risk.
• The insurer should also follow this principle because
insurance treated as a commodity binds the insurer to
fulfil the negotiations and terms of the contract, and will
compensate for the loss incurred by the insured.

10. Material facts to be disclosed
• If any other insurance company declined to insure the
property or some conditions that were imposed by the
other insurance company
• If a second insurance has been taken simultaneously on
the same asset
• If there is a greater exposure to risk than in normal
circumstances (For eg. If a part of the building is being
used for storage of firecrackers)
• Facts which would make the amount of the loss greater
than normally expected (For eg. A product being stored
in the building is hazardous in nature)

11. Two ways that lead to breach of
utmost good faith
• Misrepresentation: This may be innocent or
intentional. Intentional misrepresentation arises
when the insured wilfully distorts material facts
related to the insured object. For eg. The insured
might intentionally overvalue the used car for which
he seeks insurance.
• Non-disclosure: Deliberate intention to hide
material facts so as to defraud the insurer into
entering into the contract. For eg. The insured does
not disclose that he is an alcoholic while taking a
medical insurance.

12. Principle of Insurable Interest
• Insurable interest refers to any tangible object that the
insured wishes to insure, and the insurance of which
results in benefits. Also, in the absence of such
insurance, the insured should have a sense of loss due to
harm to the asset by occurrence of certain events.
• For eg. Any person would get insurance coverage for his
own car and not his neighbour’s vehicle.
• In simpler terms, Insurable Interest arises due to the
ownership of the said insured property and to reduce the
risks that might harm or reduce the value of this asset

13. • It should be remembered that a person in the lawful
possession of goods of another has got insurable
interest so long he is responsible for the goods. Mere
possession without responsibility does not carry any
insurable interest. Similarly a person having illegal
possession of goods has got no insurable interest.
• One important point with regard to insurable
interest is that it must be capable of being valued in
terms of money. Sentimental value is no criteria.
• In the absence of insurable interest, the contract will
be void ab inito

14. • Statutes state that the presence of an insurable interest makes
the contract valid, in its absence the contract will become a
wagering contract which are unlawful in nature.
• For eg. A cab driver may want to get his car insured because
that is his primary source of income, however if under certain
circumstances he sells his car then the insurable interest also
disappears from the contract and the driver will no longer
have insurance coverage for the said car.
• For eg. In case of life insurance spouse and dependents have
insurable interest in the life of a person. Corporations also
have insurable interests in the life of it's employees.
• For eg. A person has got insurable interest in his own life. A
husband has also got insurable interest in the life of his wife
and vice-versa. No other relationship as such merits existence
of insurable interest.

15. Principle of Proximate Cause
• This refers to the closest cause of damage to the
insured asset which is taken into account for
determining the liability of the insurance
company.
• There can be multiple causes at work in
conjunction to each other which lead to damage.
What is to be seen is which of those causes is the
closest, most powerful and most impactful in
causing destruction.

16. • No insurance policy provides protection from all
imaginable risks. In the terms and conditions of the
contract, the risks which are covered are specified and it
is for these risks only that insurance cover is granted.
This risks are those which are potential Proximate
Causes in case of damage to the asset.
• For eg. A ship was severely torpedoed and was in the
process of sinking. Almost immediately there was a
cyclonic storm and the ship sank. It was held that the
proximate cause of the sinking of the ship was torpedo
(Leyland Shipping Co. V. Norwich Union Fire
Insurance Society, 1918).
Although, the cyclone was nearer to sinking in time,
nevertheless, a torpedo was the active efficient cause,
because the ship was so hard hit by a torpedo that it
would have definitely sunk.

17. Principle of Indemnity
• Indemnity in general means security, protection, and
compensation given against damage or injury. the insured
shall get neither more nor less than the actual amount of loss
sustained. The compensation is limited to the amount assured
or actual loss (whichever is less).
• This principle does not apply to life insurance policies and
personal accident insurance because Indemnity seeks to
compensate the insured for his losses in financial terms and
the value of a human life or limb cannot be measured by
money.
• This also does not apply to Reinstatement Policy issued under
fire insurance under which the insurer agrees to give the
insurance amount or replace the damaged asset with an exact
or a close replica. This policy is taken for antiques, rare
objects, artwork etc which are unique and have few copies

18. • The principle of indemnity was well cared for in
the leading case of Castellain V. Preston (1883)
in the following way “A contract of insurance is
necessarily a contract of indemnity (except life
and personal accident insurance) and of
indemnity only, and this means that in case of a
loss the insured shall be fully indemnified, but
shall never be more than fully indemnified.

19. Ways in which insurer provides
indemnity
• Cash Payment: Indemnity is provided in cash or by
cheques by the insurer. In case of liability claims
wherein the insured has to pay for the loss to a third
party, the amount is generally paid through cheques.
• Repair: This method is predominantly used for
motor insurance and reinstated fire insurance
policy. The insurer in this case repairs the damage to
the asset and reverts the property back to its original
form and value

20. • Replacement and/or reinstatement: This method is
used in glass insurance, reinstated fire insurance
policies or property insurance where the insurer has
to replace the damaged or old asset with a new one.
This might often lead to the violation of the
principle of indemnity as the insured may make
profit out of the replacement- If the property
couldn't be made as original then the insurer has to
pay for the damages and in some cases the amount
of monetary compensation exceeds the value of
actual loss

21. Principle of Contribution
• This helps in the implementation of Principle of
Indemnity. People may take insurance on the
same risk from multiple insurer with a view to
make profit. In case of actual loss, this principle
disables the insured from making undue profit.
• If one of those insurers has paid the claim in full,
it can recover a proportion of the payment from
other insurers.

22. • If the insurer suspects that the insured might have
taken another policy where the subject could be the
same or overlapping and covered by multiple
insurers, then he can add clauses to the contract
stating that in the event of actual loss he is liable to
pay only a proportion of the damages.
• For eg. Raj has a property worth Rs.5,00,000. He
took insurance from Company A worth Rs.3,00,000
and from Company B - Rs.1,00,000. In case of
accident, he incurred a loss of Rs.3,00,000 to the
property. Raj can claim Rs. Rs.3,00,000 from A but
after that he can't make profit by making a claim
from Company B. Now Company A can make a
claim from Company B to for proportional loss claim
value.

23. Principle of contribution arises when
the following conditions are met
• Two or more insurance policies should exist
• The policies must cover a common risk
• The policies must cover a common subject matter
• The policies must be active and operational at the
time of loss
• The policies must have been in force and all of them
should be enforceable at the time of loss

24. Principle of Subrogation
• Also an extension of the principle of indemnity, it is generally
applicable to contract of marine or fire insurance.
• According to this principle, if after the damage the damaged property
still has value then ownership of that property will be of the insurer
provided that the insured has been compensated for the loss
occurred.
• Once the insured has received indemnity from the loss occurred, his
rights get shifted to the insurer, disallowing insured to make profits.
The insurer is unable to make profits too since he can recover only to
the extent of the indemnified amount. Thus supplementing the
principle of indemnity.
• For eg. Ram took a insurance policy for his Car. In an accident his
car totally damaged. Insurer paid the full policy value to insured.
Now Ram can't sell the scrap remained after the crash.

25. • If the insurer has indemnified the insured for damage
caused by a third party, then the insurer has the same
rights against the said party as the insured i.e. The
insurer now has the right to recover from the third party
the amount of damages or part of the amount paid as
indemnity.
• For eg. A had been to the market driving his car. After
parking the car somewhere in front of the market he
went inside, made some purchases, came back and found
that B was damaging the car.
In law A has a legal right of action against B for
damages. Incidentally A may also have a comprehensive
motor insurance which protects him against such losses.
Here the principle of subrogation asserts that if the
insurers pay the full loss then they (insurers) shall take
over the right of ‘A’ (insured) for proceeding against B
(third party) for their own (insurers) benefit.

26. • Although this principle comes into effect only
when the indemnity has been paid by the
insurer, this rule is often modified by the
insurers by adding a condition in the policy that
gives them subrogation rights before the claim is
paid. This gives the insurer the right to go after
the third party right from the event of damage.
However, claim from third party cannot be taken
until insurer pays compensation to the insured

27. How the right of subrogation arises
• By tort: It is a breach of duty owed to a third party. A person
cannot do wrong to another thereby causing damage to
another’s property or inflicting injury to the person of that
another. If it is so done then a right of action accrues in favour
of the wronged and to the detriment of the wrong-doer.
• By contract: A contract may put some obligation on the person
making a breach of the contract to compensate the person who
has been aggrieved as a result of the breach. As for example, an
obligation under the contract of bailment etc.
• By statutes: Statutes i.e. Laws may also create liability, for
making compensation, arising out of a breach of duty owed.
• By subject matter of insurance: This arises out of the terms and
conditions of the insurance contract

28. Principle of loss minimisation
• Insured must always try his level best to minimise
loss to the insured property, even though it may be
covered under the insurance claim.
• In case of uncertain events such as fire outbreaks,
blasts etc, the insured must take all necessary steps
to control the damage.
• The insured must not behave negligently and should
not damage the insured property on purpose.

29. • For eg. Ram took insurance policy for his house. In
an cylinder blast, his house burnt. He should have
called nearest fire station so that the loss could be
minimised.
• For eg. Divya indulges in reckless driving, jumps red
lights and does not care to take necessary/basic
precautions while driving on a busy road. Shr meets
with an accident in which even though she did not
sustain injuries, her car was seriously damaged. In
such a situation the motor insurance company may
very well refuse to cover the loss incurred by her.

30. Fin.