Insurance is a protection against a financial loss, arising on the happenings of an unexpected event. Insurance is a contract between two parties whereby one party called as insurer takes a fixed sum called premiums, in exchange to pay the other party on the happening of a certain event. A loss is paid out of this premium collected from the insuring public. The insurance company act as a trustee for the amount collected through these premiums. Insurance is generally classified into three main categories- life insurance, health insurance and general insurance. In order to get insured, an individual or an organisation can approach an insurance company directly, through an insurance agent of the concerned company or through intermediaries.

In legal terms, insurance is a ‘uberrimae fidae’ contract- a contract of ‘utmost good faith’. The compensation is contingent upon happening or non happening of a certain event. Insurance provides monetary compensation for the loss, damage or death, provided it falls within the framework of the specific terms of the insurance contract.

What will the amount of compensation of ‘loss’ be based on? The most important factor is ‘value’- perceived value of the insured object or its potential value in future, or the value for which insurance has been taken. This implies that only those entities or activities that have ascertainbale value can be insured. Assessment of ‘value’ is possible in all ‘non life’ (general insurance) contracts-say, insurance on property or vehicle- where the current market price as well as the future revenue generating capacity of the asset can be evaluated with reasonable data or assumptions.

But how does one value ‘life’- and hence ‘life insurance’? Unlike the general insurance, no compensation can be considered adequate fo loss of life. In fact, what is compensated is the loss of future income of the individual whose life was insured. Of course, this value would again depend on the age, health and earning capacity of the individual. Once a value is placed on these factors, the policy ‘insures’ the life. Hence, the essential difference between life and general insurance is that life insurance considers the future stream of cash that the insured person would be able to generate over his/her lifetime, while general insurance considers the present value of future cash flows possible from the asset.

According to M.K. Ghosh and A.N. Agrawal, “Insurance is simply a cooperative form of distributing a certain risk over a group of persons exposed to it.”

Basic features of insurance contract

1. Insurable interest

The person entering into the contract (buyer of insurance or policyholder) should have valid interest in the item being insured. This is called ‘insurable interest’. This implies that the policyholder should be able to establish that a loss incurred in the item being insured would lead to direct monetary loss to the policyholder. Any insurance contract without insurable interest is considered in the nature of ‘wagering contracts’.

Generally, one rule to establish insurable interest is through ownership of the assets being insured. However, in special cases, such as mortagagees and mortagagors, agents, executors and trustees or bailees, partial ownership of assets insured is recognised as insurable interest. There are also certain classes of insurance that do not demand proving insurable interest, such as accident insurance and certain life insurance contracts. For example, in the case of insurance taken on the life of the spouse, the relationship itself is sufficient to prove existence of insurable interest.

2. Utmost good faith

As mentioned earlier, insurance contracts are ‘uberrimae fidae’ contracts. Voluntary disclosure of all information pertinent to the contracts is expected of both the insurer and the insured. Any material fact not disclosed at the time of entry into the contract, which is relevant to the contract, can render the contract null and void. Since it may not be possible in practise to conduct a thorough due diligence on every person or entity wishing to enter into an insurance contract, the agreements contain express ‘warranties’ from the insured and ‘disclosures’ from the insurer.

3.Indemnification

Under a contract of indemnity, the indemnifier provides assurance to save the counter party from loss, caused by the action of indemnifier or a third party. Hence, every contract of insurance is a contract of indemnity. However, the party, whose loss is being compensated, should seek compensation from the loss alone and not attempt to make a profit on the compensation. It is note worthy that the principles of insurable interest and indemnification are complementary, since the entity receiving insurance should prove that it will suffer a loss to the extent of the sum assured.

4.Subrogation

This is a corollary to the indemnification feature. It is the right of the insurer to take the place of the insured, after settlement of a claim (by the insurer) to enforce the right of recovery from the source that caused the loss. This means that if the insured suffers a loss due to the action of a third party and the insurance company has settled the insured’s claim, the insurance company can step into the shoes of the insured to recover the loss from the third party that caused the loss. Subrogation therefore insures that all rights in respect of the insured asset are transferred to the insurance company once the loss is indemnified. However, if after subrogation, the insurance company is able to recover from the third party more than the imdemnified value, the excess amount will have to be paid back to the insured.

It is to be noted that both ‘indemnification’ and ‘subrogation’ are not applicable to life insurance contracts.

5.Warranties

These are corollaries of ‘uberrimae fidae’, and are written as conditions in insurance contracts. These are explicit for express warranties. There are also ‘implicit’ or ‘implied’ warranties, such as ‘affirmative’ or ‘promissory’ warranties. For example, in marine insurance, an express warranty may be that the ship is seaworthy for a particular journey, or it would take a specified route to its destination. The implied warranties in this case would be that the ship is in perfect working condition, adequately equipped with machinery, supplies and skilled workers and is not overloaded. The insurance company will not be liable to compensate loss to the ship if the express or implied warranties are violated.

6. Proximate cause

This important feature of an insurance contract looks at the ‘immediate cause’ of the event that caused the loss. For example, if a machine is insured against floods and damage is caused due to the collapse of the factory building in which the machine was kept, the insurance company is not liable to compensate even if the building collapse was due to floods. The proximate cause of damage in this case was ‘building collapse’ and not ‘floods’ as specified in the contract. However, if building collapse was included as an insured peril, the insurance company would have to compensate the loss.

7. Assignment and nomination

Both life and general insurance policies can be assigned as securities for loans granted to the insured. Nomination refers to the procedure by which the nominee (in whose favour the nomination is made) to receive the proceeds of the policy without cumbersom legal documents. However, if an assignment is made, the assignor (the insured) ceases to be the owner of the policy. Hence, once the purpose for which the policy has been assigned is achieved and the insured becomes the owner of the policy once again, he would have to carry out a fresh nomination procedure.

Benefits of insurance

Insurance is an instrument of security, savings and peace of mind. By paying a small amount of premium to an insurance company, one can avail of several benefits as follows:

a. Safeguard oneself and one’s family for future requirements

b. Peace of mind in case of financial loss

c. Encourage savings

d. Get a tax rebate

e. Protection from claims made by creditors

f. Security against a personal loan, housing loan or other types of loan

g. Provide a protection cover to industries, agriculture, women and children

Life insurance is usually acknowledged to be an institution which eliminates ‘risk’ and provides timely aid to the family in case of an unfortunate event like the death of the bread winner. It is a contract for payment of the sum of money to the person assured ( or the nominee) on the happening of the events insured against. The contract provides for the payment of premium periodically to the insurance company by the insured. The contract provides for the payment of an amount on the date of maturity or at specified dates at periodic intervals or at unfortunate deaths, if it occurs earlier. Some benefits of life insurance are as follows:

a. Protection

Life insurance guarantees the full protection against risk of death of the assured. In case of death, the full sum assured is payable.

b. Long term saving

By paying a small premium in easy installments for a long period, a handsome saving can be achieved.

c. Liquidity

A loan can be obtained against an assured policy whenever required.

d. Tax relief

Tax relief in income tax and wealth tax can be availed on the premium paid for life insurance. Health insurance policies insure guarding a holder’s health against any calamities that may cause long term harm to his life hampering his earning ability for life time. These health policies cover individuals and groups.
There are several types of health polices as given below.

Mediclaim policy

Personal accident-individual

Personal accident- family

Group accident insurance

Traffic accident policy