Insurance: in law and economics, is a

form of risk management primarily used to hedge against

the risk of a contingent, uncertain loss.
Insurance is defined as
the equitable transfer of the risk of a loss, from one entity to another,
in
exchange for payment.
An insurer is a company selling the
insurance;
an insured or policyholder is the person or
entity buying the insurance policy.
The insurance rate is a factor
used to determine the amount to be charged for a certain amount of
insurance
coverage, called the premium.
The insured receives a contract
called the insurance policy which details the conditions and
circumstances under which the insured will be compensated.

General Insurance: Insuring anything other than

human life is called general insurance. Examples are insuring property
like
house and belongings against fire and theft or vehicles against
accidental
damage or theft.
Injury due to accident or hospitalisation for
illness and surgery can also be insured.
Your liabilities to others arising
out of the law can also be insured and is compulsory in some cases
like motor
third party insurance.
Definition of Insurance
• Insurance
is a cooperative form of distributing a certain risk over a group
of
persons who are exposed to it. – Ghosh and Agarwal
•
• Insurance
is a contract in which a sum of money is paid to the assured as
consideration of insurer’s incurring the risk of paying a large
sum upon
a given contingency. – Justice Tindall
•
• Insurance
may be described as a social device whereby a large group of
individuals, through a system of equitable contributions, may
reduce or
eliminate certain measurable risks of economic loss common to
all
members of the group. – Encyclopedia Britannica
•
• Insurance
is an instrument of distributing the loss of few among many. –
Disnadle
•
•
•
• Insurance
is a device for the transfer to an insurer of certain risks of
economic
loss that would otherwise come by the insured. – Allen Z.
Mayerson
•
• Insurance
has been defined as a plan by which large numbers of people
associate
themselves, to shoulders of all, risks attach to individuals. –
Magee
 D.H.
• Insurance
•
may be defined as 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. – D.S.
Hansell
• Insurance
by lessening uncertainty, frees the individual from same element
of
risk. – Relph H. Wherry & Monroe Newman
• Insurance
is purchased to offset the risk resulting from hazardous which
exposes a
person to loss. – Robert I. Mehr and Emerson
Cammack
•
• Insurance
is a contract by which one party, for a compensation called the
premium
assumes particular risk of the other party and promises to pay to
him or
his nominee a certain or ascertainable sum of money on a
specified
contingency. – E.W. Patterson
Characteristics\feature\quality of Insurance
1. It is a contract for
compensating losses.
2. Premium is charged for
Insurance Contract.
3. The payment of Insured
as per terms of agreement in the event of loss.
4. It is a contract of
good faith.
5. It is a contract for
mutual benefit.
6. It is a future
contract for compensating losses.
7. It is an instrument of
distributing the loss of few among many.
8. The occurrence of the
loss must be accidental.
9. Insurance must be
consistent with public policy

Nature of Insurance
1. Sharing of Risks
2. C0-operative Device
3. Valuation of Risk
4. Payment made on
contingency
 5. Amount of Payment
6. Large Number of
Insured Persons
7. Insurance is not
gambling
8. Insurance is not
charity

Functions of Insurance
• Primary Function
1. Provision of certainty
of payment at the time of loss
2. Provision of
protection
3. Risk sharing
• Secondary Function
1. Prevention of loss
2. Provision of Capital
3. Improvement of
efficiency
4. Ensuring welfare of
the Society
 Utmost Good Faith

What Does Doctrine Of Utmost Good Faith Mean?

A minimum standard that requires both the buyer and seller in a transaction to
act honestly toward each other and to not mislead or withhold critical
information from one another. Also know in its Latin form as "uberrimae fidei".

Investopedia explains Doctrine Of Utmost Good Faith

In the insurance market, the doctrine of utmost good faith requires that the party
seeking insurance discloses all relevant personal information.
For example, if you are applying for life insurance, you are required to disclose
any previous health problems you may have had. Likewise, the insurance agent
selling you the coverage must disclose the critical information you need to
know about your contract and its terms.

This principle applies to all contracts of insurance and can be relatively easily
explained as being about trust.

When an insurer is approached for insurance, what do they know about the
proposer? They only know what the customer or proposer chooses to tell
them.

Similarly, the customer must trust that the policy provided covers their needs
and provides what they understand it to.

So, we can see the principle of Utmost Good Faith applies to both the
customer and the insurer but the greater duty lies with the customer to be
open and honest with the insurer. After all, the insurer only has the
information the customer provides on which to base their decision regarding
whether to offer cover and on what terms and premium level.

Facts which would influence an underwriter's decision are known as

"material", defined in the Marine Insurance Act 1906 as:

• "Every circumstance is material which would influence the judgement

of a prudent insurer in fixing the premium or determining whether he
will take the risk"

As said before, insurance contracts are about honesty and trust from both
sides. This principle has long been known by its Latin name "uberrima
fides".

This places an obligation on:

• The proposer, and

• The Insurer

To disclose accurately and fully any fact material to the cover being
provided, which includes:

• Anything that a proposer should know from normal day to day activity
even if not the subject of a specific question on the proposal or
application form.

It goes without saying that the specific questions that normally form a part of
the proposal known, as the declaration, must be answered fully and
truthfully.

A number of insurers no longer use a proposal form as such and rely on

information provided over the telephone. Utmost Good Faith is no less
important in this situation.

The insurer will typically issue what is known as a statement of facts to the
insured which states that the information shown, detailing the information
provided by the proposer, forms the basis of the contract and must be read
and checked for accuracy.

Many insurers, through the technology available today, now record and keep
on file the conversation to assist should any dispute arise.

There are normally considered two aspects to a breach of the principle of

Utmost Good Faith:

• Non-disclosure
 • Misrepresentation

Non-disclosure

This is where the proposer is aware of something that is unknown to

the insurer, which would affect either the acceptance of the proposal or
the rating. If he fails to inform the insurer it would be non-disclosure.

Misrepresentation

This relates to the provision of information that is false. If the proposer

or in some cases the insurer provides false information, this
misrepresents the facts. If these facts would have made a difference to
cover either being purchased, provided or the extent of cover or
premium being charged this is misrepresentation.

In both of these situations, there is a breach of the duty to disclose. This can
be either:

• Deliberate
• Innocent

In either case the implications could be serious.

If the insurer would not have provided the policy if they had known the full
facts, they have a number of options available:

• If the misrepresentation or non-disclosure is for fraudulent reasons

they can sue the policyholder
• They can void the contract "ab initio" (from the beginning) returning
all premiums
• They can repudiate a claim if the non-disclosure is material to that
particular claim but choose to continue cover
• They can choose to take no action if the misrepresentation or non-
disclosure is minor.
• They can continue to provide cover with additional terms imposed e.g.
increased premium, or settle the claim on a proportional basis of the
original premium paid against the correct premium due.
• As motor insurance is compulsory by law, the insurer maybe legally
bound to pay for any third party claims. They may seek recovery from
the driver.

There are some facts, where there is no duty to disclose:

 • Any facts that are either law or common knowledge
• Any facts that lessen the risk
• Any facts which an insurer fails to follow up on from information on a
proposal
• Any facts that the proposer could not be expected to know
• Any criminal convictions considered spent under the Rehabilitation of
Offenders Act 1974

The duty to disclose exists:

• At the time of completing a proposal, through to policy issue

• Throughout the term of the policy
• At each renewal

So, we can see that the principle of Utmost Good Faith can have extremely
serious consequences if it is breached. Claim repudiation, being rejected by
an insurer or possibly even prosecution.

Insurable Interest

The principle of Insurable Interest establishes the right of someone to take out
or "effect" insurance.

There is no one universally accepted definition of insurable interest but one

which is often used is "the legal right to insure arising out of a financial
relationship, recognised at law between the insured and the subject matter of the
insurance"

This establishes 2 key elements:

• You must stand to lose financially, and

• You must have a legal right to insure the subject matter.

It is probably worth explaining "subject matter". The subject matter is the thing
being insured, e.g. property, life, liability, interest, rights, on which it is possible
to place a financial valuation.

So, to take out a policy, you must have insurable interest and for insurable
interest to exist there must be a legal relationship between the insured and the
subject matter and the insured must stand to lose.
If you borrowed a camcorder to take on holiday, from a friend, and the
camcorder was lost or damaged, you would not have actually suffered a
financial loss yourself. Your friend has! Therefore you would not have been
able to insure the item even though you were temporarily responsible.

Think about the implications, without insurable interest as a principle, we could

all insure anybody and expect to be paid out when they died for whatever figure
we wanted. But with this principle, as we would not have lost out and we
certainly had no legal right to insure, we would have been unable legally to take
out the policy.

It was the Life Assurance Act 1774 which established this principle in law

There are three ways that Insurable interest can be created:

• By common law
• By contract
• By statute

Common law

We all have certain rights and duties imposed on us that give rise to insurable
interest. We gain insurable interest through ownership. If we own a house and it
burns down, we are certainly suffering a financial loss and as long as we legally
own the property, we have a right to have it insured.

We also gain insurable interest through our common duty to not cause injury or
damage to others through our negligence. This is where our right to insure for
liability arises.

Contract

Contract is where the terms of a contract we enter into insist that certain
insurances are in place. As a tenant in a part furnished property, the tenancy
agreement may insist we take out contents insurance to cover both our own
belongings and the landlord's furniture, even though we do not own these.

Statute

Statute is where the law imposes a right or duty to insure which wouldn't have
otherwise existed.

There are a couple of important things to remember:

 • No insurable interest can arise from a criminal act (setting fire to your
own property and making a claim, nor can you insure stolen goods as you
do not legitimately own them)

• You cannot insure to cover gambling. If you bet on Michael Schumacher

winning every race in the driver's championship and he lost one, you
would not have lost financially, apart from your stake, therefore you
would have no insurable interest.

Insurable Interest has to exist at different times for different classes of business.

• In Life Assurance, it must exist when the policy is taken out

• With marine cover it must exist at the time of the loss

In other classes, it must exist at inception and at the time of the loss.

Indemnity

Indemnity is probably the most fundamental principles of insurance.

The aim of an indemnity contract is to provide exact financial compensation to

place the insured in the same financial position they were in prior to the loss, in
other words to indemnify the insured. The basic idea is that you should not be
worse off or better off as a result of a claim!

Life assurance policies and other personal insurance policies, such as Personal
Accident are what are known as benefit policies. They are not contracts of
indemnity as they provide pre-agreed benefits or Sums Assured. After all, it
would be incredibly difficult, if not impossible, to calculate the exact value of
someone's life at the time of their death!

Most general insurance policies are indemnity contracts as they often insure a
more tangible thing with an obvious value.

This all sounds simple but we will now see why the principle of indemnity can
lead to difficulties at the time of a claim.

If you have a colour TV at home and it is stolen, you would no doubt expect to
be paid enough to purchase a replacement TV of similar or identical
specification.
However, the principle of indemnity says "put you back in the position you
were in before the claim". If the insurer gave you the cost of a new TV to
replace your old one, you would be better off and therefore indemnity would not
have worked.

On an indemnity contract, the insurer would ask how old your TV was and
deduct from the replacement cost a figure for wear and tear.

This is where you, as the insured start to get unhappy! If your TV was 9 years
old, it might technically have very little value as it is probably near the end of
its life. To apply the principle of indemnity strictly, the insurer is only obliged
to provide you enough compensation to purchase a 9-year-old TV!

The problem here is that technically the insurer is correct, but the customer feels
hard done by. This probably the main reason why "New for Old" cover was
developed.

In this type of cover, no deduction is made for wear and tear and generally the
claimant will receive sufficient compensation to replace the item with a new
equivalent.

On property insurance there is a further twist. If your property was damaged by

fire and rebuilt by the insurer, your property could well be better than before
and worth more. Again not indemnity! In these circumstances, the insurer may
ask for a contribution towards the costs of repair. This is known as betterment.

How is indemnity provided?

Most people's idea of a claim being settled is the sending to the insured of a
cheque. Whilst this is certainly still the case in some situations, there are other
options.

The policy wording will usually specify the range of settlement options
available. The wording will usually make it clear that is the insurer's choice as
to how a claim is settled.

Contribution

The principle of contribution is known as a corollary of indemnity, as it also

operates to prevent an insured gaining from suffering a loss.

Think about going on holiday.

You will probably take out travel insurance which covers you for items lost or
stolen. If you have a household policy, you probably have a limited amount of
cover in that policy for items temporarily removed from the house.

If you lose an item, say a piece of jewellery while you are away, it is probably
covered on both policies. To make things even more complicated, if it is a
relatively recent purchase, and you paid by credit card, you will probably have
insurance provided on this as well!

Obviously, if you claimed on each policy, you would be more than indemnified
and would definitely undermine the principle of indemnity that says you should
not gain. This is where contribution applies.

When you fill in your claim form you will nearly always be asked the question
"are there any other insurances in force which may cover this loss?"

Some companies, on their travel claim form, simply ask for the name of your
household insurer.

If more than one insurer has a legal duty to pay a claim, because their policies
provide a duplication of cover, it is recognised that it would be unfair for one to
pay the entire claim figure.

Most policies will therefore include a condition in their policy wording stating
that if other insurances are in force, they will each bear a rateable proportion of
the loss. Basically, they will each pay a proportion of the claim figure based on
their liability in relation to the particular item. The contribution from each
insurer does not therefore have to be equal.

Quite commonly, policies may include a "more specifically insured clause".

This means that if your jewellery was specifically listed and insured on your
household policy the travel insurer would probably not contribute as the
household insurer had insured specific items and probably charged a specific
premium for doing so. In that case they have a more obvious duty to pay the
claim.

Contribution

Contribution arises if:

• There are at least two similar policies in force

• The policies both cover the peril that caused the loss and the subject
matter of the claim
 • Each policy must be liable for loss under policy wording

In the event of a claim, typically one insurer would pay the claim to the insured
and would negotiate with the other insurer(s) to agree their share of the loss and
recover part of their outlay from them. The contribution amount is often
calculated using an Independent Liability calculation.

The most important issue goes back to indemnity. The insured should not profit
by having cover on three separate policies and claiming from each.

Insurers are very dependent on the insured being honest when completing a
claim form or notifying a claim regarding the existence of other policies.

Subrogation

The principle of Subrogation, similar to contribution, is often mentioned as

being a corollary of indemnity. It involves one person, usually the insurer taking
over the rights of another, usually the insured.

Most policy documents will include a subrogation clause or condition. This will
state that the insurer has the right to take over and conduct the defence or
settlement of any claim at their discretion.

Essentially if the insurer has paid a claim to its insured, thereby indemnifying
them and fulfilling the contract, it then has the right to pursue any recovery
opportunity.

Of course, in common law, an injured party has the right to claim for injury or
damages from the person who caused the damage. Without the subrogation
clause, the insured could claim through their insurance and then pursue their
legal rights. This could mean they were paid twice, which of course is contrary
to the principle of indemnity.

Here is an example:

• You take your car for a service. While it is in the garage a young,
inexperienced mechanic manages to set it alight, causing it to be
completely destroyed. In common law, you would have the right to claim
damages from the garage for their negligence.
• However, if you have motor insurance covering such damage you can
choose to claim from your motor insurance or pursue the garage direct. If
you choose to use your motor insurance, your insurer would pay your
claim and then step into your shoes to claim your rights of recovery from
the garage.
 • If your insurer is successful they keep the money to offset their costs. If
your insurer also agrees to recover your policy excess, this is returned to
you.

Proximate Cause

Insurance policies provide cover against losses caused by what are commonly
known as insured events or perils.

Insurers will normally list the events or perils covered and similarly will list
excluded perils. It is pretty obvious that the insurer does not intend to pay for
excluded perils.

There is a third category, known as unnamed or unlisted perils.

This example shows all three:

• A policy may include Fire as a listed peril, but exclude explosion cover.
Whilst neither listed nor excluded smoke damage may occur as a result of
a fire. As it isn't specifically excluded, and as it is as a direct result of the
insured peril of fire, insurers would be liable.

The fire is known as the "proximate cause" of the smoke damage. Basically if
the proximate cause is an insured peril or event, the resultant damage is likely to
be covered.

The usual definition comes from Pawsey v Scottish Union and National 1907:

• " The active, efficient cause that sets in motion a train of events, which
brings about a result, without the intervention of any force started and
working actively from a new and independent source"

This simple example might help:

• While driving you suffer an accident breaking your leg.

 • You get taken to hospital where as a result of surgery, septicaemia sets in
and you die.
• Death, although from septicaemia (blood poisoning) is a direct result of
the accident and is therefore covered, although you didn't actually die in
the accident

Using a similar example:

• You have the accident, break your leg, but don't develop septicaemia.
• You go home and come back 2 days later to fracture clinic. Whilst in
fracture clinic you contract Legionnaires disease from the air
conditioning. You are not really having a good time! You die.
• This would not be covered, the legionnaire's disease was already there,
and it was active and independent of the original accident.

Proximate Cause is an important principle, especially for those staff involved in

claims. Sometimes a claim form does not always tell the full story. What may
appear to be invalid as a claim may in fact be a valid. Each case must be looked
at on its own merits and the proximate cause identified.