Concept of Insurance – Insurance Law and Practice Important Questions
Question 1.
Write short notes on the following:
Licensing of surveyors and loss assessors.
Answer:
Licensing of Surveyors and Loss Assessors:
Regulation 3 of the Insurance Surveyors and Loss Assessors (Licensing, Professional and Code of conduct)
Regulations, 2000 specifies the requirements for issue of a licence:
(a) He holds a degree in any branch of engineering (or) Postgraduate diploma in general insurance issued by Institute of Insurance and Risk Management (or) a Degree in Agriculture (or)
(b) He is a member of the Institute of Chartered Accountants of India or the Institute of Cost and Works Accountants of India (or)
(c) He possesses actuarial qualifications or holds a degree or diploma of any recognised university or an institute in relation to insurance (or)
(d) He holds a diploma in insurance granted or recognised by the Government (or)
(e) He holds such other technical qualifications as prescribed by IRDA (and)
(f) He does not suffer from any of the disqualifications mentioned in Section 42(4) Where the entity is a company or a firm, all the directors or partners shall possess one of the qualifications as prescribed above and none of the directors or partners suffers from any of the disqualifications mentioned as above (and)
(g) Payment of fees based on the categorization of the applicant (and)
(h) Has undergone practical training as a Student-member under a licensed Surveyor and Loss Assessor (who shall be a Fellow or Associate member of the Institute) for a period of 12 months as contained in Chapter VII (persons who have more than 15 years experience in risk management and general insurance are exempt from this training) (and)
(i) Has passed the Surveyor examination conducted by the Insurance Institute of India or such other institute recognized by IDA. (and)
(j) Has undergone the special training provided by the Indian Institute of Surveyors and Loss Assessors for 100 hours for Fellowship, 50 hours for Associate and 25 hours for Licentiate level (and)
(k) He attends seminars and workshops organized by the Institute for a minimum number of seminars, viz., 10 seminars for fellowship, 8 for Associateship and 5 for Fellowship level.
Question 2.
Distinguish between ‘insurance contracts’ and ‘wagering agreements’.
Answer:
The following are the point of distinction between Wagering Agreement and Insurance Contracts
| Wagering Agreement | Insurance Contracts |
| 1. The parties have no insurable Interest in Wagering Agreement. | 1. An Insurance Policy on the other hands must have an Insurable Interest. |
| 2. In Wagering Agreement, neither party has any interest in the happening or non-happening of an event. | 2. In Insurance Contract, however, both parties are interested in the subject matter. |
| 3. Wagering Agreement, however, is a conditional contract. | 3. Contract of Insurance generally is contracts of Indemnity except Life Insurance which is a benefit policy. |
| 4. Wagering Agreement is a gamble without any scientific evaluation of risk, | 4. Insurance Contracts are based on Scientific and Actuarial evaluation of risk. |
| 5. Wagering agreement serve no useful purpose. | 5. Insurance Contracts are beneficial to the public and hence encouraged by the state. |
| 6. Wagering Agreement is void and illegal, | 6. A Contract of Insurance is a valid contract enforceable In a Court of Law. |
Question 3.
How is the contract of insurance different from an ordinary contract? What are the additional features of contract of insurance?
Answer:
Like other contracts, contracts of insurance also have important features like:
- Offer and acceptance;
- Consideration;
- Capacity to contract;
- Legality of object and other important conditions of an ordinary contract.
However, contracts of insurance also have few additional features like:
- Utmost good faith;
- Insurance Interest;
- Indemnity; and
- Proximate Cause.
If there is non-disclosure or misrepresentation with fraudulent intention, an insurance contract becomes void. A void contract has no legal effect or validity. Immovable interest may arise in a number of ways—like ownership, mortgage, trustee, bailees, lessees. Principle of indemnity arises under common law and requires that an insurance contract should be a contract of indemnity only.
Question 4.
Under what circumstances, breach of ‘duty of utmost faith’ may arise? What is its effect on insurance contracts?
Answer:
The breach of duty of utmost faith may arise:
- Unintentionally through an oversight or because the proposer thought that it was not material;
- Intentionally if there is non-disclosure or misrepresentation with fraudulent intention.
The insurance contract becomes void. A void contract has no legal effect on validity. In fact, it is not a contract at all. If the duty is broken in any other way, the contract becomes voidable which means, the insurer will have the option to avoid the contract and reject the claim. Warranties are expressly stated in the policy to ensure that the insured shall or shall not do a particular thing. Warranty must be complied with strictly.
Question 5.
Explain the maxim caveat emptor. Does this apply to insurance contracts?
Answer:
Insurance contract is one which requires utmost good faith. The rule of caveat emptor (let the buyer beware) does not generally apply. This doctrine is supported by Representation through an application of Concealment and Warranty.
An application for life and health insurance is the applicant’s proposal to the insurer for protection and is the beginning of the policy contract. The proposed ‘insured’ is required to give accurate answers to questions in the application relating to his personal and family history, habits, employment, insurance already in force, and other applications for insurance that either pending or have been postponed or refused etc.
A failure to do so leads the insurer being estopped [i.e., prevented] from denying the correctness or truth of information in the application. Insurers place great reliance on this information to issue the requested policy.
This principle of insurance stems from the doctrine of “Uberrimae Fides” which is essential for a valid insurance contract. It implies that in a contract of insurance, the concerned contracting parties must rely on each other’s honesty. Insurance contracts are different from other contracts. Normally the doctrine of “Caveat Emptor” governs the formation of commercial contracts which means ‘let the buyer beware. The buyer is responsible for examining the good or services and its features and functions. It is not binding upon the parties to disclose the information, which is not asked for.
However, in case of insurance, the products sold are intangible. Here the required facts relate to the proposer, those that are very personal and known only to him. The law imposes a greater duty on the parties to an insurance contract than those involved in commercial contracts.
They need to have utmost good faith in each other, which implies full and correct disclosure of all material facts by both parties to the contract of insurance. The term “material fact” refers to every fact or information, which has a bearing on the decisions with respect to the determination of the severity of risk involved and the amount of premium.
The disclosure of material facts determines the terms of coverage of the policy. Any concealment of material facts may lead to negative repercussions on the functioning of the insurance company’s normal business. Thus, the caveat emptor maxim is not applicable to contracts which are based on trust and faith and where the foundation of the contract is based on the parties trust and faith on each other.
Question 6.
Give a brief note on the following: Doctrine of good faith and fair dealing
Answer:
Doctrine of good faith and fair dealing: Each party to the contract is to avoid impairing the rights of the other. The duty requires insurers to make prompt and full settlements with insured and beneficiaries and to consider the insured’s interest in settling claims.
The implied-in-law duty of good faith and fair dealing imposes upon a disability insurer a duty not to threaten to withhold or actually withhold payments, maliciously and without probable cause, for the purpose of injuring its insured. The violation of that duty sounds in tort notwithstanding that it also constitutes a breach of contract.
Question 7.
Kapil purchased an automobile service station from Vimal. The purchase price included the costs of building, equipment and other assets. The business was financed by a loan take by Kapil from a scheduled bank, which also held a mortgage of the building. Kapil, after purchase, converted one of the car-repair bays into a quick-service restaurant.
Kapil had secured an insurance cover on the property but did not disclose to the insurer about the conversion’. Six months after the commencement of the business, a car undergoing servicing at the station caught fire and damaged the roof over a bay in the service station area.
From the above information, answer the following questions with reasons in brief:
(i) Who had insurable interest in the property at the time of fire?
(ii) Vimal told Kapil that in order to save money, Kapil could takeover Vimal’s insurance cover instead of buying a new policy. Would it have been appropriate to do this, without Vimal’s insurer being informed?
(iii) Investigation into the fire accident revealed that the car owner knew that the vehicle’s gas tank had a leak but this was not disclosed to Kapil when the car was left for service. Will the principle of subrogation apply in this case?
(iv) Did Kapil show utmost good faith when he applied for property insurance?
(v) Could Kapil’s insurer deny coverage for fire on the basis of material misstatement of facts?
Answer:
(i) Kapil has insurable interest in the property. Vimal after sale of the business does not have an insurable interest. The Bank as a mortgagee too, has limited insurable interest on the property.
(ii) No, Vimal cannot pass on the rights under the old insurance contract to Kapil without consulting that insurer and obtaining its consents. Insurance policy is a personal contract by nature, hence is non- transferrable. Kapil should apply for a policy and only then can benefit from it, after issuance of the same.
(iii) Yes, the principle of subrogation is applied. According to this principle, when the insured is compensated for the losses due to damage to his insured property, then the recovery rights of such payments, shifts to the insurer. In this case, the insurer of the car, after compensating for the loss of the car to that insured, can recover the loss from the service station owner (Kapil) or from his insurer.
(iv) Mr. Kapil has breached the principle of utmost good faith, by not revealing material fact of converting part of the car bay into a restaurant. In this situation, Mr. Kapil is bound to intimate any alteration to the property to the insurer if he intends to extend the coverage of the same, which can be done through an endorsement. In the present case, Mr. Kapil has not informed the company about the conversion, which is a material fact as it increases the degree of risk of the insured property.
(v) The insurer has right to cancel the contract (reputation) and can deny the coverage/claims for the misstatement/concealment of material fact by assuming that the fire was due to restaurant operations,.which was not informed to the insurance company.
Question 8.
What is the difference between Insurance and Guarantee?
Answer:
| Insurance | Guarantee |
| In a contract of Insurance, there are two parties ie. insurer and insured, | In a contract of Guarantee, there are three parties i.e. Main Debtor, Creditor & Surety. |
| Insurance contract is generally Cancelable. | Contract of Guarantee is Non-Cancelable. |
| Insurance premium is be the probability and quantum of losses | In contract of business, loss cannot be estimated generally so fee is charged for the guarantees service rendered. |
| An insurance contract transfers the Risk. | There is No Transfer of Risk in a contract of guarantee. |
Question 9.
Explain the difference between the contract of Insurance and contract of wager.
Answer:
Insurance And Wager:
A contract of Insurance, i.e. life, accident, fire, marine, etc. is not a wager though it is performable upon an uncertain event. It is so because; the principle of insurable interest distinguishes insurance from a wagering contract.
Insurable interest is the interest which one has in the safety or preservation of the subject matter of insurance. Where insurable interest is not present in insurance contracts, it becomes a wagering contract and is therefore void.
The following are the points of distinction between wagering agreements and insurance contracts:
1. The parties have no insurable interest But the holder of an insurance policy must have an insurable interest.
2. In wagering agreement, neither party has any interest in happening or non-happening of an event. But in a contract of insurance, both parties are interested in the subject matter.
3. Contracts of insurance are contracts of indemnity except life insurance contract, which is a contingent contract. But a wagering agreement is a conditional contract.
4. Contracts of insurance are based on scientific and actuarial calculation of risks, whereas wagering agreements are a gamble without any scientific calculation of risk.
5. Contracts of insurance are regarded as beneficial to the public and hence encouraged by the State but wagering agreements serve no useful purpose.
6. A contract of insurance is a valid contract whereas a wagering agreement is void being expressly declared by law.
Question 10.
What are the basic principles of Insurance? Explain each one of them in detail.
Answer:
Understanding Principles Of Insurance: The business of insurance aims to protect the economic value of assets or life of a person. Through a contract of insurance the insurer agrees to make good any loss on the insured property or loss of life (as the case may be) that may occur of time in consideration for a small premium to be paid by the insured. Apart from the above essentials of a valid contract, insurance contracts are subject to additional principles.
There are:
- Principle of Utmost good faith
- Principle of Insurable interest
- Principle of Indemnity
- Principle of Subrogation
- Principle of Contribution
- Principle of Proximate cause
- Principle of Loss Miri|imization
1. Principle Of Uberrimae Fidei (Utmost Good Faith):
- Both the parties i.e. the insured and the insurer should have a good faith towards each other.
- The insurer must provide the insured complete, correct and clear information of subject matter.
- The insurer must provide the insured complete, correct and clear information regarding terms and conditions of the contract.
- This principle is applicable to all contracts of insurance i.e. life, fire and marine insurance.
2. Principle Of Insurable Interest:
- The insured must have insurable interest in the subject matter of insurance.
- In life insurance, it refers to the life insured.
- In marine insurance, it is enough if the insurable interest exists only at the time of occurrence of the loss.
- In fire and general insurance, it must be present at the time of taking policy and also at the time of occurrence of loss.
- The owner of the party is said to have insurable interest as long as he is the owner of it.
- It is applicable to all contracts of insurance.
3. Principle Of Indemnity:
- Indemnity means guarantee or assurance to put the insured in the same position in which he was immediately prior to the happening of the uncertain event. The insurer undertakes to make good the loss.
- It is applicable to fire, marine and other general insurance.
- Under this the insurer agreed to compensate the insured for the actual loss suffered.
4. Principle Of Subrogation:
- As per this principle after the insured is compensated for the loss due to damage to property insured, then the right of ownership of such property passes to the insurer.
- This principle is corollary of the principle of the principle of indemnity and is applicable to all contracts of indemnity.
5. Principle Of Contribution:
- The principle is corollary of the principle of indemnity.
- It is applicable to all contracts of indemnity.
- Under this principle the insured can claim the compensation only to the extent of actual loss either from any one insurer or all insurers.
6. Principle Of Causa Proxima (Nearest Cause):
- The loss of insured property can be caused by more than one cause in succession to another.
- The property may be insured against some causes and not against all causes.
- In such an instance, the proximate cause or nearest cause of loss is to be found out.
- If the proximate cause is the one which is insured against, the insurance company is bound to pay the compensation and vice versa.
7. Principle Of Loss Minimization:
Under this principle it is the duty of the insured to take all possible steps to minimize the loss to the insured property on the happening, of uncertain event.