General Insurance – Practices and Procedures – Insurance Law and Practice Important Questions
Question 1.
Define the concept and nature of a ‘cover note’ under a general insurance agreement.
Answer:
Cover note is the document which is issued immediately after insurance premium is received to prove that insurance cover exists. Cover note is valid for 60 days from the date of issue. Cover note is mostly used in motor insurance and transit insurance, particularly for import covers by sea. The cover note in marine insurance would be valid for duration of transit.
The cover note does not amount to a policy or an engagement to issue the policy and can be used only for compelling the delivery of the policy and cannot be used for any other purpose.
If a claim were to arise between the issue of the cover note and the regular policy, authorities have proceeded to decide claims. But often, difficulties arise in the case of special policies. But, the fact remains that a cover note evidences the payment of premium, assumption of the risk from the date mentioned therein and is for all purposes a policy.
Question 2.
Explain to what extent a valued policy modifies the principle of indemnity.
Answer:
Under a valued policy, in the event of a total loss, the insurers must pay the agreed value regardless of the actual value at the time of the loss, even if they can prove beyond doubt that the value of the property has declined since the insurance was opened. The insured may therefore receive more than a full indemnity.
They may also receive less than indemnity if the actual value has increased. If the initial valuation is grossly excessive, the policy might be voidable for fraud or misrepresentation or even void as a gaming policy under the Gaming Act 1845. The insured will normally be required to substantiate the value for which they seek to ensure by providing an expert valuation at inception and so problems rarely arise in practice.
Valued policies are those policies where the value of the property is agreed beforehand and which is made the sum insured under the policy. The condition of such a policy is that if there is a total loss than the full sum insured is to be paid even though the actual value is less than the sum insured. Here, the insured makes again. If the actual value is more than the sum insured then the insured sustain losses.
The following points should be noted in this regard:
Only in case of a total loss there is the possibility of making either over-payment or under-payment. From experience, it can be said that the possibility of total loss is very rare as mostly we experience partial losses.
In case of partial loss, which is more common, the loss is treated under normal indemnity basis.
- Undervalued policies, the value that is agreed upon at inception is not just an arbitrary value but a value having a very realistic bearing on the actual market value.
- Valued policies are usually given to those persons whose bona-fides are not in the knowledge of insurers. In other words, issuance of valued policies are very restricted.
- Valued policies are usually issued on articles of fairly stable value.
- If may be said that undervalued policy the measure of indemnity is decided at the inception as opposed to ordinary policies where the measure indemnity is decided at the time of claim.
- Valued policies actually considered as contracts of indemnity in law and considering the above points it can very well be said that valued policies are in fact modifications of the principle of indemnity and certainly not departures from the principle of indemnity.
Question 3.
A is a horse-owner and races his horses. He has been racing horses, all of which are insured comprehensively by a general insurance company.
One of the insured horses which has won many races for A in the past, had of late, due to various factors including age, been on a losing streak and had lost at the recent three races and A had lost large amount of money because of this. Suddenly, this horse, which was insured for ₹ 25 lakhs, fell sick and died soon thereafter, the cause of death was indicated to be colic, a common killer disease of horses.
A made a claim on the insurance company for 125 lakhs and incidental expenses. The insurer after due enquiry passed the claim and paid to A the amount of ₹ 25 lakhs as claim.
One year after such payment was made, due to persistent newspapers reporting and on the basis of police investigation conducted in similar cases, it was noticed that some racehorses which had become old and were losing races, were systematically killed by the owners through the help of a syndicate which had been retained by the owners. Y was arrested by the police in this regard as the main culprit who had poisoned the horses and enabled the owners to collect the insurance money.
On examination, Y revealed the names of the horses that he had killed through poisoning and their respective owners. A was also included in the list. It was ascertained that death by electrocution could be disguised as death caused by colic. On the basis of this investigation and report, the insurer who had paid ₹ 25 lakhs to A wants to reopen the claim.
Arising out of the above move, the following issues arise for consideration which you are required to deal with-
(i) Can the insurance company which had already taken due measures to ensure the acceptance of the claim, go back on its settlement and recall the case.
(ii) As a responsible underwriter how would the insurer evaluate the risk factors while accepting the proposal for a cover?
(iii) Is moral hazard present in this case?
(iv) Can you estimate the damage compensation liability of A?
Answer:
(i) The Insurance company has relied upon the facts and documents submitted by A and made the payment of the claim for death of the horse. Insurance is a contract of utmost good faith and the company relied on all the facts as given by the claimant. However on getting further information about the actual facts as reported in the press and police investigation in the matter the insurance company is entitled to go back to its settlement and recall the case. The insurance company can only recall the case by taking A in the court putting proper evidence against A then only the company gets back the payment given to A.
Moreover, A owns many horses and out of so many horses only one of those horses dies due to colic also puts a question mark on the intents. Besides the statement given by Y also indicates towards death of horses of other horse owners who planned the electrocution with Y and made claims to their insurance companies for such horses that were old and losing in the horse races.
All these facts point towards the malafide intentions of the insured and thus insurance company can now reopen the case.
(ii) As a responsible underwriter the insurer while accepting the proposal for a cover must look into the past practices of such horse owners. The company should:
- Get a track record of the races these horses have won or lost in the past.
- Character and past track record of the owner of the horses.
- Cost of the horse and market report of the horse if available.
- What does horse mortality insurance cover.
- How much claim to be given at the time of death of a horse.
- Proper Documents to be prepared.
The company can carry out thorough investigation on these and such other matters before accepting such proposals for cover.
(iii) Yes, moral hazard is present in this case. The owner of the horse Mr. A who owned a number of horses and was very regular participant in the horse races was losing on this horse in the horse races. Since the horses were insured with suitable amount of coverage he planned the death of the horse to make a claim for its death due to horse disease colic. Since these horses were no more remunerative, owners of such horses employed people like Y to kill these horses to make insurance claims.
These are all examples of fraud and misrepresentation and hence moral hazard. This case gives the clarity of fraud and cheating the insurance company to recover the loses indulge in losing the horse race, that is why moral hazard is present in this case.
(iv) Financially A will be liable to repay to the insurance company:
- Amount of claim paid: ₹ 25,00,000
- Incidental claims paid (if any)
Incidental expenses incurred by the insurance company for the investigation and other such matters
Besides these financial liabilities the company can also take A to the court for fraud and misrepresentation where he could be convicted for manipulating the death of the horse under the relevant provisions of the procedure code.
In spite of proper care and maintenance of machinery, mishaps may yet occur. Sometimes the extent of damage may be quite high and may also lead to fatal or non-fatal injuries to human beings nearby. The remedy for such losses is offered by means of the pecuniary protection given under Oriental’s engineering insurance policies.
The various engineering policies offered by us may be divided under the following three major heads:
- Project Insurance
- Operational Machineries Insurance
- Business Interruption Insurance.
Question 4.
Explain engineering insurance in detail.
Answer:
Engineering Insurance:
The rapid industrialization of our country has lead to increasing use of machines in industry. Though use of machinery results in increased production capacities, in the event of accident and breakdowns, they can be potential sources of financial loss and could even result in the closure of business.