Characteristic features of an Insurance Contract
The following are some of the important features of an insurance contract.
1. Insurable interest
A person can enter into a contract of insurance only when he has some insurable interest on the life or property which is insured. Insurable interest basically means that the non-existence or any injury or damage caused to a property or life should bring loss which can be estimated in terms of money. So, a person is said to have insurable interest, on the property or life of any person, provided the loss or damage caused to the property or life directly affects him. Thus, a person cannot take insurance for an unconnected property or for an individual with whom he has no connection as there is no insurable interest.
For example, a husband has insurable interest on his wife and vice versa. A creditor has an insurable interest on the debtor. A shopkeeper has insurable interest on the stock kept in his shop. A manufacturer has insurable interest on the products he manufactures.
In the case of life insurance, the insurable interest should be there at the time of taking the policy. For example, a father may take a policy on the life of his daughter and later on when she gets married, her husband may become the nominee by a change of nomination.
In the case of fire insurance, the insurable interest should be there at the time of taking the policy as well as at the time of accident, and in the case of marine insurance, insurable interest at the time of accident alone is taken into consideration.
For example, a ship sailing from Bombay may take a cargo worth Rs. 10 crores and it may unload it at London and later from London, it may take only Rs. 2 crores worth of cargo. Now, if it meets with an accident, after leaving London, the loss of Rs. 2 crores alone will be taken into consideration for settling claims as the insurable interest at the time of accident is only Rs. 2 crores.
2. Contract of ‘Uberrimae fidei’ or Contract of Utmost good faith
Both the parties to the contract, that is the insured and the insurer have to disclose all the facts connected with the insurance contract. Non-disclosure of facts or declaration of false information will make the contract null and void. A person suffering from a major disease cannot insure under the pretext of having good health by concealing his ailment. If he does so, later when the insurer comes to know about his disease, the contract will become null and void and no compensation can be claimed from the insurance company.
Similarly, a ship may be having defects and by concealing this fact, the ship owner might have taken a marine insurance policy. Later, if an accident takes place, the insurance company will refuse to pay compensation on the ground that the contract was not uberrimae fiedi. Thus, all the facts connected with the contract must be disclosed by both the insured and the insurer, failing which the contract becomes void.
Life insurance is different from contract of indemnity. It is a contingent contract where the event death is certain to take place but it is a question of time. Hence, the insurance company cannot guarantee against death or prevent death but can agree to pay a stipulated sum in the event of death happening at an earlier date than agreed upon. When a person takes life insurance, he nominates his dependents to receive the policy amount in the event of his death, prior to the stipulated or agreed period.
For example, an insurance policy may be taken on life for 25 or 30 years for a sum of rupees 25,000 for which premium is paid monthly or quarterly, half-yearly or even annually. In the event of death prior to 25 years, the insurance company will pay rupees 25,000 to the dependent of the insured whose name appears as nominee. To claim insurance, premium must have been paid regularly as it forms the consideration. In the case the policy holder survives for the entire period, then the policy amount of Rs. 25,000 along with profits earned by the company will be paid to the policy holder on the date of maturity of the policy.
4. Mitigation of Loss
Though insurance aims at minimizing the loss, it is expected that every party to the contract of insurance should take adequate steps to minimize the loss. Thus, when a fire accident takes place in a match factory, the insured should minimize the loss by taking adequate preventive measures. He cannot allow the goods to be destroyed by fire simply because he has insured them. Thus, mitigation of loss ensures that both the parties to the insurance shall undertake measures by which the risk is minimized and the loss suffered is also mitigated.
5. Causa proxima
The cause for the accident should be a direct cause for which an insurance is taken and it should not be a remote cause. In other words, the insurance company will pay compensation to the insured only when the cause of accident is directly related to the loss. If the loss is the result of two causes, one must look into the nearest cause and ascertain whether that cause is insured. Only then the insurance company will pay compensation for the loss.
Example: A ship with oranges was insured against the risk of collision. And during the course of its voyage, it collided with another ship, resulting in delay in its voyage. Due to this, the oranges became unsuitable for consumption. When the cargo owner claimed for the loss, the insurance company refused to pay on the ground that the oranges were affected only due to the delay which was a remote cause and not due to collision which is a proximate cause.
Subrogation means stepping into the shoes of another person. When the insurance company pays full compensation to the insured, it takes over the ownership of the goods insured and will enjoy complete right of taking necessary legal steps to claim compensation from such persons who are responsible for the loss suffered.
For example, a cotton mill is destroyed by fire which is caused by sabotage. Here, the insurance company after paying full compensation to the extent of the insured sum will step into the shoes of the cotton company and initiate criminal action against those persons responsible for sabotage so that it can claim due compensation. Similarly, if a ship is totally destroyed, the insurance company will pay necessary compensation to the shipping company and later the insurance company will salvage the items left in the ship.
When an insurance company pays compensation to the insured, it puts back the insured in the same position that he was prior to the accident. If the insured has undertaken insurance with more than one insurance company, then he cannot claim compensation from every insurance company with which he has insured. Under the doctrine of contribution, when an insurance company compensates the insured, it will be indemnified by the other insurance company to the extent of the policy taken by insured.
When an insurance company insure with another insurance company, it is called re-insurance. Here, the original insurer becomes insured when he insure with another insurance company. The idea behind undertaking re-insurance is that each insurance company may specialize in a particular type of risk. Thus, a marine insurance company may specialize in collision risks while another company may specialize in sea perils. Another company may specialize in charter party agreements. So, the original insurer may insure with more than one marine insurance company for a lesser premium as they specialize in particular risks.
9. Double insurance:
When the insured insure with more than one insurance company, it is called double insurance. However, the insured cannot get more than the actual value of the loss in case of damage to the property insured.
In life insurance policy, there will be nomination by which the insurance company is instructed by the policy holder to pay the policy amount in the case of death to that person whose name is nominated at the time of taking the policy. The nomination can be altered later.
For example, when a person takes up a life policy, he may nominate his parents before his marriage. But after the marriage, he may change the nomination to his wife.
A policy can be assigned to a creditor as a security for the loan obtained. Once a policy is assigned, the nomination gets cancelled. When a policy is assigned, the same is informed to the insurance company and in the case of accident or loss of life, the policy amount is payable only to the creditor to whom the policy is assigned (assignee).