A life insurance policy is contract, in terms of the Indian Contract Act, 1872. A contract is an agreement between two or more parties to do, or not to do, so as to create a legally binding relationship.
EESSENTIALS OF A CONTRACT
(a) Offer and acceptance
(b) Consideration
(c) Free
consent are consensus ‘ad idem’
(d) Capacity to contract
(e)
Legally binding relationship
(f) Legality of object or
purpose
(g) Capability of performance
Insurance is a specialised type of contract. Apart from the usual essentials of a valid contract, insurance contracts are subject to two additional principles viz. Principle of Utmost Good Faith & Principle of Insurable Interest. These apply to both life and non-life Insurance.
PRINCIPLE OF UTMOST GOOD FAITH
India has adopted the British legal and insurance system whereby a filled-in proposal form is deemed to be the basis of the insurance contract- also referred to as ‘basis clause’ in the policy. And insurance is a contract of Uberrimae fidei-utmost good faith.
Uberrimae Fidei
Means “Utmost Good Faith. The basis of all insurance contracts-both parties to the contract are bound to exercise good faith and do so by a full disclosure of all information material to the proposed contract.
This actually renders the policyholder completely at the insurer’s mercy. In practice, it goes beyond the bounds of the principle of Uberrimae Fidei. A policyholder even after completing the proposal form to the best of his knowledge and got a policy on payment of premium might end up with a shock when the insurer rejects his claim on the grounds that he has omitted to mention some details.
The insured is expected to be honest and disclose all material facts related to the risk sought to be covered. In case of non-disclosure of vital information, the insurer, can reject claim.
While buying health insurance, you have to disclose existing diseases and ailments to the insurer. If you take insurance policy without such information, intentionally or unintentionally, an insurer can reject claims relating to a pre-existing disease. For example, say, you have a blood pressure problem, which you don’t disclose to the insurer at the time of taking the policy, out of fear of paying a significantly higher premium on your policy or being denied cover. Subsequently, say you suffer a stroke, which is detected to have been caused by the blood pressure problem. In this case, the insurer can reject your claim on grounds of concealing material information.
Insurer’s right to declare the policy void is however, restricted by sec. 45 of Insurance Act 1938 which says that if a policy has run for 2 years or more no insurance company can call it to question on the ground of any false or inaccurate statements unless such misrepresentation is material to the risk and fraudulently made
Facts which need not be disclosed :
(a) Facts which which are common knowledge (b) Facts of law (c)Facts which a survey can reveal (d) Facts about with insurance company has waived further information(Principle of waiver)
(b)To start with, you must have an insurable interest in the item you want covered. In other words, any untoward happening related to the insured item should result in a financial loss to you. For instance, you have a financial interest in insuring a house you own. However, if you have rented a house, it’s your responsibility to get it insured only if it is explicitly stated so in the lease agreement. If it is not stated but you still insure it, and subsequently raise a claim, it is likely to be rejected by the insurer on the grounds that you don’t have any insurable interest in the property, the owner of the house does. By the same principle, good belonging to others that might be lying in your house are not covered as part of your home insurance policy. If these are stolen or damaged, your insurer is likely to reject any claim made by you.
FEATURES OF INSURABLE INTEREST
In the case of
life insurance policies, insurable interest must exist at the
inception of the policy. There is no requirement for insurable
interest at the time of a claim under the policy. In the case of
Marine policies, insurable interest must exist at the time of the
clam. This implies that there need not be insurable interest at the
inception of the policy. When an importer asks for insurance cover on
goods which he has ordered, he is still not the owner and therefore,
has no insurable interest. In other insurance’s, insurable interest
must exist at the time of inception as well as at the time of
claim.This implies that there need not be insurable interest at the
inception of the policy. When an importer asks for insurance cover on
goods which he has ordered, he is still not the owner and therefore,
has no insurable interest.
Insurable interest is not defined in
Indian contract act or insurance act 1938.
Examples of insurable
interest : -
(a) Husband-wife (b) Debtor-creditor-surety (c)
Business partners (d) Employer-Employee
You should not profit from insurance. In case of a loss, the insurer will, subject to the terms and conditions of the underlying policy, compensate you in a manner so as to restore your financial position before the loss.
Insurers expect you to insure all you articles for their full value-not more, not less. Insurers have checks and balances in place that, so to speak, penalise you for such deviations. If you insure an article for less than its worth (termed under insurance), in case of a partial claim, the insurer won’t compensate you in full, but in proportion of the cover taken. Say the value house and its contents is Rs 5 lakh, but you get it insured for only Rs. 2 lakh (40 percent of its fair value). So,if you made a claim of Rs. 1 lakh on account of theft, you’ll get only Rs. 40,000. That’s because the insurer assumes you have retained risk worth Rs. 3 lakh, and should bear the proportionate loss (in this case, 60 percent).
By the same principle, you can’t insure any article for more than its fair value (termed over insurance). Say, you insure the same house for Rs 10 lakh. In case of a full claim, the insurer will compensate you on the basis of the fair value of the house and its contents, which is Rs 5 lakh, not Rs 10 lakh.
Another instance that is perceived as trying to profit from insurance is when an identical claim is made from two or more insurers. This happens when the same risk is covered by more than one insurer. Say, you buy house cover of Rs 5 lakh each from two insurers. In case of a claim, partial of full, if both insurers were to pay compensation in isolation, you would be compensated twice. In cases of multiple insurance, the insurers divide the compensation amount in proportion of their share of the cover. So, in this case, each insurer will pay 50 percent of the compensation amount.Insurance is not done to make a profit. Insurance should place the insured in the same form financial position after a loss as he enjoyed before it- no better. This is the principle of indemnity.
The life ins. Business deals with risks relating to life
of human beings. The circumstances (perils) that create the loss of
damage (risks) are mainly two, death and old age. Ins. Does not
prevent either. Human beings also run the risk of sickness, accidents
and unemployment these risks are insured by general insurance co.
However supplementary benefits are riders.
Risk can be managed by.
1. Prevention are avoidance
2. Retention
3.
Transfer
Risks arise because there are needs to be fulfilled. The risks attached to early death arise because of the need to maintain the family that is left behind. If there were not needs, there would be no risks. Insurance is, therefore, related to the needs of individuals. Different plans are designed with different benefits, so that they may cater to the different needs of people. While selling life insurance, therefore, it is necessary to be aware of the needs of people.
Protection of the standard of living of the family is at risk on early death. Insurance must provide the necessary income to maintain the standard, after providing for repayment of loans and other debts. Modern lifestyles subject people to debts on account of car, house, appliances and equipment’s at home obtained on hire purchase arrangements. Future expenses on account of children’s education, marriage, start of some business and so on, which are ambitions and dreams these needs have to be met, after meeting the costs of inflation. People would not be consciously aware of these as formidable problems in the future. Even if they do, they may not be willing to sacrifice some of the pleasures of the present in order to provide for the future. This is the difficulty, which life insurance agents’ face.
