Concepts and Principles of Insurance

Generally people think of insurance of physical assets such as motor car insurance or fire insurance but often they forget that creator of all these assets is the human being whose efforts have gone a long way in building up the assets. In that sense, human life is a unique income generating assets.

Concepts and Principles of Insurance

Unlike the physical assets, which decrease in value with passage of time, the individual becomes more experienced and more matured as he advances in age. This raises his earning capacity and the purpose of life insurance is to protect the income in the event of his premature death. The individual himself also needs financial security for the old age or on his becoming permanently disabled when his income will stop. Insurance also has an element of savings in certain cases.

According to Ghosh and Agarwal1, “Insurance is a cooperative form of distributing certain over a group of persons who are exposed to it.” Justice Tindall2 states, “ 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 larger sum upon a given contingency.” D.S. Hansell3opines, “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.” Relph H. Wherry & Monroe Newman4 remarks, “Insurance, by lessening uncertainty, frees the individual from same element of risk.” E.W. patterson5 is of the view, “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.”

As regards Characteristics of Insurance, (i) It is a contract for compensating losses; (ii) Premium is charged for Insurance Contract.;(iii) The payment of Insured sum is made as per terms of agreement in the event of loss; (iv) It is a contract of good faith; (v) It is a contract for mutual benefit; (vi) It is a future contract for compensating losses; (vii) It is an instrument of distributing the loss of few among many; (viii) The occurrence of the loss must be accidental.

Thus, Insurance is a contract of utmost good faith. All material facts embodied in this contract, must be disclosed in all forms of insurance. In all contracts of insurance, the proposer is bound to make full disclosure of all material facts and not merely, those which he thinks material.

Misrepresentation, non disclosure or fraud in any document leading to the acceptance of the risk automatically discharges the Corporation from all liability under the contract. Although Section 45 of the insurance Act, 1938 provides that no policy can be called in question after a period of two years from the date of its issue on the ground that any statement on proposal or a related document was false or inaccurate.

However, this provision becomes dangerous when the Corporation proves that misrepresentation or nondisclosure was on a material fact and was fraudulently made and that the policyholder knew at the time that statement one made was false. It is, therefore, in the interest of the policyholder to disclose all the material facts to the Corporation to avoid any complication when the claim arises. It is equally obligatory on an agent to see that the assured doesn’t obtain the contract by means of false representation or concealment in any respect.