Insurance-10 Features and Fundamentals

Last Updated on February 23, 2023

Insurance Meaning

It is a collaborative avenue to distribute the losses caused by a certain risk over the number of people who are exposed to the risk, and they agree to insure themselves against that risk. Also, insurance is a contract between two parties, where one party is the “insurer” and the other party is the “insured”.

A sum of money as a premium paid by the insured in consideration of the insurer’s incurring the risk of paying a large sum upon the happening of a certain event or contingency.

Insurance provides financial protection against the probable chance of loss. When uncertainty takes place, the loss is shared by all those who are exposed to risk. The risk is evaluated before insurance. A premium is a fee charged as a share of the insured’s income.

Insurance is first handled by the Lloyd’s of London. Previously, a broker would approach the insurance syndicate with a slip detailing the voyage, its paths, and destinations. The syndicate, according to their capacity, insures of the voyage and provides financial compensation.

Features of Insurance

  1. Provides certainty- the risk of loss can be reduced by better planning and administration. It relieves the person from such a difficult task. It removes the financial uncertainties, and the insured is provided with the certainty of payment of a loss.
  2. Provides protection- insurance protects against the possibility of loss. It guarantees the payment of losses and thus protects the insured from suffering from the financial loss. The insurer charges a premium for providing protection against such losses.
  3. Risk Sharing- When there is uncertainty, the losses are shared among those who are exposed to that uncertainty. On the basis of the probability of the risk, the share is obtained from each and every insured in the form of a premium.
  4. Co-operative device- The most important feature of any insurance plan is the cooperation of a large number of people who agree to share the financial losses that arise as a result of specific risks that are insured. An insurance company would not be able to compensate for all the losses from its capital. So, by selling insurance to a large number of people, it is able to pay the losses.
  5. Value of risk- before insuring, the risk is evaluated. The probability of that risk and the weight of that risk are calculated. As a result, thought is given to determining the premium amount to be charged to the individual. If the probability of that risk is higher, a higher premium amount may be charged.
  6. Contingency- the payment is made by the insurance company in the event of an occurrence of a particular contingency insured by the policy.
  7. A large number of insured- in order to spread the loss quickly, cheaply, and smoothly, the insurance company should insure a large number of people. The cooperation of the smaller groups is limited and within small reach, and because of that, the cost of insurance for each person may be higher.
  8. Insurance is not gambling- in gambling, the person making the bid exposes themselves to the chance of winning or losing. While insurance is just the opposite of gambling, the person is always opposed to the risk and will suffer a loss if not insured.
  9. Insurance is not charity- insurance is not possible without consideration, but charity is always without consideration.
  10. Financial stability- it provides cover for huge payments in the event of any loss. Without insurance, any person’s lifelong savings can be used up for the payment of certain losses that arise due to contingencies.

The Lloyd’s Association

The Lloyd's Association of London
Inside view of the Lloyd’s association at London

It is one of the most prominent insurance-providing institutions in the world. It took its name from the coffee house owned by Edward Lloyd. The coffee house was a famous place where underwriters assembled to transact business and pick up news. The organization traces its origins to the latter part of the 17th century.

In 1817, Lloyd’s act was passed. Later, it was called Lloyd’s Act 1982, incorporating the members of the association into a single corporate body with perpetual succession and a common seal. The power of Lloyd’s Corporation was extended from the business of “marine insurance” to other types of insurance and guarantee business.

The Lloyd’s Corporation is an association of individual insurers called as “underwriters“. They are also known as “syndicates” or “names” collectively. 

Any insurer who wants to become a member of the association has to deposit a certain fee as security and as an assurance for the regular payment of his liability. Lloyd’s Corporation inquires, before enrolling the insurer as a member of the association, about the financial position of the concerned party, its business reputation, and its experience.

Anyone who wants to buy insurance should approach the underwriters and not the association. Each member will be responsible for his own business. Thus, a policy will be underwritten by several underwriters, but their share of the business is fixed individually.

When there is a claim arising on the policy, the insured will realize money from all the underwriters who had underwritten the policy according to their respected proportion. If any member fails to pay his portion of the claim, the association will pay that claim amount from his security money.

Never will any single member of the association be liable for the losses of the other members, either on the policy or in a syndicate. The Lloyd’s also publishes “Lloyd’s List” and a register of ships and shipping for the informational purposes of insurers and the insuring population.

Fundamentals of Insurance

It is defined as a contract between two parties, i.e., the insurer and the insured. The insurance contract involves (A) elements of the general contract and (B) elements of the special contract.

(A) Elements of the general contract

1. Offer and Acceptance

Offer and Acceptance in a Contract

The offer to enter into a contract generally comes from the insured. The insurer may also propose entering into a contract. In insurance, the publication of the prospectus and the canvassing of the agents are an invitation to offer.

When the potential customer wants to enter into the contract, it is an offer, and if there is any change to the offer, that would be a counter-offer. If this offer or change in the offer is accepted by the proposer, it would be an acceptance.

2. Legal Consideration

Legal Consideration in a Contract

The promisor who promises to pay a fixed sum at a given contingency is the insurer. To initiate the contract, the insured must pay the premium, which is the valuable legal consideration in the form of cash.

3. Competent for Contract

Competent for contract

Insurance contracts made by an incompetent party or parties are void under the law. The following parties cannot enter into a contract:

  • A minor is not of the legal age imposed by the country’s law.
  • A person who is of unsound mind
  • Lunatic person
  • Criminal
  • Alien enemy

4. Free Consent

free consent

Both parties entering into a contract must have free consent. The consent will be free if it is not influenced by:

  • Coercion
  • Undue influence
  • Fraudulent means
  • Misrepresentation of any kind
  • By mistake

5. Legal Objective

Legal Objective

In order to make a valid contract, the objective of entering into a contract should be legal. The objective must not be

  • Forbidden by the law of any nation
  • Not an immoral objective
  • Must not contradict public policy

(B) Elements of special contract

1. Insurable interest

Insurable interest

For any contract to be valid, the insured party must have an insurable interest in the subject matter of the insurance. The insurable interest is the monetary interest by which the policyholder is benefited by the existence, prejudicial death, or damage to the subject matter.

2. Utmost good faith

Good faith

Both the insurer and the insured who enter into a contract must possess the same thoughts and ideologies at the time of making the insurance contract.

An insurance contract is a contract of “Uberrimae Fidei“.

Means: of absolute good faith

Both parties must disclose all the material facts fully at the time of entering into an insurance contract.

3. Indemnity


According to this element of an insurance contract, the insurer assumes the situation of the insured in an event of loss in the same position that he occupied immediately before the occurrence of the event insured against.

Example: In marine or fire insurance, a certain profit margin that could be earned in the absence of a loss is also included in the loss suffered by the insured at the time of the claim. The insured person has no right to profit from a loss caused by an unforeseeable event.

4. Subrogation


If the insured is in a position to recover the loss in full or in part from the third-party whose negligence may have caused the loss at the time of the loss. At that time, his right to recovery is subrogated to the insurer upon settlement of the claim.

The insurer will thereafter recover the claim from the third party. The subrogation right can be exercised by the insurance company before the payment of a loss.

5. Warranties


There are specific terms, conditions, and promises in the insurance contract called warranties. Those warranties that are mentioned in the policy are express warranties, and those that which are not mentioned in the policy are implied warranties. Those that are the answer to the questions are affirmative warranties, and those that fulfil particular conditions or promises are promissory warranties.

On breach of the warranty, the insurer becomes free from his liabilities. Therefore, the insured must fulfil the conditions and promises during the contract time period, whether they are important or not in connection with the risk.

6. Proximate cause

Proximate cause

“The maxim is sed causa proxima non-remota spectature”.

Meaning: see the proximate cause and not the remote cause.

The real cause of the loss must be considered and seen before payment of the claim of loss.

“Proximate cause means the cause that triggers a chain of events that result in loss, without the assistance of any other force started and working actively from any new and independent source”.

For the policy to cover the claim of loss, the policy must have insured perils as the proximate cause of the loss, or an insured peril must occur in the chain of causes that links the proximate cause with the loss.

7. Assignment or transfer of interest

transfer of interest

Marine and life insurance policies can be freely assigned, but assignments under fire and accident insurance policies are not valid without the consent of the insurer.

While, life insurance policies can be assigned whether the assignee has an insurable interest or not, life insurance policies are frequently assigned as they are treated as valuable securities.

8. Refund of Premium

Refund of premium

In general, once a premium is paid, it cannot be refunded. However, under the following conditions, the refund is allowed:

  • By agreement in the insurance policy.
  • Non-attachment of risk, where the subject matter insured or part thereof has never been imperiled. For example- term insurance with a returnable premium where the premium is returned to the policyholder if the death of the insured does not occur during the period of the insurance contract.
  • The undeclared balance of an open-policy.
  • Payment of the premium is apportioned- the apportioned part of the premium is refundable when a part of the interest of the insurance policy is not involved. For example- an insurance policy may be taken out in stages for a ship voyage. Each stage is rated and insured separately. In such a case, if any stage is not completed during the voyage, the premium related to the incomplete stage is returnable.
  • Any unreasonable delay in starting any voyage covered by marine insurance may entitle the insured to cancel the insurance and return the premium to the insurance company.

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