Last Updated on December 11, 2021
It is a collaborative avenue to distribute the losses cause 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 ‘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 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 the persons who are exposed to risk. The risk is evaluated before insuring. An amount is charged as a share from the insured which called a premium.
Insurance is first done by the Lloyd’s of London. In past time, a broker approach the insurance syndicate with a slip that contain details of the voyage and details of its paths and destinations. The syndicate according to their capacity done insurance of the voyage and provide financial compensation.
Features of Insurance
- Provides certainty- the risk of loss can be reduce by better planning and administration. It relieve the person from such a difficult task. It removes the financial uncertainties and the insured is provided certainty of payment of loss.
- Provides protection- insurance provide protection against the probability of loss. It guarantees the payment of loss and thus protect the insured from suffering from the financial loss. The insurer charges an amount of premium for providing protection against such loss.
- Risk Sharing- when uncertainty arises, the losses are shared among the persons 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.
- Co-operative device- the most important feature of every insurance plan is the co-operation of a large number of persons who agree to share the financial losses arise due to particular risks which 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 persons it is able to pay the losses.
- Value of risk- before insuring, the risk is evaluated. Probability of that risk and the weight of risk is calculated. Accordingly, consideration is decided which is the premium amount to be charged from the person. If the probability of that risk is more, a higher premium amount may be charged.
- Contingency- the payment is made by the insurance company in the event of an occurrence of a particular contingency insured by the policy.
- A large number of insured- to spread the loss immediately, cheaply and smoothly a large number of persons should be needed to be insured by the insurance company. The co-operation of the smaller groups is limited and within small reach because of that the cost of insurance to each person may be higher.
- Insurance is not gambling- in gambling, the persons by making bidding expose themselves to the chance of winning or losing. While, insurance is just the opposite of gambling, the persons is always opposed to the risk and will suffer a loss if not insured.
- Insurance is not charity- insurance is not possible without consideration, but charity is always without consideration.
- Financial stability- it provide cover for huge payments in the event of any loss. Without insurance any person’s life-long saved funds can be used-up for the payment of certain loss arise due to contingency.
The Lloyd’s Association
It is one of the prominent insurance providing institutions in the world. It took its name from the coffee house of Edward Lloyd’s. The coffee house was a famous place where underwriters assembled to transact business and pick-up news. The organization trace its origin 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 insurances and guarantee business.
The Lloyd’s corporation is an association of individual insurers called as ‘underwriters‘. They collectively also termed as ‘syndicate‘ or ‘names‘.
Any insurer who wants to become a member of the association has to deposit a certain fee as security and as an assurity for the regular payment of his liability. Lloyd’s corporation before enrolling the insurer as a member of the association enquire about the financial position of the concerned party, business reputation, and experience.
Anybody wants to buy insurance 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 any single member of the association is 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 information purpose 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 special contract.
(A) Elements of the general contract
1. Offer and Acceptance
The offer for entering into a contract generally comes from the insured. The insurer may also propose to enter into a contract. In insurance, the publication of the prospectus, the canvassing of the agents is an invitation to offer.
When the potential customer wants to enter into the contract it is an offer and if there is any change in 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
The promisor who promise to pay a fixed sum at a given contingency is the insurer. Premium being the valuable legal consideration in form of cash must be provided by the insured to initiate the contract.
3. Competent for Contract
Insurance contracts made by the incompetent party or parties will be void according to law. The following parties cannot enter into contract:
- A minor not of legal age imposed by the country law.
- A person who is of unsound mind
- Lunatic person
- Alien enemy
4. Free Consent
Both the parties entering into a contract must-have a free consent. The consent will be free when it is not caused by:
- Undue influence
- Fraudulent means
- Misrepresentation of any kind
- By mistake
5. 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
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 benefitted by the existence, prejudicial death, or damage to the subject matter.
2. Utmost good faith
Both insurer and the insured who entering into a contract must possess the same thoughts and ideology at the time of making an insurance contract.
An insurance contract is a contract of “Uberrimae Fidei“.
Means: of absolute good faith
Both parties must disclose all the material facts and fully, at the time of entering into an insurance contract.
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 happening of the event insured against.
Example: In marine or fire insurance, a certain profit margin that could be earned in the absence of the event of a loss is also included in the loss by the insured at the time of claim. The insured person is not entitle to gain a profit out of loss due to an uncertain event.
At the time of loss, if the insured is in a position to recover the loss in full or in part from the third-party due to whose negligence the loss may have been caused. Than at that time his right of recovery is subrogated to the insurer on the settlement of the claim.
The insurer thereafter recover the claim from the third-party. The subrogation right can be exercised by the insurance company before the payment of loss.
There are specific terms, conditions, and promises in the insurance contract called warranties. Those warranties which are mentioned in the policy are express warranties and those which are not mentioned in the policy are implied warranties. Those which are the answer to the questions are affirmative warranties and those which fulfilling particular conditions or promise are promissory warranties.
On the breach of the warranty, the insurer becomes free from his liabilities. Therefore, the insured must have to fulfill the conditions and promises during the contract time period whether it is important or not in connection with the risk.
6. Proximate cause
“The maxim is sed causa proxima non-remota spectature”.
Means: see the proximate cause and not the remote cause.
The real cause of the loss must be considered and seen, while 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 also insured peril must occur in the chain of causes that links the proximate cause with the loss.
7. Assignment or 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 it is treated as valuable securities.
8. Refund of Premium
Generally, the premium amount once paid cannot be refund. However in 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 returnable premium, where the premium is returned to the policyholder. If the death of the insure does not occur during the period of the insurance contract.
- 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 for a ship voyage in stages. Each stage is rated and insured separately. In such a case, if any stage is not complete during the voyage the premium related to the incomplete stage is returnable.
- Unreasonable delay in commencing any voyage in marine insurance may be entitle to cancel the insurance by returning the premium by the insurance company.
He is graduate in M.B.A Finance, and owner of the financial blog “Saifwealth.com“. He started this blog to share his knowdelge in the field of finance and to help people understand and aware about the financial world.