Fundamental Principles of Insurance

FUNDAMENTALS and PRINCIPLES OF INSURANCE

Life Insurance covers insurance of human beings.
General Insurance comprises of
a. Insurance of property against fire, burglary etc,
b. Personal insurance such as Accident and Health Insurance, and
c. Liability insurance that covers legal liabilities etc.
In case any of these principles are missing the insurance contract
will become void.

Student Notes PRINCIPLES OF UTMOST GOOD FAITH

To consider a ‘Life Insurance’ proposal the insurer
needs to know

• Personal details of the proposer

• Personal Health details of the proposer
• Family Health particulars of the proposer
• Previous Insurance details of the proposer etc.
To consider ‘General Insurance’ proposal the insurer
needs to know
a) Details of the property to be insured.
b) Previous details of the property / accidents etc.

The insurer is entirely dependent upon the

proposer for the above details.
The proposer on the other hand knows or is supposed
to know everything about the above details.
Fundamental Principles of Insurance CSC – VLE Training

Utmost Good faith - Contd

Hence there is a need for Utmost Good Faith on the part of the
proposer.
Both the insurer and the client should ensure that
a) Client discloses all correct and complete information in the
proposer to the insurer
i. Insurer does not withhold any information from the client
such as Standard features of the policy
ii. Premiums / Discounts as per standard policy conditions.
iii. Inclusions and exclusions in the policy
iv. Terms and conditions of the policy etc.
Utmost Good Faith can be defined as “A positive duty to
voluntarily disclose, accurately and fully all facts material to
the risk being proposed whether requested for or not”.
In Insurance contracts Utmost Good Faith means “each party to
the proposed contract is legally obliged to disclose to the other
all information which can influence the others decision to enter
the contract”.
Failure to reveal information, gives the aggrieved party the right
to regard the contract as null and void.

Disclosure of Material Facts.

WHAT IS A MATERIAL FACT?

Material fact is every circumstance or information, which would
influence the judgment of a prudent insurer in assessing the risk.
Some examples of Material facts, which need to be disclosed, in the next
page:
Fundamental Principles of Insurance CSC – VLE Training

Continued

Facts generally required to be disclosed

In Life • Age, height, weight,
Insurance • Income and occupation,
• Family history / medical history
• Previous medical history if it is likely to increase the choice of
an accident,
• Personal habits such as smoking drinking etc.
In Fire Nature of construction, whether it is
Insurance • Concrete or Kucha
• Type of roofing: Thatched /concrete
• Residential building / Godown, Office.
• Whether fire fighting equipment is available or not.
Motor • Type of vehicle / Class of vehicle,
Insurance • Purpose of its use,
• Age (Model),
• Cubic capacity etc.
Personal • Age, height, weight, occupation,
Accident • Previous medical history if it is likely to increase the choice of
Insurance an accident,
• Personal habits such as smoking drinking etc.
Burglary • Nature of stock,
Insurance • Value of stock,
• Type of security precautions taken.
• This is NOT an exhaustive list and is only indicative.
BREACHES OF UTMOST GOOD FAITH

Breaches of Utmost Good Faith occur in either of two ways.

a) Misrepresentation, which again may be either innocent or intentional. If

intentional then they are fraudulent
b) Non--Disclosure, which may be innocent or fraudulent. If fraudulent then
it is called concealment.

Failure to reveal material information can result in the contract being

declared as null and void.
Fundamental Principles of Insurance CSC – VLE Training

PRINCIPLE OF INSURABLE INTEREST

ØØ An Insurance contract is enforceable when the insured has an

insurable interest in the subject matter of the contract.
ØØ Insurance without ‘insurable interest’ would be a mere wager and as
such unenforceable in law.
Insurable Interest is defined as
“The legal right to insure arising out of a financial relationship
recognized under the law between the insured and the
subject matter of Insurance”.
WHEN SHOULD INSURABLE INTEREST EXIST

a) In Life Insurance Insurable Interest must exist at the time of

inception of Insurance and it is not required at the time of
claim
b) In Marine Insurance Insurable Interest must exist at the time
of loss / claim and it is not required at the time of inception.
c) In Property and other Insurance Insurable Interest must exist at
the time of inception as well as at the time of loss/ claims.
QUESTION.

Can you insure you house under residential building where you are
storing fire works item without disclosing it to insurance company?

Yes / NO. Risk has to be disclosed

Can you take insurance policy of Red Fort situated at Delhi?

No. Since there is no insurable interest.

SUMMARY

The principle of insurance has been formulated so that a person does

not make profit out of the insurance transaction.

The basic purpose of insurance is that the insured is put in same

financial position as he was before the loss.
Fundamental Principles of Insurance CSC – VLE Training

OBJECTIVE TYPE QUESTIONS

1.When there is a fraudulent non-disclosure of material facts the

insurance contracts becomes:

a. voidable
b. illegal
c. unenforceable
d. Void

2.The legal right to insure means

a) Competence to enter into contract

b) Insurable interest
c) Utmost good faith
d) Consideration

3.The principle of indemnity is applied in practice through

a. Franchise deduction
b. Deduction & depreciation
c. Extra premium
d. Excess clause deduction

4.Methods of providing indemnity are

a. cash payment
b. repair
c. Replacement
d. All

5. Study the two statements below:

ØØ Statement A: The proposer need not to disclose facts which considers as

not material
ØØ Statement B: Facts which are common knowledge which the
insurer is expected to need not be disclosed.

a) Only A is true
b) Only B is true
c) Both are true
d) Neither of two
Fundamental Principles of Insurance CSC – VLE Training

6. Which of the following principles of law prevents an insured from

making a profit out of his loss

a. Insurable interest
b. Caveat emptor
c. Utmost good faith
d. Indemnity

7. Read the two statements below

ØØ Statement A: The existence of other insurance must be disclosed.

ØØ Statement B: Facts of law need not be disclosed.

a. Only A is true
b. Only B is true
c. Both are true
d. Neither of two

8.Insurable interest can be created

a. by common law
b. by statute
c. by contract
d. all of the above

ANSWERS

1 2 3 4 5 6 7 8
d b b d b d a d