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This article has multiple issues. Please help improve it or discuss these issues on the talk page. It does not cite any references or sources. Please help improve it by citing reliable sources. Tagged since August 2009. It does not have a lead section. Tagged since August 2009. Very few or no other articles link to it. Please help introduce links to this page from other articles related to it. Tagged since September 2010. It may need copy editing for grammar, style, cohesion, tone or spelling. Tagged since August 2009. It may need to be wikified to meet Wikipedia's quality standards. Tagged since August 2009. Principle of insurance Contents 1 Risk 2 Peril and Hazard 3 Classification of Pure Risks 3.1 Personal Risks 3.2 Property Risks 3.3 Liability Risks 4 Method of handling risks 5 Insurance 6 Characteristics of an insurable risk 7 The Basic Principles of General Insurance 8 Essentials of a valid contract 9 Utmost good faith 10 Insurable Interest 11 How Insurable Interest arises 12 Indemnity 13 Corollaries to the principle of indemnity 14 Contribution 14.1 Illustration —Contribution 15 Proximate cause 16 Classic Definition // Risk Risk is the possibility of adverse results flowing from any occurrence. An insurance risk means uncertainty about a financial loss.It is also defined by Robson Muwani (2010) as an unforseable psychological uncertainty of the mind. Peril and Hazard A peril is a cause of loss e.g. fire, windstorm, hail or burglary. A hazard is a condition that may create or increase the chance of loss arising from a given peril. kinds of hazards physical hazard moral hazard B) KINDS OF RISK FINANCIAL AND NON-FINANCIAL RISKS STATIC AND DYNAMIC RISKS FUNDAMENTAL AND PARTICULAR RISKS PURE AND SPECULATIVE RISKS PURE RISKS ALWAYS PRODUCE LOSS. CAN BE INSURED. Eg – DAMAGE BY FIRE SPECULATIVE RISK MAY RESULT IN GAIN OR LOSS CANNOT BE INSURED. n Eg - GAMBLING Classification of Pure Risks Personal Risks e.g. Premature death, old age,sickness,unemployment Property Risks Direct Losses/Consequential Losses Liability Risks Ø It is the unintentional injury of other person/damage to property through negligence Ø RISK ARISING FROM FAILURES OF OTHERS Arises due to failure of another person to meet an obligation Other examples of hazards include: Morale hazard, Method of handling risks Ø Risk may be AVOIDED Ø Risk may be RETAINED Ø Risk may be TRANSFERRED Ø Risk may be SHARED Ø Risk may be REDUCED Insurance Ø Is a Risk Transfer mechanism Ø Is a process by which losses of a few are meted out by a fund created by many Ø Insurance is a contract between one party called the Insured and another party called the Insurer whereby in consideration of payment of premium by the Insured the Insurer agrees to make good any financial loss the insured may suffer due to operation of an Insured peril Insurance is essentially a pooling of resources by individuals to cover the likelihood of a future calamity. The key element is uncertainty. Uncertainty either as to the nature of the risk or calamity, or as to the time when it will occur. It is a contract where one party (the insurer) agrees for the payment on consideration (the premium) to make monetary provisions for another (the insured) upon the occurrence of some event or against some risk (Oxford Dictionary of Law). MacGillivray & Parkington On Insurance Law defines insurance as a system whereby loss is transferred from the insured to an insurer by means of an obligation upon the insurer to confer an offsetting benefit. Implicit in this definition is the principle that the value of the benefit shall not exceed the benefit. The rationalisation being that the insured should not receive a gain or profit from insurance receipts captures the essence of the indemnity principle, which underlies insurance contracts. Characteristics of an insurable risk n Must be accidental and fortuitous in nature n Must be a pure Risk n Must be quantifiable in terms of money n Must not be illegal n Must not be against public policy n Must not be of a catastrophic nature The Basic Principles of General Insurance n Utmost Good Faith n Insurable Interest n Indemnity n Subrogation n Contribution n Proximate Cause. Essentials of a valid contract nThe intention to create legal relations nOffer and acceptance nConsideration nCapacity to contract nCertainty of terms nConsensus ad idem nLegality of purpose nPossibility of performance Utmost good faith As for the nature of the subject matter of the insurance contract the “product” is an intangible one. Again the circumstances surrounding the subject matter are known mainly to the proposer therefore utmost good faith – UBERRIMA FIDES. The proposer thus has a duty of disclosure to disclose to the insurer all material facts. Material Facts – Facts that can affect the judgment of an underwriter. For eg nature of packing in case of marine insurance. Insurable Interest n There must be some property, right, interest, life, potential liability n It is this property, right, interest which is the subject matter of insurance n The insured must benefit from its safety and prejudiced by its loss n The relationship between insured and the subject matter of insurance must be recognized at law How Insurable Interest arises nFrom Ownership. nArising out of law nArising out of contract nArising out of legal liability nInterest of a person on his life Indemnity The principle of indemnity would signify that an insured who suffers a loss must be paid to the extent of his loss and not be allowed to make profit or loss out of it n Cash payment n Repair n Replacement n Reinstatement Limitations: Ø Average Ø Excess and Franchise Ø Deductibles An indemnity is an agreement by one person (the insurer) whereby he agrees to pay another (third party), sums owed, or which may become owed, by the insured. An indemnity insurance policy is usually taken out for the benefit of a mortgagee / lender when a high portion of the purchase price for a domestic property is borrowed. In such cases the insurance indemnifies against loss where the measure of loss is the measure of payment. These policies are generally held by the court to be for the benefit of the mortgagee / lender and only he can make a claim (Oxford Dictionary of Law). Corollaries to the principle of indemnity Ø If the Insured has any rights of action to recover the loss from any third party who is responsible for the loss, the Insurer having paid the loss is entitled to avail himself of these rights to recover the loss from the third party. This is called the right of subrogation. n Subrogation rights arise in four ways: n 1) Tort- Lorry driver backing on to your building. n 2) Contracts – Contractual rights to compensation. n 3) Statute - n 4) Subject matter of Insurance – Salvage Contribution Is the right of an Insurer who has paid a loss under the policy to recover a proportionate amount from other Insurers who are also liable for the loss A) Contribution applies when: n Two or more policies of indemnity exist n The policies cover common interest n The policies cover common peril which gives rise to the loss n The policies cover a common subject matter n Each policy must be liable for loss Illustration —Contribution Total Amount of Loss – Rs 6,000 S.I with A – Rs 5,000 S.I with B – Rs 10,000 S.I with C – Rs 15,000 Policy A will Pay 5,000/30,000X6000 = Rs 1,000 Policy B will Pay10,000/30,000X6000 = Rs 2,000 Policy C will pay 15,000/30,000X6000 =Rs 3,000 Proximate cause There is no ambiguity when a loss is caused by: n An Insured Peril. n An Uninsured Peril. n An Excluded Peril. But in certain cases the loss may be the result of two or more causes acting simultaneously or one after the other. Then it becomes necessary to choose the most important, the most effective, the most powerful cause which brought about the loss. This cause is termed the proximate cause all other causes being considered remote. Classic Definition The active and efficient cause which sets in motion a train of events which brings about a result without the intervention of any force started and working effectively from a new and independent source An example under PA policy Person went out hunting. Fell down from his horse. Injured unable to walk. Lay there on wet ground. Contracted Cold. Developed Pneumonia (something not covered under PA Policy) Died. Proximate Cause – Accidental Fall. Remote Cause – Pneumonia