BUS Law (10)_Insurance (Rev)

7/30/2019 BUS Law (10)_Insurance (Rev)

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BUS 208


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Insurance In private life we

encounter different typesof risks every day.

Insurance is a device tohelp the people torecover and

compensate any lossand damage.


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Purpose of Insurance The purpose of all

insurance is to makeprovision against suchdangers which surroundhuman life.

S/he, who seeks safety, iscalled the insured orassured.


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Purpose of insurance The insurer or

underwriter who, in

consideration ofpremium, takes uponhimself/herself the riskwhich the insured may

sustain any time.


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Insurance The risks which may be

insured against includefire, the danger of the sea

(marine insurance), death(life insurance), andaccidents and burglary.

In present days all the

risks are insurableandthe insured has to pay thepremium commensurate

with the risk involved.


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Nature of the contract of insurance The contract of insurance is called an aleatory

contract because it depends upon an uncertainevent. If such a thing happens, i.g., if the house is

burnt down or the ship is stranded, the insurer will payfor it.

At first sight this would seem to be a wageringtransaction, the insurer betting with the assured that

his house will not be burnt or his ship will not sink andgiving him the odds of its value against the premium.For this reason Lord Mansfield described insurance asa contract on speculation.


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Nature of the contract of insurance But modern view is that insurance contracts are not

speculative or wagering contracts. Insurance is not merely agamble on an uncertain future.

In reality, a contract of insurance is perfectly a validcontract; for the assured is only indemnified for his loss,and he does not gain by the happening of the event insuredagainst; he does not make a profit of his loss.

Moreover, the assured must have an insurable interest inthe subject-matter insured, while in a wager no insurableinterest is present. Therefore, although it is an aleatorycontract, depending upon an uncertain event, it is not a

wagering or a speculative contract nor is it merely a gambleon an uncertain event.


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Contract of insuranceA contract of insurance is a contract between two

parties whereby one party, called the Insurer, agrees topay the other party a certain sum of money on thehappening of a specific contingency, or agrees toindemnify the other party from losses arising fromcertain specified events.

The other party to the contract, called the Insured orAssured, pays an agreed sum of money, called thePremium, as consideration.


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Contract of insuranceA contract of insurance must fulfill all the essential

requirements of a contract as laid down in the law ofcontract.

Thus, there must be a proposal and acceptance, theparties must be capable of contracting, the object mustnot be illegal or immoral.


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Meaning of certain terms (1) Insurer: The party that

promises to pay money toor indemnify the other

party upon the occurrenceof some specific event iscalled the Insurer.

(2) Insured: The person,who receives money or

indemnity when certainevent happens, is calledthe Insured/Assuredperson or policy-holder.

Example:

Mollika made a contract offire insurance with

Greenland Insurance Co.that if her house will beburnt down, GreenlandInsurance Co. willindemnify the loss.

Here Greenland InsuranceCo. is the Insurer andMollika isInsured/Assured.


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Meaning of certain terms (3) Insurance Policy: The terms of a contract of insurance

are usually written down in a document known asInsurance Policy. The policy is stamped and signed by the

insurer and handed over to the insured. (4) Premium: The consideration payable by the insured

person to the insurer is called the Premium. Usually theconsideration is a sum of money but there is nothingin insurance law which prevents the acceptance of

consideration in any other form. The premium may be afixed amount or it may vary according to circumstancesagreed upon. Payments may be made monthly,quarterly or annually or by a single lump sum.


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Meaning of certain terms (5) Cover Note:

The insurer may give a written acknowledgement

stating that (i) the proposal has been accepted;

(ii) the first premium has been received; and

(iii) the regular policy will be issued later on.

The risk is covered immediately withacknowledgement. The written acknowledgement iscalled a Cover Note.


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Fundamental principles of

insurance Insurance transactions are conducted upon principles

which on examination prove simple and almost self-evident, yet they are constantly being invoked. Wemust never lose sight of them.

These principles are common to all types of insuranceincluding life assurance, excepting the principle ofindemnity of which does not apply to life assurance.

These principles are(1) Good Faith; (2) InsurableInterest; (3) Indemnity; (4) Mitigation of Loss; (5)Attachment of Risk; (6) Causa Proxima.


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Fundamental principles of

insurance: Good Faith (1) Good Faith:A contract of insurance is a contract,

uberrimae fidei, a contract based on utmost good faithand if the utmost good faith is not observed by eitherparty, the contract may be avoided by the other.

Since insurance shifts risks from one party to another,it is essential that the whole truth must be told aboutthe subject-matter of insurance and all circumstancessurrounding it, in order that theinsurer/underwriter may know the extent of hisrisk and how much he has to charge.


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Good faith In all insurances full and true disclosure is to be made.

Fraud invalidates the insurance, and deprives the partycommitting it of all his rights arising out of the

contract. Concealment or misrepresentation of material facts is

fatal to the contract; but in case of innocentmisrepresentation the premium is returnable on the

avoidance of the policy. In Bangladesh, the doctrine of utmost good faith is

subject to the provision of Section 45 of the InsuranceAct, 1938.


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Insurable interest (2) Insurable interest: The assured must have insurable

interest in the subject-matter of the insurance.

Any person may be said to have an interest in the

subject-matter of insurance who may be injured by therisks to which the subject-matter is exposed. Theassured must be so situated with regard to thething insured that he would be benefitted by its

existence, would be loser from its destruction. The owner of a ship runs a risk of loosing his ship, the

charterer of a ship runs a risk of losing his freight, andthe owner of the cargo of losing his goods and profits.


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Insurable interestAll these persons are interested because they all run a

risk, have something at stake, something to lose by thehappening of the peril insured against.

It is the existence of insurable interest in a contract ofinsurance that differentiates and distinguishes it froma mere wager or a gambling contract.

But it is essential that the insurable interest must be

actual and real and not a mere expectation or ananxiety.

It must be pecuniary interest, a purely sentimentalinterest would not be enough.


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IndemnityA contract of insurance, however, ceases to be a

contract of indemnity if the insurer promises to pay afixed sum on the happening of the event insured

against whether the assured has suffered any loss ornot.

From their very nature contracts of life and accidentinsurance belong to this class and in their case

indemnity is not the governing principle. In these cases, the value of the peril insured against

cannot be appraised in money, and therefore, theinjury or death cannot really be indemnified.


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Mitigation of loss (4) Mitigation of loss:

In the event of some mishap to the insured property,the owner (the insured) must act as though he wereuninsured. He must take such steps as he considersprudent.

If reasonable efforts are made and probable

precautions have been taken to save the property, theinsurer will be liable for all loss resulting from the perilinsured against.


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Attachment of risks (5) Attachment of risks:

A contract of insurance can be enforced only if the riskhas been attached.

The insurer/underwriter receives a premium fromthe insured for running the risk of indemnifyingthe assured, and if he does not run the risk, the

consideration for which the premium was put into hishands fails and therefore he must return it.


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Causa Proxima (6) Causa Proxima: The maxim in causa proxima non

remota spectatur, i,.e., the proximate and not theremote cause is to be looked to, and if the cause of the

loss is a peril insured against the assured can recover.

The inherent meaning of the maxim is thatEveryloss that clearly and proximately results whetherdirectly or indirectly, from the event insured against iswithin the policy.

When determining the cause of the loss, the nearestcause must be taken into consideration.


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Types of insurance: Life insurance Section 2 (11), the Insurance Act:

Life insurance business means the business of effectingcontracts of insurance upon human life. It includes, (i) any

contract whereby the payment of money is assured upondeath (except death by accident); or the happening of anycontingency depends on human life;

(ii) any contract which is subject to the payment ofpremiums for a term dependent on human life;

(iii) any contract which includes the granting of disabilityand double or triple indemnity accident benefits; thegranting of annuities upon human life, and theguaranteeing of superannuation allowances.


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Types oflife insurance policy (1) The Whole Life Policy: A whole life policy is one under

which a lump sum of money is payable upon the death ofthe assured to his heirs or nominees.

(2) The Endowment Policy: An endowment policy is oneunder which a lump sum of money is payable to theassured upon his attaining a certain age, or in the event ofhis dying earlier, to his heirs or nominees upon his death.

(3) Policies with or without profit: In profit policies, thepolicy-holder gets the bonuses declared from the profit ofthe insurer. The bonuses are paid on the maturity of thepolicies.


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Marine InsuranceA contract of marine insurance is an agreement

wherebythe insurer undertakes to indemnify theassured, in the manner and to the extent thereby

agreed, against marine losses, that is to say, lossesincidental to marine adventure.

A contract of marine insurance may, by its expressterms, or by usage of trade, be extended so as toprotect the assured against losses on inlandwaters or any land risk which may be incidental toany sea voyage.


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Maritime Adventure and maritime

perils There is a maritime adventure when any insurable

property is exposed to maritime perils.

Maritime perils mean the perils consequent on, or

incidental to, the navigation of the sea, that is to say, perilsof the seas, fire, war perils, pirates, rovers, thieves,captures, seizures, restraints, and detainment of princesand people, jettisons, and any other perils, which are either

of like kind or may be designed by the policy. The term perils of the seas refer to fortuitous accidents

or casualties of the sea, and does not include the ordinaryaction of the winds and waves.


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Different types of marine insurance Marine policies are of different types and are known by

different names according to the manner of theirexecution or the risk they cover:

1. Voyage Policy: Where the contract is to insure thesubject-matter from one place to another, the policy iscalled a voyage policy. Where the subject-matter isinsured from a particular place, the risk attaches onlywhen the ship starts, i.e., as soon as it starts from theport of commencement and ends as soon as the shipenters the port of destination.


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Different types of marine insurance 2. Time Policy: Where the contract is to insure the

subject-matter for a definite period of time, it is calleda time policy. If the policy is from noon March 20, 2011

to noon March 20, 2012, it is a time policy. No timepolicy can be made for a period exceeding twelvemonths, and if it is so made, it shall be invalid.

In a time policy the subject matter is covered duringthe period of insurance no matter where the ship isand how many voyages it makes A contract for bothvoyage and time may be included in the same policy.


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Different types of marine

insurance In addition to voyage and time policy, there are: (1)

valued policy; (2) unvalued policy; (3) floating policy;and (4) wager or honour policy.


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Fire Insurance Fire insurance means insurance against any loss

caused by fire.

Fire insurance can be defined as follows:

Fire insurance business means the businesseffecting contracts of insurance against loss by orincidental to fire or other occurrence customarily

included among the risks insured against in fireinsurance policies.


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Double Insurance When the same risk and same subject-matter is insured

with more than one insurer, it is called double insurance.For example: P, the owner of a house, insures it against fire

for 20 lac taka with X and 10 lac taka with Y. This is doubleinsurance.

Rules: The following rules apply in cases of doubleinsurance:

1. Lifeno limit: In case of life insurance there may be

any number of policies for any amounts. An individual isentitled to place any value s/he likes upon his/her life andthereupon death. All policies are payable whatever may bethe total amount.


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Double Insurance 2. Propertynot more than actual loss: A person is free to insure his/her property with any number

of insurers. But if any loss occurred, s/he will not beallowed to recover more than the actual loss from all theinsurers together.

Thus, if the total value of a house is 20 lac taka, the insurerwill have to pay 20 lac taka, in case of total loss by fire.

This amount will be shared by the insurers in proportion tothe value of each insurers policy. If any one insurer of theseveral insurers pays the whole amount, he is entitled tocontribution from other insurers.

3. No profit: The insured is never allowed to make a profitout of an insurance.


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Reinsurance Reinsurance means the transfer of a part of the risk

by the insurer. Suppose that a ship has been insuredfor 5 crore taka. The insurer may feel that the risk is

too heavy to be borne by him alone. If so, s/he cantransfer a part of the risk to another insurer.

Rights of Reinsurer:

1. Reinsurer is entitled to get a proportion of thepremium.

2. Reinsurer gets the benefits of the conditions andterms of the original policy.


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Reinsurance 3. Reinsurer is entitled to subrogation.

4. If for any reason the original policy lapses, thereinsurance comes to an end.

Liabilities of the reinsurer

1. Reinsurer is liable to pay the portion of the risktransferred to him.

2. Reinsurer is liable only to the first insurer becausethere is no privity to contract between the insurer andthe originally insured person.


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Double and ReinsuranceDouble Insurance Reinsurance

1. If the same risk and samesubject-matter is insured by

the policy-holder with morethan one insurer, it is calleddouble insurance.

2. If there are double

insurances in insurance ofproperties, the loss will beshared by all the insurers.

1. Reinsurance is the transferof the part of the risk by the

insurer.

2. In reinsurance, thereinsurer is entitled to get a

part of the premium, and willbe liable to bear the lossproportionately.


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Double and ReinsuranceDouble Insurance Reinsurance

3. In double insurance, eachinsurer is liable directly to the

policy-holder.

4. Double insurance is amethod of assuring thebenefit of insurance. In case

of life insurance, the insuredmay have any number ofpolicies and for any amount.

3. The reinsurer is liable onlyto the first insurer.

4. Reinsurance is a method ofreducing the risk of theinsurer.


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Rights of insurer The insurer has the following rights:

(1) Right to get premium: Insurer has the right to getpremium from the insured/policy-holder according tothe terms of the contracts. Upon non-payment thepolicy lapses. In life insurance contracts, after thepremia have been paid for two consecutive years, thepolicy acquires a surrender value and a certainproportion of the amount insured for is payable to thepolicy holder.


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Rights of insurer (2) Principle of contribution: A particular property may be

insured with two or more insurers against the same risk. Insuch cases the insurers must share the burden of paymentin proportion to the amount assured by each. If any one of

the insurers pays the whole loss, he is entitled tocontribution from the other insurers. Example: A house is insured against fire for 20 lac taka

with X and for 10 lac taka with Y. A fire occurs and thedamage is estimated at 6 lac taka. X and Y share the loss in

the proportion of 20 lac: 10 lac, i.e., 2: 1. X will have to pay 4lac taka and Y will have to 2 lac. The policy-holder can sueboth X and Y or any one of them. Suppose he has sued Xand recovered from X 6 lac taka. X can claim contributionfrom Y to the extent of 2 lac taka.


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Rights of insurer (3) Principle of subrogation: Subrogation is a form of

substitution. In marine and fire insurance contracts, afterthe policy-holder is indemnified in full, the insurerbecomes entitled to the remnants of the property insured

and all rights and claims which the policy holder may haveagainst third parties. The insurer is subrogated to theposition of the insured.

The principle of subrogation is based upon equity. If theinsurer pays the indemnity in full, he ought to get whatever

remains of the damaged property. Also the policy-holderought not to get more than the value of the propertybecause that will enable him to make a profit out of theinsurance.


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Principle of subrogation The principle of subrogation applies only on payment

of the whole loss. In case of partial losses the principledoes not apply. The principle also does not apply in

cases where the contract of insurance is not a contractof indemnity.

Example: (i) A ship insured against total loss is sunk.The insurer pays the value in full. If the ship issubsequently salvaged, the insurer is entitled to thesale proceeds of the remnants, if any. The same ruleapplies to goods.


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Rights of insurer Example: (ii) P insured his house against fire with Q.

Subsequently, he entered into a contract with R for thesale of the house. Before the sale could be completed

the house was burnt and Q paid the full value of thehouse to P. P then obtained from R the value of thehouse. Held: P must refund to Q the amount heobtained from R.

(4) No return of premiums paid: In case of fraud, thepolicy-holder cannot claim the refund of thepremiums paid.


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Obligations of insurer The obligations of the insurer are determined by the

terms of the contract of insurance. The mostimportant obligation of the insurer is to pay the money

due on the policy upon happening of the contingencyspecified in it. The liability to pay is subject to thefollowing conditions:

(1) Fulfillment of essentials: The insurer is liable to

pay only if the contract of insurance fulfills all theessential elements of a valid contract. If there is non-disclosure of material facts or fraud, the contract isvoidable.


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Obligations of insurer (2) Commencement of risk: The risk of insurer

commences after the contract of insurance is entered into,i.e., after the proposal to insure is accepted. Mere

submission of a proposal to the insurer is not enough. Theinsurance agent has no authority to accept a policy.

(3) Return of premia: Under certain circumstances theinsurer is bound to return the premia received, i.e., when

the contract of insurance is set aside on the ground of fraudby the insurer. If an insurance policy becomes void on theground of non-disclosure of material facts or fraud by theinsured person, the premia are not returnable.


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Obligations of insurer (4) Causa Proxima:

The insurer is liable onlyfor those loses which

directly and reasonablyfollow from the eventinsured against.

The insurer is not liable forremote consequences and

remote causes.

Example:

An underwriter is notliable for damage to cargo

directly caused by rats orvermin; but if is destroyedby sea water flowingthrough a hole gnawed byrats in a bathroom pipe,

the underwriter will beliable as the proximatecause of the damage is sea

water.


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Obligations of insurer (4) Causa Proxima:

The insurer is liable onlyfor those loses which

directly and reasonablyfollow from the eventinsured against.

The insurer is not liable for

remote consequences andremote causes.

Example:

Hides and tobacco wereshipped in the same vessel,

and the hide becameputrid due to sea waterduring a storm, and thestench from them spoiled

the tobacco, the damagethus caused was held ashaving been proximatelycaused by perils of the sea.


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Rights of policy-holders Policy-holder of a contract of insurance has the

following rights:

(1) Right to get payment or to be indemnified:

In case of life insurance, policy-holders or their heirs,nominees and assignees are entitled to receive themoney stipulated for in the policy on the happening of

the specific contingency. In case of other forms of insurance, the policy-holder

is entitled to be indemnified for all losses sustainedfrom the peril insured against.


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Rights of policy-holders (2) Right to assign: The policy-holder is entitled to assign

the policy, whereupon the assignee becomes entitled to allthe benefits of the policy.

(3) Right to get documents: Under the Insurance Act, 1938,policy-holders are entitled to get the followingdocumentscopies of the proposal and the medicalreport, notice regarding default of premium, writtenacknowledgement from the insurer of transfer, assignment,

and nomination etc. (4) Surrender value: A life insurance policy does not lapse

for non-payment of premium after it acquires a surrendervalue.


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Duties of policy-holders (4) Mitigation of loss: In case of accidents or

mischance it is the duty of the policy-holder to takesteps for reducing the loss as much as possible. For

example, when fire occurs the policy-holder mustsafeguard the burnt properties.

(5) No Commission: The policy-holder is not allowedto receive any part of the commission payable on thepolicy or any rebate on the premium. If he accepts anysuch payment he may be punished with a fine.(Section 41 of the Insurance Act, 1938)

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BUS Law (10)_Insurance (Rev)