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INTRODUCTION
Insurance is a contract where an offer is made in the shape of proposal and when it is accepted
subject to the principles of insurance, an insurance contract comes into existence. In such
contracts, one party i.e. the insured agrees to pay a specified sum called premium and the other
party i.e. the insurer agrees to indemnify the insured the loss or happening of an event. It means
that there should be an offer and its acceptance. The parties should be competent to enter into a
contract, they must be of sound mind and there should be legality of subject. Thus, proposal is
the starting point for an insurance contract. However, the parties are governed by the contracts of
insurance i.e. to the terms and conditions given in the policy, which are comprehensive enough
to determine the rights and liabilities of the parties. The Miscellaneous and General Insurance
Policies are policies for specified period and their renewals are fresh contracts and if the property
suffers any damage/loss between the date of expiry and date of renewal, the insurer would not be
liable on the simple ground that the risk was not covered within that period and on expiry of that
period, the policy lapses or the contract of indemnity come to end. The demand and realization of
additional premium for the lapsed policies for settlement of the claim of current policy is clear
deficiency in service. The contract of insurance is not a contract of personal service.

DEFINATION

A contract of insurance is a contract either to indemnify a person against a loss which may arise
on the happening of an event or to pay a sum of money on the happening of some or any event
for an agreed consideration. To put it in other words it is a contract under which one party
undertakes to pay to another person a sum of money or its equivalent on the happening of a
specified event. Under such contract one party agrees to take the risk of another person¶s life,
property or liability in consideration of certain comparatively small periodic payments. The
person to be paid or indemnified is called the insurer or assured, the person who undertakes to
indemnify or pay money is called the insurer or assurer. The consideration received in the form
of periodic payments is called the premium and the document containing the contract is called
the insurance policy.

It follows that every contract of insurance must have following essential elements:

a? There must be a contract between parties who are called the µinsurer¶ and the µinsured¶.
a? The contract must be that the insurer undertakes to protect the insured from any loss or
damage to be insured on the happening of the event.
a? In consideration for the above, the assured undertakes to make the insurer a periodical
payment of a sum of money called premium.
a? The contract must be in writing and the document is called the insurance policy.

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ESSENTIAL OF CONTRACT

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An insurance contract is known as a contract of 'Uberrimate Fidel' or a contract based on 'utmost


good faith'. It means both the parties must disclose all material facts. Any fact is material which
goes to the root of the contract of insurance and has a bearing on the risk involved. It is only
when the insurer knows the whole truth that he is in a position to judge:- (i) whether he should
accept the risk, and (ii) what premium he should charge. Concealment of any fact will entitle the
insurer to deprive the assured of benefits of the contract. Also,as insurance shifts risk from one
party to another, it is essential that there must be utmost good faith and mutual confidence
between the insured and the insurer.

  

A contract of insurance is a contract of 'indemnity'. It means that the insured, in case of loss
against which the policy has been issued, shall be paid the actual amount of loss not exceeding
the amount of the policy, i.e. he shall be fully indemnified. The object of every contract of
insurance is to place the insured in the same financial position, as nearly as possible, after the
loss, as if the loss has not taken place at all. This is applicable to all types of insurance except
life, personal accident and sickness insurance. A contract of insurance does not remain a contract
of indemnity if a fixed amount is paid by the insurer to the insured on the happening of the event
against, whether he suffers a loss or not. Like, in case of life insurance, the insurer is liable to
pay the sum mentioned in the policy on the death, or expiry of a certain period.

   

It means that the insured must have an actual interest in the subject matter of insurance. A
contract of insurance affected without insurable interest is void. A person is said to have an
insurable interest in the subject matter if he is benefited by its existence and is prejudiced by its
destruction. For example:- a person has insurable interest in the building he owns; employer can
insure the lives of his employees because of his pecuniary interest in them; a businessman has
insurable interest in his stock, plant and machinery, building, etc. So, all these people have
something at stake and all of them have insurable interest. It is the existence of insurable interest
in a contract of insurance which distinguishes it from a mere wagering agreement.

In case of life insurance, insurable interest must be present at the time when the insurance is
affected. It is not necessary that the assured should have insurable interest at the time of maturity
also. In case of fire insurance, insurable interest must be present both at the time of insurance and
at the time of loss. In case of marine insurance, interest must be present at the time of loss. It
may or may not be present at the time of insurance.

  
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The rule of 'causaproxima' means that the cause of the loss must be proximate or immediate and
not remote. If the proximate cause of the loss is a peril insured against, the insured can recover.
When a loss has been brought about by two or more causes, the real or the nearest cause shall be
the causaproxima, although the result could not have happened without the remote cause. But, if
the loss is brought about by any cause attributable to the misconduct of the insured, the insurer is
liable.

„ 

In a contract of insurance the insurer undertakes to protect the insured from a specified loss and
the insurer receives a premium for running the risk of such loss. Thus, risk must attach to a
policy.

   

In the event of some mishap to the insured property, the insured must take all necessary steps to
mitigate or minimize the losses, just as any prudent person would do in those of loss attributable
to his negligence. But it must be remembered that though the insured is bound to do his best for
his insurer, he is, not bound to do so at the risk of his life.

 

The doctrine of subrogation is a corollary to the principle of indemnity and applies only to fire
and marine insurances. According to it, when an insured has received full indemnity in respect of
his loss, all rights and remedies which he has against third person, will pass on to the insurer and
will be exercised for his benefit until he(The insurer) recoups the amount he has paid under the
policy. The insurer's right of subrogation arises only when he has paid for the loss for which he is
liable under the policy and this right extends only to the rights and remedies available to the
insured in respect of the thing to which the contract of insurance relates.

   

When there are two or more insurances on one risk, the principle of contribution comes into play.
The aim of contribution is to distribute the actual amount of loss among the different insurers
who are liable for the same risk under different policies in respect of the same subject matter.
Any one insurer may pay to the insured the full amount of the loss covered by the policy and
then become entitled to contribution from his co-insurers in proportion to the amount which each
has undertaken to pay in case of the loss of the same subject matter. In other words, the right of
contribution arises when:-

 ? There are different policies which relate to the same subject matter.
 ? The policies cover the same peril which caused the loss.
 ? All the policies are in force at the time of the loss.
 ? One of the insurers has paid to the insured more than his share of the loss.

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