1. Aleatory contract:
Most contracts are commutative, I,e., each party gives up goods or services
presumed to be of equal value. The insurance contract, however, is aleatory
ie., the contracting parties know that the amount to be paid by each party is
not equal. In the insurance policy, the insured pays the amount of the premium.
If he suffers loss he may receive a much larger amount from the company than he
paid in premiums, and if he suffers no loss, he will collect nothing.
All gambling
contracts are aleatory, but not all aleatory contracts are gambling contracts.
Insurance is not gambling as the requirement of insurable interest removes
insurance from the category of gambling.
2. Utmost good faith: Most ordinary contracts are bonafide
or good faith contracts. Insurance contract, however, are contracts uberrimae
fidei, or contracts of utmost good faith. It is a condition of every insurance
contract that both the parties should display the utmost good faith towards
each other in regard to the contract. This duty continues up to the time the
negotiations for the contract are completed and is equally applicable to both
the parties. The insured is bound to disclose all material facts known to him
but unknown to the insurer. Every fact which is likely to influence the mind of
the insurer in deciding whether to accept the proposal or in fixing the rate of
premium is material for this purpose. Similarly, the insurer is bound to
exercise the same good faith in disclosing the scope of insurance which he is
prepared to grant. The duty of disclosure is absolute. It is positive and not
negative.
Non-disclosure or
misrepresentation of any material fact gives the insurer an option to avoid the
contract.
3. Insurable interest: The insured must have an insurable
interest in the subject-matter insured. Without such interest the contract will
be regarded as a wagering contract and thus void. It means some pecuniary
interest in the subject matter insured where he will derive pecuniary benefit
from its preservation or will suffer pecuniary loss or damage by the happening
of the event insured against. But mere expectation does not constitute
insurable interest. Similarly, mutual love and affection is not sufficient to
constitute insurable interest.
A person has an
insurable interest in property even though he may not be the owner of it, for
example, a person who has advanced money on the security of a house has an
insurable interest in the house. Again every person has an insurable interest
in his own life, since the law presumes that each one desires to remain alive.
A person has an insurable interest in the life of another if he can expect to
receive pecuniary gain from the continued life of the other person or will
suffer financial loss from the latter’s death. Thus, a creditor has an
insurable interest in the life of the debtor. A business firm has an insurable
interest in the life of an executive or a key employee because his death would
inflict a financial loss upon the firm.
A contract of life
assurance requires interest at the time of the contract and not at the date of
the death. In the case of fire insurance, it is necessary for the assured to
prove that he had an insurable interest in the subject matter both at the date
of the policy and at the time of loss. In the case of marine insurance, the
insurable interest must exist at the time the loss occurs.
4. Indemnity: All contracts of insurance are contracts of
indemnity, except those of life assurance and personal accident insurance. It
means that the assured in the case of loss against which the policy has been
made shall be fully indemnified but never more than fully indemnified. It would
be against public policy to allow person who insure their goods to make any
profits out of the goods insured.
All policies on
property are contracts of indemnity and law would not permit them to be
otherwise construed. Thus if the value of the goods insured increases after the
date of the policy the insurers are not liable to make good the loss in respect
of the increase in value. A contract of insurance ceases to be a contract of
indemnity where the insurer promises to pay a fixed sum whether the insured has
suffered any loss or not. Contracts of life and accident insurance belong to
this class and in their cases indemnity is not the governing principle/
5. Causa proxima: Under the law of insurance, an insured can
recover from the insurer for the loss of the subject matter only if it is
caused by an event insured against. If there is only one caused of damage or
loss, there is no difficulty in fixing the liability of the insurer. But
sometimes the loss or damage results on account of a series of causes. In such
a case, the principle of causa proxima is applied. By the term proximate cause
is not meant the latest, i.e., proximate in time, but the direct, dominant and
efficient one. If it is otherwise, the insurer is not liable. Proximate cause
is the cause which sets other causes in motion. It is often the earliest in
point of time. Where there is insurance against fire, loss caused by smoke
arising out of the fire or damage caused by water escaping from pipes, melted
in the course of fire is covered by the policy. In such cases the connection
between the fire and the loss is so close that the relation of cause and effect
is established.
6. Risk must attach: Premium is the consideration for the
risk run by the insurance companies and if there is no risk, there should be no
premium. It is a general principle of law of insurance that where the insurers
have never been on the risk, they cannot be said to have earned the premium.
Thus, where a policy is declared to be void an inito or where the policy is
avoided before the risk began to run, the assured is entitled to a repayment of
the premium that may have been paid. But if once the risk has begun to run the
premium cannot be recovered.
7. Mitigation of loss: When the event insured against occurs
it is the duty of the insured to take all such steps to mitigate or minimize
the loss as if he was uninsured. The insured should not become negligent or
inactive in the event of the occurrence merely because the property which is
getting damaged is insured. He must instead act like any uninsured prudent man
would act under similar circumstances. But his does not mean that while doing
his best for the insurer he should risk his own life.
8. Subrogation: The
term subrogation literally means substitution i.e., substitution of the insurer
in place of the insured in respect of the latter’s rights and remedies.
According to the principle of subrogation, the insurer who has agreed to indemnify
the assured will, on making good the loss, be entitled to stop into the shoes
of assured, I,e., the rights of the assured pass on to the insurer. The
doctrine of subrogation is a corollary of the principle of indemnity and so
such this principle does not apply to personal assurance. The right of the
insurer to be subrogated arises only after the payment of the policy money. The
principle of subrogation does not authorize the insurers to sue the third
parties in their own names, they can only enforce their rights in the name of
the assured.
9. Contribution: There is nothing in law to prevent a person
from effecting two or more insurance in respect of the same subject matter. But
in case there is loss, the insured will have no right to recover more than the
full amount of his actual loss. If he recovers the full amount of the actual
loss from one insurer, he will have no right to obtain further payment from the
other insurers. In such a case, the principle of contribution will apply
according to which the insurer who has paid the insured the full amount of
compensation will recover the proportionate contribution from the other
insurer. In order to apply the right of contribution between two or more
companies, the following factors must exist:
(a) The subject
matter of insurance must be the same. It is not necessary that the amount of
insurance in each policy should be the same.
(b) The event insured
against must be the same.
(c) The insured must
be the same.
10. Term of Policy:
An insurance policy specifies the term or period of time it covers. Often the
nature of the risk against which insurance is sought determines the period or
life of the policy. A life insurance policy may cover a specified number of
years or the balance of the insured’s life. A contract of fire insurance is
normally for a period of one year. A contract of marine insurance may be either
for a particular period or for a particular voyage. In case it is for a
particular period and the voyage has not come to an end, the liability of the insurer
comes to an end on the expiry of the period. If the contract is for a
particular voyage, the liability of the insurer comes to an end only after the
completion of voyage.
