LEGAL PRINCIPLES OF AN INSURANCE CONTRACT
Insurance Contract – an insurance policy is a contract between 2 parties – Insurer (Insurance Company) and Insured (Policy holder) as per Indian Contract act 1872.
For any contract to be a valid contract following elements should be there –
1) Offer and Acceptance – out of the 2 parties‟ one should offer and other party should accept. Usually offer is made by proposer (policy holder) and acceptance is made by insurer.
2) Consideration – premium paid by policy holder and the promise to indemnify by insurer is known as consideration.
3) Agreement between parties – both parties should agree to the same thing.
4) Free consent – there should be no pressure on proposer while taking policy. Consent is free when the policy is taken under no-coercion; undue influence; fraud; misrepresentation; mistake.
5) Capacity of the parties – proposer should be legally competent. I.e. Sound mind, not disqualified by law, should not be minor.
6) Legality – the object of contract must be legal.
Special features of Insurance Contract–
1) Uberima Fides (or) Utmost good faith – it means that every party to contract must disclose all material facts relating to the subject matter of insurance whether asked or not.
2) Material facts/Information – proposers family history; medical history; financial details; occupational details; illness if any; habits etc. are known as material facts.
Breach of utmost good faith: –
Non-disclosure – not informing certain details.
Concealment – intentionally not giving details.
- a) Innocent – by mistake giving wrong information
- b) Fraudulent – intentionally giving wrong information.
3) Insurable Interest – it is the financial interest the proposer has in his belongings. I.e. Self; spouse; parents; house; car etc. is termed as insurable interest.
- In Life Insurance – Insurable interest should be present at the start of policy.
- In Non-life Insurance – Insurable interest should be present both at the start and during claim.
- In Marine Insurance – Insurable Interest should be present at the time of claim.
4) Proximate Clause – it is the main reason behind the various activities taking place and there by resulting into any event.
5) Free Look-In Period (or) Cooling off period – if any proposer after entering into a
contract i.e. After taking a policy if he wants to cancel or reject the policy then he or she take this decision within 15days from receiving of policy.
6) Indemnity – It means that the policyholder, who suffers a loss, is compensated so as to put him or her in the same financial position as he or she was before the occurrence of the loss event.
7) Subrogation: It is the process an insurance company uses to recover claim amounts paid to a policy holder from a negligent third party.