CHAPTER 5

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.

Misrepresentation

  1. a) Innocent – by mistake giving wrong information
  2. 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.

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