Corporate Law

The contract of insurance is a commercial transaction, which tend to cover and give assurance to a person against such events, which are bound to happen in future uncertain. The contract of insurance is very old, but we cannot find the concrete and clear-cut definition of insurance to the date. The definition that is widely accepted as comprehensive of insurance is a definition given in the case, " Prudential Insurance company v. Inland Revenue Commissioner", by British Court which defines contract of insurance as follows:

" A contract whereby one person, called the " insurer", undertakes, in return for the agreed consideration, called the " premium" , to pay to another person called the "assured", a sum of money or its equivalent, on the happening of a specified event." Judge Channel on the above mentioned case also said that the event insured must also involve some kind of uncertainty. According to him, the key to the contract of insurance is that an event against which insurance is done must be uncertain. An event against which a person procured insurance policy must be uncertain. In other word, such event is bound to happened or inevitably happen at some time in future, but nobody know at what point of that uncertain event actually occurs. In order to be a contract an insurance contract, the event on which the liability of the insurer depends must be beyond his control.

Insurance is a contract whereby one person ( the insurer) undertakes to compensate another person ( the assured) by paying him a sum of money on the happening of a specified event. The consideration for the insurer's promise is the payment by the assured of a sum known as the " premium". Insurance is therefore merely another form of contract for which a special type of rules was evolved over the years.

Classification of Insurance

Insurance can be classified in two type:
(a)    according to event upon which the sum insured becomes payables
(b)    according to nature of subject matter or interest affected
    Under (a) type insurance, there are four kinds of insurance:
(i)    Marine Insurance which covers loss from perils of the sea;
(ii)    Life insurance, in which the sum insured is paid on the death of the assured;
(iii)    Fire insurance, which covers loss from fire; and
(iv)    Accident insurance which covers loss from other event e.g. road accident
    Under (b) type insurance, there are three kinds of insurance
(i)    Personal insurance
(ii)    Property insurance
(iii)    Liability insurance
    From Insurance Act point of view, we can generalize insurance contract in two categories:
(a)    Life Insurance, which covers all forms of life assurance
(b)    Non life insurance or general business insurance which comprises all other types of insurance business other than life business.

Main purpose of contract of insurance is to protect the insured from of risk. So the insurer promises to pay on the happening of a specified event. The insurance contract is a device whereby the risk of financial loss accruing from death or disability, or damage to the property is passed on to another. The insurer usually collects an agreed rate of contribution from a large number of people and relieves the insured by paying the insurance money. It does not to attempt to prevent the happening of the event insured, but it merely compensate the insured when the event insured against occurs.

The prerequisite of contract of insurance is that the subject matter of insurance must be identified. The risk which is the real subject matter of insurance must be clearly identifies as this is the event upon which the sum insured is to be payable. Insurer are in the business to make the money and they are very careful about the likely hood of occurring such event which is insured against. As a result, the insurance policies usually describe in detail manner exactly what risks are cover and what are not. Therefore, the subject matter of insurance is money and only that risk which is quantifiable in financial terms can be the basis of a contract of insurance.

Any contract of insurance in order to be valid and enforceable under the law, it is must be supported by insurable interest. A person who entered into insurance contract with insurance company must have some sort of insurable interest on the subject mater of insurance contract. A person may be said to have insurable interest if he would be prejudiced by the happening of the event insured against. It is not possible to give comprehensive definition of insurable interest. But it can roughly be defined as an interest which can be protected by a contract of insurance. Insurable interest is such an event or incident that the occurrence of which would cause either a financial loss or would bring other kind of harm to the insured. It is widely recognized that an insurable interest must have a pecuniary value of sort. But some type of insurable interest cannot be evaluated in pecuniary valuation. Such is the case in Life Insurance where the interest of assured is not purely pecuniary in nature but the life of insured is considered as insurable interest.

Insurance contract is formed when a party ( insurance company) accept the offer of other party ( the insured). The offer in the contract of insurance is the wish of a person who want to procure the insurance policy by making an application to Insurance Company. Insurance contract can be valid even though the insured was induced to enter into such contract by the agent who is soliciting business for the insurance company. Therefore a contract of insurance is formed where the offer to procure insurance policy is accepted by issuing it and delivering to the insured.

Duty of Utmost good faith is key to the insurance law. Any insurance contract, which lack element of utmost good faith, would render such contract invalid. Truly speaking, a contract of insurance is a contract of utmost good faith. It means that each party to the insurance must provide other the full discloser of all material facts that may affect the contract. The duty is mutual as it is the duty of both insurer and insured not hide any fact or information material to subject matter of insurance contract. Usually it is the person who is procuring insurance is under obligation to make full disclosure of all material facts known to him in the proposal form. This is because the special facts upon which the risk is assessed will more commonly lie within his knowledge than the knowledge of the insurer. The question may arise what particular matter is a material to contract is insurance. Though it is not that easy to answer. But the answer must be found from the circumstance of the case. Normally all facts affecting risk are material. In other word, any fact that would increase the liability or any fact relating to moral hazard of insurer is a material. What would happen if a material fact is not disclose or it is misrepresented while seeking insurance? It very vital and if there has been non-disclosure of a material fact or a misrepresentation, the whole contract of insurance is voidable at the choice of insurer. (To be continued)

Insurance Law in a Nutshell (I)

By Gandhi Pandit, Attorney at law

Classification of Insurance