FUNDAMENTAL PRINCIPLES OF INSURANCE



1.The Principle of Utmost Good Faith


An application for life and health insurance is the applicant’s proposal to the insurer for protection and is the beginning of the policy contract. The proposed insured is required to give accurate answers to questions in the application relating to his personal and family history, habits, employment, insurance already in force, and other applications for insurance that either are pending or have been postponed or refused etc. A failure to do so leads the insurer being estopped [i.e., prevented] from denying the correctness or truth of information in the application. Insurers place great reliance on this information to issue the requested policy.


Non-compliance by either party or any non-disclosure of the relevant facts renders the contract null and void.


Representation:


All disclosures relating to an insurance policy must be made at the time of entering into the insurance contract. The insurance company hands over the application proforma to the person buying insurance seeking complete details. The person has to mention his profession, income, age, family, history of family, general health, ailments suffered, medical reports, matters relating to conduct and character, any criminal record, etc. These details given by the proposer known as representations, demand correct and full disclosure by the buyer of insurance.


Implications of concealment, non disclosure or misrepresentation by the insured:


In such circumstances it is the choice of the insurer whether to:

  1. Incorporate the required changes in the contract and charge a different premium.

  2. Accept the policy and pay compensation especially if the facts have negligible importance.

  3. Avoid any obligation on its part as per the policy.


It has to be proved by the insurer that the non-disclosure or misrepresentation was intentional on the part of the insured to commit fraud and deceive the insurer before it can stop payment of compensation. As per section 45 of the Insurance Act the insurance company can resort to this stance before the passage of two years after which it cannot take such recourse.

Non-disclosure may be unintentional on the part of the insured. Even so such a contract is rendered voidable at the insurers option and it can refuse any compensation. Any concealment of material facts is considered intentional. In this case also the policy is considered void.


2. Principle of Insurable Interest


Insurable interest means the policyholder must have a pecuniary or monetary interest in the property, which he has insured. Any damage to the property must result in financial loss to the policyholder. Only then insurable interest is said to exist. In a life insurance context, insurable interest is deemed to exist in the case of certain relationships based on sentiment. (E.g. husband & wife, parent & child). Without insurable interest no contract of insurance is possible.


Example


Two parties enter into a private agreement wherein one party agrees to pay the other Rs. 1 lakh in case Sachin Tendulkar recovers from his ailment before the tournament begins. This contract is a wagering agreement since the principle of insurable interest is absent here. The concerned parties don’t suffer any loss in case Sachin misses the tournament.

In the following cases of life insurance contracts insurable interest need not be proved:


Own life (up to the limit acceptable to insurers)

Spouse’s life

Life of children


3. The Principle of Indemnity


The principle of Indemnity ensures that the insurer is liable to pay up to the amount of loss and not more than that. In other words it implies that the insured should not derive any unwarranted benefit from a loss. Normally the principle of indemnity applies to property and liability insurance contracts and it promises that the insured be restored to the same financial position that existed prior to the occurrence of loss.

Hence a life insurance policy is not subject to the principle of indemnity but is a valued policy wherein the agreed upon amount in full is paid to the beneficiary in case of loss of life.

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