A contract of insurance is one whereby one party (called the insurer) undertakes for a consideration to inemnify another party (called the insured) upon the happening of a specified event. The consideration paid by the insured is called the premium and is either a single or periodical amount. The document setting out the conditions of the contract is called the policy, and the loss insured against is called the risk.
Indemnity insurance requires the assured to have an interest in the subject-matter of the insurance, so that any person who would suffer loss if property was destroyed could be said to have an insurable interest in the property. If this interest does not exist, then a contract of insurance relating to the property cannot be legally enforced.
Insurable interests arise in the following ways:
- A person has an insurable interest in his own life.
- A husband has an insurable interest in his wife’s life and vice versa.
- A creditor has an insurable interest in his debtor to the extent of his debt.
- A trustee has an interest in the trust estate, therefore he may insure in respect of interest of which he may be a trustee.
- A surety has an interest in the life of his principal debtor.
- An employer has an interest in his employee while in his employment.
- A partner has an interest in his partners during the subsistence of the partnership.
Uberrimae Fidei (of the utmost good faith)
An insurance contract is one uberrimae fidei and consequently full disclosure must be made to the insurer of any fact which is likely to affect the mind of the reasonable and prudent insurer when deciding whether or not to accept the risk. If there is any concealment then the policy is avoidable at the option of the insurer.
Excepting life assurance, a contract of insurance is an indemnity. This means that the insured in the case of loss against which the policy has been made shall be fully indemnified but not more than that.
There is thus no benefit to be derived from over-insuring, while, on the other hand, care must be taken not to under-insure, as the insurer will only indemnify to the value of the amount for which the goods, or property were insured, and not for the actual value of the goods, or property.
A person is free to effect insurance with more than one company in respect of the same subject-matter and the same risk. This is called double insurance. Thus, if A wants to insure his business premises against fire or any other loss for 25,000 he is free to ensure with any number of insurers for the same amount and for the same risk. But if the property insured is completely destroyed by fire, he can claim only £ 25,000 from one insurer or from all of them He is not allowed to claim £ 25,000 from each and every insurer.
A company after accepting the risk can arrange with another company to rein sure so much of the risk, but in case of any claim arising under the policy it would pay the insured the full insured amount. After it has paid, it would recover the sum from the reinsurance company to the extent of their liability under the reinsurance contract.
If after satisfaction from the insurers, the assured receives further compensation in respect of his loss, he must hold it as a trustee for his insurers. The assured must not make a profit from his loss.
Various Farms of Insurance.
Life Assurance. A life assurance contract is one whereby the insurer agrees, upon the death of the person whose life is insured, to pay a given sum in consideration of the premium paid by or on behalf of the assured.
Fire Insurance. A contract of fire insurance is one of indemnity. The insurer agrees to indemnify the insured against loss or injury by fire in respect of certain property during a specified time. The insured must have an insurable interest in the property insured.
Marine Insurance. A contract of marine insurance is one whereby the insurer undertakes to indemnify the assured against marine losses, that is to say, the loss incident to marine adventure. It is a contract of indemnity, the assured normally being unable to claim more than his actual loss.
Difference between Assurance and Insurance
Assurance is a form of cover offered by Assurance and Insurance Companies. Assurance should be distinguished from Insurance. Insurance means insuring against something which may or may not happen, e.g. fire, theft, etc. assurance means insuring against something which is bound to happen sooner or later, e.g. death.
An average clause in an insurance policy means usually that if property is insured for less than its full value, the insured will have to stand the same proportion of any loss incurred as that not covered by insurance, e.g. if a house is insured against fire for 75% of its real value, the insured will have to stand 25% of any loss incurred.
Where there are two or more insurances on any one risk, the principle of contribution applies as between the different insurers. Apart from any condition as the policy as to contribution, any one insurer is bound to pay to the assured the full amount for which he would be liable if his policy stood alone; but having paid he is entitled to an equitable contribution from his co-insurers.