CONCEPT OF RISK
CONCEPT OF RISK
Risk is prospect of loss on the happening or Risk is prospect of loss on the happening or non happening of an event
non happening of an event
In risk two elements are present 1. In risk two elements are present 1. the outthe out
come is uncertain 2.these outcomes one is come is uncertain 2.these outcomes one is favorable and other is not
favorable and other is not
There are different types of risk like:-There are different types of risk
like:-PURE AND
PURE AND SPECULASPECULATIVETIVE
Pure risk is one where is a loss or no loss butPure risk is one where is a loss or no loss but
no gain and a speculative is one where is a no gain and a speculative is one where is a chance of gain or loss
chance of gain or loss
Meaning of
Meaning of
Insur
Insur
ance
ance
Insurance is defined as a cooperative device toInsurance is defined as a cooperative device to
spread a particular risk .It does not reduce
spread a particular risk .It does not reduce risk orrisk or change the probability of risk ,it only
change the probability of risk ,it only reduces thereduces the financial losses
financial losses
In legal terms insurance is In legal terms insurance is a contract where by onea contract where by one
party agrees for a consideration called premium to party agrees for a consideration called premium to compensate the other party for losses Thus it
compensate the other party for losses Thus it involves the following
involves the following
:-
1.Insurer 2. Insured 3 .Premium 4. Policy1.Insurer 2. Insured 3 .Premium 4. Policy
The person or tThe person or the compahe company ny who is who is covering covering the rthe riskisk
is called insured is called insured
Insurance And Assurance
Insurance And Assurance
Insurance(n0n-life)Insurance(n0n-life)
Assurance(life)Assurance(life)
It is used for nonIt is used for non
life insurance life insurance
It is used for lifeIt is used for life
insurance contracts insurance contracts
F
F
unctio
unctio
ns
ns
And
And
BENIFIT
BENIFIT
S
S
Of Insurance
Of Insurance
It helps in It helps in capital formationcapital formation
It increases the business efficiency as theIt increases the business efficiency as the
executives can freel
executives can freely work without worryingy work without worrying about the insurable interest
about the insurable interest
It helps in It helps in risk sharing and risk transferrisk sharing and risk transfer
It provides certainty as risks are calculated inIt provides certainty as risks are calculated in
advance advance
It provides protection as on the It provides protection as on the happening of happening of
uncertainty paym
uncertainty payment is made and ient is made and is true fors true for all non life insurances
all non life insurances
Insurable Risk
Insurable Risk
The risk involved must have a The risk involved must have a Financial valueFinancial value
Homogeneous exposureHomogeneous exposure
It is concerned with only pure risks and notIt is concerned with only pure risks and not
speculative speculative
The loss must be The loss must be uncertain and it should notuncertain and it should not
be based on a certain event be based on a certain event
It should not be against public policyIt should not be against public policy
Insurance is undertaken not to pay any kindInsurance is undertaken not to pay any kind
of fines of fines
Essentials of
Essentials of
insur
insur
ance
ance
contract
contract
OFFEROFFER
The person who wants to cover a risk wilThe person who wants to cover a risk willl
make an offer. Offer and invitation to offer make an offer. Offer and invitation to offer are different
are different
An invitation precedes offer An invitation precedes offer and any act thatand any act that
precedes acceptance is offer precedes acceptance is offer
ACCEPTANCEACCEPTANCE
Consent given offer is acceptance and itConsent given offer is acceptance and it
should be absolute and unqualified any should be absolute and unqualified any variation is no acceptance
variation is no acceptance
CONSIDERATION
CONSIDERATION
Something in return is consideration and itSomething in return is consideration and it
must:---1.mov
must:---1.move from promises 2. e from promises 2. need moveneed move to promisor 3. be sufficient
to promisor 3. be sufficient
PPremium being remium being a valuable considea valuable consideration mustration must
be given for starting an insurance contract be given for starting an insurance contract and a promise to compensate or indemnify and a promise to compensate or indemnify asas per the terms and conditions of the policy
per the terms and conditions of the policy
A contract of insurance without payment of A contract of insurance without payment of
premium is void premium is void
CAPACITYCAPACITY
FREE CONSENT
FREE CONSENT
Where the consent of Where the consent of one party or other hasone party or other has
been induced by coercion, undue influence, been induced by coercion, undue influence, or fraud misrepresentation, contract is
or fraud misrepresentation, contract is voidable at the option of i
voidable at the option of insurernsurer
A A 56 year man insured himse56 year man insured himself but dielf but diedd
within 2 years the insurer refused to pay
within 2 years the insurer refused to pay butbut court said man of such age carries
court said man of such age carries own riskown risk and insurance company accepted it with and insurance company accepted it with open eyes
open eyes
The burden of proof lies on the insurer t oThe burden of proof lies on the insurer t o
show that the fact was misstated show that the fact was misstated
Discharge
Discharge
of contract
of contract
A contrA contract terminates in act terminates in following situations:following situations:
1.P1.Performance: when all erformance: when all the terms of the terms of
contract in terms of performance have been contract in terms of performance have been carried out
carried out
RRelease: when one elease: when one party agrees to excuseparty agrees to excuse
performance like denial of claim in case of performance like denial of claim in case of fraud
fraud
Discharge by implied consent or impossibilityDischarge by implied consent or impossibility
of performance. contract is discharged when of performance. contract is discharged when performance becomes impossible;
performance becomes impossible;
Principals of
Principals of
Insur
Insur
ance
ance
1.Utmost good faith:-Insurance is a 1.Utmost good faith:-Insurance is a contractcontract
of uberrimae fidei. The assured must disclose of uberrimae fidei. The assured must disclose to the insurer all material facts known to him to the insurer all material facts known to him . A mis-statement or withholding of any
. A mis-statement or withholding of any material information is fatal to the
material information is fatal to the contractcontract of insurance. Both the parties are under
of insurance. Both the parties are under obligation for the full disclosure
obligation for the full disclosure of materialof material information. The rule ‘ caveat emptor ’ does information. The rule ‘ caveat emptor ’ does not apply to them. To them. However the
not apply to them. To them. However the following facts are not to be disclosed
following facts are not to be disclosed
A. facts common to the publicA. facts common to the public
. Example…1.Utmost good faith [London. Example…1.Utmost good faith [London
Insurance Co. vs. Mansel (1879)] In making a Insurance Co. vs. Mansel (1879)] In making a proposal for insurance, M, in reply to
proposal for insurance, M, in reply to aa
question asking whether previous proposals question asking whether previous proposals on his life had been made to any other
on his life had been made to any other office. He omitted to disclose that his office. He omitted to disclose that his
proposal for life insurance had been declined proposal for life insurance had been declined by several other offices. Held , this was a
by several other offices. Held , this was a material failure to disclose and the policy material failure to disclose and the policy could be set aside.
could be set aside.
A A proposer should disclose proposer should disclose all material factsall material facts
at the time of making the proposal for at the time of making the proposal for
2. P2. Principle of rinciple of Indemnity:- Indemnity:-
Indemnity means to make Indemnity means to make good the loss good the loss . . AllAll
contracts of insurance are contracts of contracts of insurance are contracts of indemnity except life insurance.
indemnity except life insurance.
Indemnity can be achieved Indemnity can be achieved in following ways:-cash payment,
in following ways:-cash payment, Reinstatement ,Repair ,Replaced Reinstatement ,Repair ,Replaced
Insurance is not allowed to be Insurance is not allowed to be used to earnused to earn
profit and loss is
profit and loss is limited to the amountlimited to the amount insured .The insured has to prove
insured .The insured has to prove
:-
Castellion vs. Preston(1883) P insured hisCastellion vs. Preston(1883) P insured his
house against fire. Subsequently he agreed to house against fire. Subsequently he agreed to sell his house to R. Before the sale, the
sell his house to R. Before the sale, the house was destroyed by fire and
house was destroyed by fire and P receivedP received his value from the insurance company. P then his value from the insurance company. P then received the price from R as per the contract received the price from R as per the contract of sale. Held , the insurance company could of sale. Held , the insurance company could recover from P the money they had paid.
3. Insurable Interest :-It is 3. Insurable Interest :-It is subject matter of subject matter of
insurance contract and its absence renders insurance contract and its absence renders the contract void and without it there is no the contract void and without it there is no sanction of law and renders the contract void sanction of law and renders the contract void and hence unenforceable
and hence unenforceable
It is insurable interest that distinguishesIt is insurable interest that distinguishes
insurance from gambling insurance from gambling
It should exist both at time It should exist both at time of proposal andof proposal and
at the time of claims at the time of claims
It can be acquired by It can be acquired by ownership ,legalownership ,legal
possession custody of p
possession custody of property ,husband androperty ,husband and wife have insurable interest in
4. SUBROGATION:-Indemnity is a fundamental4. SUBROGATION:-Indemnity is a fundamental
principle of insurance law, and the principle principle of insurance law, and the principle of Subrogation is a corollary of this principle of Subrogation is a corollary of this principle
The most common form of
The most common form of subrogation issubrogation is when an insurance company pays a claim when an insurance company pays a claim
caused by the negligence of another. Thecaused by the negligence of another. The
doctrine of subrogation confers two specific doctrine of subrogation confers two specific rights on the insurer.
rights on the insurer.
1. the insurer is entitled to all the remedies 1. the insurer is entitled to all the remedies which the insured has against the third party which the insured has against the third party
2., the insurer is entitled to the benefits2., the insurer is entitled to the benefits
received by the assured f
5.Proximate Cause5.Proximate Cause
A loss is due to a cause and that cause whichA loss is due to a cause and that cause which
is
is dominant dominant is is proximate proximate causecause
This is a Latin term means neThis is a Latin term means nearest orarest or
immediate immediate
The insurer has to make good the loss of theThe insurer has to make good the loss of the
insured
insured that that clearly clearly and and proximately proximately results,results, whether directly or indirectly, from the
whether directly or indirectly, from the event insured against in the policy. The event insured against in the policy. The burden of proof that the loss
burden of proof that the loss occurred onoccurred on account of the proximate cause, lies on
account of the proximate cause, lies on thethe insured.
A ship insured against damage by enemyA ship insured against damage by enemy
action was damaged while passing over a action was damaged while passing over a torpedo. Held the insurance co. was not torpedo. Held the insurance co. was not liable as no enemy action took p
6.CONTRIBUTION6.CONTRIBUTION
If an insured obtains more than one policyIf an insured obtains more than one policy
covering the same risk he
covering the same risk he cannot recover thecannot recover the same loss from more than one source
same loss from more than one source
The insured can not be The insured can not be allowed to gainallowed to gain
profits from indemnity profits from indemnity
It checks that each policy pays only It checks that each policy pays only aa
rateable portion under each separate policy. rateable portion under each separate policy.
The contribution arises when ---1 there The contribution arises when ---1 there are different policies which relate to the
are different policies which relate to the subject-matt