Insurance

Functions of Insurance:

The function of Insurance can be studied into two parts. (1) Primary part (2) Secondary Part.

1. Primary Functions:

• Insurance gives Certainty: Insurance makes sure you will get money if a loss happens. You don’t have to
worry about when or how big the loss will be. Example, The shop owner knows insurance will give him
money if his shop burns.
• Insurance gives Protection: Insurance protects you from losing money if something bad happens (like an
accident, fire, or death). It doesn’t stop bad things from happening but helps you recover financially.
Example, The family doesn’t worry about hospital bills because insurance pays.
• Risk Sharing: Many people pay small amounts (premiums). If someone faces a loss, the money collected is
used to help them. So, everyone shares the risk together. Example, Many people pay a little, and insurance
helps the one who has a problem.

2. Other Functions:

• Prevention of Loss: Insurance supports groups like hospitals, fire services, and safety programs that help
stop bad things from happening. This means fewer losses and lower costs for everyone. Example, Insurance
helps teach safety to stop accidents before they happen.
• It provides capital: Insurance companies invest the money they collect. This money helps businesses grow
and supports the economy. Example, Insurance uses saved money to help build new buildings and
businesses.
• It improves Efficiency: Because people are not worried about losses, they can work better and achieve
more. Example, The factory owner works better because he’s not scared of losing money.
• It helps Economic Growth: Insurance protects people and businesses from big financial problems, which
helps the whole country grow and stay strong. Example, Insurance helps people do business and buy homes,
helping the country grow.

Nature of Insurance:

1. Sharing of Risk: Insurance helps people share financial losses caused by unexpected events like death, fire,
accidents, or theft. Everyone who buys insurance pays a small amount (premium), and the company uses
this money to pay those who face losses.
2. Co-operative Device: Insurance works through the cooperation of many people. All insured people pool
their money, so when someone suffers a loss, there is enough money to help them. No one is forced to buy
insurance—it’s voluntary.

3. Value of Risk: Before selling insurance, companies assess how risky the situation is. Higher risks mean higher
premiums. The premium amount depends on how likely the loss is to happen.
 4. Payment at Contingency: Insurance pays only if the insured event happens. For example, life insurance pays
on death or after a certain period. In property or accident insurance, payment is made only if damage or
accident happens.

5. Amount of Payment: In life insurance, a fixed amount is paid regardless of actual loss. In property or general
insurance, the actual loss must be proved, and payment is based on the loss value.

6. Large Number of Insured Persons: More people buying insurance makes it cheaper for everyone. With many
people sharing the risk, premiums stay low and affordable.

7. Insurance is not Gambling: Insurance reduces uncertainty, giving peace of mind. Unlike gambling where you
risk losing money, insurance protects you from financial loss due to unexpected events.

8. Insurance is not Charity: Insurance is a business, not charity. You pay a premium, and in return, the insurer
promises financial help when insured events happen.

Principles of Insurance:

1. Principle of Co-operation
• Insurance works because many people agree to help each other. Everyone pays a small amount
(premium) into a common fund. When someone suffers a loss (like death, accident, or damage),
money from this fund is used to help them. Long ago, people would help each other directly. Today,
insurance companies collect these payments and manage the fund.

2. Principle of Probability
• Insurance companies use math to estimate how likely a loss is to happen. This is called probability.
By studying past events and large groups of people, they can predict how many losses might
happen. This helps them decide how much premium to charge, so there is enough money to pay
for future claims but not too much that it becomes unfair.

Insurance Classification
Insurance can be classified from two perspectives: Business Point of View and Risk Point of View. Here, we focus on
classification from the business point of view.

1. Life Insurance

Life insurance provides coverage for human life. The insurer pays a fixed amount to the insured's family after death
or after a set period. It helps protect families against financial loss due to premature death and supports individuals
during old age when income decreases.

Key Points:
 • Provides financial security to the family after death.

• Acts as a form of savings and investment.

• Offers lump sum payment after maturity or death.

2. General Insurance

General insurance covers property and liability risks. It includes fire, marine, motor, theft, machine, and fidelity
insurances. Fidelity insurance compensates for losses when the insured is responsible for paying a third party.

Key Points:

• Covers non-life assets like property and vehicles.

• Protects against liabilities to third parties.

• Includes different types like fire, marine, and theft insurance.

3. Social Insurance

Social insurance supports weaker sections of society who cannot afford private insurance. It includes pensions,
disability benefits, unemployment benefits, and health coverage. Governments usually provide this type of insurance
as a social responsibility.

Key Points:

• Provides financial support to poor and vulnerable groups.

• Covers health, disability, old-age, and unemployment risks.

• Usually funded and managed by the government.

Risk Point of Views:

A. Property Insurance

Property insurance protects property against risks like fire, marine dangers, theft, and accidents.

(a) Marine Insurance

Covers ships, cargo, and freight from sea dangers like collisions, piracy, and fire.

• Divided into:

o Ocean Marine Insurance: Covers risks at sea.

o Inland Marine Insurance: Covers cargo risks on land during transportation.

(b) Fire Insurance

Covers losses from fire and related risks like war, riots, and turmoil.
(c) Miscellaneous Insurance

Covers various properties like machines, automobiles, furniture, and valuables against accidents, theft, or
disappearance.

B. Liability Insurance

Covers compensation to others for property damage, injury, or death caused by the insured.

• Examples include fidelity insurance, automobile insurance, and machine insurance.

C. Other Forms of General Insurance

Includes special insurances like export credit insurance and state employee insurance, which pay in case of certain
events.

D. Personal Insurance

Covers human life losses due to death, accident, or illness.

• Includes life insurance, personal accident insurance, and health insurance.

E. Guarantee Insurance

Covers losses from dishonesty, disloyalty, or failure of a second party in a contract (e.g., if an importer fails to pay for
goods).

Role and Important of Insurance:

Uses to an Individual:
1. Insurance Provides Security and Safety

Insurance protects individuals and businesses from financial loss due to unforeseen events like accidents, illness, or
disasters.
Example: Fire insurance compensates a shopkeeper if his shop is destroyed by fire.

2. Insurance Affords Peace of Mind

Knowing that insurance will cover losses reduces stress and worry about future uncertainties.
Example: A person with health insurance feels relaxed knowing hospital bills will be covered during illness.

3. Insurance Protects Mortgage Property

Insurance secures properties bought on loans; lenders are assured of repayment even if damage occurs.
Example: Home loan providers often require home insurance to protect against property loss due to disasters.

4. Insurance Eliminates Dependency

Insurance provides financial support, reducing dependence on relatives or government help during crises.
Example: After the sudden death of a family’s breadwinner, life insurance supports the family’s living expenses.

5. Life Insurance Encourages Saving

Life insurance requires regular premium payments, which promotes disciplined saving habits.
Example: A person paying life insurance premiums saves regularly, building a financial cushion for the future.

6. Life Insurance Provides Profitable Investment

Many life insurance policies offer returns with bonuses, combining protection with wealth creation.
Example: Endowment policies pay a lump sum with interest, benefiting policyholders at maturity.

7. Life Insurance Fulfills the Need of a Person

Life insurance helps meet various financial needs like children’s education, marriage, or retirement.
Example: A parent buys a life insurance policy to fund their child’s future education expenses.

Uses to Business:
1. Uncertainty of Business Losses is Reduced

Insurance reduces the financial uncertainty caused by unexpected business losses like fire, theft, or accidents.
Example: A factory owner with fire insurance gets compensation if machinery is damaged in a fire.

2. Business Efficiency is Increased with Insurance

With insurance protection, businesses can focus on growth and productivity without fear of potential losses.
Example: A transport company works confidently knowing its vehicles are insured against accidents.

3. Key Man Indemnification

Insurance covers financial loss due to the death or disability of a key employee whose skills are vital to the business.
Example: A software company insures its top developer, ensuring funds to hire a replacement if needed.

4. Enhancement of Credit

Insured businesses are more creditworthy since lenders know risks are covered and repayment is safer.
Example: A business with insured inventory easily gets a bank loan, as losses from theft or damage are covered.

5. Business Continuation
Insurance provides financial support to continue business operations even after major losses or disruptions.
Example: After a storm damages a warehouse, insurance helps a retailer quickly rebuild and resume sales.

6. Welfare of Employees

Businesses offer insurance benefits to employees, improving job security, satisfaction, and loyalty.
Example: A company offering health and life insurance to workers keeps employees motivated and loyal.

Uses of Society
1. Wealth of the Society is Protected

Insurance protects the wealth of individuals and businesses from being wiped out due to unexpected losses.
Example: After a flood damages homes, insurance compensates homeowners, preserving their wealth.

2. Economic Growth of the Country

By reducing risks, insurance encourages investment and business expansion, contributing to overall economic
growth.
Example: Businesses invest in new projects confidently because their assets are insured against potential losses.

3. Reduction in Inflation

Insurance helps control inflation by reducing sudden financial demands on government and individuals after
disasters.
Example: After a major earthquake, insured property owners receive payouts, reducing the need for government
financial aid that could fuel inflation.

Difference between Risk and Uncertainty:

Point Name Risk Uncertainty

Known outcomes with known Unknown outcomes with unknown
1. Definition
probability. probability.
Probabilities can be estimated or
2. Knowledge of Probability Probabilities cannot be estimated.
calculated.
Future events are somewhat Future events are completely
3. Predictability
predictable. unpredictable.
4. Measurement Measurable using statistics or data. Not measurable by any calculation.
Fire accident risk (probability Sudden political war (probability
5. Example
known). unknown).
6. Decision-Making Easier with available data. Difficult due to absence of data.
Partial or complete information
7. Nature of Information No reliable information available.
available.
Can be insured (since risk can be Cannot be insured (since
8. Insurability
calculated). uncertainty can't be calculated).
Elements of Insurance:

1. Agreement (Offer and Acceptance)

A contract begins when one party offers, and the other accepts the offer without changes.
Example: A person applies for life insurance (offer), and the company accepts it (acceptance).

2. Legal Consideration

Both parties must exchange something valuable; in insurance, the insured pays the premium and the insurer
promises compensation.
Example: Paying a premium is the insured's consideration; the insurer's consideration is the promise to pay at loss.

3. Competent to Make Contract

Both parties must be legally capable—adult, of sound mind, and not barred by law.
Example: A 30-year-old healthy man can buy insurance, but a minor cannot.

4. Free Consent

Consent must be given freely, not forced by coercion, fraud, misrepresentation, undue influence, or mistake.
Example: If someone is forced to sign an insurance contract under threat, it’s not valid consent.

5. Legal Object

The contract’s purpose must be lawful, not against law, morality, or public policy.
Example: Insurance for smuggling goods is illegal and thus void.

Insurable Interest
For any insurance contract to be valid, the person buying the insurance (the policyholder) must have an insurable interest in what
is being insured. This means:

1. There must be something to insure — like a person’s life, property, goods, or legal responsibility.

2. Monetary connection — the policyholder must have a financial relationship with the thing being insured. For example,
you can insure your own house because you would lose money if it were damaged.

3. Legal relationship — the relationship between the policyholder and the subject must be lawful. You can’t insure
something you have no legal right over.

4. Financial impact — the policyholder should benefit financially if the insured thing stays safe and would suffer financially
if it is damaged or lost.

Examples:

• In life insurance: the subject is a person’s life.

• In property insurance: the subject is buildings or goods.

• In liability insurance: the subject is legal responsibility.

The key point is: the loss must be financial, not just emotional or sentimental. You cannot insure something just because you
hope to gain from it, or because you are emotionally attached — only a financial loss count.
Utmost Good Faith
In insurance, both the insured (the person buying insurance) and the insurer (the insurance company) must act with utmost good
faith. This means:

• Both sides must fully and honestly disclose all important (material) facts when making the insurance contract.

• There should be no lying, hiding information, or giving false details.

• Unlike normal business deals (where "buyer beware" applies), in insurance, both sides share responsibility to tell the
truth.

What is a Material Fact?

A material fact is any fact that could influence the insurer’s decision about:

• Accepting the risk.

• Deciding the terms and premium of the policy.

Examples:

• In life insurance: age, health, job, lifestyle, income.

• In property insurance: location, design, ownership, use of property.

Full and True Disclosure

• All material facts must be shared exactly as they are.

• No half-truths, silence, mistakes, or false information.

• Both parties have this duty, but usually the insured knows more about the subject and must be extra careful to share
all details.

Facts the Insured Does Not Need to Disclose

There are some facts that the insured does not need to mention:

1. Facts that reduce the risk.

2. Facts that are public knowledge.

3. Facts that can be understood from the information already shared.

4. Facts the insurer has waived (given up the right to ask for).

5. Facts covered in the policy conditions.

Principle of Indemnity:
The principle of indemnity means that after a loss, the insurer will pay enough money to bring the insured back to the same
financial position they were in before the loss — no more, no less.

This principle applies to most insurance types like:

• Property insurance

• Fire insurance

• Marine insurance
Note: It does not fully apply to personal insurances (like life or health insurance), because it's hard to calculate the exact
financial loss.

Main Points:

1. No Profit from Insurance:

The insured cannot make a profit from their insurance claim — only the actual financial loss will be paid.

2. Helps Prevent Over-Insurance:

Without this rule, people might insure for higher amounts and then intentionally cause damage to profit. The principle
of indemnity stops this by paying only actual losses.

3. Prevents Anti-Social Behavior:

If people could profit from destruction, they might be tempted to destroy their own property. This rule prevents such
behavior.

4. Keeps Premiums Low:

If insurers paid more than actual losses, premiums would increase. This would discourage people from buying
insurance and may encourage fraud.

Conditions for Applying Indemnity:

1. The insured must prove the actual financial loss at the time of the incident.

2. Payment cannot exceed the insured amount.

3. If the insured receives more than the actual loss, the extra amount must be returned to the insurer.

4. If a third party pays compensation after the insurer has paid, the insurer has the right to recover that amount.

5. Personal insurance (like life insurance) is not subject to this principle as losses there can't be easily measured in
money.

Doctrine of Subrogation
The doctrine of subrogation gives the insurer the right to take over the legal rights of the insured after paying a claim. If a third
party is responsible for the loss, the insurer can recover the amount from that third party after paying the insured.

Essentials of Doctrine of Subrogation

(i) Corollary to the Principle of Indemnity

• Subrogation supports the principle of indemnity.

• Since indemnity allows only compensation for actual loss, if any value or right is left after loss, it belongs to the insurer.

• This prevents the insured from getting more than the actual loss.

(ii) Subrogation is the Substitution

• After paying the claim, the insurer takes over (substitutes) the rights of the insured.

• The insurer now has the right to claim from the third party who caused the damage.

(iii) Subrogation only up to the amount of payment

• The insurer can recover only up to the amount it paid to the insured.

• If the insurer recovers more than it paid, the extra amount belongs to the insured (after deducting expenses).
(iv) The Subrogation may be applied before Payment

• If the insured gets some money from a third party before receiving full payment from the insurer, the insurer only pays
the remaining balance.

(v) Personal Insurance

• Subrogation does not apply to personal insurance (like life or health insurance) because these are not contracts of
indemnity.

• For example, if a person dies due to someone else’s fault, the dependents can collect both the insurance amount and
compensation from the responsible party.

Warranties in Insurance
Warranties are promises or conditions in an insurance contract that the insured agrees to follow. They are important because the
insurer depends on these warranties to calculate the risk.

According to Marine Insurance Act:

A warranty is a promise by the insured that:

• Something will or will not be done.

• Some conditions will be met.

• A particular state of facts exists or does not exist.

Types of Warranties:

1. Express Warranties:

o Clearly written in the insurance policy.

2. Implied Warranties:

o Not written in the policy but are understood to exist by law or custom.

3. Affirmative Warranties:

o Statements that confirm certain facts are true at the time of signing the contract (usually answers to
questions).

4. Promissory Warranties:

o Promises that certain actions will or will not happen during the period of insurance.

Proximate Cause
The rule is:
“Look at the nearest (immediate) cause, not the distant one.”
(Legal maxim: causa proxima non remota spectatur)

In insurance, the proximate cause means the main, direct, and effective cause of the loss. The insurer checks this cause to
decide whether to pay the claim.

Key Points:

1. Real Cause Must Be Found:

o The insurer must find the real, main cause of the loss, not just any distant or indirect cause.
 o If this main cause is covered by insurance, the insurer pays; if not, they don’t pay.

2. Not to Avoid Investigation:

o Proximate cause is not an excuse to avoid carefully investigating the true cause.

3. Definition of Proximate Cause:

o It is the active, efficient cause that starts a chain of events leading directly to the loss, without any new,
independent force interfering.

4. Sometimes Multiple Causes Exist:

o In some situations, many events may contribute to the loss.

o The insurer still needs to find which cause is the nearest and effective one.

Example:

• A fire caused by lightning destroys a house.

• Lightning is the proximate cause.

• If fire damage is covered under the policy, the insurer will pay.

Assignment to transfer of Interest

You can freely transfer marine and life insurance policies to others, even if the new person doesn’t have an interest. But for fire
and accident insurance, you need the insurer’s permission to transfer the policy, and you must still own the insured property. If
you lose interest, the policy becomes invalid. Fire insurance assignments without consent are treated as new contracts.

Return of Premium:
Sometimes, you can get your insurance money back if certain things happen. For example, if the risk is lower or the event you
insured against doesn’t happen. You can also get money back if you cancel the policy early or didn’t use all of it. If you have two
insurance policies for the same thing, you might get some money back, unless you already made a claim or did it on purpose.

Insurance V/S Gambling

Aspect Insurance Gambling

Nature of Risk Transfers existing risk to insurer Creates new risk for the gambler
Not required — no real interest
Insurable Interest Required — must have financial loss
needed
Purpose To protect against loss To win money by betting or chance
Outcome Compensation for actual loss Winner gains, loser loses
Legal Status Legal and regulated Often illegal or restricted
Risk is shared between insured and
Risk Sharing Risk is borne by the gambler only
insurer
 Agreement based on chance or
Contract Nature Contract of utmost good faith
betting
Can lead to addiction and financial
Social Impact Encourages economic stability
loss

Fire Insurance V/S Life Insurance

Aspect Fire Insurance Life Insurance

Type of Contract Indemnity Personal

Occurrence of Event Sudden, accidental Certain, uncertain

Classification of Risk Property risk Human life risk

Period of Insurance Short-term Long-term

Protection of Investment Yes No

Insurable Interest Must exist at loss Must exist at inception

Moral Hazard High risk due to destruction Lower risk, life risk

Claim Payment Actual loss Fixed sum or amount assured

 Life Insurance
What is Life Insurance?

➢ Life insurance is a financial agreement where an insurer pays a lump sum to your beneficiaries if you die, in exchange
for regular premium payments.
Example:
If you buy a life insurance policy worth $100,000 and pay monthly premiums, your family will receive $100,000 if you
pass away during the policy term.

INSURABLE INTEREST
Insurable interest means a financial interest in someone’s life. The policyholder must suffer a monetary loss if the insured dies
or gain from their survival. Mere emotions or moral support do not count. It is required for a valid life insurance contract.

INSURABLE INTEREST IN LIFE INSURANCE

It is of two types: (Must show book diagram page 36)

1. In own life – always allowed, no proof needed.

2. In others' life – divided into:

a) Where proof is not required (e.g., spouse, dependent parents/children).
b) Where proof is required (e.g., business partners, debtor-creditor, etc.).

INSURABLE INTEREST IN OWN'S LIFE

➢ Everyone has an unlimited insurable interest in their own life. No proof is needed because death causes personal and
financial loss.

Insurable Interest in Others' Life

This is divided into two parts:

a) Where Proof Is Not Required

Close family relationships like:

• Husband and wife

• Parents and dependent children

These are assumed to have financial dependency, so no proof is needed.

b) Where Proof Is Required

Proof of financial loss or gain is needed, usually in business or extended family situations:

• Creditor–Debtor: A creditor has insurable interest in the debtor’s life up to the loan amount, interest, and premium
paid.

• Trustee–Beneficiary: A trustee can insure a beneficiary’s life due to financial responsibility.

 • Surety–Principal Debtor: A surety can insure the debtor’s life because they will have to repay the loan if the debtor
dies.

• Partners in Business: Each partner has interest in the lives of other partners, as the firm may suffer loss upon a
partner’s death.

• Employer–Key Employee: An employer can insure a key employee whose loss would affect business profit.

• Insurer–Insured: An insurer has an interest up to the amount of policy they issue and may reinsure to cover their own
risk.

3. Family Relationship

Insurable interest in family exists only if there is financial dependence, not just blood relation or affection. For example, a father
can insure his son's life only if he is financially dependent on the son. Legal obligations (e.g., funeral expenses) can justify
limited insurable interest.

General Rules of Insurable Interest in Life Insurance

1. Time of Interest:
Must exist at the time of proposal, not necessarily at the time of death.

2. Financial Relationship:
There must be a clear financial link between the policyholder and the insured.

3. Valuable Interest:
The interest must have a measurable monetary value (e.g., business, loan).

4. Legally Valid:
Interest must be legal and not against public policy; consent of the insured is essential.

5. Legal Responsibility:
If the proposer has a legal duty (like funeral costs), they can insure for that amount.

6. Definite Interest:
The interest must be certain and not based on hope or assumption.

7. Legal Consequence:
Without insurable interest, the insurance contract becomes void and is treated as a wager.

UTMOST GOOD FAITH

Life insurance requires both parties—the proposer and insurer—to be honest and fully share all important facts so the risk can
be correctly assessed.

Material Facts

Important facts like age, health, occupation, habits, income, residence, family history, and insurance plan must be disclosed.
All facts that affect risk should be shared, not just those the proposer thinks are relevant

Duty of Both Parties

Both proposer and insurer must disclose material facts, but the proposer has a greater responsibility since they know their own
details best.
Full and True Disclosure

All material facts must be fully and truthfully disclosed—no hiding, lying, or partial information.

Extent of the Duty

The duty ends once the proposal form is completed truthfully. The proposer cannot later claim ignorance or mistake for
undisclosed facts.

Legal Consequence

• Breach allows the injured party to void the contract.

• Intentional hiding (fraud) makes the contract void from the start.

• Unintentional hiding makes it voidable at the innocent party’s choice.

• If the innocent party accepts premiums after knowing the issue, they lose the right to cancel later.

Indisputability of Policy

Under Section 45 of India’s Insurance Act, after two years, insurers can’t dispute policies for wrong statements unless there was
fraud. Proof of age can still be asked anytime. This protects policyholders from long-term disputes.

PROXIMATE CAUSE
Proximate cause is the main or effective cause that directly leads to the loss. Insurance pays only if the proximate cause is
covered by the policy.

In Life Insurance

The proximate cause principle usually does not apply because the insurer pays the sum assured regardless of the cause of
death—natural or unnatural.

Exceptions Where Proximate Cause Matters

• War Risk:
If war or aviation risks are excluded and death occurs due to war, the insurer only pays the premium or surrender
value, not the full policy amount.

• Suicide:
If suicide happens within one year of policy start, payment is limited to the third party’s interest (if declared at least
one month before suicide).

• Accident Benefit:
In accident policies, proximate cause is crucial because the insurer pays double the amount if death/injury is due to an
accident.
 Selection of Risk
PURPOSE OF SELECTION

1. Decide Acceptance:
To determine if a proposal should be accepted or rejected based on the risk. Example: A person with a serious illness
might be rejected because the risk is too high.

2. Set Premium Rate:

To decide the premium amount based on the risk level—the higher the risk, the higher the premium. Example:
Smokers pay higher premiums than non-smokers because they have higher health risks.

3. Classify Risks:
Since charging different premiums for every individual isn’t practical, risks are grouped (standard or sub-standard) and
premiums set accordingly. Example: People are categorized as “standard” (healthy) or “sub-standard” (higher risk),
with different premium rates for each group.

4. Avoid Discrimination:
To fairly charge different premiums based on risk groups, so healthy people don’t pay the same as those in hazardous
jobs. Example: A construction worker pays more than an office worker due to the hazardous nature of the job.

5. Prevent Adverse Selection:

To stop high-risk individuals from getting insurance cheaply, which would cause losses for insurers and higher
premiums for honest insured people. Standard risks pay standard premiums; sub-standard risks pay extra to keep the
system fair. Example: Someone with a serious disease trying to get insurance at normal rates is either charged extra or
declined, protecting honest policyholders from higher costs.

FACTORS AFFECTING RISK

In life insurance, risks are assessed primarily based on factors affecting mortality (death rate) and the insured's behavior, health,
and lifestyle. These help determine whether to accept the proposal and what premium to charge.

1. Age

Older individuals have higher mortality risk.

Example: A 60-year-old pays a higher premium than a 30-year-old.

2. Build (Physique)

Weight, height, and chest measurements help identify potential health issues.
Example: Severe obesity at age 45 may lead to higher premium or rejection.

3. Physical Condition

Organ health (heart, lungs, kidneys, etc.) impacts mortality.

Example: A person with a weak heart may be asked to pay extra or denied.

4. Personal History

Past health, habits, jobs, and insurance record are considered.

Example: A former smoker or someone treated for cancer recently may face higher scrutiny.
5. Family History

Genetic diseases or family longevity affects risk.

Example: A person whose parents died young from heart disease may be seen as high risk.

6. Occupation

Risky or unhealthy jobs increase mortality chances.

Example: A miner or chemical factory worker is more exposed to health hazards.

7. Residence

Living in unhealthy, polluted, or unstable areas increases risk.

Example: A person living in a war zone or area with poor healthcare may be charged more.

8. Present Habits

Smoking, drinking, or drug use increases mortality.

Example: A chain-smoker will be charged a higher premium.

9. Morals

Dishonest or unethical lifestyles indicate moral hazard (intent to misuse insurance).

Example: A person with a history of fraud or financial trouble may be denied.

10. Race and Nationality

Mortality varies across racial and national groups due to environment and genetics.
Example: People in areas with poor sanitation or healthcare may face higher mortality.

11. Sex

Women generally have higher mortality due to maternity risks and limited access to care in some regions.
Example: Female proposals may be more carefully reviewed in certain contexts.

12. Economic Status

Higher income means better healthcare and awareness, lowering risk.

Example: A financially stable businessman may be seen as low risk compared to someone in poverty.

13. Defence Services

Jobs like military or air force carry war and accident risks.
Example: A fighter pilot might be charged extra premium or face exclusions.

14. Plan of Insurance

Some plans pose higher risk for insurers (e.g., term plans with high payouts), so only healthy lives are eligible.
Example: Whole life plans may be more selective in acceptance compared to endowment plans.

SOURCES OF RISK INFORMATION

To assess risk accurately, insurers collect information from multiple sources. No single source is fully reliable, so cross-checking
improves decision-making.
1. Proposal Form

Filled by the proposer and includes personal, financial, and insurance-related information.
Example: Reveals age, income, occupation, insurance history, and health habits.

2. Medical Examiner’s Report

A qualified doctor examines the proposer’s health and submits a detailed medical report.
Example: Includes findings on heart, lungs, nervous system, etc., to detect diseases.

3. Agent’s Report

The insurance agent gives a personal assessment of the proposer’s health, financial condition, and character.
Example: The agent mentions if the proposer appears healthy and is trustworthy.

4. Inspection Report

Done by insurance company staff or third-party investigators, often without the proposer’s knowledge.
Example: Inspector may talk to neighbours or employers to verify proposer’s lifestyle and habits.

5. Private Friends’ Reports

Sometimes, close friends are asked to share insights about the proposer’s habits and behavior.
Example: A friend might confirm if the proposer drinks or smokes regularly.

6. Attending Physician’s Report

The proposer’s family doctor provides a medical history for the proposer and their family.
Example: If the doctor treated the proposer for diabetes, this would be noted.

7. Medical Information Bureau (MIB)

A central medical data agency (mostly in the U.S.) that provides previous medical and insurance details of the proposer.
Example: If the person was rejected earlier due to heart issues, the MIB will record it.

8. Neighbours and Business Associates

Informal but useful source to learn about proposer’s personal and social behavior.
Example: A neighbor may reveal frequent illness or alcohol habits.

9. Commercial Credit Investigation Bureau

Collects financial and social data for assessing business applicants’ creditworthiness.
Example: Reveals unpaid loans or financial instability.

INSURANCE OF LADIES AND MINORS

1. Insurance for Minors

A. Age-based Eligibility:

• Below 15 years:
Only eligible under Children’s Deferred Endowment Assurance and Children’s Anticipated Plans.

• 15 years and above:

Eligible under various plans like Limited Payment Life, Double Endowment, Convertible Whole Life, etc.
 • 16 years (boys only):
Eligible for Progressive Protection Plan.

Example: A 14-year-old girl can be insured only under Children’s Plans, not under regular life assurance plans.

B. Conditions:

• Medical exam required (except where deferment is 10+ years).

• Proposal must be signed by parents or legal guardian.

• Policy vests in minor’s name when they reach majority or on Deferred Date in special plans.

• Policy not assignable before vesting.

2. Insurance for Ladies

A. Risk Evaluation Factors:

• Income source (earned/unearned)

• Education, occupation, marital status, health

• Physical and moral hazards assessed more cautiously

B. Rating Categories:

Category Rating Maximum Sum Assured

1. Woman with earned income 1. Woman with earned income 1. Woman with earned income

2. Woman with unearned income 2. Woman with unearned income 2. Woman with unearned income
(e.g. housewife with property) (e.g. housewife with property) (e.g. housewife with property)

3. Others: Extra rating Varies

Sub-category under Category 3:

• (a) Single Woman:

Up to Rs. 1,00,000 based on family's financial status

• (b) Married Woman:

Up to ¾th of husband’s sum assured, max Rs. 2.5 lakh

• (c) Widows:
Based on insurance need and family status

Example: A working woman can get insurance on the same terms as men. A single woman without income may get coverage
up to Rs. 1 lakh based on her father’s insurance status.

3. Restrictions & Special Clauses for Women

 1. Pregnancy Clause:
First pregnancy clause applies unless extra premium of Rs. 5 per ₹1,000 is paid.

2. Post-Delivery Proposals:
Accepted after 6 months of childbirth. If menstruation hasn't resumed, wait 1 year.

3. Pregnant Women:
Proposals are not accepted.

4. Observing Purdah (full/partial):

Not eligible for insurance.

5. Multiple Miscarriages:
Not eligible.

6. Separated Married Women:

Proposals not accepted if living separately due to husband’s infectious disease or moral risk concerns.

CLASSES OF RISK IN LIFE INSURANCE

Life insurance risks are classified into two major categories:

1. Uninsurable Risks

These are the types of risks that cannot be covered by insurance, usually due to:

• Excessive likelihood of death (e.g., person is terminally ill).

• Lack of reliable information (e.g., unknown or unpredictable risk).

• Violation of insurance principles – allowing such risks would encourage speculation and harm the insurer and other
policyholders.

Example:
A person diagnosed with late-stage cancer applies for life insurance. The insurer may reject the proposal because the risk is too
high and cannot be fairly priced.

2. Insurable Risks

These are the risks that can be accepted by insurers, usually with appropriate premium adjustments. They are categorized into:

(a) Standard Risk

• Represents the average risk.

• Not completely perfect health, but not severely impaired either.

• Premiums are charged at standard (normal) rates.

Example:
A 35-year-old non-smoker with no chronic illness and average health history qualifies as a standard risk.

(b) Sub-Standard Risk

• Higher than standard risk, but still insurable.

• Insured by charging extra premium or applying restrictions (e.g., exclusions, reduced benefits).
 • May include those with mild medical conditions or risky occupations.

Example:
A person with controlled diabetes or a deep-sea diver might be considered sub-standard and charged a higher premium.

(c) Super-Standard Risk (also called Preferred Risk)

• Represents lower-than-average risk.

• Person may be in excellent health, with healthy habits and family history.

• Insurers rarely issue policies with lower-than-standard premiums, as it might imbalance overall pricing.

Example:
A 30-year-old marathon runner, non-smoker, with no family history of illness may qualify as a super-standard risk — though few
insurers offer reduced premiums.

Methods of Risk Classification:

Insurance companies use two main ways to check how risky a person is before giving life insurance: Judgment Method and
Numerical Rating System.

1. Judgment Method

This method depends on the personal opinion of experienced staff like doctors or underwriters. They use their knowledge to
decide if a person should get insurance. It is quick and useful for simple cases but can sometimes be unfair or wrong if the
person makes a mistake.

2. Numerical Rating System

This method gives scores to each part of a person’s life, like health, job, habits, and family history. A normal (standard) person
has a score of 100. Bad things (like being overweight) add points (+), and good things (like a healthy family) take points away (−).
The final score tells if the person is normal, risky, or better than normal.

Example

If someone is overweight (+60), has a bad body shape (+10), good family health (−15), and chooses a safe plan (−10), their total
score is 145. That means they are a sub-standard risk and must pay more for insurance.

How Insurance Premiums Are Calculated

There are two ways to calculate insurance premiums:

1. Value of Service Method

o This method charges premiums based on how useful insurance is to a person.

o But everyone values insurance differently, so it’s hard to apply fairly.

o It’s not practical because people who need insurance the most (like large families or the poor) would have to
pay more, which isn’t fair or good for business.

o Conclusion: This method is not used in insurance.

 2. Cost of Service Method

o This is the actual method used.

o The premium is based on how much it costs the insurance company to provide the policy.

o The main costs are:

▪ Claims: Money paid when something happens.

▪ Administration: Office and management costs (fixed and recurring).

o The basic premium to cover claims is called the net premium.

o To cover other costs, an extra amount called loading is added.

o The final premium paid by the customer is called the gross premium or office premium.

o Insurance works on a "no profit, no loss" principle – it aims to cover costs, not make large profits.

MORTALITY TABLE

Definition

A mortality table is data showing past death rates, used to predict future mortality. It represents how a group of people of the
same age die over time, until all are dead.

Features

1. Observation of Generation
People of the same age are selected and observed until death. No new entries or exits.

2. Start from a point

The study starts at a certain age and continues until all have died.

3. Yearly Estimation
Death and survival rates are recorded year by year.

4. Mortality and Survival Rates

Each year, the number of people alive is calculated by subtracting deaths from the previous year's survivors. The table
ends when no one is left.

CONSTRUCTION OF MORTALITY TABLE

• A large group of people is selected at an attained age (e.g., 20 years = ages between 19 years 6 months and 20 years 5
months 29 days).

• Deaths are recorded each year until all are dead.

• Each year:
Living at start of year – Deaths during year = Living at start of next year

Criticism

1. Hard to gather a large, same-age group.

2. Requires long observation (maybe 100 years).

3. Expensive and time-consuming.

 4. By the time it’s finished, data may be outdated.

CONSTRUCTION OF DEATH RATE ON YEARLY BASIS

• Instead of tracking one group for life, data is collected year by year for each age.

• Death Rate =
Number of deaths during the year ÷ Number of living at the beginning of the year

• This method is easier and fits with annual premium calculations.

SOURCES OF MORTALITY INFORMATION

1. Population Statistics

o Based on census and municipal records.

o Shows deaths at each age.

o Criticism:

▪ Age may be inaccurate or unknown.

▪ Some deaths go unrecorded.

▪ Data is outdated (updated every 10 years).

▪ No separation of insurable and non-insurable lives.

2. Records of Insurers

o More reliable and accurate.

o All deaths and ages are correctly recorded.

o Data from many insurers over 10 years is used (excluding abnormal years).

o Separate tables for:

▪ Standard/Sub-standard lives

▪ Male/Female

▪ Other groups (occupation, area, etc.)

o Only lives exposed to risk (not withdrawn) are counted.

Types of Mortality Tables

1. Aggregate Table

o Combines all insured persons regardless of when they took their policy.

o Rates are between select and ultimate.

o Used for group insurance and non-medical policies.

2. Select Table

o Based on both age and time since policy started.

 o At policy start, people are medically selected, so early mortality is lower.

o Over time, the selection effect fades (after about 5 years), and mortality increases.

3. Ultimate Table (not explained in full text, but usually refers to)

o A table used after the selection effect has worn off.

o Applies to people insured for a longer period.

Nature of Marine Insurance Contract

What is Hull Insurance?

Hull Insurance is a type of insurance that covers physical damage to a ship or aircraft.

Example:
If a cargo ship hits a rock and gets damaged, hull insurance pays for the repair costs.

Subdivision of Hull Insurance

Hull Insurance is divided based on types of vessels, such as:

• (a) General Cargo Vessels (b) Dry Bulk Carriers (c) Liquid Bulk Carriers (d) Passenger Vessels (e) Other Vessels

Further subdivision:

• Ocean-going vessels: Larger, long-distance ships (5,000 to 15,000 GRT)

• Coastal tonnage: Smaller ships used for local/bulk cargo – face less sea strain

General Cargo Vessels

• Includes container ships, LASH (Lighter Aboard Ship), Ro-Ro (Roll-on/Roll-off), Reefer ships (refrigerated).

• Liners: Follow fixed schedules, routes, and maintain high standards. Expensive but reliable.

• Tramps: No fixed route or schedule. Carry bulk cargo as and when available. Often seasonal and on charter.

Dry Bulk Carriers

• Specially built for dry cargo like coal, grain, bauxite, phosphate.

• Size: Thousands of GRT (coastal) to 70,000 GRT (ocean-going).

• Features: One large deck, wide hatches, and sloping tanks for cargo stability.

• Important for insurance: Cargo type, ship stability, and route.

Liquid Bulk Carriers

• Also known as tankers, made to carry liquid cargo (oil, chemicals).

• Risks:

o 1. Liquid movement causes more damage 2. Corrosion shortens ship life

3.Fire/explosion danger is high

 • Safety: Needs Gas-Free Certificate before repair.

• Types:

o 1. VLCC (Very Large Crude Carrier) 2. ULCC (Ultra Large Crude Carrier)

• Other examples:

o LASH & Sea Bee: Carry floating containers/barges

o RO-RO: Carry wheeled cargo like trailers without cranes

Passenger Vessels

• Cruise ships or passenger liners

• Sail to scenic but dangerous areas (e.g., Arctic, rocky coasts)

• Equipped with modern navigation systems

Fishing Vessels

• Made of steel or fiberglass (GRP)

• Operate in various waters (calm to stormy seas)

• Can be:

o Classed: Certified by recognized classification societies

o Unclassed: Inspected separately

• Insurance factors: Type, age, area, structure, class, and operations

• Special tariffs apply in India

Offshore Oil Vessels

• Used for oil exploration and production at sea

• Cover includes:

o 1. Transport of equipment 2. Operation risks at mid-sea drilling sites

• Types:

o Jack-up units: Floating platforms that raise/lower for drilling

o Semi-submersible platforms: Deeper water drilling, multiple anchors

o Ship-shape units: Modified ships with drilling setup

o Fixed platforms: Built on legs, stationary structure

Hull and Machinery Insurance

• Covers:

Ship’s hull, machinery, equipment, and stores Losses: Partial, total, general average, salvage, sue & labour
Collision liability toward other vessels

• Does not cover cargo

Hull Underwriting

To assess the risk, the underwriter needs details like:

1. Type of vessel 2. Construction, builder, age, tonnage, dimensions 3.Equipment, propulsion, engines 4. Fire
safety, classification society 5. Compliance with Merchant Shipping Act 6. Warranties, navigation details, and
hazard assessment (physical and moral)

CARGO INSURANCE

• Cargo insurance covers goods in transit under risk or floating policies.

• Cargo can include goods, wares, merchandise, or property.

• As per ICC clauses (A), (B), (C) – coverage starts when goods leave the warehouse and ends at delivery.

Risks Covered

Cargo insurance covers loss or damage due to:

• War, civil war, rebellion, revolution

• Seizure, arrest, restraint, detention

• Strikes, riots, civil commotion

• General average and salvage charges

Trade Coverage

• Covers general cargo like cocoa, coffee, cotton, oil, hides, metals, sugar, tea, etc.

• Follows Institute of London Underwriters (ILU) standard policies.

• Special insurance available for:

o Coal, jute, rubber, tankers, bulk oil, frozen goods, etc.

All Risks Clause

Covers inland transit risks such as:

• Fire, lightning, explosion

• Riot, strike, malicious damage

• Road/rail vehicle impact

• Storm, cyclone, flood, inundation

• Earthquake, burglary

• Accidental physical loss or damage

Special Declaration Policy (SDP)

• A type of floating policy.

• For businesses with high turnover and frequent dispatches.

• Covers goods moved anywhere in the country via rail, road, or waterways.

Freight Insurance

Freight insurance protects the shipowner’s financial interest in the payment for carrying cargo or chartering the vessel.

Freight Insurance - Key Points

• Freight is payment for carrying cargo or using a chartered ship.

• Prepaid freight (paid in advance) is cargo owner's risk and covered under cargo insurance.

• Freight payable on delivery is shipowner’s risk and can be insured by shipowner.

• Shipowners insure freight for 12 months (Institute Time Clauses) or by voyage (Institute Voyage Clauses).

• Time charter hire stops if ship is non-operational for 24+ hours; risk lies with shipowner.

• Loss of freight occurs only if freight is payable on delivery and ship/cargo is lost or damaged.

• Prepaid freight is not refundable and included in cargo insurance, not at shipowner’s risk.

What is Marine Liability Insurance? Explain Third Party Liability under it.

Marine Liability Insurance is a type of marine insurance that covers legal liability arising from hazards such as collision (running
down) and expenses due to non-compliance with rules, provided there is no intention to deceive. It includes both ocean and
inland perils clearly defined in the policy. The insurer is liable only for the insured perils.

Third Party Liability:

This refers to the insurer's obligation to indemnify the insured in case of:

1. Accidental loss or damage to third-party property.

2. Fatal or non-fatal injuries to third parties due to erection or ship operations.

Liability arises when:

• Negligence is proven, or

• Liability is assumed under a contract.

To claim damages in tort, the plaintiff must prove negligence by the insured. Negligence means doing something incorrectly or
failing to do what should have been done.

The insurance does not cover liabilities that arise only from contracts, unless there is actionable fault or tort committed by the
insured vessel.
 Explain the forms of liability under marine insurance.

Marine insurance includes two forms of liability in case of vessel collisions:

1. Cross Liability:

• Applied when both vessels are at fault.

• Each shipowner pays a share of the other’s damage based on the level of fault.

• This form is used unless liability is limited by law.

2. Single Liability:

• Applied when one or both vessels limit their liability under law.

• The court assesses the degree of fault for each vessel.

• The party more at fault pays only the difference in damages between the two.

This ensures fair compensation based on responsibility while respecting legal limitations.

Briefly explain the important documents used in Marine Insurance.

Marine insurance involves various documents necessary for underwriting and claims settlement. Key documents include:

1. Open Cover:

• It is an agreement (not a policy) under which the insurer agrees to insure all shipments declared by the insured.

• Premium is paid for each declaration, and insurance certificates are issued.

• It provides automatic and continuous coverage and avoids the need to insure each shipment separately.

• The valuation includes cost + freight + insurance + 10%.

2. Marine Policy:

• As per Section 24 of the Marine Insurance Act, 1963, the marine policy is the legal proof of the insurance contract.

• It must include: name of assured, subject-matter, risk covered, voyage details, sum insured, and name of insurers.

3. Policy Schedule:

• It is part of the marine policy and includes:

o Policy number, date, place

o Name of assured and bank (if financed)

o Vessel name

o Voyage description

o Risks covered/excluded, packing, and duration

4. Surveyor’s Note:
 • Contains contact details of the surveyor and claims office.

• Used in case of damaged goods to initiate claim processing.

What are the essential elements of a Marine Insurance Contract?

The essential elements (fundamental principles) of a marine insurance contract are:

1. Features of General Contract 2. Insurable Interest 3. Utmost Good Faith 4. Doctrine of Indemnity

5. Subrogation 6. Warranties 7. Proximate Cause 8. Return of Premium

9. Assignment and Nomination of the Policy

Features of a general contract in Marine Insurance.

The main features of a general contract in marine insurance are:

1. Proposal:

o A formal proposal form is not used.

o Instead, a broker prepares an original slip with essential details and submits it on behalf of the proposer.

2. Acceptance:

o The slip is presented to underwriters (e.g., at Lloyd’s).

o The underwriter initials the slip to show acceptance, but the contract is not legally enforceable until the
policy is issued.

3. Consideration:

o The premium is paid at the time of the agreement and serves as consideration for the contract.

4. Issue of Policy:

o The broker sends a cover note with terms and conditions, which is just a memorandum.

o A stamped and signed policy is later issued, serving as the legal evidence of the insurance contract.

o Courts may rectify the policy to reflect the original intention as per the slip.

Subrogation in Marine Insurance.

The Doctrine of Subrogation (Section 79) ensures the insured does not profit from a loss.

1. After paying the claim, the insurer gets all rights of the insured against third parties.

2. Subrogation applies only after payment is made in marine insurance.

3. The insurer cannot sue in his own name and needs the insured’s cooperation.

4. It is different from abandonment, where the insurer takes over the property.

5. The insurer can deduct any recovery already made by the insured from the claim.

6. Section 80 supports contribution between insurers in case of double insurance.

Explain the concept of Warranties in Marine Insurance.

A warranty in marine insurance is a condition where the insured undertakes to do or not to do something, or confirms a
particular fact. If a warranty is breached, the contract becomes void, even if the breach is not material.

Types of Warranties:

1. Express Warranty – Clearly stated in the policy.

2. Implied Warranty – Not mentioned but legally understood and binding.

Further Classification of Warranties:

• Affirmative Warranty: A promise that certain facts or conditions exist or do not exist at the time of the
contract.
• Promissory Warranty: A promise that the insured will or will not do something in the future during the
policy period.

Important Implied Warranties:

1. Seaworthiness of Ship – Ship must be fit and capable of the voyage at the start or at each stage.

2. Legality of Venture – The insured activity must be lawful.

3. Non-Deviation – Ship must follow the agreed or usual route.

4. No Delay in Voyage – Voyage must start and proceed without unreasonable delay.

5. No Change in Voyage – Destination cannot be changed once the risk begins.

Exceptions (to Deviation/Delay):

1. Permitted by warranty in policy.

2. Beyond control of master or crew.

3. For safety of ship, cargo, or life.

4. Caused by barratry (wrongful act by ship’s crew or master).

Concept of Proximate Cause in Marine Insurance.

According to Section 55(1) of the Marine Insurance Act, the insurer is liable only for losses proximately caused by an insured
peril.

Key Points:

1. Proximate Cause is the direct, dominant, and effective cause of the loss—not necessarily the nearest in time, but in
effect.

2. The insurer is not liable for losses caused by:

o Misconduct of the assured

o Delay, even if caused by an insured peril

o Ordinary wear and tear, leakage, breakage, inherent vice, rats or vermin, or non-maritime injuries to
machinery
3. Dover's Rule: The cause must be judged with good sense, focusing on the real cause intended under the contract—
not remote or indirect causes.

4. If the proximate cause is an insured peril, the insurer is liable for the loss.