Legal Foundation of

Insurance
Insurance contracts
An insurance contract is a "contract under which one party (the insurer) accepts
significant insurance risk from another party (the policyholder) by agreeing to
compensate the policyholder if a specified uncertain future event (the insured event)
adversely affects the policyholder.

There are four basic parts to an insurance contract:

• Declaration Page.
• Insuring Agreement.
• Exclusions.
• Conditions.
Types of Insurance
1. General Insurance

Following are some of the types of general insurance available in India:

• Health Insurance
• Motor Insurance
• Home Insurance
• Fire Insurance
• Travel Insurance
Types of Insurance
2. Life Insurance
There are various types of life insurance. Following are the most common types of life insurance plans
available in India:
• Term Insurance: Gives life coverage for a specific time period.
• Whole life insurance: Offer life cover for the whole life of an individual
• Endowment policy: a portion of premiums go toward the death benefit, while the remaining is
invested by the insurer.
• Money back Policy: a certain percentage of the sum assured is paid to the insured in intervals
throughout the term as survival benefit.
• Pension Plans: Also called retirement plans are a fusion of insurance and investment. A portion
from the premiums is directed towards retirement corpus, which is paid as a lump-sum or monthly
payment after the retirement of the insured.
• Child Plans: Provides financial aid for children of the policyholders throughout their lives.
• ULIPS – Unit Linked Insurance Plans: same as endowment plans, a part of premiums go toward
the death benefit while the remaining goes toward mutual fund investments.
Principles of Insurance
The concept of insurance is risk distribution among a group of people. Hence, cooperation
becomes the basic principle of insurance.

To ensure the proper functioning of an insurance contract, the insurer and the insured have to
uphold the 7 principles of Insurances mentioned below:
• Utmost Good Faith
• Proximate Cause
• Insurable Interest
• Indemnity
• Subrogation
• Contribution
• Loss Minimization
Principle of Utmost Good Faith
• The fundamental principle is that both the parties in an insurance contract should act in
good faith towards each other, i.e. they must provide clear and concise information
related to the terms and conditions of the contract.

• Example – Mr. X took a health insurance policy. At the time of taking insurance, he
was a smoker and failed to disclose this fact. Later, he got cancer. In such a situation,
the Insurance company will not be liable to bear the financial burden as Mr. X
concealed important facts.
Principle of Proximate Cause
• This is also called the principle of ‘Causa Proxima’ or the nearest cause. This principle
applies when the loss is the result of two or more causes. The insurance company will
find the nearest cause of loss to the property. If the proximate cause is the one in which
the property is insured, then the company must pay compensation. If it is not a cause
the property is insured against, then no payment will be made by the insured.

• Example –
• Due to fire, a wall of a building was damaged, and the municipal authority ordered it to
be demolished. While demolition the adjoining building was damaged. The owner of
the adjoining building claimed the loss under the fire policy. The court held that fire is
the nearest cause of loss to the adjoining building, and the claim is payable as the
falling of the wall is an inevitable result of the fire.
Principle of Insurable interest
This principle says that the individual (insured) must have an insurable interest in the
subject matter. Insurable interest means that the subject matter for which the individual
enters the insurance contract must provide some financial gain to the insured and also
lead to a financial loss if there is any damage, destruction or loss.

• Example – the owner of a vegetable cart has an insurable interest in the cart because he
is earning money from it. However, if he sells the cart, he will no longer have an
insurable interest in it.
• To claim the amount of insurance, the insured must be the owner of the subject matter
both at the time of entering the contract and at the time of the accident.
Principle of Indemnity
• This principle says that insurance is done only for the coverage of the loss; hence
insured should not make any profit from the insurance contract. In other words, the
insured should be compensated the amount equal to the actual loss and not the amount
exceeding the loss.

• Example – The owner of a commercial building enters an insurance contract to recover

the costs for any loss or damage in future. If the building sustains structural damages
from fire, then the insurer will indemnify the owner for the costs to repair the building
by way of reimbursing the owner for the exact amount spent on repair or by
reconstructing the damaged areas using its own authorized contractors.
Principle of Subrogation
• Subrogation means one party stands in for another. As per this principle, after the
insured, i.e. the individual has been compensated for the incurred loss to him on the
subject matter that was insured, the rights of the ownership of that property goes to the
insurer, i.e. the company.
• Subrogation gives the right to the insurance company to claim the amount of loss from
the third-party responsible for the same.

• Example – If Mr. A gets injured in a road accident, due to reckless driving of a third
party, the company with which Mr. A took the accidental insurance will compensate the
loss occurred to Mr. A and will also sue the third party to recover the money paid as
claim.
Principle of Contribution
Contribution principle applies when the insured takes more than one insurance policy for
the same subject matter. It states the same thing as in the principle of indemnity, i.e. the
insured cannot make a profit by claiming the loss of one subject matter from different
policies or companies.

• Example – A property worth Rs. 5 Lakhs is insured with Company A for Rs. 3 lakhs
and with company B for Rs.1 lakhs. The owner in case of damage to the property for 3
lakhs can claim the full amount from Company A but then he cannot claim any amount
from Company B. Now, Company A can claim the proportional amount reimbursed
value from Company B.
Principle of Loss Minimisation

• This principle says that as an owner, it is obligatory on the part of the insurer to take
necessary steps to minimize the loss to the insured property. The principle does not
allow the owner to be irresponsible or negligent just because the subject matter is
insured.

• Example – If a fire breaks out in your factory, you should take reasonable steps to put
out the fire. You cannot just stand back and allow the fire to burn down the factory
because you know that the insurance company will compensate for it.
Pension health and Group
Insurance
• Group Insurance covers a group of lives under one contract. It can be employer- employee group or
any other homogeneous group formed for purposes other than obtaining insurance.
• In addition to providing group insurance cover, the P&GS Department also offers Fund
management services to the Employer Group through its dedicated Gratuity, Superannuation and
Leave Encashment schemes.
• It provides customized solutions to the customers at a group level. It is also the Annuity Provider
for the employees who are retiring or exiting the company.
• The Department provides customized insurance/ benefit administration schemes specifically
designed as per respective governments – State and Central.
Morbidity Rates and Insurance
• Morbidity rates are also helpful in many sectors of the financial sector.
• For example, insurance companies use morbidity rates to predict the likelihood that an
insured will contract or develop certain diseases. This helps them develop competitively-
priced insurance policies in the industry for health insurance, life insurance, and coverage for
long-term care.

• The ability to accurately estimate morbidity rates for various diseases is helpful for insurers
to set aside sufficient funds to cover benefits and claims for their customers. This data is also
used in part to establish prices for the premiums that the insurance companies charge.

• Other main factors in pricing premiums are mortality rates, operating expenses, investment
returns, and regulations. For example. many insurance companies base their pricing of group
insurance products on an expected payout of benefits. A company uses its assumptions for
mortality, morbidity, interest, expenses, and persistence to price its products.
Group Insurance
• Group insurance refers to an insurance policy that provides coverage
to a group of people, typically employees of a company, members of
an organization, or members of an association.
• This type of insurance offers several advantages, such as cost-
sharing and broader coverage, compared to individual insurance
policies.
Group Insurance Coverage:
• Health Insurance: One of the most common types of group insurance
is health insurance, which provides coverage for medical expenses,
hospitalization, and other healthcare services.
• Life Insurance: Group life insurance policies offer coverage for the
lives of group members. This coverage often includes a death benefit
paid to beneficiaries in the event of the insured person's death.
• Dental Insurance: Group dental insurance covers expenses related to
dental care, including preventive services, basic procedures, and
major dental work.
• Disability Insurance: Group disability insurance provides income
replacement in case an employee becomes disabled and is unable to
work.
Advantages of Group Insurance
• Cost-Effective: Group insurance is often more cost-effective than
individual insurance, as the risk is spread across a larger pool of
individuals.
• Employer Contributions: In many cases, employers contribute to the
cost of group insurance, making coverage more affordable for
employees.
• Broader Coverage: Group policies may offer more comprehensive
coverage compared to individual policies, especially in terms of health
insurance.
Finance
• Finance is the study of the management, movement, and raising of
money.

Basic Area’s of finance

Risk and Return
• The principle of Risk and Return indicates that investors have to be conscious of both
risk and return, because the higher the risk higher the rates of return, and the lower the
risk, the lower the rates of return.
Time Value of Money
• This principle is concerned with the value of money, that value of money is decreased
when time passes.
• The value of $1 of the present time is more than the value of $1 after some time or
years.
• So before investing or taking funds, we have to think about the inflation rate of the
economy and the required rate of return must be more than the inflation rate so that the
return can compensate for the loss incurred by the inflation.
Cash Flow
• The cash flow principle mainly discusses the cash inflow and outflow, more cash inflow
in the earlier period is preferable to later cash flow by the investors.
• This principle also follows the time value principle that’s why it prefers earlier benefits
rather than later years benefits.
Profitability and Liquidity
• The principle of profitability and liquidity is very important from the investor’s
perspective because the investor has to ensure both profitability and liquidity.
• Liquidity indicates the marketability of the investment i.e. how easy to get cash by
selling the investment.
• On the other hand, investors have to invest in a way that can ensure the maximization of
profit with a moderate or lower level of risk.
Diversity
• This principle helps to minimize the risk by building an optimum portfolio.
• The idea of a portfolio is, never to put all your eggs in the same basket because if it
falls then all of your eggs will break, so put eggs separated in different baskets so that
your risk can be minimized.
• To ensure this principle investors have to invest in risk-free investments and some risky
investments so that ultimately risk can be lower.
• Diversification of investment ensures minimization of risk.
Hedging Principles
• The hedging principle indicates that we have to take a loan from appropriate sources,
for short-term fund requirements we have to finance from short-term sources, and for
long-term fund requirements, we have to manage funds from long-term sources.
• For fixed asset financing is to be done from long-term sources.
Attributes of financial assets
• The three main characteristics of financial assets are liquidity, return on investment, and
risk.

• Liquidity refers to how quickly and easily an asset can be converted into cash without
significantly impacting its market price.
• Return on investment (ROI) is the potential gain or loss that an asset can generate
over a specific period of time.
• Risk represents the uncertainty associated with the potential return on an investment,
including the possibility of losing some or all of the original investment.
Financial Markets

• Financial markets, from the name itself, are a type of marketplace

that provides an avenue for the sale and purchase of assets such as
bonds, stocks, foreign exchange, and derivatives.
• Often, they are called by different names, including “Wall Street” and
“capital market,” but all of them still mean one and the same thing.
Types of Financial Markets
• Stock market - The stock market trades shares of ownership of public
companies. Each share comes with a price, and investors make
money with the stocks when they perform well in the market.
• Bond market - The bond market offers opportunities for companies
and the government to secure money to finance a project or
investment. In a bond market, investors buy bonds from a company,
and the company returns the amount of the bonds within an agreed
period, plus interest.
• Commodities market - The commodities market is where traders and
investors buy and sell natural resources or commodities such as corn,
oil, meat, and gold.
• Derivatives market - Such a market involves derivatives or contracts
whose value is based on the market value of the asset being traded.
Functions of the Markets

• Puts savings into more productive use

• Determines the price of securities
• Makes financial assets liquid
• Lowers the cost of transactions
Importance of Financial Markets

There are many things that financial markets make possible, including
the following:
• Financial markets provide a place where participants like investors
and debtors, regardless of their size, will receive fair and proper
treatment.
• They provide individuals, companies, and government organizations
with access to capital.
• Financial markets help lower the unemployment rate because of the
many job opportunities it offers