Concepts and Principles of Insurance
Generally people think of insurance of physical assets such
as motor car insurance or fire insurance but often they forget that creator of
all these assets is the human being whose efforts have gone a long way in
building up the assets. In that sense, human life is a unique income generating
assets.
Unlike the physical assets, which decrease in value with
passage of time, the individual becomes more experienced and more matured as he
advances in age. This raises his earning capacity and the purpose of life insurance
is to protect the income in the event of his premature death. The individual
himself also needs financial security for the old age or on his becoming
permanently disabled when his income will stop. Insurance also has an element
of savings in certain cases.
According to Ghosh and Agarwal1, “Insurance is a cooperative
form of distributing certain over a group of persons who are exposed to it.”
Justice Tindall2 states, “ Insurance is a contract in which a sum of money is
paid to the assured as consideration of insurer’s incurring the risk of paying
a larger sum upon a given contingency.” D.S. Hansell3opines, “Insurance may be
defined as a social device providing financial compensation for the effects of
misfortune, the payments being made from the accumulated contribution of all
parties participating in the scheme.” Relph H. Wherry & Monroe Newman4
remarks, “Insurance, by lessening uncertainty, frees the individual from same
element of risk.” E.W. patterson5 is of the view, “Insurance is a contract by which
one party, for a compensation called the premium assumes particular risk of the
other party and promises to pay to him or his nominee a certain or
ascertainable sum of money on a specified contingency.”
As regards Characteristics of Insurance, (i) It is a
contract for compensating losses; (ii) Premium is charged for Insurance
Contract.;(iii) The payment of Insured sum is made as per terms of agreement in
the event of loss; (iv) It is a contract of good faith; (v) It is a contract
for mutual benefit; (vi) It is a future contract for compensating losses; (vii)
It is an instrument of distributing the loss of few among many; (viii) The
occurrence of the loss must be accidental.
Thus, Insurance is a contract of utmost good faith. All
material facts embodied in this contract, must be disclosed in all forms of
insurance. In all contracts of insurance, the proposer is bound to make full
disclosure of all material facts and not merely, those which he thinks
material.
Misrepresentation, non disclosure or fraud in any document
leading to the acceptance of the risk automatically discharges the Corporation
from all liability under the contract. Although Section 45 of the insurance
Act, 1938 provides that no policy can be called in question after a period of
two years from the date of its issue on the ground that any statement on
proposal or a related document was false or inaccurate.
However, this provision becomes dangerous when the
Corporation proves that misrepresentation or nondisclosure was on a material
fact and was fraudulently made and that the policyholder knew at the time that
statement one made was false. It is, therefore, in the interest of the
policyholder to disclose all the material facts to the Corporation to avoid any
complication when the claim arises. It is equally obligatory on an agent to see
that the assured doesn’t obtain the contract by means of false representation
or concealment in any respect.