INSURANCE
CHAPTER 5:
TRANSACTIONS IN
INSURANCE BUSINESS
Presented by:
……………
CONTENT
Insurance Application
Certificate of Insurance
Insurance Renewal
Insurance Premium
Claims Settlement
Indemnity Payment
Insurance Disputes
5.1. Insurance Application (Proposal Form)
The document whereby the applicant requests insurance
coverage from the insurer.
This point defines the practical function of the Proposal Form. In
the insurance business, coverage does not begin automatically. It
must be formally initiated by the customer.
• The Instrument of Request: The application form is the primary
instrument used by a prospective policyholder (the applicant) to
express their intent to purchase insurance. It is not just a form; it
is a formal inquiry asking the insurance company to take on a
specific risk.
5.1. Insurance Application (Proposal Form)
The document whereby the applicant requests insurance coverage from
the insurer.
• Information Gathering: Through this document, the applicant provides
the insurer with essential details regarding the subject matter of
insurance (e.g., the car, the building, or the person's health). This
information allows the insurer to assess the risk accurately.
• Voluntary Act: It signifies that the applicant is voluntarily seeking
protection and is willing to pay a premium for it. Without this written
request, the insurer has no basis to evaluate or underwrite the risk.
5.1. Insurance Application (Proposal Form)
Legally serves as the 'Offer' in the contract formation process.
• This point places the document within the framework of
Contract Law. For any contract to be valid, there must be a clear
"Offer" and "Acceptance."
• The Legal "Offer": In most commercial transactions, marketing
materials are often considered an "invitation to treat." However,
in insurance, when a customer fills out and submits the
application form, they are legally making an "Offer" to the
insurance company. They are essentially saying, "I offer to pay
you this premium if you agree to cover these specific risks."
5.1. Insurance Application (Proposal Form)
Legally serves as the 'Offer' in the contract formation process.
• The Power of Acceptance: Because the application is the "Offer," the
insurance company (the offeree) holds the power of decision. They can:
–Accept the offer: Issue the policy (this forms the contract).
–Reject the offer: Decline to insure the risk.
–Make a Counter-Offer: This happens frequently. If the insurer reviews
the application and decides the risk is too high for the standard price,
they may say, "We will insure you, but at a higher premium," or "We
will insure you, but we will exclude flood damage." In this scenario, the
legal roles switch: the Insurer makes a Counter-Offer, and the
Customer must then provide Acceptance.
5.1. Insurance Application (Proposal Form)
Key contents of the Proposal Form
Details of the applicant (Insured): This section identifies exactly who is entering the contract.
It establishes the legal entity that has the Insurable Interest (the financial stake in the item
being insured).
Subject matter of insurance (Property, Life, Liability): This defines the specific object, person,
or potential liability that is at risk. It answers the question: "What exactly are we protecting?"
Scope of cover requested: This section allows the applicant to select the extent of protection
they desire. Insurance is rarely "one size fits all."
Material facts declaration: A "Material Fact" is any piece of information that would influence
the judgment of a prudent underwriter in deciding whether to accept the risk and at what
premium. This is the most critical part of the form. It includes questions about past claims
history, existing medical conditions, or hazardous hobbies. If a fact increases the risk of a loss
occurring, it is generally considered "material" and must be written down here.
5.1. Insurance Application (Proposal Form)
Principle of Utmost Good Faith (Uberrimae Fidei)
The applicant must declare all material facts honestly and accurately.:
Unlike standard commercial contracts (like buying a used car) where the
rule is Caveat Emptor ("Let the buyer beware"), insurance contracts rely on
Utmost Good Faith.
The Proposal Form is the basis of the insurance contract: The Proposal
Form is not just administrative paperwork; it is the foundation of the legal
agreement.
5.2. Certificate of Insurance (COI)
A document issued by the insurer to provide evidence that insurance
coverage is in force.
Function:
Serves as proof of insurance.
Summarizes key details: Policy number, Insured name, Effective dates,
Coverage limits.
Often used in situations requiring quick verification (e.g., Cargo insurance,
Motor insurance).
Distinction:
Policy: The full contract with all terms and conditions.
Certificate: A summary confirmation (subordinate to the Policy).
5.2. Certificate of Insurance (COI)
Serves as proof of insurance.
• The Primary Function: The central purpose of a Certificate of Insurance is to act
as evidence. While the insurance Policy is the actual contract, the Certificate is
the document used to prove to the outside world that the contract exists and is
currently active.
• Third-Party Requirement: It is rarely used between the insurer and the insured
(who already have the contract). Instead, it is designed for Third Parties.
–Example: A landlord requiring proof of liability insurance from a tenant, or a
client requiring proof of professional indemnity from a consultant.
• Validation: It confirms that the premium has been paid (or agreed to be paid)
and that the insurer has accepted the risk. Without this document, stakeholders
cannot verify if a party is financially protected.
5.2. Certificate of Insurance (COI)
Summarizes key details: Policy number, Insured name, Effective dates, Coverage limits.
An insurance policy can be dozens of pages long, filled with complex legal clauses, exclusions,
and definitions. The Certificate extracts only the most vital information for easy reference.
• Breakdown of Fields:
–Policy Number: The unique reference code used to track the file. If a claim occurs, this is
the first thing the insurer will ask for to locate the contract in their system.
–Insured Name: Clearly identifies the specific person or company covered. (Crucial for
verifying that the correct entity is protected).
–Effective Dates: Specifies the "Period of Insurance" (Inception Date and Expiry Date). This
confirms that the coverage is valid at this specific moment.
–Coverage Limits: The maximum financial liability of the insurer (e.g., "$1,000,000 per
occurrence"). This tells the third party exactly how much financial backing is available in
the event of a loss.
5.2. Certificate of Insurance (COI)
Often used in situations requiring quick verification
• Operational Efficiency: In fast-paced industries, there is no time to review a full legal
contract. Authorities and business partners need a standardized, one-page document to
verify compliance instantly.
• Scenario A: Motor Insurance (Traffic Stops): If a driver is stopped by the police or involved
in an accident, law enforcement needs to know immediately if the vehicle is insured to
cover potential damages to others. The driver presents the "Insurance Card" or Certificate
(often a small yellow/blue slip). It allows the police to verify compliance with the law in
seconds.
• Scenario B: Cargo/Marine Insurance (International Trade) In international shipping, goods
often change ownership while in transit. Banks (handling Letters of Credit) and Customs
Authorities need to ensure the goods are insured before releasing funds or clearing the
shipment. The Certificate of Marine Insurance is negotiable (transferable). It allows the
seller to transfer the rights of the insurance to the buyer by endorsing the certificate,
facilitating smooth trade without holding up the logistics chain.
5.3. Insurance Renewal
The process of extending the insurance coverage for another period
upon expiration of the current policy.
The Process:
Review: Insurer reassesses the risk (claims history, changes in risk
profile).
Offer: Insurer invites renewal (with same or revised terms).
Acceptance: Insured agrees to pay the renewal premium.
Considerations:
No Claim Bonus (NCB): Discounts applied for claim-free years.
Grace Period: A specific timeframe allowed for premium payment
after the due date (common in Life Insurance).
5.4. Insurance Premium
The monetary consideration paid by the insured to the insurer in
exchange for coverage.
The legal concept of consideration: If the premium is not paid, the
"consideration" is missing. Therefore, the contract is generally considered
void or inactive. This reinforces the legal maxim: "No premium, no cover.“
The economic concept “price of risk”: The insurer collects these small
sums from many people to pay for the misfortunes of the few.
In exchange for coverage: The payment is made in exchange for coverage,
not necessarily for a payout.
Composition of the premium: While it is a single monetary consideration
to the customer, the insurer views it in three parts: Pure Risk Premium;
Loading/Expenses/Profit Margin
5.4. Insurance Premium
Formula:
Premium = Rate x Exposure Unit
Determinants:
Probability of loss (Risk assessment).
Administrative costs (Expense loading).
Profit margin.
5.4. Insurance Premium
Payment Regulations:
Must be paid strictly according to the agreed timeline: In insurance contracts,
the timing of the premium payment is not just a suggestion; it is a critical
condition. Meaning that a delay in payment can result in a breach of contract.
Cash before cover principle (common in many jurisdictions for non-life
insurance). This legal principle mandates that the risk assumption by the
insurer does not begin until the premium has been actually received.
5.5. Claims and Claims Settlement
The Claims Process:
Notification: Insured must notify the insurer immediately
upon loss occurrence.
Verification: Insurer checks policy validity and coverage
scope.
Survey/Assessment: Loss adjusters investigate the cause
and extent of damage.
Documentation: Submission of required evidence (police
report, photos, invoices).
5.5. Claims and Claims Settlement
Insured's Duties:
Mitigate the loss (prevent further damage).
Cooperate fully with the insurer/adjuster.
Burden of proof lies with the insured.
5.6. Indemnity Payment
Principle of Indemnity:
Financial restoration of the insured to the same
position as before the loss.
The Insured cannot profit from a loss.
5.6. Indemnity Payment
Methods of settlement:
Cash Payment: Transferring money (most common).
Repair: Insurer pays the garage/contractor directly.
Replacement: Replacing the damaged item with a
new one (e.g., glass, electronics).
Reinstatement: Restoring a building to its former
condition.
5.6. Indemnity Payment
Deductions:
Application of Deductibles/Excess.
Depreciation (if "New for Old" coverage is not
selected).
5.7. Insurance Disputes
Common causes of disputes:
Denial of liability (claim rejection).
Disagreement on the quantum (amount) of loss.
Ambiguity in policy wording (interpretation of
exclusion clauses).
Breach of Utmost Good Faith (non-disclosure).
5.7. Insurance Disputes
Dispute resolution mechanisms:
Negotiation: Direct discussion between parties.
Mediation: Third-party facilitator helps reach an
agreement.
Arbitration: Binding decision by an arbitrator (often
required in commercial policies).
Litigation: Taking the case to Court (last resort).
INSURANCE
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