Principles and Practices of Insurance

The Process of Insurance, Contract Essentials and Types of

These notes cover two connected topics: (1) the step-by-step process through which an insurance
contract is formed, the elements that make it legally valid, and contemporary issues shaping the
industry; and (2) the major types of insurance available in the Indian market — both commercial and
personal — with their key features, coverages, and exclusions.

PART A: The Process of Insurance

Insurance does not come into existence automatically. It follows a structured process — from the
initial inquiry by the proposer to the issuance of the final policy document. Each step has legal
significance and specific obligations for both parties.

STEP 1 — Proposal

The insurance process begins with the prospective insured (the proposer) initiating contact with an
insurance company.
• The proposer conducts market research to identify an insurer whose products and terms meet
their requirements.
• The proposer explains the nature of the risk to the insurer — what is to be insured, its value,
its location, and its characteristics.
• The insurer, using their team of underwriters, actuaries, and surveyors, conducts a physical
inspection of the risk where required.
• Based on the inspection and risk assessment, the insurer decides: (a) whether they are willing
to cover the risk, (b) how much cover they can offer, and (c) the premium they will charge.

ℹ At the proposal stage, the duty of Utmost Good Faith applies fully. The proposer must
disclose all material facts about the risk, whether or not they are specifically asked.

STEP 2 — Offer and Acceptance

Once the proposer has decided to proceed, the formal process of offer and acceptance begins.
• The proposer fills in a printed Proposal Form — the insurer’s standard application form —
providing all details about themselves and the risk to be insured.
• Submitting the completed proposal form constitutes the OFFER by the proposer.
• The insurer verifies the information provided in the proposal form — this may involve further
questions, surveys, or medical examinations (for life insurance).
• If the insurer is satisfied with the risk, they ACCEPT the offer, and the two parties reach an
AGREEMENT — the foundation of the insurance contract.

Counter Offer: If the insurer is unwilling to accept the risk on the proposer’s original terms, the
insurer may propose modified terms (different premium, different sum assured, or additional
exclusions). This is called a Counter Offer. The original offer is rejected and replaced by the counter
offer. If the proposer then accepts the counter offer, acceptance is complete.

ℹ In contract law, a counter offer destroys the original offer. Once a counter offer is
made, the proposer cannot revert to the original terms without the insurer’s agreement.

STEP 3 — Cover Note (Temporary Policy)

After the offer has been accepted, the insurer must issue a policy document. However, preparing
and printing a formal policy document takes time. To ensure the insured is protected from the
moment of acceptance, the insurer issues a Cover Note.
• A Cover Note is a temporary insurance document that provides immediate, interim cover while
the formal policy is being prepared.
• It contains all the key details from the proposal form: the insured’s name, the subject matter,
the sum assured, the premium, and the period of cover.
• The Cover Note provides the same legal protection as the policy during the interim period.
• The Cover Note automatically becomes void (ceases to have effect) once the formal policy is
issued and delivered to the insured.

ℹ Cover Notes are particularly important in motor insurance and marine insurance,
where cover may be needed immediately — for example, to drive a newly purchased
vehicle or to ship a consignment at short notice.

STEP 4 — The Insurance Policy — Contents and Structure

The insurance policy is the formal, written document that serves as the legal evidence of the
insurance contract. It is issued by the insurer to the insured and sets out all the terms and
conditions of the agreement.

Standard Structure of an Insurance Policy

1. Heading
• The name of the insurance company.
• The registered address and contact details of the insurer.
• The policy number and type of insurance.

2. Preamble
The preamble is the introductory statement of the policy. It confirms three key matters:
• The proposal form submitted by the insured has been considered as the basis of the contract
— meaning that any misrepresentation in the proposal form may void the entire contract.
• The contract is conditional on payment of the premium — if the premium is not paid, the
contract is not in force.
• The insurer’s promise to pay the cover if the insured event occurs.
3. Operative Clause
• States the specific cover the insurer is providing — the risks covered, the sum assured, and
the circumstances under which the insurer will pay.
• This is the heart of the policy — the insurer’s promise in precise legal language.

4. Exceptions / Exclusions
• Lists all events, perils, or losses that are specifically NOT covered under the policy.
• Example: ‘We will not cover losses caused by war, nuclear radiation, or deliberate act of the
insured.’
• Exclusions define the limits of the insurer’s promise and must be read carefully by the
policyholder.

5. Conditions
The conditions section sets out the ongoing obligations of both parties during the policy period.
These typically cover:
• The principles of insurance that apply to the contract (Utmost Good Faith, Insurable Interest,
etc.).
• Procedures for reporting a loss (prompt notification requirements).
• Procedures for making a claim and the documentation required.
• The insurer’s right to inspect the property and to conduct surveys.
• Dispute resolution procedures.

6. Policy Schedule
The Policy Schedule is the personalised section of the policy — it sets out the specific details of this
particular insured and this particular risk:
• Full name and address of the insured.
• Description of the subject matter insured (property address, vehicle registration, name of life
assured).
• Sum assured and premium payable.
• Period of cover (commencement date and expiry date).
• Any special conditions or endorsements specific to this policy.

7. Signature and Seal

• The policy is authenticated by the signature of an authorised official of the insurance company
and the company’s seal.
• Without an authorised signature and seal, the policy document has no legal standing.

8. Renewal Clause
• Sets out the procedure for renewing the policy at the end of the term.
• Confirms that if the renewal premium is not paid by the due date (and within any applicable
grace period), the policy will lapse and cover will cease.

ℹ The Proposal Form is the basis of the contract. Any false or incomplete statement in
the proposal form can void the entire policy — even for losses unrelated to the false
statement — because the proposal forms the foundation of the insurer’s acceptance.
PART B: Essentials of a Valid Insurance Contract
An insurance contract is a special type of contract. Like all contracts in India, it must satisfy the
requirements of the Indian Contract Act, 1872 (Section 10) to be legally valid. In addition, it must
satisfy requirements specific to insurance law.

ℹ A contract that does not satisfy these essentials is either void (has no legal effect at
all) or voidable (can be set aside by the aggrieved party).

Essential 1: Offer and Acceptance

Every valid contract requires a clear offer by one party and an unqualified acceptance by the other.
• In insurance: the Proposal (application form) submitted by the insured is the OFFER.
• The insurer’s agreement to provide cover on the stated terms is the ACCEPTANCE.
• Counter Offer: if the insurer modifies the terms, the original offer is rejected. A new offer is
made by the insurer. The insured must then accept this counter offer for a contract to exist.
• Acceptance must be communicated — a decision made internally by the insurer but not
communicated to the proposer does not constitute legal acceptance.

Essential 2: Legal Consideration

Every valid contract requires consideration — something of value exchanged between the parties.
Premium: The legal consideration in an insurance contract, paid by the insured to the insurer in
exchange for the insurer’s promise of cover.
• The exact amount of premium need not be fixed at the time of agreement, but there must be a
clear agreement that the insured will pay a premium.
• Without consideration (premium), the insurance contract cannot be initiated or maintained.
• Under Section 64VB of the Insurance Act, the insurer cannot assume risk before receiving the
premium — reinforcing the premium’s role as the essential consideration.

Essential 3: Competency to Contract

Both parties to an insurance contract must be legally competent to enter into contracts. Under
Section 11 of the Indian Contract Act, a person is competent to contract if they are:
• A major in the eyes of law — i.e., have attained the age of 18 years (or 21 years if a guardian
was appointed by a court).
• Of sound mind — capable of understanding the contract and forming a rational judgement
about its effect on their interests at the time of making it.
• Not disqualified from contracting by any law — for example, persons declared insolvent or
those specifically disqualified by statute.

ℹ A contract entered into by a minor is void ab initio — it has no legal effect

whatsoever. This is why insurers require proof of age when issuing life insurance
policies.

Essential 4: Free Consent

The consent of both parties to the insurance contract must be freely given. Consent is NOT free if it
is caused by any of the following:
Vitiating Factor Meaning Effect on Contract
Coercion Force or threat of force used to Contract is voidable at the option
compel consent. of the aggrieved party.
Undue Influence Dominant party exploits their Contract is voidable at the option
position of power or trust. of the aggrieved party.
Fraud Deliberate false representation Contract is voidable; fraudulent
to deceive. party may face criminal liability.
Misrepresentation False statement made without Contract is voidable at option of
fraudulent intent. the innocent party.
Mistake Both parties operate under a Contract may be void (both
fundamental parties mistaken) or voidable
misunderstanding. (one party mistaken).

In insurance, free consent is closely connected to the principle of Utmost Good Faith. Any
misrepresentation or non-disclosure of material facts by the insured undermines the insurer’s free
consent and gives the insurer the right to void the policy.

Essential 5: Lawful Object

The purpose of the insurance contract must be legal. Insurance cannot be used to cover:
• Illegal activities or criminal enterprises.
• Property used for unlawful purposes.
• Losses arising from the insured’s own illegal acts.
In insurance law, the requirement of lawful object is reinforced by the principle of Insurable Interest
— which itself ensures that the insured has a legitimate legal relationship with the subject matter of
insurance.
PART C: Contemporary Issues in the Indian Insurance Industry
The Indian insurance industry continues to evolve in response to demographic, technological,
regulatory, and competitive forces. The following are the major contemporary issues shaping the
industry today.

Issue 1: Pension Coverage — A Critical Gap

India faces a significant gap in pension coverage, particularly for workers in the informal and
agricultural sectors.
• Unlike many developed economies, India does not have a universal social security system
that provides pension coverage for all citizens.
• LIC’s pension premium collections historically amounted to only approximately ₹100 crores —
reflecting very low penetration.
• Existing pension schemes cover primarily employed persons in the organised sector. Self-
employed individuals and agricultural workers are largely excluded.
• Traditional schemes have restricted eligibility: coverage was largely limited to persons above
65 years.
• 89% of India’s workforce is in the informal sector — the vast majority of working people have
no pension coverage.
• India has one of the highest proportions of persons above 60 among emerging economies, yet
among the lowest levels of pension coverage.

IRDAI and the Dave Committee have recommended the introduction of a voluntary pension scheme
for the unorganised sector. Key proposals include:
◦ Any institution — including Mutual Funds — with capital of ₹50–75 crores should be
eligible to offer pension products.
◦ The pension market should be expanded to include EPF, EPS, GPF, PPF, and voluntary
organisations.

ℹ The UK government adopted the principle: ‘take care of its citizens from cradle to the
grave.’ India, despite being one of the fastest-growing economies in the world, still lacks
a comparable national safety net for its elderly population.

Issue 2: Convergence of Insurance and Banking (Bancassurance)

The boundaries between the banking and insurance industries have been blurring as banks
increasingly enter the insurance distribution space.
• Banks possess extensive branch networks that reach rural areas where insurance companies
have found it commercially difficult to operate directly.
• Banks have pioneered micro-insurance — small-ticket insurance products designed for rural
and low-income customers.
• Bancassurance (the distribution of insurance products through bank branches) has become
one of the most important channels for reaching underserved markets.
• While the state-controlled insurance regime made such risk-taking difficult, private players
have made bancassurance commercially viable.

Bancassurance: The sale of insurance products through a bank’s branch network, using the bank’s
existing customer relationships and infrastructure to distribute insurance.
Issue 3: Alternative Distribution Channels
Beyond the traditional agent model and bancassurance, the insurance industry is increasingly
exploring alternative and digital distribution channels:

Channel Description
Direct Response Telemarketing, direct mail, newspaper advertisements, and
television campaigns that generate leads and direct policy
applications.
High Street / Bank Bank branches and financial houses acting as insurance
Branches distribution points.
Electronic / Internet Online platforms where customers can research, compare,
and purchase insurance directly. Web aggregators like
Policybazaar have transformed price transparency.
Agency Traditional individual agents who sell face-to-face and
provide personalised advice.
Financial Advisors Stock and securities brokers who offer insurance as part of
a broader financial planning service.
Post Offices and Trade Government and worker organisations that reach deep into
Unions rural and informal worker communities with customised
insurance products.

The internet has changed consumer behaviour: customers now research and compare products
online before approaching an agent. For life insurance, however, the bank channel has a practical
limitation — frequent transfer of bank employees means relationship continuity is difficult to
maintain.

Issue 4: Uniform Tax Concessions

Historically, LIC benefited from a range of tax concessions not available to private insurance
companies. This created an uneven competitive playing field:
• LIC policyholders could claim tax rebates under Sections 80CC, 88, 193, 194A, and 36V of the
Income Tax Act.
• Tax rebate of 20% on premium paid under LIC’s pension scheme (Section 80CC).
• Tax rebate on repayment of housing loans from LIC (Section 88).
• Interest earnings exempt from tax deduction at source (Sections 193 and 194A).

Private insurance companies have consistently demanded a ‘level playing field’ — i.e., the same tax
concessions to be extended to their policyholders. The Government has been called upon to take
the initiative to align tax treatment across all licensed insurers.

Issue 5: Cost and Competitiveness

Cost has become a critical competitive factor in the Indian insurance industry following liberalisation.
Competition now manifests through:
• Bonus structures: different companies follow different methods of calculating and distributing
bonuses to policyholders.
 • Special schemes: some companies offer additional premium for accidental death claims;
others offer waiver of premium if the policyholder becomes unemployed.
• Administration costs vary significantly across insurers, directly affecting the premium charged.
• Lower-premium products attract customers — insurers who can control their costs gain a
competitive advantage.
The net effect is that cost and competitiveness now shape the total insurance penetration in the
country — competitive pricing increases affordability and therefore the spread of cover.

Issue 6: Exposure Norms for Public and Private Sector

IRDAI has established stringent investment exposure norms to prevent excessive concentration of
insurance funds in single entities:
• Private insurance companies: investments must not exceed 10% of the investee company’s
total subscribed capital, free reserves, debentures, and bonds.
• Non-life insurers: investments in a single entity must not exceed 10% of the insurer’s total
assets.
• Life insurers: investments in a single entity must not exceed 10% of the controlled fund
(comprising group funds, individual funds, annuity funds, and shareholders’ funds).

ℹ These exposure norms protect policyholders’ funds from being over-concentrated in

any single investment. They ensure diversification and protect the insurer’s solvency.

Issue 7: Customer Education, CRM, and Product Innovation

Two increasingly important themes are customer education and product innovation:
• Insurance companies now conduct large-scale customer awareness campaigns — positioning
insurance not merely as a risk product but as a tool to preserve one’s lifestyle and financial
security.
• Customer Relationship Management (CRM) has become central to the insurer’s strategy for
sustainability and long-term retention of policyholders.
• Product Innovation is addressing new environmental and social hazards. Insurance
companies recognise that no single policy can meet all of a customer’s insurance needs — a
portfolio of complementary policies is required.
PART D: Types of Insurance — General (Non-Life) Insurance
General insurance covers risks relating to property, liability, and short-term health events. Unlike life
insurance, general insurance policies are typically annual contracts that must be renewed each
year. The following are the major classes of general insurance available in the Indian market.

1. Fire Insurance

Fire Insurance: A named-peril policy that covers physical loss or damage to property caused by fire
and a range of associated perils.

What Fire Insurance Covers

• Fire and its consequences.
• Explosion and implosion.
• A large number of other specified perils suitable for commercial establishments and property
owners.

Standard Exclusions
• War, invasion, and civil commotion (these require separate cover or endorsements).
• Nuclear risks.
• Losses caused by the insured’s own deliberate act.

Extensions Available on Payment of Additional Premium

• Earthquake (fire and shock) damage.
• Deterioration of stock in cold storage following power failure caused by an insured peril.

Business Interruption / Consequential Loss

A fire can destroy a business’s physical assets. But the financial damage does not stop there. The
business may be unable to operate for weeks or months while it is rebuilt. This loss of profit is a
separate and often larger loss than the physical damage itself.
• A separate Business Interruption (Consequential Loss) policy covers the net profit lost and the
fixed expenses (salaries, rent, loan repayments) incurred during the period the business
cannot operate.
• This is the lesson from the ABC International case study: physical cover alone is insufficient.
Business interruption cover is equally essential.

2. Burglary Insurance

Burglary Insurance: A policy that covers contents (stock, cash, equipment) against loss or damage
caused by burglary, housebreaking, theft, and robbery.
• Available to commercial establishments, shops, offices, and industrial premises.
• Covers loss or damage by: burglary, housebreaking, theft, and robbery.
The Critical Condition for a Claim
For a claim to be triggered under a burglary policy, the following must be established:
• Actual, forcible, and violent entry into or exit from the premises; OR
• Hold-up (i.e., robbery with threat of violence).

▶ Case: Two shoplifters in Ms. Saraswati’s shop pocketed high-value items without breaking
in, then broke through a display window to escape. Question: Is the claim payable? Analysis:
The entry was NOT forcible or violent — they entered as normal customers. However, the EXIT
through the display window constitutes forcible and violent exit. The claim for the stolen items
and the broken window is likely payable on that basis.

ℹ The forcible and violent entry/exit condition distinguishes burglary insurance from
shoplifting losses. Ordinary theft by stealth without force is typically NOT covered under
a standard burglary policy.

3. Money Insurance

Money Insurance: A policy that covers cash and other monetary instruments against loss during
transit or while held on the insured’s premises.
• Covers money in transit between the insured’s premises and banks or other specified
locations (including branch offices).
• Also covers money in safe / strong room on the premises.
• Particularly important for businesses that handle large cash sums — retailers, financial agents,
salary disbursement operations.

4. Fidelity Guarantee Insurance

Fidelity Guarantee Insurance: A policy that covers an employer against direct financial loss
resulting from the dishonesty (fraud, theft, embezzlement) of an employee.
• Covers only DIRECT financial loss caused by the employee’s dishonesty — not indirect or
consequential losses.
• May cover individual employees (specific fidelity guarantee) or all employees (blanket fidelity
guarantee).
• Requires the employer to have adequate supervision and internal controls — absence of
controls may give the insurer grounds to reduce or deny a claim.

5. Bankers’ Indemnity Insurance

Bankers’ Indemnity Insurance: A comprehensive package policy designed specifically for banks,
covering multiple risks relating to money, securities, and fraud.
Covers losses involving:
• Money and securities on the bank’s premises.
• Money and securities in transit.
• Forgery or alteration of cheques, drafts, and other instruments.
• Dishonesty of any bank employee.
• Fraud by employees in respect of hypothecated (pledged) goods.
• Fraud by appraisers (valuers appointed by the bank).
 • Money in the hands of Janata agents (rural banking agents).
• Losses during despatches by registered post.

6. Jewellers’ Block Insurance

Jewellers’ Block Insurance: An all-risks policy specifically designed for establishments dealing in
jewellery, diamonds, and precious stones.
• Originally devised for diamond establishments; now extended to all jewellery shops.
Covers:
• Loss or damage to specified jewellery and precious stone property by fire and allied perils.
• Loss by burglary when property is on the premises.
• Loss when property is in the custody of persons not in the regular employment of the insured
(e.g., on loan to a customer for approval).
• Property in transit (being transported for sale, exhibition, or repair).

7. Engineering Insurance

Engineering Insurance: A group of specialist policies covering risks unique to engineering and
construction projects.
Engineering insurance encompasses several distinct policy types:
Policy Type What It Covers
Contractors All Risk (CAR) All-risk cover for civil engineering contractors building
bridges, roads, tunnels, dams, and buildings during
construction.
Erection All Risk (EAR) All-risk cover for the erection of electrical plants,
equipment, machinery, and structures.
Machinery Breakdown (MB) Sudden and unforeseen physical damage to
machinery caused by mechanical or electrical
breakdown.
Boiler Explosion Loss or damage caused by explosion of boilers and
pressure vessels.
Machinery Loss of Profits Loss of gross profit during the period a machine is
(MLOP) under repair following a breakdown.
Advance Loss of Profits (ALOP) Loss of anticipated profits during a delay in the
commencement of a project due to an insured peril.

▶ A bottle manufacturer importing automated machinery from Germany should take: (1)
Marine Cargo insurance for the machinery in transit from Germany to India; (2) Erection All Risk
insurance during the installation of machinery at the plant; (3) Contractors All Risk insurance for
the civil construction of the plant by M/s Hankeman and Sons; (4) Machinery Breakdown
insurance once the plant is operational; (5) Fire insurance for the completed plant.

8. Industrial All Risks (IAR) Insurance

Industrial All Risks (IAR): A comprehensive package policy for large industrial enterprises,
combining fire, burglary, machinery breakdown, and business interruption cover under a single all-
risks policy.
• Issued on All Risks terms — covers all risks unless specifically excluded.
• Generally reserved for large industrial undertakings with substantial assets.
• The advantage is simplicity and completeness: one policy, one premium, comprehensive
cover.

9. Marine Insurance

Marine Cargo Insurance

Marine Cargo Insurance: Covers goods and merchandise in transit by sea, air, rail, or road against
loss or damage.
Perils covered under standard marine cargo policies:
• Fire and explosion.
• Stranding of the vessel.
• Theft and pilferage.
• Loss of package during loading and unloading.
Additional covers available on payment of extra premium:
• War risks (damage caused by war, mines, torpedoes).
• Strikes, riots, and civil commotion (SRCC).

ℹ Cargo (goods by sea or air) and Freight (goods by rail or truck, or the charges for
carriage) are distinct terms. Marine cargo insurance covers both, but the description of
the subject matter in the policy must be precise.

Marine Hull Insurance

Marine Hull Insurance: Covers loss or damage to the vessel itself — ocean-going ships, fishing
vessels, and sailing craft.
• Also covers freight (the value of cargo the ship is carrying) and the ship’s stores (fuel,
provisions, spare parts).
• War cover is available separately under a War Risk policy.

10. Liability Insurance

Liability Insurance: Policies that indemnify the insured against their legal obligation to pay
compensation to third parties for injury to their persons or damage to their property.
Major types of liability insurance:
Type Who It Protects What It Covers
Public Liability Any person or Legal liability to pay damages to third
business. parties for bodily injury or property
damage caused by the insured’s
activities or premises.
Professional Indemnity Doctors, hospitals, Legal liability arising from professional
engineers, lawyers, errors, negligence, or omissions in the
 architects. course of professional practice.
Products Liability Manufacturers and Legal liability for injury or damage
sellers. caused by a defective product
manufactured or supplied by the
insured.
Directors & Officers Company directors Legal liability for wrongful acts (errors,
(D&O) Liability and senior officers. misstatements, breaches of duty)
committed in the performance of their
management duties.
Employers’ Liability / Employers. Compensation payable to employees
Workmen’s who suffer injury, disease, or death in
Compensation the course of employment.

ℹ Public Liability Insurance Act, 1991: This Act makes public liability insurance
COMPULSORY for any person or enterprise handling hazardous goods. Failure to
maintain this cover is a statutory offence.
PART E: Applied Case Studies
The following case studies test the ability to apply insurance knowledge to practical business
situations — exactly the type of application questions that appear in examinations and professional
practice.

⚖ CASE STUDY: MN Limited — Inclusive Banking / Cash Disbursement Operations

MN Limited has been contracted by a bank to collect large sums of money and distribute them in
small amounts to farmers in remote rural areas, using employees and commission agents. The
following insurance programme is recommended:

Insurance Cover Why It Is Needed

Money Insurance (Transit) Large sums of money will be collected from the bank and
transported by employees to various town-level agents.
This money is at risk of theft, robbery, or accidental loss
during transit.
Money Insurance (On Agents at town level will hold cash overnight or for short
Premises) periods before distributing to villages. This cash needs
protection while held at agent locations.
Fidelity Guarantee Insurance MN Limited’s own employees handle large cash sums.
There is a risk of embezzlement or dishonest
misappropriation by employees. This policy covers the
employer against such direct financial loss.
Burglary Insurance Agent premises holding cash could be targeted by
burglars. This cover protects against forcible and violent
theft from the agents’ premises.
Workmen’s Compensation / Employees travelling to remote rural areas face the risk
Group Personal Accident of accident or injury. This cover protects them and their
families, and protects MN Limited from its statutory
liability as an employer.
Public Liability Insurance If MN Limited’s operations cause injury or property
damage to a third party, public liability cover protects
against the resulting legal claims.

⚖ CASE STUDY: Refrigeration & Cooling Systems Pvt. Ltd. — SME Insurance
Programme

Mr. Bhatia’s SME operates from two industrial galas, employs 15 persons, owns computers and a
pickup truck, dispatches goods to five cities, and holds significant cash on salary day. A
comprehensive insurance programme would include:

Insurance Cover Specific Risk Addressed

Fire and Allied Perils For the two galas (factory premises), contents, raw
 Insurance materials, and finished refrigeration systems stored on
the premises.
Burglary Insurance For stock, equipment, and computers at the industrial
galas.
Money Insurance For cash held on salary day (over ₹2,00,000) and for
cash in transit to Union Bank of India.
Marine Cargo Insurance For refrigeration systems being dispatched to
(Open Policy) Chandigarh, Hyderabad, Kochi, Chennai, and
Ahmedabad. An Open Policy is appropriate as multiple
consignments are sent regularly.
Motor Insurance (Own For the pickup truck: Third Party Liability is compulsory
Damage + Third Party) by law; Own Damage cover protects against physical
damage to the vehicle.
Electronic Equipment For the 4 computers: covers accidental damage,
Insurance electrical/electronic breakdown, and theft.
Workmen’s Compensation For all 15 employees: covers injury, disease, or death
Insurance arising from employment.
Fidelity Guarantee Insurance For the Cashier and Accountant who handle financial
transactions.
Group Personal Accident For all employees including drivers, covering accidental
death and disability.

⚖ CASE STUDY: Soma Auto-Components Limited — Stock Insurance at Multiple

Locations

Soma has stock worth ₹200 crores distributed across 2 factories and associated warehouses, with
values fluctuating significantly by location. The challenge: cover all stock comprehensively while
managing fluctuation.

Recommended Structure:
• Floater Policy: A single policy with one combined sum assured of ₹200 crores covering all
stocks at all four locations (2 factories and 2 warehouses). The sum assured ‘floats’ across
locations. If one location suffers a total loss, the full sum assured is available.
• Declaration Policy: Since stock values at individual locations fluctuate significantly, a
Declaration Policy allows Soma to declare actual stock values periodically (monthly) and pay
premium based on the average of those declarations. This prevents over-paying premium on
locations that are temporarily low in stock.
• Combined approach: A Floater cum Declaration Policy — the sum assured floats across all
locations AND the premium adjusts based on periodic declarations. This is the most efficient
and cost-effective structure for Soma’s situation.
• Open Policy (Marine) for Transit: Soma’s components are being transported to four client
factories. An Open Marine Policy covers all transits throughout the year under a single policy
with periodic premium declarations as each consignment is despatched.
Quick Revision Summary

The Insurance Process — Four Steps

Step What Happens Key Document
1. Proposal Insured approaches insurer, explains Proposal Form (the OFFER)
risk. Insurer inspects and decides on
cover and premium.
2. Offer and Insured submits proposal form. Letter of Acceptance
Acceptance Insurer verifies and accepts (or makes
counter offer).
3. Cover Interim temporary cover issued Cover Note (void once policy
Note immediately while policy is being issued)
prepared.
4. Policy Formal policy document issued with Insurance Policy
Issued all terms, conditions, and the policy
schedule.

Essentials of a Valid Insurance Contract

• Offer and Acceptance — Proposal + unqualified acceptance (or counter offer accepted).
• Legal Consideration — Premium (the price of cover; contract does not begin without it).
• Competency — Both parties must be major, of sound mind, and not legally disqualified.
• Free Consent — No coercion, undue influence, fraud, misrepresentation, or mistake.
• Lawful Object — The purpose of insurance must be legal; reinforced by insurable interest.

Types of General Insurance — Quick Reference

Type Core Cover Key Condition / Feature
Fire Insurance Property damage by fire and Business Interruption cover
allied perils. available separately.
Burglary Insurance Loss by burglary/theft/robbery. Must prove FORCIBLE &
VIOLENT entry or exit.
Money Insurance Cash in transit and on premises. Covers salary cash, bank
runs, agent float.
Fidelity Guarantee Employee dishonesty / fraud. Covers only DIRECT
financial loss.
Bankers’ Indemnity Banks’ money, securities, Package policy with 8
forgery, employee fraud. distinct covers.
Jewellers’ Block Jewellery and diamonds on Originally for diamond
premises, in custody, in transit. establishments.
Engineering — Construction and erection All-risks cover during
CAR/EAR projects. project execution.
Machinery Breakdown Sudden mechanical/electrical Covers repair costs; MLOP
breakdown. covers lost profit during
repair.
Industrial All Risks Fire + Burglary + MB + Business All-risks basis; for large
Interruption. industries only.
Marine Cargo Goods in transit by sea, air, rail, War & SRCC available as
road. add-on cover.
Marine Hull Vessel itself; freight and stores. Time Policy (12 months) or
Voyage Policy.
Public Liability Third-party bodily injury and Compulsory under Public
property damage. Liability Insurance Act, 1991
for hazardous goods.
Professional Indemnity Negligence / error by Doctors, engineers,
professionals. lawyers, architects.
D&O Liability Wrongful acts by directors and Covers management
officers. decisions and actions.

ℹ Remember: Cargo = goods by sea or air. Freight = goods by rail or truck (or the
charges for carriage). Marine insurance covers both, but the subject matter must be
precisely described in the policy.