Physical risk

and its
treatment
Dr. Ravi Jaiswal
PGDIM, PhD. UGC NET
Fellow III
How do you see and
perceive several risks
 "Can you guys help? I want to insure my old
friend's life because he still owes me money!"

"I’ve changed my job from Project Coordinator

to Mine Engineer in a coal mine. Do I need to
disclose this to my insurer?"

"My car was destroyed in a fire, and the entire

Few Questions.. scrap was taken away by strangers. Will I get a
theft or fire claim?"

"Can I claim from the insurance company or the

person responsible for the loss—or from both?"

"Can I insure my factory with three different

companies and claim the benefit from each?
And what about life insurance?"
 The basis of Insurance

A TOOL OF RISK CAN ALL RISKS RISK (PURE VS. PHYSICAL, LAW OF LARGE ECONOMIC &
TRANSFER OR PERIL BE SPECULATIVE) MORAL & NUMBER SOCIAL
INSURABLE? MORALE PERSPECTIVE
HAZARD
Classification FIRE INSURANCE MOTOR
INSURANCE
MISCELLANEOUS
INSURANCE

of Business

MARINE LIABILITY HEALTH

INSURANCE INSURANCE INSURANCE

ENGINEERING
INSURANCE
 Pure vs. Speculative risk.

Speculative risk is risk

Pure risk can only result
that is taken on
in a significant loss or
voluntarily and can result
minimal loss if it occurs.
in either a profit or loss.
Example- Fire, Theft or
Example- Gambling,
accident.
Stock Market etc.

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 Physical, Moral & Morale hazard
Physical hazards: These are hazards that affect the physical
characteristics of whatever is being insured. For example a building
made of wood represents a higher level of physical hazard than one
made of brick.

Moral hazards: These hazards refer to the defects that exist in a person’s
character that may increase the frequency or the severity of loss. Such a
character may tend to increase the loss for the company.

Morale hazards: The fundamental postulate of insurance is that the insured

should always conduct himself as if he is uninsured. However, if there is a
situation of a wilful carelessness on the part of the policyholder because of the
existence of insurance, then it is a case of Morale hazard.
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Law of Large number
 Offer

Acceptance
The General
Principles of Consideration
Insurance
Capacity to Contract

Free consent

Lawful object
The Specific Principles of Insurance

Utmost Good Insurable

Indemnity
Faith Interest
The Specific Principles to Insurance

Proximate
Subrogation Contribution
Cause
 Utmost Good Faith
Both parties to an insurance contract must act honestly and fully
disclose all important information related to the contract.

Information about Material Facts…

Insurers must also act in good faith by issuing clear and unambiguous
policy wordings, as they prepare the contract document.
 Facts which are common knowledge

Information Facts of law / Public knowledge

need not be
disclosed Facts which reduce the risk

Facts about with insurance company

has waived for information
To avoid liability on grounds of non-disclosure,
the onus is on the insurer to prove that-

The undisclosed facts were material

The facts were within the actual or presumed

knowledge of the insured.

The facts were not communicated to the insurer.

 Cases….
Satwant Kaur obtained a mediclaim policy but concealed her pre-
existing heart condition. When she was hospitalized, New India
Assurance denied the claim. The Supreme Court upheld the
rejection, reinforcing that non-disclosure of material facts violates
utmost good faith. Satwant Kaur Sandhu v. New India Assurance
Co. Ltd. (2009)

The insured did not disclose three existing life insurance policies in the
proposal form. The insurer repudiated the claim alleging breach of utmost
good faith. The Supreme Court held that materiality of non-disclosure
depends on facts of each case. Since the insurer knew of a larger policy
(proved) and still issued the policy, repudiation was not justified. Mahaveer
Sharma vs. Exide Life Insurance Co. Ltd. (2025)
 Insurable Interest
Insurance contracts without an insurable interest are not legally valid
because they are treated as mere speculation or gambling.

By this principle, insurance interest exists to other parties also like

Debtor-Creditor, employer-employee, Business partners, Bailees etc.

Their interest is limited to the extent of their financial commitment

only.
 Cases….
Macaura owned a timber business but insured the timber in his
personal name instead of the company’s. When the timber was
destroyed in a fire, the insurer refused to pay, arguing that Macaura had
no insurable interest since the property belonged to the company. The
court upheld the insurer's stance. (Macaura v. Northern Assurance Co.)

In this Michigan case, a mother insured a vehicle owned and registered by

her 33-year-old non-resident son to benefit from lower premiums. After an
incident, MemberSelect Insurance Company denied the claim, arguing the
mother lacked an insurable interest. The Michigan Court of Appeals upheld
the trial court's decision, affirming that the mother had an insurable interest
in her son's vehicle, thereby broadening the interpretation of insurable
interest in the state. MemberSelect Insurance Company v. Flesher (2020)
 Indemnity means that the insured person is
placed, financially, in the same position, as
he was before the loss.

Indemnity One can not make profit out of Claim.

This principle does not follow the Life

Insurance Contracts.
 How Indemnity is provided

Cash payment – for the amount payable under the policy

Repair – most extensively used method of providing indemnity (motor

claims)

Replacement – commonly used in glass insurance

Reinstatement or replacement by new item– used in restoring or rebuilding

or replacing machinery or reinstatement of building under engineering &
Fire insurance policies (whether Principle of Indemnity met or not?)
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 Factors limiting the Indemnity
Average – this is applicable where an insured deliberately or
otherwise underinsures his property.

Compulsory excess – Money borne by insured

Limits in case of paintings and antique pieces

The emerging Indemnity approach in

Parametric Insurance
 Cases….
Sony Cheriyan had insured a consignment of goods being transported. Upon loss
during transit, he filed a claim with the insurer for the total insured value. However, the
insurer found that the actual loss was significantly lower. The Supreme Court held that
insurance contracts are contracts of indemnity, and the insured cannot claim more
than the real financial loss. The ruling reinforced that compensation is strictly limited to
actual damage or loss suffered, to prevent misuse or profit from insurance. Oriental
Insurance Co. Ltd. vs. Sony Cheriyan

In this case, the insured, Kantika Colour Lab, suffered damage to its photo processing lab due to a
fire. The company had taken an insurance policy for a higher amount than the actual value of the
machinery. When claiming compensation, the insured demanded the full sum insured. The insurer
contested, arguing that indemnity is limited to actual loss, not the insured amount. The court
upheld the principle of indemnity, stating the insured is entitled only to the amount of actual loss,
not more—even if the policy coverage is higher.
United India Insurance Co. Ltd. vs. Kantika Colour Lab & Ors. (2010)
Express conditions of an Indemnity contract
1. Contribution

Contribution condition is a corollary to the Principle of indemnity. If an insured

obtains more than one policy covering the same risk, he cannot recover the
same loss from more than one source so that he is not benefited by more
than ‘Indemnity’.

Contribution condition checks that each policy pays only a

ratable portion under each separate policy.
 Contribution
When Contribution arise-
Two or more policies of indemnity must
exist
The policy must cover common interest &
subject matter
Common peril
Each policy must be liable for loss
 Example - Contribution

❑ Mr. Peter insures his property worth Rs. 20,00000 with 4 Insurers (A, B,
C and D for 2, 4, 6, 8 Lakhs) After the loss of Rs. 2 lakhs he recovered
it fully from company A (Ignored others).

❑ What is the right of company A, Can it recover from others?

 Cases….
In this case, the insured property was covered under fire insurance policies by more
than one insurer. After a fire incident, the insured claimed the full amount from
National Insurance. The insurer later demanded contribution from the other insurance
company. The court upheld the right of an insurer to seek contribution from co-
insurers and stated that the principle ensures fairness and prevents undue burden on
a single insurer when multiple insurers share the same risk. National Insurance Co.
Ltd. vs. Hindustan Safety Glass Works Ltd. (2005)

In this case, a factory insured the same stock of goods under two separate fire insurance policies
from different insurers. A fire caused damage, and the insured claimed the entire loss from New
India Assurance. The insurer paid the full amount and later claimed contribution from the co-
insurer. The court held that when the same risk is covered by multiple insurers, all are
proportionately liable. The insured cannot recover more than the actual loss, and contribution
ensures equitable distribution of liability among insurers. New India Assurance Co. Ltd. vs.
Protection Manufacturers Pvt. Ltd. (1996)
 2. Subrogation

Subrogation condition is another corollary to the principle of Indemnity. A loss

may occur accidentally or by the action or negligence of third party . The
property owners have a right to proceed against the offending third party to
recover the loss/damage and under their insurance policy but not under both.

An exception to this are life insurance polices wherein insured/ beneficiaries can
claim under an insurance policy and also proceed against the offending third
party.
When Subrogation arise-
Tort
Contract
Statute
Subject matter of Insurance
Mr. X was on his way to office in his car when it was hit from
behind by a Lorry, and the lorry driver was drunk. Here X can
claim compensation from the insurance company. The
insurer in turn can sue the lorry owner Y for the damages.
Here X will have no right of action against Y if he receives
compensation for the loss from the insurer.
Mr. A insures his house with an insurance company. The
house is burnt by fire and A recovers the loss from the
insurance company. A subsequently brings an action against
his neighbour, who was responsible for the fire and recovers
damages from the neighbour. Here, the insurance company is
entitled to the amount, which A has received from his
neighbour. So, A must pay the amount to the insurance
company.
What if Insurance company didn’t pay claim to insured, can it
sue third party?
 Case (Castellain v. Preston)

Preston the owner of a house property entered into a transaction under which he
contracted to sell his house. The property was insured against fire. Before the transfer of
title of the property to the buyer, the house was partly damaged by fire. The insurer
indemnified Preston for the loss.
After that the sale was completed and the buyer paid the full price that was agreed upon
to Preston. Ultimately the insurer came to know about this and filed a suit against
Preston on the ground that since he received the full price, he doesn’t stand to incur any
financial loss from the mishap.
So, there is no valid reason for him to receive payment from the insurer. The court
accepted the insurer’s stand and ordered Preston to return the amount indemnified by
the insurer.
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 Importance of Subrogation

It prevents the insured from profiting from the damage, i.e., obtaining
compensation twice for the same loss.

It enforces the rule of law that the guilty is brought to book and made
to pay for the loss.

It helps the insurer to partially or fully recover the amount paid for the
loss.

Because of recovery, the insurance company’s losses are

substantially scaled down, the benefit of which in turn is passed on to
the final policyholder by way of reduction in premium.
Proximate Cause
The principle of proximate cause states that for
a loss to be covered under an insurance
policy, it must result from the dominant,
effective, and nearest cause of the loss. When
multiple events contribute to a loss, the insurer
identifies the proximate cause—the cause that
sets the chain of events in motion without any
break.
If this dominant cause is insured under the
policy, the claim is payable. Conversely, if it is
an excluded peril, the insurer is not liable.
 Cont’d
This principle helps insurers and insureds
determine liability in complex situations involving
more than one cause of loss.
It prevents confusion by focusing on the real cause
rather than remote or incidental factors. Proximate
cause ensures fairness and consistency in claim
settlement.
It is especially important in fire, marine, and
accident insurance where losses often arise from a
series of interconnected events.
 Continued…
A ship encounters a storm that causes seawater
to enter the cargo hold, damaging the goods.
Even though water caused the immediate
damage, the proximate cause is the storm, an
insured peril. Therefore, the loss is covered
under the marine insurance policy.
"A person was involved in horse racing and
suddenly lost his way, ending up reaching in a
forest. There, he accidentally fell and lay in wet
conditions for a long time. Eventually, someone
took him to the hospital, where he contracted
pneumonia and later died. What should be the
status of the claim?“