.
Nature of General Insurance
Contracts
• Insurance contract is an arrangement in which one party (called
the insurer) charging a price (called the premium) promises to pay
another party (called the insured person(s), business, or entity) a
sum of money if something should happen which causes financial
loss to insured.
• A party who undertakes or promises to pay the above referred loss
is called insurer.
• A party to whom such promises is given is called insured.
• An agreed consideration
11/22/2024
paid to the insurer is called premium.
Principles and Practice of General Insurance 2
Essential elements of contract
of insurance
• Insurance contracts, like other contracts, are governed by the
general principles of the law of contract as codified in the Indian
Contract Act, 1872.
• As in other contracts, the essential elements in a contract of
insurance are:
(1) Offer and acceptance.
(2) Consideration.
(3) Agreement between the parties.(Consensus “ad idem”)
(4) Capacity of the parties.
(5) Legality of the contract.
11/22/2024 Principles and Practice of General Insurance 3
[Link] and
Acceptance
• A contract is completed by one party's acceptance of an offer made by the
other party.
• The offer usually comes from the Person desiring insurance protection who
is called proposer and on having sought insurance protection becomes
insured. A proposal when accepted becomes a promise
• The offer is known as the proposal.
• The proposal may be made orally, on the telephone or it may be made in
writing.
• There is a practice to use printed proposal forms for most of the general
insurance contracts
11/22/2024 Principles and Practice of General Insurance 4
• In Marine insurance, proposal forms are not used. Brief details of
the risk are usually submitted through a letter or even on the
telephone.
• In fire insurance proposal forms are used for certain types of
insurances.
• In Accident insurance the offer is invariably required to be made by
the completion of a proposal form.
• Acceptance is not effective until it is communicated to the party
who made the offer.
• Acceptance can be verbal but insurers indicate acceptance usually
by the issue of a cover note.
11/22/2024 Principles and Practice of General Insurance 5
[Link]
• In Insurance contracts the consideration is the premium that the
Insured pays to the Insurer as the price of the promise that the
Insurer has made.
• There is no validity of a contract if there is no consideration.
• Hence premium payment is the consideration on part of the insured and the promise
to Indemnify is the consideration on part of the Insurer.
• It means Insurer agrees that insured shall indemnified in case of loss.
• Consideration consists of some profit or benefit accruing to the one party or some
loss or responsibility suffered or undertaken by the other.
• According to the Insurance Act, 1938, as amended in 1968, prior payment of premium
is a 11/22/2024
pre-requisite for assumption of risk
Principles by insurers.
and Practice of General Insurance 6
3. Agreement between the parties
• This is the principle of "consensus ad idem”.
• Both parties should agree to the same thing in the same sense.
• The reasons for taking the Insurance policy should be understandable to both
the parties.
• In other words, there must be consent arising out of common intention.
• There will be no consensus if either of the parties or both of them are under
an erroneous impression as to some circumstance affecting the contract.
• For example, if an Insured seeking a fire policy and insurer issued a burglary
policy there is no consent arising out of common intention.
11/22/2024 Principles and Practice of General Insurance 7
4. Capacity of the parties to
contract
• According to Indian Contract Act every person is competent to contract
provided:
1. Who is of the age of majority (18 years)according to the law to which he is
subject.
2. Who is of sound mind.
3. Who is not disqualified from contracting by any law to which he is subject.
4. Thus minors and persons of unsound mind 'cannot enter into insurance
contracts.
11/22/2024 Principles and Practice of General Insurance 8
5. Legality of the contract
• The subject matter of the contract must, be legal. As
per Indian Contract Act, the object of an agreement is
lawful unless
1. It is forbidden by law.
2. Is of such a nature that, if permitted, it would defeat
the provision of any law or is fraudulent.
3. Involves or implies injury to the person and property
of another.
4. The court regards it as immoral or opposed to public
policy.
11/22/2024 Principles and Practice of General Insurance 9
Evidence of Insurance Contract
• Insurance policy document is proof of insurance.
• It is a formal legal document that is used as a legal
binding for the insurance contract.
• The policy document is the evidence of the insurance
contract and contains all the terms and conditions.
• This makes the terms of the contract become clear to
both parties and to facilitate compliance.
• To make the contract legally enforceable, Policies are
required to be stamped as per the provisions of the
Stamp Act.
11/22/2024 Principles and Practice of General Insurance 10
• Other Features of Insurance Contracts
11/22/2024 Principles and Practice of General Insurance 11
1. Insurance is an
Aleatory Contract
• Aleatory means that the performance of one or more parties is
dependent on happening of certain contingencies which cannot be
controlled by either of the parties, such as Accidents, Natural
disasters and Death.
• In other words the outcome is affected by chance. Some times
policy may lapse, and the event for payout may not occur at all.
• Insurers are required to perform that is to pay the loss only if the
insured contingency takes place.
• The insured’s premium is small compared to the amount the insurer
must pay if a loss occurs
11/22/2024 Principles and Practice of General Insurance 12
2. Insurance is a Unilateral
Contract
• Only the Insurer makes a makes legally binding promise to do
something, the insured on the other hand after payment of
premium does not make any promises.
• However insured must comply with the conditions if he wants the
insurer to perform. (to receive payment for covered loss).
• Here the insured agrees to do certain things (such as file a proof of loss in the
event of a loss) he or she has no legal obligation to do so.
• In an insurance contract, the insurance firm promises to
indemnify or pay the insured individual a specific amount of
money if a certain event happens.
• Since it is a unilateral contract, the insurer is not obligated to
make a payment to thePrinciples
11/22/2024 insured and Practiceif the Insurance
of General event does not occur. 13
3. Insurance is a Contract of
Adhesion
• A contract of adhesion is not a negotiated contract.
• One party draws the contract and the other party must “take-it or
leave-it” as written.
• An insurance contract is that it is drafted by one party only viz. the
insurer in the form of standard policies and endorsements.
The insured usually has no say in the matter.
• Therefore, whenever there is an ambiguity in the wording of the
policy, the courts gives the benefit of doubt to the insured that is to
say; the policy is interpreted by the courts in favour of the insured and
against the insurers, because the policy was drafted by the insurers
11/22/2024 Principles and Practice of General Insurance 14
• But, it does not mean that if the policy wording is not clear, the
benefit always goes to the insured.
• The policies are interpreted according to certain well-defined rules
of interpretation or construction, which have been established by
case law.
• The most important rule of construction is that the intention of the
parties must prevail and this intention is to be looked for in the policy
itself.
11/22/2024 Principles and Practice of General Insurance 15
[Link] is a Conditional
Contract
• In the insurance contract liability is met out or paid
paid to the policyholder once the conditions stipulated
in the contract have been satisfied.
• Failure to follow the conditions of the contract may
make the contract Void
11/22/2024 Principles and Practice of General Insurance 16
Interpretation of Insurance
Policies
• The policies are interpreted according to certain well-defined rules of
interpretation or construction, which have been established by case law.
• Most important rule of construction is that the intention of the parties must
prevail and this intention is to be looked for in the policy itself.
The other important rules are as follows:
• Printed and typed portions are to be construed together as far as possible,
but if there is contradiction between the two portions then:
• Typed portion over-rides the printed portion.
• The handwritten portions over-ride the typed portion.
11/22/2024 Principles and Practice of General Insurance 17
• The clauses in the margin override the clauses in the main body of the policy.
• The policy is to be interpreted as a whole; i.e. if possible, effect must be given
to every part of the policy.
• The words in the policy are to be given their plain, ordinary, and popular
meaning.
• However, technical terms are to be given their-strict technical meaning.
• The ordinary rules of grammar shall apply.
11/22/2024 Principles and Practice of General Insurance 18
[Link] of General Insurance and
Products
11/22/2024 Principles and Practice of General Insurance 19
Traditional Classification
• Any insurance, which does not qualify for calling as Life Insurance is termed as Non-
life or General Insurance and includes insurance of property, interest liability and
person excluding natural death.
Traditionally General Insurance is classified as under:
• Fire Insurance
• Marine Insurance
• Miscellaneous Insurance.
11/22/2024 Principles and Practice of General Insurance 20
Modern Classification of General
insurance
• In present set up the General insurance business is classified under the
following headings:
A)Property insurances –Fire, Theft, Engineering, Motor insurance and Mis
cellaneous accident.
Liability insurances –Employers liability, Public liability, Products liability and
Professional indemnity etc.
Pecuniary insurances - Fidelity guarantee, Cast in transit, Case in Safe Credit
insurance etc.
Personal Accident and Health insurances:
Loss of Profit or Consequential or Interruption of Business insurances arising
out 11/22/2024
of fire and engineering risks.
Principles and Practice of General Insurance 21
• B)- Personal Lines and Commercial (Business) Insurance
• Personal insurance business: It caters to the needs of the individuals
and families. Examples on the general insurance side, the individuals
require fire, motor, personal liability, professional indemnity and
personal accident and health insurances.
• Commercial insurance: It addresses various aspects of business and
cater its insurance needs,. Examples are typically providing coverage
for general liability occurrences, property damage, workers
compensation, automobile liability etc.
11/22/2024 Principles and Practice of General Insurance 22
• C) - First Party and Third Party Insurance
• First Party insurance: Policy provides coverage for losses sustained directly by
the insured. For example, a fire insurance policy is designed to provide
coverage for fire loss to the insured’s own property.
• Third Party Insurance (also known as liability insurance) provides coverage for
losses sustained by other persons, other than insured but for which the
insured may be legally responsible.
• For example, a product liability policy may provide coverage to the
manufacturer for losses sustained by others due to defective product
manufactured by him. Third party coverage is generally only available where a
“suit” has been commenced against the insured claiming damages that fall
within the scope of coverage.
11/22/2024 Principles and Practice of General Insurance 23
• D)- Long-term and Short-term Insurance
• Based on the tenure of contract insurance business is classified as Long-
term and Short-term Insurance.
• Long‑term insurance business: Refers to life, industrial life, insured
pensions and permanent health insurance business which are normally
issued for long periods ‑ running into several years or even for whole of
life time of the insured.
• In this context, life business is referred to as ordinary life business to
distinguish it from industrial life business.
• Short‑term insurance business: Policies under general insurance business,
are normally issued for twelve months or shorter durations. Recently
long‑term agreements have made an entry into this type of business but
the duration does not normally exceed five years.
11/22/2024 Principles and Practice of General Insurance 24
•
• E) Voluntary (Private) and Compulsory Insurances
• In the interests of the public, certain insurance schemes are made
compulsory, so that on the happening of an accident or a mishap
causing personal injury, adequate compensation is made available
to the workmen or the members of the public. Typical examples
are Motor Vehicles Act, 1988, Workmen's Compensation Act,
Factories Act, 1948 and Public Liability Insurance Act, 1991
• All other insurances are voluntary and left to the option of the
individual or the body corporate.
11/22/2024 Principles and Practice of General Insurance 25
• F) Social Insurance ( Social Security Welfare Schemes)
• There are certain situations where the government feels that financial assistance be
provided to the needy with the help of contributions from those who can afford to
pay them.
• Social insurance is seen mainly in the form of national health and unemployment
schemes.
• Pradhan Mantri Shram Yogi Maan-Dhan Yojana (PM-SYM) (Old Age Protection),
Pradhan Mantri Jeevan Jyoti Yojana (PMJJBY)
• Pradhan Mantri Suraksha Bima Yojana (PMSBY), Atal Pension Yojana
• The contributions would normally be recovered on a compulsory basis from the
working population to provide benefit to the old, ailing and unemployed members of
the population.
11/22/2024 Principles and Practice of General Insurance 26
• G) Micro Insurance
• Micro insurance is specifically intended for the protection of low -
income people, with affordable insurance products to help them
cope with and recover from financial losses.
• Its main objective is to pool both risks and resources of whole
groups for the purpose of providing financial protection to all
members against the financial consequences of mutually
determined risks.
• Insurance protection can either be provided by the conventional
Insurance Companies or by a cooperative Insurance society formed
by the people themselves for that purpose or by non-profit
organisation.
11/22/2024 Principles and Practice of General Insurance
27
BRIEF KNOWLEDGE OF GENERAL
INSURANCE PRODUCTS
• FIRE INSURANCE
• The 'Fire Insurance policy does not cover 'fire' and ‘lightning only but
covers (or can be extended to cover) loss or damage to the subject matter
due to certain other perils also.
• Explosion
• Spontaneous combustion, heating or fermentation
• Riot, Strike Malicious damage
• Civil Commotion
• Terrorism
11/22/2024 Principles and Practice of General Insurance 28
Perils of Nature:
• Flood, Inundation, Storm, tempest, and Hurricane
• Earthquake,
• Subterranean Fire
• Subsidence and Landslide.
Miscellaneous Perils:
[Link] and / or overflowing of water tanks, apparatus
[Link] Damages.
[Link] by any Rail/ Road vehicle or animal
[Link] form Automatic Sprinkler Installation
All moveable/ immoveable properties of the proposer on land (excluding
those
11/22/2024
in transit) can be covered
Principles andunder fire Insurance
Practice of General insurance 29
• MARINE INSURANCE
• This is the oldest form of insurance. Marine Insurance may be categorised
into Marine Cargo Insurance and Hull Insurance.
• Marine Cargo Insurance
• This class of insurance covers goods, freight and other interests against loss or
damage, whilst being transported by rail, road, sea and/or air.
• The coverage provided depends on the type of Institute Cargo Clauses (ICC)
attached to the Policy
11/22/2024 Principles and Practice of General Insurance 30
• Institute Cargo Clauses
• These clauses are drafted by Institute of London Underwriters
which is an association representing the marine insurance
companies operating in London and Lloyd’s underwriters.
• The clauses are used all over the world barring few countries.
• Institute Cargo Clauses (A),(B) and (C)
• ICC (A) All Risk and thus covers all physical loss or damage to the
cargo except those specifically excluded by the said clause.
11/22/2024 Principles and Practice of General Insurance 31
• ICC(B) and ICC(C) are named perils policy and more or less covers only
maritime perils like
• fire/explosion,
• Grounding of vessel.
• Sinking of the vessel or craft,
• Over turning or derailment of vehicle
• Collision or contact of vessel or conveyance with external object
• Discharge of cargo in distress etc.
Extension:
• Inland transit policies can be extended to cover Strike, riot and civil
commotion (including terrorist act).
• Export /Import policies can be extended to cover War and /or SRCC perils
11/22/2024 Principles and Practice of General Insurance 32
Marine Hull Insurance:
• This insurance covers Hull and Machinery of Ships or boats or any other
floating materials like
• Ocean Going Vessels
• Coastal Vessels
• Inland Vessels
• Pleasure Crafts
• Coverage:
The standard Hull policy covers loss or damage to Hull or Machinery due to
'Maritime' perils i.e. incidental to navigation of the sea and includes such
perils as fire, collision, stranding etc.
11/22/2024 Principles and Practice of General Insurance 33
MISCELLANEOUS INSURANCE
• This is the broadest class of Insurance. A wide range of policies would
come under this category. All classes of insurances other than Fire and
Marine come under this class of Insurance e.g.:
• Motor Insurance
• Burglary Insurance
• Money in Transit Insurance
• Personal Accident Insurance
• Engineering Insurance
• Liability Insurance
• Aviation Insurance etc.
11/22/2024 Principles and Practice of General Insurance 34
MOTOR INSURANCE
• Package Policy: This cover loss or damage to the vehicle insured and T.P.
Liability
• Motor Insurance covers all types of vehicles plying on public roads such
as:-
• Scooters &Motorcycles
• Private cars
• All types of commercial vehicles(Trucks, Buses and other goods and
passenger carrying vehicles)
• Miscellaneous Motor Vehicles(Type D,E,F and G types)
• Act Liability or [Link] policy- This covers third party liability for
bodily injury liability and /Principles
11/22/2024
or death and property
and Practice of General Insurance
damage. Personal 35
Accident cover for Owner-driver is also included.
PERSONAL ACCIDENT INSURANCE
• This insurance is designed to
provide cover in respect of
financial loss that may arise as a
result of accidental bodily injury
causing death or disablement.
• In general the following types of
coverage are offered under a
Personal Accident policy:-
• Death cover wherein 100% of
the capital sum insured is
payable.
11/22/2024 Principles and Practice of General Insurance 36
• Loss of two limbs / both eyes / one limb and one eye wherein 100% of
the capital sum insured is payable.
• Loss of one limb or one eye wherein 50% of the capital sum insured is
payable.
• Permanent Total Disablement other than above e.g. paralysis due to an
accident, wherein 100% of the capital sum insured is payable.
• Temporary Total Disablement i.e. where the insured person becomes
temporarily disabled from undertaking any work as a result of an accident
for e.g. fracture of legs. (% age of Sum Insured)
11/22/2024 Principles and Practice of General Insurance 37
BURGLARY INSURANCE
• In insurance, burglary or theft is defined as theft involving entry to or
exit from the premises by forcible and violent means. This does not
clude entry to the premises by a key, by a trick or by hiding in the
premises whilst open for business (unless the thief subsequently makes
his exist by forcible and violet means).
• The object of a Burglary Insurance Policy is to reimburse an insured for
losses and damages sustained through burglary and theft.
• Burglary (Business Premises) This insurance is designed to cover the
contents of offices, shops, warehouses and other business premises.
• Burglary Insurance (Private residences): This policy covers contents
of private dwelling houses. The property insured may be classified as
(i) household goods, personal effects and furniture, and (ii) gold and
silver articles, jewelry and valuables.
11/22/2024 Principles and Practice of General Insurance 38
The bases of Burglary Insurance are:
• Full Value Basis – Under this basis the sum insured on each item is
equal to its exact value at risk. In the event of loss, if the sum insured is
• less than the value at risk, what is known as “Average” will be applied.
• This means that the insured will bear a ratable proportion of the loss
in the event of under-insurance.
First Loss Policy –Under the first loss policy basis the sum insured is
deliberately limited to a sum lower than the full value of the property
with the insurer’s consent.
• Losses up to this are normally paid without application of Average in
the normal way. It is usually taken by an insured who feels that the
loss he may suffer cannot be more than a percentage of the value at
risk.
• In assessing this type of risk the following factors will be taken into
consideration
• 1. Location of the premises containing the goods – For example a
building is located in remote area as compared to thickly populated
area.
2. Building Security – The type of security systems employed within
and around the building is an important factor.
3. Nature of goods stored – The degree of attractiveness of the goods
stored matters. For example, jewelry and electronics are more
susceptible to theft than items such as deep freezers, furniture etc.
• Money-in-Transit policy: In insurance, the definition of “money” is
much wider than most people expected and includes such things as:
• Cash, Currency notes, bank notes, bonds, bills of exchange, stamps,
postal orders, trading stamps, money orders, in other words, items
whose negotiability gives them as currency whilst in transit from place
to place.
• Money is property and is at risk from both fire and theft, it is
particularly attractive to thieves having all the attributes that the thief
likes, such as – high value, small bulk, easy to transport, easy to dispose
of , difficult to trace available in both the fire and theft policies. Money
is at risk anywhere and particularly so when in transit.
11/22/2024 Principles and Practice of General Insurance 42
• Cash in safe is included under a separate item in the policy.
• Baggage insurance: Accompanied baggage of persons traveling is
covered against loss or damage due to theft, fire, or accident during
travel.
• Policies are effected for the period of the journey or on an annual
basis and the cover operates during travel by land, sea or air.
• Unaccompanied baggage is usually insured under a marine policy.
PUBLIC LIABILITY INSURANCE
• This policy provides an indemnity in respect of legal liability for accidental death or bodily
injury or accidental damage to property of third parties, arising out of the negligence of
the insured or his employees or through defects in the insured's premises or other
property owned by him.
• Legal costs are also payable under the policy.
• The scope for public liability insurance is very wide as will be evident from the following
broad classification of risks:
• Property owners.
• Shops, warehouses, factories, departmental stores.
• Builders and contractors.
• Lifts.
• Hotels and restaurants.
• Hospitals and nursing homes.
11/22/2024 Principles and Practice of General Insurance 44
•
PROFESSIONAL INDEMNITY INSURANCE
Professionals are expected to exercise a reasonable degree of care and skill
and any failure in this respect may cause financial loss to the clients giving rise
to a claim for damages.
Professional Indemnity policies are issued to members of the various
professions such as
• Physicians
• Surgeons
• Dentists
• Solicitors
• Chartered accountants
• Architects etc., This policy covers their legal liability for professional
negligence.
11/22/2024 Principles and Practice of General Insurance 45
PRODUCTS LIABILITY INSURANCE
These policies provide an indemnity to manufacturers and others against legal
liability in respect of accidental death or bodily injury or accidental damage to
property caused by any defect in any of the products manufactured, sold or
supplied by the insured. Products that may give rise to liability are:
• Pharmaceuticals
• Electrical appliances
• Cosmetics
• Hospital equipment
• Canned food
• Industrial machinery, etc.
• The territorial limits within which the injury or damage must arise are
specified
11/22/2024 in the policy. Principles and Practice of General Insurance 46
ENGINEERING
INSURANCE
Subject matter of this class is machinery. The main types of cover
comprised in engineering insurance are:
• Machinery Break down
• Boiler insurance.
• Erection All Risk insurance(EAR)
• Marine- cum-Erection.(MCE)
• Contractor Plant and Machinery(CAR)
• Contractor All Risk Insurance(CAR)
• Civil Engineering Completed Risk.
11/22/2024 Principles and Practice of General Insurance 47
Machinery Breakdown insurance:
• Policy covers sudden and unforeseen damage to the insured machinery whilst in
operation, due to:
1. Internal causes such as faulty material, short circuit, etc., whilst in operation or at
rest.
2. External causes such as lack of skill, sabotage, entry of foreign bodies etc.
3. Accidental damage is also covered during dismantling of machinery for
overhauling, cleaning or repairs and during subsequent re-erection.
4. Third party liability may be added to the policy
The basis of indemnity is the cost of repairs or the market value, as the case may be.
• Loss of Profits (Machinery) Insurance:
• This policy provides an indemnity against financial losses caused by interruption of
production due to machinery breakdown. The cover provided is generally in line
with that available under LossPrinciples
11/22/2024
of Profits (fire)
and Practice policy.
of General Insurance 48
AVIATION INSURANCE
Aviation insurance comprises the following types of cover:
1. Insurance of aircraft against loss or damage.
2. Insurance of legal liability to third parties and passengers.
3. Insurance of legal liability for freight, mail, etc. carried.
4. Insurance of pilots, crew and ground staff against personal accident
risk.
5. Insurance of pilots and other crew against loss of professional
license.
11/22/2024 Principles and Practice of General Insurance 49
FIDELITY GUARANTEES
• Fidelity guarantee insurance indemnifies the employers against the financial
loss suffered by them due to the specified dishonest acts of their employees.
• The cover granted is against a direct pecuniary loss and not a consequential
one. The loss should be in respect of moneys or goods of the insured and the
act should be committed in the course of the duties specified.
HEALTH INSURANCE
• This policy provides for reimbursement of medical expenses incurred in India in
a hospital as an inpatient (and under certain specified circumstances at home)
as a direct result of accident or sickness occurring or contracted anywhere in
the world.
• All the existing illnesses are excluded from the scope of cover under the policy
when taken for the first time
11/22/2024 Principles and Practice of General Insurance 50
•THANKS