Essential Elements and Principles of Insurance
Subject: Business Studies
Overview
Insurance contributes a lot to the general economic growth of the society by provides stability to the functioning of the process. The insurance industries develop financial institutions and reduce uncertainties by improving financial resources.
Essential Elements and Principles of Insurance
Essential elements of Insurance
Insurance means protection against loss. It is the process of safeguarding the interest of people from loss and uncertainty. It is based on the contract. It is a valid agreement that incorporates certain terms and conditions. It may be described as a social device to reduce or eliminate a risk of loss to life and property. The essential elements of insurance are listed below:
- Agreement
The agreement means communication by the parties to one another regarding their intentions to create a legal relationship. For a valid contract of insurance, there must be an agreement between the parties. That is one making offer or proposal and another accepting the proposal or signifying his acceptance of the proposal. - Free consent
There must be free consent between the two parties in the contract. Parties entering into the contract should enter it by their free will and consent. The contract entered via undue force, influence, fraud, misrepresentation, hiding the facts is not a valid contract. Consent received forcefully can't be a free consent. - Components of the contract
An agreement must be legally competent between the parties to enter into the contract. It means both parties in the insurance contract must be at the age of majority. He/she must have a sound mind and not disqualified by the law of the country. It states that a person who is minor, lunatics, an idiot and alike cannot enter into an insurance contract. The contract done with these parties will be declared as void. - Increase self-respect
There is a direct connection between self-respect and independence of a person in society. Insurance supports to the person to be independent. It provides economic support to an individual, businessman which helps to increase the self-respect of the person in society. - Legal consideration
There must be valid considerations in a valid insurance contract. Consideration is the value that each party gives to the other party. For the establishment of the legal relationship, there should be a creation of an obligation between them and to make it enforceable by law there must be a lawful consideration. - Compliance with legal formalities
In the contract of insurance, the agreement between parties must be in written form and signed by both parties. It must be properly tested by the witness and registered otherwise, it may not be enforced by the court. - Competent of contract
The parties to the contract should satisfy certain qualifications to enter into contracts. A person who is at the age of majority according to the law, who is of sound mind and who is not disqualified by the law can enter into the contract. So, the person of unsound mind, disqualified and minors cannot enter into insurance contracts. A contract made by incompetent parties will be invalid. - Certainty
The terms and conditions of a contract should be clear and certain. They should be clearly understood by both parties. Hence, to make it clear and certain, the insurance company provides a printed policy document. It contains all the terms and conditions of the policy. - Insurable interest
Insurable interest refers that the insured must suffer if the loss takes place in the property. In the case of a property interest, ownership of property can support insurable interest but in the case of life insurance, close family ties or marriage will satisfy the requirement of insurable interest. - Encourage Saving
The insurance should pay the amount of premium regularly and compulsorily. It develops the habit of saving. The deposited insurance premium cannot be withdrawn like a bank deposit. Life insurance is the best method of saving an investment. It is a good means to make provision for retirement age. - Writing and registration
The insurance contract must be in writing, duly signed, stamped and registered. - Warranties
Certain conditions and promises imposed in the contract are called warranties. A warranty is that by which the insured undertakes that some particular thing shall or shall not be done. Warranty is a very important condition in an insurance contract which is to be fulfilled by the insurance company.
Principles of Insurance
Insurance is a contract between the insurer and the insured. It needs to follow certain basic principles. Every business has its own values and assumptions which play an important role in related business. To run the insurance business effectively, it has its own values, assumptions, and guidelines. Such values, assumptions, and guidelines are known as principles. The principles of insurance are listed below:
- Principle of Nature of Contract
The nature of the contract is a fundamental principle of an insurance contract. An insurance contract comes into existence when one party makes a proposal of a contract and the other party accepts the proposal. A contract should be simple to be a valid contract. The person who is entering into a contract should enter with his free consent. - Principle of Utmost Good Faith
An insurance contract is based on the principle of utmost good faith. Under this insurance contract, both parties should have faith over each other. They must behave or act in utmost good faith. As a client, it is the duty of the insured person to disclose all the facts to the insurance company. Any fraud or misrepresentation of facts can result in the cancellation of the contract. - Principle of Insurable Interest
Under this principle of insurance, the insured must have an interest in the subject matter of the insurance. In the absence of insurable interest, no one can get a property insured and can claim the compensation of loss from the insurance company by destroying property. - Principle of Indemnity
The principle of indemnity states that the insurer agrees to pay no more than the actual amount of loss. Indemnity is the security or compensation against loss or damage. The principle of indemnity is such principle of insurance stating that an insured may not be compensated by the insurance company in an amount exceeding the insured’s economic loss. - Principle of Mitigation
According to this principle, the insured should try to minimize the loss as far as possible when the incident takes place. It is the duty of the insurer to make every effort and to take all possible steps to minimize the loss in the event of the accident. - Principle of Double Insurance
Double insurance denotes the insurance of the same subject matter with two different companies. It is the same company under two different policies. Insurance is possible in case of indemnity contracts like fire, marine and property insurance. A double insurance policy is adopted where the financial position of the insurer is doubtful. Here, the insured cannot recover more than the actual loss and cannot claim the whole amount from both the insurers. - Principle of Proximate Cause
The proximate cause literally means the ‘nearest cause’ or ‘direct cause’. This principle is applicable when the loss is the result of two or more causes. The proximate cause means; the most dominant and most effective cause of loss. This principle is applicable when there are series of causes of damage or loss. - Principle of Subrogation
This principle of subrogation strongly supports the principle of indemnity. Subrogation means the substitution of the insurer in place of the insured for the purpose of claiming from the third person for a loss covered by insurance. For example, in the case of an auto accident, subrogation stops an insured from collecting payment from two insurance companies for the same loss, places responsibility for the accident on the third party and gives an insurance company the legal right to demand recovery. - Principle of Contribution
The principle of contribution allows insurance companies to share the cost of claims and prevents an insured from collecting in full on more than one policy. The main purpose of the principle is to compensate only the actual loss in a proportionate way by the insurers. If one insurer pays the claim in full, the insurer can then recover a percentage of the payment from the other insurers. (Chand)
References
Business Hub. 03 01 2015. Electronic. 15 06 2016. http://yourlearningtopics.blogspot.com/2015/01/essentials-of-insurance-contract.html
Chand, Smriti. your article library.com. Since 1998. Electronic. 15 06 2016. http://www.yourarticlelibrary.com/insurance/7-most-important-principles-of-insurance/7536/
Things to remember
- Insurance has evolved as a process of safeguarding the interest of people from loss and uncertainty.
- The parties in an agreement must be legally competent to enter into the contract.
- Consent means that parties to an agreement must agree on a specific thing in the same sense or their understanding should be the same.
- Insurable interest must exist at the time of the purchase of the insurance.
- The principle of indemnity is such principle of insurance stating that an insured may not be compensated by the insurance company in an amount exceeding the insured’s economic loss.
- Subrogation is a principle of substitution and recovery.
- It includes every relationship which established among the people.
- There can be more than one community in a society. Community smaller than society.
- It is a network of social relationships which cannot see or touched.
- common interests and common objectives are not necessary for society.
Questions and Answers
What are the major essential elements of insurance?
The essential elements of insurance are listed below:
1. Agreement
The agreement means communication by the parties with one another. There must be an offer and acceptance of the terms and conditions of the insurance contract. The acceptance or rejection of an offer is made by the insurer. The insurance contract becomes valid after the issuance of acceptance notice by the insurer to the insured.
2. Free consent
The parties involved in a contract are said to consent freely when they agree upon the same thing in same sense. There must be free consent between the two parties in the contract. The consent is free when the contract is not made by coercion, undue influence, fraud oor misrepresentation or mistake.
3. Competents to contract
The parties to the contract should be competent to enter into contracts. Every person is competent to contract who is of the age of majority according to the law and who is of sound mind and is not disqualified from by any law. The insurer must also be legally competent. The insurer must have license to sell the insurance contract.
4. Increase self-respect
There is the direct connection between self-respect and independence of a person in the society. Insurance supports to the person to be independent. It provides economic support to an individual, businessman which helps to increase the self-respect of the person in the society.
5. Legal consideration
In every contract, there should be a legal consideration. In an insurance contract, payment of premium is taken as a valid consideration. Without payment of premium, the insurance contract cannot be initiated.
6. Compliance with legal formalities
In the contract of insurance, the agreement between parties must be in written form and signed by both the parties. It must be properly tested by the witness and registered otherwise, it may not be enforced by the court.
7. Certainty
The terms and conditions of a contract should be clear and certain. They should be clearly understood by both the parties. In insurance, the insurance company gives printed policy deocument which contains all the trms and conditions of the policy.
8. Insurable interest
Insurable interest refers that the insured must suffer if the loss takes place in the property. Incase of the property interest, ownership of property can support to insurable interest but in the case of life insurance, close family ties or marriage will satisfy the requirement of insurable interest.
9. Encourage saving
The insurance should pay the amount of premium regularly and compulsorily. It develops the habit of saving. The deposited insurance premium cannot be withdrawn like a blank deposit. Life insurance is the best method of saving an investment. It is a good meant to make provision for retirement age.
10. Writing and registration
The insurance contract must be in writing and duly signed, stamped and registered. The condition is fulfilled as the proposer signs in a printed proposal form. The insurance compnay issues the policy document properly signde and stammped.
Explain the principle of insurance.
The principles of insurance are listed below:
1. Principle of nature of contract
Nature of contract is a fundamental principle of an insurance contract. An insurance contract comes into existence when one party makes a proposal of a contract and the other party accepts the proposal. A contract should be simple to be a valid contract. The person who is entering into a contract should enter with his free consent.
2. Principle of utmost good faith
An insurance contract is based on the principle of utmost good faith.Under this insurance contract both the parties should have faith over each other. They must behave or act in utmost good faith. It means that they should disclose all material facts or information fully and truly at the time of entering into a contract.
3. Principle of insurable interest
Under this principle of insurance, the insured must have an interest in the subject matter of the insurance. In the absence of insurable interest, no one can get a property insured and can claim the compensation of loss from the insurance company by destroying property.
4. Principle of indemnity
The principle of indemnity the insurer makes compensation to the insured against the loss in financial terms. This principle clarifies that the insurance is only for compensation of loss but not for any financial benefits. It means compensation given to the insured can never be more than the actual loss of the property.
5. Principal of mitigation
According to this principle, it is the duty of the insured to make every effort and to take all possible steps to minimize the loss in the event of an accident. He must do his best to minimize the damage and save the property from damage.
6. Double insurance
Double insurance denotes the insurance of same subject matter with two different companies. It is the same company under two different policies. A double insurance policy is adopted where the financial position of the insurer is doubtful. Here, the insured cannot recover more than the actual loss and cannot claim the whole amount from both the insurers.
7. Principle of proximate cause
The Proximate cause literally means the ‘nearest cause’ or ‘direct cause’. This principle states that if the loss is caused by two or more than two reasons, then it becomes necessary to identify the nearest cause of the loss. The insurance company is not liable to compensate the loss caused by remote cause.
8. Principle of subrogation
This principle of subrogation strongly supports the principle of indemnity. Subrogation is the right of the subject matter of insurance gets to be transferred from insured to the insurance company after indemnity.
9. Principle of contribution
The principle of Contribution allows insurance companies to share the cost of claims and prevents an insured from collecting in full on more than one policy. This principle exists when the insured can insure the same property within more than one insurance company. It states that if a person takes insurance policy from more than one insurance company for a single property than the insured will be paid the actual loss by these insurance companies in the ratio of the value of policy issued by them.
Explain any six principles of insurance.
Any six principles of insurance are as follows:
1. Principle of nature of contract
Nature of contract is a fundamental principle of an insurance contract. An insurance contract comes into existence when one party makes a proposal of a contract and the other party accepts the proposal. A contract should be simple to be a valid contract. The person who is entering into a contract should enter with his free consent.
2. Principle of utmost good faith
An insurance contract is based on the principle of utmost good faith.Under this insurance contract both the parties should have faith over each other. They must behave or act in utmost good faith. It means that they should disclose all material facts or information fully and truly at the time of entering into a contract.
3. Principle of insurable interest
Under this principle of insurance, the insured must have an interest in the subject matter of the insurance. In the absence of insurable interest, no one can get a property insured and can claim the compensation of loss from the insurance company by destroying property.
4. Principle of indemnity
The principle of indemnity the insurer makes compensation to the insured against the loss in financial terms. This principle clarifies that the insurance is only for compensation of loss but not for any financial benefits. It means compensation given to the insured can never be more than the actual loss of the property.
5. Principal of mitigation
According to this principle, it is the duty of the insured to make every effort and to take all possible steps to minimize the loss in the event of an accident. He must do his best to minimize the damage and save the property from damage.
6. Double insurance
Double insurance denotes the insurance of same subject matter with two different companies. It is the same company under two different policies. A double insurance policy is adopted where the financial position of the insurer is doubtful. Here, the insured cannot recover more than the actual loss and cannot claim the whole amount from both the insurers.
Explain any five essential elements of insurance.
1. Agreement
The agreement means communication by the parties with one another. There must be an offer and acceptance of the terms and conditions of the insurance contract. The acceptance or rejection of an offer is made by the insurer. The insurance contract becomes valid after the issuance of acceptance notice by the insurer to the insured.
2. Free consent
The parties involved in a contract are said to consent freely when they agree upon the same thing in same sense. There must be free consent between the two parties in the contract. The consent is free when the contract is not made by coercion, undue influence, fraud oor misrepresentation or mistake.
3. Competents to contract
The parties to the contract should be competent to enter into contracts. Every person is competent to contract who is of the age of majority according to the law and who is of sound mind and is not disqualified from by any law. The insurer must also be legally competent. The insurer must have license to sell the insurance contract.
4. Increase self-respect
There is the direct connection between self-respect and independence of a person in the society. Insurance supports to the person to be independent. It provides economic support to an individual, businessman which helps to increase the self-respect of the person in the society.
5. Legal consideration
In every contract, there should be a legal consideration. In insurance contract, payment of premium is taken as a valid consideration. Without payment of premium, the insurance contract cannot be initiated.
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