The Nature of Insurance (For B.Com )

Introduction:.
The law of insurance is contained in the Insurance Ordinance 2000. It extends to the whole of Pakistan. The Securities and Exchange Commission of Pakistan will implement this law.

What is the definition of insurance?

Insurance is a means to spread the loss caused by particular risk over a number of people against some amount called premium.
Insurance creates a fund under which many persons contribute some money called the premium out of which the persons who suffer losses are compensated.

Definition of Contract of Insurance

A contract of insurance is a contract in which one party undertakes against premium to pay to the other party a certain amount on the happening of a certain event.
A contract of insurance is a conditional contract. The general principles of the law of contract apply to it. It is a valid contract. It comes into existence by the offer in the form of proposal and its acceptance. The object of the contract must not be immoral or illegal.

Definitions

1.    Insurance

The party which promises to pay a certain sum of money to the other party is called the insurer (Insurance Company).

2.   Insured

The party to whom a certain some of money is paid is called the insured (policy-holder).

3.   Policy

The document containing the terms and conditions of the contract of insurance is called a policy.

4.   Premium

The consideration, which the insured has to pay to the insurer for the protection given to him is called premium.

5.   Policy Amount

The amount for which a policy is issued is known as policy amount.

6.   Subject matter

The thing property insured is called the subject matter of insurance.

What are the principles of insurance?

The following are the principles of contract of insurance.
1.   Utmost Good Faith
This contract requires utmost good faith on the part of both the parties to the contract. It is the duty of the insured to provide full information about the subject matter of the contract to the company. Similarly, the insurance company must disclose all necessary facts relating to the insurance contract. If the party fails to provide full information to each other, the contract is not enforceable in a court of law.

2.   Insurable Interest

It is essential for the insurance contract that the insurance should have insurance interest (monetary interest) in the subject matter of insurance. A person has an insurable interest in the subject-matter insured when he goes monetary benefit from its existence or suffers loss from its destruction. Insurance contract without insurable interest is void.

3.   Indemnity

All insurance contracts are contract of indemnity except of life insurance. In case of marine and fire insurance, the insured can recover only actual loss not exceeding the amount of policy. If there is no loss, the insurer is insurer of not liable.
But, in life insurance this principle does not apply because in case of death of insured the loss cannot be ascertained in monetary forms.

4.   Immediate Cause

It means that the insured can recover the loss only if it is caused by the risks insured against. The insurer is liable only for those losses caused by the risks insured against. To make the insurer liable for a loss, the immediate cause is considered. The insurer is not liable for remote causes. If there are two or more causes for damage to the property, the insurer considers the last cause of damages. The possible causes of damages are in the insurance policy.

5.   Subrogation

According to this principle, the insurer can recover the actual amount of loss. In case the loss occurs without any fault of third person, the insured can recover the loss from insurer only. But, if the loss occurs due to the negligence of third party, the insured can recover the loss from the insurer or the third party. If the insured recovers the loss from the insurer, then all the rights of insured against the third party will transfer to the insurer. The insurance company will recover the loss from the party responsible for loss.

6.   Contribution

This principle also applies in fire and marine insurances. According to this principle, in case of double insurance, all insurers must share the burden of payment proportionately. If an insurer pays more than his share of the loss, he can recover the excess from his co-insurers.

7.   Reduction of loss

In the event of some mishap to the insured property, the insured must take all necessary steps to reduce the loss. If he does not do so, the insurer can avoid the payment. In short, he must do his best but not at the risk of his life.

Reinsurance And Double Insurance

Something an insurance company accepts a very big risk. It may be difficult for it to beat the whole risk. Thus, the company gets insured a part of the risk with another insurance company. This is called reinsurance.
Double insurance is the insurance by more than one company. When a person gets his life insured by different companies he can receive the sum assured from all of them on maturity, But in marine or fire insurance all companies will pay the actual loss to the insured.

Assurance And Insurance

Both words are used for insurance. The word assurance is used for such insurance in which the event must take place. The word insurance is used for contract of indemnity. The word assurance is used for life insurance and insurance for marine and fire insurance.