Chapter 1

PRINCIPLES OF INSURANCE

PRINCIPLES OF INSURANCE

 

Insurance is a contract between parties. A Contract of insurance is a contract by which one party undertakes to make good the loss of another, in consideration of a sum of money, on the happening of a specified event, e.g. fire accident or death. Law recognizes insurance as a system of sharing risk too great to be borne by one individual. The insurance contract involves

  • The elements of general contract
  • The elements of special contract relating to insurance.

 

  1. General contract

According to section 10 of the Indian contract act 1872, valid contract should have the following essentialities.

  • Offer and acceptance
  • Legal relationship
  • Consensus ad idem
  • Competency of parties
  • Free consent
  • Lawful consideration
  • Legal object

 

  1. Offer and acceptance: An offer is an expression of willingness to contract on certain terms, made with the intention that it shall become binding as soon as it is accepted by the person to whom it is addressed. In order to create a valid contract there must be an agreement between two parties. In insurance, the offer is typically initiated by the insurance applicant through the services of an insurance agent by tilling out an application for insurance. In other words people who are willing to take an insurance policy makes a proposal to the agent of the insurance company by filling up a prescribed proposal form which is available free of cost. In insurance the insured offers for entering into contract. There should be a valid acceptance on the part of insurer. When the insurer gives a notice of acceptance to the insured, it will become a valid acceptance. The acceptance of the offer depends upon whether the insurance is for property or liability, or for life insurance. For property and liability insurance, the offer is the application for insurance and the payment of the 1st premium, or the promise to do so. In most personal lines of insurance, the agent can accept the offer for the company, binding the company to the contract.
  2. Legal relationship: The parties should intend their agreement to result in legal relations. That means all agreements which do not result in legal relations are not contracts.
  3. Consensus ad idem: The two parties must have agreed about the subject matter of the contract at the same time and the same sense.
  4. Competency of parties: The parties to the agreement must be competent to contract. The insurance will be competent to contract if he has got a license to carry on insurance business.
  5. Every individual is competent
  • Who are the age of majority according to the law to which they are subject.
  • Who are sound mind
  • Who are not disqualified from contracting by any law to which they are subject.

It indicates that a minor is not competent to enter into contract. If the life insurance policy is issued to minor, the insurer cannot reject it during his minority. At the attainment of the age of majority, he has to exercise the option within a reasonable time, whether he would continue to carry on the policy or not. A person who is unsound mind is also not capable of entering contract. An alien enemy, an undercharged insolvent and criminals cannot enter into a valid contract.

  1. Free consent: An agreement must have been made by free consent of the parties. Consent may not be free either on account of a mistake in the minds of the parties or on account of consent obtained by some unfair means like coercion, fraud, misrepresentation or undue Influence.
  2. Lawful Consideration: All contracts must be supported by lawful consideration. Lawful consideration requires both the presence of consideration and the lawfulness of consideration. Premium being the valuable consideration must be given for starting the insurance contract. The first premium is consideration and subsequent premiums are merely conditions to contract.
  3. Legal objective: The object of the contract must be lawful. The objective must be Legal only if there is insurable interest
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