Chapter 1: Introduction to Insurance.

Chapter 1: Introduction to Insurance.

a) Definition and Nature of Insurance: 

Definitions:

1. Functional Definitions.
2. Contractual Definitions.

Functional Definitions: 

Insurance is:

1. Co-operative device to spread the risk.
2. The system to spread the risk over a number of persons who are insured against the risk.
3. The principle to share the loss of each member of the society on the basis of probability of loss to their risk;
4. The method to provide security against losses to the insured. 

Disnadle: “insurance is an instrument of distributing the loss of few among many”.

Allen C Mayerson: Insurance is the device for the transfer of certain risks of economic loss to an insured, that would otherwise be borne by the insured.”

Contractual definition:

The insurance is a contract whereby:

1. Certain sum, called premium, is charged in consideration.
2. Against the said consideration, a large sum is guaranteed to be paid by the insurer who received the premium.
3. The payment will be made in a certain definite sum.
4. The payment is made only upon a contingency. 

Justice Tindall: “Insurance is a contract in which a sum of money is paid to the assured in consideration of the insurer's incurring the risk of paying a large sum upon a given contingency.”

MacLean: “Insurance is a method of spreading over a large number of persons a possible financial loss too serious to be conveniently borne by an individual”. 

Nature of Insurance: 

1. Sharing of Risk and its transfer. 
2. Large Number of Insured Persons.
3. (It is) a co-operative device. 
4. Value of Risk.
5. Payment as contingency.
6. Amount of Payment.
7. It is not a Charity.
8. It is not a gambling. 

Source:  Book “An Introduction of Insurance laws” by Dr. Naresh Mahipal and Book “insurance principles and practices.  M.N Mishra, Dr S.B Mishra 

b) Function of Insurance: 

c) Principles of Insurance: 

Source: Book “An Introduction of Insurance Laws” by Dr. Naresh Mahipal.

Principles of Insurance 

*Concerned with Introduction c . of Part B- Insurance Law 

1. Principle of Utmost Good Faith

Concept: The principle requires Policyholders to truthfully disclose all the information related to the risk to the insurance company. 

They must not hide any facts, technically referred to as material facts, that can affect the policy from the insurer. 

This principle requires reciprocal obligation as the insurer must also disclose all the features of a policy.  

The insurer must honestly explain everything clearly about the extent of the terms/conditions of the insurer. 

On the other hand, the insured must also provide a clear and correct for objects or interests of the insured

Nepali Legislation: Insurance Act 2079, Section 63(4)

Q. What constitutes material facts?

Material facts are the most essential information that influences the insurance policy. 

They are the information about the insured and their circumstances that influence the insurer’s decision to issue an insurance policy or terms of the policy.

Case: Prudential Insurance Company Ltd. vs Wengtes printing  

Principle used: If a party fails to disclose correct information vis a vis material fact of the contract or discloses false facts to enter into a contract or intentionally falsifies the material facts, utmost good faith is deemed to have been violated. The contract is voidable on the grounds that a party was deceived into entering the contract.

2. Insurable Interest 

Concept: The principle of insurable interest requires policyholders to have a financial stake in the subject matter of the insurance policy. 

The principle ensures that there is a proprietary relationship between the policyholder and the subject of the insurance. 

If any loss or contingency against which insurance is established occurs, the policyholder must suffer loss or damage. 

Insurance is established to give financial security against the risk of peril or loss of ownership or possessed goods. Therefore, prospective loss of ownership and possessed goods is a precondition to establishing an insurance contract. 

The principle of insurable interest ensures that the policyholder has a monetary interest in the subject matter of insurance. Thus there must entail property, life, interest, or a liability.

Q. How is insurable interest relevant in third-party insurance?    

Although ownership, possession, or monetary interest are not involved, the risk of an accident evokes liability. Thus, prospective liability is the insurable interest in third-party insurance. 

Q. What constitutes an insurable interest in life insurance?

Insurable interest does not always comprise property or possessed goods. A policyholder’s insurable interest in life insurance is established by a legal, contractual, or blood relationship. In English law, a person’s insurable interest in the insured’s life is the latter’s legal obligation to support the former.

However, in Harse v Pearl Life Assurance Co. Ltd, wherein a son had insured his mother’s life, the insurance was for the funeral expenses, the court held that the son did not have a legal obligation to bury his mother. 

The case above and its judgment pose the question of the relevance of insurable interest in life insurance. English law has recognized legal obligation as a pre-requisite for insurable interest but there exist interhuman links that go beyond the legal realm, ones it cannot define which make it difficult to establish legal obligation in practice. 

Aymer vs Hardford: “Parents have no insurable interest in child apart from funeral cost” 

Elements that establish insurable interest: 

1. Ownership/Legal ownership
2. Financial stake

3. Causa Proxima 

Concept: Derived from Latin phrase phrase ‘causa proxima non remota spectator’ (the immediate, and not the remote cause is to be considered) 

Translated to English as Proximate cause or immediate cause is a principle in Insurance that helps to determine the actual peril or cause of loss or damage. 

In insurance law, the basis for indemnity is derived from the peril or cause that is insured for in the policy. If the loss is identified to have been the result of the cause insured for, the insurer is covered. In this vein, the Causa Proxima is of relevance in insurance law. 

If an incident involves two or more probable causes for loss, this principle is used to identify the most immediate cause for loss or damage. 

For instance, Durga’s Nursing Home is a hospital in Tokha located on the banks of Bishnumati. Along the banks just 500 meters north is occupied by squatters who’ve recently protested the municipality's decision to evict them, by blocking the river. Consequently, the river flooded and caused considerable damage to the hospital. The hospital is insured against damages caused by riot, fire, and earthquake; however, it is not insured against damages caused by flood. The hospital claims that the flooding is only the aftermath of the protest which saw squatters blocking the river. However, it was found that the proximate cause for the damage or loss was flooding. As for the if but and may be concerning flooding, the riot or the protest was established as the far cause.

Case 1: In Kajima Daewoo Joint Venture v. New India Assurance Co. Ltd. Uttaranchal State 

Fact: Commission stated that the numbers of machines employed in constructing a power project was duly insured. One such machine was the TIL excavator. The machine was insured for site and burst when the lubricating system failed. With much effort, the machine was lifted to a safe place. Otherwise, that 30 ton machine would have fallen much below suffering an absolute harm. Still, the machine was reported as irreparable on the ground of damage caused to the engine. A surveyor was deputed for the assessment of the loss/damage. The claim was repudiated on the ground, inter alia, that the machine did not suffer any external impact and that the damage to the engine was mechanical on account of seizure of the engine due to deprivation of lubricant oil, which was not within the purview of the policy. 

Judgment: The commission observed entire material on record and reached a conclusion that the

mechanical failure of the machine was due to its slipping on the hilly terrain and the accident was the proximate cause of the mechanical failure. Therefore, it was well covered under the policy. (Source: KSL review 2014. Volume 4. Manjeet Kumar Sahu)

Case 2: Coxe v. Employers’ Liability Assurance Corporation

Fact: An army officer visiting sentries posted along the railway lines was accidentally run over by a passing train and killed. 

The policy excluded death or injury directly or indirectly caused by war, among other grounds. The place of the accident was dark due to a blackout. 

The passing of train was held to be proximate, efficient and effective cause of the accident but the indirect cause was the war because it was the reason for the presence of the officer on the spot. 

Judgment: The claim was rejected on the ground that the death of the officer was not a direct but an indirect result of the war. (Source: KSL review 2014. Volume 4. Manjeet Kumar Sahu)

4. Principle of indemnity 

The principle of indemnity prescribes that the insurer only covers the loss or damage that has taken place and nothing above or lower the same.

The indemnity is to be proportionate to loss or damage. 

Ultimately, the aim is to restore the insured or the loss bearer's financial position to what it was before the peril. 

Exceptions:

1. Life Insurance
2. Personal Accident Insurance

Castellion vs. Preston

Fact: The owners of houses which were insured against fire contracted to sell the property, and reserved power under the contract to name the time for completion. The property was burned, and the insurance company, in ignorance of the contract, paid the vendors for the damage done. The vendors neither reinstated the premises nor handed the insurance money to the purchasers, but they subsequently named a time for completion, and the purchase was eventually completed.

Justice Chitty stated that ‘Undoubtedly it is settled law that a contract of insurance is a contract of indemnity’

5. Principle of Subrogation 

Concept: The insurer inherits rights available to the insured. The insurer steps into the insured's shoes; that is to say, the insurer reserves the right to recover the claim from the third party. 

In other words, the insurer has the right to claim indemnity from the third party following a loss to the insured. 

For instance, in an accident involving Person A and B wherein Person B crashes into Person A’s motorbike consequently breaking his side view mirror, Person A’s insurer Pappu Insurance reserves the right to recover the claim from Person B. In essence, in the absence of Subrogation, insurer has to equitably bear the financial burden for loss or damage caused by another party.

Nepali Legislation: National Civil Code Act, 2074 Section 573

Q. Why Subrogation?

1. Prevent double recovery: It prevents the insurer from claiming recovery from the party that caused the damage after having already covered the loss by its insurer. 
2. Maintain lower insurance premium 
3. Enforce legal responsibility on the party that caused loss or damage 

Case: Hobbs vs Marlow

It was established that subrogation cannot be limited to recovery after the compensation is paid, but the insurer can exercise the right against the third party before indemnifying the insured. 

6. Principle of Mitigation: 

The principle of mitigation in insurance is a fundamental concept that requires the insured to take reasonable steps to minimize the loss or damage to their insured property. This principle is important because it ensures that the insured acts responsibly and does not intentionally allow a loss to increase or occur when it could have been prevented or lessened.

Key aspects of the principle of mitigation include:

1. Duty to Minimize Loss: The insured must act as if they were uninsured and take all reasonable measures to reduce the extent of any loss or damage. This means they should not just wait for the insurer to compensate them but actively try to prevent or reduce further damage.
2. Reasonable Effort: The insured is required to make reasonable efforts to mitigate the loss. This does not mean they have to take extraordinary or risky measures but should act sensibly and prudently to protect their property.
3. Preventing Further Damage: In the event of an incident, such as a fire or flood, the insured should take steps to prevent further damage. For example, if a pipe bursts, they should try to stop the water flow and move valuables to a safer place if possible.
4. Insurer’s Support: In some cases, the insurer may provide guidance or assistance on how to mitigate the loss. The insured should follow these instructions where feasible.
5. Consequences of Not Mitigating: If the insured fails to take reasonable steps to mitigate the loss, the insurer may reduce the claim amount. The insurer is only liable for the loss that could not have been avoided with reasonable efforts.
6. Legal Obligation: The principle of mitigation is not just a contractual obligation but also a legal one. Courts generally expect individuals to act reasonably to minimize their losses in any context, including insurance.
7. Documentation: The insured should document all actions taken to mitigate the loss. This can help support their claim and demonstrate that they have fulfilled their duty to mitigate.

          Prepared and edited by Aarohan Subedhi, Madhu Dahal and Manish Rajak.