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nsurance policies are based on the law of contracts. Each insurance contract must meet the following essential requirements Offer and Acceptance Consideration Competent Parties Common Intention Legality of Purpose
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should be driving the vehicle for a legal purpose to be covered under the policy. The conditions for identifying the insured in case of unnamed policies, are also clearly specified in the insurance policy. Co-Insurance The same property can be insured with multiple insurers. In such a case whenever a loss occurs, it is paid by all insurers in the proportion of their respective insurance amounts. When a person chooses to insure a property for less than its full value, he is considered to be insurer for self for the uninsured part. Accordingly in case of a loss, the insured has to bear the loss in the same proportion as the uninsured part bears to the value of the property. For example, if a property worth Rs. 5 lakhs is insured for only Rs. 4 lakhs, then the insured is considered to be the insurer for self to the extent of Rs. 1 lakh. In case of a loss causing event where the property suffers damages to the tune of say Rs. 3 lakhs, the amount payable by the insurance company would be calculated as below:
Amount of Insurance Carried Loss = Amount of Recovery Value of Property or Rs. 4,00,000 Rs. 3,00,000 = Rs. 2,40,000 Rs. 5,00,000
Purpose The purpose of co-insurance is to achieve equity in charging premiums. For example, consider two adjoining properties valued at Rs. 5 Lakhs each. Suppose the owner of the first property Mr. A insures his property for Rs. 4 Lakhs only while the owner of the second Mr. B insures his property for the full value of Rs. 5 Lakhs. If the premium rate is Rs. 1 per thousand ,then Mr. A pays a premium of Rs. 400 while Mr. B pays a premium of Rs. 500. Further, suppose both properties suffer damages of Rs. 3 Lakhs. If the principle of co-insurance is not applied both Mr. A and Mr. B will receive Rs. 3 Lakhs from the insurer. But Mr. B will be paying more premium to get the same amount as Mr. A. This would be inequitable and implies penalizing individuals who insure their assets for their true value! Hence Mr. A shall get i.e. 80% of the loss which works out Rs 2.40 lakhs only.
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Exercise
The bungalow of an actor, Murali is on the seashore. It is furnished with the most exotic collection of paintings and furniture. Murali has a contract with National Insurance Company, to pay him damages to the extent of Rs. 5 crores, if there is any damage to the house due to tsunami or fire. He will have to pay a premium of Rs. 2 Lakhs pa, irrespective of whether the house will ever catch fire or a tsunami will destroy it. What characteristic of the contract is explained by this example? Solution : Such a contract is an example of Aleatory contract. Due to some unfortunate incident, fire indeed broke out due to some combustible explosives in the house. The kitchen got destroyed and Murali wanted to press charges against the damages. The claims department, on receipt of the request, ordered an enquiry. They discovered that there was some combustible material in the house, which increased the risk of fire. This was not mentioned as a probability when the insurance was drawn. Thus, NIC can refuse the payment. What characteristic of the insurance contract does the example exemplify? Solution : This is a Conditional contract. Murali for some reason was not too happy with this house. He noticed that a lot of negative things had happened to his career after moving into this house. So, he decided to bring this property into the market. There was an industrialist who was looking to buy a second house near the seashore and he liked the architecture of the house. The deal was struck and the money exchanged hands. But the industrialist also took a more comprehensive house and property insurance. The insurance, which Murali had purchased, could not be transferred to the new buyers name. What characteristic of the contract is this? Solution : This is a Personal contract.
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Chapter Review
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