Meaning Of Insurance

Definition of Insurance

The best way to introduce ourselves to insurance is to describe it as the adequate provision of water before getting thirsty.
Insurance may be defined in any of the following ways:

  1. As a social device through which the insuring public transfer their risks to insurance companies and get compensation when they suffer loss.
  2. It may also be defined as the pooling of risk together whereby participating members of the insuring public pay premium corresponding to the risks they bung to a common fund from which the unfortunate few ones who may suffer losses will be paid.
  3. It is a contract between two parties (the insured and insurance company) whereby the insured having paid the required premium. gets compensated by the insurance company for any genuine loss he may suffer within the period of insurance.

The Insurer And The Insured
The insurer is the insurance company. It is the party in an insurance contract Who in return of the premium paid by the insured, promises to pay the sum insured when there is a loss. The insurer may also be referred to as the seller of insurance products. While the insured is the person buying the insurance products. It is the party to an insurance contract who is entitled to receive the payment of the sum insured when there is a loss. The insured may also be referred to as the policy holder.

Essentials of a Valid Insurance Contract

(i) Offer and Acceptance:
An offer is a firm statement made by a person known as the Offeror to another person known as the ‘Offeree’, thereby inviting the offeree to a contract. While acceptance is made by the offeree confirming his or her willingness to go into such contract with the offeror. An offer is made by the insured who is the offeror and this is done in writing when the insured completes the proposal form, while the acceptance is done by the insurance company when the proposal is accepted.

(ii) Consensus ad-idem:
This means the ‘coming together of minds’ of the two parties to the insurance contract. That is, both parties should have a common mind regarding the risk to be placed for insurance. Without the parties to an insurance contract having a common mind, there is no valid insurance between the two parties involved.

(iii) Consideration:
The consideration is the premium paid by the insured to the insurance company. The premium paid guarantees the payment of the sum insured by the insurance company when there is a loss.

(iv) Contractual capacity:
Contractual capacity means that the two parties to the insurance contract must have full contractual capacity to go into the contract. For instance, the insurance company that is selling the product must be licensed to sell the product, while the insured must have reached the age of maturity.

(v) An Intention to create legal obligation:
This means that the proposed insurance Contract must not in any way be against the public policy. Where it is against the public policy, it will be regarded as unenforceable at law and therefore not valid.

Essential Features of Insurance Contracts

In addition to the elements of a valid insurance contract stated above, there are other essential features of insurance contract. These are:

i. Adhesion:
In a contract of adhesion, one party draws up the Contract in its entirety and presents it to the other party on a ‘take it or leave it basis. Simply put, the receiving party does not have the option of negotiating, revising or deleting any part or provision of the document.

Insurance Contracts are of this type, because the insurer writes the contract and the insured either adheres to it or is denied coverage. However, where there is ambiguity, the court will render its interpretation against the party that wrote the contract, that is, the insurer.

ii. Utmost good faith:
Utmost good faith means that the two parties to the insurance contract should tell each other willingly all the truth they know about the contract. It is all about being honest and transparent. Therefore, the principle of utmost good faith requires both the insured and insurance company to disclose to each other all relevant facts about the risk to be placed for insurance. These relevant facts are called material facts.

iii. Insurable Interest:
This is the legal right that a person must have to enable him or her to insure his building, car and other risks. It is usually defined as “the legal right to insure arising out of a financial relationship between the insured and the subject matter of insurance, which is recognized at law”. There is no valid insurance contract if there is no insurable interest.

iv. Warranties and Representations:
A warranty is an undertaking by the insured that certain things shall be done or not done and that certain things shall he put in place or not in place.

Scroll Down to Select Page 3 for the next topic – Historical Development of Insurance

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