Chp-23 ~ Business Risks And Insurance

Question 1

What do you understand by insurable risks?

Answer 1

Insurable risks are those risks which can be insured against.
The probability of these risks can be estimated beforehand.
The magnitude of these risks can be financially computed with the help of past experience and statistical techniques.
Loss by theft, fire, accident, bad debts, etc. are examples of insurable risks.

Question 2

What are the characteristics of insurable risks?

Answer 2

1. Large exposure
2. Accidental
3. Estimable
4. Unexpected
5. Not catastrophic
6. Not against public policy
7. Significant

Question 3

Define non-insurable risks. Give examples.

Answer 3

Non-insurable risks are those which cannot be insured against because they cannot be anticipated with reasonable accuracy. Some example are:
a) loss due to business decisions
b) loss due to fluctuations in demand and prices
c) loss due to natural calamities
d) loss due to war.

Question 4

Define insurance.

Answer 4

Insurance may be defined as a contract in writing whereby one party (the insurer) undertakes to indemnify the other party (the insured) in consideration of a certain sum of money (premium) against any loss as a result of some uncertain event.
The event against which insurance is made is called the ‘risk’.
The contract for providing insurance is known as ‘insurance policy’.

Question 5

What are the characteristics of insurance?

Answer 5

1. It is a contract between two parties.
2. One party (insured) agrees to pay premium lump sum or in instalments.
3. The other party (insurer) undertakes to compensate the insured against loss up to the specified limit.
4. It is a contract of indemnity.
5. It covers the risk of uncertain event in future.
6. It is based on the principle of ‘cooperation’ whereby one person’s loss is shared by many persons.

Question 6

List down the objectives and purpose of insurance.

Answer 6

1. Insurance aims at indemnifying against loss arising from the happening of uncertain events,
2. It is a method by which a person or business firm can protect themselves from uncertain events.
3. It provides a sense of security by compensating the insured for loss suffered from the event.
4. It plays a vital role in modern business.
5. It is a form of social compensation or mutual help.
6. Insurance helps businessmen to carry on business with confidence and peace of mind.
7. It helps in the expansion and growth of commerce and industry.

Question 7

PRINCIPLES OF INSURANCE

Answer 7

1. Utmost good faith (Uberrimae Fidei)
2. Insurable interest
3. Indemnity
4. Doctrine of subrogation
5. Contribution
6. Causa proxima (Proximate cause)
7. Mitigation of loss

Question 8

Explain re-insurance.

Answer 8

Sometimes, an insurance company accepts a huge risk.
It finds it difficult to bear the entire amount of risk itself.
In such a situation, the company (called re-insured) gets a part of the risk insured with another insurance company or a group of insurance companies (called re-insurers).
This is known as re-insurance.
A re-insurance contract is a contract between two or more insurance companies.
The re-insured or underwriter pays insurance premium to the re-insurer or re-underwriter.
There is no contractual relationship between the original insured and the re-insurer.

Question 9

Explain double insurance.

Answer 9

1. When the insured feels that he has insured for a lesser amount than the value of his property, he may obtain another insurance policy for the same property.
   This is known as double insurance.
   It means insurance with two or more insurance companies on the same risk and the same subject matter but for different amount so as to ensure a complete insurance protection.
   It is useful only in case of life insurance.
   In case of fire and marine insurances, principle of indemnity applies and therefore, there is no benefit of double insurance in fire and marine risks.

Question 10

Provide distinction between Re-Insurance and Double Insurance.

Answer 10

Basis:
Re-Insurance || Double Insurance
1. Purpose:
To distribute liability for loss || To obtain protection in case of insolvency of an insurer
2. Parties:
Insurer and the re-insurer || Insurers and the insured
3. Claim:
The original insured cannot claim compensation from the re-insurer || The insured can claim compensation from all insurers
4. Legal Nature:
Is obligatory in some cases under the law || Is not essential under any law
5. Desirability:
Desirable in all cases of fire and marine insurance || Desirable in case of life insurance only

Question 11

Explain ‘Utmost good faith (Uberrimae Fidei)’ as a principle of insurance.

Answer 11

1. An insurance contract is based on utmost good faith on the part of both the parties.
2. It is the legal duty of the proposer (one who wants to get an insurance policy) to disclose all the material facts about the subject to be insured.
3. The insurer has no access to the information which is in possession of the insured. Thus, insurer relies on the information provided by the proposer.
4. The amount of premium is fixed on the basis of the information supplied by the proposer.
5. If the proposer conceals or withholds any material facts, the insurer can refute the contract of insurance.
6. Thus, good faith requires each party to disclose all information at his command to the other party.
7. One party cannot induce the other party, by hiding material facts, to enter into a contract of insurance which is disadvantageous to the other party.
8. If a party fails to disclose any material fact within his knowledge, the other party can avoid the contract on grounds of material misrepresentation.

Question 12

Explain ‘Insurable interest’ as a principle of insurance.

Answer 12

1. In the absence of insurable interest, a contract of insurance becomes a wagering contract which is null and void and unenforceable at law.
2. Insurable interest means that the insured must be in such a position that he will suffer a primary loss by the happening of the event insured against.
3. A person is said to have an insurable interest in the subject matter insured, if he is benefited by its existence and suffers a loss by its destruction.
4. Thus insurable interest is the financial interest of the insured in the subject matter of insurance.

Question 13

Explain ‘indemnity’ as a principle of insurance.

Answer 13

1. Indemnity means a promise to compensate in case of loss.
2. The object of every insurance contract is to place the insured as nearly as possible in the same financial position after the loss as he was before the loss.
3. The insured will not be allowed to make any profit out of the happening of any loss covered by insurance contract.
4. The principle of indemnity is not applicable in case of life insurance because no amount of money can compensate for the loss of life.
5. IN case of life insurance, the sum insured is fixed and it is payable on the expiry of the policy or on the death of the life insured whichever is earlier.
6. A contract of life insurance is therefore a contingent contract and not a contract of indemnity.

Question 14

Explain ‘doctrine of subrogation’ as a principle of insurance.

Answer 14

1. Doctrine of subrogation implies that after indemnifying the insured for his loss, the insurer becomes entitled to all the rights and remedies relating to the property insured.
2. Doctrine of subrogation is applicable to all contract of indemnity and it is not applicable to life insurance.
3. Insurer’s right of subrogation will extend only to the extent of the sum insured.
4. Subrogation applies only after the insurer has paid the claim to the insured.
5. Doctrine of subrogation is a corollary of indemnity.

Question 15

Explain ‘contribution’ as a principle of insurance.

Answer 15

1. It means the right of an insurer who has paid claim under an insurance policy to call upon other insurers to contribute to the payments.
2. When an insured has taken more than one policy on the same property, he shall not be entitled to claim from each insurer more than the rateable proportion of the loss for which they are liable.
3. The contributions payable by different insurers can be calculated through the following formula:
   [(Sum insured with an insurance company)/(Total sum insured with all the insurance companies)] X [Amount of Loss].

Question 16

What are the conditions that should be satisfied for the principle of contribution to be applicable.

Answer 16

The principle of contribution is applicable when the following conditions are satisfied:
a) insured must be the same person
b) all policies must cover the same risk
c) all the policies must be in force at the time of loss
d) the total amount of compensation under all policies must not exceed the amount of loss.

Question 17

Explain ‘causa proxima (proximate cause)’ as a principle of insurance.

Answer 17

1. In a contract of insurance, the insurer is liable only for insured perils and not for expected or uninsured perils.
2. The insured can claim damages when the loss has been caused by the insured perils and the cause has been proximate (nearest) to the loss.
3. Doctrine of ‘proximate cause’ runs as ‘causa proxima non-remota spectatur’, i.e., only immediate cause and the remote cause is to be take notice of, while determining the liability of the insurers.
4. It is not the latest but the direct, dominant and operative cause that shall be taken into consideration.

Question 18

Explain ‘mitigation of loss’ as a principle of insurance.

Answer 18

1. According to this principle, it is the duty of the insured to take all possible steps to minimise the loss or damage in case of a mishap.
2. The insured should not be careless in the event of any accidental loss just because the property is insured.
3. He should behave like a prudent person and make reasonable efforts to save the insured property.