AN ASSIGNMENT ON INSURANCE AND RISK MANAGEMENT (MGT412) 2

AN ASSIGNMENT

ON

INSURANCE AND RISK MANAGEMENT (MGT412)

(THE SUMMARY ON THE WHOLE SYLLABUS)

PREPARED FOR:

MD. MAMUN UR RASHID

LECTURER & COURSE TEACHER

DEPARTMENT OF BUSINESS ADMINISTRATION

PREPARED BY:

NAME: Md. Sojibur Rahman

DEPARTMENT OF BUSINESS ADMINISTRATION

MANARAT INTERNATIONAL UNIVERSITY, DHAKA-1212

July 24, 2010

Introduction

Common features of development:

If we analyze the gradual development in sphere of insurance, we shall come across some certain common features associated with such development.

These common features of development are:

1.   Insurance basically developed in response to a demand created by the insuring community;

2.   Industrial revolution of 19^th century was largely responsible for rapid growth of insurance business;

3.   In early days there were absence of reliable statistical data and theoretical soundness. Gradually this vacuum was filled by various theoretical approaches and actions of various associations. This ultimately gave legal, technical, scientific and theoretical soundness to the business of insurance;

4.   As an earliest day insurers started as specialist office. i.e doing one type of business only. Then demand of multifarious they turned into composite offices. i.e. 

5.   The idea as to maintain reserve for with standing catastrophe losses gradually developed. Now-a-days hardly there a company which does not provide such a reserve;

6.   The necessity of reinsurance gradually developed with the increase in the insurer’s commitment on a particular risk.

v   Section 23, public property only insured with Shadharan Bima Corporation:

1)   All insurance business relating to any public property, any risk or liability operating to any public property shall be with the Shadharan Bima Corporation and with no other insurer; 

2)   Any policy of insurance taken or issued in contravention of sub-section (1) shall be void;

Provided that any claim for loss, damage, compensation or refund of premium arising out or relating to, such policy shall be binding on the insurer;

3)   In this section, “ public property” means-

a)   Any property movable or immovable which belongs to, or the protection of which is the legal responsibility of

                             i.    The Government, or a local authority;

                           ii.    Any company, firm, undertaking, institution or organization or other establishment which is managed or controlled by the Government or by the local authority, or in which the Government, by itself or jointly with the local authority or company managed or controlled by it, holds the financial share or interest or which is specified by the Government for the purpose of this section;

b)  A project finance out of an external loan or with external aid until it reaches:-

                             i.    In the case of an industrial project, the stage at which it is capable of commencing normal production;

                           ii.    In the case of any other project project, the stage at which it is capable of being put to the use for which is intended;

v Republic of Bangladesh established the Bangladesh Insurance Academy in November, 1973 with the following objectives:

1)   To promote, organize and impart professional education in insurance leading to Degree / Diploma / Certificates;

2)   To organize, conduct and promote research on problems of insurance industry;

3)   To organize and conduct in service training for the officers and employees of JBC and SBC and also employees of the organization dealing in insurance;

4)   To facilitate, promote, encourage and foster publication of research work and literature on matters of insurance interest;

5)   To establish and maintain close contact with experts and similar institutions at home and abroad;

6)   To provide coaching facilities for the standard examination like ACII, CLU etc;

7)   To award prizes and rewards to persons who have contributed to the cause of insurance education and industry;

Principle of insurance:

There are six principle of insurance. These are:

1.   Principle of utmost good faith:

          According to this principle, both the parties to the insurance contact must disclose all facts material to the risk voluntarily to each other. Any breach of this duty shall render the contract voidable at the option of the aggrieved party that is who has suffered as a result of this breach.

Facts which are required to be disclosed:

i)            Facts which would render a risk grater than the normal. In the absence of this information the insurer would consider this risk as normally deceived. For example –Commercial storage of kerosene in a private dwelling house as a side business.

ii)          The fact which would suggest some special motive is hind the insurance that is excessive over insurance.

iii)        Facts which suggest the abnormality of the proposer him self. That is making frequent claims.

iv)         Facts explaining the exceptional nature of risk.

     Facts which should not be disclosed:

i)            Fasts which lessen the risk, existing of a fire brigade near the premises; in case of fire insurance.

ii)           Facts of public knowledge or facts which reasonably supported to be known insurers in the ordinary course of this business.

iii)        Facts to the matter of law.

iv)         Facts possible of discovery through enquiry.

v)           Facts which should be reasonably inferred by the insurers on the contract of the particular disclosed.

vi)         Facts which the insurers do not attack much importance

2.   Principle of insurable interest:

                   The principle asserts only the person who has insurable interest on a subject matter of insurance can insure that the particular subject matter. It is not possible for a person who has got on insurable interest on a particular subject matter.

The insurable interest virtually a legal right to insurance .It is the financial legal right man on a property.

The insurance being such that by the safety of the subject matter he is benefited, loss destruction there of he is prejudiced.

Section 5(2) of the marine insurance act, 1906:

                   “An insurable interest means that the policy holder must stand to suffer a direct financial loss if the event does occur”.

“Indemnity means a sum of money in compensation for loss or injury.”

Essential elements of insurable interest:

i) There must be property, rights, Interest, life ,limb or potential liability developing upon the insured capable of being covered  by policy of insurance .

ii) Such property, life, limb, interest or liability must be the subject matter of the insurance.

 iii) The insured must be bear some relationship recognized by the law to that subject matter of insurance where by the benefits by the subject matter and is prejudiced by the loss, damage or distraction there of.

  Insurable interest exists in the following cases:

i)            Owners

ii)          Part owners and joint owners.

iii)        Morgator/ Morgagee

iv)         Bailees

v)           Carriers

vi)         Administrator, Executor and trustee

vii)       Life

viii)     Debtor and creditor

ix)         Insurers

x)           Liability

When insurable interest must exists:

 It is varies depending on the type of insurance-

a)   Marine: Insurable interest must exist at the  at the time of  effecting the policy however at the time of affecting the policy the insured must be proved he is going to acquire  insurable interest soon marine act,1906.

b)  Fire: Insurable interest must exist at the time of the effecting the policy and the time of the claim.

c)   Life: Must exist at the time of the effecting the policy needs not to be required at the time of claim.

d)  Accident: Insurable interest must exist both at the time of affecting the policy and at the time of claim. 

3.   Principle of Indemnity

The principle of indemnity asserts that on the happening of a loss the insured shall be put back the same financial position as he used to occupy immediately before the loss. In the other words the insured shall get neither more nor less sustained. It is always subject to the limit of some insured, subject to certain term and to the policy.

There are three terminologies they do create impact on the principle of indemnity:                                                                                             

§  Excess:

This means that with regard to any loss, the predetermine amount shall be detected and the balance, if any shall be paid.

§  Franchise:

If the policy is subject to franchise then in order to get a claim the extent of claim must reach the amount of franchise, when the insured gets full claim. If the amount of loss does not reach the claim then insured does not get anything. It is actually pre-requested or pre-qualified to get claim.

§  Average:

Average is method by which under insurance defeated. There are three types of average in practice:

        I.    Pro-rata condition:

As per of this type of average, if at the time of loss it is found that the value of the property is more than the sum-insured then the insurers will pay that proportion of the actual loss that the sum-insured bear to actual value.

     II.    Special condition of average:

This is also known as the 75% condition of average. Under this type of average if it is found that the sum-insured is less then the 75% value of the actual property, then that proportion of the loss, sum-insured bears to the actual value. If the sum insured is more than the 75%, then the no condition is applied.

III.        Two-condition of average:

It has parts. First part is exactly pro-rata condition and it at the time of loss, it is found that more than one policy cover the same loss then that the specific policy pay the loss first, if then claim left, then only this policy shall come forward to pay the balance loss and in case of under insurance coverage shall apply in the usual manner of balance.

Valued Policy:

Are those policies where the value of the property is agreed before hand and which is made the sum insured under the policy. The condition of such policy is that if the there is a total loss then full sum insured is to be paid if even though the actual value is less than the sum-insured. Here the gain of insured:

a)   Only in case of total loss there is a possibility of making either over payment or under payment;

b)  In the case of partial loss, the loss is treated under normal basis of indemnity;

c)   Under valued policies very realistic bearing on the actual market value;

d)  Value policies are not given those persons whose benefits are not in knowledge of insurers;

e)   Valued policies are usually issued on articles of fairly stable value;

f)    Valued policies the measure of indemnity is decided of the inception;

Methods of Providing Indemnity:

The methods of providing indemnity are:

a)   Cash payment:

Cash payment is making payment of claim.

b)  Repair:

This is another way providing compensation rather than making cash payment, the insurer will get the loss repaired to pre-loss condition as far as practicable.

c)   Replacement:

Replace another by the same standard age and quality.

d)  Reinstatement:

Reinstatement is the property by option. It is for building damage or destroyed by fire.

4.   Principle of Subrogation:

 Subrogation is a right that a person has of standing another and availing himself all the rights and remedies of that another, whether already enforced or not.

In insurance, after payment of the claim, the insurers shall be entitled to take over the legal right of the insured against the liable third party for the purpose of recovery.

When the right of subrogation arises:       

In which situation the right of subrogation arises. These are given bellows:

a)   Under-tort:

This is a wrong doing to another. In other words, it is a breach of duty owned to a third party. A person cannot do wrong to another causing damages one person’s property or injured the other person. If it is done then there is a right action accrues in favor of the wrong.

b)  Under contract:

A contract may put some obligation on the person making breach of the contract to compensate the person who has been agreed as a result of the breach.

c)   Under statute:

Statute also may create liability for making compensation, arising out of a breach there of.

5. Principle of Contribution:

Contribution is a right that an insurer has, who has paid under a policy of calling other interested insurers in the loss to pay or contribute ratably to the payment.

“ This means that if at the time of loss it is found that there are more than one policy covering the san e loss than all policies should pay the loss proportionally to the extent of their respective liabilities so that the insured does not get more than one whole loss from all these sources.”

Essence of principle of contribution:

Principle of contribution before contribution can operate the following condition must be fulfilled:

a)   There must be more one policy involved and all policies covering the loss must be in force;

b)  All the policies must cover the same subject-matter. If all the policies cover the same insured but different subject-matter than there will be no question for contribution;

c)   All the policies must cover the some peril causing the loss;

d)  All the policies must cover the same interest of the same insured;

5.   Principle of Proximate Cause:

It means the active, efficient cause that sets in motion a train of events which brings about a result, without the intervention of any force started working actively from new and independent sources.

Rule of proximate Cause:

With regard to playability or otherwise of a claim, keeping in the view perils insured, uninsured and expected, certain rules of proximate cause should be noted carefully-

                I.    Single Cause:

Single cause gives rise to claim the issue is simple. If the cause is an insured one of the claim is payable and if the claim is payable.

             II.    Concurrent Cause:

It is difficult when the causes are number of perils; some are insured, some uninsured and some expected. If no expected peril is involved, then provided that one insured peril is involved, if one peril is involve with the insured peril than the expected peril is separated from the insured peril than there is a liability for the loss caused by the insured peril, but if it can not be separated than there will be no liability.

           III.    Unbroken Sequence:

If expected peril followed insured peril no claim. When several events occur in an unbroken sequences, then there is no expected peril involved, the whole claim is payable only if insured peril is involved.

            IV.    Broken Sequence:

If expected peril is followed by an insured peril as a new and independent cause then there a liability for the loss caused by the insured people. 

Life Insurance Contract  

v Life Insurance:

The life insurance contract is enlarged by section 2(ii) of the Insurance Act 1938 by including annuity business. Since, the life insurance contract is not an indemnity contract; the undertaking on the part of the insurer is an absolute one to pay a definite sum on maturity of policy at the death or an amount in installment for a fixed period or during the life.

v Features of Life Insurance Contract:

1.   Nature of General Contract:

a)  Offer and Acceptance

b)   Competency of the parties

c)   Free Consent of the parties

d)  Legal Consideration

e)   Legal Object

2.   Insurable Interest:

Insurable interest is the pecuniary interest. The insured must have an insurable interest in the life to be insured for a valid contract. Insurable interest in life insurance may be divided into two categories:

a)  Insurable interest in own life:

An individual always has an insurable interest in his own life. It presence is not required to be proved.

b)   Insurable interest in other life:

There are two types of insurable interest in other life:

A.  Proof is not required:

Insurable interest has not to be proved in the following cases:

                        I.    Wife has insurable interest in the life of her husband

                      II.    Husband has insurable interest in the life of his Wife

B.  Proof is required:

Insurable interest has not to be proved in the following cases:

                        I.    Business Relationship:

§  A creditor has in the life or his debtor;

§  A trustee has insurable insurance in respect of the interest;

§  A partner  has insurable insurance in respect of each partner;

§  A survey has insurable insurance in respect of his principle;

§  An employer has in the life of a key-man;

§  An insurer has in the life assured;

                     II.    Family Relationship

3.   Utmost Good Faith:

In utmost good faith both the parties, insured and insurer, must be of the same mind at the time of contract because only then the risk may be correctly ascertained. The must make full and true disclosure of the facts material to the risk. In life insurance material facts are age, income, occupation, habits, residence, family history and plan of insurance.

The following facts are not required to be disclosed:

§  Circumstances which are diminishing the risk.

§  Facts which are known or reasonably should be known to the insurer in his ordinary course of business.

§  Facts which are waived by the insurer.

§  Facts which are superfluous to disclose by reason of a condition or warranty.

§  Facts of public knowledge.

4.   Warranties:

Warranties are an integral part of the contract, i.e. these are the bases of the contract between the proposer and insurer and if any statement, whether material or non-material, is untrue the contract shall be null and void and the premium paid by him may be forfeited by the insurer. As has been disclosed already that the warranties may be

§  Informative Warranties

§   Promissory Warranties

5.   Proximate Cause:

In life insurance the doctrine proximate cause is not applied because the insurer is bound to pay the amount of insurance whatever may be the reason of death. This principle is not of much practical importance in connection with life insurance, but in the following cases the proximate causes are observed in the life insurance:

§  War-risk

§  Suicide

§  Accident benefit

6.   Return of premium:

Ordinarily, the premium once paid can’t be refunded. But, For Reason of Equity implies a condition that the insurer shall not receive the price of running a risk he runs. Thus, there the contract does not come into effect or it is held to be void ab initio.

7.   Other Features:

Life insurance policies have the following additional features:

§  Aleatory Contract

§  Unilateral Contract

§  Conditional Contract

§  Contract of Adhesion

v Classification of Policies:

The life insurance policies can be divided on the basis of-

1.    Duration of Policies:

The life insurance policies according to the duration may be:

a)   Whole life policies:

Whole life policies can be affected either by payment:

§  Single premium

§  Continuous premium

§  Limited premium

b)   Term life:

Term insurances are of the following types:

§  Straight-Term Insurance

§  Renewable Term Policies

§  Convertible Term Policies

c)    Endowment insurance:

The endowment policies can be several, of which important endowment policies are:

§  Pure Endowment Policy

§  Ordinary Endowment Policy

§  Joint Life Endowment Policy

§  Double Endowment Policy

§  Fixed Term Endowment Policy

§  Educational Annuity Policy

§  Triple Benefit Policy

2.   Method of Premium payments:

The policies according to the premium payment may be of the following types:

Ø  Single Premium Policy

Ø  Level Premium Policy

3.   Participation in profit:

Ø  Without Profit Policies or Non-participating Policies

Ø  Without Profit Policies or participating Policies

4.   Number of lives covered:

On the basis of number of persons insured in a policy, the policy may be

Ø  Single Life Policies

Ø  Multiple Life Policies

Ø  Joint Life Policy

Ø  Last survivorship Policy

5.   Method of payment of claim amounts :

The policy amount may be paid in –

Ø  Lump Sum Policies

Ø  Installment or Annuity Policies

6.   Non-conventional Policies

Classification of Annuity According to the Number of Lives:

Classifications of Annuity According to the Number of Lives are:

Ø  Single Life Annuity

Ø  Multiple Life Annuity

Classification of Annuities according to Mode of Premium:

The annuities according to payment of premium can be level single premium annuities:

Ø  Level Premium Annuities

Ø  Single Premium Annuities

Classification according to the disposition of Proceeds:

The annuities according to this classification may be –

Ø  Life Annuity

Ø  Guaranteed Minimum Annuities

Ø  Temporary Annuities

Factors Affecting Risk: 

These factors affecting risk these are:

1.   Age

2.   Build

3.   Physical Condition

4.   Personal History

5.   Family History

6.   Occupation

7.   Residence

8.   Present Habits

9.   Morals

10.            Race and Nationality

11.            Sex

12.            Economic Status

13.            Defence Services

14.            Plan of Insurance

Sources of Risk Information:

The sources of risk information are given bellows:

1.    The Proposal Form:

The first and the important source of risk information is application form. The proposer is required to disclose all the material facts truly and fully. The proposal form is divided into two parts:

a)   Application form and

b)   Personal Statement

2.    Medical Examiner’s Report:

The medical examiner has to identify the applicant to avoid the case of impersonation. The knowledge of medical examiner to the assured is also required.

3.    Agent’s Report

4.    The Inspection Report

5.    Private Friends Report

6.    Attending Physicians

7.    Medical Information Bureau

8.    Neighbors and Business Associates

9.    Commercial Credit Investigation

Nature of Marine Insurance Contract:

Marine Insurance:

Section 2 (13) A of the Insurance Act 1938 defines marine insurance as follows:

Marine insurance business” means the business of effecting contracts of insurance upon vessels of any description, including cargoes, freights and other interests which may be legally insured in or in relation to such vessels, cargoes and freights, goods, wares, merchandise and property of whatever description insured for any transit by land or water or both and whether or not including warehouse risks or similar risks in addition or as incidental to such transit and includes any other risks customarily included among the risks insured against in marine insurance policies.

Elements of Marine Insurance Contract:

  The marine insurance has the following essential features:

1. Features of General Contract :

The features of general contract are:

a)  Proposal:

The broker will prepare a slip upon receipt of instructions to issue from shipowner, merchant or other proposers.

b)   Acceptance:

The original slip is presented to the Lioyd’s Underwriters or other insurers or to the Lead of the insurer’s, who initial the slip and the proposal is formally accepted.

c)   Consideration:

  The premium is determined on assessment of the proposal and is paid at the time of the contract. The premium is called consideration to the contract.

d)  Issue of policy:

Having affected the insurance, the broker will now send his client a cover note advising the terms and conditions, on which the insurance has been placed.

2. Insurable Interest:

An insured person will have insurable interest in the subject matter where he stands in any legal or equitable relation to the subject matter in such a way that he may benefit by the safety or due arrival of insurable property or may be prejudiced by its loss, or by damage thereto or by the detention thereof or may incur liability in respect thereof.

 There are two exceptions of the rule in marine insurance:

a)   Lost or not loss

b)   P.P.I. Policy ( Policy Proof of Insurance)

The insurable interest in marine insurance can be of the following forms:

I.    According to Ownership:

The owner has insurable interest up to the full value of subject matter. The owners are of different types according to the subject-matter.

a)  In Case of Ships

b)  In Case of Cargo

c)  In Case of Freight

II.    Insurable Interest in Re-insurance:

The underwriter under a contract of marine insurance has an insurable interest in his risk and may re-insure in respect of it.

III.    Insurable Interest in other cases:

In this case all those underwriters are included who have insurable interest in salary and own liabilities.

3. Utmost Good Faith:

          The doctrine of caveat emptor ( let the buyer beware) applies to commercial contracts , but insurance contracts are based upon the legal principle of uberrimae fides ( utmost good faith). If this is not observed by either of the parties, the contract can be avoided by the other party.

          In the following circumstances, these are the exception where doctrine of good faith may not be adhered to:

a) Facts of common knowledge;

b) Facts which are known should be known to the insurer;

c)  Facts which are not required by the insurers;

d) Facts which the insurer ought reasonability to have in ferred from the details given to him;

e) Facts of public knowledge;

4. Doctrine of Indemnity:

The doctrine of indemnity applies where the value of subject-matter is determined at the time of loss. In other words, where the market price of the loss is paid, this doctrine has been precisely applied. Where the value for the goods has not been fixed in the beginning but is left to be determined at the time of loss, the measurement is based on the insurable value of the goods.

 There are two exceptions of the doctrine of indemnity in marine insurance:

a. Profits Allowed:

Actually the doctrine says that the market price of the loss should be indemnified and no profit should be permitted, but in marine insurance a certain profit margin is also permitted.

b. Issued Value:

The doctrine of indemnity is based on the insurable value whereas the marine insurance is mostly based on insured value.

5.  Doctrine of Subrogation:

The aim of doctrine of subrogation is that the insured should not get more than the actual loss or damage. After payment of the loss, the insurer gets the light to receive compensation or any sum from the third party from whom the assured is legally liable to get the amount of compensation.

The main characteristics of subrogation are as follows:

a)  The insurer subrogates all the remedies rights and liabilities of the insured after payment of the compensation.

b)   The insurer has right to pay the amount of loss after reducing the sum received by the insured from the third party.

c)   After indemnification, the insurer gets all the rights of the insured on the third parties, but insurer cannot file suit in his own name.

6. Warranties:

Warranties are the statement according to which insured person promises to do or not do a particular thing or to fulfill or not fulfill a certain condition.

There are two types of warranties:

a)   Express Warranties:

Express warranties are those warranties which are expressly included or incorporated in the policy by reference.

b)  Implied Warranties:

These are not mentioned in the policy at all but are tacitly understood by the parties to the contract and are as fully binding as express warranties.

Implied warranties are very important. These are:

Ø  Seaworthiness of Ship;

Ø  Legality of Venture;

Ø  Non-deviation;

7.   Proximate cause:

According to Marine Insurance Act, ‘Subject to the provisions of the Act and unless the policy otherwise provides the insurer is liable for any loss proximately caused by a peril insured against, but subject to as aforesaid he is not liable for any loss which is not proximately caused by a peril insured against’.

 Classes of Marine Insurance Policies:

       Different types of policies are used in marine insurance:

§  Voyage Policies

§  Time Policies

§  Voyage and Time Policies or mixed Policies

§  Valued Policies

§  Unvalued Policies

§  Floating Policies

§  Blanket Policies

§  Named Policies

§  Single Vessel and Fleet Policies

§  Block Policies

§  Currency Policies

§  P.P.I. Policies

Policy Conditions in Marine Insurance:

                 The policy conditions in marine insurance are given bellows:

§  Hull Clauses

§  Cargo Clauses

§  Freight Clauses

Marine Perils:

     The perils insured against are mentioned in the policy and the underwriter shall be liable for damages caused by the insured perils.

The marine perils are:

§  Perils of Sea

§  Fire

§  Man-of-War

§  Enemies

§  Pirates, Rovers, thieves

Marine Losses:

     If the loss takes place on account of any of the perils insured against with the insurer, the insurer will be liable for it and shall have to make good the losses to the assured. If the peril is insured, the insurer will indemnify the assured, otherwise not. The doctrine of causa proxima is to be applied while calculating the amount of loss.

1.   Actual Total Loss:

          Actual total loss is a material and physical loss of the subject-matter insured. The actual total loss occurs in the following cases:

a)   The subject-matter is destroyed.

b)  The subject-matter is so damaged as to cease to be a thing of the kind    insured.

c)   The insured is irretrievably deprived of the ownership of goods even they are in physical existence as in the case of capture by enemy, stealth by thief or fraudulent disposal by the captain or crew.

2.   Constructive Total Loss:

          Where the subject-matter is not actually lost in the above manner, but is reasonably abandonment when its actual total loss is unavoidable or when it cannot be preserved from total loss without involving expenditure which would exceed the value of the subject-matter. The constructive total loss will be where:

a)   The subject-matter insured is reasonably abandonment on account of its actual total loss appearing to be unavoidable;

b)  The subject-matter could not be preserved from actual total loss without an expenditure which would exceed its repaired and recovered value.

Documents Required for Claim in Marine Insurance:

The following documents are required at the time of claim:

§  Policy or certificate of insurance

§  Bill of loading

§  Invoice or bill

§  Copy of protest

§  Certificate of survey

§  Account sales or Bill of sale

§  Letter of subrogation

Documents in Different Types of Claim in Marine Insurance:

Documents in different types of claim in marine insurance are given bellows:

1.   Total Loss:

In case of total loss:

§  Insurance Policy

§  Bill of loading

§  Copy of invoice

§  Protest

§  Letter of subrogation

§  Notice of abandonment

2.   Partial Loss:

In case of partial average loss:

§  Policy or certificate of insurance

§  The voice for the whole shipment

§  Bill of loading

§  Copy of protest

§  A survey’s report

§  Letter of subrogation

§  Cost of protest

3.   Particular Charge:

          When claim is made under those heads, shipping and insurance documents with evidence for the amount of the particular charges are required.

4.   General Average:

          While making a claim for general average loss, all the documents required for claims in total losses or in particular average losses if partial sacrifices are required to be represented to the underwriter.

5.   Salvage Charge:

          The documents in support of a salvage claim and the procedure to be followed are almost identical to those for a General Average Claim.

Nature and Use of Fire Insurance:

Definition:

Fire insurance is a device to compensate for the loss consequent upon destruction by fire. Thus the fire insurer shifts the burden of fire losses from their actual victims over to all the members of the society. It is a cooperative device to share the loss. It relieves the insured from the horror of the fire losses to which he is expected.

Causes of Fire:

Two types of causes of fire:

a)   Physical Hazard:

This may occur due to inflammable nature, construction, artificial lighting and heating, lack of extinguishing apparatus use of the property.

b)  Moral Hazard:

Where the property was destroyed with the willingness of the property owner, moral hazard exists.

Elements of Fire Insurance Contract:

The elements of fire insurance contract are:

1.   Feature of General Contract:

      All the features of general contract are also application to the fire inrance contract.

a)   Proposal

b)   Acceptance

c)    Commencement of risk

2.   Insurable Interest:

Insurable interest is the general principle of insurance without which insurance cannot lawfully be enforced for an insurance unsupported by an insurable interest would be a gambling transaction.

The following condition must be fulfilled to constitute an insurable interest:

a)   There should be a physical object capable of being damaged or destroyed by fire.

b)   The object must be the subject matter of insurance.

3.   Principle Of Good Faith:

The contract of fire insurance is one in which the observance of the utmost good faith-uberrima fides- both the parties are of vital significant. The utmost good faith in fix insurance has two aspects-first, disclosure of material facts and second, preservation of the property insured.

4.   Principle Of Indemnity:

The doctrine of indemnity aims to compensate the insured for a loss sustained and the compensation should be such as to place him as nearly as possible in the same pecuniary position after the loss as he occupied immediately before the occurrence.

5.   Doctrine of Subrogation:

Subrogation means the right of one person to stand in the place of another and to avail himself of the latter’s rights and remedies. The principle of subrogation is just a corollary to the principle of indemnity.

6.   Warranties:

The contents of proposal form are expressly incorporated in the policy, which form warranty. Warranty is that by which the assured undertakes that some particular thing shall or shall not be done, or that some conditions shall be fulfilled or whereby he affirms or negatives the existence of a particular state of facts.

7.   Proximate Cause:

      Proximate cause is very important in fire insurance. The principle of proximate cause has already been discussed in detail. The insurer always takes the proximate cause while paying the claim.

Kinds of Policies:

The policies can be of various types:

1.   Valued Policy

2.   Valuable Policy

3.   Specific Policy

4.   Floating Policy

5.   Average Policy

6.   Excess Policy

7.   Declaration Policy

8.   Adjustment Policy

9.   Maximum Policy

10.                Reinstatement Policy

11.                Comprehensive Policy

12.                Consequential Loss Policy

13.                Sprinkler Leakage Polices.

Policy Conditions:

There are two types of policy conditions:

1.   Implied Conditions:

The following conditions are implied in fire insurance:

a)   Existence of property

b)   Insured property

c)    Insurable Interest

d)   Good Faith

e)   Indemnity

2.   Express Conditions:

The following conditions are express in fire insurance:

a) Misdescription

b) Alteration

c) Exclusions

d) Fraud

e) Claim

f)  Reinstatement Clause

g) Insurer’s Rights After a Fire

h) Subrogation

i)  Warranties

j)  Arbitration

k) Purchaser’s Interest Clause

l)  Loss Procedure