Chapter 17: Types of Insurance
A trader storing cotton bales in a godown, an exporter sending machinery across the sea, a factory owner employing two hundred workers, and a shopkeeper whose cashier handles the day’s collections are all exposed to loss. Each of these losses is uncertain, and any one of them can be large enough to end the business that suffers it. Insurance answers this problem by allowing many persons facing a similar risk to pay small regular premiums into a common fund, out of which the few who actually suffer a loss are compensated. Because the risks differ, the contracts that cover them differ as well. A contract covering the life of a person cannot be written in the same way as one covering a godown against fire, and neither can be framed like a contract covering cargo on a sea voyage. The insurer must know precisely what is being covered, for how long, and on what conditions a claim becomes payable. This chapter sets out the main types of insurance — life, fire and marine — explains how they differ from one another, and examines the miscellaneous covers a business commonly takes: health, social, motor vehicle and fidelity insurance.
Figure
Fig. 17.0-1 — Cargo Awaiting Shipment At A Port Photograph of stacked shipping containers at an Indian port with a cargo vessel being loaded in the background.
17.1 Types Of Insurance
A business is exposed to several unrelated risks at the same time. The same firm may own a godown that can catch fire, despatch consignments by sea, employ workers who may fall ill or meet with an accident, and keep cash in the hands of a cashier. No single contract can sensibly cover all of these, because the events differ in their cause, in the way the loss is measured, and in the period over which cover is required.
Insurers therefore issue separate contracts for separate classes of risk. Each class has its own subject matter, its own basis of premium and its own conditions of claim, and a firm buys only those covers its activities call for. The traditional classes are life, fire and marine insurance, and newer covers have since grown up around health, employment and motor vehicles. The classification is summarised in FC 17.1.
Flowchart
FC 17.1 — Types Of Insurance Insurance → Life Insurance, General Insurance; General Insurance → Fire Insurance, Marine Insurance, Social Insurance, Miscellaneous Insurance
The Basic Division
The first and widest division is between cover taken on a human life and cover taken on property, goods and liability. The division matters because the two are measured differently. The loss of property can be valued in money and made good; the loss of a life cannot, and so the amount payable has to be fixed in advance when the policy is taken.
17.1.1 Life Insurance
Under life insurance, the insurer undertakes to pay the sum assured either on the maturity of the policy or on the death of the policyholder, whichever occurs earlier. If the policyholder survives the term, the money reaches him; if he dies during the term, it reaches the family he supported.
The event insured against here is certain to occur — only its timing is uncertain. For that reason a life policy is written for a long term, often for many years or for the whole of life, and the premium is set mainly by the age of the assured and the sum assured chosen. Because the money is bound to be paid out at some point, the contract serves as a means of saving as well as a means of protection.
17.1.2 General Insurance
General insurance covers property, goods, earnings and liability rather than life. It is taken mainly on assets such as buildings, factories, stock, vehicles and cargo, and is normally written for one year at a time and renewed, because the value of the property and the level of risk can both change from year to year.
Here the insured event may or may not happen at all, and if it does happen, the loss can be measured. The insurer therefore pays only what has actually been lost, up to the sum insured. General insurance is grouped as follows.
- Fire insurance — covers loss or damage to property caused by fire. It is taken on houses, factories, shops and godowns, since a single fire can destroy in an hour what took years to build up.
- Marine insurance — covers the risks of a sea voyage. A ship may sink, run aground or be damaged in a storm, and the cargo it carries is exposed to the same perils, so shipowners insure the vessel and traders insure the goods.
- Social insurance — covers workers against sickness, employment injury, maternity, disability and old age. Contributions come from the employer and the employee, with the government supporting and regulating the scheme.
- Miscellaneous insurance — covers the remaining specific risks that do not fall under the heads above, such as theft, employee dishonesty and damage to vehicles.
Common Miscellaneous Covers
The miscellaneous group is the widest of the four, because a policy can be written for almost any measurable risk a business faces. The covers most often met with are the following.
- Burglary insurance — covers loss of stock, cash or valuables by theft and housebreaking.
- Fidelity insurance — covers loss caused to the employer by the dishonesty of an employee.
- Credit insurance — covers loss arising when customers who have bought on credit fail to pay.
- Motor vehicle insurance — covers damage to the insured vehicle and liability for damage caused to others.
- Crop insurance — covers damage to standing crops by natural calamities, which the farmer cannot control.
- Goods-in-transit insurance — covers loss of goods while they are being carried by road or rail.
- Profit insurance — covers the profit lost while a business remains closed after an insured mishap.
- Third-party insurance — covers the sum the insured becomes legally liable to pay to some other person.
17.2 Life Insurance
17.2.1 Meaning And Definition Of Life Insurance
Death is certain for every person, but the time of death is not. A family that depends on one earning member therefore lives with a risk it cannot avoid and cannot meet out of savings alone, because the loss may fall long before enough has been saved. Life insurance exists to meet exactly this uncertainty.
Life insurance is a contract under which the insurance company agrees to pay a fixed sum of money either at the end of a stated period or on the death of the person insured, whichever is earlier, in return for a premium. If the policyholder lives till the end of the term, the money is paid to him. If he dies during the term, it is paid to the person he has named to receive it.
The business is carried on in India by the Life Insurance Corporation of India and by a number of private life insurers. Whoever the insurer, the same set of terms is used in every policy, and these should be learnt before the contract itself is studied.
- Insurer — the insurance company that promises to pay the sum of money on the event insured against.
- Insured — the person whose life is covered by the policy. In life insurance he is also called the assured.
- Insurance policy — the written contract setting out the sum assured, the term, the premium and all other terms and conditions.
- Premium — the consideration paid by the insured to the insurer, monthly, quarterly, half-yearly or yearly. The periodical payments are called instalments, and non-payment usually brings the contract to an end.
- Sum assured — the amount for which the policy is taken and which becomes payable on maturity or on death.
- Nominee — the person named by the policyholder to receive the sum assured if the policyholder dies before maturity.
17.2.2 Characteristics Of Life Insurance
A life policy differs from most other insurance contracts in one basic respect: the event insured against is bound to occur. This single fact explains nearly all of its features.
- Written agreement — the contract exists in the form of a policy document, because the cover may have to be proved and claimed many years after it was bought.
- Two parties — the contract is between the insurer and the assured, the first promising payment and the second promising the premium.
- Certain event, uncertain timing — the sum assured is payable either at the end of a fixed period or on the death of the insured, so the insurer is certain to pay, and only the date of payment is unknown.
- Long-term contract — since the cover is meant to run until maturity or death, the policy is taken for a long period, unlike fire and marine policies which are normally yearly.
- Not a contract of indemnity — human life cannot be valued in money, so the amount payable cannot be measured against an actual loss and is instead fixed in advance when the policy is taken.
- Right of the insurer to rescind — if the assured conceals a material fact or breaks the conditions of the policy, the insurer may set the contract aside, because the premium was fixed on the strength of what was disclosed.
17.2.3 Benefits Of Life Insurance
Life insurance is bought partly for the family and partly for the policyholder himself, and its advantages follow from these two purposes.
- Protection for dependants — if the earning member dies early, the sum assured replaces the income the family has lost and helps it maintain its standard of living.
- Provision for old age — where the policy matures during the policyholder’s lifetime, the money received supports him at an age when earning capacity has fallen.
- Security for a loan — once a policy has run long enough to acquire a value, it can be offered as security, because the lender knows a definite sum will be received from it.
- Tax concessions — premiums paid and sums received enjoy relief under the income tax law, which lowers the real cost of the cover.
- Encourages thrift — the premium falls due on fixed dates and must be paid to keep the policy alive, so saving becomes regular rather than occasional.
- Wide choice of policies — different plans are available for education, marriage, retirement and business needs, so the cover can be matched to the purpose.
- Capital formation — the premiums collected from millions of policyholders form a large pool of long-term funds, which is invested in industry and public projects and assists the economic development of the country.
17.2.4 General Principles Of Life Insurance
Two of the general principles of insurance apply to a life policy. They are set out in FC 17.2.
Flowchart
FC 17.2 — General Principles Of Life Insurance Life Insurance → Utmost Good Faith, Insurable Interest
Under utmost good faith, the proposer must disclose every material fact about his age, health, habits and occupation. The insurer cannot examine these for itself with any certainty, and the premium is calculated on the strength of what is disclosed, so concealment entitles the insurer to rescind the contract.
Under insurable interest, the person taking the policy must stand to lose financially by the death of the person insured. Every person has an unlimited insurable interest in his own life, and a husband and wife are treated as having such an interest in each other. A creditor may insure the life of a debtor to the extent of the debt. Without this requirement, a policy on a stranger’s life would be nothing more than a wager.
17.2.5 Protection And Investment In Life Insurance
A person who buys a life policy is pursuing two objectives at once, and this is what distinguishes life insurance from every other class of cover.
The first is protection. If the insured dies early, the sum assured is paid although only a few premiums have been received, and the financial loss suffered by the dependants is made good.
The second is investment. If the insured lives, the small amounts paid as premium accumulate with the insurer over the years and are returned as a lump sum on maturity. The money is not lost for want of a claim, as it would be under a fire or marine policy, and a life policy therefore doubles as a long-term saving.
17.2.6 Important Terms Of A Life Insurance Policy
Because a life policy runs for many years, the policyholder’s circumstances may change during its term. He may be unable to continue the premiums, or may wish to transfer the policy or alter who receives the money. The following provisions deal with such situations.
Surrender Value
Surrender value is the amount the insurer pays to the policyholder when he gives up the policy before it matures. It becomes available only after premiums have been paid regularly for the minimum period stated in the policy, since an insurer that has received only a few premiums has nothing to return.
The surrender value is always less than the total premium paid. The insurer has carried the risk of the policyholder’s death for the whole period the policy was in force, and the cost of carrying that risk is deducted before the balance is returned.
Paid-Up Policy
A paid-up policy is one that a policyholder converts into a smaller policy when he can no longer pay further premiums. Instead of the policy lapsing and the earlier premiums being lost, the sum assured is reduced in proportion to the premiums already paid, and this reduced amount becomes payable on the maturity of the original policy or on the death of the insured. The policy must have run for the minimum period fixed in its terms before this option can be exercised.
Assignment
Assignment means the transfer of all the rights and liabilities in the policy from the policyholder to another person, usually where the policy is offered as security for a loan. It is made either by an endorsement on the policy itself or by a separate document, and must be attested and witnessed. It becomes operative only when notice of it has been given to the insurer, so that the insurer knows to whom payment is due.
Nomination
Nomination means naming the person who is to receive the sum assured if the policyholder dies before the policy matures. If the policyholder survives to maturity, the money is paid to him and the nomination has no effect. The policyholder may change or cancel the nomination at any time before maturity, and the change takes effect only after proper notice has been given to the insurer.
Figure
Fig. 17.2-1 — A Life Insurance Policy Document Photograph of a life insurance policy document with a premium receipt placed beside it.
17.3 Fire Insurance
17.3.1 Meaning And Definition Of Fire Insurance
A fire destroys in a few hours what a business has built up over years, and it can start from causes the owner cannot fully control — a short circuit, a spark in a godown of cotton, a neighbouring building catching alight. The property lost has a money value that can be worked out, which is why this risk can be covered by a contract.
Under fire insurance, the insurer undertakes to make good the loss suffered by the insured if the property covered is destroyed or damaged by fire, in return for a premium. The claim is payable only where the loss has actually been caused by fire; the insurer is not bound to pay for a loss caused by something merely resembling fire, such as scorching from excessive heat without ignition.
Two consequences follow from the wording. Only the actual loss is made good, so the full sum insured is not payable after every accident, and the policy is normally written for one year and lapses at the end of that year unless it is renewed. Renewal allows the insurer to re-examine the value of the property and the level of risk before agreeing to carry it for another year.
17.3.2 Essentials Of A Fire Insurance Contract
A fire policy is valid only if certain conditions are satisfied. These conditions exist to keep the contract a means of protection rather than a means of profit, and are summarised in FC 17.3.
Flowchart
FC 17.3 — Essentials Of A Fire Insurance Contract Fire Insurance Contract → Insurable Interest, Utmost Good Faith, Personal Contract, Principle Of Indemnity
- Insurable interest — the person insuring the property must stand to lose by its destruction. In fire insurance the interest must exist both when the policy is taken and when the loss occurs, because the insured must own the property at the time it is damaged for there to be any loss to make good. Without such an interest the contract would be a wager on another person’s misfortune.
- Utmost good faith — the proposer must disclose every material fact about the property: how it is built, what is stored in it, what surrounds it and what arrangements exist for putting out a fire. The insurer fixes the premium on the strength of these facts, so concealment or misstatement entitles it to rescind the contract. The duty continues throughout the term, and in the event of fire the insured must take every step to keep the loss down.
- Personal contract — the cover is granted to a particular person, whose conduct and care affect the risk. The insured therefore cannot transfer the policy to another person without the insurer’s consent. Where the insured dies, his legal representative acquires the rights under the policy, and where he becomes insolvent, the official receiver does.
- Principle of indemnity — the insured can recover only the actual loss suffered, or the sum insured, whichever is lower. Fire insurance is a means of restoring what was lost and not a means of gain, so damage to the insured property must be proved before any claim is paid.
17.3.3 Benefits Of Fire Insurance
The value of a fire policy lies not only in the money received after a fire, but in what the cover allows the business to do before one ever occurs.
- Protection against loss by fire — the compensation replaces the buildings, machinery or stock destroyed, so a single accident does not wipe out the firm.
- Continuity of business — because funds become available soon after the loss, the firm can rebuild and resume trading instead of closing down for want of capital.
- Security of property — the insurer inspects the premises and insists on precautions before accepting the risk, which improves the safety arrangements of the business itself.
- Easier borrowing — an insured factory or godown is better security than an uninsured one, since the lender knows the value is protected against fire.
- Freedom to take business decisions — the owner who has transferred this risk to an insurer can invest in larger stock and costlier machinery without the fear of losing everything in one accident.
17.4 Marine Insurance
17.4.1 Meaning And Definition Of Marine Insurance
Ocean transport carries the bulk of the world’s foreign trade, and it carries more risk than any other mode. A ship may sink in a storm, strike rocks, run aground or collide with another vessel, and the goods it carries face the same perils along with damage from sea water, fire and pilferage during the voyage. A trader whose consignment is lost at sea loses the whole value of the goods in a single event over which he has no control.
Marine insurance covers these losses. It is a contract of indemnity under which the insurer promises to compensate the insured for damage arising out of the perils of the sea, in return for a premium. The shipping company bears responsibility only for the ordinary risks of carriage; the unusual risks remain with the owner of the goods, and it is against these that the cover is taken.
17.4.2 Subject Matter Of Marine Insurance
A sea voyage puts several different interests at risk at the same time, and each of them belongs to a different party. Separate policies are therefore written for each, as shown in FC 17.4.
Flowchart
FC 17.4 — Subject Matter Of Marine Insurance Marine Insurance → Cargo Insurance, Hull Insurance, Freight Insurance, Liability Insurance
- Cargo insurance — covers the goods carried in the ship, which are known as cargo. It is taken by the owner of the goods, and the compensation payable is the value of the cargo together with an agreed margin of profit, because a trader who loses a consignment loses the earnings on it as well. The premium depends on the nature of the cargo, the distance, the perils of the route and the standing of the shipping company.
- Hull insurance — covers the ship itself, and is taken by the shipowner. Ships face the same perils as the cargo they carry and cost far more, so the vessel is insured separately, either for a stated period or for a particular voyage.
- Freight insurance — covers the freight charges of the shipping company. Where freight is payable only on delivery, the company earns nothing if the goods are lost at sea, and it insures the freight to protect that earning.
- Liability insurance — covers the compensation the insured becomes legally bound to pay to a third party. If the insured ship collides with another vessel and is required to compensate its owner, that amount can be recovered from the insurer under this cover.
17.4.3 Essential Features Of Marine Insurance
Besides the ordinary requirements of a valid contract, a marine policy must satisfy the following conditions.
- Insurable interest — the insured must stand to gain by the safe arrival of the goods and to lose by their destruction. Here the interest need not exist when the policy is taken, but it must exist at the time of loss, because cargo changes hands while it is afloat. A shipowner has such an interest in the ship, a cargo owner in the cargo, a shipping company in the freight and a pledgee in the goods pledged with him.
- Utmost good faith — every material fact must be disclosed by both parties. The insurer cannot inspect a ship or a consignment at sea, and depends entirely on what it has been told, so concealment of a fact that would have influenced the premium allows the other party to rescind the contract.
- Implied warranties — certain assurances apply to every marine policy even though they are not written into it. If they are broken, the insurer is released from liability.
- Indemnity — the insured recovers the actual loss or the sum insured, whichever is lower, since marine insurance restores what has been lost and is not a source of profit.
The Three Implied Warranties
- Seaworthiness of the ship — the insurer accepts the risk on the assumption that the vessel carrying the cargo is fit in every respect to undertake the voyage. If the ship is later shown to have been unseaworthy, the insurer is not liable, because it was asked to carry an ordinary sea risk and not the risk of a defective vessel.
- Legality of the venture — the goods must be carried lawfully. No claim arises on a voyage that is itself unlawful, since a court will not enforce a contract that supports an illegal act.
- Non-deviation — the ship must follow the route agreed upon. If it departs from that route and an accident then occurs, the insurer is not liable, because the risk it agreed to cover was the risk of the stated route. Deviation is excused where it is unavoidable, where it is needed for the safety of the ship or cargo, where a person on board requires urgent medical help, or where it is undertaken to save life at sea.
17.5 Difference Between Fire, Marine And Life Insurance
The three main classes of insurance have now been studied one by one. Placed side by side, they differ on almost every point of the contract — on what is insured, on when insurable interest must exist, on how long the cover runs and on how much is payable. These differences are not accidental. They follow from a single fact: in fire and marine insurance the event insured against may never happen and the loss can be measured in money, while in life insurance the event is certain to happen and the loss cannot be measured at all.
That is why fire and marine policies are contracts of indemnity and a life policy is not. It is also why the first two are taken for short periods and renewed, while the third runs for years together. The points of difference are set out in Table 17.1.
The table also explains why a life policy can be surrendered or assigned while the other two cannot. A life policy accumulates a value over the years and can therefore be given up for money or transferred as security. A fire or marine policy holds no such value, and since the risk depends on the care of the particular insured, it cannot be passed to someone else without the insurer’s consent.
17.6 Miscellaneous Insurance
Life, fire and marine insurance leave a good many business risks uncovered. A firm may lose money because an employee steals from the till, because a delivery van is wrecked, or because a worker is injured on the shop floor and cannot earn. Policies have grown up around each of these, and together they form the miscellaneous group. The four covers of most importance to a business are shown in FC 17.5 and are taken up in turn.
Flowchart
FC 17.5 — Principal Miscellaneous Covers Miscellaneous Insurance → Health Insurance, Social Insurance, Motor Vehicle Insurance, Fidelity Insurance
17.6.1 Health Insurance
Medical costs have risen faster than incomes, and a single illness, accident or operation can consume the savings of a middle-income family. Health insurance meets this by pooling the risk: a large number of policyholders pay premiums, and the fund so built up meets the hospital bills of the few who fall ill in any year.
Health insurance is an arrangement under which a person or a group pays a premium to an insurer, and the insurer in return agrees to meet the medical and hospitalisation expenses incurred during the policy period, on the terms of the policy. It has become as much a part of personal financial planning as saving or investing.
- Premium-based cover — the premium depends on the age of the insured, the state of health, the sum insured and the extent of cover, because each of these affects the likelihood and size of a claim.
- Sum insured and sub-limits — every policy fixes a maximum amount payable in a year, and some policies also cap particular items such as room rent, which restricts what can be claimed under that head.
- Cashless treatment and reimbursement — the insured may either be treated at a network hospital without settling the bill himself, or pay first and claim the amount back afterwards on submitting the bills.
- Expenses covered — the policy generally meets room rent, doctors’ fees, nursing charges, operation theatre charges, tests and medicines connected with hospitalisation.
- Policy period and renewal — cover is usually taken for one year and must be renewed to continue, and unbroken renewal preserves benefits such as continuity and no-claim advantages.
- Exclusions and waiting period — cosmetic procedures and expenses that are not medically necessary are excluded, and claims for certain diseases and for pre-existing illnesses are admitted only after a stated waiting period has passed. Without these limits, cover would be bought only after the illness had begun.
- Claim procedure — the insured must submit hospital bills, the discharge summary, prescriptions and test reports, since the insurer has to satisfy itself that the expense was actually incurred on covered treatment.
17.6.3 Motor Vehicle Insurance
Vehicles are used constantly and in conditions their owner cannot control, and an accident damages not only the vehicle itself but often another person’s property or person as well. Motor vehicle insurance covers both sides of this risk.
Motor vehicle insurance is a contract under which the insurer undertakes to compensate the insured for loss or damage to the insured vehicle caused by an accident, and to bear the liability arising where the insured vehicle causes damage or injury to a third party.
- Wide range of vehicles — cars, trucks, vans, motorcycles and scooters can all be insured, whether used privately or commercially.
- Own damage cover — where the insured vehicle is damaged, destroyed or stolen, the insurer compensates the owner.
- Third-party liability cover — where the insured vehicle damages another vehicle or injures another person, the insurer meets the compensation payable. Cover of this kind is required by law before a vehicle may be used in a public place, because the person injured is a stranger to the contract and must not be left without a remedy.
- Limited to actual loss — the insurer pays the actual loss or the policy amount, whichever is lower, so the cover remains a means of protection and not of profit.
17.6.4 Fidelity Insurance
Employees in a business handle cash, stock, accounts and confidential records every day. Most are honest, but a firm cannot watch every transaction, and a loss caused by theft, fraud, forgery or embezzlement by an employee can damage both its finances and its standing. Fidelity insurance covers this particular risk, and is widely taken by banks, retail stores, finance companies and warehouses.
- The employer is the insured — the policy is taken by the business to protect itself, not by the employee, since it is the business that stands to lose.
- Contract of indemnity — only the actual loss proved is made good, and only up to the limit stated in the policy.
- Individual or group cover — a policy may name one employee or may cover a group of employees doing similar work, which suits firms where many people handle cash.
- Duty-related loss — the loss must arise while the employee is performing the duties of the job; dishonest acts outside work are not covered, because the cover relates to the trust placed in the employee at work.
- Proof required — the employer must establish both the loss and the employee’s dishonesty through audit reports, records and the findings of an inquiry, since the insurer is being asked to pay for a deliberate act.
- Exclusions — losses from mere negligence, normal shortages, bookkeeping errors, or a loss reported long after it occurred are usually outside the policy.
Figure
Fig. 17.6-1 — Cashless Facility At A Hospital Photograph of an insurance help desk at a hospital where a patient’s admission papers are being processed.
17.7 Summary
- A business faces several unrelated risks at once, and no single contract can cover all of them, so insurers issue separate contracts for separate classes of risk. The spine of the chapter is the classification shown in FC 17.6.
Flowchart
FC 17.6 — Classification Of Insurance Insurance → Life Insurance, General Insurance; General Insurance → Fire Insurance, Marine Insurance, Social Insurance, Miscellaneous Insurance; Miscellaneous Insurance → Health, Motor Vehicle, Fidelity, Burglary, Credit, Crop, Goods-In-Transit, Profit, Third-Party
- Life insurance covers a human life; general insurance covers property, goods, earnings and liability. The division matters because property loss can be valued in money and made good, while the loss of a life cannot, so the amount payable has to be fixed in advance.
- Life insurance pays the sum assured on maturity or on the death of the policyholder, whichever is earlier. The event is certain and only its timing is uncertain, which is why the policy runs for a long term and serves as saving as well as protection.
- A life policy is a written, long-term contract between the insurer and the assured, is not a contract of indemnity, and may be rescinded by the insurer if a material fact was concealed. Its benefits include protection for dependants, provision for old age, security for a loan, tax concessions, the encouragement of thrift and the building up of long-term capital for the country.
- Life insurance rests on two principles:
- Utmost good faith — every material fact about age, health, habits and occupation must be disclosed, since the premium is fixed on the strength of what is disclosed.
- Insurable interest — the proposer must stand to lose financially by the death insured against, and this interest must exist when the policy is taken.
- Four provisions deal with a change in the policyholder’s circumstances:
- Surrender value — the amount paid when the policy is given up before maturity; it is always less than the premiums paid, because the insurer carried the risk meanwhile.
- Paid-up policy — the cover continues for a reduced sum assured when further premiums cannot be paid.
- Assignment — the transfer of the rights and liabilities in the policy to another person, effective on notice to the insurer.
- Nomination — the naming of the person who is to receive the sum assured, which can be changed before maturity.
- Fire insurance indemnifies the insured for loss or damage caused by fire, up to the sum insured. It is normally a yearly contract, and only the actual loss proved is paid.
- A fire insurance contract rests on insurable interest at the time of the contract and at the time of loss, utmost good faith, the personal nature of the contract, and the principle of indemnity. Its benefits are protection against loss, continuity of business, safer premises, easier borrowing and freedom to take business decisions.
- Marine insurance is a contract of indemnity against losses incidental to a marine adventure. Its subject matter is cargo, hull, freight and liability, each insured by the party whose interest is at risk.
- Marine insurance requires insurable interest at the time of loss, utmost good faith and indemnity, and carries three implied warranties — seaworthiness of the ship, legality of the venture and non-deviation from the agreed route.
- Fire, marine and life insurance differ on subject matter, nature of risk, timing of insurable interest, indemnity, compensation, measurement of loss, period, premium, object, assignment and surrender. The differences follow from one fact: in fire and marine insurance the event may never occur and the loss can be measured, while in life insurance the event is certain and the loss cannot be measured.
- Miscellaneous insurance covers risks outside the three main classes. The four of most importance to a business are:
- Health insurance — meets medical and hospitalisation expenses, subject to sum insured, sub-limits, exclusions and waiting periods, and settled either cashless or by reimbursement.
- Social insurance — a government-supported scheme funded jointly by employer and employee, giving standardised benefits for sickness, employment injury, maternity, disability and old age.
- Motor vehicle insurance — covers damage to the insured vehicle and the liability arising where it harms a third party, the latter being required by law.
- Fidelity insurance — indemnifies the employer against loss caused by the dishonesty of an employee in the course of employment, on proof of both the loss and the dishonesty.
17.8 Key Terms
- Assignment The transfer of all the rights and liabilities in a life insurance policy from the policyholder to another person, effective only when notice of it has been given to the insurer.
- Fire Insurance A contract by which the insurer, in return for a premium, undertakes to compensate the insured for loss or damage caused by fire to the property insured, up to the sum specified in the policy.
- General Insurance Insurance taken on property, goods, earnings and liability rather than on a human life, normally written for one year at a time and renewed.
- Insurable Interest The financial interest of the insured in the subject matter of the policy, by which he stands to gain by its safety and to lose by its loss.
- Insured The person or firm whose life or property is covered by the policy, and who receives the compensation when the insured event occurs.
- Insurer The insurance company that promises, in return for a premium, to compensate the insured on the happening of the event insured against.
- Life Insurance A contract under which the insurer undertakes to pay the sum assured on the maturity of the policy or on the death of the policyholder, whichever is earlier.
- Marine Insurance A contract of indemnity under which the insurer undertakes to compensate the assured against losses incidental to a marine adventure.
- Miscellaneous Insurance The group of covers taken against specific risks that fall outside life, fire and marine insurance, such as health, motor vehicle, fidelity, burglary and crop insurance.
- Nomination The naming by a policyholder of the person who is to receive the sum assured if he dies before the policy matures.
- Nominee The person named by the policyholder to receive the sum assured in the event of his death before maturity.
- Paid-Up Policy A life policy converted into one for a reduced sum assured when the policyholder is unable to pay further premiums, the reduced amount being payable on maturity or death.
- Premium The consideration paid by the insured to the insurer for the cover granted, payable in a lump sum or by instalments.
- Social Insurance A government-supported system of social security under which employers and employees contribute to a common fund that provides benefits for sickness, employment injury, maternity, disability and old age.
- Sum Assured The amount for which a life insurance policy is taken and which becomes payable on maturity or on the death of the insured.
- Surrender Value The amount payable by the insurer to the policyholder when a life policy is given up before maturity, after the minimum period stated in the policy has run.
- Utmost Good Faith The principle requiring both parties to an insurance contract to disclose every material fact known to them relating to the risk covered.
17.9 Points To Ponder
- Life insurance is not a contract of indemnity because a human life cannot be valued in money. If that is so, on what reasonable basis should the sum assured be decided when a policy is taken?
- In fire insurance the insurable interest must exist both when the policy is taken and when the loss occurs, but in marine insurance it need exist only at the time of loss. Is the difference justified by the way goods and property change hands, or does it leave marine cover open to misuse?
- Health policies keep premiums affordable by using waiting periods, sub-limits and exclusions. These same devices deny a claim to the policyholder who needs it most. Where should the balance between affordable cover and adequate cover be struck?
- Third-party motor cover is compulsory while cover for one’s own vehicle is optional. Consider why the law treats the two so differently, and whether any other business risk deserves the same treatment.
- Fidelity insurance transfers the loss from employee dishonesty to an insurer. Could an employer who is well insured become less careful about supervision and internal checks, and how might an insurer guard against that?
- Insurance is often described as a means of protection rather than a source of gain. Weigh this against the fact that a life policy returns money to a policyholder who suffers no loss at all.
17.10 Objective Questions
- Which of the following is the subject matter of hull insurance? [1]
- The goods carried in the ship
- The ship itself
- The freight payable on delivery
- The liability towards another vessel
- There are two statements given below, marked as Assertion (A) and Reason (R). Read the statements and choose the correct option. [1] Assertion (A): The surrender value of a life policy is always less than the total premium paid on it. Reason (R): The insurer carried the risk of the policyholder’s death for the whole period during which the policy was in force.
- Both (A) and (R) are true, and (R) is the correct explanation of (A).
- Both (A) and (R) are true, but (R) is not the correct explanation of (A).
- is true, but (R) is false.
- is false, but (R) is true.
- Match the type of insurance in Column A with the loss covered in Column B. [1]
- Fidelity insurance
- Credit insurance
- Profit insurance
- Social insurance
- Earnings lost while the business remains closed after a mishap
- Sickness, employment injury and old age of workers
- Money taken by an employee in the course of employment
- Amounts left unpaid by customers who bought on credit
- (i)–(C), (ii)–(D), (iii)–(A), (iv)–(B)
- (i)–(D), (ii)–(C), (iii)–(B), (iv)–(A)
- (i)–(A), (ii)–(B), (iii)–(D), (iv)–(C)
- (i)–(B), (ii)–(A), (iii)–(C), (iv)–(D)
- Fill in the blank: The warranty of ______ requires a ship to follow the route agreed upon in the policy. [1]
- State whether the following statement is true or false: In marine insurance, insurable interest must exist at the time the policy is taken as well as at the time of loss. [1]
17.11 Check Your Concepts
- Define a paid-up policy. [2]
- Distinguish between fire insurance and life insurance on any three bases. [3]
- Explain why a fire insurance policy cannot be transferred to another person without the consent of the insurer. [3]
- State the three implied warranties in a marine insurance contract and explain the effect of breaking any one of them. [4]
- ‘Life insurance offers protection as well as investment, whereas fire insurance offers only protection.’ Explain this statement with reference to the nature of the risk covered in each case. [6]
17.12 Case-Based Questions
- Vaishali Handlooms insured its godown and stock against fire for ₹30 lakh. While filling in the proposal, the proprietor did not mention that a portion of the godown was being used to store a highly inflammable dye, since disclosing it would have raised the premium. A fire that began in that portion destroyed stock worth ₹12 lakh. On inspecting the premises after the fire, the insurer discovered the storage of the dye and refused to pay the claim.
- Name the principle of insurance that the proprietor has broken, and state what it required him to do. [2]
- State whether the insurer is justified in refusing the claim, giving one reason in support of your answer. [2]
17.6.2 Social Insurance
A business depends on a workforce that is healthy and secure. Workers, however, face sickness, injury at work, maternity, disability and old age, any of which can stop their earnings. Social insurance spreads these risks between the employer, the employee and the state instead of leaving them on the worker alone.
Social insurance is a government-supported system of social security under which employers and employees contribute regularly to a common fund, out of which benefits are provided to workers and their families on the happening of specified contingencies. For a business it is a structured way of discharging its welfare responsibilities.
The Employees’ State Insurance Scheme The Employees’ State Insurance scheme is a social insurance arrangement for workers in India, funded by contributions from employers and employees. A worker injured during work receives medical treatment and cash support for the wages lost, and the employer is spared a sudden and unplanned compensation payment.