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Legal Aspects of Insurance Contracts
Contract of indemnity
Indemnity means that the insured person is placed, financially, in the same position, as he was before the loss. The exceptions to the rule are found in Personal Accident Policies, Agreed Value policies in Marine Insurance and valuables and reinstatement policies like in Engineering policies. These are also contracts of indemnity but by a special application of the principle, the measure of indemnity is decided at the time of entering into the contract itself.
Implied conditions of a contract
Good faith & Utmost good faith
Both the parties to a contract are expected to observe good faith. However, the good faith assumes utmost importance when Material Facts are concerned and therefore utmost good faith should be observed on matters relating to Material facts. (A material fact is the information, which acts as a criterion for acceptance of insurance contract and the price at which to do so. The insurers, who issue the contract document, have the same duty to observe good faith while issuing the policy and should ensure that there is no ambiguity in the contract wording).
Insurable Interest
Insurance contracts without insurable interests have no sanction of the law as they amount to speculation. The owner of a property has absolute insurance interest. When a person insures a property, what is insured therein, is his interest in that property. By this principle, insurance interest exists to other parties like lessor, lessee, financiers, etc., but their interest is limited to the extent of their financial commitment only. The insurable interest must exist both at the time of the proposal and at the time of claims. However, in the case of marine insurance contracts which are assignable without the consent of the insurers, insurable interest must exist at the time of loss only (Marine insurance contracts are governed by marine Insurance Act of 1963).
Existence of subject matter
Existence of subject matter of insurance is necessary.
Legality of parties to contract
At law, a minor cannot enter into a legal contract. However, so long as the contract is for the benefit of the minor himself, such contract is valid. Contracts entered with person of unsound mind or with a person from alien Country, are illegal.
Proximate cause
A loss could be due to a cause of causes. In the chain reaction, it is the dominant cause, which would be the proximate cause to be considered for the purpose of a claim. It is always the duty of the insured to prove that the loss arose out of the insured peril, which is proximate.
Consensus Ad Idem (of the same mind)
In Insurance contracts only one party - the proposer, knows the details of the risk. He has a duty to disclose particularly, material facts and the same should be understood by the other party to the contract - the insurers. In other words, each party should understand what is proposed for insurance and the same should be covered by the insurance contract. As the insurers issue the contract document, any ambiguity in the contract wording will be read against the insurers as they have drafted the contract.
Express conditions of a contract
These conditions are mainly framed to achieve the principle of indemnity and to ensure that the insured does not make any profit out of the loss.
The express conditions include
Contribution
Contribution condition is a corollary to the Principle of indemnity. If an insured obtains more than one policy covering the same risk, he cannot recover the same loss from more than one source so that he is not benefited by more than ‘Indemnity’. Contribution condition checks that each policy pays only a ratable portion under each separate policy.
Subrogation
Subrogation condition is another corollary to the principle of Indemnity. A loss may occur accidentally or by the action or negligence of third party (not workmen). The property owners have a right to proceed against the offending third party to recover the loss/damage and also under their insurance policy but not under both. If the insured opts to recover the loss under the insurance policy, which is faster and does not involve litigation, he will surrender his rights against the third parties in favour of the Insurers signing a ‘Letter of subrogation’ on an appropriate stamp paper.
An exception to this are life insurance polices wherein insured/ beneficiaries can claim under an insurance policy and also proceed againt the offending third party.
Subrogatioin is the legal right of one person, having indemnified the other in a contratual obligation to do so, to stand in the place of another and avail of all the righs and remidies of the another, whether enforced or not.
Arbitration
When liability under the policy is admitted but the quantum is disputed, the insured cannot rush to a Court of law without first referring the dispute to Arbitration as per ‘Indian Arbitration and reconciliation Act -1996'. In keeping with the provisions of the Act, the insured may appoint an arbitrator to be followed by appointment of another arbitrator by the insurers. They can also appoint a single arbitrator, to represent both of them. If the two separate arbitrators cannot reach an agreement, both the arbitrators can appoint a third arbitrator called umpire. The award of the Arbitrators is binding on both the parties to the dispute and cannot be challenged unless a point of law is involved.
The jurisdiction of Arbitration proceedings is within Indian territory. However, when foreign funding is involved, the financiers who are also joined in the policy as co-insured, may insist upon conducting the Arbitration proceedings in their own country. In such a case, the insurers may agree to modify the arbitration condition suitably.
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