Assignment on Insurance & Risk Management

Submitted To:
Md. Jamil Sharif
Lecturer Department of Accounting & Information Systems

University Of Dhaka

Submitted by: Group: 6

Name
Md. Ariful Haque Mst. Tahmina Akter Wahid Hossain Shams Zerin Chowdhury Shayla Sultana Mala

Id no.
21 26 30 73 367

Dhaka City College

Date of Submission: 16-04-2011

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Q. What are the six principles of insurance?

Ans: The six principles of insurance are described below: 1. The principle or the doctrine of utmost good faith: According to this principle both the parties to the insurance contract must disclose all facts materials to the risks voluntarily to each other. Any branch of this duty shall render the contract voidable at the option of the aggrieved party i.e. the party who has suffered as a result of the breach. Although insurance contract is a simple commercial contract but it differs from other commercial contract with regards to the application of this principle. It does not follow the rule of caveat emptor. 2. Principles of insurable interest: It may be defined as a financial or pecuniary interest in the subject matter of insurance where by the insured benefits financially by its safety and suffers financially by its lost. There must be a subject matter to be insured. 3. Principle of indemnity: Insurance contract actually stand in different category because there is nothing visible or tangible here which can be physically examined like other contracts. Therefore the law is not of let the buyer beware. Unless both the parties disclose voluntarily to the other party all facts it is not possible for the other party to know precisely as to what type of bargain he is entering into. 4. Principle of subrogation: It refers to the right of the insurance to stand in the place of the insured after the settlement of claim. So far as the insureds right of recovering from alternative source is involved. 5. Principle of contribution: It has been well established through the principle of indemnity that on the happening of a loss the insured shall be placed back into the same financial position as if no loss has taken place. He shall be paid neither more nor less. In order to preserve this principle if therefore, there comes up any possibility which is likely to disturb this principle that is to say if somebody is likely to get more than the amount of loss; then that has to be checked so that the principle remains undisturbed. 6. Principle of proximate cause: The principle of proximate cause virtually revolves around the claims administration and more precisely, diagnosing the pay ability or otherwise of a claim on the question of perils covered by a policy. A policy may cover certain perils mentioned specifically therein, whilst some perils may be specifically excluded and some may still be neither included nor excluded.

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Q. What is material fact?

Ans: Material fact: A material fact is a fact which would influence the decision of a prudent underwriter to decide whether to enter into an insurance contract or not, if to enter, at what rate terms and conditions. A material fact is every circumstance, which would influence the judgment of a prudent underwriter/insurer in fixing the premium or determining whether he will take the risk. Any change in facts previously notified could be material and must, therefore, be notified. Failure to disclose material facts could result in insurers voiding the Policy and all claims made under it. The duty of disclosure is ongoing and applies from the moment discussion commences with insurers, prior to the issue of any policy document, throughout the period of insurance and at renewal.

Q. Write which facts are required to be disclosed and which are not?
Ans: Facts which are required to be disclosed: Facts which render a risk, greater than normal. Facts which some special motive behind insurance. Facts which suggest the abnormality of the proposer himself. Facts explaining the exception nature of risk.

Facts which are not required to be disclosed: Facts which lessen the risk. Facts of public knowledge. Facts pertaining to matters of law. Facts possible of discovery through enquiry. Facts which should be reasonable inferred by the insurer. Facts to which the insurer do not attach much importance. Facts which are super flows to disclosed.

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Q. Show the warranties.

difference

between

representation

and

Ans: The difference between the representation and warranties are given bellowRepresentation Points of Warranties Difference A representation is a statement made Definition Warranty is an undertaking by by the proposer to the insured relating the insured by the effect that he to a proposed risk. shall not do certain thing. Both material and immaterial facts Disclosing of facts It may be either expressed or needs to be disclosed. implied. It is required to be substantially true. Truthfulness Warranty must be strictly and literally complied with. Insurer is bound to prove that Proof Any breach or immaterial is information is materially misstated enough to avoid the contract .No need to prove must appear in the policy. So these are the some difference between representation and warranties.

Q. How breaches of the duty of utmost good faith take place?

Answer: As the underwriter knows nothing and the man who comes to him to ask to insure knows everything, it is the duty of the assured to make full disclosure to the underwriter without being asked of all the material circumstances, this is expressed by saying it is a contract of utmost good faith. The contract may breach for several ways. The breaches of the duty of utmost good faith take place are discus below: 1. Non disclosure: This means omission to disclose a material fact inadvertently or because he innocently thought the information to be immaterial. 2. Concealment: This means concealing or suppressing a material fact intentionally, knowing it to be material. 3. Innocent misrepresentation: This means, making an inaccurate or false statement pertaining to material facts innocently and believing it to be true. 4. Fraudulent misrepresentation: this means making false statements, pertaining to facts material to the risk intentionally and with the intent to deceive the insurers. The maker of Prepared by: Arif, Wahid, Lucky, Zerin & Shayla.

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such a statement knows it to be false, but nevertheless he makes it recklessly with a careless disregard for the veracity. This is actionable not only under the law of contract but also under the law of tort. It should be clearly remembered that any breach, as mentioned herein, renders the contract voidable at the option of the aggrieved party, i.e. the party who have suffered as a result of this breach.

Q. What courses of actions are open to an insurer when an insured makes breach of utmost good faith? What is a voidable contract?

Answer: Insurance is a contract between insurers and insure. Sometimes the contract breaches for some causes. There are some coerces of action are open to an insurer when an insured makes breach of utmost good faith. They are 1. Repudiate liability with regard to any claim, 2. Cancel the policy if Still in force, or 3. Overlook the breach. When the breach is overlooked as such, the contract remains absolutely unaffected. Voidable Contract: In law, a transaction or action which is voidable is valid, but may be annulled by one of the parties to the transaction. Voidable is usually used in distinction to void ab initio (or void from the outset) and unenforceable. A voidable contract, unlike a void contract, is a valid contract. At most, one party to the contract is bound. The unbound party may repudiate the contract, at which time the contract is void. For example, depending upon jurisdiction, a minor has the right to repudiate certain contracts. Any contract with a minor is thus a voidable contract. If a minor were to enter into a contract with an adult, the adult would be bound by the contract, whereas the minor could choose to avoid performing the contract. Therefore, when entering into contracts with a minor, people often require the co signature of an adult, preferably a parent or legal guardian.1

The Wikipedia free encyclopedia. [http://en.wikipedia.org/wiki/Voidable]

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Q. What are the three essentials of insurable interest?

Ans: The followings are the three essentials of insurable interest: a. There must be property, rights, interest, life, limb or potential liability devolving upon the insured capable of being covered by a policy of insurance. b. Such property, right, life, limb, interest or liability must be the subject matter of insurance. c. The insured must bear such relationship, recognized by law, to that subject matter of insurance whereby he benefits by the safety of that subject matter and is prejudiced by the loss, damage or destruction thereof. When a person fulfils the above criteria or when a person has such a relationship with the subject matter, it is said that he has insurable interest and it is only then that he can insure.

Q. Recall the difference between subject matter of insurance and subject matter of insurance contract.
Ans: Subject matter of insurance is nothing but the property that is being insured. The subject matter of insurance contract is indeed not the property as such but the insurable interest of a man in that property. There some basic difference between subject matter of insurance and subject matter of insurance contract. viz. Subject matter of insurance Points of Subject matter of Insurance difference contract Subject matter of insurance is Definition The subject matter of insurance nothing but the property that is being contract is indeed not the property as insured. such but the insurable interest of a man in that property. It is the property or subject matter Subject matter It shows the interest of the owners which is insured. over the property or the subject matter. It is life in Life Insurance; Examples: It is the insurable interest i.e. the Factory, machinery, stock, house etc. interest of life in Life insurance; in Fire Insurance; Interest of machinery in fire Ship, cargo etc. in Marine Insurance. insurance is the subject . These are the basic diference of subject matter of insurance and subject matter of insurance contract.

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Q. What legal principle was decided in the English case CASTELLAIN Vs PRESTON (1883)?

Ans: The principle of subrogation was decided in the English case Castellian vs. Preston in 1883. The court emphasized the amplitude of the insurer's right of subrogation which gave him "the advantage of every right of the assured, whether such right consists in contract, fulfilled or unfulfilled, or in remedy for tort capable of being insisted on or already insisted on, or in any other right, whether by way of condition or otherwise, legal or equitable . . . The second right vested in the insurer by the doctrine of subrogation is to claim from the assured any benefit conferred on the assured by third parties with the aim of compensating the assured for the loss in respect of which the insurer has indemnified him. The right is usually exercised by an insurer claiming from the assured a sum equivalent to any sum of damages paid to the assured by a third party legally liable for the loss. The right is wider in scope than that, however, and the insurer is entitled to moneys paid to the assured ex gratia to diminish his loss unless intended by the donor to benefit the assured to the exclusion of the insurers." The doctrine of subrogation is based on the fact that a contract of insurance is a contract of indemnity, and that the insurer is placed in the shoes of the insured in respect of claims whereby the insured loss is diminished.2 To sum up we can say that the principle of subrogation was considered in this case.

Q. Recall the position as to when insurable interest must exist in various branches of insurance.

Ans: The question as to when insurable interest must exist varies depending on the type of insurance. The position is as follows. Marine Insurance: Insurable interest must exist at the time of claim although it need not exist at the time of effect the policy. However, at the time of effect the policy the insured must prove that he is going to acquire insurable interest soon.3 Fire Insurance: Insurable interest must exist at the time of effect the policy and at the time of claim.

2 3

[http://www.swarb.co.uk/lisc/Insur18491899.php] Marine Insurance Act, 1906

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Life Insurance: Insurable interest must exist at the time of effect of the policy and it may not exist at the time of claim. For example, if a creditor takes out a policy on the life of a debtor and subsequently the debtor pays back the loan, nevertheless, the creditor can continue the policy on the policy as per original terms and shall be entitled to sum assured either on death of the debtor or on maturity, even though at the time of claim there exist no insurable interest.4

Accident Insurance: Like fire, insurable interest must exist both at the time of effect of the policy and the time of claim. It should be remembered that in the absence of insurable interest the contract should be void ab-initio. Therefore, it is the duty of the underwriters to see the position of insurable interest at the time of insurance of the policy and similarly it is the duty of the Claims Manager to see the position of insurable interest at the time of settling a claim.

English case Dalby Vs. The India & London Life Assurance Co., 1854

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