Page 163 - DCOM309_INSURANCE_LAWS_AND_PRACTICES

Insurance Laws and Practices

Notes Some examples to explain the principle of indemnity are:
If a vehicle is insured and is destroyed by fire, the insurance company will make good the
loss by taking into consideration the depreciation and the wear and tear of the vehicle,
having been in use by the insured. The insurance company will not pay the price of new
car. It will not be true indemnity to pay the price of a new vehicle. If the insurance
company’s did so, the insured will be tempted to destroy the insured assets.
In case a building is damaged by fire, the measure of indemnity is the cost of repairing it.
For machinery, the measure of indemnity is the cost of repair, if the machinery is destroyed
in fire, the market value of such machine after taking into consideration the wear and tear
shall be paid by the insurer.
For manufactured stock, it is the cost of raw materials, plus cost of labour, fuel and
overheads i.e., the value added will be indemnified.

It is so provided in the Marine Insurance Act, 1963 that for marine perils, the indemnity is “in the
manner and to the extent agreed”, by the insurers and the insured.
In the case of personal accident policies, it is not possible to place a value on life as such. Hence,
personal policies are called benefit policies. Whatever is the sum assured as per the premium/
the type of policy taken, the amount shall be paid.

9.1.3 Utmost Good Faith

In any insurance contract, the proposer is the only person who is supposed to know all the facts
of the subject matter of the insurance and the insurer has to completely rely on what the proposer
has disclosed. The proposer, should therefore, furnish all material facts concerning the property
proposed for insurance.
The insured need not disclose the facts of the following nature:
1. Which would diminish the risk of insured peril, e.g., appointing a driver or appointing a
night watchman.
2. Which are presumed to have been known to the insurer, e.g., large scale rioting in the
area.
3. Which could be understood from the information already, furnished, e.g., customary
process in an industry.
4. Which should have been enquired but was omitted by the insurer? The insurer will construe
this as warranty.

If the insured does not reveal the material facts related to the subject matter assured, then the
contract is void or voidable in the hands of the insurance company as the case may be.

Example: Examples of material facts are:
Marine Insurance: Method of packing, the nature of goods, the condition of vessel
carrying the goods, the ports of shipment and destination, etc.
Fire Insurance: Construction of the building, occupancy (e.g., office, residence, shop,
godown, workshop, etc.), the nature of goods, i.e. non-hazardous, hazardous, extra-
hazardous and so on.
Motor Insurance: Cubic capacity of engine (private car), the year of manufacture,
carrying capacity of a truck (tonnage), the purpose for which the vehicle is used, the

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