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Unit 4: Contract of Insurance

where there is an offer (from the person facing the risk) and the underwriter or the insurer Notes
accepts it by issuing the policy. The contract of insurance (in order to be a valid contract) can be
entered into only by person(s) competent to contract.
A contract of insurance other than life insurance contract is a contract of indemnity. The insurer
undertakes to indemnify the insured for loss or damage arising as a result of risk specified.
In case of life insurance, if a person dies the insurance company can only give a specified claim
amount as compensation to the survivors; it cannot indemnify the loss of lost life as the person
who is dead cannot be brought back.
In the next unit, you will study about the various principles of insurance such as principle of
utmost good faith, principle of insurable interest, principle of indemnity, principle of contribution,
principle of subrogation and principle of causa proxima (nearest cause).

4.1 Meaning of Insurance Contract

Let’s discuss what exactly is meant by an insurance contract.

An insurance contract is whereby, for specified consideration, one party undertakes to compensate
the other for a loss relating to a particular subject as a result of the occurrence of designated
hazards.
The normal activities of daily life carry the risk of enormous financial loss. Many persons are
willing to pay a small amount for protection against certain risks because that protection provides
valuable peace of mind. The term insurance describes any measure taken for protection against
risks. When insurance takes the form of a contract in an insurance policy, it is subject to
requirements in statutes, administrative agency regulations, and court decisions.
In an insurance contract, one party, the insured, pays a specified amount of money, called a
premium, to another party, the insurer. The insurer, in turn, agrees to compensate the insured
for specific future losses. The losses covered are listed in the contract, and the contract is called
a policy.
When an insured suffers a loss or damage that is covered in the policy, the insured can collect on
the proceeds of the policy by filing a claim, or request for coverage, with the insurance company.
The company then decides whether or not to pay the claim.

Notes The recipient of any proceeds from the policy is called the beneficiary.
The beneficiary can be the insured person or other persons designated by the insured.
A contract is considered to be insurance if it distributes risk among a large number of persons
through an enterprise that is engaged primarily in the business of insurance.

Example: Warranties or service contracts for merchandise do not constitute insurance.
They are not issued by insurance companies, and the risk distribution in the transaction is
incidental to the purchase of the merchandise. Warranties and service contracts are thus exempt
from strict insurance laws and regulations.
The business of insurance is sustained by a complex system of risk analysis. Generally, this
analysis involves anticipating the likelihood of a particular loss and charging enough in premiums
to guarantee that insured losses can be paid. Insurance companies collect the premiums for a
certain type of insurance policy and use them to pay the few individuals who suffer losses that
are insured by that type of policy.

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