Insurable Interest Limits Payment Law Contract Essay

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02 Nov 2017

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In the case of property insurance, not only must an insurable interest exist at the time of the loss, but the amount the insured is able to collect is limited by the extent of such interest. For example; if you have a one-half interest in a building that is worth Rs. 10,00,000 at the time it is destroyed by fire, you cannot collect more than Rs. 5,00,000 from the insurance company, no matter how much insurance you purchased. If you could collect more than the amount of your insurable interest, you would make a profit on the fire. This would violate the principle of indemnity. An exception exists in some states where valued policy laws are in effect. These laws require insurers to pay the full amount of insurance sold if property is totally destroyed. The intent of the law is to discourage insurers from selling too much coverage.

In contrast to property insurance, life insurance payments are usually not limited by insurable interest. Most life insurance contracts are considered to be valued policies or contracts that agree to pay a stated sum upon the occurrence of the event insured against, rather than to indemnify for loss sustained. For example; a life insurance contract provides that the insurer will pay a specified sum to the beneficiary upon receipt of proof of death of the person whose life is the subject of the insurance. The beneficiary does not have to prove that any loss has been suffered because he or she is not required to have an insurable interest.

Some health insurance policies provide that the insurance company will pay a specified amount per day while the insured is hospitalized. Such policies are not contracts of indemnity; they simply promise to make cash payments under specified circumstances. This makes such contract "incomplete," as discussed in the introduction to this chapter. This also leads to more litigation because there are no explicit payout amounts written into the contract while improvements in medical technology change the possible treatments daily.

Although an insurable interest must exist at the inception of a life insurance contract to make it enforceable, the amount of payment is usually not limited by the extent of such insurable interest. The amount of life insurance proceeds collectible at the death of an insured is limited only by the amount insurers are willing to issue and by the insured’s premium-paying ability. The life insurance payout amount is expressed explicitly in the contract. Thus, in most cases, it is not subject to litigation and arguments over the coverage. The amount of the proceeds of a life insurance policy that may be collected by a creditor-beneficiary, however, is generally limited to the amount of the debt and the premiums paid by the creditor, plus interest.

Utmost Good Faith (Italian word is Uberrimae Fidei) - Life Insurance is a ‘legal contract’ as per ‘The Contract Act, 1872’ and is also a contract of utmost good faith. While entering into a contract with insurance company, the insured should be open and truthful and should not conceal any material facts in giving the information. Concealment of any fact or misrepresentation will entitle the insurance company to repudiate the contract if it wishes to do so. Most commercial contracts are subject to the ‘doctrine of caveat emptor’ (let the buyer beware); where :

It casts responsibility on both parties to the contract to examine the item or service, which is the subject-matter of the contract.

So long as one party does not give misleading information, contract is not void.

Insurer needs to disclose all the relevant facts about the risk being proposed for insurance. For example; in case of life/ health insurance, there are certain aspects of the risk, which are not apparent at the time of survey or medical examination like pre-existing diseases, medical history and so on.

The duty of disclosure by the insured to the insurer is again applicable before the contract of general insurance is renewed, extended, vary or reinstated. The insured party generally knows in advance about the risk he/she intends to insure and his own past insurance history. This gives the insured party an advantage over the insurer in making a contract of insurance. Uberrimae Fidei; ‘utmost good faith’ means potential insureds are held to the highest standards of truthfulness and honesty in providing information for the underwriter. The law therefore requires anyone seeking insurance to disclose all "material facts" to the insurer before undertaking any risk. It is no defense for you to say that you never realized that the mentioned fact was material. It is also important to remember that an innocent misrepresentation has the same effect as a fraudulent one.

Claims must also be presented in good faith; an exaggerated claim could amount to a fraudulent claim. No connection between a declined claim and a misrepresented or undisclosed material fact is required. So even if your loss is unrelated in any way to the misrepresentation or non-disclosure, the same consequences will prevail. Thus, a proven non-disclosure is likely to leave you uninsured, having you to meet your losses from your own funds.

When you give the information to the insurers, about a risk you want them to underwrite, you must be fair and truthful in your discussions and must not misrepresent any detail. You, as the insured party, is responsible for disclosing the information about your business, its insurance history and the experience. The insurer is not supposed to extract the information from you by interrogating for it; and the fact that an insurer does not ask about a "material fact" does not discharge you from your duty to disclose the information voluntarily. It should be remembered that the consequences of misrepresentation and non-disclosure are very severe. The policy can be declared void "ab initio", in the both cases:

the claim that gives notice of a breach of utmost good faith can be declined

any other claim made under the policy can also be declined.

Consequently, any fact that would make a risk more probable or more severe must be disclosed to the insurance company. Even if your full and accurate disclosure would not, in itself, have decisively affected the insurer’s opinion about acceptance of the policy and the rate of premium, something that you misrepresent or fail to disclose may still be proved material. Once the materiality is proved, the burden of establishing that the misrepresentation or non-disclosure did not induce the making of the contract lies with the insured party. The insurer is entitled to render the policy void, if the misrepresentation or non-disclosure of a material fact did actually induce the making of the contract. However, the court may require the insurer to demonstrate that this was so.

The duty of disclosure continues up to the time at which the contract is made, unless the policy provides otherwise. The duty then ends, although any later changes that could take the risk outside the scope of the policy must still be disclosed. However, any specific term in your policy may impose on you a continuing duty to disclose, i.e. you must tell the insurer about any material change in your business during the term of the policy. It is your duty to provide all material information, so you should make sure you disclose every fact that could be material (even if you are not sure about it) so that the insurer can decide whether it is material. Here are some example of the facts that need not be disclosed :

facts of law

facts that reduce the risk

facts within the insurer’s own domain

facts that the insurer would be expected to know at large, out of the general knowledge and from the class of insurance concerned.

The last point means that an insurer should not decline a claim because "he was unaware that a tilt trailer had soft sides" that thieves could easily breach. When an insurer underwrites marine cargo or freight-related business, it is reasonable to expect that he knows the characteristics of a transport unit. Any such ignorance on his part would be inconsistent with the principle of utmost good faith. On the other hand, if you used the trailer as a storage unit (i.e. not in the normal course of transit), this could breach the principle on your side.

When the policy is due for renewal, the duty to disclose all material facts will arise again. Here are some of the examples of material facts that must be disclosed but let us understand that no list of examples can be exhaustive :

the fact that goods are of high value

the fact that goods are fragile

the fact that goods are second hand

information about geographical trading areas

information about storage periods

information about storage premises

the fact that another insurer has refused to renew a policy of the type being negotiated

your previous claims experience



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