Insurance is a cooperative device to spread the loss caused by a particular risk over a number of persons who are exposed to it and it does not reduce risk. But it only reduces financial loss to a number of people who take insurance in one insurance company. Therefore, insurance is financial management that spread the costs of loss among a number of members of the insurance company. A contract of insurance is one having as its object the endeavour to avert loss from the party liable to suffer it, by shifting the possible loss on to the shoulders of others, who are willing, for money or some other consideration, to take the risk of it. The principal forms of insurance are life, fire, marine and motor vehicle. The parties to a contract of insurance are the insurer, who is the person taking the risk, and agreeing to indemnify or pay a lump sum down on the happening of a particular event. The insured is the person paying the premium in order that he may be indemnified or receive payment. Except in insurance on life, the insurer contracts to indemnify the insured for what he may actually lose by the happening of certain events upon which the insurers’ liability is to arise. The insured is not supposed to make any profit on his loss. Contracts of life insurance are not contracts of indemnity but are contingency contracts; i.e. the insurer undertakes to pay a lump sum on the happening of a certain event, irrespective of the loss suffered by the insured. The legal definition of insurance is that, it is a contract between the insurer and the insured whereby, in consideration of payment of premium by the insured, the insurer agrees to make good any financial loss the insured may suffer due to the operation of a peril (risk) insured. Insurance is a social device for spreading the chance of financial loss among a large number of people. By purchasing insurance, a “person” shares risk with a group of others, thereby reducing the individual potential for disastrous financial consequences. Transacting insurance includes soliciting insurance, collecting premiums and handling claims.
Section 3 of the Insurance Act, 2009 stipulates that: “insurance business” means the business of assuming the obligation of an insurer in any class of insurance whether defined in this section or not, … and includes assurance and reinsurance and reassurance. FORMATION OF A CONTRACT OF INSURANCE The first step is the Proposal: This is the means, by which the insured makes known to the insurer, the nature of the risk the insurer is being asked to undertake. The terms of the proposal are embodied in a formal document called a policy. There is no statutory requirement that contracts of insurance, other than marine insurance, must be in writing. The second step is cover note: This is a provisional contract of insurance, quiet distinct from the contract to be embodied in the policy. It provides an interim protection and usually states that it is to be for a limited period only until formal policy is delivered. In the meantime, however, the insurers are free to decide whether or not to accept the insured’s proposal. Similarly, the insured may withdraw his proposal without in anyway affecting the contract contained in the cover note. The third step is commencement of cover The moment the insurance contract is formed mark the point at which cover commences. However, in practice the this commence the moment the first premium is paid.
PARTIES TO INSURANCE CONTRACT
1. Insurer. The party agreed to pay for the loss of the insured
2. Insured: the party who insured his risk of loss with insurer RIGHTS OF THE INSURER
i. Right to collect premium from the insured ii. Right to specify the conditions and benefit under the policy iii. Responsibility to for the loss occurred RIGHTS AND RESPONSIBILITY OF THE INSURED i. To pay premium
ii. Right to collect the money from the insurance company if the loss occurred iii. Obligation to comply with the terms of the contract of insurance TYPES OF INSURANCE
1. Life insurance (assurance). Insurance which deal with the insurance of human life. Provides social security.
2. Non-life insuranc, Fire insurance,Marine insurance, Personal accident insurance, Vehicle insurance, Crop insurance, Burglary insurance.
FUNCTIONS OF INSURANCE
1. It helps capital formation
2. It help to share risk
3. It helps prevention of losses
4. It provides protection against economic loss
5. It provides certainty
CHARACTERISTIC OF INSURANCE
1. It is a cooperative device
2. It helps risk sharing and risk transfer
3. It require number of insured to be large to operate properly
4. It is not gabling
5. Claim is paid upon the occurrence of the insured event/risk
6. There must be an uncertain future event as no one knows when, or if, the event insured against will occur. Nevertheless, the party paying for insurance is essentially paying for peace of mind, with the security of being able to transfer any loss that does in fact occur onto the party bearing the risk.
7. The insured must have an insurable interest in the subject matter of the insurance, whether this is the life or the property in question. Without insurable interest, the contract would be regarded as a gaming or wagering contract and would, therefore, be invalid.
8. The insurance contract must be lawful. In order for any contract to be enforceable, it must first be legally binding on the parties. In the case of insurance, the insurer must be under a legal obligation to pay the other party when the uncertain event occurs.
9. A contract of insurance must pay money or money‟s worth to the insured as compensation for his loss when the insured event occurs. After all, that is the point of taking up insurance in the first place.