Fundamental Element of Insurance Contract
The contract of insurance is very useful to indemnify any loss. In this light, the contract of insurance is also called a contract of indemnity in which insurer indemnifies the loss incurred due to the happening or non-happening of an event depending upon contingency.
To make a contract of insurance valid in the eye of the law, some essential elements must be considered, in its process of validity. The insurance contract, like any other contracts, must satisfy the usual conditions of a contract. The essentials of insurance contracts are as follows:
(a) Agreement
The agreement means communication by the parties to one another of their intentions to create a legal relationship. For a valid contract of insurance, there must be an agreement between the parties, i.e. one making offer or proposal and another accepting the proposal or signifying his acceptance upon the proposal.
(b) Free consent
There must be free consent between the parties to contract. Consent means that parties to an agreement must agree on a specific thing in the same sense or their understanding should be the same. Consent must be given by the parties thereto in a contract, freely, independently, without any fear and favor. The consent is known to be free when it is not caused by, fraud, misrepresentation, mistakes and other undue influences.
(c) Utmost Good Faith
An insurance contract is known as a contract of “Uberrimae Fidel” or a contract based on ‘utmost good faith’. It means both the parties must disclose all material facts. Any fact is material which goes to the root of the contract of insurance and has a bearing on the risk involved.
(d) Indemnity
A contract of insurance is a contract of ‘indemnity’. It means that the insured, in case of a loss against which the policy has been issued, shall be paid the actual amount of loss not exceeding the amount of the policy, i.e. he shall be fully indemnified. The object of every contract of insurance is to place the insured in the same financial position, as nearly as possible, after the loss, as if the loss has not “taken place” at all this is applicable to all types of insurance except life, personal accident, and sickness insurance. A contract of insurance does not remain a contract of indemnity if a fixed amount is paid by the insurer to the insured on the happening of the event against, whether he suffers a loss or not. Like, in the case of life insurance, the insurer is liable to pay the sum mentioned in the policy on the death, or expiry of a certain period.
(e) Insurable interest
It means that the insured must have an actual interest in the subject matter of insurance. A contract of insurance affected without insurable interest is void. A person is said to have an insurable interest in the subject matter if he is benefited by its existence and is prejudiced by its destruction.
(f) Cause Proxima
The rule of “cause proxima” means that the cause of the loss must be proximate or immediate and not remote. If the proximate cause of the loss is a peril insured against, the insured can recover. When a loss has been brought about by two or more causes, the real or the nearest cause shall be the causa proxima, although the result could not have happened without the remote cause. But, if the loss is brought about by any cause attributable to the misconduct of the insured, the insurer is liable.
(g) Risk
In a contract of insurance, the insurer undertakes to protect the insured from a specified loss and the insurer receives a premium for running the risk of such loss. Thus, risk must attach to a policy.
(h) Mitigation of loss
In the event of sonic mishap to the insured property, the insured must take all necessary steps to mitigate or minimize the losses, just as any prudent person would do in those of loss attributable to his negligence. But it must be remembered that though the insured is bound to do his best for his insurer, he is, not bound to do so at the risk of his life.
(i) Subrogation
The doctrine of subrogation is a corollary to the principle of indemnity and applies only to fire-and marine insurances. According to it, when an insured has “received full indemnity in respect” of his loss, all rights and remedies which he has against the third person will pass on to the insurer acid will be exercised for his benefit until he (The insurer) recoups the amount he has paid under the policy. The insurer’s right of subrogation arises only when he has paid for the loss for which he is liable under the policy and this right extends only to the rights and remedies available to the insured in respect of the thing to which the contract of insurance relates.
