Insurance is a contract between the insurer and the policy holder. Insurance is a specialized type of contract. Apart from the above essentialities life insurance contracts are subject to certain basic principles.
- Principle of utmost good faith
- Principle of insurable interest
Principle of utmost good faith
The principle of utmost good faith should be preserved by both parties in life insurance. Both of them must disclose all material facts. Most of the facts related to health, habits personal history, family history etc. which is the basis of life insurance contract are known only by the proposer. The insurer is not able to know it. He will know it when the proposer discloses it. The disclosure of material facts is necessary to ascertain the risk accurately. The underwriter can ask a medical report. But all material facts cannot be disclosed through as medical report. So disclosure of material facts should be done by the proposer himself.
In life insurance material facts are age, income, occupation, health, habits, family history, etc. There should be no concealment, misrepresentation, half disclosure and fraud of the subject matter to be insured. According to insurance laws, parties to insurance have greater duty than in the case of commercial contracts. It is the duty of the proposer to make a full disclosure to the insurer. The duty of disclosure operates till the risk commences. If material facts are not disclosed then the contract will become void. The breach of the principle of utmost good faith may arise due to misrepresentation or nondisclosure. There are certain material facts which are not to be disclosed. They are given below.
- Facts of common knowledge: There is certain information which is known by all. There is no need of disclosing such information.
- Facts of law
- Facts which are disclosed by survey: For example information provided by Planning Commission.
- Facts which could be reasonably discovered.
- Facts which are waived by the insurer.
Principle of insurable interest
Insurable Interest means that the proposer must have a stake in the continuance of subject matter insured and could suffer a loss, if the risk occurs. It is a pecuniary interest. The insured must have insurable interest in the subject matter which is insured. It is not necessary that the assured should have insurable interest at the time of maturity also. In the case of life insurance policies, insurable interest must exist at the beginning of the policy. Under life insurance policy, there is no requirement for insurable interest at the time of making claims. In other words Insurable interest must exist at the time the life insurance policy is purchased. However, for a life insurance policy, insurable interest is not required at the time of loss. There must be financial relationship between the proposer and life assured.
Insurable interest in life insurance can be classified into two groups.
- Insurable interest on own life
- Insurable interest in others life
Insurable interest on Own Life – Every person has an unlimited insurable interest in his or her own life. The insurable interest in his own life is unlimited because the loss to the insured or to his dependents cannot be measured in terms of money. The insured person can choose whoever they want to be the beneficiary (who the proceeds are paid to upon the insured’s death) of their life insurance policy. Insurable interest on others life: Life insurance can be affected on the lives of third parties provided the proposer has insurable interest in the third party.
- Parent and Child, Husband and wife, Brother and Sister – All have insurable interest in each other, because of blood relation or marriage.
- Creditors – All creditors may have an insurable interest in debtors. The creditor can be the beneficiary of debtor’s life insurance policy for the amount of any outstanding loan.
- Business relationships – May create an insurable interest. An employer may insure the life of an employee, and an employee may insure the life of an employer.