Insurance Contract: Elements and Clauses Insurance Contract

Insurance may be defined as a contract between two parties whereby one party called insurer undertakes, in exchange for a fixed sum called premiums, to pay the other party called insured a fixed amount of money on the happening of a certain event.

The insurance, thus, is a contract whereby

1. Certain sum. called premium, is charged in consideration
2. Against the said consideration, a large sum is guaranteed to be paid by the insurer who received the premium
3. The payment will be made in a certain definite sum. I.e., I lose or the policy amount whichever may be, and
4. The payment is made only upon a contingency

Since Insurance is a contract, certain sections of the Contract Act are applicable.

All agreements are contracts if they are made by the free consent of the parties, competent to contract, for a lawful consideration and with a lawful object and which are not hereby declared to be void.

Elements of Insurance Contract can be classified into two sections;

1. The elements of general contract and
2. The elements of special contract relating to insurance: the special contract of insurance involves principles: insurable interest, utmost good faith, indemnity, subrogation, warranties. Proximate cause, assignment, and nomination, the return of premium.

Elements of Insurance Contract

This Act says that all agreements are the contract if they are made by the free consent of the parties, competent to contract, for a lawful consideration and with a lawful object and which are not at this moment declared to be void”.

The insurance contract involves—(A) the elements of the general contract, and (B) the element of special contract relating to insurance.

The special contract of insurance involves principles:

1. Insurable Interest.
2. Utmost Good Faith.
3. Indemnity.
4. Subrogation.
5. Warranties.
6. Proximate Cause.
7. Assignment and Nomination.
8. Return of Premium.

So, in total, there are eight elements of the insurance contract which are discussed below:

General Contract

The valid contract, according to Section 10 of the Indian Contract Act 1872, must have the following essentialities;

1. Agreement (offer and acceptance),
2. Legal consideration,
3. Competent to make a contract,
4. Free consent,
5. Legal object.

Offer and Acceptance

The offer for entering into the contract may come from the insured.

The insurer may also propose to make the contract. Whether the offer is from the side of an insurer or the side of the insured, the main fact is acceptance. Any act that precedes it is the offer or a counter-offer. All that preceded the offerer counter-offer is an invitation to offer.

In insurance, the publication of the prospectus, the canvassing of the agents are invitations to offer.

When the prospect (the potential policy-holder) proposes to enter the contract, it is an offer and if there is any alteration in the offer that would be a counter-offer.

If this alteration or change (counter-offer) ill-accepted by the proposer, it would be acceptable.

In the absence of a counter-offer, the acceptance of the offer will be an acceptance by the insurer. At the moment, the notice of acceptance is given to another party; it would be a valid acceptance.

Legal Consideration

The promisor to pay a fixed sum at a given contingency is the insurer who must have some return or his promise. It need not be money only, but it must be valuable.

It may be summed, right, interest, profit or benefit Premium being the valuable consideration must be given for starting the insurance contract.

The amount of premium is not important to begin the contract. The fact is that without payment of premium, the insurance contract cannot start.

Competent to make the contract

Every person is competent to contract;

1. Who is off’ is an age of majority according to the law,
2. Who is of sound mind, and
3. Who is not disqualified from contracting by any law to which he is subject?

A minor is not competent to contract. A contract by a minor is void excepting contracts for necessaries. A minor cannot sign a contract.

A person is said to be of sound mind to make a contract if, at the time when he makes it, he is capable of understanding it and of forming a rational judgment as to its effect upon his interests.

A person who is usually of unsound mind, but, occasionally of sound mind may .make a contract when he is of sound mind. Alien energy, an undischarged insolvent and criminals cannot agree. A contract made by an incompetent party/parties will be void.

Free Consent

Parties entering into the contract should enter into it by their free consent.

The consent will be free when it is not caused by—

(1) coercion,
(2) undue influence,
(3) fraud, or
(4) misrepresentation, or
(5) mistake.

When there is no free consent except fraud, the contract becomes voidable at the option of the party whose consent was so caused. In the case of fraud, the contract would be void.

The proposal for free consent must sign a declaration to this effect, the person explaining the subject matter of the proposal to the proposer must also accordingly make a written declaration or the proposal.

Legal Object

To make a valid contract, the object of the agreement should be lawful. An object that is,

(i) not forbidden by law or
(ii) is not immoral, or
(iii) opposed to public policy, or
(iv) which does not defeat the provisions of any law, is lawful.

In the proposal from the object of insurance is asked which should be legal and the object should not be concealed. If the object of insurance, like the consideration, is found to be unlawful, the policy is void.

Insurable Interest

For an insurance contract to be valid, the insured must possess an insurable interest in the subject matter of insurance.

The insurable interest is the pecuniary interest whereby the policy-holder is benefited by the existence of the subject-matter and is prejudiced death or damage of the subject- matter. The essentials of a valid insurable interest are the following:

1. There must be a subject-matter to be insured.
2. The policy-holder should have a monetary relationship with the subject-matter.
3. The relationship between the policy-holders and the subject-matter should be recognized by law. In other words, there should not be any illegal relationship between the policy-holder and the subject-matter to be insured.
4. The financial relationship between the policy-holder and subject-matter should be such that the policy-holder is economically benefited by the survival or existence of the subject-matter and or will suffer economic loss at the death or existence of the subject matter.

The subject-matter is life in the life insurance, property, and goods in property insurance, liability, and adventure in general insurance.

Insurable interest is essentially a pecuniary interest, i.e., the loss caused by fire happening of the insured risk must be capable of financial valuation.

No emotional or sentimental loss, as an expectation or anxiety, would be the ground of the insurable interest. The event insured should be one that if it happens, the party suffers financially and if it does not happen, the party is benefited by the existence.

But a mere hope or expectation, which may be frustrated by the happening to some extent, is not an insurable interest.

Utmost Good Faith

The doctrine of disclosing all material facts is embodied in the important principle ‘utmost good faith’ which applies to all forms of insurance.

Both parties to the insurance contract must agree (ad idem) at the time of the contract. There should not be any misrepresentation, non-disclosure or fraud concerning the material.

In case of insurance contract the legal maxim ‘Caveat Emptor” (let the buyer beware) docs not prevail, where it is the regard of the buyer to satisfy himself of the genuineness of the subject-matter and the seller is under no obligation to supply information about it.

But in the insurance contract, the seller, i.e., the insurer will also have to disclose all the material facts.

An insurance contract is a contract of uherrimae fidei, i.e., of absolute good faith both parties to the contract must disclose all the material facts and fully.

Material Facts

A material fact is one which affects the judgment or decision of both parties in entering into the contract.

Facts which count materially are those which knowledge influences a party in deciding whether or not to offer or to accept such risk and if the risk, is acceptable, on what terms and conditions the risk should be accepted.

These facts have a direct bearing on the degree of risk about the subject of insurance.

In case of life insurance, the material facts or factors affecting the risk will be age, residence, occupation, health, income, etc., and in case of property insurance, it would make him use the design, owner, and situation of the property.

Full and True Disclosure

The utmost Good Faith says that all the material facts should be disclosed in true and fill the form. It means that the facts should be disclosed in that form in which they exist.

There should be no concealment, misrepresentation, mistake or fraud about the material facts. There should be no false statement and no half-truth nor nay silence on the material facts.

The duty of Both the Parties

The duty to disclose the material facts lies on both the parties the insured as well as the insurer, but in practice the assured has to be more particular, about the; observance of this principle because it is usually in full knowledge of facts relating to the subject-matter which, despite all effective inspections of the insurer, would not be disclosed.

Facts need not be disclosed by the insured

The following facts, however, are not required to be disclosed by the insured (0 Facts which tend to lessen the risk.

1. Facts of public knowledge.
2. Facts that could be inferred from the information disclosed.
3. Facts waived by the insurer.
4. Facts governed by the conditions of the policy.

Principle of Indemnity

As a rule, all insurance contracts except personal insurance are contracts of indemnity.

According to this principle, the insurer undertakes to put the insured, in the event of loss, in the same position that he occupied immediately before the happening of the event insured against, in a certain form of insurance, the principle of indemnity is modified to apply.

For example, in marine or fire insurance, sometimes, a certain profit margin which would have earned in the absence of the event, is also included in the loss. In a true sense of the indemnity, the insured is not entitled to make a profit from his loss.

1. To discourse over insurance the principle of indemnifying it an essential feature of an insurance contract, in the absence of which this industry would have the hue of gambling, and the insured would tend to affect over-insurance and then intentionally cause a loss to occur so that a financial gain could be achieved. So, to avoid this international loss, only the actual loss becomes payable and not the assured sum (which is higher in over-insurance). If the property is under-insured, i.e., the insured amount is less than the actual value of the property insured, the insured is regarded his insurer for the amount if under insurance and in case of loss one shall share the loss himself.
2. To avoid an Anti-social Act; if the assured is allowed to gain more than the actual loss, which is against the principle of indemnity, he will be tempted to gain by the destruction of his property after getting it insured against risk. He will be under constant temptation to destroy the property. Thus, the whole society will be doing only anti-social acts, i.e., the persons would be interested in gaining after the destruction of the property. So, the principle of indemnity has been applied where only the cash-value of his loss and nothing more than this, though he might have insured for a greater amount, will be compensated.
3. To maintain the Premium at Low-level; if the principle of indemnity is not applied, the larger amount will be paid for a smaller loss, and this will increase the cost of insurance, and the premium of insurance will have to be raised. If the premium is raised two things may happen first, persons may not be inclined to ensure and second, unscrupulous persons would get insurance to destroy the property to gain from such an act. Both things would defeat the purpose of insurance. So, a principle of indemnity is here to help them because such temptation’ is eliminated when only actual loss and not more than the actual financial loss is compensated provided there is insurance up to that amount.

Conditions for Indemnity Principle

The following conditions should be fulfilled in full application of the principle of indemnity.

1. The insured has to prove that he will suffer a loss on the insured matter at the time of happening the event and the loss is an actual monetary loss.
2. The amount of compensation will be the amount of insurance. Indemnification cannot be more than the amount insured.
3. If the insured gets more amount than the actual loss, the insurer has the right to get the extra amount back.
4. If the insured gets some amount from the third party after being fully indemnified by the insurer, the insurer will have the right to receive alt the amount paid by the third party.
5. The principle of indemnity does not apply to personal insurance because the amount of loss is not easily calculable there.

Doctrine of Subrogation

The doctrine of subrogation refers to the right of the insurer to stand in the place of the insured, after the settlement of a claim, in so far as the insured’s right of recovery from an alternative source is involved.

If the insured is in a position to recover the loss in full or in part from a third party due to whose negligence the loss may have been precipitated, his right of recovery is subrogated to the insurer on the settlement of the claim.

The insurers, after that, recover the claim from the third party. The right of subrogation may be exercised by the insurer before payment of loss.

Essentials of Doctrine of Subrogation

A corollary to the Principle of Indemnity

The doctrine of subrogation is the supplementary principle of indemnity.

The latter doctrine says that only the actual value of the loss of the property is compensated, so the former follows that if the damaged property has any value left or any right against a third party the insurer can subrogate the left property or right of the property because if the insured is allowed to retain, he shall have realized more than the actual loss, which is contrary to principle of indemnity.

Subrogation is the Substitution

The insurer, according to this principle’, becomes entitled to all the rights of insured subject matter after payment because he has paid the actual loss of the property.

He is substituted in place of other persons who act on the right and claim of the property, insured.

Subrogation only up to the amount, of payment

The insurer is subrogated all the rights, claims, remedies and securities’ of the damaged insured property after indemnification, but he is entitled to gel these benefits only to the extent of his payment.

The insurer is, thus, subrogated to the alternative rights and remedies of the insured, only up to the amount of his payment to the insured.

In the same way, if die insured is compensated for his loss from another party after he has been indemnified by his insurer he is liable to part with the compensation up to the extent that the insurer is entitled to.

In one U.S. case it was made clear “if the insurer, having paid the claim to the insured, recovers from the defaulting third party in excess of the amount paid under the policy, he has to pay this excess to the insured though he may charge the insured his share of reasonable expenses incurred in collecting.

The Subrogation may be applied before Payment

If the assured got certain compensation, from the third party before being fully indemnified by the insurer, the insurer could pay only the balance of the loss.

Personal Insurance

The doctrine of subrogation does riot apply to personal insurance because the doctrine of indemnity does not apply to such insurance. The insurers have no right of action against the third party in respect of the damage.

For example, if an insured dies due to. the negligence of a third party his dependent has the right to recover the amount of the loss from the third party along with the policy amount No amount of the policy would be subrogated by the insurer.

Warranties

There are certain conditions and promises in the insurance contract which are called warranties.

According to Marine Insurance Act, “A warranty is that by which the assured undertakes that some particular thing shall or shall not be done, or that some conditions shall be fulfilled, or whereby he affirms or negatives the existence of a particular state of facts.”

Warranties that are mentioned in the policy are called express warranties. Certain warranties are not mentioned in the policy.

These warranties are called implied warranties. Warranties which are answers to the question are called affirmative warranties. The warranties fulfilling certain conditions or promises are called promissory warranties.

Warranty is a very important condition in the insurance contract which is to be fulfilled by the insured. On the breach of warranty, the insurer becomes free from his liability.

Therefore insured must have to fulfill the conditions and promises of the insurance contract whether it is important or not in connection with the risk. The contract can continue only when warranties are fulfilled.

If warranties are riot followed, the contract may be canceled by the other party whether the risk has occurred or not or the loss has occurred due to other reasons than the waiving of warranties.

However, when the warrant is declared illegal, and there is no reverse effect on the contract, the warranty can be waived.

Proximate Cause

The rule; is that immediate and not the remote cause is to be regarded. The maxim is “sed causa proximo non-remold-spectator”; see the proximate cause and not, the distant cause.

The real cause must be seen while payment of the loss. If the real cause of loss is insured, the insurer is liable to compensate for the loss; otherwise, the insurer may not be responsible for a loss.

Proximate cause is not a device to avoid the trouble of discovering the real ease or the common sense cause.

Proximate cause means the actual efficient cause that sets in motion a train of events which brings about result, without the intervention of any force started and worked actively from a new and independent source.

The determination of real cause depends upon the working and practice of insurance and circumstances to losses. A loss may not be occasioned merely by one event.

There may be concurrent causes or chain of causes. They may occur in a sequence or broken chain. Sometimes, certain causes are excepted by (the insurance contract and the insurer is not liable for the accepted peril.

The efficient cause of a loss is called the proximate cause of the loss.

For the policy to cover the loss must have an insured peril as the proximate cause of the loss or also the insured peril must occur in the chain of causation that links the proximate cause with the loss.

The proximate cause is not necessarily, the cause that was nearest to the damage either in time or place but is rather the cause that was responsible for the loss.

Determination of Proximate Cause

1. If there is a single cause of the loss, the cause will be the proximate cause, and further, if the peril (cause of loss) was insured, the insurer will have to repay the loss.
2. If there are concurrent causes, the insured perils and excepted perils have to be segregated. The concurrent causes may be first, separable and second, inseparable. Separable causes are those which can be separated from each other. The loss occurred due to a particular cause may be distinguishing known. In such a case if any cause, is excepted peril, the insurer will have to pay up to the extent of loss which occurred due to insured perils. If the circumstances are such that the perils are inseparable, then the insurers are not liable at all when there exists any excepted peril.
3. If the causes occurred in the form of the chain, they have to be observed seriously.
   • If there is an unbroken chain, the excepted and insured peril has to be separated. If an excepted peril precedes the operation of the insured peril so that the loss caused by the latter is the direct and natural consequence of the excepted peril, there is no liability. If the insured peril is followed by an excepted peril, there is a valid liability.
   • If there is a broken chain of events with no excepted peril involved, it is possible to separate the losses. The insurer is liable only for that loss caused by an insured peril; where there is an excepted peril, the subsequent loss caused by an insured peril will be a new and indirect cause because of the interruption in the chain of events. The insurer will be liable for the loss caused by insured peril which can be easily segregated. Similarly, if the loss occurs by an insured peril and there is, subsequently loss by an excepted peril, the insurer will be liable for loss occurred due to the insured peril.

In brief, if the happening of an excepted peril is followed by the occurrence of an insured peril, as a new and independent cause there is a valid claim. If an insured peril is followed by the happening of an excepted peril, as a new and independent cause, there is a claim excluding loss or damage; caused by the excepted peril.

Assignment or Transfer of Interest

It is necessary to distinguish between the assignment of (a) the subject-matter of insurance, (b) the policy, and (c) the policy money when payable.

Marine and life policies can be freely assigned but assignments under fire and accident policies, are not valid without the prior consent of the insurers—except changes of interest by will or operation of law.

Moreover, assignments under fire and accident policies must be made before tine insured parts with his, interest. Once he has lost interest, the policy is void and cannot be assigned.

The life policies can be assigned whether the assignee has an insurable interest or not.

Life policies are frequently charged, assigned or otherwise dealt with, for they are valuable securities. The marine policy is freely assignable unless it contains terms expressly prohibiting assignment.

It assigned either before or after a loss. A marine policy may be assigned by endorsement thereon or in another customary manner.

In practice, a marine cargo policy is frequently endorsed in blank and becomes in effect a quasi-negotiable instrument.

Thus, it will be appreciated, adds considerably to the convenience of mercantile transactions as the policy can be negotiated through a bank along with other documents of title.

Assignment in fire insurance cannot be recognized without the prior consent of the insurer, change of interest in fire policies (unless by will or operation of law) are not valid unless and until the consent of the insurer has been given.

The fire policies are not like an assignment nor intended to be assigned from one person to another without the consent of the insurer. Assignment in fire insurance constitutes a new contract.

Return of Premium

Ordinarily, the premium once paid cannot be refunded. However, in the following cases, the refund is allowed.

By Agreement in the Policy

The assured may pay a full premium while affecting the insurance but it may be agreed to return it wholly or partly in the happening of certain events. For example, special packing may reduce risk.

For Reasons of Equity

1. Non-attachment of risk: Where the subject-matter insured or part thereof, has never ten imperiled, for example, term insurance with returnable premium where the premium is returned to the policy-holder if death does not occur during the period of insurance.
2. The undeclared balance of on open policy: The policy may be canceled and premium may be returned for short interest allowed provided there was no further interest in the policy.
3. The payment of Premium is apportionable. The apportioned part of -the consideration is refundable when a part of policy interest is not involved. For example, insurance may be taken for a voyage in stages, each stage being rated separately. In such a case if some stages are not completed the premium relating to the incomplete stage is returnable.
4. Where the assured has no insurable interest throughout the currency of the risk, the premium is returnable provided the policy was not attached by way of wagering.
5. Unreasonable delay in commencing the voyage may also entitle the insurer to cancel the insurance by returning the premium.
6. Where the assured has over-insured under an unvalued policy a proportionate part of the premium is returnable.

Over-insurance by Double Insurance

If there is over-insurance by double insurance, a proportionate part of the several premiums is returnable provided that if the policies are taken at different times and any earlier policy has at any time born the entire risk or if a claim has been paid.

On the policy in respect of the foil insured thereby, no premium is returnable in respect of that policy and when double insurance is affected knowingly by the assured no premium is returnable.

Various Clauses of Insurance Contract

The old form of policy is even used today, To make the standard policy suitable for the different types of contracts, suitable conditions are added to the policy.

Use conditions are inserted in the policy in the form of clauses. The clauses took the standard form with special meanings. They may be about Hull, Cargo, and Freight.

Hull Clauses

These clauses are mainly framed wife the insurances on vessels and are incorporated in hull policies. The clauses may be about losses resulting from a collision, standing, general average, etc.

‘All risks policy’ may be issued or certain risks may be excluded from the policy by inserting suitable clauses. ‘Inland or Port Risk Clauses’ may be incorporated in fee policy to determine the extent of the loss. These clauses are known as ‘Institute Time Clauses’.

Cargo Clauses

These clauses are used in the insurance of goods and are incorporated in cargo policies. Use clauses describe the nature, extent; and scope of the insurance and define comprehensive conditions and restrictions.

The additional marine perils against which cover may be sought or which are excluded from the policies are inserted through special clauses. The terms and conditions of Cargo insurance are specially incorporated in the policies.

‘With Average (W.A.) or With Particular Average, ‘Exposed during transit,’ etc., are the important clauses of cargo insurance.

The underwriting of cargo-risks depends upon the nature of goods, the susceptibility of the goods, intentions of the insurer and insured and willingness of the assured to pay the extra premium. This clause is known as the ‘Institute Cargo Clause.’

Freight Clauses

The clauses are framed in connection with the loss of freight due to maritime perils which may be insured for a period or a voyage. A person who paid the freight in advance and the person who will receive the freight on completion of the voyage are interested in covering the risk.

The General Average. (GA.), Particular Average (P.A.), etc. are used in the freight clauses. The clauses are known as Institute Freight Clauses’.

The clauses to be incorporated in the policy are taken from Lloyd’s Association. There are various clauses which are suitably inserted according to the nature and type of policies. Hull, cargo, and freight policies have different standard provisions.

In case of hull insurance, the clauses provide that if the insured vessel at the expiration of the policy is at sea or a port of refuge.

Generally, the ship may be covered until arrival at the port of destination. In case of cargo policies with Average,

Free of Particular Average or All Risks are generally used. There are standard clauses that are invariably used in marine insurance.

Firstly, policies are constructed in the plain, ordinary and popular sense, and, later on, specific clauses are added to them according to the terms and conditions of the contract. Clauses attached to the policy would override the printed wording in the policy.

Description of the Marine Clauses

The usual clauses which are or may be incorporated in a marine policy are:

1. Assignment clause,
2. Lost or not lost,
3. At and from clause,
4. Warehouse to warehouse clause,
5. Deviation, touch and stay clause,
6. Inchmaree clause,
7. Running down clause,
8. Sue and Labor clause,
9. Reinsurance clause,
10. Memorandum clause,
11. Continuation clause.

Let’s get an idea regarding them;

Assignment Clause

“The clause of assignment is as below …. as well as in his/their name as for and in the name and names of all and every other person or persons to whom the same doth mayor shall appertain, in part or all doth make assurance… and cause… and them and every of them, to be insured ….”

This clause makes it clear that the marine policy is freely assignable unless this is expressly prohibited. The policy can be assigned to anyone who may acquire an insurable interest in the subject- matter as soon as the assured parts with his interest.

Cargo policy is freely assignable, and no notice thereof is essential to be given to the underwriter.

But, in case of hull insurance die policy cannot be assigned freely, and the consent of underwriter is essential because the degree of risk of the subject- matter is materially changed when the management and ownership of the vessel are changed.

Since the owner of cargo has no control over the cargo in transit, the blank endorsement may be permitted. But in hull insurance, specific endorsement of an assignment is essential.

It is interesting to note that marine policy can be assigned even after h takes place, but the assignee does not get a better title than the assignor.

However, where the assured has parted with his interest in the subject, matter insured and has not, before or at time of so doing, expressly or impliedly agreed to assign the policy and subsequent assignment of the policy is inoperative.

Lost or Not Lost Clause

The clause is as to be insured, lost or not lost. The policy was taken in good faith. The meaning of the clause is that the insurer insures the subject-matter irrespective of the fact that it has already been lost or not lost before the issue of the policy.

It is taken in such a case where a merchant receives information of the shipment of his cargo very late after the sailing of the steamer and, therefore, when he submits the risk to the underwriter and effects insurance it was not known whether the subject- matter to be insured was lost or was not lost.

So, to provide full protection for shipment, the words, ‘Lost or not Lost’ are inserted. It means that the insurer undertakes to indemnify the insured whether the subject matter before the date of issue of the policy was already lost or not.

In this case, it is assumed that the assured and the underwriters are ignorant about the safety or otherwise of the subject- matter.

The policy terminates if it is proved later on that one of the two parties was aware of the subject-matter at the time of loss.

The introduction of this clause has a retrospective effect to provide for any loss which has occurred during the period from the date of shipment to the date of issue of policy.

This clause was most prevalent in olden times when the media of communication were not developed so much. Now, the clause has lost much of its importance.

At and From Clause

This clause is applicable in voyage policies insuring hull, and freight. It determines the time when the actual risk commences. As soon as the ship will arrive at the port, the risk will commence.

It means that the policy covers the subject-matters while it is lying at the port of departure and from the time the ship sails when the policy contains from only instead of “At and Form.”

From means, the risk commences from the time of departure of the ship and not previous to that. In the case of cargo policy, this clause is amended as the risk may commence boom the ‘time the cargo is loaded onto the vessel.

In voyage policy, if the ship is not at that place when the contract is concluded, the risk commences as soon as the ship arrives there in good safety. If the place of departure is specified by the policy, and the ship sails from another place than the specified one, the risk does not attach.

Termination of Risk

The wordings of policy, in this case, are as follows:

“And upon the goods and merchandises until the same be there discharged and safely landed.” When the ship arrives at the port of destination, the goods must be landed within a reasonable time and if they are not landed the risk ceases.

The risk of landing within a reasonable time is permitted in most of the cases. But, where it is allowed with a standard policy, clauses such as craft, lighters, etc., are inserted into the policy.

Warehouse to Warehouse Clause

Underwriters are responsible for the risk commencing from the time of loading to the time of unloading the cargo. But, in certain cases, the risks are beyond these two limits, i. e., departing, and destination.

So, to cover the inland risks from the original place of departure to the port of sailing and from the port of discharge to the place of final destination are insured under ‘Warehouse to warehouse clause.’

Under this policy, the risk commences from the specified place and continues to the specified place of destination named in the policy. Thus, the risk of land, craft transport and transshipment are also covered under a single marine insurance policy.

Sometimes, time-limit is also inserted in the policy, and the extra cost is required from the insured to cover the remaining voyage. But, where goods are willfully detained, the underwriter shall cease his liability.

The clause has appeared in the Institute Cargo clause is as follows:

The risks covered by this policy attach from the time the goods leave the Warehouse and/or Store at the place named in the policy for the commencement of the transit and continue during the ordinary course of transit, including customary transshipment, if any, until the goods are discharged oversize from the oversea vessel at the final port.

Thereafter the risks covered are continued whilst the goods are in transit and/or awaiting transit until delivered to final warehouse at the destination named in the policy or until the expiry of 15 days (30 days if the destination to which the goods are insured is outside the limits of the port) whichever shall first occur. The time limit referred to above to be from midnight of the day on which the discharge overside of the goods hereby insured from the overseas vessel is completed.

Transshipment, if any other than as above, and/or delay more than the above time limits arising from circumstances beyond the control of the assured, held covered at a premium to be arranged.

Deviation Touch and Clauses

The ship should not deviate from the course of the voyage described in the policy or where the course is not a specifically designated one, from the customary course. Any departure from the specified course or a customary course amounts to the deviation.

A deviation is different from the change of voyage. In the latter case, the destination agreed upon is changed, while in the former case the destination is the same as agreed, but the course to it is deviated from.

In the change of voyage, the underwriter’s liability comes to an end from the time the intention or decision to change the voyage is taken, but in deviation, the mere intention to the deviation is not material; there should be an actual deviation to avoid the policy.

Once deviation has taken place the risk ceases to attach to the rest of the voyage even though the loss has occurred after the vessel had reverted to the proper course.

Where the ship deviates without lawful excuse, the underwriters are relieved of the liability as from the time of deviation.

The fact that deviation did not increase the risk or that the ship regained her route before any loss occurred, would not amount to non-deviation. This clause applies only to voyage policies. In time policies, this clause does not apply.

The deviation is excused under certain circumstances but it should be noted that the ship must resume her course and prosecute the voyage with reasonable dispatch. Deviation or delay is excused in the following cases:

1. Where authorized by any special term in the policy. The special term must be incorporated in the policy. Underwriters are usually willing to extend the protection of the policies after charging an additional premium.
2. Where deviation is caused by circumstances beyond the control of the master and his employer.
3. Where deviation or delay is necessary to comply with an express or implied warranty.
4. The deviation or delay is necessary for the safety of the ship or subject-matter insured.
5. To save human life or aid a ship in distress where human life may be in _ danger. For, and for obtaining medical or surgical aid, deviation or delay is required.
6. Where deviation is caused by the barratrous conduct of the master or crew if the barratry is one of the perils insured against.

Touch and Stay

It accords liberty to the vessel to touch and stay at any port, or place whatsoever. In the absence of the clause, the liberty to touch and stay at any port or place whatsoever does not authorize die ship to depart from the course of her Voyage from the port of departure to the port of destination.

Where several ports are specified, the ship may touch or stay at all or any of them. In the absence of any usage or sufficient cause to the contrary, the ship must proceed to the designated ports.

The following wordings are incorporated in the standard policy.

“And it shall be lawful for the said ship, etc., in the voyage to proceed and sail to and touch and stay at any ports or places whatsoever without prejudice to this insurance.”

It means that the vessel in the course of the voyage must touch and stay at such ports and in such order as are mentioned in the policy or if no course is mentioned in the policy, the ports must be in the ordinary course of the voyage.

Inchmaree Clause

The clause protects the ship-owners against losses to be included in claims by the assured. This clause is taken from an illustration of a steamer called ‘Inchmaree’.The donkey pump of the steamer was damaged due to salt. The claim was covered under the “and all other perils, losses, and misfortunes clause”.

The court decided that due to negligent, such losses were outside the scope of the insurance arid should not be covered by it.

So, now to provide indemnity for the insured for damage to the hull or machinery resulting from the negligence of the master or crew, as well as from an explosion or latent defects, a clause was introduced into hull policies which are commonly known as ‘Inchmaree clause.’ This clause is also incorporated in cargo policies.

Hague Rules

A Maritime Law Committee of the International Law Association sat at The Hague in 1921 and framed a set of rules regarding the rights and liabilities of cargo-owners and ship-owners in connection with Bills of Lading so that no complication may arise in settlement of claims.

Running Down Clauses (R.D.C.)

This clause is also called a collision clause and is included in hull policies.

It provides that the underwriter agrees to take upon the liability of the owner of the ship for damage done by his vessel to another vessel on collision to the extent of three-fourths of such liability. The underwriter will be responsible only when this clause is added to the policy.

The assured himself has to bear one-fourth of the loss so that he may exercise greater care in the navigation of the vessel.

The full protection can be given by deleting the words ‘Three-fourths’ from the clause.

In case the ship sinks in a collision and is held liable for the damage done to the other vessel, the underwriter may have to pay a total loss and a heavy claim under the R.D.C.

The amount of damage extends to include damage done to other ships, her cargo, and compensation for loss of employment in consequence of the collision.

Sue and Labor Clause

This clause reads as follows:

“And in case of loss of misfortune it shall be lawful to the assured, their factors, servants and assigns to sue, labor and travel for in and about the defense, safeguards, and recovery of the said goods and merchandises, and ship, etc., or part thereof, without prejudice to this insurance, to the charges whereof we, the assurers, will contribute each one according to the rate and quantity of his sum herein assured”.

Thus, it is the duty of the assured and his agents to act in such a way that they are uninsured and to take such measures as may be reasonable for averting or minimizing loss or damage.

This clause requires underwriters to pay any expenses properly incurred by the assured or his agents in preventing or minimizing loss or damage to the subject-matter. The reasonable expenditure is payable even though it may be, also, to the total loss.

The essential features of Sue and Labor Charges are;

1. The expenses must be incurred for the benefit of the subject-matter insured. If occurred for the common benefit they may become a part of the general average which is not recoverable under this clause.
2. They must be reasonable.
3. They may be incurred by ‘the assured, his factors, his servants or assigns’. The clause excludes salvage charges.
4. The expenses are incurred to avert or minimize a loss from a peril covered by the policy. Expenses incurred to avert or diminish any loss not covered by the policy are not recoverable under this clause.

Reinsurance Clause

The reinsurance clause…. “being reinsurance and subject to the same clauses and conditions as the original policy, and to pay as may be paid thereon.”…. is generally added to the original policies. The reinsurer is liable only for claims for which the original underwriter is liable. If the reassured has paid a claim for which he is not legally liable under his policy, the reinsurer is under no obligation to reimburse him. The cost incurred by the original insurer in contesting liability under the original policy, need not be paid by the reinsurer. The reinsurance policy is closely linked with the original insurance and any alteration in the original policy must be agreed with the reinsurer.

Memorandum Clause

The memorandum clause reads as under:

“Com, fish, salt, fruit, flower, and seed are warranted free from average, unless general, or the ship is stranded—sugar, tobacco,… are warranted free from average,… and all other goods, also the ship and freight, are warranted free from average.”

This clause is meant to provide a minimum limit to be underwriter’s liability regarding claims for a particular average by exempting him from such claims.

Continuation Clause

This clause refers that the vessel shall continue to be covered even after completion of the voyage under the policy at a pro-rata premium to her port of destination provided previous notice was not given.

Institute Cargo Clauses

These clauses are used to cover various types of general merchandise involving transit by sea. The risks clauses, general average clause and collision clause are included in these clauses. These clauses are ICC (A) (B) and (C).

Types of Insurance Contract

Insurance may be defined as a contract between two parties whereby one party called insurer undertakes, in exchange for a fixed sum called premiums, to pay the other party called insured a fixed amount of money on the happening of a certain event.

The insurance contract may be divided into two forms — first life insurance contract and the second contract of indemnity.

Occurring of Event

The event, the death, in life insurance is certain, but the only uncertainty is the time when death will occur.

In indemnity insurance {in fire and marine insurances) the event may not take place at all or may take place in part.

Therefore, in life insurance, ordinarily every piece will become a claim sooner or later but it is not certain in indemnity insurance.

Subject-Matter

The subject-matter in life insurance is life.

Chances of death would increase along with the advance in age whatever precautionary measures may be taken for improvement of health whereas the property in other insurance can be repaired and replaced and may remain usually in good condition.

Related: Proximate Cause Principle of Insurance

Variance in Premium

In life insurance premium is not much variable whereas in other insurance premiums is variable in numerous forms.

Classification of Risk

The classification of risks is generally simpler in life insurance than in other types of insurance contracts.

In life contract, it would be standard, sub-standard and un-insurable but in other insurance, it may be several.

Period of Insurance

Generally, life insurance is taken for a longer period. Whereas the other forms of insurance are taken for not more than one-two years.

Protection and Investment

The life insurance contract protects against loss of early death and investment to meet the old age requirement.

Other forms of insurance do not provide investment because the premium paid is not returnable if the contingencies (hazards) do not occur within the period.

Other forms of insurance provide only protection against loss of the damage of the property against the insured perils.

Premium Payment

The mode of premium payment in life insurance is generally level premium whereas, in other forms of insurances, it is a single premium.

Insurable Interest

Insurable interest must be at the time of proposal in insurance but in property insurance, it must be present at the time of loss.

Insurance Policy Form

Since most of the insurance contracts are simple contracts, these need not necessarily be in writing.

The exceptions are fidelity guarantee contracts and marine insurance contracts which are required to be evidenced in writing because of the requirement of law.

However, as a rule, insurers do issue policies about all types of insurance contracts.

It should be known by the students that policy as such is not the contract in itself, it is simply evidence to the contract which already exists.

In practice, different insurers use different types of policies for the same class of business, and there is no standardization as such.

In some classes of business, it may be seen, however, that most of the wordings have been standardized and an example may be the standard fire policy.

Related: 4 Difference between Insurance and Assurance

Apart from this, another common feature that will be found in almost all policies is the appearance of a schedule, where all important information about the insurance is marshaled.

The advantage of such scheduled, policies is that one can easily find out the critical information from the schedule rather than taking the trouble of going through the whole policy wordings.

POLICY SECTIONS

Whatever might be the type or class of a policy, it will invariably have the following sections:

1. Heading: hi this section will appear the name and address of the company.
2. Recital Clause: This is also known as the preamble. It gives a start for arriving at the Operative Clause by saying that as the insured has made a proposal and declaration (which shall form the basis of the contract) for taking out a policy of insurance and as he has paid or agreed to pay the premium, therefore, the insurer agrees to provide him cover in respect of loss, damage or destruction etc. as per the Operative Clause.
3. Operative Clause: This section, the scope of cover provided under the policy is mentioned, followed up by exceptions to indicate the precise range of cover. Sometimes exceptions do also appear partly under conditions, but in scheduled form of policies, these are usually grouped in one place and mostly within the operative clause. It becomes easier than to understand as to what is precisely covered by the policy and what is not. There is usually a war exclusion clause appearing within the operative clause.
4. Schedule: Most of the vital information about the particular insurance are grouped here. It gives the name, address, and occupation of the insured, subject-matter of insurance, premium and renewal premium, the period of insurance, policy number, renewal date, renewal premium, sum-insured, etc.
5. Attestation Clause: This is also known as the signature clause and appears just below the Schedule. The person authorized puts his signature and date here for and on behalf of the insurer.
6. Conditions: In some policies, the conditions appear after the Attestation Clause, and in some policies, these appear before the Schedule. Whatever it is, these are usually grouped. Some of these conditions are;
   1. conditions precedent to contract, e. g., the disclosure of material facts before completion of the contract,
   2. some are conditions after contract, e. g., a notice of alteration to insurers, and
   3. some are conditions precedent to liability, e. g., a notice of loss to insurers.

All these conditions fall into two main categories, viz., express conditions and implied conditions.

Express conditions are those which appear on the policy specifically and implied conditions are those who even though are not appearing on the policy but would apply.

Examples of implied conditions are the observance of the duty of utmost good faith, the existence of insurable interest, the existence of the subject-matter, etc.

The common express conditions that usually appear on the policy are;

1. Misrepresentation: The insured should exercise the utmost good faith in all his dealings about the insurance. If there is any non-disclosure, concealment, misrepresentation or suppression of any material fact, then the contract shall be avoided by the option of the aggrieved party.
2. Alteration: This condition requires that if after taking Out of the policy and during the continuation of the contract there is any change or material alteration in the risk which is likely to increase the risk then the insured must inform this alteration to the insurers and obtain their written consent. By this condition, the inherent duty of utmost good faith becomes a continued/contractual duty of utmost good faith. Life Policies do not contain such a condition.
3. Claim: This lays down the rule relating to formalities to be observed by the insured when there is a loss.
   Normally, time is prescribed within which the claim is to be lodged, and all required papers and documents are to be submitted. If no time is mentioned, then the claim is to be given within a reasonable time.
4. Fraud: If the claim is in any respect fraudulent then the whole benefit under the policy may be forfeited.
5. Subrogation: This condition states that in respect of a loss if there is any third party liable, then the insurers may require the insured to realize the claim from the third party first. The insurers will pay the balance only if any of the full claims when there is no recovery. The students should recall that under common law, in the absence of policy conditions as such, the insurers must pay the claim first and then take over the right of subrogation from the insured and proceed against the liable third party for any possible recovery. Life and personal accident policies do not contain such a condition since the principles of indemnity and subrogation do not apply to it. Such a condition also does not appear in marine policies.
6. Contribution: This condition requires that if at the time of loss there is found to be more than one policy involved covering the same loss of the same insured, then the insured must claim proportionately from all such policies involved and the liability under this policy shall be limited to its share only. The students should recall that if there is no condition in the policy as such, then under common law the insured can claim the full amount of loss from any of the policies involved, when the company paying the full loss would have the right of calling other interested insurers to pay it back their respective share of losses. Since the principles of indemnity and contribution do not apply to life and personal accident insurances, therefore, such a condition would not appear in such contracts.
7. Arbitration: If there is any dispute between the insurer and the insured relating to quantum of loss, liability being otherwise admitted, then such disputes shall have to be referred to arbitration. The decision of the arbitration shall be final unless there is a mistake of law or misconduct or partiality. If the dispute relates to liability itself, then it must go to court for decision.
8. Cancellation: Both the parties to the contract are usually given the right to cancel the contract during its currency. Formalities as to cancellation are laid down here.

By examining life policy forms, you should know that the express conditions are quite different therein.

They usually relate to

(a) Privilege conditions, indicating days of grace, surrender, paid-up, loans, non-forfeiture regulations, etc. and
(b) Restrictive conditions, indicating foreign travel, residence, occupation, suicide, war, etc.

The students should also observe that marine policies stand in a different category since they do not contain any express condition marshaled as such. The terms and conditions are rather scattered throughout the policy and the clauses attached to it.