ASPECTOS GENERALES DE LA EVALUACION.

the principle of indemnity, which implies that one cannot gain more from insurance than one has lost through the peril.

Definition

The principle of “Contribution” implies that if the same asset is insured with more than one insurance company, the compensation paid by all the insurers together cannot exceed the actual loss suffered.

If the insured were to collect insurance money for the full value from all the insurers, insured would make a profit from the loss. This would violate the principle of indemnity. Not only that, it would encourage people to use insurance as a tool for making speculative gains.

IRDAI Health /insurance Regulations have clearly spelt out the operation of this principle in relation to health policies as under:

The contribution clause shall not be applicable where the cover/benefit offered is fixed in nature and does not have any relation to the treatment costs. Therefore, in case of multiple policies which provide fixed benefits, on the occurrence of the insured event in accordance with the terms and conditions of the policies, the insurer shall make the claim payments independent of payments received under other similar polices.

If the claim relates to indemnification of treatment costs, the insurer shall not apply the contribution clause, but the policyholder shall have the right to require a settlement of his claim in terms of any of his policies. The insurer who has issued the chosen policy shall be obliged to settle the claim without insisting on the contribution clause as long as the claim is within the limits of and according to the terms of the chosen policy.

However, If the amount to be claimed exceeds the sum insured under a single policy after considering the deductibles or co-pay, the policy holder shall have the right to choose the insurers by whom the claim to be settled. In such cases, the insurer may settle the claim with contribution clause.

It may also be noted that the principle of contribution does not apply to life insurance or Personal Accident Insurance contracts. This is so because the value of human life is deemed to be priceless. Thus the legal heirs of a person can collect full amounts (Sum Insured) from each insurer for death claim against policies issued by such insurers. 4. Uberrima Fides or Utmost Good Faith

a) Good faith

All commercial contracts in general require that good faith shall be observed in their transaction and there shall be no fraud or deceit. Apart from this legal duty to observe good faith, the seller is not bound to disclose any information about the subject matter of the contract to the buyer.

The rule observed here is that of “Caveat Emptor” which means buyer beware. The parties to the contract are expected to examine the subject matter of the contract and so long as one party does not mislead the other and the answers are given truthfully, there is no question of the other party avoiding the contract

Example

Mr. Chandrasekhar goes to a TV showroom and falls in love with a fanciful brand of TV with many features. The sales person knows from experience that the particular brand is not very reliable and has, in the past, given rise to problems for other customers. He does not reveal this for fear that it might endanger the sale.

In this case the salesman cannot be held guilty of deceit since the “Buyer Beware” principle would operate. However, the situation would have been different if the sales man had been asked about the reliability of the brand and had replied that it was very reliable.

b) Utmost good faith

Insurance contracts stand on a different footing. The proposer has a legal duty to disclose all material information about the subject matter of insurance to the insurers who do not have this information. This legal duty of utmost good faith arises under common law.

Material information is that information which enables the insurers to decide:  Whether they will accept the risk

 If so, at what rate of premium and subject to what terms and conditions Insurance contracts are subject to a higher obligation than ordinary contracts. When it comes to insurance, good faith contracts become utmost good faith contracts. The concept of "Uberrima fides" is defined as involving “a positive duty to voluntarily disclose, accurately and fully all facts material to the risk being proposed, whether requested or not."

What is meant by complete disclosure?

The law imposes an obligation to disclose all material facts. The duty applies not only to material facts which the proposer knows, but also extends to material facts which he ought to know.

Example

It must be noted that the principle of utmost good faith applies to the insured as well as the insurer.

i. Misleading of facts by the insured

An executive is suffering from Hypertension and has had a mild heart attack recently, following which he decides to take a medical policy but does not reveal his true condition. The insurer is thus duped into accepting the proposal due to misrepresentation of facts by insured.

ii. Misleading of facts by the insurer

An individual has a congenital hole in the heart and reveals the same in the proposal form. The same is accepted by the insurer but the proposer is not informed that pre- existing diseases are not covered for at least 4 years.

c) Material fact

Material fact has been defined as a fact that would affect the judgment of an insurance underwriter in deciding whether to accept the risk and if so, the rate of premium and the terms and conditions.

Whether an undisclosed fact was material or not would depend on the circumstances of the individual case. In case of disputes, this would have to be decided ultimately only in a court of law.

Let us take a look at some of the types of material facts in insurance that one needs to disclose:

i. Facts indicating that the particular risk represents a greater exposure than normal such as proposer having past history of illness in case of health policies or taking part in motor sports in the case of personal accident policies.

ii. Existence of past policies taken from all other insurers and their present status or whether any such proposal was declined or accepted with certain unusual conditions.

iii. All questions in the proposal form, which is the application for insurance, are considered to be material, as these relate to various aspects of the subject matter of insurance and its exposure to risk. They need to be answered truthfully and fully in all respects

The following are some examples of material facts:

Example

i. Personal Accident Insurance  The exact nature of occupation

 Age

 Height and weight

 If suffering from any physical disabilities etc.

 If engaged in any dangerous activities like motor sports, mountaineering etc. ii. Health Insurance

 Any operations undergone in the past

 If suffering from Diabetes or Hypertension or any terminal disease  Whether smoker, alcoholic or mentally depressed etc.

iii. General questions-applicable to all types of proposals.

 The fact that previous insurers had rejected the proposal or charged extra premium, or cancelled, or refused to renew the policy

 Previous losses suffered by the proposer

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d) Duty of disclosure in non-life insurance

In non-life insurance, the contract will stipulate whether changes are required to be intimated or not. When an alteration is made to the original risk affecting the contract, the duty of disclosure will arise. The duty of disclosing material facts ceases initially when the contract is concluded by issue of a policy. The duty arises again at the time of renewal of the policy.

e) Breach of utmost good faith

Let us now consider situations which would involve a breach of utmost good faith. Such breach can arise either through non-disclosure or misrepresentation.

i. Non-Disclosure

This arises in the following situations:

 Insured is silent in general about material facts because the insurer has not raised any specific enquiry

 Through evasive answers to questions asked by the insurer

 Disclosure may be inadvertent (made without one’s knowledge or intention) or because the proposer thought that a fact was not material. In such case it is innocent. When a fact is intentionally not disclosed it is treated as concealment. In this case there is intent to deceive.

ii. Misrepresentation

A statement made during negotiation of a contract of insurance is called representation. This may be a definite statement of fact or a statement of belief, intention or expectation.

When it is a fact, it is expected to be substantially correct. When it concerns matters of belief or expectation, it must be made in good faith.

Misrepresentation is of two kinds:

 Innocent Misrepresentation relates to inaccurate statements, which are made without any fraudulent intention e.g. an individual who occasionally smokes and is not a habitual smoker may not reveal the same in the proposal form as he does not think it has any bearing on the risk.

 Fraudulent Misrepresentation are false statements made with deliberate intent to deceive the insurer or are made recklessly without due regard for truth. For example, a chain smoker may deliberately not reveal the fact that he smokes.

An insurance contract generally becomes void when there is concealment with intent to deceive, or when there is fraudulent non-disclosure or misrepresentation. In case of other breaches of utmost good faith, the contract may be rendered voidable, i.e. the affected party is free to decide whether or not to treat the contract as invalid.