What is Insurance? Definition and Meaning

What is Insurance? Definition and Meaning, Insurance policies help reduce the possibility of financial loss, large or small, due to damage to insured property or liability for injury or damage caused by third parties.

Every business is vulnerable to different risks.

For example,

• Employees may be injured in work-related accidents
• Goods may get damaged in transit, or
• A fire may break out in the basement.

The businessman or owner is responsible for all losses but for paying a small premium, insurance covers losses due to such risks.

It helps the company recover any losses that could arise from various events in the business.

This insurance can be purchased either partially or entirely through the insurance company.

Before we get into the details about insurance, let’s first discuss what’ business risks’ are?

Risk is the chance of loss or destruction caused by factors that we don’t have control over.

The risk of business loss or damage is similar.

Unintentional damage to goods or loss of goods could occur while they are being transported from one location to another.

For example,

• The trains could also be derailed,
• The bridge might collapse,
• The plane may crash because of engine trouble,
• Robbers could steal the truck as it travels to another city,
• Damage may occur to cargo shipped at loading and unloading at seaports, or
• The change in customers’ tastes and preferences may cause a decrease in product demand, leading to a loss in profit or a reduction in sales.

In the same way that there are changes in market demand due to technological and scientific innovations, the demand for certain products can change.

For example,

• The fixed-line telephone demand has dropped because of the advent of mobile phones.
• A business‘ earnings may be affected by changes in government policy, tax rates, and/or interest rates.

These were just a few examples of potential risks a company may face over its lifetime.

The question is now whether insurance covers all of these risks.

The answer is “NO.”

Insurance does not cover all business risks. Some of the above risks are insurable, while others are not.

You can insure the loss from fire, theft, earthquake, flood, and other causes for a nominal sum that is known as insurable risks.

The risk of losing a product because of a decrease in demand, changes in fashions, new products on the market, or changes in government policies cannot be insured.

These are non-insurable risks and these are to be fully covered by businessmen.

What is Insurance Meaning?

Insurance is a contract between two people, one called insured and the other as insurer.

The insurer agrees on payment of a set amount of money to compensate the insured for the risk of loss or damage that may cause by specific events.

The contract document is called the ‘Insurance Policy.

The risk that is insured is called “Insured” or “Assured,” and the person or company which insures it is known as “Insurer” or “Assurer.”

“Premium” is the amount that the insurance company or insurer agrees to, in exchange for the insured compensation.

Insurance can also be described in terms of a contract between an insured and the insurer.

The insured must pay a set amount of money to the insurer (premium) in exchange for the occurrence of a specific event (like getting older or on death) or the actual loss that occurs due to the risk insured.

Importance of Insurance

Protection Against Risk

Insurance covers the business against all possible risks.

Insurance offers protection through compensation for the insured who has suffered the loss.

Pooling of Risk

Insurance is a way to share the risk.

Many people purchase insurance by paying the premium to creates an insurance fund.

Anyone who has suffered damage or loss can get compensation through this fund and In effect, this spreads the loss and damage over many people.

Helps in Securing Loans

Banks and financial institutions often emphasize property and goods insurance before lending can be approved for their safety.

Therefore, it is a good idea to have insurance to be able to borrow money or get advances from financial institutions.

Protection Against Liabilities under various Labour Laws

The insurance protects business owners in compensation to employees for fatal injuries, partial injuries, disablement, sickness, or maternity.

Contribute to Economic Development

Funds from insurance companies are used to invest in different securities and projects that contribute to the country’s economic development.

Generation of Employment

Insurance companies employ many people regularly and these people make their living as insurance agents.

Social Security

Life insurance offers protection against the risks of premature death and old age.

The Employees State Insurance Scheme provides social security for workers and covers accidental risks.

PRINCIPLES OF INSURANCE

Contracts between an insurer and an insured may be subject to specific principles.

These principles can be found below:

Utmost good faith

Mutual trust and reliance are the two main components of insurance contracts.

The insured and the insurer have to share all pertinent information and Insurers must fulfill all promises made in the policy and the contract can be canceled if any information is intentionally hidden.

For example,

To enter into a life insurance contract, an insured must indicate if he is suffering from any illness that could threaten his life.

If he fails, and afterward it is discovered that the insured has died from a serious disease, then the insurance company will not be liable for any claim.

Insurable interest

It refers to a financial interest in insurance subject matter and it means that the insured will suffer personal losses if their property or assured life is damaged.

If a person stands to profit from the existence of the property or loss, he has an insurable right in it.

A person who is interested in life insurance must have an insurable right to the policy.

A man can buy a life insurance policy under his wife’s name and the insurance contract will not be invalidated if the couple divorce later.

This is because the husband had an insurable right in the wife’s life when he entered into the contract.

Marine insurance requires that insurable interest exists at the time of property loss or damage.

It must also exist when the policy is taken and when the insured property suffers loss or damage.

Indemnity

Indemnity means to restore someone to their pre-eventual position and it applies to marine and fire insurance.

This principle is not applicable to life insurance because it does not restore life.

This principle stipulates that the insured can not profit from the insurance contract covering the insured event.

Compensation is determined based on either the actual loss or the insured sum, whichever is lower.

Contribution

Multiple insurers may be insured for the same subject matter and in these cases, all insurance companies must contribute to the insured’s insurance claims.

Subrogation

Subrogation is a term that means that the insurer compensates the insured, and then the insurer takes all insured’s rights regarding the subject matter.

Let’s say If goods worth Rs. 30,000 are damaged in a fire, and the insured is paid the compensation.

The insurance company then has the right to purchase these damaged goods and place them on the market.

Mitigation

In the event of an accident, the insured must take every precaution to avoid any loss to the policy’s subject matter.

This principle ensures that the insured is not negligent about protecting the subject matter of insurance policies.

The insured must act as though they had not guaranteed the subject matter.

Causa-Proxima (nearest cause)

This principle stipulates that an insured can claim only for compensation of losses caused by an insured risk.

The insured risk must be the closest cause of the loss and not distant or unrelated reasons and only then is the insurance company responsible for the payment of the compensation.

For example,

A ship carrying orange is insured against loss resulting from an accident.

The ship arrived safely at the port, but there was a delay in the loading of oranges from the boat, or the oranges were spoiled.

Here because the primary cause of the loss was a delay in loading and not an accident during the voyage, the insurer can refuse to pay the compensation.