Insurance Fundamentals and Principles of Insurance
Domain 1 tests the legal skeleton of a life insurance contract: why insurance works, which principles a valid contract needs, and the Insurance Act, 1938 sections the examiner reuses (38, 39, 41, 45, 64VB). Questions are situational - a proposal dispute or a claim rejection - with four plausible options.
Principles that carry marks
- Risk pooling and the law of large numbers. Many premiums fund few claims; mortality is predictable in aggregate, which is why life insurance is priced from mortality tables rather than guesswork.
- Insurable interest. Own life (unlimited), spouse, a key employee (employer), a debtor (creditor, limited to the debt). In life insurance it must exist at inception; it need not exist at death.
- Utmost good faith (uberrima fides). The proposer must disclose every material fact a prudent underwriter would weigh. Non-disclosure and misrepresentation are different defences, and Section 45 time-limits both.
- Not indemnity. A life policy pays the agreed sum assured, so subrogation, contribution and salvage never apply.
- Contract essentials. The proposer makes the offer; the insurer accepts, often by counter-offer with modified terms printed in the policy; premium is the consideration; capacity requires majority and soundness of mind (Indian Contract Act, 1872); consent must be free and the object lawful.
Worked example
A creditor wants ₹20 lakh of cover on a ₹8 lakh loan. Reasoning: insurable interest exists only to the extent of exposure, so about ₹8 lakh plus interest is sustainable; the insurer will cap the sum assured and may ask for an assignment. Choosing ₹20 lakh because "the debtor consented" is the planted wrong answer.
Traps
Getting the timing wrong (life = inception, property = loss). Reading indemnity into a life policy because premiums are "returned". Assuming the nominee owns the money. Believing the insurer must prove fraud even after three years - after three years, proving fraud is exactly its burden.