Meaning of Insurance
First of all, we need to learn how to recognize insurance; how to distinguish insurance from comparable financial products; and to know when to comply with legislation regulating insurance.
British courts do not define insurance but speak, for instance, of “those who are generally accepted as being insurers”. Comparing with the United States, where insurance has been defined as a “contract whereby one undertakes to indemnify another against loss, damage or liability arising from a contingent or unknown event”;3 and where the primary elements are the shifting (or underwriting) of risk and the distribution of risk.
Description: An insurance contract has been described as a contract whereby a person (who is the insurer), usually in business as such, agrees to pay money on the occurrence of an uncertain and adverse event, in return for payment called premium.
- What is Money: Financial risk is transferred from X, the insured, to Y, the insurer: Y compensates X for what X may have lost. In some circumstances, B pays (not money) but for A to receive benefits, such as the replacement of property damaged, valuable advice. So, in one leading case the judge said that “it is difficult to see why a contract to provide advice and assistance should not be a contract of insurance”.
- What is Contract: An insurance contract must be a restrictive contract. Usually, it takes the form of an insurance policy, but in practice, it may exist without a policy.
- What is Adverse Events: The occurrence of the event insured against must be fortuitous, uncertain at the time of the contract. The uncertainty may be not only whether the event will occur at all (such as theft) but also when the event will happen (for ex. death). To be insurable the event must be one adverse to the interests of the insured, but not one against public policy, such as a gambling loss.
- What is Premium: Insurance contracts usually require the insured to pay “premiums” in advance.
Contracts that can be distinguished from Insurance
Reinsurance: A reinsurance contract is “is an independent contract under which the subject-matter reinsured is the original subject-matter. The insurable interest which entitles the insurer to reinsure in respect of that subject-matter is the insurer’s exposure under the original insurance”.
Guarantees: Insurance contracts include credit insurance, where A promises to indemnify C, if B fails to pay or repay a debt, and where the primary feature is indemnity.
Distinguish credit insurance from performance bonds and from guaranteed contracts, where guarantor A promises C to answer for the debt or default of another person, B.
Investment: Life insurance is often seen by financial markets as an investment. To distinguish investment life insurance is difficult and each case must be examined on its own merits.
The Supply of goods and services: Most supply contracts entail some allocation of risk (one of the key features of insurance). For example, on the sale of a business, there may be warranties of turnover.
Insurance “covers risks lying outside an insured’s own deliberate control”, which distinguishes the risk element in the supply of goods and services.
- Insurance Contract Law (Malcolm Clarke)