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Friday, March 11, 2011

Whether a Claimant should prove their legal existence to receive claim payment - Insurance Fundamental

Dear (s)

Insurance awareness has spread so much, people know so much about insurance and there are so many practitioners.  At the time of a claim, Insurers being confronted with various issues -   attributable to lack of clarity in description of what was covered and   more so on what the terms and conditions are not rare.   At times, there is also avoidable confusion in - who our insured is and whether they are eligible to take out insurance in the first place.

It was a piquant situation..  A claim for breakdown of an  equipment was reported.  There existed a policy and the equipment affected was covered.  The loss was assessed and by due course, the claim cheque was made favouring the Insured - which was a Company.  Run of the mill and nothing to write about..........

BUT - life is never so simple............ there was a representation from the policy holder  - fortunately not contesting the value of the claim but requesting change in payee's name.  The letter stated that 'it was a sole proprietary concern and that there was no bank account in that name' and hence the cheque issued by us cannot be encashed. 

There have been stray instances especially when insurance is granted to small shops and minor establishments – they are peeved on the documentations that are called for to prove their existence, the existence of subject matter and on establishing the loss or damage.  There was an instance of  damage to stocks - ::   there was indeed a shop, there was loss arising out of an insured peril BUT - the shop was not registered with any of the authorities, there existed no books of accounts or documents evidencing and recording the business transactions;  and there was no bank account in the name of the shop - the name in which it was insured.

That drives us back to the fundamentals of what is Insurance and who is eligible to take out a Policy.  All agreements are contracts if they are made by the free consent of parties competent to contract, for a lawful consideration and with a lawful object, and are not hereby expressly declared to be void. A contract is a legally enforceable agreement between two or more parties with mutual obligations.   Insurance is a contract between : -   Insurer and Insured - where upon receipt of a consideration the Insurers agree to indemnify the Insured for loss of or damage to the subject matter insured caused by insured perils.   

The Contract can be entered only with a legal entity – which can be individual who is of the age of majority,  possessing sound mind and is not disqualified from contracting.  The juristic person can also be an entity – Association, Corporation, Partnership, Joint venture, Proprietorship, Company and others who have the legal capacity to enter into agreements or contracts, assume obligations, incur and pay debts, sue and be sued in their own rights.

There should also exist  legality of their operations which is necessitated by law. If only some efforts are taken to check and confirm the  legal existence and establishment of the subject matter of insurance and if this is  mandated at the time of proposal itself, lot of heart burn could be avoided . 

As you would experience, most often when called upon to prove their existence and establish the existence of subject matter – the common refrain is ‘why was the policy granted in first place ?’  if one were   to prove these at the time of a claim.  The policy holder would feel that something unnecessary is being asked that too on their very existence, when the Insurer happily accepted the premium money paid without caring to ask whether they really exist. 

The existence of a subject matter, loss or damage to such item insured, loss being caused by an insured peril and the recipient being a legal entity are all fundamentals – but there have been times when even the fundamentals are called for scrutiny and hence the request. 

If the issue of legality of the contracting party (the insured), clarity in the subject matter of insurance (what is being insured) and being in a position to establish the existence of the subject matter of insurance are verified at the time of inception of policy, - would go a long way in making the customer feel comfortable that there would not be unnecessary questions about their existence, when the unfortunate event occurs.  

With Regards
S Sampathkumar

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