GENERAL INSURANCE

CONTRACT
General Insurance Contract
• A contract of insurance is an agreement whereby
a) One party-the insurer,
b) In return for a consideration – the premium
c) Undertakes to pay the other party-the insured
d) A sum of money (or its equivalent)-the claim upon the happening of
certain specified event.
Elements of a contract of insurance
• The usual rules of contract law govern the contracts of insurance. Specific Elements of insurance
contract are:
1) Offer and acceptance: When applying for insurance, the first thing you do is get the proposal
form of a particular insurance company. After filling in the requested details, you send the form
to the company (sometimes with a premium check). This is your offer. If the insurance company
agrees to insure you, this is called acceptance.
2) Consideration: This is the premium or the future premiums that you have to pay to your
insurance company. For insurers, consideration also refers to the money that is paid out to you,
when you file an insurance claim. This means that each party to the contract must provide
some value to the relationship.
3) Legality (illegal contract are void) and being capable of performance
4) Agreement: The consent of the parties is necessary for a contract to be enforceable.
5) Contractual capacity: Certain persons e.g. minors cannot be party to a contract.
6) An intention to create a legal relationship
7) No intention to commit fraud.
8) The absence of one or more of these will make the contract void, voidable or unenforceable.
Utmost Good Faith
• It is important to remember that contracts to insurance differ from normal
commercial contracts, as they are governed by the principle of utmost good faith.
Insurance contracts are different from normal contracts because:
1) Here, we are not dealing with a physical sale/purchase
2) The true facts of the risk are better known to the proposer than to the insurer; the
insurer is relying on the proposer to disclose all material facts about the proposed
risk.
• Failure on the insured’s part to reveal all material facts may make the policy void (i.e.
totally ineffective) from inception.
• However, to activate such avoidance of liability on grounds of non-discloser, the
responsibility is on the insurer to prove that the:
i) Undisclosed facts were material ( material means ‘any fact which would influence
the insurance underwriter in accepting or declining a risk or in fixing the premium
or terms and conditions of the contract’ )
ii) Facts were within the actual or presumed knowledge of the insured.
iii) Facts were not communicated to the insurer
Proposal form

• As mentioned earlier, principle of utmost good faith is critical as far as

insurance is concerned.
• The insurer must have maximum possible information for the relevant
insurance proposal to be able to take a fair decision.
• To make this as simple and easy for the insured as possible, the insurer
has developed proposal forms for virtually all the major classes.
• Discussed below are the contents of a typical insurance proposal forms.
 a) Generic Questions
• There are questions common to all insurance proposal forms:
With a corporate client, this should also include all subsidiaries, which are crucial to get the information
Name
correct and may arise further questions as to the business
Website This will give additional amount of information about the client
C o n t a c t
information
This should include, not just the address of the head office, but also the addresses of major business units of the
Address
insured
This should be descriptive of the clients business with words such as “engineering”, “Consultant”, etc. requiring
Business expansion, so that true occupation can be identified. Certain trades may also require expansion as to the processes
involved. Also, certain covers such as liability, are likely to request details of activities and / or processes.
Period of Insurance
Insurance history This will also ask who they were insured with earlier and whether they have been declined insurance in the past.
This will normally be for the last 3 years- if possible, may be even for last 5 years. Questions will also be asked whether
Claims experience
there have been incidents that did not lead to claim.
Convictions This may give lead into moral hazard.
Declaration A signed declaration to confirm that all answers are true and correct.
 b) Insurance-Specific Questions
This section will have questions related to the insurance cover required.

The insurer will want to understand more details about the risk to be covered
 Property insurance: This will be a description of the subject matter; some details will be high level e.g.
buildings (situated at…) and some details will be very specific e.g. Lenovo X61s laptop serial number…
Exposure
 Liability insurance: This will be the turnover of the business, if products liability then it will be
turnover of the relevant product line
 Motor insurance: Details of the vehicles and the drivers
This will relate to the limits the insured wishes to insure upto
Policy limits  Property insurance: this will be the sum insured, with modern covers, it is usually the reinstatement value
 Liability covers: this will be the limit of indemnity required
 Liability insurance: may ask whether hazardous chemicals are handled or whether heat is involved
Specific Questions  Motor insurance: may ask questions relating to the garaging of the vehicle or whether the vehicle has
been modified.
 c) Specific questions
With a number of covers, there will be a requirement for an additional questionnaire to be
completed as the proposal itself will not have the detailed questionnaires (and it is not
sensible for the questions to be included on a standard proposal).
Examples of these specific covers relating to individual areas could include the following:
• Contractor’s all risks
vTunneling
vBridges and dams
• Liability covers relating to areas such as
vHeat work precautions
vWork in high hazard environments
• Crime covers relating to areas such as
vArmored car/cash carryings
• Marine covers relating to areas such as
vShip details
Sample of PROPOSAL FORM
• https://hei.com.np/property-insurance-proposal-
form/
INSPECTION
• When you purchase property or liability insurance, most providers will require a post-
policy inspection.
• This inspection is to validate information from the quoting or policy process and to
look for obvious potential claims.
• After you purchase a policy, the assessment/inspection verifies the information
provided on the application.
• The core objective behind the inspection is to eliminate potential risks linked to
your vehicle, evaluating its mechanical conditions thoroughly to insure
comprehensive coverage.
• These assessments aid in determining the insurance company’s willingness to cover
any associated risks for the car owner.
• If the inspection reveals issues, the company will give you feedback and recommend fixing
the problem. E.g. if the inspector finds a problem like a broken EXIT light or expired fire
extinguisher, the insurance company will likely seek confirmation that the errors has been
corrected.
• If you refuse to make corrections or refuse the inspection in general, the insurance
company will likely cancel your policy.
• Inspection helps to verify the following information:
i. Proper valuations: an insurance company verifies that the limit of sum insured
proposed by insured is adequate to restore him in its original financial position after loss.
ii. Protective safeguards: an insurance company stands behind a policy holder to cover
loss to the property for an unexpected event but insurance companies also work to limit
their exposure by improving risk management for their policy holders. Protective
safeguards include fire protection systems, burglar and smoke alarms, upgrades to
electrical plumbing systems, and proper clearance for wildfire defense.
General Insurance Policy
• The basic seven components of an insurance policy are as follows:
Policy components
1. Heading
Every policy document has a heading that includes the name of the insurer and usually their
logo/address, together with other contract details e.g. phone numbers, websites etc.

2. Preamble
This is generally similar throughout the market. It consists of four main points:
a) The proposal form and any questionnaire part of the contract and are incorporated within it.
Therefore, the insured must be particularly careful when completing these.
b) The sum insured
c) The premium is mentioned
d) The preamble states that the insurer will provide the cover as agreed
e) Names of the different parties to the contract- the insured person and the company providing the
insurance.
3) Signature
• Under the preamble or close to it, will be printed the signature of an authorized official of
the company. Year ago, this would have been the actual signature. But nowadays, due to
increased volumes even a printed copy is accepted by the courts in cases of dispute.
4) Operative clause
• This is the key part of the policy where the actual cover provided is outlined. It is also
called the “Insuring clause” and includes the phrase “the company will…”
5) Exceptions
• The section details what the insurer will not pay for. Whilst ideally the policy holder would
like a policy that covers all the eventualities, this is impractical in terms of premium,
reinsurer agreement, insurer solvency etc.
• Certain policies name the perils which are covered and also name the exclusions. These are
called “named perils” polices. Certain other policies are “All risk” which covers all causes of
damage except those specifically excluded stands covered. The exclusions are specifically
mentioned and what is not excluded stands covered. Such policies generally state
‘………….. if any of the insured property be accidentally, physically lost, destroyed or
damaged other than by an excluded peril/cause………’.
6. Conditions
• Provisions in the policy that qualify or place limitations on the insurer’s promise to
perform.
• In effect, the conditions section imposes certain duties on the insured.
• If the policy conditions are not met, the insurer can refuse to pay the claim.
• Eg: Notifying the insurer if a loss occurs, protecting the property after a loss,
cooperating wit the insurer in the event of a liability suit.
7. Policy Schedule:
COVERAGE
There are two basic forms of coverage:
1) Named-perils coverage
2) “All-risks” coverage

1) Named-perils coverage:
• Under this coverage, only those perils specifically named in the policy are covered.
• If the peril is not named, it is not covered.
• For eg: in the homeowner’s policy, personal property is covered for fire, lightening, windstorm and
certain other named perils.
• Only losses caused by these perils are covered.
• Flood damage is not covered because flood is not a listed peril
2) “All-risks” Coverage :
• Under this coverage, all losses are covered except those losses specifically excluded.
• Also called “ an open perils policy and a special coverage policy.
• If the loss is not excluded , then it is covered
• For e.g. the physical damage section of the personal auto policy covers losses to a
covered auto thus, if a smoker burns a hole in the upholstery(cushion of the seat) in
a car or a bear in a national park damages the vinyl top of a covered auto, the losses
would be covered because they are not excluded.
• All risks coverage is generally preferable to named perils coverage because the
protection is broader with fewer gaps in coverage.
• In case of Nepalese insurance companies, they are providing Contractor’s All risk
policy and Erection All risks policy.
Exclusions
• Exclusions are another basic part of any insurance contract. There are 3 major types
of exclusions:
i. Excluded perils:
§ the contract may exclude certain perils or causes of loss.
§ In a homeowners policy, the perils of flood, earth movement and nuclear radiation
are specifically excluded
§ In the physical damage section of the personal auto policy, loss to a covered auto is
specifically excluded if the car is used as a public taxi.
§ In property and liability insurance, most insurance contracts exclude coverage for
intentional acts.
ii. Excluded losses
§ Certain types of losses maybe excluded.
§ For e.g. in a homeowners policy, failure of an insured to protect the property from
further damage after a loss occurs is excluded.
§ In the personal liability section of a homeowners policy( which covers accidental
injuries and property damage that you or other members of your household do to
others; eg. Lets say someone slips and falls down in the stairs in your home, this
insurance coverage covers), a liability lawsuit arising out of the operation of his
automobile is excluded
iii. Excluded property
§ The contract may exclude or place limitations on the coverage of certain property.
For e.g. in a homeowners policy certain types of personal property are excluded such
as cars, planes, animals, birds and fish.
Reasons for exclusions
• Exclusions are necessary for the following reasons:
1) Some perils considered uninsurable
§ Exclusions are necessary because the peril may be considered uninsurable by commercial insurers.
§ For e.g., most property and casualty insurance contracts excludes losses for potential catastrophic
events such as war or exposure to nuclear radiation.
§ A health insurance may exclude losses within the direct control of the insured such as an
intentional, self inflicted injury.
§ Predictable declines in the value of property such as wear and tear and inherent vice (destruction or
damage of property without any tangible external force such as tendency of fruit to rot), are not
insurable.
ii) Presence of extra ordinary hazards
§ a hazard is a condition that increases the chance of loss because of an extraordinary increase in
hazard, loss maybe excluded.
§ For e.g. the premium for liability insurance under the personal auto policy is based on the
assumption that the car is used for personal and recreational use and not as a taxi. The chance of
an accident and a resulting liability lawsuit, is much higher if the car is used as a taxi for hire.
iii) Coverage provided by other contracts
§ Exclusions are used to avoid duplication of coverage and to limit coverage to the
policy best design to provide it.
§ For e.g. a car is excluded under a homeowners policy because it is covered under a
the personal auto policy and other insurance contracts. Of both policies covered the
loss there would be unnecessary duplications.
iv)Coverage not needed by typical insureds
§ For e.g. most homeowners do not own private planes to cover aircraft as personal
property. To cover aircraft as personal property under the homeowners policy would
be grossly unfair to the vast majority to the insureds who do not own planes because
premiums would be substantially higher.
 Adds on Cover/ Riders
• Add-ons, or additional coverage benefits, are optional features that can be added to a
general insurance policy to increase the level of protection for the insured.
• Add-ons are available at an extra cost and can provide coverage for aspects that are not
included in the base policy.
• Here are some examples of add-ons that can be added to a general insurance policy:
• Zero depreciation
This add-on covers the entire cost of replacing parts without deducting depreciation. It's
recommended for cars that are under 5 to 7 years old
• Roadside assistance
This add-on provides emergency services like towing, medical help,, and more
• War and war like situation
Under normal circumstances where war and or warlike situation prevails Personal Accident
cover is not offered. However, on payment additional premium the same can be got
covered.
Sample of PROPOSAL FORM
• https://hei.com.np/property-insurance-proposal-
form/
Policy Conditions
These are as critical to the understanding of the cover, as are the exceptions. They describe to
the insured what he or she must do or must not do. Traditionally, conditions appear towards
the end of the policy. Some of the common conditions are as follows:
Condition Comment

Terms The insured must comply with the terms of the policy

A l t e r a t i o n t o t h e The insured must notify the insurer should there be a change to the risk
risk
Claims procedure This will vary from cover to cover

Fraud The benefit of the policy will be forfeited should it be discovered that the claim
is in any way fraudulent
Reasonable care Insured is to take reasonable care to prevent/minimize loss

Contribution Applies if other policies are also in force, covering the same loss

Cancellation Will outline the terms to be applied and procedure to be followed, should the
company choose to exercise its right to cancel the policy.
Estimates/Declarati This will detail the procedures to be followed should the policy premium be
ons based on an estimated figure (e.g. wages/profit)
Express conditions and implied conditions : The points mentioned in above table
are known as express conditions, i.e. they are specifically stated as opposed to implied
conditions. Implied conditions are these, which are applicable and accepted without
being mentioned i.e. being part of the principles of insurance e.g. insurable interest,
utmost good faith, etc.
Conditions subsequent to the contract: This is a condition that refers to an act or
event that cancels a contractual right. E.g. any act of fraud within the claim process on
the part of the insured, would immediately cancel the insurer’s obligation to continue
with the claim.
Conditions precedent to the contract: These are contractual obligations that require
one party to the contract, to do something, before the other party to the contract is
required to do something, to fulfill its contractual obligation.
Schedule
The schedule is the part of the policy document that is specific/unique to each insured
person, who has bought the policy. The information that is contained in the schedule
includes, but is not restricted to:
• Insured’s title
• Insured’s address
• Nature of the business
• Period of insurance
• Premiums
• Limits of liability
• Policy number
• Any special exclusions/conditions or aspects of cover
• Having established that a contract has been entered into, the next task is to determine
what it means.
• The starting point is always to construe the contract in according with the ordinary
meaning of the words used.
• The approach is no different when trying to work out the meaning of a contract of
insurance.
• Getting the meaning right is, therefore, of vital importance to insurers, as they need
to be confident that:
They know what risks are to be covered
The wording adequately reflects that intention
Most insurance policies are in a printed form, prepared by the insurer. A policy
customarily identifies the following:
1 Parties, by names 2 Subject matter of insurance
3 Sum insured or limit of indemnity and the premium payable 4 Policy duration
5 Contingencies insured against 6 conditions
7 Exceptions
• It should also contain provision for a signature or attestation on behalf of the insurer.
• Details that vary from policy to policy are often grouped in a schedule.
• The policy may expressly incorporate the proposal form, as completed by the insured.
Endorsements
• With the consent of both parties, the policy may be amended from time to time. The
insurer then prepares an endorsement for attachment to the policy.
• Endorsement are normally used when the terms of an insurance contract are to be
varied.
• Endorsements are attached to the policy document and the two together constitute
the evidence of the insurance contract.
• Endorsement may be issued during the currency of the policy, e.g. when alterations
in the risk are to be recorded.
• They could also be issued at the time of the issue of the policy to provide specific
exclusions from the cover or specific extensions to include and additional peril.
• Endorsements are issued on standard forms, or are separately typed, or are written
on the policy itself.
The alterations normally required under a policy relate to:
Variations in sum insured (increase/decrease)
Change of insurable interest by way of sale, mortgage etc.
Extension of insurance to cover additional perils
Change of risk, e.g. change of construction, or occupancy of the building etc.
Transfer of property to another location
Cancellation of insurance etc.
• The insured should make it appoint to carefully examine the policy document to
confirm that it provides the cover required and take note of any conditions that he
must observe.
• Policy should be stored in a safe place ensuring that they are available when required.
Days of Grace/ Grace Period
• An insurance grace period is a set amount of time after a premium is due when a policyholder can pay it
without losing coverage. The grace period begins immediately after the due date and is not an extension of
it.
• The length of the grace period depends on the type of insurance and how often the premium is paid:
• Annual, semi-annual, or quarterly: 30 days
• Monthly: 15 days
• Short-term or smaller policies: 7 or 14 days

IMPORTANCE OF GRACE PERIOD

• Prevent the policy from lapsing
• Provide a safety net for policyholders who might miss a payment
• Allow policyholders to avoid immediate cancellations and legal penalties
• Grace periods can vary by state and type of insurance, such as car, health, life, or homeowners.
• In Nepal, the grace period for insurance premiums varies by insurance company and policy type, but it is
typically 30–31 days
• Some insurance companies may not have grace period. For eg: In Oriental Insurance, there is no grace
period for continuity of insurance cover and policy cover expires on the last day of policy period.
Policy cancellation
• It refers to the termination of an insurance policy by either the insurer or the insured before the
coverage period ends
• An insurance policy can be canceled by the policyholder or the insurance company before the term
is due. The method of cancellation determines what each party owes. Here are some things to
consider when canceling an insurance policy:
• Policyholder cancellation
• The policyholder can cancel their policy by contacting their insurer and following the terms and
conditions.
• Insurer cancellation
• An insurer may cancel a policy for a number of reasons including:
• Failure to pay premiums for at least one month
• Failure to comply with the duty of disclosure
• Misrepresenting the situation when entering into the contract
• Making a fraudulent claim
• Believing the policyholder has not kept to the terms of the policy
• The insurer will usually give 31 days' notice before canceling, but can cancel without notice in the
case of fraud or dishonesty.
(News Extract of Republica)
• The cases of surrendering/cancelling life insurance policies by insured individuals
before maturity period are on the rise, likely due to the slowdown in economic
activities.
• The records with the Nepal Insurance Authority (NIA) show that life insurance
policies worth Rs 10.70 billion were surrendered in the first 10 months of the current
fiscal year. According to the NIA, an average of over 8,500 insured individuals
canceled their purchased insurance policies of Rs 1 billion every month in the review
period.
• The NIA has maintained the rule barring the buyers of life insurance policies from
surrendering before settling the premium payments for three years. Likewise, insurers
cannot issue general life-insurance policies for less than five years of maturity.
Reinstatement of the policy
• Reinstatement is the process of restoring a lapsed insurance policy to its original
terms and conditions. It allows policyholders to reactivate their policy without
purchasing a new one.
• When an insurance policy is not renewed or the premium is not paid on time, the
policy lapses, leaving the policyholder without coverage.
Insurance Act, 2079 website
https://nia.gov.np/law/insurance-act
• The Insurance Act, 2079 of Nepal includes specific provisions for the cancellation and renewal of insurance
policies, ensuring that both insurers and policyholders are clear about their rights and responsibilities. Below is a
summary of the key processes related to cancellation and renewal of insurance policies under the act:
• 1. Cancellation of Insurance Policies
• Policyholder’s Right to Cancel:
• A policyholder has the right to cancel an insurance policy within a specified period (known as the "free-look
period") after the policy has been issued. The free-look period allows the policyholder to review the terms and
conditions of the policy and decide whether they want to continue.
• The free-look period typically lasts 15 days (or as specified by the Insurance Board) from the date of receipt of
the policy document.
• If the policyholder chooses to cancel during this period, they are entitled to a full refund of the premium paid,
minus the administrative charges (if any).
• Cancellation by the Insurer:
• The insurance company may also cancel the policy under certain circumstances. This includes situations where:
• Non-payment of premiums: If the policyholder fails to pay premiums as required, the insurer can cancel
the policy after a specified grace period (usually 30 days).
 • Fraudulent information: If the insurer discovers that the policyholder has provided false or fraudulent
information during the underwriting process, they may cancel the policy.
• Breach of policy terms: If the policyholder violates any major terms and conditions of the insurance
contract, the insurer may also have grounds for cancellation.
• Notice of Cancellation:: In case of cancellation by the insurer, the insurer is required to provide the
policyholder with written notice, stating the reasons for cancellation and any applicable refund (if any) or
adjustments based on the terms of the policy.
• Cancellation of Group Insurance: For group insurance policies (e.g., employee group insurance),
cancellation may be subject to different conditions, and the policyholder (such as an employer) may need to
inform the insurer according to the specific terms of the group policy.
• 2. Renewal of Insurance Policies
• Policyholder’s Responsibility:
• A policyholder has the responsibility to renew their policy on time to avoid any lapses in coverage. The renewal
process generally requires the policyholder to pay the premiums before the policy expires.
• The policyholder is typically sent a renewal notice by the insurance company, reminding them of the due date for
premium payment.
• Renewal Procedure:
• Premium Payment: To renew an insurance policy, the policyholder must pay the renewal
premium before the policy expires. The insurer may allow a grace period (usually 30 days) after
the policy expiration, during which the policy can still be renewed without losing coverage.
• No Claim Bonus (NCB): Some insurance policies, especially motor and health insurance, may
offer a No Claim Bonus (NCB) for policyholders who have not made any claims during the
previous policy year. This bonus reduces the renewal premium or adds benefits.
• Renewal Premium Adjustments:
• Insurance companies can adjust renewal premiums based on factors such as:
• Risk Profile: If the risk has changed (e.g., an increase in the insured sum, higher coverage,
or change in the risk conditions), the insurer may revise the renewal premium.
• Inflation or Industry Trends: The insurer may increase premiums to reflect inflation or
changes in the actuarial assumptions.
• Automatic Renewal:
• Some types of insurance policies may include provisions for automatic renewal, meaning the
policy will renew automatically if the policyholder has provided authorization for automatic
payment or if no cancellation notice is given within a specified period.
• For automatic renewal, the insurer typically sends a reminder and renews the policy unless the
policyholder actively cancels or requests changes.
• Non-Renewal:
• In some cases, the insurance company may choose not to renew a policy. This may occur if the
insurer is no longer willing to offer coverage under the terms of the existing policy, or if the
policyholder’s risk profile has significantly changed (e.g., a significant health issue in health
insurance, or a major increase in the value of property insured in case of property insurance).
 • If an insurer decides not to renew a policy, they must notify the policyholder in advance, as specified in
the terms of the policy or by the Insurance Act.

3. General Provisions Regarding Cancellation and Renewal

• Grace Period:
• The Insurance Act, 2079, provides a grace period for both cancellation and renewal of policies. If a
policyholder does not pay the premium by the due date, a grace period (usually 30 days) is allowed
before the policy lapses, during which the coverage remains in force. The exact period may vary
depending on the type of insurance policy.
• Refunds on Cancellation:
• If the policy is canceled after the free-look period but before the policy term ends, the insurer may
provide a pro-rata refund of the premium, depending on the terms of the policy and the duration for
which the policy was in force.
• Amendments to the Act:
• The Insurance Act, 2079 allows for amendments, including changes to renewal procedures and
cancellation clauses. This is intended to provide flexibility in the management of insurance policies and
to ensure the interests of both insurers and policyholders are balanced.
THANK YOU!!