In law and economics, insurance is a form of risk management primarily used to hedge against the risk of a contingent, uncertain loss-illustrate and explain.

INTRODUCTION

 “The topic mainly derives from the term insurance, its impacts, problems related to it & it’s probable solutions. Insurance is one of the most commonly & widely used term at today present world. As the asset & liability situation is becoming more uncertain day by day, therefore the importance of insurance or getting insured has also emerged keeping a pace with it. Moreover, people all over the world are now more cautious & well aware of their own rights & safety. Moreover, in this age of mass competition, it is very difficult for people to earn something, but it takes only seconds to lose it. Therefore, mostly based on security purpose, people tends to get insured which provides some sort of guarantee towards their property. Even in some countries depending on the asset & government policy, the government has made mandatory to go for insurance. Insurance does not only safeguards one’s property, but also creates a clear-cut documentation regarding the ownership of a specific product or asset. It also helps in curbing corruption at some cases. The insurance policy is mainly based on an agreement, where the two parties make the agreement as per the law & order provided or established by the specific government. In the policy, the rules & individual rights are clearly stated which in most cases solves or creates automatic solutions for disputes.  But, there are cases where the situation or a single party takes the advantage of the loop-holes of law & thus the situation gets into the grey area. There comes the point of problem solving either though arbitration, public policy or by going to the court.

This entire paper will discuss about the issues & facts related to the stated topic, where discussions will be done form both the legal perspective & the general perspective.

Insurance

“In law and economics, insurance is a form of risk management primarily used to hedge against the risk of a contingent, uncertain loss. Insurance is defined as the equitable transfer of the risk of a loss, from one entity to another, in exchange for payment”.[1]

As stated earlier, insurance is a form of risk management, where the risk can be hedged against any sort of loss towards any property or the subject insured, against any loss which is uncertain. The transfer can be stated as equitable, as the entire policy is done through payment. In general perspective, it can be stated that, someone can buy safety or security against any specific asset, where the insurer will provide the returns in case any uncertain loss happens with the asset or product insured. On other terms, it can be stated that the person “insured” is buying the safety in terms of financial payment.

 Insurance Policy & Principles

“Insurance involves pooling funds from many insured entities (known as exposures) to pay for the losses that some may incur. The insured entities are therefore protected from risk for a fee, with the fee being dependent upon the frequency and severity of the event occurring”.[2]

In order to meet up the principle of insurance, the subject has to be a matter of being insurable. Where, it must maintain certain characteristics. As per the policy, there are two major parties that play the main role behind the deal; they are the “insurer” & the “insured”.

There are different types of insurances, including:

1. Auto insurance

Auto insurance protects the policyholder against financial loss in the event of an incident involving a vehicle they own, such as in a traffic collision.

Coverage typically includes:

1. Property coverage, for damage to or theft of the car;
2. Liability coverage, for the legal responsibility to others for bodily injury or property damage;
3. Medical coverage, for the cost of treating injuries, rehabilitation and sometimes lost wages and funeral expenses.

Most countries, such as the United Kingdom, require drivers to buy some, but not all, of these coverage’s. When a car is used as collateral for a loan the lender usually requires specific coverage.[3]

1. Home insurance

Home insurance provides coverage for damage or destruction of the policyholder’s home. In some geographical areas, the policy may exclude certain types of risks, such as flood or earthquake that require additional coverage. Maintenance-related issues are typically the homeowner’s responsibility. The policy may include inventory, or this can be bought as a separate policy, especially for people who rent housing. In some countries, insurers offer a package which may include liability and legal responsibility for injuries and property damage caused by members of the household, including pets.[4]

1. Health insurance

Health insurance policies cover the cost of medical treatments. Dental insurance, like medical insurance protects policyholders for dental costs. In the US and Canada, dental insurance is often part of an employer’s benefits package, along with health insurance.

1. Accident, sickness and unemployment insurance
   1.                      I.            Disability insurance policies provide financial support in the event of the policyholder becoming unable to work because of disabling illness or injury. It provides monthly support to help pay such obligations as mortgage loans and credit cards. Short-term and long-term disability policies are available to individuals, but considering the expense, long-term policies are generally obtained only by those with at least six-figure incomes, such as doctors, lawyers, etc. Short-term disability insurance covers a person for a period typically up to six months, paying a stipend each month to cover medical bills and other necessities.
   2.                    II.            Long-term disability insurance covers an individual’s expenses for the long term, up until such time as they are considered permanently disabled and thereafter. Insurance companies will often try to encourage the person back into employment in preference to and before declaring those unable to work at all and therefore totally disabled.
   3.                  III.            Disability overhead insurance allows business owners to cover the overhead expenses of their business while they are unable to work.
   4.                  IV.            Total permanent disability insurance provides benefits when a person is permanently disabled and can no longer work in their profession, often taken as an adjunct to life insurance.

Workers’ compensation insurance replaces all or part of a worker’s wages lost and accompanying medical expenses incurred because of a job-related injury.

1. Casualty

Casualty insurance insures against accidents, not necessarily tied to any specific property. It is a broad spectrum of insurance that a number of other types of insurance could be classified, such as auto, workers compensation, and some liability insurances.

1.                      I.            Crime insurance is a form of casualty insurance that covers the policyholder against losses arising from the criminal acts of third parties. For example, a company can obtain crime insurance to cover losses arising from theft or embezzlement.
2.                    II.            Political risk insurance is a form of casualty insurance that can be taken out by businesses with operations in countries in which there is a risk that revolution or other political conditions could result in a loss.
3. Life

Life insurance provides a monetary benefit to a decedent’s family or other designated beneficiary, and may specifically provide for income to an insured person’s family, burial, funeral and other final expenses. Life insurance policies often allow the option of having the proceeds paid to the beneficiary either in a lump sum cash payment or an annuity.

Annuities provide a stream of payments and are generally classified as insurance because they are issued by insurance companies, are regulated as insurance, and require the same kinds of actuarial and investment management expertise that life insurance requires. Annuities and pensions that pay a benefit for life are sometimes regarded as insurance against the possibility that a retiree will outlive his or her financial resources. In that sense, they are the complement of life insurance and, from an underwriting perspective, are the mirror image of life insurance.

Certain life insurance contracts accumulate cash values, which may be taken by the insured if the policy is surrendered or which may be borrowed against. Some policies, such as annuities and endowment policies, are financial instruments to accumulate or liquidate wealth when it is needed.

In many countries, such as the US and the UK, the tax law provides that the interest on this cash value is not taxable under certain circumstances. This leads to widespread use of life insurance as a tax-efficient method of saving as well as protection in the event of early death.

In the US, the tax on interest income on life insurance policies and annuities is generally deferred. However, in some cases the benefit derived from tax deferral may be offset by a low return. This depends upon the insuring company, the type of policy and other variables (mortality, market return, etc.). Moreover, other income tax saving vehicles (e.g., IRAs, 401(k) plans, Roth IRAs) may be better alternatives for value accumulation.

1. Burial insurance

Burial insurance is a very old type of life insurance which is paid out upon death to cover final expenses, such as the cost of a funeral. The Greeks and Romans introduced burial insurance circa 600 AD when they organized guilds called “benevolent societies” which cared for the surviving families and paid funeral expenses of members upon death. Guilds in the Middle Ages served a similar purpose, as did friendly societies during Victorian times.

1. Property

Property insurance provides protection against risks to property, such as fire, theft or weather damage. This may include specialized forms of insurance such as fire insurance, flood insurance, earthquake insurance, home insurance, inland marine insurance or boiler insurance. The term property insurance may, like casualty insurance, be used as a broad category of various subtypes of insurance, some of which are listed below:

1.                                              I.            Aviation insurance
2.                                            II.            Boiler insurance
3.                                          III.            Builder’s risk insurance
4.                                          IV.            Crop insurance
5.                                            V.            Earthquake insurance
6.                                          VI.            Fidelity bond
7.                                        VII.            Flood insurance
8.                                      VIII.            Home insurance
9.                                         IX.            Landlord insurance
10.                                           X.            Marine insurance
11.                                         XI.            Supplemental natural disaster insurance
12.                                       XII.            Surety bond
13.                                     XIII.            Terrorism insurance
14.                                     XIV.            Volcano
15.                                       XV.            Windstorm insurance

1. Liability

Liability insurance is a very broad superset that covers legal claims against the insured. Many types of insurance include an aspect of liability coverage. For example, a homeowner’s insurance policy will normally include liability coverage which protects the insured in the event of a claim brought by someone who slips and falls on the property; automobile insurance also includes an aspect of liability insurance that indemnifies against the harm that a crashing car can cause to others’ lives, health, or property. The protection offered by a liability insurance policy is twofold: a legal defense in the event of a lawsuit commenced against the policyholder and indemnification (payment on behalf of the insured) with respect to a settlement or court verdict. Liability policies typically cover only the negligence of the insured, and will not apply to results of wilful or intentional acts by the insured.

1.                                  I.            Public liability
2.                                II.            Directors and officers liability insurance
3.                              III.            Environmental liability
4.                              IV.            Errors and omissions insurance
5.                                V.            Prize indemnity insurance
6.                              VI.            Professional liability insurance

10. Credit[5]

Credit insurance repays some or all of a loan when certain circumstances arise to the borrower such as unemployment, disability, or death.

1.                                  I.            Mortgage insurance insures the lender against default by the borrower. Mortgage insurance is a form of credit insurance, although the name “credit insurance” more often is used to refer to policies that cover other kinds of debt.
2.                                II.            Many credit cards offer payment protection plans which are a form of credit insurance.
3.                              III.            Accounts Receivable insurance also known as Credit or Trade Credit insurance is business insurance over the accounts receivables of the insured. The policy pays the policy holder for covered accounts receivable if the debtor defaults on payment.

 Insurer

“One who has obliged himself to insure the safety of another’s property, in consideration of a premium paid, or secured to be paid, to him. It is his duty to pay any loss which has arisen on the property insured”[6].

As stated earlier, the insurer is the party or person, who is going for the insurance procedure where that party or person provides safety/ security/ certainty against any specific uncertain loss. In response, that party or individual has to provide or pay the amount of loss that the insured product or property may go through. Because of this fact, the insurer charges premium from the person or party who has asked for insurance.

 Insured

“The person or entity who will be compensated for loss by an insurer under the terms of a contract called an insurance policy”.[7]

In contrast to the insurer, the person who seeks & gets the safety or security of any asset, can be stated as “insured”. The insured party provides a specific amount of financial payment to the insurer in order to hedge the risk associated to its specific product or asset.

 Dispute

“Dispute is a state of prolonged public controversy or debate, usually concerning a matter of opinion in the theory of law, a controversy differs from a legal case; while legal cases include all suits, criminal as well as civil, a controversy is a purely civil proceeding”.[8]

In general terms, dispute can be stated as the controversy between parties related to any specific matter, topic or contract. It can mostly be stated as a conflict of rights & claims. This also includes the assertion of right, one side demand, which is made by contrary claims against one another.

In terms of insurance, disputes are a common term in today’s world. Dispute arises when despite of having specific documented contract, the claim & acceptance between the insurer & the insured does not match.

 Arbitration

“Arbitration, a form of alternative dispute resolution (ADR), is a legal technique for the resolution of disputes outside the court, where the parties to a dispute refer it to one or more persons (the “arbitrators”, “arbiters” or “arbitral tribunal”), by whose decision they agree to be bound. It is a settlement technique in which a third party reviews the case and imposes a decision that is legally binding for both sides.^”[9]

Problems usually are solved through a number of procedures or methods. Arbitration is one of them, which plays a very vital role in terms of problem solving situations or attempts. Through this procedure, the parties in conflict without going to the court can solve the dispute with the help of a third party, whose decisions they think that they are bound to follow. This policy or technique is also well practiced worldwide & also has got mass acceptance. Though this entire procedure is taking place outside the court, it does not mean that the procedure is done apart from the law. The proceedings are based on law, where the code of conduct of the law & order is strictly maintained.

Public Policy

“Public policy as government action is generally the principled guide to action taken by the administrative or executive branches of the state with regard to a class of issues in a manner consistent with law and institutional customs”.[10]

The shaping & formulation of public policy is a very complex procedure, where numerous personnel or individuals or interest groups tend to influence or manipulate the policymakers to perform the act in a specific way. A person playing the major role behind it uses a variety of strategy formulation & tactics to achieve their goal & target. This also includes advocating the positions of those groups or individuals in public, either by attempting to manipulate their supporters & opponents or by mobilizing their allies to take control of a specific issue.

 Disputes, Arbitration & Public policy

When there is the proper implementation of rule of law, then it can be expected that all disputes that arises between the insurer & the insured can be arbitrable. Arbitration has been a well followed option in terms of dispute resolution. The main concern regarding arbitration is the public policy can be influenced through education, lobbying or political pressure. Groups related to advocacy usually attempts to educate the policy makers as well as the general people regarding the type & origin of the problems aroused, required level of legislation to resolve the problems & mostly the required level of funding in order to provide the service & to conduct the research. Therefore, it can be clearly stated that the public policy itself is influenced by advocacy. An unbiased & unaltered research data can play a very vital role in terms of educating the people as well as the policy makers which can eventually improve the overall public policy process.

  Conclusion

There is always an option to solve a problem or dispute. It depends which procedure to choose. Even after selecting a specific policy, procedure or pattern, the question comes whether the policy or procedure will be appropriate or unbiased. Or whether, what is the probability to get maximum possible positive output from the effort. After the prolonged discussion, we can state that disputes which arises between the insurer & insured over the policy can be arbitrable in many cases. But it is not always safe. Because, when it comes to raising “public policy”, there is always a chance for manipulation or biasness. As long as the manipulation of bias factor cannot be removed, then there is always a chance of alteration & misuse of justice. But as long as the threat regarding alteration & manipulation can be taken care of, we can hopefully state that the disputes that occur between the insurer & insured can be arbitrated, and public policy can also be of best use & outcome.

Bibliography

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11.    xi.            http://www.nytimes.com/2009/09/22/opinion/22tue1.html
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14. Federation of European Risk Management Associations
15.  xv.            Insurance at the Open Directory Project
16. Insurance Bureau of Canada
17. Insurance Information Institute
18. Museum of Insurance – displays thousands of antique insurance policies and ephemera
19. National Association of Insurance Commissioners
20.  xx.            The British Library – finding information on the insurance industry (UK bias)
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