Insurance Company and the Law
A Insurance Article Contributed by Shobha Cutting
Insurance Company and the Law
Legal provisions strictly regulate the activities of an insurance company. In the absence of involvement by an insurance company, there are three parties who get financially adversely affected in the event of a mishap. The party who suffered a loss, the party who caused the loss and the party required by law to make good the loss, such as an employer under the Workmen's Compensation Act.
The primary function of the insurance company is to allocate the burden of loss on account of a mishap from the above-mentioned three parties to a much larger number or pool of entities that constitute the policyholders. Each party pays an insurance premium, which gets collected. In the event of a mishap, losses are paid out of this aggregation of premiums. The party suffering the loss is thus spared the financial ill effects of the mishap.
The premium paid by the policyholders is not refundable, irrespective of whether or not that particular policyholder made any claim. In practice, the insurance company is the manager and safe keeper of the premiums collected from the policyholders. Historically, the concept of sharing the risk is not new. Lloyds of London are an example of how the insurance company developed. The business began in Edward Lloyd's coffee house around 1688.
Sailors would gather in the coffee house, exchange news regarding movement of ships, pool their resources for compensating the families of sailors who lost their lives and rehabilitate ship owners who lost their ships in voyage. This started as an informal arrangement.
The Need for Legislation in Activities of an Insurance Company
The need for economic stability is vital to commerce, as also to many other aspects of life. Since the insurance company primarily ensures the economic stability of the policyholder in the face of a mishap, the law ensures that an insurance company is regulated and fair to the policyholder.
Till 1944, the functioning of an insurance company was not considered 'commerce' and was therefore not in the purview of federal regulations. But the Supreme Court ruled that Congress could regulate transactions of an insurance company. The McCarran-Ferguson Act, the Sherman Act, the Clayton act and the Federal Trade Commission Act regulate the insurance business today. The state laws govern some aspects of the insurance business while federal laws control other aspects.
If the issue concerns the business of insurance, state law covers it and if it relates to the peripherals of the industry, the federal law covers that issue.
The Legal Necessity of Intervention by an Insurance Company
There is yet another aspect of law where, instead of regulating the activities of insurance companies, the law requires acquisition of insurance policies by the players. Compulsory third party insurance of all automobiles as necessitated by law is a classic example of necessity of such intervention.
In many other circumstances, while intervention by the insurance company may not be a legal requirement, it is highly recommended on account of the legal obligation that is placed on the party to make good any loss caused by a mishap. The risk in work related activities of doctors, lawyers and other similar professionals who may be held responsible for loss of life or property of their clients must be covered by adequate insurance.
