What Is Indemnity?

Indemnity is a comprehensive form of insurance compensation for damage or loss. When the
term indemnity is used in the legal sense, it may also refer to an exemption from liability for
damage.

Indemnity is a contractual agreement between two parties. In this arrangement, one party
agrees to pay for potential losses or damage.1

A typical example is an insurance contract, in which the insurer or the indemnitor agrees to
compensate the other (the insured or the indemnitee) for any damage or losses in return
for premiums paid by the insured to the insurer. With indemnity, the insurer indemnifies the
policyholder—that is, promises to make whole the individual or business for any covered
loss.

How Indemnity Works

An indemnity clause is standard in the majority of insurance agreements. However, exactly

what is covered, and to what extent, depends on the specific agreement.

Any indemnity agreement has what is called a period of indemnity, or a specific length of
time for which the payment is valid. Similarly, many contracts include a letter of indemnity,
which guarantees that both parties will meet the contract stipulations (or else an
indemnity must be paid).

Indemnity is common in agreements between an individual and a business (for example, an

agreement to obtain car insurance). However, it can also apply on a larger scale to
relationships between businesses and government or between governments of two or more
countries.

Indemnity clauses can be complicated to negotiate and can lead to increased costs of
services because of the increased risk of the contract.

Sometimes, governments, a business, or an entire industry must take on the costs of larger
issues on behalf of the public, such as outbreaks of disease. For example, according to
Reuters, Congress authorized $1 billion to fight a bird flu epidemic that devastated the U.S.
poultry industry in 2014 and 2015. The U.S. Department of Agriculture spent $200 million
of that money on indemnity payments paid to farmers who needed to kill their birds to stop
the spread of the virus.23

Special Considerations

How Indemnity Is Paid

Indemnity may be paid in the form of cash, or by way of repairs or replacement, depending
on the terms of the indemnity agreement. For example, in the case of home insurance, the
homeowner pays insurance premiums to the insurance company in exchange for the
assurance that the homeowner will be indemnified if the house sustains damage from fire,
natural disasters, or other perils specified in the insurance agreement.
In the event that the home is damaged significantly, the insurance company will be
obligated to restore the property to its original state—either through
repairs by authorized contractors or reimbursement to the homeowner for spending on such
repairs.

Indemnity Insurance

Indemnity insurance is a way for a company (or individual) to obtain protection from
indemnity claims. This insurance protects the holder from having to pay the full sum of an
indemnity, even if the holder is responsible for the cause of the indemnity.

Many companies make indemnity insurance a requirement, as lawsuits are common.

Everyday examples include malpractice insurance, which is common coverage for those in
the medical field, and errors and omissions insurance (E&O), which protects companies and
their employees against claims made by clients and applies to any given industry. Some
companies also invest in deferred compensation indemnity insurance, which protects the
money that companies expect to receive in the future.

As with any other form of insurance, indemnity insurance covers the costs of an indemnity
claim, including, but not limited to, court costs, fees, and settlements. The amount covered
by insurance depends on the specific agreement, and the cost of the insurance depends on
many factors, including the policyholder's history of indemnity claims.

Property leases also include indemnity clauses. For example, in the case of a rental property,
a tenant is typically responsible for damage due to negligence, fines, lawyer fees, and more
depending on the agreement.

Acts of Indemnity

An act of indemnity protects those who have acted illegally from being subject to penalties.
This exemption typically applies to public officers, such as police officers or government
officials, who are sometimes compelled to commit illegal acts in order to carry out the
responsibilities of their jobs.

Often, such protection is granted to a group of people who committed an illegal act for the
common good, such as the assassination of a known dictator or terrorist leader.

History of Indemnity

Although indemnity agreements haven't always had a formal name, they are not a new
concept. Historically, indemnity agreements have served to ensure cooperation between
individuals, businesses, and governments.

In 1825, Haiti was forced to pay France what was then called an "independence debt." The
payments were intended to cover the losses that French plantation owners "suffered" after
losing land and slaves.4 While this form of indemnity was incredibly unjust, it is one
example of many historical cases that show the ways indemnity has been applied worldwide.
Another common form of indemnity is the reparations a winning country seeks from a losing
country after a war. Depending on the amount and extent of the indemnity due, it can take
years and even decades to pay off. One of the most well-known examples is the indemnity
Germany paid after its role in World War I. Those reparations were finally paid off in 2010,
almost a century after they were assessed.56

What Is Indemnity in Insurance?

Indemnity is a comprehensive form of insurance compensation for damage or loss. It

amounts to a contractual agreement between two parties in which one party agrees to pay for
potential losses or damage caused by another party.

What Is the Purpose of Indemnity?

Indemnification, or indemnity, designates one party (the indemnifying party) as being

required to compensate the other party (the indemnified party) for certain costs and
expenses, typically stemming from third-party damage claims.7

What Is the Rule of Indemnity in Insurance?

With indemnity insurance, one party commits to compensate another for prospective loss or
damage. In insurance policies, in exchange for premiums paid by the insured to the insurer,
the insurer offers to compensate the insured for any potential damage or losses.8

The Bottom Line

Indemnity is a type of insurance compensation paid for damage or loss. When the term is
used in the legal sense, it also may refer to an exemption from liability for damage.
Indemnity is a contractual agreement between two parties in which one party agrees to pay
for potential losses or damage caused by another party. Typically, an insurance contract
dictates that the insurer, also known as the indemnitor, agrees to compensate the other party
involved (the insured or the indemnitee) for any damage or losses in return for premiums
paid by the insured.

Conditions For The Contract Of Indemnity

Two Parties

There must be more than one party in the contract of indemnity. No person can make a valid
contract with himself. Also, these parties should have the capacity to contract, which means
the parties should not be minor or lunatic. There can be more than two parties also, depending
upon the situation.

A Promise

The one party must offer the condition to another party and the same should be accepted by
another party. When the offer is accepted on the same conditions by another party, it is
called acceptance. After accepting the offer, it becomes a promise. The party who made
the promise becomes the promisor and has accepted the promise becomes the promisee.

Promise To Pay Losses

It is the important part of the contract of indemnity that “the promise must be made by the
promisor to pay the losses of the promisee”.

Expressed Or Implied

The contract of indemnity can be expressed or implied. The express and implied are
two types of contracts given under contract law. Express means the contract is done orally
or in writing whereas, where the contract is made due to the conduct of the parties is called
implied contract.

There Must Be Loss Incurred

It is the condition of the contract of indemnity that “the loss must be incurred to the
promisee”. If there is no loss incurred to the promisee, the promisor is not liable to pay
anything.

Conduct Of The Promisor Or Other Party

The loss incurred to the promisee should be done by:

 The conduct of promisor- the promisor is liable to pay the loss if he has done
something which consequently made the loss to the promisee.
 Conduct of other parties- the promisor is also liable in the contract of indemnity if
the loss incurred to the promisee is due to any other party also. If any other party has
done something which made the loss to the promisee, the promisor has to pay those
losses.
Lawful Object And Consideration

It should be kept in mind that the contract of indemnity can only be done for the lawful
object and lawful consideration. A contract to do something illegal act that is contrary
to the public policies cannot be considered a contract of indemnity. There must be the
lawful object and lawful consideration for the contract of indemnity.
Example Of Contract Of Indemnity

 Car insurance is one of the best examples of the contract of indemnity. When you
take car insurance, the insurance company makes the promise that they will pay to
repair your car if you got an accident and the take consideration for the same. Now,
your car is hit by a person on road and your car got damaged. Now, the car insurance
company will pay the loss done to your car.
 Amit make the contract of indemnity with Rakesh that he will pay his losses if he got
took any loss in his business. Rakesh did not get any losses in the company, Amit is
not liable to pay any loss. But if Rakesh incurred any loss in his company, in that
condition, Amit will be liable to pay the losses incurred to Rakesh.
 A makes the contract with B to deliver his goods every month at the cost of 5000 per
month. Now, C made the contract of Indemnity with B that he will pay his losses if A
fails to deliver his goods on time. Here C is Indemnifier and B is indemnified.
The indemnification can be done with cash or by repair or replacement or any other
way which is decided by the parties of the Indemnity.

Parties In The Contract Of Indemnity

The definition of the contract of indemnity clearly shows that there are mainly two parties
involved namely promisor and promisee. The promisor is known as Indemnifier and the
promisee is known as Indemnified. The person who makes the promise and makes good
the loss is known as Indemnifier and the person whose loss is to be made good is known
as indemnity holder or indemnified.

For example, there is a contract between A and B in which A will sell his plot to B after 6
months and he will compensate if any loss occurred in this process. But in the meantime, A
sold this plot to C. Now, A will be liable to indemnify B. Here A is the indemnifier and B is
the indemnified.

Nature Of Indemnity

It is important to note that the contract of indemnity is contingent in nature and it mainly
provides a safeguard provision for future uncertainties. A contract of indemnity is just like
any other contract and it shall necessarily follow all the requirements of a valid
contract. For example – A enters into a contract with B. The principal terms and conditions
were that B will beat C and A promises to indemnify him against any grave consequences.
Now, B beats C and he was fined 1000 rupees for it. Here, the promise of A cannot be
enforced and B will not get anything because the object of the agreement is unlawful.

The Object Of The Contract Of Indemnity

The main object of the contract of indemnity is to protect the promisee from the losses
incurred to him due to the conduct of the promisor or any other person

Types Of Indemnity

There are basically 2 types of indemnity namely express indemnity and implied indemnity.

Express Indemnity

This is also known as written indemnity. Under this, all the terms and conditions of the
indemnity are mentioned specifically in a contract. The rights and the liabilities of both
parties are clearly set out in the agreement. This type of agreement includes insurance
indemnity contracts, construction contracts, agency contracts, etc.

Implied Indemnity

It refers to that indemnity wherein the obligation arises from the facts and the conduct of the
parties involved. This is not a written contract. The core example of this type of indemnity is
the master-servant relationship. The master is liable to indemnify his servant for the losses
that he incurred while working as per his instruction.

These two are the Types of Indemnity given under the Indian contact act.

The landmark judgement of implied indemnity is of Adamson vs Jarvis 1872. In this case,
the plaintiff was an auctioneer and he sold certain goods on the instructions of the master.
Later on, it came to the knowledge that the master was not the real owner of the good and the
true owner sued the plaintiff. The plaintiff in turn sues the master to recover the damage. The
court held that the master will be liable to indemnify the auctioneer as it was evident from the
conduct that he was working under his instructions and there was an implied indemnity
agreement between them.

Special Provisions Of Implied Indemnity

Section 69 of Indian Contract Act, 1872-

As per this section, if a person pays the money on behalf of any other person (which is legally
bound to pay) then he is entitled to reimburse them. Forex. If A is running a shop on lease.
When the owner came to collect monthly rent, A was out of town and B paid the rent on his
behalf. Now A is liable to reimburse B.

Section 145 of the Indian Contract Act

It deals with the right of surety in a contract of guarantee. It states that if the surety
(guarantor) pays the money on behalf of the principal debtor, then the debtor is liable to
indemnify him by repaying the amount. For example. X took a loan from the bank and Y
gave the guarantee for it. X failed to repay the money and Y were called to pay the dues of
the bank. Y paid it but now X will be liable to indemnify Y for the loss he incurred.

Section 222 of the Indian Contract Act

This section deals with the liability of a principal to indemnify his agent to make good all the
losses that he incurred while working in the authority given to him.

Types Of The Contract Of Indemnity

As we know from the essentials that indemnity can be done expressly and impliedly. There
are mainly three types of contract of indemnity which can be done expressly and impliedly as
well. The types of the contract of indemnity are:

Broad Indemnification

Under the broad indemnification, the indemnifier promise to pay the losses incurred by all
the parties including the third party. He promises to pay the losses even if the third party is
solely at the fault.

Intermediate Indemnification

Under the Intermediate indemnification, the indemnifier promise to pay the losses
incurred due to the act of promisor and promisee only. In this situation, the contract of
indemnity does not include the losses incurred due to the conduct of a third party.
Limited Indemnification

Under the limit indemnification, the indemnifier promise to pay the losses incurred due to
his act only. In limited indemnification, the contract of indemnity does not include the losses
incurred due to the conduct of the promisee and third party.

Rights Of Indemnity Holder

Section 125 of the Indian Contract Act, 1872 deals with the rights of indemnity holder or
indemnified when he sued due to the conduct of the promissory or by the other party. For
receiving all the benefits it is necessary that for receiving any type of benefit in an ongoing
suit either he shall be authorised by the indemnifier or as per the circumstances, it was
prudent to represent.

He has mainly 3 rights namely:-

Right Of Indemnity Holder To Receive All Damages

It is one of the best rights of indemnity holders that, in a suit, it may occur that the court
ordered the indemnity holder to pay all damages to the third party. Now, he is entitled to
receive all these damages from the indemnifier. He has to file the plaint under the civil
procedure code in the court of law by containing all the facts of the case. In that case, the
indemnifier may agree with all the facts given in the plaint by filing the written statement or
denying them. The court will decide the case on the basis of oral and documentary
evidence.

Right Of Indemnity Holder To Receive All Cost

The indemnity holder may incur a hefty cost in the ongoing litigation. Now it is the
responsibility of the indemnifier to pay all the costs which he incurred as he was merely
acting as per his instructions.

Right of indemnity holder to receive all sums

The indemnity holder is also entitled to receive all the sums which he paid as a sort of
compromise in a suit from the indemnifier. It is necessary that the compromise shall not be
against the will or order of the indemnifier.
It is important to understand that the rights mentioned under Section 125 are not exhaustive
in nature. The indemnity holder has many other rights which he can exercise to save himself
from the liability concerned.

Liability Of Indemnity Holder

Along with the rights, the indemnity holder has certain liabilities also. The chief among them
is that he must act as per the direction of the promissory and shall not violate his orders.
Furthermore, he shall act with due caution and care and take all possible steps to reduce the
loss as no contract of indemnity exists. This shows that the rights of the indemnity holder are
not absolute or unfettered.

For example. A was a school driver by profession and work for XYZ school. It was an order
by the school administration that all the drivers will not run the bus beyond 40 km/ph. A did
not follow the rules and met an accident. Now the school administration will not be liable to
indemnify him as he contravenes their orders.

Timing For Invocation Of Indemnity

There is always a matter of debate regarding the time when the indemnity holder should be
called upon to discharge his liability. The major question is whether the liability shall
commence when the actual loss occurs or when the liability becomes certain or absolute. The
Indian Contract Act, 1872 is silent on this but from our judicial pronouncement it is clear that
the indemnity holder doesn’t need to wait till the actual loss occur but it can invoke the
indemnity when the liability became absolute.

The landmark authority in this regard is the judgement of the Bombay High Court of Bombay
in the case of Gajanan Moreshwar Parelkar v Moreshwar Madan Mantri –

In this case, it was held that the value of the indemnity Clause will lose its significance if the
indemnity holder had to wait till he paid the actual loss. It will put an unnecessary burden on
his shoulders and he had to wait till the judgement is pronounced. The court applied the
concept of equity and held that the indemnifier can be called upon to pay into the court a
sufficient amount of money which is used to create a fund and pay the claim whenever it is
made.

Rights Of Indemnifier
  After the compensation provided by the indemnifier for the losses caused to
indemnity holders, it is the right of the indemnifier that he can possess all the methods
and resources that can save him from the loss.
 He will indemnify the indemnity holder if there is any loss incurred to him.
Scope Of The Contracat Of Indemnity

The scope of an indemnity clause is quite subjective in nature and it differs from agreement
to agreement. The scope mainly depends upon the wording of the particular indemnity clause
in the agreement and the liability thereto. The parties to a contract may agree to a narrow or a
widely drafted indemnity clause as per their requirement. A narrowly drafted clause reduces
the liability of the indemnifier whereas a widely drafted one increases it. For example, a
broadly drafted indemnity clause may provide for the protection of liability against indirect
losses or any other potential threats.

Indemnity And Damages

Both indemnity and damages are the remedies for the breach of contract and they hold special
importance in a commercial contract. These two concepts are generally taken interchangeably
and we sometimes failed to understand their actual difference. These differences are as
follows –

1. A claim for indemnity can be brought before the actual breach of contract but the
damages can only be asked after the breach of contract.
2. The concept of indemnity also covers the loss arising out of the conduct of the third
party whereas the damages can only be claimed from the parties to a contract at the
time of the breach.
3. The jurisprudence behind the concept of indemnity is to restore the position of the
person as personally as he was before the loss occurred. There is no profit or loss
involved in it. However, in the case of monetary damages, the award may exceed or
fall below the actual loss that occurred.]
nsurance is a contract in form of a policy where one party agrees to pay a certain amount for
consideration to make the other party liable to recover the amount of damage caused to that
party. Insurance is an old concept in India but today it’s becoming very common and
important for every person who is either a businessman, or a person holds assets. Protecting
the asset or businesses is very important to cover up the losses through insurance. Various
insurance companies in India are:

1. Life Insurance Corporation of India

2. Max Life Insurance Company
3. HDFC Life Insurance Company
4. ICICI Prudential Life Insurance
5. Tata AIA Life Insurance Company
6. Bajaj Allianz life insurance Company
 7. SBI Life Insurance Company
8. Reliance Nippon Life Insurance Company
9. Kotak Life Insurance Company
10. Birla Sun Life Insurance Company
11. Aviva Life Insurance Company.
Types of insurance policies in India

Life Insurance Policy

This is the most common kind of insurance taken by individuals as well as the businesses for
its employees to provide financial protection to the family members of the policy taker after
the death of that person. If the person who is taking life insurance is the only person earning
for the whole family, then Life Insurance is the best option. Kinds of Life Insurance policies:

Term Life Insurance Policy

Term Life Insurance is the easiest to understand and to buy with an affordable price and it’s
the simplest kind of life insurance policy. This term life insurance policy provides insurance
for sick terms for example- insurance after the death of the policy taken. Insurance amount
can be taken by the family members of the policy taker on what is death monthly basis or a
complete lump sum amount depending on their own need.

Endowment Life Insurance Policy

It is also known as a term saving option at a much lower risk. This insurance plan helps the
policy taker by three ways:

1. Insurance amount after the death.

2. Half the insured amount is invested by the insurance company which gets matured
after a certain period.
3. And periodical bonuses that the policy taker gets company.
Whole Life Insurance Policy

Whole life insurance policy covers the lifetime of the whole life whether limit of up to 100
years. It is different from other kinds of life insurance policy. It is there limited to a specific
term which is not up to 100 years. This policy the person insured for the whole life and even
leaves that for their heirs.

Money-Back Life Insurance Policy

This is this kind of insurance an amount of from time to time after a certain period of time
arts giving back the amount of money a short on a periodical basis for the survival benefits to
the insured person.

Child Life Insurance Policy

This policy is usually taken by the policy taker for his child who covers the future plan of the
child such as financial assistance in education and marriage. The benefit of this plan in India
can only be taken after the child gets an 18 year old.

Retirement Insurance Policy

This policy helps the insured person to get the amount of insurance after the age of 60 years
the age of retirement in India. A certain amount of money is paid from time to time and after
the retirement period, a certain amount of assured money is paid annually on a monthly basis
which helps the person to survive when he has no financial security.

Health Insurance Policy

Healthy life is very crucial for every person and to reduce the risk of the financial disability
incurred by the hospitalization charges and the recovery it is important to take Health
Insurance. There are two kinds of health insurance policy in India:

Indemnity Based Health Insurance Policy

The benefit is taken when they financially need to pay hospitalization charges and other
charges for health recovery. In this policy the insurance company directly pays the hospital.

Fixed benefit based Health Insurance Policy

The benefit is taken when the charges of hospitalization are paid and shown to the insurance
company, the company pays the amount of money to the insured person who paid the
hospitalization charges.

General Insurance Policy

The policies which are not included in life and health insurance policy are usually included in
general insurance policy. There are various kinds of insurance policy which are covered in
the general insurance policy:

Motor Insurance Policy

Motor insurance covers the insurance of motor vehicles which includes the private vehicles
and commercial vehicles loading the motor vehicles. Insurance of Motor Vehicles are
covered under the Motor Vehicles Act 1939. Insurance of motor vehicles against damage is
not made compulsory, but the insurance against third party liability arising out of the use of
motor vehicles in public places is made compulsory. Insurance Cover against damage is
known as “Own Damages” and against injury or death to a third party is known as “Third
Party” claim. No motor vehicle can ply in a public place without such insurance.

Liability Insurance Policy

The liability arising out of the damage caused to the third party or any person the insured
person is personally liable according to the Indian law can be recovered by taking a liability
insurance policy in India.

Home Insurance Policy

Home Insurance policy helps the insured person to recover the loss caused to his home
through the insurance company.

This policy covers the damage caused to the home by natural disasters, fire and even protects
the loss caused through the burglary/ damage to the jewellery, etc.

Mobile Insurance Policy

In today’s world mobile phones cost a lot so you can even get a mobile insurance policy to
recover the amount of damage caused to the mobile phone accidentally. By taking the
insurance, the policy taker can have the insurance for the old phone and can even get a new
phone.

Travel Insurance Policy

The financial liability caused to you while travelling which can be related to medical and non
medical emergencies. The travel insurance covers the laws of passports, accidental death,
adventurous Sport, medical emergencies, etc during the travel.

Rural Insurance Policy

There are various kinds of insurance policy taken by the people living in rural areas by taking
my insurance policy for anything on which the insurance is allowed like dog insurance, sheep
and goat insurance, agricultural insurance, hut insurance, etc. This insurance policy is taken
as the sectors in which the rural people work, animals and other things are important for them
to earn.

Marine Insurance Policy

After globalization and the free trade between the countries and the cross border import and
Exports marine insurance come up as an important kind of insurance to recover the damage
caused to the ship, cargo vessels, etc.
Marine Cargo Insurance Policy

The owners of the ship who use it for the commercial purposes for the transportation of the
supply, it is necessary for them to have Marine cargo insurance policy. It is important to note
that compensation is not given to the loss of all damage which is done to the ship
intentionally.

Liability Insurance Policy

It covers the loss caused due to the crash, attack or collision by which the damage is caused
to the ship.

Freight Insurance Policy

Insurance policy is taken to cover the loss caused to the shipping company if the freight is
damaged or lost during the transportation.

Fire Insurance Policy

Fire insurance for the fire accidents caused to the people who hold some assets like home, or
a building with business activities going on, the machinery, or even the stock damaged due to
the Fire. Kinds of fire insurance policy in India:

Specific Insurance Policy

In this policy only the specific amount of money short can be claimed the loss incurred due to
the Fire.

Comprehensive Insurance Policy

In this policy the loss recovered is not only against the fire related happenings also cover the
loss/ damage caused due to burglary, robbery, etc.

Floating Insurance Policy

This policy is usually taken by the people who run the business of import and export as this
policy helps to recover the loss/ damage caused to the stock or goods of the owner at various
places.

Replacement Insurance Policy

In case where the property is damaged due to fire, the insurance company compensate for the
loss of that specific property according to the market price of that property pertaining at that
time.
Principles of Insurance
The concept of insurance is risk distribution among a group of people. Hence, cooperation
becomes the basic principle of insurance.
To ensure the proper functioning of an insurance contract, the insurer and the insured have to
uphold the 7 principles of Insurances mentioned below:

1. Utmost Good Faith

2. Proximate Cause
3. Insurable Interest
4. Indemnity
5. Subrogation
6. Contribution
7. Loss Minimization

Let us understand each principle of insurance with an example.

Principle of Utmost Good Faith
The fundamental principle is that both the parties in an insurance contract should act in good
faith towards each other, i.e. they must provide clear and concise information related to the
terms and conditions of the contract.
The Insured should provide all the information related to the subject matter, and the insurer
must give precise details regarding the contract.
Example – Jacob took a health insurance policy. At the time of taking insurance, he was a
smoker and failed to disclose this fact. Later, he got cancer. In such a situation, the Insurance
company will not be liable to bear the financial burden as Jacob concealed important facts.
Principle of Proximate Cause
This is also called the principle of ‘Causa Proxima’ or the nearest cause. This principle
applies when the loss is the result of two or more causes. The insurance company will find
the nearest cause of loss to the property. If the proximate cause is the one in which the
property is insured, then the company must pay compensation. If it is not a cause the property
is insured against, then no payment will be made by the insured.
Example –
Due to fire, a wall of a building was damaged, and the municipal authority ordered it to be
demolished. While demolition the adjoining building was damaged. The owner of the
adjoining building claimed the loss under the fire policy. The court held that fire is the
nearest cause of loss to the adjoining building, and the claim is payable as the falling of the
wall is an inevitable result of the fire.
In the same example, the wall of the building damaged due to fire, fell down due to storm
before it could be repaired and damaged an adjoining building. The owner of the adjoining
building claimed the loss under the fire policy. In this case, the fire was a remote cause, and
the storm was the proximate cause; hence the claim is not payable under the fire policy.
Principle of Insurable interest
This principle says that the individual (insured) must have an insurable interest in the subject
matter. Insurable interest means that the subject matter for which the individual enters the
insurance contract must provide some financial gain to the insured and also lead to a financial
loss if there is any damage, destruction or loss.
Example – the owner of a vegetable cart has an insurable interest in the cart because he is
earning money from it. However, if he sells the cart, he will no longer have an insurable
interest in it.
To claim the amount of insurance, the insured must be the owner of the subject matter both at
the time of entering the contract and at the time of the accident.
Principle of Indemnity
This principle says that insurance is done only for the coverage of the loss; hence insured
should not make any profit from the insurance contract. In other words, the insured should be
compensated the amount equal to the actual loss and not the amount exceeding the loss. The
purpose of the indemnity principle is to set back the insured at the same financial position as
he was before the loss occurred. Principle of indemnity is observed strictly for property
insurance and not applicable for the life insurance contract.
Example – The owner of a commercial building enters an insurance contract to recover the
costs for any loss or damage in future. If the building sustains structural damages from fire,
then the insurer will indemnify the owner for the costs to repair the building by way of
reimbursing the owner for the exact amount spent on repair or by reconstructing the damaged
areas using its own authorized contractors.
Principle of Subrogation
Subrogation means one party stands in for another. As per this principle, after the insured, i.e.
the individual has been compensated for the incurred loss to him on the subject matter that
was insured, the rights of the ownership of that property goes to the insurer, i.e. the company.
Subrogation gives the right to the insurance company to claim the amount of loss from the
third-party responsible for the same.
Example – If Mr A gets injured in a road accident, due to reckless driving of a third party,
the company with which Mr A took the accidental insurance will compensate the loss
occurred to Mr A and will also sue the third party to recover the money paid as claim.
Principle of Contribution
Contribution principle applies when the insured takes more than one insurance policy for the
same subject matter. It states the same thing as in the principle of indemnity, i.e. the insured
cannot make a profit by claiming the loss of one subject matter from different policies or
companies.
Example – A property worth Rs. 5 Lakhs is insured with Company A for Rs. 3 lakhs and
with company B for Rs.1 lakhs. The owner in case of damage to the property for 3 lakhs can
claim the full amount from Company A but then he cannot claim any amount from Company
B. Now, Company A can claim the proportional amount reimbursed value from Company B.
Principle of Loss Minimisation
This principle says that as an owner, it is obligatory on the part of the insurer to take
necessary steps to minimise the loss to the insured property. The principle does not allow the
owner to be irresponsible or negligent just because the subject matter is insured.
Example – If a fire breaks out in your factory, you should take reasonable steps to put out the
fire. You cannot just stand back and allow the fire to burn down the factory because you
know that the insurance company will compensate for it.
Candidates can check other articles important for competitive exams:

Benefits of Insurance
The insurance gives benefits to individuals and organisations in many ways. Some of the
benefits are discussed below:

1. The obvious benefit of insurance is the payment of losses.

2. Manages cash flow uncertainty when paying capacity at the time of losses is reduced
significantly.
3. Complies with legal requirements by meeting contractual and statutory requirements,
also provides evidence of financial resources.
4. Promotes risk control activity by providing incentives to implement a program of
losing control because of policy requirements.
5. The efficient use of the insured’s resources. It provides a source of investment funds.
Insurers collect the premiums and invest those in a variety of investment vehicles.
6. Insurance is support for the insured’s credit. It facilitates loans to organisations and
individuals by guaranteeing the lender payment at the time when collateral for the
loan is destroyed by an insured event. Hence, reducing the uncertainty of the lender’s
default by the party borrowing funds.
7. It reduces social burden by reducing uncompensated accident victims and the
uncertainty of society

Account Takeover

An Account Takeover – or ATO – occurs when fraudsters take ownership of an online

account, often using stolen credentials. Thiefs can easily purchase credentials on the dark
web or acquire them through social engineering scams, data breaches or phishing attacks and
later use them to commit bank account fraud.
Once access is achieved, the attacker may change the password to lock out the real account
owner. They may transfer money to another account, make fraudulent payments, or open new
accounts (most often credit lines) in the victim’s name.
ATOs result in costly disputes for banks, and can have a detrimental impact on the
company’s reputation and customer loyalty. They also cause substantial financial losses for
consumers. About 22% of U.S. adults are victims of ATOs per year, with average losses of
around $12,000.

Here’s a closer look at some of the techniques fraudsters may use to launch an ATO attack:

 Phishing attacks

fraudsters may obtain account credentials by sending a fake email or text message to
customers that direct them to a fake bank login page. When customers enter their
credentials, fraudsters steal them.
  Credential stuffing

Fraudsters leverage sophisticated bots to automatically test random credentials. Also

referred to as “brute force” attacks, they leverage lists purchased on the dark web,
trying different combinations until they gain access to an account.

 Social engineering

A broad range of attacks that fraudsters use to obtain account information directly
from users by tricking them or appealing to their emotions and fears during
interactions.

 Cybersecurity issues

Fraudsters often target unpatched software and other cybersecurity weaknesses to gain
access to data servers and steal customer information.

 Call center fraud

Call center fraud is a form of social engineering in which a fraudster contacts an

organization’s call center pretending to be a legitimate customer. They may then trick
the call center representative into giving them access to an account or performing
fraudulent or malicious actions within an account. According to Pindrop, call center
fraud attacks increased by 57%

New Account Fraud

One of the most common type of bank fraud, New account fraud is also known as account
creation fraud, account opening fraud, and fake account fraud. It describes the type of fraud
that occurs when a fraudster or money mule opens an account with the intent of committing
fraud, often utilizing stolen or synthetic identities.

They may steal identities of legitimate customers via data breaches or phishing, or they may
sensitive information of children, deceased or even homeless people. In some cases, mules
might create accounts using their own identities for fraudulent purposes, thus
committing first-party fraud.

Fraudsters can also create synthetic or fake identities, which is more complex but common.
To do this, they use some legitimate information about a real person combined with random,
invented or stolen information from others. Once a new account is created, fraudsters may
rack up charges or write checks against it in a victim’s name.

Money Laundering
Money Laundering is named right – illegal or “dirty” money is put through a series of
transactions through foreign banks and/or legitimate businesses, making it legal or clean.
Through this process, the money is “washed” – its origin is concealed, and no one can trace it
to illicit activities such as drug trafficking, corruption, embezzlement or illegal gambling.
Typically, money laundering is executed by organized fraud rings. There are three stages to
money laundering:

 Placement

Money is placed into the financial system. For example criminals can break up large
sums of cash into less conspicuous amounts that are deposited into accounts or used to
purchase checks or money orders. Money may also be placed into bank accounts in
small amounts that fall below the AML reporting thresholds – a process called
“smurfing.”

 Layering

During this phase, the criminal moves funds around, creating distance between the
origin. They may channel funds by purchasing and selling investments, using a
holding company, or transferring it to different financial entities. They might disguise
transfers as a private loan or payments for goods and services.

 Integration/Extraction

During the third stage, criminals integrate funds into the economy by buying goods
and services, investing in real estate or business ventures, or hiring fake employees.
The process of washing reduces profits, but the fraudster still comes out ahead.

Some of the warning signs of money laundering include repetitive transactions in amounts
just under $10,000. Transactions executed by the same account on the same day by different
people and large numbers of internal transfers are also yellow flags.
It takes good expertise and strong data to combat money laundering and stay compliant with
AML regulations to avoid regulatory and law enforcement issues. Customer due diligence is
key, and so is having the right software to monitor accounts and warn officials of potential
criminal activity.

Money Mules

Money mules transfer money that they acquire illegally either in person, via a courier service
or digitally on behalf of someone else. They’re transaction mercenaries and paid for their
services.

A criminal recruits a money mule to help launder funds that they secure through online scams
and other types of fraud or criminal activity, such as drug trafficking. The mule helps add to
the “layers” of distance between the criminal and the source of the funds they stole.
Money mules move funds through bank accounts, cashier’s checks, cryptocurrency, prepaid
debit cards or other means. Some of the mules are aware that they’re assisting criminals,
while others may be completely naive. For example, they may have a trusting relationship
with the criminal who’s asking them for help, and think that they’re doing the person a favor.
That’s why it is the one of the most difficult types of bank frauds to detect as mules pass all
KYC and AML checks and are not flagged as fraudsters.

Payment Fraud

Payment fraud occurs when a cybercriminal completes any type of false or illegal transaction.
There are many different types of transactions that take place in the banking Industry across
the customer account lifecycle. Some examples include cash withdrawals and deposits,
checks, online payments, debit card transactions, wire transfers and loan payments. Each one
is an opportunity for bad actors to commit fraud.

ACH Fraud

ACH fraud occurs when a criminal steals funds through the Automated Clearing House
(ACH) financial transaction network, which is a central clearing facility for all U.S.
Electronic Fund Transfer (EFT) transactions. In 2020 alone, the Federal Trade Commission
received more than 2.2 million fraud reports.

Imposter scams were the most common type of fraud, with scammers using Authorized Push
Payment (APP) schemes to trick customers into executing ACH transitions. Since ACH fraud
can be committed with just two pieces of stolen information – a business checking account
and a bank routing number – it’s easy to commit. Banks must compensate consumer accounts
for fraudulent ACH transactions, and, as a result, ACH fraud can be costly for banks.

Check Fraud

Check fraud occurs when paper or digital checks are used to steal money. People may write
fraudulent checks on their own accounts or closed accounts, forge someone else’s signature,
or draft a fake check.

According to data published by the Association of Financial Professionals (AFP) in

conjunction with JPMorgan, checks and wire transfers are still the payment methods most
impacted by fraud (66% and 39%, respectively). One contributing factor to the rise in check
fraud is the increased use of mobile check deposits, which rose 41% between 2020 and 2021.

Banks typically reimburse customers for check fraud, and the cost is high – for every dollar
of losses, the associated costs for disputes and other fees is about $4.
Card Fraud

Credit card fraud is probably the most common type of bank fraud. It is a broad term that
signifies fraud committed using any type of payment card, including credit, debit, gift card,
and prepaid ones. How do they obtain this information?

By stealing a physical card, finding a lost card or card information, or card skimming (for
example at a gas station). It can e divided into card-present fraud (CP) and card-not-present
(CNF) schemes. CNP fraud is 81% more prevalent than CP is.

The Payment Card Industry Data Security Standard (PCI DSS) is a data security standard. It
was created to help financial institutions process card payments securely and reduce card
fraud, but it’s not always successful.

According to 2021 research, about half of all Americans experienced a fraudulent charge on
their credit or debit cards. Meanwhile more than one in three credit or debit card holders have
experienced fraud multiple times.

P2P Payment Fraud

Today, one billion people use Paypal, Venmo, Zelle, Apple Pay and other cash apps globally
to complete peer-to-peer (P2P) payments. These digital payment apps are easy targets for
fraudsters who know that companies often lack the data and insights to detect new fraud
patterns associated with them.

Scams occur frequently — a fraudster might sell goods to consumers over an online
marketplace requiring payment via Paypal or Zelle, for example, and never deliver the goods.
Fraudsters may also use stolen credit card information to create P2P accounts and purchase
goods and services for themselves.

Since 2016, the number of people falling victim to fraud via P2P payment fraud has risen an
astonishing 733%. Unfortunately, most P2P apps don’t have policies for protecting users
against fraud losses due to scams. Worse yet, P2P fraud serves as a gateway to account
takeovers and other types of fraud.

Wire Transfer Fraud

The term “wire transfer” originated from the practice of transferring funds between banks
across telegraph wires. Wire transfer fraud typically occurs in one of two ways:

 A scammer poses as a trusted individual, vendor, company or family remember and

requests a wire transfer, often tricking the victim emotionally by claiming it’s an
emergency. For example, an employee in finance receives an email from the CEO
asking for money to be transferred to a vendor by the close of business or the deal will
 fall through. The email includes the account information and looks legitimate, but
isn’t.
 A hacker may monitor email communications around a wire transfer and change the
wire instructions to redirect the funds to a different account.

With people becoming more comfortable sending money online, wire transfer fraud is
increasing – as is the value of each transfer. One study shows that the average value is up
nearly 68% from Q2 2020, reaching $12.5K in Q4 2021

Application Fraud

To commit application fraud, criminals use stolen or synthetic IDs to apply for loans or lines
of credit. Here are a few examples:

 A criminal applies for a credit card and builds credit gradually over months or even
years to gain access to more credit. He then maxes out the card, with no intention of
paying back the lender.
 A fraudster may submit an application for credit or a loan using someone else’s
information. Today these criminals can submit applications at scale to different
financial institutions at once (this is called loan stacking), using automated bots and
virtual machines. By the time fraud is detected, the criminal has received the money
and is long gone.

Third-party application fraud often involves fraudsters creating synthetic identities by mixing
real and fake information. First-party fraud involves people using their true identity by
providing false information, such as a fake residence or inflated income.

Loan Fraud

A subset of application fraud is loan fraud. During Q2 of 2022, nearly 1% of all mortgage
applications – 1 in every 131 applications – contained fraud. There are several different types
of loan fraud, including mortgage fraud, loan scams and payday fraud, but all of them involve
criminals using a person’s personal information to illegally obtain a loan.

Loan fraud has increased in recent years due to the rising popularity of online lenders, who
often don’t execute thorough background checks on applicants. They may rely solely on basic
information such as name, address, social security number and income to make lending
decisions – information that can easily be stolen or or obtained via nefarious means.

The full form of ATM is an Automated Teller Machine. Bank customers use this electronic
machine for their different types of account transactions. The user has a type of plastic card,
that is popularly known as a debit card. The information of the user is drafted on the card.
The card has an identification code. The cardholder needs to insert the card within the
Automated Teller Machine through which the account and its transactions can be accessed. In
1960, John Shepherd – Barron invented the automated teller machine. Through the automated
teller machine, the users can perform depositing money, withdrawing money, transferring
money, information related to the respective account, and changing of ATM PIN.

An ATM is also known as cash deposit money or an automatic banking machine. Without the
help of any bank representatives, the account transactions can be completed with the help of
this machine. Two types of automated teller machines are available. The first one is the basic
which only allows the withdrawal of cash and the details of the account balance. The second
type is a complex that deposits money and gives credit card facilities and account balances.

History of ATM

The concept of the ATM started in several countries from Japan, and Sweden to the US. The
computer load machine for the computer loan was invented by Japan in 1966. In 1967, the
cash dispensing machine was developed in London. This computer load machine was used
first by Barclays Bank. As in India, the development of ATMs was very slow. The automated
teller machine gave solutions to many problems relating to the branch systems of the banks.
With time the ATMs have been developed.

ATM Machines – Types

There are a few different types of automated teller machines which are mentioned below:

 Leased Line machine: This machine connects to the host processor directly. They
connect from a four-wire point to a telephone line. The operation cost of these
machines is very high and they are preferred in particular places only.
 Dial-up machines: These machines link with the processor through a phone line by
using a modem. They require a normal connection and less cost. The operation cost of
these machines is less than the leased machines.
 White Label machine: These are operated by non-bank organisations. These are
introduced by RBI for the access of ATMs within the country. They don’t show any
type of bank logo and were introduced by TATA.
 Brown Label: These machines are owned by the service providers and they take care
of the cash and network areas
 Onsite ATM: These machines are made available where a particular branch of a bank
is located. By this, both the bank and ATM are used for various purposes.
 Offsite ATM: These machines are made separately, which means only the ATM is
present there. This helps to reach the banks in more geographical areas to use its
services even when the bank is not available within that region.
 Cash dispenser: This automated teller machine provides withdrawal of cash, details of
balance, and mini statements.
 Mobile ATM: These were introduced during covid-19 and are helpful for the users.
 Green label machines: These are mainly used for agriculture purpose transactions.
 Orange label: These are used for transactions of shares.
 Yellow label: This automated teller machine is for online purchases through the e-
commerce facility.
  Pink label: This automated teller machine is used by women. Protectors keep a check
on these ATMs so that no one other than women can use the services.

Benefits of Automated Teller Machine

There are many benefits of the ATMs that are listed below:

 ATMs are made available in every area so that every person can avail of the services.
 It helps in withdrawing money in a few seconds.
 For getting an ATM card no documented work is required. Every bank gives an ATM
card during the process of account opening.
 With the help of an ATM, the balance of the respective account can be known.
 ATMs allow utility payments.
 It provides 24×7 services.
 ATMs are password protected. Users can get access to their accounts if they know
their passwords which makes them secure and safe.
 It decreases the workload and pressure on the bank employees.
 The cash-carrying process becomes easier because money can be withdrawn from any
available ATM centre.
 New currency notes are provided to the users by the ATMs.
 These machines are beneficial and convenient for the users.
 The machine provides services without any type of error.
Online banking allows you to conduct financial transactions via the Internet. Online banking
is also known as Internet banking or web banking.

Online banking offers customers almost every service traditionally available through a local
branch including deposits, transfers, and online bill payments. Virtually every banking
institution has some form of online banking you can access through a computer or app.

KEY TAKEAWAYS

 Online banking allows you to conduct financial transactions via the Internet.
 You aren't required to visit a bank branch in order to complete basic online banking
transactions.
 You need a device, an Internet connection, and a bank card to register for online
banking.

Understanding Online Banking

With online banking, you aren't required to visit a bank branch to complete most of your
basic banking transactions. You can do all of this at your own convenience, wherever you
want—at home, at work, or on the go. Online banking can be done using a browser or
app. Mobile banking is online banking that is done on a phone or tablet.

Using online banking requires a computer, tablet, mobile phone, or other device, plus an
Internet connection and a bank or debit card. In order to access the service, you need to
register for the bank's online banking service and create a password. Once that's done, you
can use the service to do your banking.

Banking transactions offered online vary by institution. Most banks generally offer basic
services such as transfers and bill payments. Some banks also allow customers to open up
new accounts and apply for credit cards through online banking portals. Other functions may
include ordering checks, putting stop payments on checks, or reporting a change of address.

Checks can be deposited online through a mobile app using remote deposit capture . Enter
the check amount, then use the app to take a photo of the front and back of the check to
complete the deposit.

Online banking typically does not permit the purchase of traveler's checks, bank drafts, or
certain wire transfers. It also typically does not permit the completion of certain credit
applications, such as for mortgages. These transactions still need to take place face-to-face
with a bank representative.

Most banks do not charge fees for online banking.

Online Banks

Online banks operate exclusively online, with no physical branch at all. The best online
banks offer low-cost or free banking, plus above-average yields on savings accounts and
tools to help you manage your money.

Online-only banks may not provide direct ATM access but will make provisions for
customers to use ATMs at other banks and retail stores. They may reimburse you for some
of the ATM fees charged by other financial institutions. Reduced overhead costs associated
with not having physical branches typically allow online banks to offer significant savings
on banking fees. They also offer higher interest rates on savings accounts.

These banks handle customer service by phone, email, or online chat, instead of in person.

Prominent online banks in the United States include Ally Bank, Discover Bank,
and Synchrony Bank.

Advantages of Online Banking

Convenience is a major advantage of online banking. Basic banking transactions such as

paying bills and transferring funds between accounts can easily be done any time of the day
or night, seven days a week. If your bank offers a payment network such as Zelle, you can
use your online bank account to send money to another person.1

Online banking is fast and efficient. Funds can be transferred between accounts almost
instantly, especially if the two accounts are held at the same institution.
You can open and close a number of different accounts online, from fixed deposits to
recurring deposit accounts that typically offer higher rates of interest.

You can also monitor your accounts closely, allowing you to keep your accounts safe.
Around-the-clock access to banking information provides early detection of fraudulent
activity, thereby acting as a guardrail against financial damage or loss.

Disadvantages of Online Banking

For a novice online banking customer, using electronic systems for the first time may
present challenges that prevent transactions from being processed, which is why some
people prefer face-to-face transactions with a teller.

Online banking doesn't help if you need access to large amounts of cash. While you may be
able to withdraw a certain amount at the automatic teller machine (ATM)—most cards come
with a limit—you will have to visit a branch to get the rest.

Although online banking security is continually improving, such accounts are still
vulnerable when it comes to hacking. Customers are advised to use their own data plans,
rather than public Wi-Fi networks, when using online banking to prevent unauthorized
access.2

Additionally, online banking is dependent on a reliable Internet connection. Connectivity

issues from time to time may make it difficult to determine if banking transactions have
been successfully processed.

What do you need for online banking?

To use online banking, you'll need an Internet connection and a device, such as a computer
or mobile phone. You might also need your bank card, debit card, or account number and
routing number. You'll have to register your account, which will require you to set a
password.

How can you use online banking safely?

To protect your money as well as your personal information, it's important to take advantage
of the various security features your bank offers. Set a strong, unique password, and change
it regularly (once a quarter is a good start). Use a password manager program to help you set
and remember strong passwords.3 Enable two-factor or multi-factor authentication if your
bank offers it. Never give your online banking details to anyone, and avoid online banking if
you're using public WiFi.2 Check your accounts regularly, and report suspected fraud
immediately.

Can you use online banking to pay bills each month?

Yes, you can use online banking to pay your bills on time every month. You can log in to
your online banking account each month to arrange bill payments, or you can set up
automatic payments. Online bill pay is a simple way to automate your bills and ensure you're
never late on a payment. It works especially well for bills with regular, set amounts, such as
a mortgage, insurance, or car payment,

What is a smart card?

A smart card is a physical card that has an embedded integrated chip that acts as a security
token. Smart cards are typically the same size as a driver's license or credit card and can be
made out of metal or plastic. They connect to a reader either by direct physical contact -- also
known as chip and dip -- or through a short-range wireless connectivity standard such as
radio-frequency identification (RFID) or near-field communication.

The chip on a smart card can be either a microcontroller or an embedded memory chip. Smart
cards are designed to be tamper-resistant and use encryption to provide protection for in-
memory information. Cards with microcontroller chips can perform on-card processing
functions and manipulate information in the chip's memory.

Smart cards are used for a variety of applications but are most commonly used as credit cards
and other payment cards. The payment card industry's support of smart cards for the Europay,
Mastercard and Visa (EMV) card standard has driven the distribution of smart cards. Smart
cards capable of short-range wireless connectivity can be used for contactless payment
systems. They can also be used as tokens for multifactor authentication (MFA).

International standards and specifications cover smart card technology. Some of those
standards and specs are industry-specific applications. In the United States, smart card
technology conforms to international standards -- International Organization for
Standardization/International Electrotechnical Commission 7816 and ISO/IEC 14443 --
backed by the Secure Technology Alliance.

The first mass use of smart cards was Télécarte, a telephone card for payment in French pay
phones, launched in 1983. Smart cards are now ubiquitous and have largely
replaced magnetic stripe -- also known as mag stripe -- card technology, which only has a
capacity of 300 bytes of nonrewriteable memory and no processing capability.

provide personal identification, authentication, data storage, and application

processing. Applications include identification, financial, public transit, computer
security, schools, and healthcare. Smart cards may provide strong security
authentication for single sign-on (SSO) within organizations.

 Subrogation is a term describing a legal right held by most insurance carriers to

legally pursue a third party that caused an insurance loss to the insured.
 Generally, in most subrogation cases, an individual’s insurance company pays its
client’s claim for losses directly, then seeks reimbursement from the other party's
insurance company.
 Subrogation is most common in an auto insurance policy but also occurs in
property/casualty and healthcare policy claims.
 Subrogation allows the at-fault party's insurer to reimburse the victim's insurance
company.
  That insurance company will then reimburse the insured, along with any deductibles
paid.

Understanding Subrogation

Subrogation literally refers to the act of one person or party standing in the place of another
person or party. It effectively defines the rights of the insurance company both before and
after it has paid claims made against a policy. Also, it makes easier the process of obtaining
a settlement under an insurance policy.

When an insurance company pursues a third party for damages, it is said to "step into the
shoes of the policyholder," and thus will have the same rights and legal standing as the
policyholder when seeking compensation for losses. If the insured party does not have the
legal standing to sue the third party, the insurer will also be unable to pursue a lawsuit as a
result.

How Subrogation Works

In most cases, an individual’s insurance company pays its client’s claim for losses directly,
then seeks reimbursement from the other party, or their insurance company. In such cases,
the insured receives prompt payment, and then the insurance company may pursue a
subrogation claim against the party at fault for the loss.

Insurance policies may contain language that entitles an insurer, once losses are paid on
claims, to seek recovery of funds from a third party if that third party caused the loss. The
insured does not have the right to file a claim with the insurer to receive the coverage
outlined in the insurance policy or to seek damages from the third party that caused the
losses.

Subrogation in the insurance sector, especially among auto insurance policies, occurs when
the insurance carrier takes on the financial burden of the insured as the result of an injury or
accident payment and seeks repayment from the at-fault party.

Example of Subrogation

One example of subrogation is when an insured driver's car is totaled through the fault of
another driver. The insurance carrier reimburses the covered driver under the terms of the
policy and then pursues legal action against the driver at fault. If the carrier is successful, it
must divide the amount recovered after expenses proportionately with the insured to repay
any deductible paid by the insured.

Subrogation is not only relegated to auto insurers and auto policyholders. Another
possibility of subrogation occurs within the health care sector. If, for example, a health
insurance policyholder is injured in an accident and the insurer pays $20,000 to cover the
medical bills, that same health insurance company is allowed to collect $20,000 from the at-
fault party to reconcile the payment.

Subrogation Process for the Insured

Luckily for policyholders, the subrogation process is very passive for the victim of an
accident from the fault of another party. The subrogation process is meant to protect insured
parties; the insurance companies of the two parties involved work to mediate and legally
come to a conclusion over the payment.

Policyholders are simply covered by their insurance company and can act accordingly. It
benefits the insured in that the at-fault party must make a payment during subrogation to the
insurer, which helps keep the policyholder's insurance rates low.

In the case of an accident, it is still important to stay in communication with the insurance
company. Make sure all accidents are reported to the insurer in a timely manner and let the
insurer know if there should be any settlement or legal action. If a settlement occurs outside
of the normal subrogation process between the two parties in a court of law, it is often
legally impossible for the insurer to pursue subrogation against the at-fault party. This is due
to the fact most settlements include a waiver of subrogation.

Benefits of Subrogation

In insurance, subrogation allows your insurer to recover the costs associated with a claim,
such as medical bills, repairs costs, and your deductible, from the at-fault party's insurer
(assuming you were not at-fault). This means that both you and your insurer can recoup the
costs of damage or harm caused by somebody else.

It also means improved loss ratios and profits for your insurer.

Waivers of Subrogation

A waiver of subrogation is a contractual provision whereby an insured waives the right of

their insurance carrier to seek redress or seek compensation for losses from a negligent third
party. Typically, insurers charge an additional fee for this special policy endorsement. Many
construction contracts and leases include a waiver of the subrogation clause.

Such provisions prevent one party’s insurance carrier from pursuing a claim against the
other contractual party in an attempt to recover money paid by the insurance company to the
insured or to a third party to resolve a covered claim. In other words, if subrogation is
waived, the insurance company cannot "step into the client's shoes" once a claim has been
settled and sue the other party to recoup their losses. Thus, if subrogation is waived, the
insurer is exposed to greater risk.

Does Subrogation Affect the Insured Victim?

The subrogation process, which is meant to protect insured parties, is very passive for the
insured victim of an accident from the fault of another insured party. The insurance
companies of the two parties involved work to mediate and legally come to a conclusion
over the payment. Policyholders are simply covered by their insurance company and can act
accordingly. It benefits the insured in that the at-fault party must make a payment during
subrogation to the insurer, which helps keep the policyholder's insurance rates low.

What is a Waiver of Subrogation?

A waiver of subrogation is a contractual provision whereby an insured party waives the right
of their insurance carrier to seek redress or seek compensation for losses from a negligent
third party.

Typically, insurers charge an additional fee for this special policy endorsement. Many
construction contracts and leases include a waiver of the subrogation clause. This prevents
the insurance company from "stepping into the client's shoes" once a claim has been settled
and suing the other party to recoup their losses. Thus, if subrogation is waived, the insurer is
exposed to greater risk.

What Is the Broad Legal Definition of Subrogation?

Subrogation, in the legal context, refers to when one party takes on the legal rights of
another, especially substituting one creditor for another. Subrogation can also occur when
one party takes over another's right to sue

RBI uses a Credit control monetary policy strategy to ensure that the country’s economic
development is accompanied by stability. It means that banks will not only contain
inflationary trends in the economy but will also stimulate economic growth, resulting in
increased real national income stability in the long run. Because of its functions, including
issuing notes and keeping track of cash reserves, the RBI does not regulate credit because it
would cause social and economic instability in the country.

RBI- The Reserve Bank of India is India’s central bank and regulatory organisation in charge
of overseeing the country’s financial sector. It is owned by the Government of India’s
Ministry of Finance. It is in charge of issuing and distributing the Indian rupee.

Credit Control Policy

Credit control is a monetary policy tool used by the Reserve Bank of India to control the
demand and supply of money, or liquidity, in the economy. The Reserve Bank of India (RBI)
supervises the credit granted by commercial banks.

Credit Control Objectives

The following are the broad aims of India’s credit control policy:

 To maintain an acceptable amount of liquidity in order to achieve a high rate of

economic growth while maximising resource use without causing severe inflationary
pressure.
 To achieve stability in the country’s currency rate and money market.
 To meet financial obligations during a downturn in the economy as well as in regular
times.
 Controlling the business cycle and meeting the needs of the company.
Methods Used By Rbi For Credit Control And Types Of Credit Control
RBI uses two types of credit control methods for money supply in the Indian economy,
Qualitative and Quantitative.

Qualitative Method
By quality, we refer to the purposes for which a bank loan is used. Qualitative approaches
regulate how money is channelled, and credit is extended in the economy. It is a selective
approach of control in that it restricts credit for some sections while expanding credit for
others, referred to as the ‘priority sector,’ depending on the scenario.

The Following Are The Types That Are Used In This Method
Marginal Requirement

Loan current value of security supplied for ban-value of loans authorised is a minimum
criterion. For those commercial activities whose credit flow is to be controlled in the
economy, the marginal requirement is raised.

Credit Rationing
There is a maximum limit to the number of loans and advances that can be made using this
approach, which commercial banks cannot exceed. The Reserve Bank of India establishes a
ceiling for various categories. This type of rationing is utilised when credit flow needs to be
monitored, especially for speculative operations. The Reserve Bank of India can also impose
a minimum “capital: total assets” ratio (the ratio of capital to total assets).

Publicity
The Reserve Bank of India (RBI) uses the media to publicise its opinions on the current
market situation and the directives that commercial banks must follow in order to contain the
turmoil. However, this strategy is not very effective in poor countries because of the high rate
of illiteracy, which makes it difficult for people to understand laws and their repercussions.

Quantitative Method
The control of the overall amount of credit is referred to as quantitative credit control.

Bank Rate
The discount rate is another name for the bank rate. It’s the official lowest rate at which the
country’s central bank is willing to re-discount approved bills of exchange or lend on
recognised securities. Bank Rate is defined as “the standard rate at which it (RBI) is prepared
to acquire or re-discount bills of exchange.

When a commercial bank, for example, has lent or invested all of its available funds and has
little or no cash above the regulatory minimum, it may request funding from the central bank.

Working on the Bank Rate

Changes in bank rates are implemented in order to manage price levels and economic activity
by altering loan demand. Its operation is based on the idea that changes in the bank rate cause
changes in the market interest rate. Consider a country that is experiencing inflationary
pressures. In such circumstances, the central bank will raise the bank rate, resulting in a
higher loan rate. Borrowing will be discouraged as a result of this rise.

Role Of Rbi In Controlling Credit In India

The Reserve Bank of India, as the country’s central bank, takes essential actions to keep
credit under control. The Reserve Bank of India (RBI) uses credit control to implement
monetary policy and keep inflation under control. The RBI’s role in credit control makes it
one of the most important bodies for the development of the Indian economy. Control of
credit can be thought of as money control for a better understanding.

 Credit control is used to control the demand and supply of money. The credit-control
system is utilised by the Reserve Bank of India to ensure the long-term development
of the Indian economy.
  Controlling credit helps the RBI and the government achieve economic growth while
also keeping inflation under control.
 In India, the RBI is the only authority for currency issuance and the custodian of cash
reserves.
 The RBI’s role in credit control in India ensures that the country maintains social and
economic stability.

 Cheque crossing is recognized in the Negotiable Instruments Act of 1881.

 Crossing a cheque means drawing two parallel transverse lines between the lines
on the cheque with or without additional words such as “& CO.” or “Account
Payee” or “Not Negotiable.”
Why Cross a Cheque?

 Minimizing the risk: The crossing of the cheque gives the paying banker
instructions to pay the amount only through the banker and not directly to the
payee or holder presenting the amount at the counter. It is an effective way to
minimize the risk of loss or falsification.
 Paying instructions: Crossing is a way for the paying banker to generally pay the
money to a bank or to a particular bank, as applicable.
 Payment through the bank: Only a banker can secure the payment of a crossed
cheque, which makes it easy for the holder to present it with a quarter of the
respectability and credit that is known. By using a crossed cheque, you can ensure
that the specified amount cannot be cashed but can only be credited to the bank
account of the payee.
 The receiver of the amount: As only a banker secures the payment of a crossed
cheque, the money received can easily be traced for whose use.
 Negotiability: Merely a cheque crossing does not affect its negotiability.
Who is authorized to Cross a Cheque?
In accordance with the Sec. 125 of the Negotiable Instruments Act, the following persons are
authorized to cross the cheque, apart from the drawer:

The Holder

 The holder of a cheque is authorized to cross a cheque, either in general or in

particular if the cheque is not crossed.
 He is also entitled to cross a cheque, especially if the same is generally crossed.
He can also add the words “non- negotiable” to crossed cheques in general and in
particular.
The Banker
  The banker in whose favour a cheque is crossed in particular can also cross it in
favour of another banker or his agent for collection purposes. Such a crossing is
called Special Double-crossing.
Different Types Of Crossing of Cheque
A crossing of cheques is basically of 2 types:

 General Crossing
 Special Crossing of cheques.
General Crossing
Section 123 of the Negotiable Instruments Act deals with the general crossing of cheque, In
the following cases, a cheque is generally considered to be crossed:

 If two parallel transverse lines are marked across the cheque face.
 If the cheque has an abbreviation “& C” between the two parallel transverse lines.
 If the cheque is written between the two parallel lines, the words “Not
Negotiable”.
 When the cheque comes with the words “A / C. Payee” between the two parallel
transverse lines.
Implications of General Crossing

 The effect of the general crossing is that any other banker must submit such a
cheque to the paying banker.
 Payment can only be made by bank account and should not be made at the bank’s
payment counter.
 The banker then credits the cheque amount to either the owner of the cheque or the
payee ‘s account.

Special Crossing
According to section 124 of the Negotiable instruments Act,

 For a cheque to be deemed to have been crossed, the banker’s name had to be
added across the face of the cheque.
 In case of a special crossing, a cheque must not be crossed by drawing two parallel
lines.
Section 124 of The Negotiable Instruments Act, 1881 defines Special Crossing as: “Where
a cheque bears across its face an addition of the name of a banker, either with or without the
words “not negotiable”, that in addition shall be deemed a crossing, and the cheque shall be
deemed to be crossed specially and to be crossed to that banker.”

 Also known as Restricted Crossing.

 Two transverse lines must not necessarily be drawn.
  The banker’s name is added across the face of the cheque.
 The banker’s name may or may not carry the abbreviated word’ & Co.’
 Payment can only be made through the bank of the crossing. The banker
mentioned at the crossing can appoint another banker to collect such cheques as
his agent. Therefore, it is safer than ‘generally’ crossed cheques.
 Specially Crossed Cheques are not convertible into General Crossing.
Implications of Special Crossing – The bank pays the banker with his name between the
crossing lines.

Double Crossing
Section 127 of The Negotiable Instruments Act, 1881
“Where a cheque is crossed specially to more than one banker except when crossed to an
agent for the purpose of collection, the banker on whom it is drawn shall refuse payment
thereof.”
 A double-crossed cheque shall be paid by the banker if the second banker acts only as
of the agent of the first collecting banker and this is clearly stated on the cheque. i.e.,
Crossing must specify that the banker to whom it was particularly crossed again acts
as the first banker’s agent for the purpose of collecting the cheque.
Why Double Crossing a Cheque?
 In the case that the banker to whom a cheque is crossed, has no branch at the place of
the paying banker,
 Or if he feels the need otherwise, he can cross the cheque to another
banker( specifying clearly).
Non-Negotiable Crossing
 Although the non- negotiable crossing does not result in the cheque becoming non-
transferable, it still loses much of the negotiability of the cheques.
 This prevents anyone other than the cheque transferor from holding a better title than
the one he has.
 However, if such a cheque is transferred for consideration and if such a transfer does
not lead to a defect in the transferor ‘s title, the validity of such a non- negotiable
crossing is still not removed from the cheque.
Section 130 of the Negotiable Instrument Act which deals with Non-Negotiable crossing
states that “a person taking a cheque crossed generally or especially, bearing in either case
the words ‘not negotiable’ shall not have and shall not be capable of giving a better title to
the cheque than that which person from whom he took it had.”
A/C Payee Crossing
In order to ensure that a cheque will not be able to be encashed by anyone but the rightful
owner of the cheque, the words “account payee” are often added to the crossing ensuring that
the bank receiving such a cheque is to collect the amount only for the purposes of the payee’s
account.
The Advantages of A/C Payee Crossing
 The same does not lead to a reduction in the cheque ‘s negotiability or transferability.
The Court held that this was also the case in various matters like National Bank v.
Lilke and also in the case of A.Z. Underwood Ltd. v. Bank of Liverpool & Martins
Ltd.
 Checking with an account payee crossing does not affect the paying banker in any
way since it only has to ensure that even if the cheque cannot be collected by the
payee himself, the proceeds of the payee are credited to the account of the payee.
Usage of A/C Payee: A Custom
Although the words ‘ account payee’ is not mentioned in the Negotiable Instrument Act, they
are still considered to be part of the law because of their widespread practice and use.
Non-Negotiable A/C Payee Crossing
It has often been observed that both non- negotiable crossing and crossing of accounts payee
help to ensure that cheques are extremely secure. Sometimes, a type of crossing is referred to
as a’ non- negotiable account payee crossing.’
Advantages of Non-Negotiable Account Payee Crossing for the Payee:
 The non- negotiable element of the crossing makes the cheque non- negotiable and
therefore removes the more insecure element of the cheque’s negotiability;
 The crossing of the’ account payee’ element serves as a direction for the payee banker
to collect the cheque from the payee only, serving as a warning of the banker’s
responsibility if he does not do the same.
The Implication of Non-Negotiable Account Payee Crossing– Payment will be credited to
the payee account named in the cheque.
Paying Banker Accountability
Paying banker is also accountable to:
1. The true owner of the cheque;
2. The drawer of such a cheque.
Reasons for such Accountability
 If the paying banker pays for a cross-cheque that does not comply with the wishes of
the drawer that is transmitted through the cheque, Then the banker in question shall be
held liable for any loss suffered by him as a result of such payment to the true owner
of the crossed cheque.
 Similarly, if the paying banker fails to make the payment in accordance with the
provisions of Sec. 126 of the Negotiable Instrument Act, the law considers it to be a
payment not made in accordance with the instructions of the drawer. This law
prevents such a banker from debiting the check amount on his customer’s account, as
such payment is considered to have been made to the wrong person.
Duties of a paying banker as to crossed cheques
 1. For general Crossing- Sec. 126 of the Negotiable Instruments Act states that crossed
cheques are usually only paid to a banker.
2. For Special Crossing- A cheque crossed in particular should only be paid to the
banker to whom it is crossed or who is a collection agent.
3. For Second Special Crossing- Sec. 127 of the Negotiable Instruments Act, 1881,
allows the banker who would act as the agent of the first banker to collect a second
special crossing. In the second special crossing, it is, therefore, necessary to specify
that the banker in whose favour he is made is the collection agent on behalf of the first
banker.
4. Care and Attention- A banker must not pay a cheque by ignoring the crossing since
it is not legally justified to pay the payee in cash over the counter.
Duties of a Collecting Banker
1. Drafts Collection: The collecting banker’s duty is to collect and place the proceeds of
both cheques and drafts for his customer’s account, since 85-A of the Negotiable
Instruments Act, 1881, defined drafts as “an order to pay money, drawn from one
bank office to another bank office”.
2. Checking Account Holder bona-fides: Establish the Bona- fides of the Account
Holder: the banker must ask to determine the Bona- fides of the person who wishes to
become a customer. If the banker fails to do so or fails to make a proper introduction
or a reliable reference from the proposed customer, he will commit a breach of duty in
accordance with section 131 of the Negotiable Instruments Act, 1881.
3. Crossings Examination: The collecting banker must carefully examine all the
crossings and cheques he receives for collection. If the customer gives him a cheque
crossed to any banker, in particular, he should not accept it for collection. Likewise, a
cheque crossed “Account Payee Only” should only be collected for the payee named
in the cheque and nobody else.
4. Indorsements Examination: While paying, the paying banker usually relies on the
discharge of the collecting banker. It is, therefore, a very important duty of the
collecting banker to examine all approvals and other material parts of all cheques and
drafts before submitting them for collection and discharge on the instruments.
5. Dishonour Notice: If a cheque is dishonoured upon presentation, the collecting
banker is responsible for informing his client accordingly. In addition, the banker has
the right to debit a dishonoured cheque to the account of his customer if he has
already credited the cheque.
In accordance with Sec. 126 of the Negotiable Instrument Act, the paying banker is obliged to
make the payment in accordance with the terms of the crossing on a crossed cheque. This was
also laid down in Sec. 126 of the Negotiable Instrument Act, according to which:
“Where a cheque is crossed generally, the banker on whom it is drawn shall not pay it
otherwise than to a banker and where a cheque is crossed specially, the banker on whom it is
drawn shall not pay it otherwise than to the banker to whom it is crossed or his agent for
collection.”
 Therefore, only a banker is allowed to receive a crossed cheque.
 The paying banker is not authorized to send the proceeds of a crossed cheque to the
payer or the cheque holder.
 Any failure by the paying banker to pay a crossed cheque shall be punishable by
liability as defined in Sec. 129 of the Negotiable Instrument Act.