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Risk and Subject Matter of Insurance
Source: Insurance, Banking & Negotiable Instruments Law Teaching Material
The next principle of insurance is that for a valid contract of insurance the risk must attach. If the subject-matter of insurance ceases to exist (e.g. the goods are burnt) or the insured ship has already arrived safely, at the time the policy is effected, the risk does not attach, and as a consequence, the premium paid can be recovered from the insurers because the consideration for the premium has totally failed. Thus, where the risk is never run, the consideration fails and therefore the premium is returnable. It is a general principle of law of insurance that ‗if the insurers have never been on the risk, they cannot be said to have earned the premium.‘
The risk also does not attach and therefore the premium is returnable where a policy is declared to be void ab-initio on account of some defect, e.g., assured being minor or parties not being adidem. But where a policy is void because there is no ‗insurable interest‘ premium paid cannot be recovered because in that case it amounts to ‗wager‘, except in the case of marine insurance where the assured is not required to have insurable interest at the time of entering into the contract. In addition, the premium cannot be recovered where the insurer on grounds of fraud avoids the policy by the insured.
Art 682/1/ of the commercial code provides that contracts of insurance concluded in respect of goods, which are already lost, damaged, or destroyed, or in respect of goods, which are no longer exposed to a risk, shall be of no effect. The premium paid in respect of such contracts shall be refunded to the insured, as the insurer was not bearing the risks as it would have under normal circumstances, i.e., in cases of valid contracts, provided that the insured, at the time he purchased the policy, was not aware of the loss, or damage or destruction of the object, nor of their safe arrival at the warehouse.