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Negotiable Instrument

INTRODUCTION

Transactions are a very important part of businesses. There are many documents which are required for these transactions. These documents are used for transactions as well as transferring from one person to the other. Thus, these documents in business terms are called the negotiable instrument. Cheques, bill of exchange, bank draft, etc are some of the examples of these instruments.

MEANING:

The negotiable instruments guarantee the payment of an amount done on demand or on a set time with the name of the paper usually on the document. In banking, the banknotes are termed as the promissory notes. Thus, this note is made by the bank and is payable to the bearer of this demand.

Features of Negotiable Instrument

Some of the common features of these negotiable instruments are as follows:

• It is always a written document.
• It is payable to bearer than it is transferred just by delivery. And it is payable to the orderer than it is transferred by delivery and endorsement.
• The person who holds the negotiable document can sue based on this document.
• There is no consideration mentioned in the instrument. It is presumed already that it has been drawn for a valuable consideration.
• It works just like money and can be transferred from one person or the other.
• For debt, it is considered one of the simplest mode.

Types of Negotiable Instrument

As discussed above, there are many types of negotiable instruments in the market. They are as given below:

Commercial bill

This deals in commercial markets. They are drawn either by the seller or the drawer and it is drawn by the drawer of the goods of the buyer in place of the value for the goods delivered.

They are also called trade bills. When these bills are accepted by the commercial banks, they are called commercial bills.

Promissory note

This is considered as a legal document between the borrower and the lender. Through this document, the lender agrees to certain conditions regarding the money which is borrowed.

Whenever someone borrows the money from commercial banks then they have to sign a promissory note. Thus, these notes can also be bought and sold. This only happens in some countries and it is issued by large companies.

Cheque

There are many forms of cheque available as the negotiable instruments in the market. The cheque is also known as the bill of exchange.

It orders the bank to pay a specified amount to a person’s account from a person who has issued the cheque. Blank cheque, order cheque, bearer cheque, etc are the different types of the cheque.

Commercial paper

Commercial paper is also issued in the form of promissory note. It can be sold directly by the issuer to the investors. It can also be transferred to the borrowers through agents.

These instruments can only be issued in multiples of 5 lakhs and thereafter. The maturity period varies from one week until one year.

Treasury bills

Treasury bills are also known as T-bills. It is a short-term instrument for borrowing for the government. For these bills, the tender is issued in the money market and various government departments.

Thus, for this, tenders are invited weekly from brokers and bankers. It provides the government a very cheap way to borrow the money in the times of fluctuating cash and further it also provides the security for the transaction. Furthermore, the RBI which is the banker for government provides these bills at a discount rate.

Bank draft

These are also the bills of exchange. So, in this, the bank’s orders one its branch to repay the money to a person or to his order. For this, the banks charge a nominal fee.

Next Topic

Law of insurance

Meaning: Insurance law is the practice of law surrounding insurance, including insurance policies and claims. Insurance is a contract in which one party (the “insured”) pays money (called a premium) and the other party promises to reimburse the first for certain types of losses (illness, property damage, or death) if they occur.

The Key Elements of an Insurance Contract

Any type of insurance is purchased by contract, where the rights and responsibilities of both the insured and the insurance company are clearly outlined. Here we will examine all of the components in an insurance contract that make it a legally binding document for both parties.

1. Offer and Acceptance

When a prospective insured goes to buy an insurance policy, they must fill out an application provided by the insurance company. If they are shopping online, they will complete a digital application. If they are working with an agent or broker, then he or she may fill this out for the customer.

The application is legally known as an offer, where the insured offers to make premium payments of a certain dollar amount in return for insurance coverage up to specific limits. Acceptance occurs when the insurance company formally issues the policy, or when the agent or broker issues a certificate of temporary coverage.

2. Legal Consideration

This represents the dollar value of the premiums that the insured agrees to pay and the dollar limit of the coverage that the insurer will provide in return. If the insurance company receives a claim that is covered in the policy, then the insurer will pay this claim.

3. Competent Parties

Insurance contracts are only valid if both parties are of sound mind and body, referred to legally as “competent parties.” The insured must be at least the legal age of majority and the insurance company must be licensed in the state in which the insured lives.

4. Free Consent

Both parties in any insurance contract must enter into the contract with free consent, which means it is on their own volition. There cannot be any fraud, misrepresentation, intimidation or coercion involved when the contract is signed. The contract also cannot be signed as a result of an error.

5. Legal Purpose

All insurance contracts are required to obey the laws of the land. They must adhere to all state-specific laws that apply to the contract and cover only legal activities. A business that deals in criminal activity would not be covered according to the tenant of legal purpose. Any agreement that is made outside of those laws is null and void.

6. Insurable Interest

The insured has an insurable interest when they benefit financially from the person or thing being insured. The insured will then experience a financial loss if the item or person being insured either dies or is damaged or lost. Prospective insureds cannot get coverage on something in which they have no insurance interest.

7. Utmost Good Faith

This phrase “utmost good faith” means that both parties in any insurance contract have acted without any type of deception, omission or other form of misrepresentation and that all pertinent facts have been disclosed by both parties.

8. Material Facts

Material facts are the factors that affect the risk that is being taken. They consist of the factors that the insurance company needs to know about in order to decide whether to insure the risk or reject it. If an insured applies for life insurance, then the insurer will need to know all about the insured:’

Age.

Height.

Weight.

Health.

Occupation.

For car insurance, the insurer needs to know:

• The insured’s age.
• Driving record.
• the kind of car that is being insured.

9. Full and True Disclosure

This means that both parties are required to completely disclose all material facts pertinent to the insurance policy. There can be no omissions, misrepresentations or twisting of the facts when filling out the application or providing the policy.

10. Duty of Both the Parties

Both the insured and the insurer have a legal obligation, or duty to disclose all material facts accurately and correctly. The insured does this when they fill out the application, and the insurance company does this by adhering to all of the laws and rules that apply to it.

11. Principle of Indemnity

The principle of indemnity applies to most types of insurance policies. It means that the insurance company will compensate the insured with a cash settlement if a covered loss occurs. The idea is that the insured will be in the same position financially that they were in before the loss occurred.

Conversely, the insured cannot receive greater compensation than the amount of the loss. The insurance company is only required to cover the actual monetary value of the loss and no more.

12. Doctrine of Subrogation

Subrogation allows the insurer to pursue reimbursement from a third party that caused the covered insurance loss. For example, if another driver crashes into the insured’s car and totals it, then the insured’s insurance company will repay the insured for the loss and then pursue reimbursement from the other driver’s insurance company.

13. Warranties

Warranties are all of the respective promises that are laid out in the insurance contract. They delineate the specific conditions that can trigger a claim and also outline the actions that will be taken by the insurance company as a result of the claim.

14. Conditions

Conditions are the elements that determine whether a claim will be paid out. Paying the policy premiums is the most obvious condition that must be met. But many other conditions can also apply to an insurance policy. Most insurance policies have geographic limits for their coverage in addition to the specific circumstances detailing what the insured must do in order to be paid. Failing to meet these conditions relieves the insurer of the burden of paying the claim.

If the insured fails to notify the insurer of a loss or refuses to provide the requested information to the insurance company (such as a medical exam or property inventory) then the insured has breached the contract and will not be reimbursed for the loss.

15. Limitations

Limitations outline the parameters of the insurance coverage being provided. They list the maximum amounts that will be paid for a given type of loss along with any conditions that would allow the insurance company to pay less or require it to pay more (i.e. a life insurance policy may be required to pay out twice the amount of the death benefit if the insured dies in a car crash).

16. Exclusions

Exclusions are exceptions to the conditions under which the insurance company will pay a claim. For example, a death caused by war or natural disaster is usually excluded by most life insurance companies.

17. Proximate Cause

Proximate cause refers to the actual manner in which a loss was sustained. The insurance company needs to know why a loss occurred so that it can determine whether the cause was an insured peril.

For example, if the belongings in an insured’s house were destroyed due to a flood, (the proximate cause) then the homeowner’s insurance company would not pay out for damages unless they were insured for flood loss under the policy, had added a flood rider or bought a separate policy covering floods.

18. Return of Premium

In the event that you overfund or overpay your insurance premiums, then the return of premium clause will guarantee the return of any excess premiums paid, or else credit the excess to the next insurance period.

Conclusion

Insurance contracts are complex legal documents that have been created by attorneys. They are used to establish an agreement between an insured and the insurance company and ensure that both parties act in an honest and fair manner.

We’ve laid out the basics for you here, but insurance contracts are often complicated for the average person to decipher. Consult your financial advisor or insurance agent for more information on insurance contracts and how they can affect you.