INSURANCE LAW IN

INDIA.

What is insurance?
Part of: Financial System
Protects: Economic Value of Assets

Classification of Insurance
Broadly Insurance Contracts are Classified in to two (2)
categories:
1.Life Insurance
2.Non-life Insurance
3.
Life contracts are not indemnity
contracts
4.
Non life contracts are indemnity
contracts indemnify actual loss. Insurer enjoys
indemnifier privileges
such as subrogation
& contribution.

Types of Insurance
Under Category 1, Life Insurance we may include:
Personal Life insurance - [Not a contract of Indemnity]
* Employees State Insurance
*[Contracts of
indemnity
* Group Health Insurance
indemnify actual loss.]
* Corporate Medi-claim Insurance
Under Category, Non-life Insurance we may include:
* Fire insurance
* Marine, Road, Rail and Air Cargo insurance
* Motor vehicles insurance
* Miscellaneous insurance such as
Public Liability Insurance
Professional Errors and Omissions insurance
Crop Insurance etc..
Re-insurance - Insurer for insurance company

Role Players in Insurance Markets

1.
Agents: Trained marketing representatives of an insurance
company.
2.
Brokers: Sell the products of a number of companies.
3.
Corporate Agents: Banks/Market brokers.
4.
Intermediaries: Solicit business from prospective clients
e.g. Banks/Firms/Company brokers.
5. Underwriters: Decide the acceptance of a proposal and
fixes the price.
6. Actuaries: Statistical analysts help in preparing
standard price tables for products.
7. Third Party Administrators: Promote clientele net
works/approve the cashless limits for health care policy
holds.
8. Surveyors: Assess and certify the loss of a claim in
non-life insurance.

Special Features of Insurance Contracts.

All Contracts of Insurance are
- Contracts (1) Uberrimae fidei.
Contracts of Insurance are
- Contracts of (2) Indemnity
except in case of Life Insurance, Accident and
Sickness Insurance.
Contracts of Insurance are (3) Contingent Contracts
partakes the nature of speculation or gamble,
but should be distinguished from wagering
agreements.
Contract of Insurance has its base in a scientific
and actuarial evaluation of Risk and Premium.
Insurable Interest subsists in various Insurance
Contracts.

Terms Peculiar to Insurance Contracts.

Proposer is called the Insured
Acceptor is called the Insurer
Consideration for the Insurer is Premium sum
Consideration for the Insured Indemnification
in the event of loss suffered.
Subject Matter of the Contract is existence of

Insurable
Interest.
Other important concepts related to Insurance:
*Nomination
*Assignment
*Subrogation
*Causa proxima
*Double
Insurance
*Constructive Total Loss
*Abandonment.

Essentials Principles of
Insurance Contract
1. Utmost Good Faith (Uberrimae
fidei)

2. Indemnity
3. Insurable interest
4. Cause Proxima
5. Risk: (Sharing by Average Clause)
6. Average Clause: (Sharing Risk)
7. Mitigation of loss
8. Subrogation
9. Contribution (Co-insurers)

1. Contracts Uberrimae fidei - means

Contract based on utmost good faith

requiring full disclosure of all material
facts
Each party to an insurance contract
should disclose all material facts relating
to the proposed contract, fully and
correctly, provided such facts are
known to him.
What a material fact is a question fact in
each case.
It may be defined to mean

Contracts Uberrimae fidei - 2

Obligation to disclose all material facts is cast

upon both the parties to an Insurance
Contract.
However, the obligation of utmost good faith
on the part of the Proposer (i.e. the Insured) is,
generally included in the Contract of
Insurance
as one of the specific conditions.
The logic behind such requirement is that:
a) The proposer is on a vantage ground, being in
possession of the information of all material
facts relating to the subject matter of the
Insurance Contract; whereas the Insurer has no
access to such information.

Contracts Uberrimae fidei - 3

b) The Insurance Contract shifts

risk from one
person to another. Therefore, to
enable the
Insurer to judge:
i) the extent of risk he is
contemplated to
undertake;
ii) whether he should accept the
risk; and
iii) the amount of premium he
should charge

Contracts Uberrimae fidei - 4

The duty of the Proposer to observe

utmost
good faith continues till the
conclusion of the
Contract of Insurance.
It extends to all facts which he
considers to be
material, and, to those facts which a
reasonable man would consider
as material.

Contracts Uberrimae fidei - 5

Effects of Non-disclosure of Material Facts:
When the Proposer of an Insurance Contract does
not observe utmost good faith
The contract becomes voidable at the option of
Insurer.
It is immaterial whether the non-disclosure is
intentional and fraudulent or otherwise.
The plea that the insured did not disclose a fact
considering it to be immaterial rather than a
material fact, can not be put up as a defence by
an Insured - in a suit by the Insurer, praying for
rescission of the Insurance Contract.
Thus, failure to disclose all material facts with
utmost
frankness, entitles the Insurer to avoid the Contract.

2. Contracts of Indemnity
An Insurance Contract is a Contract whereby
A person, called Insurer, undertakes to indemnify
another person called the Insured, in case of loss
on the happening of a specified uncertain event,
in consideration of a sum of money called
Premium.

Illustration: A gets his house insured with an

insurance company B, against fire for one year and
pays the premium. The liability of B arises only if
As house catches fire with in the year and does
not arise if the house does not catch fire during
the year. The liability to indemnify the Insured by
the Insurer is contingent upon the house catching
fire in that agreed period.

Indemnity-2

(Exception to:

Rule of Stranger to Contract)

A contract of insurance is a contract of 'indemnity'.

It means: The insured - in case of loss against which the
policy has been issued - shall be paid the actual amount
of loss not exceeding the amount of the policy.

IOW: He/She shall be fully indemnified.

The object of every contract of insurance is to place the
insured in the same financial position, as nearly as
possible, after the loss, as if the loss has not occurred,
at all.
This Principle is applicable to - all types of insurance,

Exception life, personal accident, and sickness

insurance.

When A Contract of Insurance is

- Not A contract of Indemnity?

If a fixed amount is paid

- by
the insurer to the insured
` - on the
happening of the event,
- irrespective of the
fact, whether
- the insured suffered a
loss or not.
Example: In life insurance, the
insurer is

3. Insurable Interest

A person has a right to get a particular subjectmatter insured, only if he/she has an insurable
interest in it.
The terms Insurable Interest implies that
- the Insurer is situated in a legally recognised
relationship with the thing insured;
and - the relationship with the thing insured is such
that he will suffer a pecuniary loss on its
destruction.
IOW, - the insured will benefit financially from

the existence of the subject-matter;

- he will suffer financial loss from the
non-existence of the subject-matter.

Insurable Interest - 2

Thus Insurable Interest implies:

1.A legally recognised relationship between the subjectmatter insured and the Insurer.
2.The Insurer has a pecuniary or financial interest in the
subject matter. He will have
financial benefits, if the subject-matter
remains in existence
and will have financial loss, if the subject-matter
is destroyed.
3.The Insurable interest, however, must not be
- a mere expectation or anxiety or sentimental
interest etc., It must be real and actual.
4.Insurable interest need not be present at the time of
settlement of claim of a Nominee in life insuranc
Example: 1. A person has insurable interest in his life;
2. A transporter has insurable interest in his
vehicles;
3. A house owner has insurable interest in
his house

4. Cause Proxima
The rule of 'causa proxima' means:
The cause of the loss must be
- proximate; or
- immediate and
not remote.
If the proximate cause of the loss is a peril
insured against, the insured can recover.
When a loss has been brought about by two or more
causes, the real or the nearest cause shall be the
causa proxima, although the result could not have
happened without the remote cause.
But, if the loss is brought about by any cause
attributable to the misconduct of the insured, the
insurer is not liable.

5. Risk
(Sharing by Average Clause)

In a contract of insurance
- the insurer undertakes
- to protect
the insured
- from a specified loss and
- the insurer receives a
premium
- for
running the risk of such loss.
Therefore, it is essential that
- Risk must fasten to the
Policy.

6. Average Clause
(Sharing the Risk)
Where there is an underinsurance - the condition
of Average Clause applies.

Underinsurance occurs when Sum Insured is less than

Current Value of the asset insured.

This insurance term is used when calculating a payout

against a claim where the Policy undervalues - the sum
insured.

In the event of partial loss, the amount paid against a claim will
be in the same proportion as the value of
the
underinsurance.
For example: if stock in a godown worth Rs.10 lakhs but
insured for Rs.5 lakhs is totally destroyed, the insurers will only
pay Rs. 5,00,000/-. Thus, they make the insured to share the
risk for his act of underinsurance.

 Sum Insured is the maximum amount that

can
be paid out and is only paid out in cases of
total destruction.
In most of the cases, partial destruction
occurs and claims are made accordingly. Where
partial destruction occurs, Payout is pro
rata in line with the underinsurance.
This is because, insurance
companies calculate and collect the premium
on their risk of losing the full Sum Insured in
case of total destruction of the subject matter
covered by Insurance Policy.

 The formula is
Payout =

Claim

Sum Insured

Current Value

Where
Payout is the amount paid out by the policy;
Claim is the amount of loss claimed against the policy;
Sum Insured is the maximum amount to be paid
out by the policy, and
Current Value is the value the policy should be insured
for.
Underinsurance occurs when Sum Insured is less
than Current Value

7. Mitigation of loss
To mitigate the loss means to minimise loss.
In the event of some mishap to the insured
property , the insured must
- take all necessary
steps
- to
mitigate or minimise the losses,
- just as any prudent person would do
- in those circumstances of loss
- attributable to his
negligence.
Though the insured is bound to do his best for his
insurer - he is not bound to do so at the risk of his

life.

8. Subrogation
The term subrogation literally means substitution.
- substitution of the insurer in place of the insured
- in respect of the
latters rights and remedies.
As per the principle of subrogation
- the insurer steps into the shoes of the
insured
- becomes entitled to all the
rights of the insured
- regarding the subject matter of insurance
- after the claim of the insured has been fully
and finally settled.
The doctrine of subrogation is a corollary to the
principle of indemnity and applies only to fire and
marine insurances.

9. Contribution.
When there are two or more insurances on one risk
the Principle of Contribution comes into play.

The aim of contribution is

- to distribute the actual amount of loss
- among the different insurers
- who are liable for the same risk
- under different
policies
- in respect of the same subject matter.
Any one insurer may pay to the insured
- the full amount of the loss - covered by the
policy and
- become entitled to contribution from his
co-insurers
in proportion to the amount which each has
undertaken to pay
- in case of the loss of the same subject
matter.

Principle of Contribution - 2
In other words, the right of contribution arises
when: There are different policies which relate to
the same subject matter.
The policies cover the same peril which
caused the loss.
All the policies are in force at the time of the
loss.
One of the insurers has paid to the insured
more than his share of the loss.

In case of Life Insurance, double claims are

allowed.

10. Principle of Right to Salvage

Salvage means the portion of goods or property

that has been saved or remains after some type of
casualty, such as a fire.
The term salvage is defined more specifically
depending on the industry referring to it.
In business, salvage is any property that is no
longer useful but has scrap value. An example of
business salvage is obsolete equipment.
In insurance, salvage is the portion of property
that the insurance company takes after paying the
claim for the loss.
The insurance company may deduct the salvage
value from the amount of the claim paid and leave
the property with the insured.

After Liberalisation of
Indian Economy

Four public sector General

Insurance companies have
become autonomous
Doors have been opened to
Private players both in Life and
General Insurance Business
Presently around 25 companies
each in life & non-life Insurance
are transacting the business

MAJOR TURN IN THE

INDUSTRY

In April, 1993
Govt. has appointed a High Power
Committee
headed by Dr. R. N. Malhotra
Former Governor of R.B.I.
to examine the structure
of the insurance
industry and

Recommendations
Dr. R. N. Malhotra has submitted
his report
on 7th January, 1994. Its
recommendations,
inter alia, included:
Establishment of a strong and
effective Insurance Regulatory
Authority
in the form of a statutory
autonomous board
on the lines of Securities and

I.R.D.A.
Consequently, Insurance Regulatory and Development
Authority Act, 1999 was enacted
An Act to provide for the establishment of an authority
- to
protect the interests of holders of insurance
policies
- to regulate, promote and ensure orderly growth
of the insurance industry and
- for matters connected therewith or incidental
thereto; and further
- to amend the Insurance Act, 1938 ,
the Life
Insurance Corporation Act, 1956 and General
Insurance Business Nationalisation Act, 1972.

Contingent Contract

The liability of the Insurer, in a contract of

Insurance, is
- dependent upon (contingent upon)
- the happening of an uncertain event.
Thus an Insurance Contract resembles a
Wagering
Agreement, because a Wagering
Agreement is a
promise to pay money or moneys worth
upon
determination or ascertainment of an
uncertain event.

Insurance Contract vs. Wagering Agreement

A contract of insurance, though contingent in
character, cannot be termed wager because it
differs from wagering agreements in many ways.
1. In a contract of Insurance, the Insured has
insurable interest in the subject-matter insured .
Whereas in a wagering agreement, no party has
any interest in the agreement except the interest
to be paid or received under it.
Insurable interest implies the pecuniary or financial
interest in the existence of the subject-matter
insured.

Insurance Contract vs. Wagering Agreement - 2

2. A contract of insurance is a
contract of indemnity
(except in case of life, accident and
sickness) and
as such the insured is entitled to
receive only the
actual amount of loss (not exceeding
the amount
for which it has been insured)
in case of any loss from the risk
insured.

Insurance Contract vs. Wagering Agreement - 3

3. The object of a contract of insurance

is Protection of
insured against loss occurring
on account of a specified event; and
Is beneficial to the society.
The object of a wagering agreement
is to make speculative gains; and
it ruins the society.

Insurance Contract vs. Wagering

Agreement - 4
4. A contract of insurance is a contract
of utmost good faith;

Whereas a
wagering agreement is not so.
5. A contract of Insurance has its basis
in a scientific and actuarial evaluation
of risk and premium;

Nomination.

Nomination implies:
Specifying the name of a person
To whom the insured money shall be
payable
In the event of the death of the
Insured
In case of a Life Insurance.
Note: Nomination is a concept relevant
to Life
Insurance Policies.

Such Nomination may take place

Either at the time of effecting the

Assignment.
Assignment implies
The process, whereby
the rights and liabilities of the Insured
under a policy
are transferred to another person.
It takes effect when a notice to the effect is
sent to the Insurer.
The assignment is endorsed
- either on the
Insurance policy
- or on a separate instrument, prepared for this
purpose.

Assignment - 2.

If the assignment is to be legally

valid, it
should take place
before maturity of the policy; and
for a consideration, or
in those exceptional cases where a
contract without consideration is valid.

The assignee of a policy gets it

subject to the rights and liabilities of
his assignor.

Nomination vs. Assignment.

1. Nomination is a feature peculiar to life
polices.
Whereas
assignment of policy can take place in every
kind of insurance policy.

2.

The Nominee of a life policy has a right to

receive insured money only in the event of
death of the Insured.
Whereas in case of Assignment, the Assignee
has a right to receive insured money even
during the life of the Insured.

Nomination vs. Assignment - 2

3. The Nomination of a life policy can be revoked
at any time before maturity of the policy;
Whereas Assignment is irrevocable. Further,
Assignment of a life policy results in
automatic
cancellation of Nomination.
4. The object of Nomination is to entitle the
Nominee to recover the insured money in the
event of death of the Insured;
Whereas the object of Assignment is to
transfer the rights and liabilities of a policy
holder under it.

Nomination vs. Assignment - 3

5. Nomination does not result in vesting the
property in the policy in the Nominee;
Whereas Assignment results in vesting the
property in the policy in the Assignee.
6. Nomination does not require any consideration;
whereas it is essential in case of Assignment.
7. Nomination can be made by an endorsement
on the policy only;
whereas Assignment can be made
either on the policy
or by a
separate deed.

Some Tips.
No-fault Liability otherwise known as Third
Party Liability Insurance. It is peculiar to
Motor Vehicles Insurance. The Principle of
Causa of Proxima shall not affect Liability
arising to third party; nor the Doctrine of
Privity of Contract. It is an exception to the
rule of stranger to contract.
Restrictions on Transfer of Policy: Change
in ownership - ends the liability. Exception:
Motor Insurance.
In case of Life Insurance, double claims
are allowed.

THANK YOU
Prof. Dr. KSN Sarma
Icfai Business School (IBS)
Hyderabad