UNIT – I
1.0 Introduction
1.1 General Principles
1.1.1 Essentials of Insurance Contract
1.1.2 Specific Principles of Insurance Contract
1.1.2.a Uberrima fides or Utmost Good Faith
1.1.2.b Insurable Interest
1.1.2.c Indemnity
1.1.2.d Proximate Cause or Causa Proxima
1.1.2.e Subrogation
1.1.3 Miscellaneous Principles
1.1.3.a Contribution
1.1.3.b Double Insurance
1.1.3.c Re-insurance
1.1.3.d Assignment
1.2 The Insurance Act, 1938
1.3 The Insurance Regulatory and Development Act, 1999
1.4 Important Reference Books
1.0 Introduction
The insurance idea is an old institution of transactional trade. Even from olden days merchants who made great adventures gave money by way of consideration, to other person who made assurance, against loss of their goods, merchandise ships aid things adventured. The rates of money consideration were mutually agreed upon. Such an arrangement enabled other merchants more willingly and more freely to embark upon further trading adventures. Insurance in the modern form originated in the Mediterranean during 13/14th century. The use of insurance appeared in the account of North Italina Merchant Banks who then dominated the international trade in Europe and that time. Marine insurance is the oldest form of insurance followed by life insurance and fire insurance.
The term ‘insurance’ may be defined as a co-operative mechanism to spread the loss caused by a particular risk over a number of persons who are exposed to it and who agree to ensure themselves against that risk.
Insurance is a ‘contract’ wherein one party (the insurer) agrees to pay the other party (the insured) or his beneficiary, a certain sum upon a given contingency (the insured risk) against which insurance is required.
Some authors defined insurance as a social apparatus to accumulate funds to meet the uncertain losses arising through a certain hazard to a person insured for such hazard.
According to J.B. Maclean, “Insurance is a method of spreading over a large number of persons a possible financial loss too serious to be conveniently borne by an individual.” (J.B. Maclean; Life Insurance P.1)
According to Riegel and Miller, “Thus it serve the social purpose; it is a social device whereby uncertain risks of individual may be combined in a group and thus made more certain; small periodic contribution by the individual providing a fund out of wich those who suffer losses may be reimbursed.” (Riegel and Miller; Principles of Insurance and Practice; P-10)
The primary function of insurance is to act as a risk transfer mechanism. Under this function of insurance, an individual can exchange his uncertainly for certainly. In return for a definite loss, which is the premium, he is relieved from the uncertainly of a potentially much larger loss. The risk themselves are not removed, but the financial consequences of some are known with greater certainly and he can budget accordingly.
Every subject or discipline has certain generally accepted and a systematically laid down standards or principles to achieve the objectives of insurance. Insurance is not exception to this general rule. In insurance, there is a body of doctrine commonly associated with the theory and procedures of insurances serving as an explanation of current practices and as a guide for all stakeholders making choice among procedures where alternatives exit. These principles may be defined as the rules of action or conduct that are universally adopted by the different stakeholders involved in the insurance business. These principles may be classified into following categories:
· Essentials of Insurance Contract
· Specific Principles of Insurance Contract
· Miscellaneous Principles of Insurance Contract
History of Insurance Legislation in India
Upto the end of nineteenth century, the insurance was in its incept / ional stage in India. Therefore, no legislation was required till that time. Usually the Indian Companies Act, 1883 was applicable in business concern; banking and insurance companies New Indian Insurance Companies and Provident Societies Started at the time of national movement; but most of them were financially unsound. It was asserted that the Indian Companies Act, 1883 was inadequate for the purpose. Therefore, two acts were passed in 1912, namely, Provident Insurance Societies Act V of 1912 and the Indian Life Insurance Companies Act, 1912. These two acts were in pursuit of the English Insurance Companies Act, 1909.
These two enactments were governing only life insurance. There was no control on general insurance since such businesses were not so developed. Besides, there were the following defects of these acts:
1 The control and enquiry was slight. Non-compliance of rules and regulations was not strictly penalised.
2 The foreign companies were to submit report of their total business both in Indian and outside India. But separate particulars regarding business done in India were not demanded and the absence of these made it impossible to get any idea of the cost of procuring business in India for foreign companies and comparing them with similar data of the Indian companies.
3 The government actuary was not vested with the power to order investigation into the conduct of a company even when it appeared that the company was insolvent under the power of exemption.
4 Any one can start life insurance business only with the sum of Rs. 25000/-. It was too law to prevent the mushroom growth of companies. Foreign insurer was not bound to deposit a certain sum of life policy issued in India.
1.1 General Principles
1.1.1 Essentials of Insurance contract
The valid insurance contract, like any other contracts, according to section 10 of the Indian contract act, 1872 must based upon the following principles:
(i) Offer and acceptance
(ii) Legal consideration
(iii) Competent to make contract
(iv) Free consent
(v) Legal object
(i) Offer and acceptance
The intimation of the proposer’s intention to buy insurance is the ‘offer’, while the insurer’s readiness to undertake the risk stated, is the ‘acceptance’. The ‘offer’ in case of insurance is called proposal. If other party accepts this proposal, it is transformed into an agreement. The offer for entering into contract may generally come from the insured. The insurer may also propose to make the contract. Whether the offer is from the side of insurer or from the side of insured the main fact is acceptance. Any act that precedes it is an offer or a counter-offer. All that precedes the offer or counter – offer is an invitation to offer. In insurance, the publication of prospectus, the convassing of others are invitations to offer. When the prospect (the potential policy - holder) proposes to enter the contract it is an offer and if there is any alteration in the offer that would be a counter-offer. If this alteration or change (counter-offer) is accepted by the proposer, it would be an acceptance. At the moment, the communication of acceptance is given to other party; it would be a valid acceptance.
(ii) Legal consideration
In insurance contract, the premium is the consideration on the part of the insured. Certainly, the insurer who promises to pay a fixed sum at a given contingency must have some return for his promise. The fact is the that without payment of premium insurance contract cannot be initiated.
(iii) Competent to make contract
The parties to the contract should be competent to contract. Every person is competent to contract (a) who is of the age of majority according to the law; (b) who is of sound mind; (c) who is not disqualified from contracting by any law to which he is subject.
As far as the insurance contracts are concerned, only those insurers grant insurance policies who have been issued licenses by insurance regulatory and development authority (IRDA). Similarly, minor, people of unsound mind and criminal background cannot take on insurance. This applies to bankrupt persons. In case of minor, the natural guardians enter into a valid contract on behalf of the minor, till the minor attains 18 years of age.
(iv) Free consent
When both the parties have agreed to a contract on the terms and conditions of the agreement in the same sense and spirit, they are said to have a free consent. The consent will be free when it is not caused by; (a) coercion; (b) undue influence; (c) fraud; (d) misrepresentation ; or mistake. When there is not free consent except fraud the contract become voidable at the option of the party whose consent was so caused. In case of fraud the contract would be void.
(v) Legal object
The object of the agreement should be lawful. An object that is; (i) not forbidden by law; (ii) is not immoral; or (iii) opposed to public policy; or (iv) which does not defeat the provisions of any law, is lawful. In proposal from the object of insurance is asked which should be legal and the object should not be concealed. If the object of an insurance, like the consideration is found to be unlawful, the policy is void. Moreover, the object of the contract should not be based on gambling nature.
1.1.2 Specific Principles of Insurance Contract
Besides, the essentials of a valid insurance contract discussed in the previous section, there are certain specific principles, which are of paramount significance to the contract of both the life and non-life insurance. The specific principles of the contract of insurance consist of the following:
· Uberrima fides or Principle of Utmost Good Faith;
· Insurable Interest;
· Indemnity;
· Proximate Cause;
· Subrogation;
1.1.2.a Principle of Utmost Good Faith or Uberimma Fides
In Marine Insurance Act, 1906, Section 17 which provides, “A contract of Marine Insurance is a contract based upon the utmost good faith, and if utmost good faith is not observed by either party, the contract may be avoided by either party”.
Section 18 (1), despite the title of the statuate, this section is of general application is insurance law. Section 18 (1) provides:
“Subject to the provision of this section, the assured must disclose to the insurer, before the contract is concluded, every material circumstances, which is known to the insured and insured in deemed to know every circumstances which, in the ordinary course of business, ought to be known by him. If the assured fails to make such disclosure, the insurer may avoid the contract.”
The test for determining the materiality of any “circumstances” is laid down by section 18 (2) of the act which provides that, “Every circumstances is material which would influence the judgment of a prudent insurer in fixing the premium or determining whether he will take the risk.”
Characteristics of utmost good faith
1. It is an obligation to the parties to insurance contract to make a full and true disclosure of material fact.
2. The obligation to make full and true disclosure applies to all type of insurance.
3. The duty to disclose continues upto the conclusion of the contract.
4. It covers any material alteration in character of the risk which may take place between personal and acceptance.
5. Concealment of material fact on misrepresentation may affect the validity of the contract.
The principle of utmost good faith must be used in respect of the following –
In Life Insurance – Information relating to age, health and disease, habits, family history, nature of business or profession.
In Fire Insurance – Information relating to structure of assets, nature of goods, condition of godown, activities of the firm etc.
In Marine Insurance – Information relating to size of the ship, nature of cargo, packaging of cargo etc.
It is true that the underwriter can have a pre-survey for fire insurance or medical examination for life or health insurance, carried out, but even then there are certain aspects of the risk which are not apparent at the time of pre-survey or medical examination, for example, the previous loss or medical history and so on. Because of the aforesaid reason the law imposes a greater duty of disclosures on both the parties to an insurance contract than to other commercial contracts. This is called uberimma fides (utmost good faith).
Remedies for breath of utmost good faith – The aggrieved party has the following options:
· To avoid the contract by either
a) Repudiating the contract void ab initio; or
b) Avoiding liability for an individual claim;
· To sue for damages as well, if concealment or fraudulent misrepresentation is involved;
· To waive these rights and allow the contract to carry on unhindered.
The aggrieved party must exercist his option within a reasonable time of discovery of breach or it will be assumed that he has decided to waive his right. Legal consequences – It is worth mentioning that in absence of utmost good faith the contract would be voidable at the option of the person who suffered loss due to non-disclosure. The inadvertent concealment will be treated as fraud and it void – ab initio. However, as and when the voidable contract has been validated by the party not at fault, the contract cannot be avoided by him later on.
In United India Insurance Co. Ltd. v/s M.K.J. Corporation [(1996) 6 SCC 428] observed that “it is the fundamental principle of insurance that utmost good faith must be observed by the contracting parties. It is different than the ordinary contract where the parties are expected to be honest in the dealings but they are not expected to disclose all the defeats about the transaction,” further observed that it is the duty of the insurer and their agents to disclose all material facts within their knowledge since obligation of good faith applies to them equally with the assured.