N.

BHAGYA LAKSHMI

LAW OF
INSURANCE
UNIT 1
 What is

5
What is the
Insurance?
Purpose?

How is it
Helpful?

Is it a New
What are
Concept?
the types
of
Insurances
?
 CE
AN
U R
IN S PROTECTION
CONFIDENCE

COVERAGE

SAFETY

SECURITY

HELP
Simply.means
Insurance

o is an important tool for risk

management
o .and the mitigation of loss.
o When people suffer a loss or damage to
their property or persons,
o insurance coverage is vital.
o ..is an intricate economic
o and social device for the handling of risks
to life and property
Cont

insurance.
protection or safe guard the person
from various risks..

RiskChance of loss

Risk cannot be eliminated..but loss

can be.
 Definition.

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.
 In financial sense.

.is a social device

..providing financial compensation for the
consequences of adversity
the payment being made from the
accumulated contributions
Of all parties participating in the
arrangement
 In Legal sense

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.
 Need of.....

All assets have some economic value

attached to them.
.......a possibility
these assets may get damaged/destroyed
or become non-operational
due to risks
........like breakdowns, fire, floods,
earthquake etc
 Purpose.....

The primary...... of insurance

.......is to provide economic protection
against losses
that may be incurred due
to a chance of an event happening such as death,
illness, or accident
????

RiskPeril
Hazard

Are one & the same?

Is there any difference?
 What is Risk?
Risk can be defined......

An uncertain event or condition, which if occurs,

would have an undefined or unknown impact on
achievement of objective
...... as uncertainty regarding loss
the inability to work and earn an income due to
disability is a risk
the destruction of a home due to hurricane......
 Cont......

The loss of family income due to

death of a person..
The potential for an automobile
accident is a risk
The chance of someone slipping on
icy driveway is a risk
 Types of risk

Pure Risk
Speculative Risk
Particular Risk
Fundamental Risk
peril

Perilis a cause of loss.

Most of the insurance policies
Will have specific recitals
regarding
The perils insured against and
exclusions.
Perils.....

Exclude
d

Uninsur
ed
Insured Perils

o Those named in the policy as insured

o example fire, sea, water, lightening, storm theft etc.

Excluded Perils
o Those stated in the policy as excluded either as causes of insured
perils
o e.g. riots, earthquake, war etc.
Cont.

Uninsured perils those perils not mentioned in the

policy at all as insured and excluded perils.
Smoke and water may not be excluded nor
mentioned as insured in a fire policy.
It is possible for a water
damageclaimto becoveredunder a
fire policy, if for example, a fireoccurs
and the fire brigade extinguishes it
with water.
Cont

Ahazardis a condition that

increases the possibility of loss.
For ex. Fire is a peril because it
causes losses,
While a fireplace is a hazard
because it increases the
probability of loss from fire.
 Insurance law?

Contract of insuranceis also

concluded ..
Through proposal and its acceptance
Mere mental assent to an offer..
The offerer must indicate the mode
of communicating acceptance
 Cont.

Insurance law is the name.......

......... Given to practices of law surrounding
insurance,
....Including insurance policies and claims.
Insurance regulation that governs ......
The business of insurance is typically
.....Aimed at assuring the solvency of
insurance companies
 ???????

General Assurance Society

Ltd.
Vs.
Chandumull Jain and Anr.
AIR1966 SC 1644
 ??????

The appellant ...... general insurance company

On June 2, 1950 .......the respondents submitted
proposals to the company
...... with a view to insuring houses in Dhullian
for Rs. 51,000 and Rs. 65,000 respectively
against fire
and including loss or damage by cyclone, flood
and/or change of course of river or erosion of
river, landslides and subsidence
 Cont....

....... Dhulian is situated on the banks of the

Ganges
and for several years the river had been
changing its course
and in 1949 a part of the town was washed
away.
The insurance was obviously effected with this
risk in sight.
The period of insurance was to be from June 3,
1950 to June 2, 1951.
 Cont

The Company accepted the proposals ...

..........by two letters on June 3, 1950
and the letters stated that in accordance
with the proposal
......the assured was held covered under
cover notes enclosed with the letters.
At the back of these letters of acceptance,
there was description of the houses
Endorsement....

"Including Cyclone, Flood and/or

loss by change of course of river
diluvium and/or Erosion of River
Landslide and/or subsidence. It is
further noted that there is a
thatched building of residence
within 50 ft. of the above premises."
 Cont....
The said property is hereby held insured
against damage by Fire, subject to the terms of
the Applicant's proposal
and to the usual Conditions of the Society's
policies.
......... expressly stipulated that this protection
Note cannot, under any circumstances be
applicable for a longer period than Thirty Days
and that it is also immediately terminated before
that date
Cont......

o OnJune 7........
o .......the assured sent the premium
by cheque
o As no policy was received by them,
o the assured wrote a letter onJuly 1
asking for the policy or for extension
of the cover notes.
o This was not done.
 Cont....

On July 6, 1950 the Company wrote to the

assured
In accordance with the terms & conditions
.......cancel the risk from 6th July, 1950 as
noted below.
The relative Endorsement is under
preparation and will be forwarded ... in due
course.
The above cover note is cancelled ....... from 6th July, 1950
 Cont....

On July 15, 1950 the assured stated......

........the Company bound because
although there was no erosion by the
river
when the proposals were submitted and
accepted,
the Company was trying to get out of the
contract when the river was eroding the
banks.
Cont....
Further stated that...
as the risk had already "commenced" and "taken place",
there could be no cancellation as there was no time left for the
assured to take precautionary measures by reinsuring.

condition 10
In reply .......the Company referred to of
the Fire policy under which the Company claimed to cancel the
policy at any time
 Condition 10 of the Fire
Policy .......
This insurance may be terminated at any time at
the request of the Insured,
in which case the Society will retain the customary
short period rate for the time the policy has been in
force.
This insurance may also at any time be terminated
at the option of the Society,
on notice that effect being given to the Insured,
in which case the Society shall be liable to repay on
demand a rateable proportion of the premium for the
unexpired terms from the date of the cancellation."
 Cont....

In reply the assured wrote......

onAugust 2......that the condition did not apply
to any risk except that of fire and could not, in
any event, protect the Company after the risk had
commenced.
On13thand15th Augustthe houses were
washed away.
After unsuccessfully demanding payment under
the policies,
the assured filed the present suit before the
Calcutta High Court.
It was dismissed with costs
On appeal....

o .........the claim was decreed to

the extent of Rs. 1,10,000 with
costs, the decree amount to carry
interest at 3% per annum.
o Next......
o ....... Present appeal has been
filed by the Company.
Issues raised.....

Didcondition10applytothefacts?

Ifitdid,howisittobeconstrued?

Wasthecancellationofthepolicyvalidinlaw?
 S.C explained.....

....... held that condition 10 of the policy applied to all the

risks covered by the policy and not the risk from fire only.

Although the policy was not ready, the proposal not

having been declined during the period of the cover note,

the learned Judge held, the policy was bound to issue

and the extent of the protection would thus be according
to the company's usual terms and subject to the
conditions in the policy.
 Cont...
Insuranceofpropertyisnota bet.butawell -
knowncommercialdeal.
Acceptanceoftheproposalreadwiththecovernotes
clothed theassured
witharighttodemandapolicyinrelationtothekind
of insurance
hehadboughtandhecouldonlyclaimtobe covered
against risk
.inthemannerlaiddowninthepolicy.
The cover notes were an integral part of the acceptance
of the proposals and the two had to be read together.
 Interpretation of....

..contractofinsurance
isaspeciesofcommercialtransactions
andthereisa well established
Commercial practice
. to send cover notes even prior to the
completion of a proper proposal
While theproposalisbeing considered or a
policy is in preparation for delivery.
 Cont.

A cover note is a temporary and limited

agreement.
It may be self contained or it may
incorporate by reference to the terms and
conditions of the future policy.
When the cover note incorporates the policy
in this manner
it does not have to recite the terms and
conditions
but merely to refer to a particularly
standard policy
Cont
If the proposal is for a standard policy and the cover note
refers to it
the assured is taken to have accepted the terms of that
policy.
The reference to the policy and its terms and conditions
may be expressed in the proposal or the cover note
even in the letter of acceptance including the cover
note.
The incorporation of the terms and conditions of the policy
may also arise from a combination of references in
two or more documents passing between the parties.
 Cont

Documents like the proposal

cover note and the policy are commercial documents

and

to interpret the commercial habits and practice cannot

altogether be ignored.

During the time the cover note operates

the relations of the parties are governed by its terms

and conditions of the policy bargained for and to be issued.
Cont...
When this happens the terms of the policy are
incipient but after the period of temporary cover
......the relations are governed onlybythe terms
and conditions of the policy unless insurance is
declined in the meantime.
Delay in issuing the policy makes no difference.
The relations even then are governed by the
future policy
if the cover notes give sufficient indication that
it would be so.
Cont

In interpreting documents relating to a contract of

insurance
the duty of the court is to interpret the words in
which the contract is expressed by the parties
because it is not for the court to make a new
contract, however reasonable
if the parties have not made it themselves.
Looking at the proposal, the letter of the acceptance
and the cover notes
it is clear that a contract of insurance under the
standard policy for fire and
extended to cover flood, cyclone etc. had come
into being
Cont...

The four essentials of a contract

of insurance are:-
The definition of the risk
The duration of the risk
The premium
The amount of insurance
 Cont...

Even if no terms are specified

..the terms contained in a policy customarily issued in such
cases, would apply.
There is ample authority for the proposition.

...Where the contract to insure or issue a policy of the fire

insurance does not specify the terms and conditions of the policy,
it is a general rule that the parties will be presumed to have
contemplated a form of policy containing such conditions and
limitations are as usual in such cases...
 Cont

If property is insured against flood

it is not open to the insurance company to send
couriers on motor cycles ahead of the floods to cancel the
policy.
But if it is thought that a particular dam was not quite safe
the insurance company will be entitled to cancel the
policy against flood before the dam has actually started to
crumble or has crumbled.
Cancellation is reasonably possible before the liability
under the policy has commenced or
has become inevitable and it is a question of fact in
each case whether the cancellation is legitimate or
illegitimate.
 Cont

In the present case, it was always clear that the

Ganges would get into the floods in the rainy
season
but it was not clear that it would begin to
erode the bank in such a way that these houses,
which were at a distance of 400/500 ft. from
the bank would inevitably was washed away.
The question thus is whether the cancellation
was done after liability of the assurer under the
policy had commenced or the commenced or the
loss had become inevitable.
 Cont
concerned with two dates in particular and they are 18 th
June, 1950 when inspection officer visited Dhulian and
when the policy was cancelled (July 6).
The houses were 400/500 ft. away when the proposal
was made.
The river remained calm till the second week of June.
It only began to rise in third week of June.
Thus on, when ..I.O. visited the place, there was no
flood and no erosion.
only estimated the possibility of loss and no more
Cont

Even in the third week of June there was no erosion

and it began by the end of June.
In these circumstances,
.it cannot be said that the loss had commenced
or that it had become so certain as to be inevitable
or that the cancellation was done in anticipation
and with knowledge of inevitable loss.
The cancellation was done at a time when no one
could say with any degree of certainty that the
houses were in such danger that the loss had
commenced or became inevitable
 Cont
The assurers were, therefore, within their rights
under condition 10 of the policy to cancel it.
As the policy was not ready they were justified in
executing it and cancelling it.
The right of the plaintiff to the policy and to enforce
it was lost by the legal action of cancelling
In the result the appeal must succeed.
It is allowed.
The decree passed by the divisional bench is set
aside dismissing the suit is restored.
PREMIUM
??????

An insurance premium
The amount of money that an
individual or business
Must pay for an insurance policy
considered income by the
insurer
And also represents a liability
Case-law

Petitioner:
National Insurance company Ltd.
Vs.
Respondent:
Seema Malhotra and ors.
(2001)3 SCC 151
 Facts.

The insured was one Yash Paul Malhotra.

He and the appellant insurance company entered
into an insurance contract on 21st December, 1993
.by insuring a Maruti car for a sum of Rupees
one lakh and fifty thousand.
On the same day, the insured gave a cheque for
Rs.4492/- towards the first installment of the
premium
and the insurance company issued a cover note
Cont.

But unfortunately,
the last day in the year 1993 became the last day of
the insured
as well as his Maruti car
because the insured died and the car was
completely damaged in an accident
which occurred on 31.12.1993.
 Cont.

On 10.1.1994 the bank on which the cheque was drawn by the

insured sent an intimation to the insurance company
that the cheque was dishonoured
Due to insufficient funds.
On 20.1.1994 the insurance company informed the business
concern of the insured..
Cont.

Notwithstanding anything contained to the

contrary,
it is hereby agreed and declared that your cheque
has been dishonoured by the bank.
So .. cancelling the above said policy with
immediate effect.
The company is not at risk.
???????

The respondents who are the widow and

children of the insured,
..filed a claim for the loss of the vehicle.
.the claim was repudiated,
the respondents moved the State Consumer
Protection Commission
???????????
Question arose.

Is the insurer liable in such a situation to honour the

contract of insurance?
 Judgment.

As per.. the said claim was rejected

.In so far the facts of the present case are
concerned,
it is a settled law
that the insurer even if it had issued a cover note
is entitled to cancel the policy
if it fails to cash the cheque for premium.
The concept of contract in essence envisages a
proposal, acceptance and passing of consideration.
 Cont..

In the absence of any consideration there can be no contract

. recognised by sec. 64-VB of the Insurance Act.
The insurer was justified in repudiating the contract
and it has done it in time and soon after the cheque bounced.
Aggrieved..

.. moved the High Court

the division bench which heard the
matter
reversed the order passed by the State
Consumer Commission
and held the insurance company liable to
honour the claim.
????????????
Cont..

because it chose to cancel the

policy
with effect from the date of
bouncing of the cheque,
whereas the liability was incurred
prior to it.
While ordering the cancellation of
policy in question.
Cont.

.. insurance company instead of

cancelling the same due to dishonour
of cheque of the premium from the
date it was issued i.e. 21.12.1993,
chose to cancel it with immediate
effect.
This clearly indicates that till the
issuance of this communication
respondent insurance company itself
treated the policy subsisting.
Also

o directed the State Commission to

assess the compensation in
accordance with law
o and pay the same after deducting the
amount of premium
o (as the cheque was dishonoured).
Next

Insurance companybeing
aggrieved with the order of
Preferred..
Interpretation.S.C

The essence of the insurance

business is the coverage of the
risk
by undertaking to indemnify the
insured against loss or damage.
They agree to pay the damages
arising out of any accident
Cont

by taking a chance that no

accident might happen.
Motivation of the insurance
business
is that the premium would turn
to be the profit of the business
in case no damage occurs.
Cont.

Such business of the insurance company

can be carried on only with the premium
The only profit.of the insurance business
is the premium paid when no accident or
damage occurs.
But to ask the insurance company
to bear the entire loss of damages of
somebody else
without receiving a pie towards premium is
contrary to the principles of equity
Cont..

In a contract of insurance..
.. a cheque towards payment of
premium or part of the premium,
such a contract consists of reciprocal
promise.
The drawer of the cheque promises the
insurer
that the cheque, on presentation, would
yield the amount in cash.
Cont..

o Thus, when the insured fails to pay the

premium promised,
o or when the cheque issued by him towards
the premium is returned dishonoured by the
bank
o the insurer need not perform his part of the
promise.
o The corollary is that the insured cannot claim
performance from the insurer in such a
situation.
Finally

uphold the contention of the appellant

insurance company.
.. allow this appeal and set aside
the impugned judgment of the Division
Bench of the High Court.
The order passed by the State
Consumer Commission will stand
restored.
History & Origin..
History & Origin

The first methods of transferring or

distributing risk in a monetary
economy------------practiced by Chinese &
Babylonian
Greeks & Romans introduced -----origins of
Health & Life insurances
 Cont...

Chinese merchants to reduce their

risks, split the shipment into small
portions and placed them on several
boats
The first written insurance
policy.....Babylonian
 Cont....
The Insurance idea is an old-institution of
transactional trade.
..insurance was the marine insurance.

.nothing like disaster to set mens

minds to work.
Consequently, in due course of time fire and
life insurance made their appearance.
Cont.

Within the last hundred years the

insurance principle is being extended
wider.

Today .. finds insurance cover for

accidents motor vehicles, glass, life
stock, cargo, burglary and various
other disasters.
History in India

InIndia..has deep rooted

history
explained in the Manu,
Yagnavalkya and Kautilya
.Pooling resources re-
distributed in times of calamities
precursor to modern day insurance
Cont.

1818- Oriental Life Insurance CompanyCalcutta

this company failed in 1834
1829- Madras equitable Life Insurance
History of Insurance
Legislation..

Up to the end of 19th century,

.the insurance was in its inception stage in India.
Therefore, no legislation was required till that
time.
Cont.
Usually the Indian Companies Act, 1883
was applicable to business concern;
banking & insurance companies
like New Indian Insurance Companies
and Provident Societies started during the
time of independence movement
but most of them were financially
unsound.
It was asserted that the Indian Companies
Act, 1883 was inadequate for the purpose.
 Cont.
Therefore, two Acts were passed in 1912
Provident Insurance Societies Act ,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.
Cont.

o In 1870, Bombay Mutual Life Assurance

Society became the first Indian Insurer
o Subsequently .many insurance
companies came in to existence
o The oldest existing insurance company
in India---National Insurance
Company----found in 1906
o LIC came in to existence in the year----
1956
 Cont

Until the passage of the Insurance

Regulatory and Development Authority Act
in 1999,
it was a public sector monopoly
Insurance is an important element of
financial planning.
However, more so as a risk-management
tool rather than an investment.
Cont

Tracing back in time for a few years,

insurance policy was considered to be useful
to safeguard the revenues in the future.
However, in this day and age, the mounting
risk of financial uncertainties makes it
necessary to have an insurance cover.
The recognition of the importance of an
insurance cover has helped the Indian
insurance industry bloom in the recent years.
 Main reason.

.to insure ones interest is protection

against future financial losses.
It offers the insured a peace-of-mind to
help him achieve a higher productivity.
It helps to attain a sense of security that
he will remain safe from financial hardship.
These hardships could be the result of
theft, loss of income or medical
emergencies.
CLASSIFICATION
 CLASSIFICATION..

NON LIFE
LIFE INSURANCE
INSURANCE
Classificatio
n of
Insurance

Whole life
Motor
Endowme
insurance
nt
Fire
Life
insurance
annuity
Etc
Etc
What is Life Insurance?

.Contract between the insured person and

the company or carrier that is providing the
insurance
that gives out a certain amount to the insured
or their nominated beneficiaries upon a
certain event death of the individual
insured
Means.it offers way to replace the loss of
income ..
Simply.LI related to human life
Cont...

Its basically long term investment &

requires periodic payments......
Either monthly or quarterly or
annually.....
The risks......covered by life insurance
include...
Premature death
Income during retirement
Illness...etc.
NON-LIFE INSURANCE....

.......to protect an individual against losses and

damages other than those covered by life
insurance
Coverage period......usually one year
Premiums ...normally paid on a one time basis
The risks covered under.......
Property loss
Motor insurance
Personal accident insurance etc.....
THANK YOU