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LAW OF INSURANCE
Dr.Ashok R PatilAssociate Professor in LawChair on Consumer Law and PracticeNLSIU, Bangalore
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Nature of Insurance
Yat bhavati tat nasyati- whatever is created
will be destroyed Creation is inevitably followed by
destruction.
Change is a natural course & its occurrenceinvolves risk
Risk is closely connected with ownership
The owner want to save themselves fromrisk and out of this desire, is the businessof insurance born
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The aim of all insurance is to protect the
owner from a variety of risks which heanticipates.
Collection of small contribution from all aspremium & given to the sufferer.
Mainly Two purposesi. Immediate- short range- individual get the
lossii. Far sighted- long range- remote purpose- to
accelerate the economic growth of thenation- funds are invested in organizedcommerce & Industry (even 5 yr plans)
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Once you take Insurance- Itimproves the mental, moral &national circumstances & raises
conditions of the community
Insurance reduces the fear of
future risk.
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Insurance is mainly protectionagainst future loss. It can be betterdescribed as promise of
reimbursement in any case of loss.Insurances are paid to people orcompanies by the insurance
company against any kind ofhazards or calamities.
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I n s u r a n c e A c t s i n I n d i a
The Insurance Sector in India is regulated
by a number of acts. The insurance Acts inIndia are as follows:
i. The Insurance Act, 1938
ii. General Insurance Business(Nationalisation) Act, 1972
iii. Life Insurance Corporation Act, 1956
iv. Marine Insurance Act, 1963
v. Insurance Regulatory and DevelopmentAuthority (IRDA) Act, 1999
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Insurance Regulatory andDevelopment Authority Act, 1999
The preamble: An Act to provide for the
establishment of an authority to protect theinterests of holders of insurance industryand for matters connected therewith or
incidental thereto and further to amend theinsurance Act 1938, the LIC Act 1956 andthe General Insurance Business(Nationalization) Act, 1972.
Total 32 sections divided into 6 chapters inthe Act.
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Three major concerns
i. The protection of the interest of theconsumers
ii. To ensure the financial soundness of
the insurance industry &iii. To pave the way to help a healthy
growth of the insurance market,
where both the govt & pvt partiesplay simultaneously.
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IRDA-Sec.14(2):Powers and Functions
a. Issue to the applicant a certificate of
registration, renew, modify, withdraw,suspend or cancel such registration
b. Protection of the interests of the policyholders in assigning of policy, nomination bypolicy holders, insurable interest, settlementof insurance claim, surrender value of policyand other terms and conditions of contracts.
c. Specifying requisite qualifications, code ofconduct and practical training forintermediary or insurance intermediaries andagents;
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Cont..
d. Specifying the code of conduct forsurveyors and loss assessors;
e. Promoting efficiency in the conduct ofinsurance business;
f. Promoting and regulating professionalorganisations connected with theinsurance and re-insurance business;
g. Levying fees and other charges forcarrying out the purposes of this Act;
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Cont..
h. Calling for information from, undertaking
inspection of, conducting inquiries andinvestigations including audit of theinsurers, intermediaries, insuranceintermediaries and other organisations
connected with the insurance business;i. Control and regulation of the rates,advantages, terms and conditions that maybe offered by insurers in respect of general
insurance business not so controlled andregulated by the Tariff Advisory Committeeunder s.64U of the Insurance Act 1938;
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j. Specifying the form and manner in which
books of account shall be maintained andstatement of accounts shall be rendered byinsurers and other insuranceintermediaries;
k. Regulating investment of funds byinsurance companies;l. Regulating maintenance of margin of
solvency;
m. Adjudication of disputes between insurersand intermediaries or insuranceintermediaries;
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n. Supervising the functioning of the Tariff
Advisory Committee;o. Specifying the percentage of premium
income of the insurer to finance schemesfor promoting and regulating professional
organisations referred to in clause (f);p. Specifying the percentage of life insurance
business and general insurance business tobe undertaken by the insurer in the rural or
social sector, andq. Exercising such other powers as may be
prescribed
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I n s u r a n ce Po l i c i e s i n I n d i a
Insurance Policies in India isusually categorized as follows:
i. General Insurance Policies
ii. Life Insurance Policies
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Under such contract one party agrees to
take the risk of another persons life,property or liability in consideration ofcertain comparatively small periodicpayments.
The person to be paid or indemnified iscalled the insurer or assured, the personwho undertakes to indemnify or pay money
is called the insurer or assurer orunderwriter, the last word being generallyused in marine insurance;
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the consideration received in theform of periodic payments iscalled the premiums or premia;
and the document containing thecontract is the insurance policy.
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Every contract of insurance musthave the following essential elements
i. There must be a contract betweenparties who are called the insurerand the insured
ii. The contract must be that theinsurer undertakes to protect theinsured from any loss or damage to
be insured on the happening of theevent.
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iii. In consideration for the above, theassured undertakes to make theinsurer a periodical payment of asum of money called premium.
iv. The contract must be in writing andthe document is called the insurance
policy.
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Classification of contracts ofinsurance
According to the Nature of the Event:
i. Life Insurance: the sum insured becomespayable on the death of the insured or onthe attained of a particular age.
ii. Fire Insurance: in this class of contracts,the sum is payable on the accident of fireby which the insured property is destroyed
or damaged, Here the loss insured is thedamage caused by fire.
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iii. Marine Insurance: Here the sum
becomes payable on the happening of aperilous event at sea.
iv. Miscellaneous Insurance: This includes
a variety of new insurances which go inthe modern times under the terms
social Insurance or Liability Insurance,
Industrial Insurance, Motor VehiclesInsurance, Aviation Insurance, etc.
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Nature of the Insurance Contract
a. Contract is Aleatory: contract ofspeculation; depending on uncertainevent or contingency as to bothprofit and loss
b. Contract of Utmost Good Faith(Uberrima fides)
c. Contract of Indemnityd. Not a Wager Contract
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Insurable Interest means
A relation between the insuredand the event insured against,such that the occurrence of the
event will cause substantialloss or injury of some kind to
the insured.
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Insurable Interest
1. The interest should not be a meresentimental right or interest, forexample, love & affection alone
cannot constitute insurableinterest.
2. It should be a right in property or
a right arising out of a contract inrelation to the property.
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Cont..
3. The interest must be pecuniary, that is,
capable of estimation in terms of money. --In other words, the peril must be suchthat its happening may bring upon theinsured an actual or deemed pecuniary
loss. Mere disadvantage or inconvenienceor mental distress cannot be regarded asan insurable interest.
4. The interest must be lawful, that is, itshould not be illegal, unlawful, immoral oropposed to public policy.
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Delhi Electric Supply Undertaking v. Basanti Devi,AIR 2000 SC 43 : 1999 AIR SCW 4161.
The facts of this case the LIC floated a "SalarySavings Scheme" under which Bhim Singh, anemployee of DESU took an insurance policy for anamount of Rs. 50,000/- with the LIC. Insurance policywas to commence on January 28, 1992.
Bhim Singh had paid Rs. 636/- as premium for twomonths to the LIC. Premium for the third month waspayable by March 29, 1992.
The amount of the premium was deducted by theDESU from the salary of Bhim Singh and remitted byit to the LIC.
It appears that premium for the subsequent monthswas deducted by DESU from the salary of Bhim Singhbut was not remitted to LIC.
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Cont..
In the meantime Bhim Singh died on August 17,1992.
Basanti Devi, widow of Bhim Singh informed LIC ofthe death of her husband and requested for paymentof the amount due under the policy.
LIC disclaimed any liability for payment under the
policy as the instalments of premium after June, 1992were not received by it. LIC, therefore, repudiated claim of Basanti Devi. LIC
said that since default had been committed inpayment of premium the policy taken out by BhimSingh lapsed.
This led Basanti Devi to file a complaint before theState Commission against LIC and DESU. Thenappeal to National Commission and lastly before SC.
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In this case SC held that the court is not concerned with theinsurance agent.
It is not the case of the LIC that DESU could be permitted as aninsurance agent within the meaning of Insurance Act and theRegulations. DESU is not procuring or soliciting any business forthe LIC.
DESU is certainly not an insurance agent within the meaning ofaforesaid Insurance Act and the Regulations but DESU is certainly
an agent as defined in Section 182 of the Contract Act. Mode of collection of premium has been indicated in the scheme
itself and employer has been assigned the role of collectingpremium and remitting the same to LIC.
As far as employee as such is concerned, employer will be agent ofthe LIC. It is a matter of common knowledge that Insurance
Companies employ agents. When there is no insurance agent as defined in Regulations in theRegulations and the Insurance Act, general principles of the law ofagency as contained in the Contract Act are to be applied.
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Cont..
Then SC observed in this case that Agent in Section 182 means aperson employed to do any act for another, or to represent other
in dealings with third persons and the person for whom such act isdone, or who is so represented, is called the principal. Under Section 185 no consideration is necessary to create an
agency. As far as Bhim Singh is concerned, there was no obligationcast on him to pay premium direct to LIC.
Under the agreement between LIC and DESU, premium was
payable to DESU who was to deduct every month from the salaryof Bhim Singh and to transmit the same to LIC. DESU had,therefore, implied authority to collect premium from Bhim Singhon behalf of LIC.
There was, thus, valid payment of premium by Bhim Singh.Authority of DESU to collect premium on behalf of LIC is implied.In any case, DESU had ostensible authority to collect premiumfrom Bhim Singh on behalf of LIC.
So far as Bhim Singh is concerned DESU was agent of LIC tocollect premium on its behalf.
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Cont..
Therefore, SC directed that LIC shall pay to Basanti
Devi insurance amount of Rs. 50,000/- with interestat the rate of 15% per annum from December 17,1992 till payment, thus substituting Life InsuranceCorporation of India for Delhi Electric SupplyUndertaking, as ordered by the State Commission and
upheld by the National Commission. For suffering which Basanti Devi had to undergo for
the default committed by DESU in not remitting thepremium to LIC we would direct that DESU will paycost of these proceedings, which we quantify at Rs.25,000/-.