7/31/2019 Law of Insurance Report
1/23
Law of Insurance
(MGT 206 Legal Aspects of Business)
Submitted by
Group No. 01
April 18, 2012
Semester II (February May 2012)
School of Management StudiesNagaland University(A Central University Established by an Act of Parliament 1989)
DC Court Junction
Dimapur-797112
Nagaland
7/31/2019 Law of Insurance Report
2/23
MGT 206 LEGAL ASPECTS OF BUSINESS
Group Report 02 Page 2
Content
Sl. No. Particular Page No.
1 Group
Chapter 1 Principles of Insurance
Contract of Insuarance 4Nature of Contract 4
7/31/2019 Law of Insurance Report
3/23
MGT 206 LEGAL ASPECTS OF BUSINESS
Group Report 02 Page 3
Group No.01 Topic Allotment
Sl. No. Name Topic
1 Rokov N. Zhasa (NU/MN-22/11) Principles of Insurance
2 Nukchala Jamir (NU/MN-19/11) Life Insurance
3 Ahuto Swu (NU/MN-03/11) Fire Insurance
4 Dilip Kumar Sah (NU/MN-06/11) Marine Insurance
7/31/2019 Law of Insurance Report
4/23
MGT 206 LEGAL ASPECTS OF BUSINESS
Group Report 02 Page 4
Chapter 1 Principles of InsuranceRokov N. Zhasa
Risk and uncertainty are incidental to life. Man may meet an untimely death. He may suffer
from accident, destruction of property, fire, sea perils, floods, earthquakes and other natural
calamities. Whenever there is uncertainty, there is risk as well as insecurity. It is to provideagainst risk and uncertain events; it only spreads the loss the loss over a larger number of
people who insure themselves against that risk. The main principle underlying insurance is
the pooling of risks. It is thus a co-operative device to spread the loss caused by a risk(which
is covered by insurance) over a large number of persons who are also exposed to the same
risk and insure themselves against that risk.
Contract of insurance
Contract of insurance: A contract of insurance is a contract by which a person, inconsideration of a sum of money, undertakes to make good the loss of against a
specified risk, e.g., fire, or to compensate him or his estate on happening of a
specified event. E.g., accident or death.
Insurer and insured: The person undertaking the risk is called the insurer, assure orunderwriter and the person whose loss is to be made good is called the insured or
assured.
Premium: The consideration for which the insurer undertakes to indemnify theassured against the risk is called thepremium. It may either be a single or a periodical
payment.
Policy: The instrument in which the contract of insurance is generally embodied iscalled thepolicy. The policy is not the contract; it is the evidence of contract.
Subject-matter of insurance and insurable interest: The thing or property insured is
called the subject-matter of insurance, and the interest of the assured in the subject-matter is called his insurable interest.
Perils insured against: That which is insured is the loss arising from uncertain eventsor causalities, i.e., destruction of or damage to the property or the death or
disablement of a person, and these are calledperils insured against.
There are a number of kinds of insurance, but the following kinds stand out as being of
special importance:
1. Life insurance: In this case a certain fixed amount becomes payable on the death ofthe assured or on the expiry of certain fixed period, whichever is earlier.
2. Fire insurance: It covers losses caused by fire.3. Marine insurance: It covers all marine losses, that is to say, the losses incidental tomarine adventure.
4. Personal accident insurance: In this case, the amount payable is a compensation forany personal injury caused to the assured.
Life insurance was nationalised on 19th
January, 1956, and the general insurance business on
the 13th
May, 1971.
Nature of contract of insurance
Insurance is the laws attempt to socialise responsibility. When it first appeared as a strange
intruder in the field of jurisprudence, it was dismissed as a kind of gambling and wagering. InCarter v. Boehm, (1765) 1 Sm. L.C. 546, Lord Mansfield described insurance as a contract
7/31/2019 Law of Insurance Report
5/23
MGT 206 LEGAL ASPECTS OF BUSINESS
Group Report 02 Page 5
on speculation, which in the legal sense means a wagering agreement. A wagering
agreement is one in which a person promise to pay money or transfer property upon the
happening or non-happening of an uncertain event.
A contract of insurance bears a superficial resemblance to a wagering agreement. With social
evolution, the attitude that insurance was a contract on speculation changed, and the lawcame to recognize insurance as a system of sharing risk too great to be borne by one
individual. The contract of insurance is an aleatory (depending on contingencies) contract. It
depends on an uncertain event. But, it is not a wagering agreement.
Difference between insurance and wager
1. A contract of insurance (except life, accident and sickness insurance) is a contract ofindemnity. It seeks to indemnify the assured for the loss suffered by him on the
happening of an uncertain event. In life insurance, the amount payable in case of
death of the assured is ascertained and fixed in advance. In a wagering agreement,
however, there is no question of indemnity as the parties do not intend to cover any
risk.
2. The object of a contract of insurance is to protect the assured against losses on thehappening of some uncertain events, whereas the object of a wagering agreement is to
earn speculative gains.
3. In a contract of insurance the assured must have a pecuniary or insurable interest inthe subject-matter of insurance. In a wagering agreement neither party has any
pecuniary interest except that created by the contract itself.
4. A contract of insurance is a contract requiring utmost good faith by the parties to thecontract. In a wagering agreement good faith need not be observed.
5. A wagering agreement is void ab initio, because it is against public policy. A contract
of insurance is legally enforceable and is encouraged as it benefits the community as awhole.
6. A contract of insurance is based on scientific and actuarial calculation of risks and thepremium is calculated taking into account all the circumstances attending on the risk.
A wagering agreement is a mere gamble and there is no scientific calculation of risk.
7. An insured event may cause varying degrees of loss or damage. A wager is either wonor lost. A contract of insurance, if it by way of wagering, is void (Sec. 6 of the Marine
Insurance Act, 1963).
Contract of Insurance-A species of the general contract
A Contract of insurance is a species of the general contract. It is governed by the same
general principles of law as other contracts. It comes into existence by the process of offer inthe form of proposal and its acceptance (by the issue of a policy). The proposal is made by
one party (assured or insured) to the other party (insurer, assurer or underwriter) for insurance
against same loss should it occur on the happening of an uncertain event within a limited tike.
If the insurer or underwriter accepts the proposal unconditionally, he must communicate his
acceptance to the person making the offer. Silence on his part does not denote acceptance
[Life Insurance Corpn. Of India v. Vasireddy, AIR (1984) S.C. 1014]. If the parties are
agreed on all the martial terms such as the nature, time of commencement and duration, of the
risk, the amount to be insured, and the premium to be paid, a contact comes into existence.
The object of contract must be lawful. The consent of the parties must be free and genuine.
The contract must be supported by consideration and must be embodied in a formal document
called policy. The policy must be duly executed.
7/31/2019 Law of Insurance Report
6/23
MGT 206 LEGAL ASPECTS OF BUSINESS
Group Report 02 Page 6
Cover note
It is a document issued by an insurer or underwriter on receiving a proposal pending the
execution of the policy it covers the risk between the date of the contract of insurance and
actual issue of the policy of insurance. It cannot be regarded in law as either an insurance
policy or an agreement to issue an insurance policy. But, it has been held that if the covernote is properly stamped, a suit for specific performance of the contract can be founded
thereon (Surajmal v. Triton Insurance Co., 52 Cal . 408). The liability of the insurer under the
cover note ceases when he intimates to the assured the rejection of the proposal.
Example. A cover note was issued on 18th
June, which covered the risk from 15th
June.
Unknown to both the parties, the goods had been destroyed by the fire on 16th
June. Held,
the insurance company was liable and there was no question of mistake under Sec. 20 of
the Indian Contract Act, 1872 (Indian Trade & General Insurance Co, v. Bhailal, AIR
(1954) Bom. 148).
Fundamental elements of Insurance
1. Utmost good faith: The general rule in a of contract is that each party to the contractis entitles to make the best bargain he can. But there are certain cases where the
knowledge of facts is almost exclusively on one side. In such cases, the contract is
vitiated by a non-disclose of any material facts. Such contacts are known as contracts
ofuberrimae fidei (of the fullest confidence) or contracts requiring utmost good faith.
The rule of caveat emptor i.e., let the buyer beware does not apply to them and non-
disclosure of material facts would go to the root-it being regarded as fatal to the
validity of contract. Contracts of insurance are based on the rocky foundation of
utmost good faith.
In contracts of insurance, the assured is on the vantage ground. He knows more about
the subject-matter of the contract than the insurer. Consequently, he is under a duty to
disclose accurately all material facts with perfect degree of accuracy and no such fact
should be withheld or concealed. Where the assured does not make a complete
disclosure of everything which it was material for the insurer to know in order to
judge (a) whether he should accept the risk, and (b) what premium he should charge,
the insurer can avoid the contract (Mithoolal Nayak v. Life Insurance Corpn. Of India,
AIR (1962) S.C. 814). Any fact is material which goes to the root of the contract of
insurance, and which will affect the willingness or otherwise of the insurer to take up
risk relating to the subject-matter of insurance. In other words, any fact is material if it
has a bearing on the risk and would materially affect the insurer in deciding to makethe contract or not.
If the assured has knowledge of a fact which the insurer cannot ordinarily have, then
he should not indulge himself in suppression very (suppression of the truth or passive
misinterpretation) suggestion faults (active misrepresentation) by making a suggestion
which is false or suppressing a matter which is true (V. Srinivasa Pillai v. LIC of
India, AIR (1977) 181).
Example. In making a proposal for insurance, M. in reply to a question asking wherther
previous proposal on his life had been made to any office, and if so whether thay had been
accepted at the ordianary rates said that he was then insured at two offices at the ordinaryrates. He omitted to disclose that his proposal for life insurance had been declined by several
7/31/2019 Law of Insurance Report
7/23
MGT 206 LEGAL ASPECTS OF BUSINESS
Group Report 02 Page 7
other offices. Held, this was a material failure to disclose and the policy could be set aside
(London Insurance Co. v. Mansel, (1879) 11 Ch. D. 363).
Whether the omission to disclose any particular circumstances or concealment of a fact is
material so as to render the contract voidable is a question is a question of fact in each case.
Example. In a proposal form, the proposer in answer to a question if he consulted any
physician in the last five years said none. In fact he had consulted a doctor who prescribed
tonics, but he had never been away from work. The insurers doctor said he would have still
recommended the case at the ordinary premium even if the proposer had answered the
question in the affirmative. Held, there was no material concealment and the policy could not
be avoided. [Mutual Life Insurance Co. of New York v. Ontario Metal Products Co., (1925)
A.C. 344].
A proposer should disclose all material facts at the time of making the proposal for insurance
and must continue to do so till the negotiations are completed.
Example. L made a proposal to an insurance company for an insurance on his life for
Rs.50,000. He truthfully answered various questions on the proposal form and disclosed all
relevant facts. A few days later but before the proposal was accepted by the insurance
company. L was taken ill with pneumonia. Two days later, he died of pneumonia and the
company learned of this illness for first time. Held the company was not liable to pay the
claim [Looker v. Law Union & Rock Insurance Co. Ltd. (1928) 1 KB 554] as notice of illness
which amounted to material alternation in the risk between the date of the proposal and its
acceptance was not given.
The proposer should disclose not only those facts which he honestly thinks to be material but
every fact which a reasonable man would have thought to be material. The duty to disclose,
however, is not continuing obligation. The assured is under no legal obligation to disclose
any facts which may come to his knowledge after the contract of insurance has been
conducted.
2. Indemnity: A contract of insurance (except life, personal accident and sicknessinsurance) is a contract of indemnity. This means that the assured, 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. Indemnity is the controlling principle in contracts
of fire, marine and burglary insurance. The object of every contract of insurance likes
to place the assured in the same financial position, as nearly as possible, after the lossas if the loss had not taken place at all. It would be against public policy to allow an
assured to make a profit out of the happening of the loss or damage insured against.
This is because, if that were so, the assured might be tempted to bring about the event
insured against in order to get the money. Moreover, in the absence of principle of
indemnity, there might be a tendency in the direction of over-insurance.
Example. P insured his house against fire. Subsequently he agreed to sell his house to R for
Rs. 340000. Before the sale could be completed the house was destroyed by fire and P
received its value from the insurance company. P then received the price from R as per the
contract of sale. Held, the insurance company could recover from P the money they had paid
[Castellain v. Preston, (1883) 11QBD 380].
7/31/2019 Law of Insurance Report
8/23
MGT 206 LEGAL ASPECTS OF BUSINESS
Group Report 02 Page 8
A contract of life insurance is not a contract of indemnity. In this case the insurer is liable to
pay the sum mentioned in the policy upon the happening of the contingency (death or expiry
of a certain period, whichever takes place earlier) specified in the policy.
3. Insurable interest: Insurable interest is necessary to support every contract of
insurance. It is the legal right of a person to insure. It means that the assured must bein a legally recognized relationship to what is insured so that he will suffer a direct
financial loss on the happening of the event insured. It exists where a person is so
circumstances with respect to the subject-matter of the policy as to have benefit from
its existence or prejudice from its destruction. [Lucena v. Craufurd, (1806) 2 BPNR
269].
It is the existence of insurable interest in a contract of insurance which distinguishes it from a
wagering agreement.
It is not the owner alone to take the case of fire or marine insurance, but every person who
would suffer direct financial loss if the property or goods were damage of or destroyed, who
has insurable interest. Likewise, A cannot insure the life of B. But if he has some pecuniary
interest in the life of B, he can insure Bs life.
In life insurance, insurable interest must be present at the time when the insurance is effected.
In fire insurance, it must be present both at the time of insurance and at the time of loss of the
subject-matter. In marine insurance, it must be present at the time of loss of the subject-
matter.
4. Causa proxima: The assured can recover the loss only if it is proximately caused byany of the perils insured against. This is called the rule of causa proxima. The rule is
causa proxima non remota spectator, i.e., the proximate or immediate and not the
remote cause is to looked to, and if the proximate cause of loss is a peril insuredagainst, the assured can recover the amount of the loss from the insurer. Every loss
that clearly and proximately results, whether directly or indirectly, from the event
insured against is within the policy.
The question, which is the causa proxima of a loss arises only when there is a
succession of causes. When a result has been brought about by two or more causes,
one has, in insurance law to look to the nearest cause, although the result would, no
doubt, not have happened without the remote or other causes. Proximate does not
mean the nearest in time. The cause which is truly proximate is that which is
proximate in efficiency. If the loss is the result of such efficient cause, it will be
regarded as having been caused by the proximate cause. The choice of the real orefficient cause from out of the whole complex of the facts must be made by applying
common sense standards. Bur if the loss is brought about by any applying
commonsense standards. But if the loss is brought about by any cause attributable to
the misconduct of the assured, the insurer is not liable.
Examples. (a) A ship carrying the cargo of oranges collided with another ship. As a result of
collision, cargo was mishandled and there took place some delay. The cargo consequently
deteoriated. Held damage to the cargi was not the direct result of collision but if the delay and
mishandling, and as such the assured could not recover the loss [Pink v. Fleming, (1899) 25
QBD 396].
7/31/2019 Law of Insurance Report
9/23
MGT 206 LEGAL ASPECTS OF BUSINESS
Group Report 02 Page 9
(b) A ship was insured against damage by enemy action. It was damaged by passing over a
torpedoed ship. Held, no damage could be recovered as the loss in this case was not due
directly to enemy action but to the torpedoed ship [William & Co. v. North of England, etc.,
Assurance Co, (191) 2 KB 527].
(c) The cargo of rice in a ship was destroyed by sea-water flowng in the ship through a holemade by rats in a bathroom lead pipe. Held, the underwater was liable as the damage was due
to a peril of the sea. The proximate cause of the damage in this case is sea-water. If, however,
the loss is caused directly by rats or vermin, the underwriter will not be liable [Hamilton
Fraser & Co. v. Pandrof, (1887) 12 App. Cas, 518].
(d) A ship carrying meat was delayed by a storm in consequence of which it became
decomposed and had to be thrown overboard. Held, the loss of meat was not a loss by the
perils of the sea [Taylor v. Dunbar, (1869) 4PC 206].
5. Risk must attach: The insurer receives the premium in a contract of insurance forrunning a certain risk. If for any reason the risk is not run, the consideration for which
the premium was given fails. In such an event the insurer must return the premium.
The premium is also to be returned even where the risk is not run or could not be run
due to the fault, will or pleasure of the assured.
6. Mitigation of loss: In the event of some mishap to the insured property, the assuredmust take all necessary steps or measures as may be reasonable for the purpose of
averting or minimising a loss [British & Foreign Marine Ins. Co. v. Grant, (1921) All.
E.R. 44].He must act as an uninsured prudent person would act under similar
circumstances in his own case. If he does not do so, the insurer can avoid the payment
of loss attributable to his negligence. In short, he bound to do his best under the
circumstances, but he is not bound to do so at the risk of his life.
7. Contribution: Where there are two or more insurance on one risk, the principle ofcontribution applies as between different insurers. 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. In case of
loss, any one insurer may pay to the assured the full amount of the loss covered by the
policy. Having paid this amount, he is entitles to contribution from his co-insureres in
proportion to the amount which each has undertaken to pay in case of loss of the
dame subject-matter.
E.g., A insures his house against fire for Rs. 10, 000 with insurer X, and for Rs. 20,000 withinsurer Y. A loss of Rs. 12,000 occurs. X is liable for Rs. 4000 and Y for Rs.8000. If the
whole amount of the loss is paid by Y, he can recover Rs.4000 from X. The liability of X and
Y in this case will be expressed by the following formula:
Sum insured with an individual insurer (i.e., X or Y)x Loss
Total sum insured
Thus the liability of X will be Rs.(10,000/30,000)x12,000, i.e., Rs. 4,000
And the liability of Y will be Rs. (20,000/30,000) x 12,000, i.e., Rs. 8000.
7/31/2019 Law of Insurance Report
10/23
MGT 206 LEGAL ASPECTS OF BUSINESS
Group Report 02 Page 10
The right of contribution arises when (1) there are different policies which relate to the same
subject-matter; (2) the policies cover the same peril which caused the loss; (3) all the policies
are the force at the time of the loss; and (4) one of the insurers has paid to the assured more
than his share of loss.
8. Subrogation: The doctrine of subrogation is a corollary to the principle of indemnityand applies only to fire and marine insurances. According to it, the insurer, on makinggood the loss, is entitled to be put in to the place of the assured. He succeeds to all the
ways and means by which the assured might have protected himself against the loss
[Burnand v. Rodocanachi, (1882) App. Cas. 333). Whenever, therefore, an assured
has received full indemnity in respect of his loss, all rights and remedies which he has
against third persons must be held and exercised for the benefit of the insurer until he
(the insurer) recoups the amount he has paid under the policy. In simple words, the
insurer steps into the shoes of the assured or he is entitled to every right of the assured
or he is entitled to every right of the assured [Castellain v. Preston, (1893) 11 QBD
388].
If at a subsequent time he assured recovers more than the full indemnity, i.e., both
from the insurer and from the person responsible for the loss, he loss, he holds the
excess reoccupied the trust for the insurer, and the insurer is entitled to recover from
the assured any sum which he may have received in excess of the loss actually
sustained by him.
Example.A insures his goods withB for Rs. 1000. The goods are damaged by fire caused by
C, a miscreant. A recovers the loss fromB and subsequently he succeeds in recovering this
loss from Calso. He must hold the amount recovered from Cin trust forB.
The principle of subrogation is subject to the following limitations:
(1)The insurer is subrogated to only the rights and remedies available to the assured inrespect of the thing to which the contract of insurance relates
E.g., (a) M owned two vessls, R and S, which were insured with different insurers. The two
vessels collided due to the fault of vessel R. The insurer of vessel S indemnified the owner,
M, under the policy, and then proceded against M as the owner of vessel R by virtue of the
doctrine of subrogation for claiming the amount paid in respect of ship R. Held, he could not
recover as the insurer is subrogated to only the rights of M, the insured , and as no person will
succeed against himself, the insurer of vessel S did not get any right as both the ships were
owned by M [Simpson v. Thomson, (1887) 3 App. Cas.279].
(b) S insured his furniture with M, an insurance company. Ss wife put the furniture to fireafter she had some domestic quarrel with her husband. M indemnified S under the policy and
then wanted to proceed against S wife in tort for damages. Held, M could not do so as a
husband had no such right against his wife, and therefore, M was not subrogated to any right
to proceed against S wife [Midland Insurance Co. v. Smith, (1881) 6 QBD 561].
(2) The insurer right of subrogation arises only when he pays the loss for which he is liable
under the policy.
(3) The insurer is not entitled to the benefit of what is recovered until the assured has
recovered a full indemnity.
7/31/2019 Law of Insurance Report
11/23
MGT 206 LEGAL ASPECTS OF BUSINESS
Group Report 02 Page 11
9.Period of insurance: A contract of life insurance is a continuing contract with a condition
that the premium is to be paid at regular intervals. If the premium is not paid regularly, the
contract lapses and can be revived subject to the fulfilment of certain period, usually a year.
The contract automatically comes to an end after the expiry of the fixed period. A contract of
marine insurance may be for a particular perios or for a particular voyage. If it is for a
particular period and the voyage has not ended during the period, the liability of the insurercomes to an end. If the contract is for a particular voyage, the voyage may take longer than a
year. In that case the insurer continues to be liable for the perils insured against till the
voyage is completed.
Premium
Premium is the consideration paid by the assumed to the insurer for the risk undertaken by
the latter. It may be in cash or kind. But usually it is in the form of cash. It is determined by
the insurer by taking into account the average of losses and the contributions (in the form of
premiums) that he receives. Besides taking into account the special circumstances affecting
risk in a particular case, the insurer also keeps a margin for his overhead and other expensesand profit.
A simple illustration would explain the point. Suppose there are 10, 0000 houses in a locality
an the owners of 8000 of them decide to get their houses insured. Experience shows that
every year two houses (on average) catch fire. Let us assume that each house is valued at R.
2,00,000. This means the average loss arising from fire to the house in any year will work out
to be Rs.4, 00,000. If the insurer fixes up the rate of premium, at say, Rs. 100 per house, his
total receipts from premium will aggregate to Rs.8,00,000. Out of this sum, he will make
good the loss of the assured, meet overhead expenses and will be left with some profit. It is
simple common sense that if some houses are subject to more than ordinary risk, the insurer
would charge some additional premium to protect himself against the extra risk, the insurerwould charge some additional premium to protect himself against the extra risk. The
premium in marine insurance is also fixed on like consideration. In life insurance, the
premium is based on the average rate of mortality.
The duty of the assured to pay the premium and the duty of the insurer to issue the policy to
the assured are concurrent conditions. The parties may also agree otherwise.
The premium is usually paid by instalments which may be annual, half-yearly, quarterly or
monthly. The policy lapses if the premium is not paid when it falls due or within the days of
grace.
Return of premium. The premium is returnable:
1. Where the consideration for the premium has totally failed, for example, where thesubject-matter ceases to exist or if the insured vessel has already arrived safely at the
time the contract is entered into. Where the consideration has partially failed,
appointment is made.
2. Where there never was a binding contract of insurance between the parties to thecontract, for example, where the policy is void ab initio provided there has been no
fraud or illegality on th part of the assured or where the contract is ultra vires the
insurers.
3. Where the assured has no insurable interest at any time during the currency of the
risk.
7/31/2019 Law of Insurance Report
12/23
MGT 206 LEGAL ASPECTS OF BUSINESS
Group Report 02 Page 12
4. Where the assured bona fide over-insures on an unvalued policy. In that case,proportionate premium is returnable.
5. Where the assured over-insures by double insurance, bonafide and not knowingly.
If the risk is run even for a very short period, the premium is not returnable. Also if the
contract of insurance is induced by fraud or misinterpretation on the part of the assured,and the insurer avoids the policy, the premium is not returnable at law.
Re-Insurance and Double Insurance
Re-insurance
Every insurer has a limit to the risk that he can undertake. If at any time a profitable venture
comes his way, he may insure it even if the risk involved is beyond his capacity. Then in
order to safeguard his own interest, he may insure the same risk either wholly or partially
with other insurers. This is called re-insurance. The reason for re-insurance like the reason for
original insurance is the necessity of spreading the risk.
Re-insurance can be resorted to in all kinds of insurance. The insurer has an insurable interest
in the subject-matter insured to the extent of the amount by him because a contract of re-
insurance is also called a contract of indemnity. The re-insurers are liable to pay the amount
of the loss to the original insurer only if the original insurer has paid the amount to the
assured.
The re-insurer is, however, not liable to the insured or assured. This is because there is no
privity of contract between them. But reinsurance is entitled to all the benefits which the
original insurer is entitled to under the policy. The policy of re-insurance, in other words, is
co-extensive with the original policy. If the original policy for any reason comes to an end or
is avoided, the policy of re-insurance comes to an end. A contract of re-insurance is also acontract ofuberrimae fidei. The original insurer, vis--vis the re-insurer, is in the position of
the assured. He must disclose to the re-insurer all the material facts disclosed to him. On
payment of the loss under the policy of re-insurance, the re-insurer is subrogated to all rights
of the original insurer including the rights of the assured to which the original insurer is
subrogated.
Double insurance
Where the assured insures the same risk with two or more independent insurers,and the total
sum insured exceeds the value of the subject-matter, the assured is said to be over-insured by
double insurance. There is over-insurance where the aggregate of all the insurances exceeds
the total value of the assureds interest at risk. If there is no express condition in a contract of
insurance, both double insurance and over-insurance are perfectly lawful.
Example. A insures his house worth Rs.50,000 with B for Rs.40,000 and with C for Rs.
30,000. There is double insurance. If he insures his house withB and Cfor Rs. 25,000 each,
there is no double insurance.
1. Recovery of actual loss: A man may insure with as many insurers as he pleases andup to the full value of his interest with each one. If a loss in no event is he entitled to
recover more than his loss, because a contract of insurance is a contract of indemnity
only. This right to sue his insurers in any order he likes is a valuable right for the
assured. It protects him against loss in the event of one or more of the insurersbecoming insolvent.
7/31/2019 Law of Insurance Report
13/23
MGT 206 LEGAL ASPECTS OF BUSINESS
Group Report 02 Page 13
2. Excess amount recovered to be held in trust. If an assured recovers more than thevalue of his interest in case of loss, he holds the excess amount recovered for the
insurers according to their respective rights inter se (among themselves), as a trustee.
3. Liability of insurers-contribution. The insurers as between themselves are liable tocontribute to the loss in proportion to the amount for which each one is liable. If an
insurer pays more than his rateable proportion of the loss, he has a right to recover theexcess from his co-insurers who have paid less than their rateable proportion.
4. No limit on life insurance: In case of life insurance, an assured may take any numberof policies on his life and for any amount.
7/31/2019 Law of Insurance Report
14/23
MGT 206 LEGAL ASPECTS OF BUSINESS
Group Report 02 Page 14
Chapter II Life Insurance ContractNukchala Jamir
The contracts of life insurance in India are governed by the insurance Act, 1938 and the Life
Insurance Corporation Act, 1956. The life insurance business in india was nationalised on
January 19, 1956. And on September 1, the same year, under sec. 3 of the Life Insurance
Corpration Act,1956, the Life Insurance Corporation of India came into being. The
nationalisation of life insurance is a vital link in the process of widening and deepening of all
possible channels of public savings for the development of the country. It is an important
steps towards mobilising savings.
A contract of life insurance is a contract by which the insurer, in consideration of the
payment of certain sums, called premiums,undertakes to pay a certain sum of moneyon the
death of a person whose life is insured, or on the expiry of a certain period, whichever isearlier.The premium may be paid in a lump sum or by periodical instalments.
Types of Contract
There are varioyus types of policies of life insurance. These are issued to meet the varying
and special needs of the members of the community. The main and important types are as
follows:
1. Endowmernt policy: It provides for payment of the sum assured at the end of aspecified term of years or at death should it occur sooner. This is the most important
form of life insurance.Children endowment policy: such a policy may be taken for the provision of the
marriage of the children when they attain a certain age.It may also be taken to ensure
for the education of the children after the death of the life assured, by means of
annuity payments payable at the end of the selected term of years.
2. Whole- life policy: Under this policy, premiums are payable throughout the life timeof the life assured. The sum assured becomes payable only on the death. It is the
cheapesr form of policy.
3. Limited-payment life policy: In this case, premiums are payable for a selected periodof years or until death if it occurs within this period. The assured knows how much
amount he will be required to pay, no matter how long he lives. This policy resembles
endowment policy as regards payment of premiums, the term being fixed in both thecases.But in case of limited payment policy, the amount becomes payable only on the
death of the assured.
4. Joint life policy: The sum assured uner a joint life policy (on two or more lives) ispayable at the end of the endowment term or on the first death of any of the lives
assured, if earlier. Partnership firms usually go in such for policies to provide for the
return of the capital of the deceased partner.
5. Convertible whole life policy: This policy is designed to meet the needs of youngpersons who are on the threshold of their career and have prospects of increase in
income after some years. In the earlier years the premiums are payable at a lower rate.
Then after the expiry of a certain period, the assured is given an option to convert the
policy into an endowment policy. If the option is not exercised, the policy continuesas a whole life policy with premiums ceasing at a certain age.
7/31/2019 Law of Insurance Report
15/23
MGT 206 LEGAL ASPECTS OF BUSINESS
Group Report 02 Page 15
6. Anticipated policy: This is a policy which provides for payment of the sum assured atthe end of specified intervals, say 20 per cent at the end of first five years, 20 per cent
at the end of next five years and the balance at the end of the term of the policy.
Should death take place earlier, the full amount of the policy becomes payable.
7. Annuity policy: This is a policy under which the amount is payable by the insurer not
in one lump-sum, but by monthly, quaterly, half-yearly or annual instalments after theassured attains a certain age. The assured may pay the premiums regularly over a
certain periodor he may pay a single premiums at the outset.The annuity is useful to
those who desire to provide a regular income for themselves and their dependents
after the expiry of a specified period.
8. Sinking fund policy: This policy is very useful for companies for redeeming theirdebentures or paying off their loans. A fixed amount is paid as premium annualy. It
goes on accumulating at a certain rate of interest. At the end of the required period,
the amount of the policy is paid to the company. Out of the amount so received,the
company redeems its debentures or pays off the loan. Such policies may also be taken
for making a provisions for the replacement of an asset afrer a period of time.
9. Janata Policy: It is a policy wich covers risk of death by accident for one year only.The premium charged is very nominal and in case of dearth aby accident a fixed
amount is payable.
Assignment and nomination
Assignment
An inrterest in a policy of life insurance, which is an actionable claim, can be assigned.
Assignement has the effect of transfering the rights of th transferor in respect of the policy to
the asignee. Sec 38 of the Insurance Act, 1938 contains the following rules regarding
assignment of life policies;
1. Procedures: The assignment, whether with or without consideration, can be made byan indorsement upon the policy itself or by a separate instrument must be signed by
the assignor, and attested by at least ibe wutness.
2. Notice: the assignment is binding upon the insurer after a notice in writing andindorsement on the instrument or a certified copy thereoff is delivered to him
3. Priority: Incase of more than one assignment, the priority of the claims of theassigness is governed by the order in which the notice to the insurer is delivered.
4. Recognition: the insurer recognise the rights of the assignees from the date of thereceipt of the notice.
5. Assignment subject to equities: the assignee, after the notice of the assignment isgiven to the insurer, is the only person entitled to benefit under the policy. This issubject to all liabilities and equities to which the assignor is subject at the date of
assignment.
6. Conditional assignment: the assignment may be absolute or conditional. Thus there isan assignment in favour of a person subject to the condition that the interest shall pass
to some other person on the happening of a specified event during the lifetime of the
assured, the assignment is valid.
Nomination:
The holder of the policy of life insurance on his own life may nominate the person to
whom the money secured by the policy is to be paid in the event of his death. This may bedone at the time when the policy is taken out or at anytime before the policy matures for
7/31/2019 Law of Insurance Report
16/23
MGT 206 LEGAL ASPECTS OF BUSINESS
Group Report 02 Page 16
payment. The person who nominate in the policy is called the nominee. The holder may
also appoint more than one nominee.
Section 39 of the insurance act, 1938 contains the following rules regarding nomination;
1. Procedure: the nomination is usually incorporated in the policy itself. It may also bemade by an indorsement on the policy. In this case, this would be communicated to
the insurer and registered by him in the records telating to the policy. The insurer is
bound to furnish to the policy holder a written acknowledgement of having registerd
the nomination.
2. Cancellation and change: A nomination may be cancelled or change before thepolicy matures for payment, by notice in writing to the insurer.
3. Automatic cancellation: A transfer or assignment of a policy automatically cancels anomination. Where the policy matures for payment during the lifetime of the person
whose life is insured, the amount secured by the policy becomes payable to the policy
holder or his heirs or legal representatives. Same will happen if the nominee dies
before the policy matures for payment. If the nominee survives the person whose lifeis insured, the amount secured by the policy becomes payable to him.
4. Discharge of insurer: the insurer is discharged from his liability under the policy bypaying the amount due to the nominee. If the policy matures for payment during the
lifetime of the assured, the insurer must pay the money to the policy holder. The strict
legal position of the nominee is that he is entitled to receive and collect the moneys
under the policy only as trusty for the benefit of legal hires of the decades.
Nomination does not clothe the nominee with title to an insurance money. It only
indicates the hands which is authorised to receive the amount on the payment of
which the insurer gets a valid discharge of his liability under the policy. The amount
however can be claim by the heirs of the assured in accordance with the law of
succession governing them.
7/31/2019 Law of Insurance Report
17/23
MGT 206 LEGAL ASPECTS OF BUSINESS
Group Report 02 Page 17
Chapter III Fire InsuranceAhuto Swu
Definition
Fire insurance means insurance against any loss caused by fire. Section 2 (6A) of the
Insurance Act defines fire insurance as follows: Fire insurance business means the businessof effecting, otherwise than incidentally to some other class of business, contracts of
insurance against loss by or incidental to fire or other occurrence customarily included among
the risks insured against in fire insurance policies.
What is fire?
The term fire in a Fire Insurance Policy is interpreted in the literal and popular sense .There
is fire when something burns .In English cases it has been held that there is no fire unless
there is ignition. Stnaley v. Western insurance CO. Fire produces heat and light but either of
them alone is not fire. Lightening is not fire but. But if lightening ignites something, the
damage may be covered by a fire-policy. The same is the case with electricity.
Characteristics of fire insurance
1. Fire insurance is a contract of indemnity: The insurer is liable only to the extent ofthe actual loss suffered. If there is no loss there is no liability even if there is a fire.
1. A fire insurance is a contract of good faith: The policy- holder and the insurer mustdisclose all the material facts known to them.
2. A fire insurance policy is usually made for one year only. The policy can be renewedaccording to the terms of the policy.
3. The contract of insurance is embodied in a policy called the fire policy. Suchpolicies usually cover specific properties for a specified period.
4. Insurance interest: A fire policy is valid only if the policy holder has an insurableinterest in the property covered. Such interest must exist at the time when the loss
occurs.
5. Assignment: According to English law a policy of fire insurance can be assigned onlywith the consent of the insurer. In India such consent is not necessary and the policy
can be assigned as a chose-in-action under the Transfer of Property Act.
Formation of contract.
A contract of fire insurance is entered into by the process of a proposal by one party and its
acceptance by the insurer. The proposal is made in writing by filling up a printed form, and
paying the premium or a part of it to the insurer. On receipt of the proposal and premium ,the
insurer issues a deposit receipt usually called a cover note. Subsequently if the proposal isaccepted the insurer issue a regular policy.
Example. Property worth rs 100000 is insured for rs 80000 the policy contains an average
clouse. If half of the is burnt down, the assured can recover only 40000. This is worked out as
follows sum to be recovered=value of policy/full value of subject matter *actual loss
80000/100000*500000=40000
The assured could recover the full amount of Rs 50,000 i.e, half of 100000.
Rights of insurer.
1. Right of avoiding the contract for non-disclosure or concealment of any material
fact. If the assured mis-states any fact or withholds any material fact, the insurer
7/31/2019 Law of Insurance Report
18/23
MGT 206 LEGAL ASPECTS OF BUSINESS
Group Report 02 Page 18
avoid the contract. The assured is bound to disclose not only the facts which he really
knows but also those which he is deemed to know.
2. Right of control over the property. When the property or goods are damaged ordestroyed, the insurer has an implied right to assume control over the damaged
property .It is the insurer who is ultimately to suffer the loss under the fire insurance
contract .In order to safeguard his interests, he can adopt any means he likes tomitigate further loss.
3. Right of entering the property .The insurer has, on a notice of fire by the assured, afurther rights to enter the premises insured or the premises where the things insured
are lying.
4. Right to salvage. When the subject matter is destroyed or damaged by fire, theinsurer has a right to take possession of the salvage. i.e, the property or things saved
after fire. This right of the insurer is absolute and flows from the contract of
indemnity.
5. Right of contribution. If the same subject-matter is insured with two or more insurers,and if in case of loss, one of the insurers has paid the full amount of loss to the
assured, the insurer has the right to claim contribution from the other co-insurers.
Types of fire policies
1. Specific policy: A specific policy is one under which the liability of the insurer islimited to a specified sum which is less than the value of the property.
2. Valued Policy: The valued policy is one under which the insurer agrees to pay aspecific sum irrespective of the actual loss suffered. A valued policy is not a contract
of indemnity.
3. Average policy: Where a property is insured for a sum which is less than its value, thepolicy may contain a clause that the insurer shall not be liable to pay the full loss but
only that proportion of the loss which the amount insured for, bears to the full value
of the property.
4. Floating policy: It is a policy which covers property at different places against loss byfire.
5. Replacement or reinstatement policy: In orders to prevent fraudulent devise by theassured, the insurer usually insert a clause in the policy, is called re-instatement clause
Assignment
A fire policy can be assigned like a chose-in-action under the Transfer or Property Act, 1882.
The assignment must be by endorsement on the policy or by a separate deed of assignment.
But the insurer must be given notice of assignment.
Section 135 and 49 of the Transfer of Property act, 1882 deal with assignment of fire
policies. The sections are reproduced below.
Every assignee, by endorsement or other writing, of a policy of insurance against fire, in
whom the property in the subject insured shall be absolutely vested at the date of the
assignment, shall have transferred and vested in him all rights of suits as if the contract
contained in the policy had been made with himself.(sec 135)
Where immovable property is transferred for consideration, and such property or any part
thereof is at the date of transfer insured against loss or damage by fire, the transferee , in case
of such loss or damage ,may, in the absence of a contract to the contrary , require any
7/31/2019 Law of Insurance Report
19/23
MGT 206 LEGAL ASPECTS OF BUSINESS
Group Report 02 Page 19
money which the transferor actually receives under the policy , or so much thereof as may
be necessary, to be applied in reinstating the property. (sec 49).
7/31/2019 Law of Insurance Report
20/23
MGT 206 LEGAL ASPECTS OF BUSINESS
Group Report 02 Page 20
Chapter IV Marine InsuranceDilip Kr. Sah
According to Marine Insurance Act of 1963, Sec. (3) A contract of marine insurance is an
agreement whereby the insurer undertakes to indemnify the assured, in the manner and to the
extent thereby agreed, against marine losses, that is to say, losses incidental to marine
adventure.
Marine Insurance is an attempt to minimize the loss due to perils of the sea in course of sea
voyage. The marine insurance is affected for three kinds of goods:
1. Hull Insurance: The Hull Insurance is affected against the loss of ship in the voyage.
2. Cargo insurance: This is an insurance affected against the goods loaded on the ship.
The goods in the upper deck of the ship are generally not covered under this
insurance.
3. Freight Insurance: Sometimes shipping freight is payable on the destination. Thus, itis doubtful for the shipping company that it may not be paid freight when the ship will
not reach at the destination. The freight insurance is a provision against this risk.
Warranties in a Marine Insurance:
In marine insurance the insured is required is required to fulfill certain conditions
compulsorily. These conditions are called warranties. Some of the conditions are
mentioned in the insurance policy. They are called expressed warranties. Some compulsory
conditions are not mentioned in the policy, but it is essential to fulfill these conditions to
make insurance contract legally valid. Such conditions are implied warranties.
There are three implied warranties:
1. Seaworthiness of the ship: It is essential in the marine insurance contract that the ship
should be worthy of transporting goods to the destination or it should have
seaworthiness. It is the responsibility of the shipping company to make the ship
seaworthy. If the insurance company proves that the ship had no seaworthiness, it will
not be liable to indemnify loss.
2. Legality of venture: The object of sea voyage should not be illegal. Trade with alien
countries, illegal trade etc., are the illegal ventures of the ships.3. Non-deviation: Most of the insurance policies contain this condition these days.
However, this clause was omitted in the policies of old age. This clause signifies that
the ship voyage should be on the sea routes mentioned in the policy as far as
practicable. Moreover, the voyage should be on the operating sea routes as far as
practicable if the route is not mentioned in the policy. The insurance company may be
liable to indemnify the loss, if the ship captain does not follow this principle.
However the deviation is allowed in the following circumstances:
a) When the insurance policy permits deviation.
b) When it was essential in the interest of safety and security of both the ship and the
cargo.
7/31/2019 Law of Insurance Report
21/23
MGT 206 LEGAL ASPECTS OF BUSINESS
Group Report 02 Page 21
c) When deviation is effected to save the life of a person on the ship or for medical
help.
Marine Losses
Marine losses are generally divided into two groups:
1) Total Loss: When there is loss of ship or cargo or freight in entirety, it is called totalloss.
2) Partial Loss: When a part of the subject of insurance is lost, it is called partial loss.
Features and Requisites of a Marine Policy:
A marine insurance policy to be valid must fulfill the following requirements:
1) Essential elements: A contract of marine insurance must fulfill all the essential
elements of a valid contract, for example the marine adventure which is the subject
matter of insurance, must be lawful.
2) Time of contract: A contract of marine insurance is deemed to be concluded when the
proposal of the assured is accepted by the insurer, whether the policy is then issued ornot, and for the purpose of showing when the proposal was accepted, reference may
be made to the slip, covering note or other customary memorandum of the contract
although it be unstamped Sec. 23.
3) The Policy: The contract must be written in a document called a sea policy or a
marine policy or a marine policy. Sections 24 to 33 of the Act lay down the rules
regarding the policy. The document must be stamped in accordance with the
provisions of the Stamp Act.
4) Insurable Interest: A marine policy is enforceable only if the policy-holder has an
insurable interest at the time when the claim is made.
5) Good faith: The contract of marine insurance is a contract good faith and the insured
must disclose all the material facts.
Types of Marine Insurance:
There are various types of risks in the sea voyage. The insurance companies issue different
types of marine policies to cover these risks. Some of the important marine policies are as
follows:
1) Voyage Policy: It is the marine policy issued for a specific sea voyage viz. Delhi to
London voyage insurance. The insurance company is liable to indemnify the losses in
this particular voyage. Such insurance is more suitable for cargos.2) Time Policy: It is a marine policy issued for a specific period of time, viz. the policy
for the period of 1st
Jan 2011 to 1st
Jan 2012. This policy is generally affected for the
instance of the ship. The ship voyages may be at different times during the period.
3) Mixed Policy: This policy is affected in the combined form of voyage and time
policies. This policy is generally obtained for the ships which operate in between two
ports.
4) Valued Policy: This policy contains the value of the subject of the insurance. The loss
is indemnified on the basis of that value.
5) Unvalued Policy: The value of the subject of the insurance is not mentioned in this
policy. The actual loss is ascertained and claims are paid on the basis of actual loss.
7/31/2019 Law of Insurance Report
22/23
MGT 206 LEGAL ASPECTS OF BUSINESS
Group Report 02 Page 22
6) Floating or Open Policy: When a businessman makes shipment of the goods on
different times, he will obtain a floating or open insurance policy. The insured will
have to inform the insurance company about shipment of the goods and the name of
the ship within a particular period of time. This process continues till the shipment of
goods is made to the amount of insurance policy.7) Block Policy: The policy covers other risks also in addition to the risks of sea routes.
These other risks are not concerned with sea voyage such as risk of transport from
coal mines to the port. The place of origin of this policy is the gold mines in Africa.
8) Wager Policy: The wager policy is obtained for the insurance of such subject in which
the insured has no insurable interest. This policy is not legally valid. In fact, it is not a
policy but a kind of wagering contract.
9) Currency Policy: The insurance policy issued in foreign currency is known as
currency policy. This policy is affected to cover the risk of loss due to variations in
the rate of exchange.
10)Construction Policy: This policy covers the risks during the construction period of the
ship. This policy continues till the ship is worthy for the sea voyage.
Important Clauses of a Marine Insurance Policy:
Generally the following are the important clauses of a marine insurance policy:
1) Name of the Insured or his Agent: This clause contains the name of the insured or his
agent. There is also provision in this clause to mention the name of assignee of the
policy.
2) Lost or not lost clause: Sometimes marine insurance is affected after the departure of
the ship. In this condition, both the insured and insurance company has no knowledgeabout the safety of goods and the arrival of the ship to the destination. Thus this
clause signifies that the goods are insured by the insurance company whether lost or
not lost.
3) At and From clause: This clause is used in voyage policy. Full description of the
voyage is mentioned in it. It also contains the times of beginning and end of the
voyage. When From is mentioned in this policy, the risk of the insurance company
will begin from the departure of the ship. And in case of At and from clause the risk
begins from the time of loading the goods on the ship.
4) Name of the Vessel: This clause contains the name of the vessel through whichshipment of goods is made. There will be no change of ship without the permission of
the insurance company.
5) Name of the Captain: This clause contains the name of the captain of ship, but it is
not compulsory.
6) Touch and Stay: This clause contains the name of all those ports where the ship will
stay. The time of stay of the ship at each port is also mentioned in this clause.
7) Valuation: This clause contains the value of goods insured. In the absence of this
clause, the loss is determined by making valuation of the goods insured.
8) Perils: This clause contains the perils of the sea for which the insurance company
bears the risks to indemnify the loss. The perils of the sea are accidental,
7/31/2019 Law of Insurance Report
23/23
MGT 206 LEGAL ASPECTS OF BUSINESS
G R P
extraordinary and unknown, such as foundering, stranding, collision, seawinds etc.
from which the ship is damaged.
9) Premium: This clause contains the amount of premium.
10)Sue and Labour: The sue and labour clause empowers the insured to realize all those
expenses from the insurance company which may be incurred in connection with thesaving or reducing the possibilities of perils of the sea.
Reference:
Sen, Anil, Kumar, Mitra, Jitendra, Kumar Commercial law and Industrial Law, WorldPress 2008
Kapoor, N. D., Mercantile Law, Sultan Chand Verma, Yogendra, Prasad, Elements and Organization of Commerce
*******