General Principles of

INSURANCE
Dr.Ashok R Patil
Associate Professor in Law
Chair on Consumer Law and Practice
NLSIU, Bangalore

Nature of the Insurance Contract

a. Contract is Aleatory: contract of
speculation; depending on uncertain
event or contingency as to both
profit and loss
b. Contract of Utmost Good Faith
(Uberrima fides)
c. Contract of Indemnity
d. Not a Wager Contract

Insurable Interest means

A relation between the insured
and the event insured against,
such that the occurrence of the
event will cause substantial
loss or injury of some kind to
the insured.

Insurable Interest
1. The interest should not be a mere
sentimental right or interest, for
example, love & affection alone
cannot constitute insurable
interest.
2. It should be a right in property or
a right arising out of a contract in
relation to the property.

Cont..
3. The interest must be pecuniary, that is,
capable of estimation in terms of money. -In other words, the peril must be such
that its happening may bring upon the
insured an actual or deemed pecuniary
loss. Mere disadvantage or inconvenience
or mental distress cannot be regarded as
an insurable interest.
4. The interest must be lawful, that is, it
should not be illegal, unlawful, immoral or
opposed to public policy.

When Insurable Interest must

Exist?
i. Life Insurance: at the time of
beginning/inception
ii. Fire Insurance: both at the time of
beginning and at the time of loss
iii. Marine Insurance: at the time of loss

i.

Insurable Interest and

Life Insurance

Insurable interest should exist at the

time of taking the policy. It need not
exist at the time when the loss takes
place or even when the claim is made
under the policy.
Life insurance contracts, as we have
noted, are not strictly speaking
contracts of indemnity.

 The following persons have been

recognised as having insurable
interest and they may conveniently
be considered under three main
headings, namely:
a) By relationship by marriage, blood or
adoption
b) By contractual relationship, and
c) By statutory duty

a) Blood Relationship
i)

On ones own life: Every person is

presumed to have insurable interest in his
own life without any limitation. Every
person is entitled to recover the sum
insured whether it is for full life or for any
time short of it. If he dies, his nominee or
dependents are entitled to receive the
amounts.
ii) By Husband or Wife:
iii) Parent and Child:
iv) Other relations

ii) By Husband or Wife

Griffiths v Fleming (1909)
- It is now well settled in England and America
that a wife has an insurable interest in the
life of the husband and vice versa.
- It forms an exception to the general rule
that interest necessary to support the
insurance of another persons life must be
capable of expression it terms of money or
pecuniary interest.

 The husband and wife are dependent

on each other, that is presumed as
insurable interest in the life of each
other.
Insurable interest should be existed
at the time of entering in to the
contract. They will continue to be
operative even after the dissolution of
the marriage.

Example
A takes out a policy on the life of his wife B
and subsequently even if they are divorced
still the policy continues to be valid.
On other hand, if A takes out a policy on
the life of B whom he proposes to marry or
who has been divorced by him, the policy is
not valid for want of insurable interest at
the commencement of the risk, that is, at
the time when the contract is made.

ii) Parent and Child

If the person has any pecuniary interest in
the life of the child, whether natural or
adopted, he can take out an insurance
policy on the life of such child.
A child whether natural or adopted is
presumed to have an insurable interest in
the life of the parent because it depends on
the life of the parent for support whether
natural or adopted.
Even if such interest is proved, if a person
effects a life insurance on a boy whom he
intends to adopt, the insurance is not valid.

b) Contractual Relationship

Debtor and Creditor

Partner and Co-partner
Principal and Agent
Master and Servant

Debtor and Creditor Relationship

A creditor has an insurable interest in the
life of the debtor [Godsall v Baldero (1807)]
It is immaterial whether the debt is secured
or unsecured.
The creditors interest has an insurable
interest in the life of the debtor because the
chance of obtaining repayment materially
depends upon the continuance of the life of
the debtor.
The creditor has also an insurable interest
in the life of the surety, as a surety is only
a favoured debtor.

 On the same principle the surety has

an insurable interest in the life of the
principal debtor.
A policy on the life of the debtor will
not cease to be operative even
though the debt has been satisfied or
the debt becomes time barred before
the debtor dies.

Similarly
Surety can insure the life of a co-surety
Mortgagee can insure life of his mortgagor

In these relationship it may be

noted that the person who is in the
position of a creditor only has an
insurable interest in the life of the
person in the position of the debtor
and not vice-versa

Utmost Good faith/ Uberrima fides

A contract of insurance is a contract
based upon the utmost good faith,
and, if the utmost good faith be not
observed by either party, the contract
may be avoided by the other party.

LIC v. G.M.CHannabsemma,
AIR 1991 SC 392
In a landmark decision the SC has held that
the onus of proving that the policy holder has
failed to disclose information on material facts
lies on the corporation.
In this case the assured who suffered from
tuberculosis and died a few months after the
taking of the policy, the court observed that it
is well settled that a contract of insurance is
contract uberrimae fides, but the burden of
proving that the insured had made false
representation or suppressed the material facts
is undoubtedly on the corporation.

Sec.45 of Insurance Act 1938

The insurance contract is a contract of utmost
good faith and therefore if the assured has
not disclosed all the material facts, the
insurance company can avoid the contract.
It has become the practice of the insurers to
insert a clause in the policies and proposal
forms as we have already noted, to declare
that all the answers stated in the proposal form
shall form the basis and form part of the terms
of the contract in the policy.

New India Insurance Company v.

Raghava Reddy, AIR1961 AP 295
It was held that a policy cannot be avoided on the
ground of misrepresentation unless the following
are established by the insurer namely,
a. The statement was inaccurate or false.
b. Such statement was on a material matter or that
the statement suppressed facts which it was
material to disclose.
c. The statement was fraudulently made
d. The policy holder knew at the time of making
the statement that it was false or that fact which
ought to be disclosed has been suppressed.

Cont..
By such a declaration, for any variation of
the state of things from the
representations in the proposal form,
whether in fact is material or not, and
however slight the variation may be the
insurer gets a right to avoid the policy.
Section 45 of the Insurance Act 1938,
modified this rule materially and
mitigated the rigour of the rule of utmost
good faith.

Cont
It lays down that no policy can be
challenged after two years from the date
of the policy on the ground that any
statement made in the proposal or in
any report of the medical officer or any
document was inaccurate or
false unless it is material to disclose and
it was fraudulently made and the policy
holder knows at the time that it was
false or he suppressed the fact material
to be disclosed,

Cont..
provided that nothing in that
section prevents the insurer
from calling for proof of age of
the assured or to adjust the
rate of premium according to
the correct age proved
subsequently.

Mithoolal v. Life Insurance

Corporation, AIR 1962 SC 814
LIC challenged a policy after two
years after its issue. It was in
evidence that the assured
fraudulently suppressed facts. It was
held that the LIC was not liable

LIC v. Janaki Ammal, AIR 1968

Mad 324.
Following the SC observations of the
Mithoolal case referred to above held that if
a period of two years has expired from the
date on which the policy of life insurance
was effected,
that policy cannot be called in question by
an insurer on the ground that a statement
made in the proposal for insurance or on
any report of a medical officer or referee,
or a friend of the insured, or in any other
document leading to the assure of the
policy, was inaccurate or false.

Present Position
If the policy is questioned after a period of
two years the insurer can repudiate the
policy only if he knows that such a
statement was on a material matter or the
insured suppressed facts which it was
material to disclose and
that it was fraudulently made by the policy
holder and that the policy holder knew at
the time of making it that the statement
was false or that it suppressed facts which
it was material to disclose.

Special Doctrines
Reinstatement
Subrogation
Contribution

Special Doctrines
Reinstatement
Reinstatement literally means
- replacement of what is lost or
- repairing the damaged property and
bringing it to its original value and
utility.

In Anderson v. Commercial Assurance Co,

(1955) 55 DJQB 146 (CA)
Lord Esher MR explained: we have come to
the conclusion that the words reinstate
and replace should thus be applied:
- if the property is wholly destroyed, the
company may, if they choose, instead of
paying the money replace the things by
others which are equivalent; or,
- if the goods insured are damaged but not
destroyed, may exercise the option to
reinstate them, ie, to repair them and put
them in a condition in which they were
before the fire.

Right of Reinstatement
This right of the insurers to reinstate
the property instead of paying the
money may spring up;
a. either from a contract in the form
of a clause under the policy, or
b. under a statute.
This type of clause is not inserted in
all policies in all branches of
insurances, eg, it is not and cannot
be included in life policies.

 Only in indemnity insurances, in

appropriate branches of insurance, like
fire, burglary, steam boilers, or motor
vehicle insurances, this clause called
the reinstatement clause, entitling the
insurers to exercise an option, on the
happening of the insured event, either
to reinstate or to pay the insured
money can be incorporated.

Times Fire v Hawke, 1858

When once the option to reinstate is
expressly or by implication exercised
in favour or reinstatement, it
amounts to a new contract and they
cannot go back and say that they
would pay money.
The selection of one alternative
amounts to an abandonment of the
other.

In Brown v Royal Assurance co Ltd, 1859

CJ Campebell observed:
On exercising the option the case stands
as if the policy had been simply to
reinstate the premises in case of fire;
because, where a contract provides for
an election, the party making the
election is in the same position as if he
had originally contracted to do the act
which he has elected to do

 In reinstatement, it is sufficient
that a substantially similar building
is construed although the new
building is not identical in all
minute details with the destroyed
one.
But if the new building is by far
less than the original building, they
have to make good the loss.

In Brown v Royal Insurance Co

It has been held that if the new
building is costlier than the
original building, on that count
they cannot go back from their
duty nor in the absence of a
specific agreement, require the
assured to contribute for the
balance.

Smith v Colonial Mutual Fire, 1880

It was held that if a fire occurs

for a second time during the
reinstatement, they are their
own insurers and so cannot
claim credit for what they have
already spent.
They should replace a similar
building.

Subrogation

Randal v. Cockran (1748) 1 Ves Sen 98

The doctrine of subrogation is a
necessary incident to a contract of
indemnity and therefore is applicable
to a contract of fire insurance and
one of marine insurance.

 It is given statutory recognition in sec.79

of the Marine Insurance Act 1906. Under
this doctrine, as applicable to fire
insurance, the insurer has a right of
standing in the shoes of the insured and
avail himself of all the rights and
remedies of the insured, whether already
enforced or not.
The principle of subrogation prevents an
insured who holds a policy of indemnity
from recovering from the insurer the sum
greater than the economic loss he has
sustained.

 Therefore, if a loss occurs under such

circumstances that insured has an
alternative right to recover damages,
under common law, tort or statute and
if the loss is also covered by the policy
and so he can recover the entire loss
from the insurer and if he so receives,
the insurer is entitled to, or is
subrogated to, the former alternative
rights and remedies of the insured and
this is technically called subrogation.

Limitation on the Doctrine

i.

Does not apply to life and personal

accident policies;
Before the doctrine is applied, there must be
indemnity. Since life and personal accident
policies are not governed by strict principle
of indemnity the doctrine applies only to
fire, marine and other non-life policies;
ii. Insurer must pay before he claim
subrogation;

iii. Assured must have been able to bring action.

For Example.
where two ships belonging to the same owner collided
by fault of one of them, the insurers of the ship not at
fault have been held not to be entitled to make any
claim on the owner of the ship at fault, though the
insurers of cargo owned by a third party can claim
subrogation [Simpson v. Thompson, 1877 (3) AC
279].
Similarly, where the assured and the wrongdoer are
co-assureds the doctrine does not apply [Petrofira v.
Magnaload, 1983 (2) Lloyds Rep 91].

AIR 2001 SC 2630 "Savani Road Lines v.

Sundaram Textiles Ltd."

COPRA S.2(1)(d) - CONSUMER

PROTECTION - "Consumer" - Insurance
company compensating consignor for
loss of goods during transit - Insurance
company taking letter of subrogation,
filed consumer complaint for recovery
of amount against carrier of goods Letter of subrogation was in effect an
assignment -

 Therefore, insurance company being

an assignee was not beneficiary of
services hired by consumer from
carrier - Insurance company not
consumer vis-a-vis the carrier Consumer complaint by Insurance
Company, not maintainable Insurance company can file civil suit
for recovery of amount.

Contribution
Like subrogation, contribution is also
a corollary to the principle of
indemnity. Therefore contribution
generally arises only in property
insurance. The rule is of ancient
origin and was recognized by the
chancery courts.

North British and Mercantile v. Liverpool

and London Globe, (1977)3 Ch.D 569
The doctrine is defined and explained in
this judgment as:
Contribution exists where the thing is done
by the same person against the same loss,
and to prevent a man first of all recovering
more than the whole loss or if he recovers
the whole loss from one which he could
have recovered from the other, then to
make the parties contribute rateably. But
that only applies where there is the person
insuring the same interests with more than
one office.

 Contribution arises because of the

liberty of the assured to insure the
same property with more than one
insurer which is called double
insurance. By mere double insurance
and, over insurance, the right of
contribution springs up.

Essential conditions of Contribution

i.

All the insurance must relate to the same

subject-matter.
ii. The policies concerned must all cover the
same interest of the same insured.
iii. The policies concerned must all cover the
same peril which caused the loss.
iv. The policies must have been in force and
all of them should be enforceable at the
time of loss.

Example
If a house is insured with company X for
Rs.5,000 and with company Y for
Rs.10000 and the damage amounts to
Rs.1200,
company X will apparently be liable to
contribute Rs.400 and company Y
Rs.800.

Differences between the Doctrines

of Contribution and Subrogation
i.

In contribution the purpose is to

distribute the loss while in subrogation
the loss is shifted from one person to
another
ii. Contribution is between insurers but
subrogation is against third party
iii. In contribution there must be more
than one insurer but in subrogation
there may be one insurer and one
policy.

Cont..
iv. In contribution the right of the
insurer is claimed but in
subrogation the right of the
insured is claimed.
In modern fire policies we find the
contribution clause which enables
the insurer to claim contribution
from other co-insurers.