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Insurance is a business of risk but not a risky business
Submitted to Adv. Nadirshaw K. Dhondy
By: Lucky Parashar 08bs0001551
I, Nadirshaw K. Dhondy, Advocate Supreme Court, have examined the thesis of Ms. Lucky Parashar who is enrolled at ICFAI Business School, Mumbai in the MBA course for the academic year 2008-2010 at unique enrollment number 08BS0001551 She has completed the thesis entitled “Insurance is a business of risk but, not a risky business” in part completion of the final examinations. She has been rated to receive ______ marks out of fourty (40). Dated 14th day of December Signed Signed
Nadirshaw K. perpetual support and encouragement has made me what I am. I can never measure the contribution of my family. Dr. Y. I owe a deep sense of gratitude to Mr. Though words are seldom sufficient to express gratitude. love. the Dean of IBS Mumbai. ACKNOWLEDGEMENTS This project is not a result of an individual effort but is a product of collective wisdom and experience of all those who have shared their views. whose blessings. my teacher and guide who provided me with an overwhelming opportunity to work in an area where I could gain more knowledge. Lastly I am grateful to almighty for giving me an opportunity to showcase my practical effort in the work led by many. Bhushan. With a deep sense of gratitude my thanks to the campus head and the senior advisor. Dhondy – Supreme Court Advocate. . I also take this opportunity to thank Advocate Rahul Diwaker. It is my great privilege and a unique experience to study in IBS Mumbai led by him. K. it somehow gives me an opportunity to acknowledge those who have helped me with this thesis titled “Insurance is a business of risk but. far beyond those found within the covers of the book. Madam Sunanda Ishawaran. a friend and guide for his guidance and support.3 |Page Lucky Parashar Dhondy Nadirshaw K. thus at the onset I would like to thank all those helping hands. not a risky business”.
People buy insurance so as to protect themselves from the costs of a catastrophically expensive possibility. and there is risk as well as insecurity. synchronization between insurance and investments. It is to provide against risk and insecurity that insurance came into being. Risk and uncertainty are incidental to life. External hedging through a. Appropriate portfolio construction and timely revision. homogenization/ Mutualisation . destruction of property.4 |Page PROLOGUE Generally speaking. He may suffer from accident. earthquakes and other natural calamities. fire. sea perils. Averaging portfolio of volumes risks. Insurance principle operates on the Law of Large Numbers and the Law of Averages (Lex Numerorum Multorum Et Principiae Medianae Propabilitatis) An insurance company mitigates. coinsurance b. By a simple interpretation. Internal Hedging through a. Insurance does not avert or eliminate loss arising from uncertain events. insurance is a measure of risk management in our day-to-day life against the possibilities of risks and uncertainties. the business of insurance is a business of risk. b. B. co-relationships. Whenever there is uncertainty. and mix by establishing statistical portfolio independence convergence. eliminates and reduces risk by two methods: A. Man may meet an untimely death. floods.
Seema Malhotra (2001) 3 SCC 151 . An insurance policy will set out in detail which perils are covered by the policy and which are not. Any risk that can be quantified can potentially be insured.1 1 National Insurance Co. Such business of the insurance company can be carried on only with the premium paid by the insured person on the insurance policy. Risk can be defined as “calculated uncertainty”. The only profit. to be charged for a certain amount of insurance coverage. The essence of the insurance business is the risk by undertaking to indemnify the insured against loss or damage. Reinsurance Insurance 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. An insurer is a company which accepts your risk after charging a premium.5 |Page c. V. Specific kinds of risk that may give rise to claims are known as "perils". They agree to pay the damages out of any accident by taking a chance that no accident might happen. of the insurance of the insurance business is the premium paid when no loss or damage occurs. called the premium. Motivation of the insurance business is that the premium would turn to be the profit of the business incase no damage occurs. The insurance rate is a factor used to determine the amount. But to ask the insurance company to bear the entire loss or damage of somebody else without the company receiving a rupee towards premium is contrary to principles of equity. if at all the insurance company makes.
Chandumull Jain AIR 1966 SC 1644. 9. Skandia Insurance Company Ltd. v. M/s. 1993 SC. Balkrishna v. Pawson v. Indian Charge Chrome and others. v. Ltd v. 6. 4. Oriental Insurance Co. M. 13. 8. New Castle Fire Insurance Company v. . (1857) 8 E and B 232. Wheelton v. (1863) 3 B&S 751. 5.K. (2001) 1 SCC 269.J.M. Faber..Channabasamma (1991) 1 SCC 357. (1815) 3 ER 1057. v. 340. Modern Insulators Ltd.J Corpn. 14. v. 3. Kokilaben Chandravadan. (1987) 2 SCC 654. 12. Life Insurance Corporation of India v. Burness. M. Life Insurance Corporation of India v. 15. Svenska Handelsbanken vs. B. Rao. Watson.K. 7. Ltd. General Assurance Society Ltd. Mac Morram and Co. United India Insurance Co ltd.6 |Page CASE LAW INDEX 1. AIR 1959 Pat 102. Haristy. Hanil Era Textiles Ltd. (1983) 1 Q. Glen v. 11. Parvathavardhini Ammal AIR 1965 Mad 357. Smt. Kusuma T. United India Insurance co. (1778) 98 ER 1361. 2. New Indian Assurance Company. (2000) 2 SCC 1014. Lewis (1853) 8 Exch.B. 17. 16. (1991) 70 Comp Cas 86. Behn v. Oriental Insurance Company Ltd. G. 607. Barnard v. (1996) 6 SCC 428. v. Life Insurance Corporation v Smt. Corporation (1996) 6 SCC 428. 10.
805. Chinto Devi & Others. Mrs. (1909) 1 K. v.R. CIT (1991) 4 SCC 22. (1990) 2 SCC 680. 21. Sujir Ganesh Nayak and Company. SC. 22. Griffith v. Ltd. Limited. Sainani (1997) 6 SCC 383. Preston (1881) All ER 494. Vasudeva Mudaliar v Caledonian Insurance Co. 1972 (2) SCC 877. Union of India v Sri Sarada Mills Ltd. v. (1899) AC 604 (PC).. Manufacturer's Life Insurance Company.. 20. Life Insurance Corporation of India v. (1886) LR 1 CP 305. 371. Anctil v. v. 25. SC. Western Insurance Company (1868) L. 31. 19. 2002 (2) SCC 407. 23. 1966 (1) AC.B. 34. 33. & Anr. V Hoplurane. 418. Seema Malhotra (2001) 3 SCC 151 . & Anr. New India Assurance Company Ltd. 1984. Tomlison (Haullers) Ltd. 27. Stanley V. 26. 29. Seagrave v Union Insurance Co. V. Jikubhai Nathuji Dabhi (Smt) and Others. v. A. v. New India Assurance Company. AIR 1997 SC 2049. 28. National Insurance Co. National Insurance Company. Oberai Forwarding Agency v New India Assurance Co. B. 2000. Fleming. 1997(1) SCC 66. Vania Silk Mills (P) Ltd. Raja Vasireddi Komalavalli Kamba and Others. 32. Limited. v. AIR 1965 Madras 159.7 |Page 18. Ram Dayal & Others. Castellan v. 30. Ltd. 24. National Insurance Company Limited. N. National Insurance Company Ltd..
both tangible. factory or intangible like the voice of a singer. disaster and dangers cannot be predicted. The person/business that gets its life/property insured is called 'Insured/Assured'. if one is able to predict the forthcoming dangers. This makes insurance indispensable for a business organization. the hand of an author and many others. The agreement or contract . risk and insecurity are incidental to any form of business. in return for a consideration called 'premium'. The agency which helps in entering into an insurance arrangement is called 'Insurer' or 'Insurance company'. the house. because death. leg of a footballer. For insurance. Now all such assets are insured because they run the risk of becoming non-functional through a disaster or an accident. All individuals have assets. Such possible and unforeseen occurrences are known as “Perils”. And the damage caused by such perils is called risk that the assets are exposed to. car. Risk is a contingency and the insurance is done against such possible contingencies. Uncertainty. the concept of insurance will cease to exist.8 |Page PRIME TIME MATTER Life is full of uncertainties and insurance is based on uncertainties and if there are no uncertainties about the occurrence of a disaster. then one will take a proper safeguard action and then face the crisis in a very normal manner. but then this is a utopian concept. Insurance may be defined as a contract in writing under which one party agrees to indemnify the other party against a loss or damage suffered by it on account of an uncertain future.
Continuity and certainty of business: if all the risks were to be borne by the businessmen themselves. It is a means of pooling of risks. under which a group of people who are subject to an insurable risk contribute regularly to a fund. The fund so created is utilized to compensate those members of the group who actually suffer a loss due to some unexpected calamity. it enables the business firm to invest and optimally utilize its capital. Thus the loss of a few is shared by all the members on an equitable basis. at the time of admission to the group. Credit standing: of the firm is enhanced as the businessman can easily transfer some of his risks to an insurance company.9 |Page which is put in writing. the aim of insurance is to compensate the owner against the losses arising from a variety of risks which he anticipates to his life. then the loss will be shared by others and minimized in order to enable the individual member recover from the loss and cover his ground. Diffusion of risks: as the burden of loss is spread over a large number of people. congregate and come to an agreement that if any individual member suffers a loss. property and business. the business operations would have been uncertain and halting in character. Thus. People who are in a similar trade and are exposed to the same risks. Better utilization of the capital of the firms: as the Insurance companies take over the risk. is called a 'policy'. INSURANCE IS A BUSINESS OF MANAGING RISKS The concept of insurance is quite simple. Similarly the different kinds of risks can be identified and separate groups can be formed to counter such risks and reduce the impact to a manageable level in which the share could be collected from the members either after the loss or in advance. An insurance policy provides the following benefits to a business concern : Protection: it provides protection against risk of loss and a sense of security to the businessmen. This is an exemplary sign of humanity and insurance therefore serves .
the result can be anywhere from 2 to 12. Having a stock that pays $100 in dividends each year and seldom changes in price is not very risky. then you can better evaluate your options and perhaps get a better deal on insurance. Having a stock that goes up or down wildly from one period to another is risky. You pay an insurance company a premium and insurance pays your bills.000 is risky. "Risk Pooling" happens when many people get together and share their losses by averaging them together. permanently or temporarily. but saved from the misfortune. if you roll dice once. If you roll . You get rid of risk and the insurance company takes your risk. The purpose of insurance is a safeguard against such misfortunes by making good the losses of the unfortunate few. who were exposed to the same risk. the average becomes more and more stable. Unusually high or low numbers tend to cancel each other out. If the property which is the source of such income is lost fully or partially. However. Thus the essence of insurance is to share losses and substitute certainty by uncertainity. Having a chance of winding up in the hospital and having to pay $100." As you average together more and more numbers in a certain range. The same is true for health care costs. the income too would stop. a point most of the individuals tend to overlook. since monetary aspect is involved. What does the insurance company do with your risk? Do they keep it? Do they also get rid of it somehow? When you understand what the insurance company does with your risk. HOW DOES INSURANCE REDUCE RISK? Health insurance seems like a simple exchange.10 | P a g e mankind to a great extent. Risk pooling works because of the "law of large numbers. through the help of the fortunate many. For example. there is more to it that this. Satisfaction of economic needs requires generation of income from some source. One measure of risk is the potential for ups and downs. Paying $100 each year for eyeglasses is not risky.
the do not cancel out. the average will be very stable around 7. their average return from the portfolio is more stable and less risky than the return from a single stock. Risking pooling is also used in finance. the average cost is very stable and they have little risk themselves. INSURANCE REGULATION IN INDIA Insurance law regulations in India manage all the matters related to various insurance companies in the country. ENTRY OF PRIVATE COMPANIES: A LAND MARK DECISION . Insurance companies use risk pooling to get rid of the risk they take from you. "Independent" risks go up and down at different times. although contagious diseases or widespread disasters can change that. Health care risks for individuals are generally independent.11 | P a g e dice more and more. When they pool many people. In order for risk pooling to work. the insurance companies in India were privatized. Since its introduction. Earlier. For example. When people buy a bunch of different stocks in a diversified portfolio. not together. the individual risks that are pooled must be independent. the history of insurance in India has undergone many phases. When risks go up and down at different times. They charge you a premium based on average cost plus their administrative cost. By the time you roll the dice 1. Social insurance was the first of its kind which took shape in India. it is less risky to provide accident insurance for 100 people traveling on 100 different boats than for 100 people traveling on the same boat. If they go up and down together. they tend to cancel each other out. The idea of getting anything insured gained its momentum from the overseas traders who used to practice marine insurance in somewhat crude form. This is one reason why many life and property insurance policies exclude losses from catastrophic events such as war. The concept of insurance in India dates back to the ancient period.000 times. the average will get closer and closer to 7.
12 | P a g e In the later years. In the most recent move in this regard. Some of the important powers. These include: • • • • Insurance Regulatory and Development Authority (IRDA) Tariff Advisory Committee Ombudsmen Insurance Association of India Insurance Regulatory and Development Authority (IRDA) Insurance Regulatory and Development Authority (IRDA) is a very powerful body which oversees important aspects of the functioning of the insurance companies in India. This remarkable decision gave the industry a breath of fresh air. the Insurance law regulations in India permitted the entry of private companies and foreign investment in the sector. insurance companies were nationalized with the help of insurance laws. duties and functions of Insurance Regulatory and Development Authority (IRDA) include: • • • • • To regulate. Much of the development and growth of the insurance sector in India owes to the decision of the government to nationalize the insurance business in India and to allow private and foreign insurance companies to establish their business in the country. ensure and promote the orderly growth of the insurance business To prescribe regulations on the investment of funds by insurance companies To regulate the maintenance of the margin of solvency To adjudicate the disputes between insurers and intermediaries To supervise the functioning of the Tariff Advisory Committee . It was set up by the government to safeguard the interest of the insurance policy holders of the country. REGULATORY AUTHORITIES There are 4 regulatory authorities which oversee different functioning of the insurance companies in India and provide guidelines to them.
benefits. These days a new concept of terrorism insurance has come up. Anyone having a grievance against an insurance company can approach Ombudsmen for redressal. TYPES OF INSURANCE Insurance is mainly protection against future loss. It can be better described as promise of reimbursement in any case of loss. They are appointed to address all complaints relating to settlements of claims. Liability Insurance and Credit Insurance. Insurances are paid to people or companies by the insurance company against any kind of hazards or calamities. It has 2 councils under its patronage. Insurance Association of India All the insurance companies functional in India are members of the Insurance Association of India. These are known as: • • Life Insurance Council General Insurance Council Ombudsmen Ombudsmen play important role in regulating and ensuring smooth functions of the insurance companies. .Health Insurance. Life Insurance. Casualty Insurances. terms and conditions offered by the insurance companies working in India. Disability Insurances. There are some major types of insurances that include.13 | P a g e Tariff Advisory Committee The prime duty of Tariff Advisory Committee is to regulate and control the rates. Terrorism insurance is insurance purchased by property owners to cover their potential losses and liabilities that might occur due to terrorist activities. Property Insurance.
5 United India Insurance co. The burden of proof to show non-disclosure or 3misrepresentation is on the insurance company and the onus is a heavy one4. The Marine Insurance Act.Channabasamma (1991) 1 SCC 357. Good Faith A contract of insurance is a contract uberrimea fidei i. Parvathavardhini Ammal AIR 1965 Mad 357. M. The duty of good faith is of a continuing nature in as much no material alteration can be made to the terms of the 5 contract without the 7 mutual consent of the parties.8 The Insurance Act lays down that an insurance policy cannot be called in question two years after it has been in force for two years.J Corpn. (2001) 1 SCC 269.K. 1. Both the parties to the contract are required to observe utmost good faith and should disclose every material fact known to them. 4 Life Insurance Corporation of India v. Just as the assured has a duty to disclose all 6 the material facts.M. 6 Section 21(a) of the Indian Marine Insurance Act. v. this provision is not applicable when the statement was made fraudulently.14 | P a g e PRINCIPALS OF INSURANCE LAW Where there is a positive enactment of the Indian legislature. However. 1963 2 3 subsequently demand additional premium nor can he escape liability by contending that General Assurance Society Ltd. . Ltd.J. equity and good conscience. Smt. The insurer cannot the situation does not warrant the insurance cover. However. which has been in force for a long time. the language of the statute is applied t o the facts of the case. the insurer is also under an obligation to do the same. 7 Hanil Era Textiles Ltd. This was done to obviate the hardships of the insured when the insurance company tried to avoid a policy. Corporation (1996) 6 SCC 428. G. v. 1906. the common law of England is often relied upon in consideration of justice.K. There is no difference between a contract of insurance and any other contract except that in a contract of insurance there 2 is a requirement of utmost good faith. (1996) 6 SCC 428. Oriental Insurance Co. a contract of utmost good faith. on the ground of misrepresentation. v. This is a fundamental principle of insurance law. Chandumull Jain AIR 1966 SC 1644. Ltd v. M. 8 United India Insurance Co ltd. Life Insurance Corporation of India v.e.
A mere recital of representations made at the time of entering into the contact will not make then12 warranties. (1863) 3 B&S 751 11 Pawson v. in case of their being untrue. 12 Wheelton v. the policy can be 9  4 Lloyd's Rep IR 247. either prior to or while entering into an insurance contract. of some matter or circumstances relating t o it and which is not an10 integral part of the contract. Misrepresentation Representations are statements. However. and. The decision in the Star Sea Case lays down that the duty of good faith in insurance contracts continues after the inception of the policy. which had no effect when the policy was drawn initially. (1857) 8 E and B 232. (1778) 98 ER 1361. 10 . ought to be known by him. if representations are made an integral part of the contract they become warranties. but the duty is far less strict than it was prior to the commencement of the contract. This is because it would enable the insurers to avoid the whole policy ab initio for a post-contractual breach. Haristy. In India the post contractual duty of good faith is very strict. Burness. or which are presumed to be known by the insurer or information which is waived by the insurer or any circumstance which is superfluous to disclose by reason of any express or implied warranty need not be disclosed. has changed in9 England through a recent decision of the House of Lords. The insured is deemed to know every circumstance. which in the ordinary course of business. 2. The insurer may avoid the contract if the assured fails to make such disclosure or if the representation made is untrue. this position has yet to be accepted by the Indian courts. circumstances which diminish the risk. However. Watson. made by one part y to the other. These statements are said to have fulfilled their obligations when the11 final acceptance on the policy is conveyed. The disclosures by the assured or by his agent should be true. The situation. However.15 | P a g e (“Marine Insurance Act”) lays down that the insured must disclose all the material facts before t he contract is concluded. Behn v. in absence of any enquiry. though.
consideration should be paid as to whether such representations are willful or innocent and whether they are preliminary or for part of the contract. 15 Life Insurance Corporation v. even if the loss does not arise from the fact concealed or misrepresented. and (c) the policy. Smt. However. 14 . although it may not relate to a matter material to the risk insured. The Insurance Act lays down three conditions to establish that the misrepresentation was willful. B. Smt. Warranties may be express or implied. (a) the statement must be on a material matter or must suppress facts which it was material to disclose. AIR 1991 SC 392 Life Insurance Corporation v Smt. implied warranties are mostly confined t o marine insurance.M. (b) the suppression must be fraudulently made by the policy holder. Channabasemma. or affirms or negatives 13 Life Insurance Corporation v. AIR 1991 SC 392. 3. A policy of life insurance cannot be called in question on the ground of misrepresentation after a period of two years from the commencement of the policy. In determining whether there has been suppression of a material fact it is necessary to examine whether the suppression relates to a fact which is in the exclusive knowledge of the person intending to take the policy and also that it could not be ascertained by reasonable enquiry by a prudent15 person.M. The Marine Insurance Act defines a warranty as a promise whereby the assured under takes that some particular thing shall or shall not be done. or that some condition shall be fulfilled. Rao. (1991) 70 Comp Cas 86. In dealing with representations as circumstances invalidating a contract.16 | P a g e avoided. if it is condition implied by law. Warranties A warranty may be distinguished from a representation in as much a representation may be equitably and substantially answered but a warrant y must be strictly complied with.holder must have known at the time of making the statement that it was false or that it suppressed facts which it was material to disclose. A breach of warranty will avoid the policy. Kusuma T. G. Channabasemma. G. The burden of proof of establishing13 that the insured had in fact suppressed material facts in obtaining insurance is on the insurer and14 all the aforesaid conditions are required to be proved cumulatively.
which are essential for the creation of a valid contract. non-compliance of a warranty is excused when. They can be either conditions precedent or subsequent.J.17 irrespective of the question whether the statement. or when compliance with18 the warranty is rendered unlawful by any subsequent law or when such a warranty has not been19 mentioned in the policy. (1996) 6 SCC 428. good faith etc. 607. AIR 1959 Pat 102. 19 United India Insurance Company Ltd. However. M.satisfaction of which makes the contract void ab initio. concerned is of a material nature or not. However. 1872. The warranty should be in the policy or must be incorporated by reference. 22 Glen v.20 Conditions precedent are those. . If any of the statements or representations made by the assured in the proposal have been made the “basis” of the contract and they are found to be untrue. 21 Svenska Handelsbanken vs. by reason of a change of circumstances. Lewis (1853) 8 Exch. the contract of insurance would be void and unenforceable in law. the non. 340.B.21 Conditions subsequent relate to the continuance of a valid contract. which are implied by law to apply t o every contract of insurance irrespective of any specific inclusion or reference to them such as insurable interest. the nonfulfillment of which leads to the avoidance of the contract22 from the date of the breach. Indian Charge Chrome and others. Conditions Conditions are terms which prescribe the limitations under which an insurance policy is granted and which specify the duties of the assured. They can be further classified into express conditions and implied conditions. New Indian Assurance Company.17 | P a g e the existence of a particular state of facts. v. Faber. 1963. 4. Corporation. (1983) 1 Q.. v. (1987) 2 SCC 654.16 The statements must be true in fact without any qualification of judgement. 20 Barnard v. the insured is absolved once it is shown that he has done everything in his power to 24 keep. Mac Morram and Co. 1993 SC. Balkrishna v. M/s. 23 Section 28 of the Indian Contract Act. (1815) 3 ER 1057. Kokilaben Chandravadan. Implied conditions are those. the warranty ceases to be applicable to the circumstances of the contract. 18 Section 36 of The Marine Insurance Act. honour 16 17 New Castle Fire Insurance Company v. opinion or belief. A condition. 24 Skandia Insurance Company Ltd.K. which seeks to reduce or curtail the period of limitation and prescribes a shorter period than that prescribed by law23 is void.
Although the insured is to be placed in the same position as if the loss has not occurred. The market value of the property determines the amount of indemnity. (2000) 2 SCC 1014. An insurer cannot take recourse to a condition. National Insurance Company Ltd. which has not been mentioned in the policy to reduce his liability25. A contract of marine insurance is an agreement whereby the insurer undertakes to indemnify the insured to the extent agreed upon. Legal & Tax Counseling Worldwide Indemnity is a fundamental principle of insurance law. However. and the principle of Subrogation is a corollary of this principle in as much the insured is precluded from obtaining more than the loss he has sustained. 2. v. Injury or loss sustained by the insured has to be proved. Indemnity and Subrogation Most kinds of insurance policies other than life and personal accident insurance are contracts of indemnity whereby the insurer undertakes to indemnify the insured for the actual loss suffered by him as a result of the occurring of the event insured against. Even within the maximum limit. Oriental Insurance Company Ltd. . The most common form of subrogation is when an insurance company pays a claim caused by the negligence of another. Sujir Ganesh Nayak and Company. the amount of indemnity may be limited by certain conditions: 1.18 | P a g e and fulfill the promise and he himself is not guilty of a deliberate breach. The insured is indemnified only for the proximate causes. The indemnity is limited to the amount specified in the policy 3. The doctrine of subrogation confers two specific rights on the insurer. the insurer is entitled to all the remedies which the insured has against the third party incidental to the subject 25 26 27 Modern Insulators Ltd. v. 4. v. an insurance policy may not curtail the right but may merely provide for forfeiture26 or waiver of any such right and such a right would be enforceable against either party. Firstly. 5. Vania Silk Mills (P) Ltd. CIT (1991) 4 SCC 22. AIR 1997 SC 2049. the27 insured cannot recover more than what he establishes to be his actual loss.
28 The fact that an insurer is subrogated to the rights and remedies of the insured does not ipso jure29 enable him to sue third parties in his own name. The excess amount. & Anr. 371. In case of subrogation. from the event insured against in the policy.R. An insurance policy may contain a special clause whereby the insured assigns all his rights. Preston (1881) All ER 494. such that the insurer can take advantage of any means available to extinguish or diminish. 29 31 32 Oberai Forwarding Agency v New India Assurance Co. would be returned to the insured. which means that the proximate and not the remote cause shall be taken as the cause of loss. AIR 1965 Madras 159. Ltd. but he is not liable for any loss which is not proximately caused by a peril insured against. whether32 directly or indirectly. unless the insurance policy states otherwise. & Anr.e. the insurer is liable for any loss proximately caused by a peril insured against. 1972 (2) SCC 877. The burden of proof that the loss occurred on account of the proximate cause lies on the insured. Stanley V. if any. Secondly. the assured cannot recover for a loss 28 Castellan v. It will only entitle the insurer to sue in the name of insured30. it being an obligation of the insured to lend his name and assistance to such an action. the loss for which the insurer has indemnified the insured. which vests by operation of law rather than as the product of express agreement.19 | P a g e matter of the loss. 6. the insured would be entitled to only to the extent of his 31 loss. 30 Vasudeva Mudaliar v Caledonian Insurance Co. The insurer is thus has to make good the loss of the insured that clearly and proximately results. The Marine Insurance Act further states that the insurer is not liable for any willful misconduct of the insured i. in favour of the insurer.. against third parties. Western Insurance company (1868) L. the insurer is entitled to the benefits received by the assured from the third party with a view to compensate himself for the loss. Proximate Cause The doctrine of proximate cause is expressed in the maxim 'Causa Proxima non remota spectator'. . An insurer would therefore be exempted from liability when the cause of loss falls within the exceptions of the policy. As per the Marine Insurance Act. 2002 (2) SCC 407. Union of India v Sri Sarada Mills Ltd.
which are either punitive or preventive. v. irrespective of the proximity of33 the cause. Therefore. Insurance services fall within the purview of the Consumer Protection Act. 8. 7. B. New India Assurance Company Ltd.20 | P a g e where his own deliberate act is the proximate cause of it. The courts have held that insurance companies do not fall under the definition of “consumer” under the Consumer Protection Act. 1963. the insurer cannot be held liable. N. The provisions of this Act are compensatory in nature. Sainani (1997) 6 SCC 383. in the event of loss caused by the delay of the ship. In the case of assignment of all rights by the insured to the insurer. . the consumer forum and he courts generally refuse to accept the locus standi of the insured. 1986 (“Consumer Protection Act”) is one of the most important socio-economic legislation for the protection of consumers in India. as no service is rendered to them directly. the remedy available to the insurer is to file a suit in a civil court for recovery of the loss. Neither the subrogation nor the transfer of the right of action would confer t he legal status of a 'consumer' on the insurer. in as much. Disputes between policyholders and insurers generally pertain to repudiation of the insurance claim or the matters connected with admission of the claim or computation of the amount of claim. Further. any deficiency in service of the insurance company would enable the aggrieved to make a complaint. Insurance and Consumer Protection The Consumer Protection Act. unlike other laws. Insurable Interest 33 34 Section 55 (2)(b) of the Marine Insurance Act.34nor can the insurer be regarded as any beneficiary of any service.
The test for determining if there is an insurable interest is whether the insured will in case of damage37 to the life or property being insured. Fleming. respectively. Sainani. the insurance policy would amount to a wager 36 and consequently void in nature. Manufacturer's Life Insurance Company. the courts have also held that such an insurable interest would exist for a creditor (in a debtor) and for an employee (in an employer) to the extent of the debt incurred and the remuneration due. which held that such39 an interest could exist as neither was likely to indulge in any 'mischievous game'. New India Insurance Company Ltd. Insurable interest varies depending on the nature of the insurance. 1966 (1) AC. Anctil v.B. 805. Commencement of policy 35 36 37 38 39 Seagrave v Union Insurance Co. (1997) 6 SCC 383. Further. in the absence of which. However. . The controversy as to the existence of an insurable interest between spouses was settled by the court. (1899) AC 604 (PC).N. Ltd. (1909) 1 K. v. Griffith v. V Hoplurane. 9. in India. (1886) LR 1 CP 305. The existence of insurable interest at the time of happening of the event is another important consideration. that is to say. 418. is dependent on the existence of an insurable interest in the subject matter. in the case of fire and motor accident insurance the insurable interest has to be present both at the time of taking the policy and at the time of the accident. Tomlison (Haullers) Ltd. cause him to lose a benefit or incur a liability. The person seeking an insurance policy must establish some kind of interest in the life or property to be insured.21 | P a g e To constitute insurable interest. In case of life and personal accident insurance it is sufficient if the insurable interest is present at the time of taking the policy. suffer pecuniary loss.. G. The case is completely different with marine insurance wherein there need not be any insurable interest at the time of taking the policy. The validity of an insurance contract. A person having a limited interest can38 also insure such interest. it must be an interest such that the risk would by its proximate35 effect cause damage to the assured. The same analogy may be extended to parents and children.
Acceptance should be signified by some act as agreed upon by the parties or from which the law raises a presumption of acceptance. v. When the policy is of a particular date. Whether the final acceptance is to be made by the insured or insurer really depends on the negotiations of the policy. Mrs. 2000. Hence where the time of the issue of the insurance policy is mentioned. is that the party to whom the offer has been made should accept it unconditionally and communicate his acceptance to the person making the offer. 44 National Insurance Company. the terms of the contract would prevail. SC. The mere receipt or retention of premium until after the death40 of the applicant or the mere preparation of the policy document is not acceptance. However. it would cover the liability of the insurer from the previous43 midnight preceding the same date. SC. Life Insurance Corporation of India v. Limited. silence does not denote consent and no binding contract arises until the person to whom an offer is made says or does something to signify his 42 acceptance. Vol. Limited. v. then the liability would be covered only from the time when it was45 issued. v. However. Jikubhai Nathuji Dabhi (Smt) and Others. as per the Indian Contract Act. Nonetheless. 43 New India Assurance Company. Ram Dayal & Others. 1984. where there is a special contract to the contrary in44 the policy. page 986. 1997(1) SCC 66 45 National Insurance Company Limited. Raja Vasireddi Komalavalli Kamba and Others. A. 41 Corpus Juris Secundum. Also. 1984. Chinto Devi & Others. XLIV.41 acceptance may be presumed upon the retention of the premium.. Raja Vasireddi Komalavalli Kamba and Others. (1990) 2 SCC 680. 40 Life Insurance Corporation of India v. 42 . SC.22 | P a g e The general rule on the formation of a contract. mere delay in giving an answer cannot be construed as acceptance.
H.com www.manupatra. Pinto By Vaughan & Vaughan Fundamentals of Risk and Insurance Various websites referred: www.com www.com www. Singh Bharats Manual of Insurance Laws By Ravi Puliani. Mishra Handbook of Insurance Claims By S.com www. Garg.P. K. M.C.indlaw. Bodla. Environment and Procedures By B.N.com .supremecourtcaselaw.23 | P a g e BIBLIOGRAPHY Insurance : Fundamentals.scconline.S.P.google.P.com www.com www. V. Gupta.legalserviceindia. Mahesh Puliani Insurance Law Manual Taxman Law of Insurance By Dr.supremecourtofindia.wikipedia. M.com www.
21 . 19 17 17 20 8 9 8 13 8 14. 18.24 | P a g e CROSS REFERENCE INDEX A Ab initio Accident insurance B Burden of proof C Calculated uncertainty Casualty Insurances Causa Proxima non remota spectator Commencement of policy Compensate Conditions precedent Conditions subsequent Consumer Protection Act. 1986 Contingency Continuity and certainty of business Contract in writing Credit Insurance Credit standing D Deliberate breach Diffusion of risks Disability Insurances Doctrine of proximate cause 17 8 13 19 4 13 19 21 9. 16.19 15. 17 11.
15. 18. 20. equity and good conscience L Legal & Tax Counseling Worldwide Lex Numerorum Multorum Et Principiae Medianae Propabilitatis Liability Insurance Life Insurance Locus standi M 18 4 13 6. 21 9 12 12 4. 21 4 19 10 9 14. Insurable Interest Insurable risk Insurance Association of India Insurance Regulatory and Development Authority (IRDA) Insured/Assured Internal Hedging Ipso jure J Justice. 5. 16 20 5. 7. 11. 14 18 11 21 17. 17 18 9 4 29 .25 | P a g e E Economic needs External hedging Enterprise Risk Management F Forfeiture G Good Faith H Health insurance Humanity I Indemnity and Subrogation Independent risks Indian Contract Act. 15. 13.
28 18 5 11 11. 8. 16 9 11. 20. 21 21 14.26 | P a g e Marine insurance Mischievous game Misrepresentation Monetary N Nationalization O Ombudsmen P Pecuniary loss Perils Policy Pooling of risks Portfolio construction Post contractual duty of good faith Premium Principle of Subrogation Principles of equity Privatization Property Insurance Protection Proximate Cause Punitive or preventive R Regulatory authorities Reinsurance Repudiation Risk Pooling S Safeguard Share losses 11. 16. 20 20 12 4. 15. 12. 20 18. 18. 19. 29 20 10. 15. 14. 13 8. 8 5. 13 21 4. 8. 17. 15. 22. 14. 18. 28. 16. 5. 22. 18. 19. 21. 17. 10. 13. 12 12. 28 9 4 15 5. 12 10 . 11 8. 19. 9.
27 | P a g e Social insurance Substitute certainty Superfluous T Tariff Advisory Committee Terrorism insurance U Uberrimea fidei Uncertainties Unenforceable in law W Warranties 11 10 15 12 13 14 4. 16 . 8 17 15.
changing customer needs and the uncertain economic conditions in the developing world are exerting pressure on insurer’s resources and testing their ability to survive. So how do the insurance companies sustain the tough competition and the cold slowdown waves in the market? There are a few new emerging trends in the market that help the risk guard to guard itself like: 1. is still a less popular one in Insurance Industry and even general policy-holders are not very familiar with this term. which will then reimburse the loss that insurer.28 | P a g e EPILOGUE In today’s time of globalization. It makes the risk management process of insurance companies more effective and economical. In addition. Reinsurance is a process in which an insurer transfers certain percentage of its business risk to another company. insurance companies face a dynamic environment which is here to stay. the appearance of new risks. An insurance company uses this tool to transfer a portion to one or more insurance companies. to indemnify another insurer against all or part of loss that insurer may sustain under its policy or . Low growth rates in developed markets. Reinsurance is a transaction in which one insurer agrees for a premium. In a general language. new types of covers to match with new risk situations and unconventional and innovative ideas on customer service. Dramatic changes are taking place owing to the internationalization of activities. though known. the existing insurers are facing difficulties from non-traditional competitors that are entering the retail market with new approaches and through new channels. REINSURANCE: The concept of Reinsurance. may face in his business.
THE BRIGHT FUTURE OF INDIAN INSURANCE INDUSTRY: Indian markets hold tremendous potential to attract foreign insurers. It is a risk management tool that spreads the risk so that no single entity has to bear the burden of paying back beyond the limit. the insurer. Reinsurance companies indemnify a certain percentage of the losses which the primary insurer is unable to pay or the amount of loss is beyond the capacity of the primary insurer. Another important aspect is that India accounts for an insignificant share in the world market. The transaction is also described as "The Insurance of Insurance Companies". 2. it is not a risky business as the principles of justice. Global economic and industrial developments have changed the risk profiles of insurance companies. . there is great room for expansion in this business of risk management. Enterprise Risk Management (ERM) Enterprise Risk Management refers to restructuring the risk philosophy of a company. This in a sense means a tremendous market potential which possibly can be tapped mainly by mounting a programme of radical reforms. To deploy scarce capital effectively and to maximize economic value. Thus. The company purchasing the reinsurance is known as the Ceding Insurer (or Primary Insurer) and the company selling reinsurance is known as the Assuming Insurer (or simply Reinsurer). they need to move towards risk-based capital wherein the companies’ capital requirements are based on the risk they face. Regulatory changes have also compelled insurance companies to move towards riskadjusted returns. This is putting up pressure on India to open up its markets. equity and good conscience not only offer a cover to the insured but also to the one who covers i. Enterprise Risk Management is a large change management initiative that needs to be handled carefully and in a structured way. They have realized the importance of risk sensitive system in managing scarce capital.29 | P a g e policies of insurance.e. And hence we can conclude by saying that Insurance is a business of risk management but.