DAMODARAM SANJIVAYYA NATIONAL LAW UNIVERSITY

VISAKHAPATNAM, A.P., INDIA

INSURANCE LAW

NON INDEMNITY POLICIES- CRITICAL ANALYSIS

MS BHAGYALAKSHMI MADAM

Vineeth reddy
2013129, 8th SEMESTER
INTRODUCTION:

Man has always been in search of security and protection from the beginning of civilization. The
urge in him lead to the concept of insurance. The basis of insurance was the sharing of the losses
of a few amongst many. Insurance provides financial stability and strength to the individuals and
organization by the distribution of loss of a few among many by building up a fund over a period
of time. Insurances can be broadly divided into two types they are indemnity insurance and non
-indemnity insurances.

Indemnity Insurance

Indemnity insurance (also referred to as short-term insurance) is insurance in terms of which the
insured will recover the amount of the actual loss he has suffered. Often, an indemnity insurance
contract is subject to annual renewal.

Example: Peter insures his car against damage, and the policy covers him to the full amount of
any loss he may suffer. If Peters car is damaged in a collision to the extent of R200, he is
entitled to be paid R200 by the insurer. This represents the actual loss that Peter has suffered.

The following are examples of indemnity insurance:

Damage to property insurance;

Fire insurance;

Motor vehicle insurance;

Burglary insurance;

Public liability insurance;

Marine insurance.

Non-indemnity Insurance
Non-indemnity insurance (also referred to as long-term insurance) is where the amount which
the insured has the right to receive is not necessarily equivalent to the actual loss he has suffered.
The non-indemnity insurance contract usually endures for long periods of time, if not for the
lifetime of the life insured.

For example: John insures his life for R10 000 and nominates his wife as the beneficiary of the
policy. When he dies, his wife will have the right to receive R10 000. The concept of indemnity
is not applicable here, because Johns life may be worth more than R10 000 to his wife or on the
other hand, it may be worthless to his wife. The important question is whether the insured event,
namely, Johns death, did or did not occur.

The following are examples of non-indemnity insurance:

Contracts of life assurance;

Personal accident assurance;

Sickness insurance.

A person can insure his life for whatever amount he pleases (subject to underwriting
requirements) and can do so with any number of assurance companies.
This means that, if a person insures his life with Liberty Group Limited for R10,000, with
Norwich Union for R15,000 and with Old Mutual for R50,000, then each company must pay
these amounts in the event of the assureds death. The assurance companies cannot invoke the
doctrine of proportionate contribution as they could have in the case of indemnity insurance in
terms of which each would only have had to pay a proportion of the loss suffered.

Indemnity vs Non-indemnity Insurance

The differentiation between non-indemnity and indemnity insurance is vital because even though
an insurable interest is essential in both indemnity and non-indemnity insurance, the date at
which an insurable interest must be present differs.

In the case of indemnity insurance, an insurable interest must exist at the time of the loss, since if
there is no interest at that time, no loss is suffered, whereas, in the case of non-indemnity
insurance, an insurable interest need only exist when the insurance is taken out, that is, at the
time of concluding the contract of insurance.

Life insurance as non-indemnity insurance:

Fire and marine insurance contract, in general, are contracts of indemnity, that is, they provide
for compensating the insured for loss or damage sustained. A contract of life insurance, however,
forms an exception to the general rule.

A contract of life insurance is a mere contract to pay a certain sum of money on the death of a of
person (or on maturity) in consideration of the payment of a certain sum of money at periodical
intervals. The assured merely pays the premium to the insure in order to secure a certain sum
payable to him or to his representatives in case of death. money at periodical intervals.

A life insurance contract does not resemble a contract of indemnity because the insurer does not
undertake to indemnify the assured for any loss on maturity or death of the assured but promises
to pay sum assured in that event. A policy of insurance on ones own life is not an indemnity
because it is merely a contract to pay a certain sum in the event of death. The assured merely
pays the premium to the insurer in order to secure a certain sum payable to him or to his
representatives in case of death. There is no question of indemnification in such a case, for the
loss resulting from death, cannot be estimated in money. Life insurance is adopted as a means of
saving; the idea of indemnity is foreign to it.

It is doubtful whether the above view can universally be applied to all kinds of life insurance. If a
creditor insurers the life of his debtor, it is no more than a contract which provides a security
against the chance of the debtors dying without repaying it. To say that such a contract is not a
contract of indemnity is not reasonable.

Fire, marine, motor, and other accident insurances, except life and personal accident insurances
are contracts of indemnity. This means that the insured in case of a loss against which the policy
has been made shall be fully indemnified (compensated in money terms), but shall never be more
than fully indemnified. The object of these contracts is to place the insured in the same position
in which he would be if the event causing the loss had not occurred.
Life insurance is not the contract of indemnity, but a contract to pay a stated sum. Neither the
doctrine of subrogation nor the doctrine of contribution applies to life insurance. A person who
has insured life with more than one insurer has right to recover the sum assured under all the
policies. (Doctrine of contribution not applicable.)

Even where a third party causes an insureds death, the insurer has no right to proceed against the
third party (Doctrine of subrogation not applicable.) The most fundamental difference between
life insurance and property insurance is that the subject matter of life insurance is human life .It
is largely a contract of investment which enables the insured to raise funds for himself or for the
benefit of dependents.

This non-indemnity nature of life insurance makes trading possible as the contract has a pre-
specified value. 111 Indian Contracts Act (1872) defines a contract of indemnity as a contract by
which one party promises to save other party from loss caused to him by conduct of himself or
by conduct of any other person. Insurance contracts are not contracts of indemnity as defined by
the Indian Contract Act, but the principles of indemnity apply to insurance contract except for
life and accident insurance.

In the life insurance contract, the amount mentioned in the policy is not the estimation of the
value of life because human life cannot be estimated in value correctly. Loss or damage caused
by the death of a human being is incapable of exact estimation. The value of life insurance policy
is based on the capacity to pay premiums. This non-indemnity nature of life insurance makes
trading possible as the contract has a pre-specified value. It facilitates the price determination of
the tradable policies.

Because of non-indemnity nature of life insurance, the insurer promises to pay a pre -specified
value on the termination of the policy or in the event of uncertain event (death in case of term
and whole life policies, and survival in case of endowment policies). This value enables the
insurer to calculate the cash surrender value. The cash surrender value acts as a benchmark for
pricing of tradable policies.

Insurable Interest:
Insurable interest in case of life insurance must exist at the time of inception of the policy. That
means a policy cannot be issued to a person who has no insurable interest in the insureds life.
However, at the time of termination of the policy or settling claim the insurable interest is not
mandatory. The claims are settled in favor of the legal heir9 or the assignee, in case of an
assigned policy. This implies that returns or benefits of life insurance can accrue to the third
party who is an assignee. This makes the trading feasible.

Insurable interest in life Insurance is required by statute in England, by the Life Insurance act,
1774,while in America and India, it is not required by any statute but as a matter of public policy.

In the absence of statutory provision in India on insurable interest, one has to draw upon the
principles underlying the decisions of the foreign courts in UK and USA. Section 30 of the
contract act is the only express statutory provision having bearing on insurable interest.

In the light of Life Insurance Act 1774, the courts of UK held that insurable interest should exist
at the date of the contract and not at the date of death. (Dalby v. India and London Assurance
Co.) The principle of the decision in above case is taken to be the law in India.

The insurable interest is applied at the time of inception in life insurance to protect the insured
from others betting against his life. In early days, absence of insurable interest led to gambling in
England. Third parties insured the lives of prominent persons. The Life Insurance Act was
enacted to make the insurable interest mandatory for inception of the life insurance policy.

Even though Insurance Act 1938, does not define insurable interest, it has been stated by the
Bombay High Court that in India, an insurance for a term of years on a life of a person in which
the person effecting the insurance has no interest, is void as a wagering contract under Section 30
of the Indian Contract Act.

As the life insurance is not a contract of indemnity, the existence of insurable interest and the
amount thereof will have to be considered at the time of effecting the contract, since lack of such
interest would render the contract void. If insurable interest existed at the inception of the policy,
the contract would be enforceable, even though such interest might cease to exist later.
( Madhyastah , BalChandra , Diwan, 2000) A commonly expressed, argument against secondary
market trading in life insurance is that it is a wagering agreement since the third party is
benefiting from the speculation about the death of the policyholder. Since the earlier provisions
in India on the matter of insurable interest are not statutory and are ambiguous, the recent
Bombay High Court Judgment provides the much needed judicial comment.

ACCIDENT & HEALTH INSURANCE

Hazards to which Income Earning Individuals (Income Producers) are subject: 1. Premature
Natural Death or dying too soon 2. Economic Death or living too long 3. Disability Due to
accident 4. Disability Due to Illness

Insurances for the physical and economic well-being of individuals Life Insurance is the
instrument which affords protection against the first two hazards. By means of its policies, the
family is guaranteed against the economic consequences of the husbands or fathers death, and
the insured himself is protected against the time when his earning days are over that the he
becomes a burden to the family.

Disability Insurance finds its uses in continuing the income of the insured during the time when
by reason of injury or illness he is unable to work. It has also a collateral function in
indemnifying the insured against the heavy additional expenses which disability always entails.

Personal Accident (PA) Insurance is that particular type of insurance which provides
benefits/indemnity in case of losses to the person or physical well-being of an insured individual
arising out of accident. Types of Losses that can be sustained by the individual from accident and
types of Benefits available.

1. Accidental Loss of Life Lump sum called Principal Sum

2. Accidental Loss of Limb or sight Lump sum called Capital Sum

3. Loss of Income Fixed cash benefits usually payable on weekly basis

4. Medical Expense Medical Reimbursement Health Insurance includes a variety of

individual and group coverage whose basic purpose is to reimburse the cost of medical treatment
and replace the lost income in case of illness or injuries.
Forms of Health Insurance: 1) Basic Hospital Expense Insurance 2) Basic Surgical Expense
Insurance 3) Physicians Attendance Benefit 4) Major Medical Expense Insurance

Underwriting unlike in property insurance where an ocular inspection of the risks being insured
can be made prior to binding of coverage, the personal accident underwriter usually has just to
content himself with an accomplished application form to form a picture of the person he is
insuring. The application form for PA insurance usually provides for at least the following
information: 1. Name 6. Beneficiary 2. Age 7. Health Status 3. Sex 8. Insurance History 4.
Address 9. Existing Insurance 5. Occupation 10. Signature Occupational Classification The
exposure of a person to accident is a function of the type of work he does or his occupation.

Major Occupational Classes: Class I - Non-hazardous occupation with office or travel duties
Class II - Limited occupational exposure Class III - Skilled and semi-skilled with moderate
occupational exposure Class IV - Skilled and semi-skilled with extensive occupational exposure

Application of Fundamental Insurance Principles on Accident and Health Insurance 1. Utmost

Good Faith. Although both parties to the proposed insurance contract are bound by this doctrine,
the duty of disclosure is more exacting on the person applying for insurance. The prospective
insured alone knows, or should know, all the material facts that will have bearing on his
acceptability for this type of insurance, and it is his duty to disclose them. 2. Indemnity. A
personal accident policy, as a rule, is not a contract of indemnity but a benefit policy. Under a
contract of indemnity, the amount recoverable is measured by the extent of the insureds
financial loss. On the other hand, a benefit policy is a contract to pay a sum of money in the
event of certain contingency, it is however wrong to state that a personal accident policy is never
a contract of indemnity. An employer may undertake to pay an employee full wages in the event
of his disablement and insure his liability to do so. This is a contract of indemnity and the usual
consideration applies.

In practice, the principle of indemnity is preserved as fas as possible by not granting higher
benefits than those justified by the applicants financial standing. Whenever possible, if the sums
insured seem large for a person of a particular occupation and age, tactful inquiries should be
made to see whether he might be better off disabled than when working. 3. Subrogation. The
right of subrogation, by which insurers run after Third Parties causing the loss, arises only from a
contract of indemnity. Since the great majority of personal accident policies are not contracts of
indemnity, subrogation does not apply. This means that an insured may collect the benefits
payable under his policy and, in addition, claim against a negligent third party, receiving
compensation from him as though no benefit had been received from any insurance. 4.
Contribution. This, like subrogation, does not apply where the contract is not one of indemnity.
An insured may hold several personal accident policies and is entitled to the full benefits of each.
The total insurance benefits from the several sources could therefore be far in excess of the
insureds usual income. A safeguard is sometime provided by requiring the proposer to disclose
particulars of any other insurances held, so that it may be confirmed that the combined benefits
correspond to the proposers income. 5. Insurable Interest. This is always necessary for a valid
insurance contract. An individual is deemed to have an unlimited interest in his own person. In
many personal accident contracts, therefore, insurable interest presents no problem, but the
principle calls for special consideration if the insurance is taken on another person. Examples are
an employer who insures his employees, or a wife who insures her husband. In most insurance
contracts, the insured must have an insurable interest at the time of loss, but with personal
accident insurance and life insurance, it is thought to be sufficient if there was a valid interest
when the policy was issued or when it was last renewed. 6. Proximate Cause. The doctrine of
proximate cause is important in dealing with personal accident claims, because more than one
cause may operate to produce the condition resulting in the claim. It must then be ascertained
whether the dominant and effective cause was an insured peril on one which was excluded from
the contract. As an example, an insured suffers from gall stones, is knocked down by a motor car
and dies, although but for the gall stones he would not have died. His death is not an accident
within the policy (Cawley V. National Employers, 1885). E. The Policy Form. The policy form to
be considered in this lesson is that in general use for annual contracts. The wording and
arrangement of the principal clauses vary with insurers. There are two forms existing: the
Continental or British form and the

American form. One clear difference between the two is in the scale of Indemnities for non-death
losses. The continental form defines loss as meaning amputation or loss of use, whereas the
American form defines it as only actual severance or dismemberment. The constituent parts of a
Personal Accident policy is the same as other policies, earlier discussed and need not be repeated
here.