UNIT 1 – SYNOPSIS

Origin of Insurance:

• Marine underwriting by trading companies in Europe - Mercantile customs - Lloyd’s

Usages

• Organized system of Fire Insurance after great London fire 1666

Fire insurance arose much later, obtaining impetus from the Great Fire of London in 1666. A
number of insurance companies were started in England after 1711, during the so-called
bubble era. Many of them were fraudulent, get-rich-quick schemes concerned mainly with
selling their securities to the public. Nevertheless, two important and successful English
insurance companies were formed during this period—the London Assurance Corporation
and the Royal Exchange Assurance Corporation. Their operation marked the beginning of
modern property and liability insurance.

No discussion of the early development of insurance in Europe would be complete without

reference to Lloyd’s of London, the international insurance market. It began in the 17th
century as a coffeehouse patronized by merchants, bankers, and insurance underwriters,
gradually becoming recognized as the most likely place to find underwriters for marine
insurance. Edward Lloyd supplied his customers with shipping information gathered from the
docks and other sources; this eventually grew into the publication Lloyd’s List, still in
existence. Lloyd’s was reorganized in 1769 as a formal group of underwriters accepting
marine risks. (The word underwriter is said to have derived from the practice of having each
risk taker write his name under the total amount of risk that he was willing to accept at a
specified premium.) With the growth of British sea power, Lloyd’s became the dominant
insurer of marine risks, to which were later added fire and other property risks. Today
Lloyd’s is a major reinsurer as well as primary insurer, but it does not itself transact insurance
business; this is done by the member underwriters, who accept insurance on their own
account and bear the full risk in competition with each other.

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• Life Insurance – The Amicable Society for a Perpetual Assurance Office 1706

Amicable Society was founded in London in 1706 by William Talbot (Bishop of

Oxford) and Sir Thomas Allen, 2nd Baronet The first plan of life insurance was that each
member paid a fixed annual payment per share on from one to three shares with consideration
to age of the members being twelve to fifty-five. At the end of the year a portion of the
"amicable contribution" was divided among the wives and children of deceased members and
it was in proportion to the amount of shares the heirs owned. Amicable Society started with
2000 members.
A modification from Amicable's life insurance was developed by "The Society for Equitable
Assurances on Lives and Survivorships." This new life insurance society was developed by
Halley, De Moivre, Simpson, De Parcieux, and Dodson. The reason for the new society (life
insurance company) was because Dodson, who was over 45 (the age limit for new
admissions), wanted to have his life insured but was turned down by the Amicable Society,
so formed a new society. In 1757 a petition for a charter of incorporation was submitted. It
was worked on for four years, but ultimately turned down in 1761. In 1762 a modification of
the original terms was finally agreed upon and the society started a business of life insurance.
The society was referred to as the "Equitable" and it issued policies for life insurance of fixed
sums on single or joint lives, or on survivorships, and for any term. Equitable's life insurance
was different than Amicable's in that the premiums were regulated according to age.
Anybody could be insured and were admitted regardless of their state of health and other
circumstances. The initial scheme of Equitable had many imperfections, but through time
developed into life insurance as we know it today.

Due to Equitable's new type of insurance, Amicable changed its policies in 1807. It then had
various premium fees to be paid on policies obtainable according to age, occupation, and
health. In 1866 the Amicable Society was acquired by the Norwich Union Life Insurance
Society.

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Nature of Insurance:

• System for distributing losses resulting from events (shipwreck, fire, premature death,
disability)

• Objective: to guard against loss of property / future earnings caused from event • General
fund – imposition of proportionate contribution (premium) on many exposed to the common
hazard – few who actually suffer indemnified

• Promise by insurer to indemnify insured/assured

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General Conditions for Insurance system:

1. Risk of real loss beyond power of insurer/insured

2. Risk common to large number of persons

3. Casualty likely to fall on small number of persons exposed to the risk

4. Probabilities of occurrence capable of being estimated with approximate certainty

beforehand

5. Loss apprehended significant enough to be worth insuring against

6. Cost of insurance small enough to be affordable in context of loss insured against

7. General fund – permanent, honestly administered

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History of Insurance in India:

• Insurance in Ancient India,

• Insurance in India during British rule

• Insurance in Constitution of India

• Nationalization of Insurance Business: LIC Act 1956, General Insurance Business

Nationalization Act 1973

• Malhotra Committee Report 1994

• Liberalization of Insurance sector

• Establishment of IRDAI

• Insurance Laws (Amendment) Act 2015

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In India, insurance has a deep-rooted history. It finds mention in the writings of Manu (
Manusmrithi ), Yagnavalkya ( Dharmasastra ) and Kautilya ( Arthasastra ). The writings talk
in terms of pooling of resources that could be re-distributed in times of calamities such as
fire, floods, epidemics and famine. This was probably a pre-cursor to modern day insurance.
Ancient Indian history has preserved the earliest traces of insurance in the form of marine
trade loans and carriers’ contracts. Insurance in India has evolved over time heavily drawing
from other countries, England in particular.

1818 saw the advent of life insurance business in India with the establishment of the Oriental
Life Insurance Company in Calcutta. This Company however failed in 1834. In 1829, the
Madras Equitable had begun transacting life insurance business in the Madras Presidency.
1870 saw the enactment of the British Insurance Act and in the last three decades of the
nineteenth century, the Bombay Mutual (1871), Oriental (1874) and Empire of India (1897)
were started in the Bombay Residency. This era, however, was dominated by foreign
insurance offices which did good business in India, namely Albert Life Assurance, Royal
Insurance, Liverpool and London Globe Insurance and the Indian offices were up for hard
competition from the foreign companies.

In 1914, the Government of India started publishing returns of Insurance Companies in India.
The Indian Life Assurance Companies Act, 1912 was the first statutory measure to regulate
life business. In 1928, the Indian Insurance Companies Act was enacted to enable the
Government to collect statistical information about both life and non-life business transacted
in India by Indian and foreign insurers including provident insurance societies. In 1938, with
a view to protecting the interest of the Insurance public, the earlier legislation was
consolidated and amended by the Insurance Act, 1938 with comprehensive provisions for
effective control over the activities of insurers.

The Insurance Amendment Act of 1950 abolished Principal Agencies. However, there were a
large number of insurance companies and the level of competition was high. There were also
allegations of unfair trade practices. The Government of India, therefore, decided to
nationalize insurance business.

An Ordinance was issued on 19th January, 1956 nationalising the Life Insurance sector and
Life Insurance Corporation came into existence in the same year. The LIC absorbed 154
Indian, 16 non-Indian insurers as also 75 provident societies—245 Indian and foreign
insurers in all. The LIC had monopoly till the late 90s when the Insurance sector was
reopened to the private sector.

The history of general insurance dates back to the Industrial Revolution in the west and
the consequent growth of sea-faring trade and commerce in the 17th century. It came to India
as a legacy of British occupation. General Insurance in India has its roots in the establishment
of Triton Insurance Company Ltd., in the year 1850 in Calcutta by the British. In 1907, the
Indian Mercantile Insurance Ltd, was set up. This was the first company to transact all classes
of general insurance business.

1957 saw the formation of the General Insurance Council, a wing of the Insurance Associaton
of India. The General Insurance Council framed a code of conduct for ensuring fair conduct
and sound business practices.

In 1968, the Insurance Act was amended to regulate investments and set minimum
solvency margins. The Tariff Advisory Committee was also set up then.

In 1972 with the passing of the General Insurance Business (Nationalisation) Act, general
insurance business was nationalized with effect from 1st January, 1973. 107 insurers were
amalgamated and grouped into four companies, namely National Insurance Company Ltd.,
the New India Assurance Company Ltd., the Oriental Insurance Company Ltd and the United
India Insurance Company Ltd. The General Insurance Corporation of India was incorporated
as a company in 1971 and it commence business on January 1sst 1973.

This millennium has seen insurance come a full circle in a journey extending to nearly 200
years. The process of re-opening of the sector had begun in the early 1990s and the last
decade and more has seen it been opened up substantially. In 1993, the Government set up a
committee under the chairmanship of RN Malhotra, former Governor of RBI, to propose
recommendations for reforms in the insurance sector.The objective was to complement the
reforms initiated in the financial sector. The committee submitted its report in 1994 wherein ,
among other things, it recommended that the private sector be permitted to enter the
insurance industry. They stated that foreign companies be allowed to enter by floating Indian
companies, preferably a joint venture with Indian partners.
 Following the recommendations of the Malhotra Committee report, in 1999, the Insurance
Regulatory and Development Authority (IRDA) was constituted as an autonomous body to
regulate and develop the insurance industry. The IRDA was incorporated as a statutory body
in April, 2000. The key objectives of the IRDA include promotion of competition so as to
enhance customer satisfaction through increased consumer choice and lower premiums, while
ensuring the financial security of the insurance market.

The IRDA opened up the market in August 2000 with the invitation for application for
registrations. Foreign companies were allowed ownership of up to 26%. The Authority has
the power to frame regulations under Section 114A of the Insurance Act, 1938 and has from
2000 onwards framed various regulations ranging from registration of companies for carrying
on insurance business to protection of policyholders’ interests.

In December, 2000, the subsidiaries of the General Insurance Corporation of India were
restructured as independent companies and at the same time GIC was converted into a
national re-insurer. Parliament passed a bill de-linking the four subsidiaries from GIC in July,
2002.

Today there are 31 general insurance companies including the ECGC and Agriculture
Insurance Corporation of India and 24 life insurance companies operating in the country.

The insurance sector is a colossal one and is growing at a speedy rate of 15-20%. Together
with banking services, insurance services add about 7% to the country’s GDP. A well-
developed and evolved insurance sector is a boon for economic development as it provides
long- term funds for infrastructure development at the same time strengthening the risk taking
ability of the country.

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Theories of Insurance:

1. Theory of co-operation Common purpose - Exposed to same/similar risk -Distribution of

risk over large number of persons - Voluntary contribution to fund (premium) - Indemnity to
persons who actually suffer loss

2. Theory of probability Contribution (premium) proportional to risk (higher risk, higher

premium) - Premium calculated with theory of probability - Past experience of loss -
Probability of happening of uncertain events – Premium to include sufficient margin to cover
unfavourable conditions (moral hazards etc)

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The insurance is based upon (i) Principles of Co-operation and, (ii) Principles of Probability.

(i) Principles of Co-operation:

Insurance is a co-operation device. If one person is providing for his own losses, it cannot be
strictly insurance because in insurance, the loss is shared by a group of persons who are
willing to co-operate. In ancient period, the persons of a group were willingly sharing the loss
to a member of the group. They used to share the loss to a member of the group.

They used to share the loss at the time of damage. They collected enough funds from the
society and paid to the dependents of the deceased or the persons suffering property losses.
The mutual co-operation was prevailing from the very beginning up to the era of Christ in
most of the countries. Lately, the co-operation took another form where it was agreed
between the individual and the society to pay a certain sum in advance to be a member of the
society.

The society by accumulating the funds, guarantees payment of certain amount at the time of
loss to any member of the society. The accumulation of funds and charging of the share from
the member in advance became the job of one institution called insurer.

Now it became the duty and responsibility of the insurer to obtain adequate funds from the
members of the society to pay them at the happening of the insured risk. Thus, the shares of
loss took the form of premium. Today, all the insured give a premium to join the scheme of
insurance. Thus, the insured are co-operating to share the loss of an individual by payment of
a premium in advance.

(ii) Principles and Theory of Probability:

The loss in the shape of premium can be distributed only on the basis of theory of probability.
The chances of loss are estimated in advance to affix the amount of premium. Since the
degree of loss depends upon various factors, the affecting factors are analysed before
determining the amount of loss. With the help of this principle, the uncertainty of loss is
converted into certainty.

The insurer will have not to suffer loss as well have to gain windfall. Therefore, the insurer
has to charge only so much of amount which is adequate to meet the losses. The probability
tells what the chances of losses are and what will be the amount of losses.

The inertia of large number is applied while calculating the probability. The larger the
number of exposed persons, the better and the more practical would be the findings of the
probability. Therefore, the law of large number is applied in the principle of probability.

In each and every field of insurance the law of large number is essential. These principles
keep in account that the past events will incur in the same inertia. The insurance, on the basis
of past experience, present conditions and future prospects, fixes the amount of premium.

Without premium, no co-operation is possible and the premium cannot be calculated without
the help of theory of probability, and .consequently no insurance is possible. So these two
principles are the two main legs of insurance

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Types of Insurance:

A. Business point of view

i. Life insurance – protection & investment

ii. General insurance – property (marine, fire, burglary), liability

iii. Social insurance – pension, disability, unemployment benefits

B. Risk point of view

i. Property insurance: specific risks (fire, marine, miscellaneous)

ii. Liability insurance: risk to pay third party (fidelity, MV, machine)

iii. Other insurance: state employees insurance, export-credit insurance

C. Nature of interest affected

i. Personal insurance: life, health, personal accident

ii. Property insurance: fire, marine perils, damage to property

iii. Liability insurance: third party payment (MV, aviation etc)

D. Nature of event

i. Life insurance: payable on death or attainment of specific age

ii. Fire insurance: payable on fire accident & property damage

iii. Marine insurance: payable on happening of marine peril

iv. Miscellaneous insurance: MV insurance, aviation insurance, social insurance, Liability

insurance

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Terms in Insurance:

1. Peril

In the insurance world, a peril has a very particular meaning: a specific cause of damage or
injury. Insurance policies exist to cover you against specific perils like fire, wind and theft.
However, some perils (like water damage) are covered only in certain situations, and others
(like neglect) are excluded from insurance entirely.

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2. Hazard: Physical (outside control of party at time of/close to peril) Moral

(character/integrity of party in relation to insurance contract) Morale (negligence/recklessness
of party due to insurance protection)

Before deciding to provide coverage, an insurer may consider the particular hazards that
make one candidate riskier than most others. A hazard may be any action, condition, habit,
circumstance, or situation that makes a peril more likely to occur or a loss more likely to be
suffered as the result of a peril.

The insurance industry commonly divides hazards into three categories: physical, moral, and
morale.

Physical Hazards

Physical hazards are actions, behaviors, or conditions that cause or contribute to peril.
Smoking is considered a physical hazard because it increases the chance of a fire occurring. It
also is considered a physical hazard in regard to health insurance because it increases the
probability of severe illness.

Frayed electrical wiring or liquid spills are physical hazards, as are a number of activities,
such as working at high altitudes and operating heavy equipment.

Moral Hazards

Moral hazards are wrongful behavior or conduct.

Health insurance companies are concerned with moral hazards that lead to fraudulent claims,
such as auto accident victims who invent or exaggerate their injuries.

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3. Risk (insurable; real; calculable; legal; common at large; covered by low premium)

n insurance terms, risk is the chance something harmful or unexpected could happen.

This might involve the loss, theft, or damage of valuable property and belongings, or it may
involve someone being injured.

Insurers assess and price various risks to work out how much they would need to pay out if a
policyholder suffered a loss for something covered by the policy. This helps the insurer
determine the amount (premium) to charge for insurance.

To be able to put a financial value on a risk, insurers calculate the probability that the insured
item or property might be accidentally lost, stolen, damaged or destroyed, how often this
might occur and how much it would cost to repair or replace.
By pricing risk, insurers know how much money they need to reserve to pay claims.

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4. Time of Loss: General rule: insurer liable if insured peril arises during policy, even if
resulting loss arises after policy expired (subject to contract to contrary)

Kelly v Norwich Union Fire Insurance Society Ltd (1989) 2 All ER 888 (CA)

The case of Kelly v Norwich Union Fire Insurance Society Ltd [1989] 2 All ER 888
(Appendix 8.2) illustrates how a privately insured can face great difficulties in this area. The
plaintiff had an external water pipe break and he had it repaired. He then insured the
bungalow. The pipe leaked again. It was later discovered that the bungalow had suffered
damage due to water leakage. It was not possible to determine which leak had caused what
damage. The Court of Appeal disallowed the insured’s claim. No apportionment was possible
as between damage caused by the pre-policy leakage and policy leakage, because there was
no evidence submitted to distinguish the damage caused by the two leaks. The second area of
difficulty is that relating to mitigation of loss. The requirement in the general law of contract
that the innocent party should mitigate his losses is well known. Does this translate to an
insurance setting? It is not unusual for the policy to require efforts to be taken by the insured
to avert or mitigate potential loss, rather like a motor policy or a buildings policy requiring
that the vehicle or building be kept in a good state of repair.

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5. Premium:

Consideration for insurance contract

Grace period for premium payment not legally mandatory, subject to contract to contrary

Premium.— According to writers the premium is the consideration which the insured has to
pay to the insurance company for the benefits of the policy provided by the insurance
company. In a way, the premium is the price paid by the insured for protection of his life or
property. (For detailed study, see chapter under “Premium”)

Stuart v Freeman (1903) 1 KB 47

Stuart v Freeman, (1903) 1 KB 47 (CA) – In this case, premium on life policy was not paid
before due date. The assured died after due date. The premium was paid after the death of
assured, but before the expiry of grace period. It was held that the payment during grace
period was deemed to be the payment before due date and the insurer is liable.

Where the premium is paid during grace period, but after the contingency (happening of the
event/loss), the liability of the insurer is to be determined by taking into consideration, the
facts and circumstances of the case.
If the insurers have a right to refuse the renewal of the premium, and elect not to carry on
with an insurance which they are not bound to renew, then it is clear that their liability will
cease on the last day of the period for which the insurance was expressed to run, and the
tender of the renewal premium by the assured during the days of grace will not alter the
position.

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Refund of premium: risk not attached at all – repudiation/setting aside policy by insured –
repudiation/setting aside policy by insurer – void policy

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 SYNOPSIS – GENERAL PRINCIPLES OF INSURANCE LAW

Essential Elements of Insurance Contract

1. Agreement
 Proposal by assured & acceptance by insurer
 Modes of acceptance: express or by necessary implication
General Assurance Society v Chandumull Jain AIR 1966 SC 1644; LIC v Raja Vasireddy
Komalvalli AIR 1984 SC 1014
 Meaning of insurer: sec 2(9) Insurance Act 1938
2. Legal relationship
3. Lawful consideration: premium by assured & promise to indemnify on happening of loss by
insurer
4. Capacity of parties: adult, sound mind, not disqualified by any law
5. Free consent: Sec 15-20 of Indian Contract Act & Sec 45 Insurance Act 1938
6. Lawful object
7. Not declared to be void
8. Not impossible to be performed or uncertain
9. Legal formalities: in writing, signed by parties
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Offer and Acceptance
The offer for entering into the contract may come from the insured.
The insurer may also propose to make the contract. Whether the offer is from the side of an insurer
or the side of the insured, the main fact is acceptance. Any act that precedes it is the offer or a
counter-offer. All that preceded the offerer counter-offer is an invitation to offer.
In insurance, the publication of the prospectus, the canvassing of the agents are invitations to offer.
When the prospect (the potential policy-holder) proposes to enter the contract, it is an offer and if
there is any alteration in the offer that would be a counter-offer.
If this alteration or change (counter-offer) ill-accepted by the proposer, it would be acceptable.
In the absence of a counter-offer, the acceptance of the offer will be an acceptance by the insurer.
At the moment, the notice of acceptance is given to another party; it would be a valid acceptance.
Legal Consideration
The promisor to pay a fixed sum at a given contingency is the insurer who must have some return
or his promise. It need not be money only, but it must be valuable.
It may be summed, right, interest, profit or benefit Premium being the valuable consideration must
be given for starting the insurance contract.
The amount of premium is not important to begin the contract. The fact is that without payment of
premium, the insurance contract cannot start.
Competent to make the contract
Every person is competent to contract;
1. Who is off’ is an age of majority according to the law,
2. Who is of sound mind, and
3. Who is not disqualified from contracting by any law to which he is subject?
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A minor is not competent to contract. A contract by a minor is void excepting contracts for
necessaries. A minor cannot sign a contract.
Free Consent
Parties entering into the contract should enter into it by their free consent.
The consent will be free when it is not caused by—
(1) coercion,
(2) undue influence,
(3) fraud, or
(4) misrepresentation, or
(5) mistake.
When there is no free consent except fraud, the contract becomes voidable at the option of the party
whose consent was so caused. In the case of fraud, the contract would be void.
The proposal for free consent must sign a declaration to this effect, the person explaining the
subject matter of the proposal to the proposer must also accordingly make a written declaration or
the proposal.
Legal Object
To make a valid contract, the object of the agreement should be lawful. An object that is,
(i) not forbidden by law or
(ii) is not immoral, or
(iii) opposed to public policy, or
(iv) which does not defeat the provisions of any law, is lawful.
In the proposal from the object of insurance is asked which should be legal and the object should
not be concealed. If the object of insurance, like the consideration, is found to be unlawful, the
policy is void.
Insurable Interest
For an insurance contract to be valid, the insured must possess an insurable interest in the subject
matter of insurance.
The insurable interest is the pecuniary interest whereby the policy-holder is benefited by the
existence of the subject-matter and is prejudiced death or damage of the subject- matter.
Utmost Good Faith
The doctrine of disclosing all material facts is embodied in the important principle ‘utmost good
faith’ which applies to all forms of insurance.
Both parties to the insurance contract must agree (ad idem) at the time of the contract. There should
not be any misrepresentation, non-disclosure or fraud concerning the material.
In case of insurance contract the legal maxim ‘Caveat Emptor” (let the buyer beware) docs not
prevail, where it is the regard of the buyer to satisfy himself of the genuineness of the subject-
matter and the seller is under no obligation to supply information about it.
But in the insurance contract, the seller, i.e., the insurer will also have to disclose all the material
facts.
An insurance contract is a contract of uherrimae fidei, i.e., of absolute good faith both parties to the
contract must disclose all the material facts and fully.

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Case Laws:
1. General Assurance Society v Chandumull Jain AIR 1966 SC 1644
The Supreme Court of India in General Assurance Society Ltd Vs. Chandumull Jain, AIR 1966 SC
1644 : 1966 (3) SCR 500 : 1966 (36) CC 468 : 1966 ACJ 267 held that there is nothing wrong in
including in a contract of insurance a mutual condition for the cancellation of the contract.
A full bench comprising of Chief Justice P.B. Gajendragadkar, Justice K.N. Wanchoo, Justice R.
Sathyanarayan Raju, Justice Vaidynathier Ramaswami and Justice M. Hidayatullah who delivered
the judgment observed that condition (10) of the Fire policy gave equal rights of cancellation to
both parties and was not unreasonable.

2. LIC v Raja Vasireddy Komalvalli AIR 1984 SC 1014

Supreme Court in LIC of India v. Raja Vasireddy Kamalavali Kamba AIR 1984 SC 1014 by
holding that an insurance contract gets completed when the proposal is accepted and the policy
document issued.

Provisions:
 Meaning of insurer: sec 2(9) Insurance Act 1938
(9) “Insurer” means—
(a) Any individual or unincorporated body of individuals or body corporate incorporated under the
law of any country [other than India, [***]] carrying on insurance business [not being a person
specified in sub-clause (c) of this clause] which—
(i) Carries on that business in [India], or
(ii) Has his or its principal place of business or is domiciled in [ India ], [or
(iii) With the object of obtaining insurance business, employs a representative, or maintains a
place of business, in [India ] ;]
(b) any body corporate [not being a person specified in sub-clause (c) of this clause] carrying on
the business of insurance, which is a body corporate incorporated under any law for the time being
in force in [India]; or stands to any such body corporate in the relation of a subsidiary company
within the meaning of the Indian Companies Act, 1913 (7 of 1913) , as defined by sub-section (2)
of section 2 of that Act, and
(c) any person who in [India] has a standing contract with underwriters who are members of the
Society of Lloyd's whereby such person is authorized within the terms of such contract to issue
protection notes, cover notes, or other documents granting insurance cover to others on behalf of
the underwriters, [but does not include a principal agent, chief agent, special agent, or an
insurance agent] or a provident society [as defined in Part III];
 Free consent: Sec 15-20 of Indian Contract Act & Sec 45 Insurance Act 1938
45. Policy not to be called in question on ground of mis-statement after two years.—No policy of
life insurance effected before the commencement of this Act shall after the expiry of two years from
the date of commencement of this Act and no policy of life insurance effected after the coming into
force of this Act shall after the expiry of two years from the date on which it was effected, be called
in question by an insurer on the ground that a statement made in the proposal for insurance or in
any report of a medical officer, or referee, or friend of the insured, or in any other document
leading to the issue of the policy, was inaccurate or false, unless the insurer shows that such
statement 1[was on a material matter or 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 2[or that it suppressed facts which it was material to
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disclose]: 2[Provided that nothing in this section shall prevent the insurer from calling for proof of
age at any time if he is entitled to do so, and no policy shall be deemed to be called in question
merely because the terms of the policy are adjusted on subsequent proof that the age of the life
insured was incorrectly stated in the proposal.]
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Nature of Insurance Contract

1. Contingent contract: sec 31, 32 of Indian Contract Act
2. Aleatory contract: based on chance/possibility of loss
3. Contract of utmost good faith: duty of full disclosure by parties
4. Contract of indemnity: restore status quo, not profit/investment
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1. Contingent Contract
For example, in a life insurance contract, the insurer pays a certain amount if the insured dies under
certain conditions. The insurer is not called into action until the event of the death of the insured
happens. This is a contingent contract.
Under Section 31 of the Indian Contract Act, 1872, contingent contracts are defined as follows: “If
two or more parties enter into a contract to do or not do something, if an event which is collateral to
the contract does or does not happen, then it is a contingent contract.”
Section 32: Enforcement of Contracts contingent on an event happening - Contingent contracts to
do or not to do anything if an uncertain future event happens, cannot be enforced by law unless and
until that event has happened. If the event becomes impossible, such contracts become void.”

2. Aleatory Contract:
An aleatory contract is an agreement whereby the parties involved do not have to perform a
particular action until a specific event occurs. The trigger events aleatory contracts are those that
cannot be controlled by either party, such as natural disasters or death. Insurance policies use
aleatory contracts whereby the insurer doesn't have to pay the insured until an event, such as a fire
resulting in property loss.

3. Contract of utmost good faith

The doctrine of utmost good faith is a principle used in insurance contracts, legally obliging all
parties to act honestly and not mislead or withhold critical information from one another. Insurance
agents must reveal critical details about the contract and its terms, while applicants are required to
provide honest answers to all the questions fielded to them. Violations of the doctrine of good faith
can result in contracts being voided and sometimes even legal action.

4. Contract of Indemnity
Indemnity means making compensation payments to one party by the other for the loss occurred.
Description: Indemnity is based on a mutual contract between two parties (one insured and the
other insurer) where one promises the other to compensate for the loss against payment of
premiums.

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 Principles of Insurance Contract
1. Insurable interest
Characteristics of insurable interest:
 not limited to proprietary/legal interest only
 not mere sentimental right or interest
 legal presumptions of insurable interest in life insurance – certain relationships (Halford v
Kymer (1830) 10 B&C 724)
 relates to right in property (insurance subject-matter)
 pecuniary and lawful
Macaura v Northern Assurance Co Ltd 1925 AC 619
Time and Duration of Insurable interest:
 Life insurance – at time of formation of insurance contract only (Dalby v India & London
Life Assurance Co (1854) 15 CB 365)
 Fire/accident insurance – at time of formation of insurance contract and at time of loss
 Marine insurance – at time of loss only (sec 8 of Marine Insurance Act)

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Case Laws:
1. Halford v. Kymer (1830) 10 B&C 724

A father has insured the life of his son. Payment of the fund was refused by the insurers on a
ground of lack of interest, and in this they were sustained, the court holding that the interest must
be pecuniary in its nature. Mere love and affection will not suffice. In England, it has been laid
down that a parent has no insurable interest in the life of the child because mere love and affection
is not sufficient to constitute an insurable interest whereas in India, both parent and child may have
an insurable interest in life of each other.

2. Macaura v Northern Assurance Co Ltd 1925 AC 619

In Macaura v. Northern Assurance Co Ltd, the House of Lords held that neither a shareholder nor a
simple creditor of a company has any insurable interest in any particular asset of the company
despite the fact both the shareholder and the creditor may suffer loss upon destruction of their
company’s property.

3. Dalby v India & London Life Assurance Co (1854) 15 CB 365

An insurance company (Anchor) had taken out insurance with the defendant on the life of the Duke
of Cambridge in the sum of pounds 1000 for which it paid a yearly premium during the life of the
Duke. Anchor had itself granted policies of insurance to a Reverend Wright on the Duke’s life in a
total amount of pounds 3000. Anchor’s policy with the Defendant was ‘a cross or counter-
assurance’. Before the Duke died Anchor agreed with the Reverend Wright to the surrender and
5
cancellation of his policies in return for an annuity. The issue was whether or not it sufficed that
Anchor had an interest in the Duke’s life when the policy with the Defendant was affected or
whether such an interest had to subsist at the time of the Duke’s death. No one seems to have
bothered with questions whether or not the Reverend Wright had an interest in the Duke’s life.
Held: It was sufficient for the interest to exist at the time the insurance was affected and that its
value at that time was recoverable under Section 3. The obligation at that time to pay the Reverend
Wright was ‘unquestionably an interest in the continuance of the life of the Duke’ under Section 3.

Sections

Section 8 of Marine Insurance Act:

8. When interest must attach.—
(1) The assured must be interested in the subject-matter insured at the time of the loss, though he
need not be interested when the insurance is effected: Provided that, where the subject-matter is
insured “lost or not lost”, the assured may recover although he may not have acquired his interest
until after the loss, unless at the time of effecting the contract of insurance the assured was aware
of the loss, and the insurer was not.
(2) Where the assured has no interest at the time of the loss, he cannot acquire interest by any act
or election after he is aware of the loss.
======================================================================

6
 2. Good faith
Uberrimae fidei – duty of full disclosure of material facts on parties to insurance contract
(heavier on assured)
Carter v Boehm (1766) 3 Burr 1905; London Assurance Ltd v Mansel (1879) 11 Ch D 363;
LIC v Asha Goel AIR 2001 SC 549; Norwich Union Life Insurance Society v Qureshi 1999
CLC 1963 (uberrimae fidei on insurer)
Test of materiality:
 Facts which would influence judgment of prudent insurer in: (a) fixing premium or (b)
determining to take the risk
 Material facts – affect nature/incidence of risk & affect character of insured
Ratanlal v Metropolitan Insurance Co AIR 1959 Pat 413
Forms of breach of good faith:
Omission ; Concealment ; Innocent misrepresentation ; Fraudulent misrepresentation
Form filled by insurance agent (Biggar v Rock Life Assurance Co (1902) 1 KB 516)
Facts need not be disclosed (examples):
 Facts not known to assured (Joel v Law Union & Crown Insurance Co (1908) 2 KB 863
 Facts known to insurer (Woolcott v Excess Insurance (1979) 1 Lloyd’s Rep 231
 Facts which diminish risk
 Facts relating to law of country
 Facts of common public knowledge / known through ordinary diligence or profession
-----------------------------------------------------------------------------------------------------------------------

Case Laws:
1. Carter v Boehm (1766) 3 Burr 1905
Carter v Boehm (1766) 3 Burr 1905 is a landmark English contract law case, in which Lord
Mansfield established the duty of utmost good faith or uberrimae fidei in insurance contracts.
Mr Carter was the Governor of Fort Marlborough (now Bengkulu), which was built by the British
East India Company in Sumatra, Indonesia. Well he called himself Governor but he was self-
appointed. He was actually an employee of the British East India company.
He took out an insurance policy against the fort being taken by a foreign enemy with Boehm. He
knew the French were likely to attack but what was insured?
The French did attack, and Mr Boehm denied the insurance claim and so accordingly Carter sued.
A witness called Captain Tryon testified that Carter knew the fort was built to resist attacks from
natives but not European enemies.
Lord Mansfield held that Carter had failed in his duty of utmost good faith (the latin being
uberrimae fidei) in failing to disclose these material facts. He stated,” Insurance is a contract based
upon speculation. The special facts, upon which the contingent chance is to be computed, lie most
commonly in the knowledge of the insured only; the underwriter trusts to his representation and
proceeds upon the confidence that he does not keep back any circumstance in his knowledge, to
mislead the underwriter into a belief that the circumstance does not exist, and to induce him to
estimate the risque as if it did not exist.
Good faith forbids either party by concealing what he privately knows, to draw the other into a
bargain from his ignorance of that fact, and his believing the contrary”.
7
2. London Assurance Ltd v Mansel (1879) 11 Ch D 363

In the case of London Assurance Co. v. Mansel (1879) 11 Ch D 363. Jessel, M. R. said:
"As regards the general principle, I am not prepared to lay down the law as making any difference
in substance between one contract of assurance and another. Whether it is life, or fire
or marine insurance, I take it good faith is required in all cases, and thout1h there may be certain
circumstances from the peculiar nature of marine insurance, which require to be disclosed and
which do not apply to other contracts of insurance, that is rather, in my opinion, an illustration of
the application of the principle than a distinction in principle."

3. LIC v Asha Goel AIR 2001 SC 549

The Supreme Court in Life Insurance Corporation of India & Ors. Vs Asha Goel (Smt.) & Anr.[3]
held that the contracts of insurance including the contract of life insurance is contracts Uberrimae
fides that means contract based on ‘utmost good faith’ hence each and every material facts must be
disclosed and the concealment of any material information or providing any false or incorrect
information in the policy is a violation of the insurance contract. Concealment of any material fact
will entitle the insurer to deprive the assureds’ benefits of the contract. For example: If the life
assured or proposer is suffering from tuberculosis then he is legally bound to declare this material
fact to the insurer at the time of taking the insurance policy.

4. Norwich Union Life Insurance Society v Qureshi 1999 CLC 1963

An insurer's duty of disclosure did not go beyond facts which were material to the insurance
contract. Appeals by the defendants ('the Names') against the decisions of Rix J and Rimer J to the
effect that the Names had no case against the plaintiff ('NU') in respect of alleged dishonest
concealment of material facts in relation to endowment policies entered into by the Names with
NU. The actions arose out of Plans marketed by NU, under which NU gave guarantees on behalf of
the Names to Lloyds to meet losses incurred by the Names. Under the Plans the Names charged
real property or investments to NU to secure the liabilities of NU under the guarantees. The Names
also took out endowment policies with NU and assigned them to NU by way of further security.
Any sums paid by NU under the guarantees were to be treated as sums advanced under the charge.
Provided that the Names paid interest on those sums and premiums under the policy they were not
required to repay to NU the principal sum unless and until the policy matured. NU had honoured
calls under the guarantees, but the Names claimed to be entitled to be relieved of their obligations
to make repayment on the ground of dishonest concealment of material facts by NU. In particular,
they alleged that at the time that they were considering entering into the policies NU owed them a
duty of utmost good faith to disclose that subsidiary or associated companies of NU were already
affected by the kind of adverse losses which were later to escalate with catastrophic effects for the
syndicates of which the Names were members.

5. Ratanlal v Metropolitan Insurance Co AIR 1959 Pat 413

Facts Of The Case: Pyare Lal (insured) died on 19-4-1946, plaintiff in this case were his sons
(successors and heirs). On accord of his policy, it so happened that before the acceptance could be
supplemented with regular policy, the assured died on 19-4-1946. But the amount which had been
paid up by the deceased was first kept in suspense account and thereafter on 28-3-1946 was
adjusted it first annual premium. Therefore it could be said that on the date of adjustment of
account, the policy was deemed to be a binding contract between the parties.
8
This case places a distinction between the fact of ordinary disorder and the material change in
health of the insured which could be made ground of repudiation by the company and its important
to make this distinction clear as it may lead to grave injustice to the insured. Ordinary disorder if
doesn't lead to deterioration of health of the deceased then would not amount to suppression of
material fact.

6. Biggar v Rock Life Assurance Co (1902) 1 KB 516

In Biggar v Rock Life Assurance Co [1902] 1 KB 516 (Appendix 6.11), the customer gave the
correct answers to the agent who incorrectly transcribed them. The customer did not check over the
completed form. He failed in his action against the insurer. The decision in this, and later cases, is
based on the argument that one is bound by one’s signature and failing to read over a document
before signing it is a fault that should rest squarely on that person’s shoulders.

7. Joel v Law Union & Crown Insurance Co (1908) 2 KB 863

The duty is a duty to disclose, and you cannot disclose what you do not know. The obligation to
disclose, therefore, necessarily depends on the knowledge you possess.’

8. Woolcott v Excess Insurance (1979) 1 Lloyd’s Rep 231

Insurance (Fire)-Non-disclosure-Insurance brokers -Plaintiff did not disclose previous convictions
to insurers-Property destroyed by fire-Whether non-disclosures material-Whether brokers aware of
plaintiff's criminal record-Whether insurers could avoid policy-Whether insurers entitled to an
indemnity from brokers
======================================================================
3. Indemnity
Indemnity limited to actual amount of loss – if assured recover from third party in addition to
sum assured, insurer entitled to additional amount recovered
Castellain v Preston (1883) 2 QB 380
Exceptions: life insurance, accident & sickness insurance, valued policies
--------------------------------------------------------------------------------------------
All insurance policies, except the life policies and personal accident policies, are contract of
indemnity. This principle is based on the fact that the object of the insurance is to place the insured
as far as possible in same financial position in which he was before the happening of the insured
peril. Under this principle, the insured is not allowed to make any profit out of the happening of the
event because the object is only to indemnify him and profit making would be against this
principle. This principle is linked with the insurable interest. As an example, if a house is insured
for Rs 10 lakhs against the risk of fire, and is damaged in fire causing a loss of Rs one lakh only,
then the insured would be paid only Rs one lakh because the principle is to indemnify him.
Likewise, this principle also limits the amount of compensation. If the loss caused is more than Rs
10 lakhs, he cannot recover more than the amount for which the house was insured and the excess
clause would also apply. The principle of indemnity has been explained in an English case
Castellain v. Preston as under:
Every contract of marine and fire insurance is a contract of indemnity, and of indemnity only, the
meaning of which is that the assured in case of a loss is to receive a full indemnity, but is never to
receive more. Every rule of insurance law is adopted in order to carry out this fundamental rule,
9
and if ever any proposition is brought forward, the effect of which is opposed to this fundamental
rule, it will be bound to be wrong. There are many propositions bearing on this question, and many
rules may be glanced which are well known in insurance law. The doctrine in marine insurance law
of constructive total loss is adopted solely in order to carry out the fundamental rule. It is a doctrine
which is in favour of the assured, because where the loss is not an actual total loss, but is what, as a
matter of business, is treated as equivalent to a total loss, this rule is adopted to carry out the
fundamental doctrine and gives the assured a full indemnity. Grafted on that doctrine came the
doctrine of abandonment which is only applicable to cases of constructive total loss, and is
introduced in favour of the underwriter so that they may have to pay no more than an indemnity.
======================================================
4. Subrogation
Corollary to indemnity principle – after indemnifying assured, insurer subrogated to all rights
of assured against third parties with respect to any advantage to diminish loss
Commercial Union Assurance Co v Lister (1874) 9 Ch A 483
Limitations:
Arising post-payment only ; Not available if assured has no right against third party ; Claim in
assured’s name only
SS Navigation Co v National Insurance Co AIR 1988 Cal 168
Economic Transport Organization v Charan Spinning Mills Ltd (2010) 4 SCC 114

------------------------------------------------------------------------------------------------------------------
This brings us to the fourth principle of insurance. As a matter of fact, this principle is a corollary
to principle of indemnity. This principle applies to all contracts of insurance except life insurance
and personal accident insurance. Under this principle, the insurer has a right to stand in place of the
insured after the settlement of the claim having all rights and remedies against the third party.
Whatever remains after the settlement of the claim is the property of the insurer. The insured, under
this principle, is entitled to benefits only to the extent of the payment made by him. The concept of
subrogation was discussed in detail in Economic Transport Organization v. Charan Spg. Mills
(P) Ltd., by the Supreme Court which observed that the equitable assignment of the rights and
remedies of the assured in favour of the insurer, implied in a contract of indemnity, known as
“subrogation”, is based on two basic principles of equity: (a) No tortfeasor should escape liability
for his wrong; (b) No unjust enrichment for the injured, by recovery of compensation for the same
loss, from more than one source. The doctrine of subrogation will thus enable the insurer, to step
into the shoes of the assured, and enforce the rights and remedies available to the assured. The term
“subrogation” in the context of insurance, has been defined in Black’s Law Dictionary thus, “The
principle under which an insurer that has paid a loss under an insurance policy is entitled to all the
rights and remedies belonging to the insured against a third party with respect to any loss covered
by the policy.” Black’s Law Dictionary also extracts two general definitions of “subrogation”. The
first is from Dan B. Dobbs Law of Remedies which reads thus: Subrogation simply means
substitution of one person for another; that is, one person is allowed to stand in the shoes of another
and assert that person’s rights against the defendant. Factually, the case arises because, for some
justifiable reason, the subrogation plaintiff has paid a debt owed by the defendant.

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 Case Laws:

Commercial Union Assurance Co v Lister (1874) 9 Ch A 483

In Commercial Union Assurance Co. v. Lister (1874) 9 Ch App 483 the owner of a building
insured it against fire, but unfortunately not to its full value. Following a fire caused by the
negligence of a third party, the court stated that the presence of any uninsured loss entitled the
owner to conduct the action without any interference from insurers
======================================================================

5. Contribution
Corollary to indemnity principle – subject matter insured with several insurers (co-insurers),
rateable proportion of payment by co-insurers, on loss
Legal & General Assurance Society Ltd v Drake Insurance Co Ltd 1992 QB 887
General Assurance Society Ltd v Sitarama Rice Mills & Ors (1970)2 MLJ 483
Conditions:
Same subject-matter ; Same insurable interest of assured with all insurers – Same peril covered
by all policies ; All policies valid & enforceable at time of loss ; No express clause excluding
contribution liability
Calculation of Contribution:
 Maximum liability basis (contribution in proportion to sum insured)
 Independent liability basis (contribution in proportion to liability)
-----------------------------------------------------------------------------------------------------------------------
The next principle is the principle of contribution which is also a corollary to principle of
indemnity. It may be explained like this. If a property has been insured with several insurers, and in
the event of loss one insurer has to pay for the loss, such insurer has a right to recover a
proportionate amount from other insurers, and this right is known as contribution. Under this
principle, the insured has the choice to select from which insurer he wants to recover the loss.
Thus, contribution is the right of an insurer, who has paid under a policy; to call upon the other
insurers who are liable to contribute equally otherwise those other insurers shall be liable for the
insured loss. It follows that for the exercise of this right, there should be two or more insurers fully
covering the same risk in respect of the same interest in same subject-matter for the same period. In
other words, subject- matter of insurance must be common. Further, the peril due to which the loss
has occurred must also be common to all the policies, though other perils may also be included.
The assured person should also be same and the policies should be in force at the time when the
loss occurred. This right is not based on any contract; instead, it is equity that the burden should be
shared by all insurers. In North British and Mercantile Insurance Co. v. London, Liverpool and
Globe Insurance Co., the principle of contribution has been explained as under: 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 from the other then to make the parties
to contribute ratably. But that only applies where there is the same person insuring the same
interest with more than one office.

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Case Laws:

Legal & General Assurance Society Ltd v Drake Insurance Co Ltd 1992 QB 887

An insurance company, having paid under the policy to a doubly insured party, sought contribution
from the second insurer, who had not been notified of the claim by the insured. The claim for a
contribution was one in equity, but since the company had paid in excess of their true liability,
because of a ‘ratable proportion’ clause, they were not entitled to recover any part of the voluntary
payment. The matter should be looked at at the time of the loss before there was any non-
compliance with the condition precedent. Lloyd LJ said: l ‘the principles on which one insurer is
entitled to recover from another in a case of double insurance have been settled since Lord
Mansfield’s day’.
======================================================================

6. Causa proxima
Insurer liable if loss proximately caused by the risk insured against, not excluded risks
Leyland Shipping Co v Norwich Union Fire Insurance Co (1918) AC 350
Determination of Proximate Cause:
A. Loss caused by single peril – proximate peril included in policy, insurer liable to pay
B. Loss caused by several perils / chain of events
B1. Loss caused by several perils, in unbroken sequence, some perils excluded in policy
B1.1 if excluded peril before insured peril - insurer not liable for any damage
B1.2 if excluded peril after insured peril & loss by excluded peril distinguishable from
loss by insured peril - insurer liable for loss by insured peril only
B1.3 if excluded peril after insured peril & loss by excluded peril and loss by insured
peril not distinguishable - insurer not liable for any damage

B2. Loss caused by several perils, in broken sequence, some perils excluded in policy
B2.1 if excluded peril before insured peril - insurer liable for damage from insured peril
only
Marsden v City & County Assurance Co (1865) LR 1 CP 232
B2.2 if excluded peril after insured peril - insurer liable for insured peril loss only till
time of intervention of excepted peril
B2.3 if perils acting concurrently, not in successive order/chain – loss not distinguishable
- insurer not liable
-----------------------------------------------------------------------------------------------------------------------
The maxim, as it runs, is causa proxima non remota spectatur which means “the immediate, not the
remote, cause”. In order to pay the insured loss, it has to be seen as to what was the cause of loss. If
the loss has been caused by the insured peril, the insurer shall be liable. If the immediate cause is
an insured peril, the insurer is bound to make good the loss, otherwise not. In Pawsey & Company
v. Scottish Union and National Insurance Co., the proximate cause has been defined to mean the
active efficient cause that sets in motion train or events which bring about a result, without the
intervention of any force, started and working actively from a new and independent source.
Following illustrations would show the doctrine of proximate cause. In fire policies it is necessary
1
2
that fire should be the proximate cause for loss. In Marsden v. City and County Assurance Co., the
shop in question was insured for loss from any cause but not by fire. A fire broke out in the
adjoining building which spread to the rear of the plaintiff’s shop. The plaintiff was engaged in
shifting the contents of the shop to a safer place when a mob attacked the shop, broke down the
shutter and windows in order to loot the property. Under these circumstances, it was held that the
proximate cause for the damage was not fire; instead, it was the act of the mob. However, in
Leyland Shipping Co. Ltd. v. Norwich Union Fire Insurance Society Ltd., a ship was torpedoed
while its final loss was due to storm. It was held that torpedo was the proximate cause of loss.

Case Laws:
Marsden v City & County Assurance Co (1865) LR 1 CP 232
A mob broke the windows of a burning house, intending to use the fire as cover for looting the
contents. The owner of the house made a claim under his policy covering plate-glass windows, and
the insurer relied on the exclusion for fire damage. The judge found that the proximate cause was
not the fire but the ‘lawless violence’ of the mob – the exclusion did not apply to this cause, and
there was therefore coverage for the loss.
======================================================================

7. Mitigation of loss
Duty on assured – reasonable steps – common person of ordinary prudence – reduce/mitigate
loss – irrespective of clause in insurance contract
-------------------------------------------------------------------------------------------------------------
Definition: Mitigation means reducing risk of loss from the occurrence of any undesirable event.
This is an important element for any insurance business so as to avoid unnecessary losses.
Description: In general, mitigation means to minimize degree of any loss or harm. In insurance
contracts, various clauses and conditions are specified so as to ensure minimum losses to the
insurer. The actuaries are entrusted with the responsibility of underwriting the insurance policy.
They employ a variety of quantitative techniques in order to assess the risk associated with the
insured and decide the appropriate premiums commensurate with the risk. The primary objective of
the exercise is to mitigate the risk ingrained with the insured.
======================================================================
8. Attachment of risk
liability of insurer commences when risk attaches to insurance subject-matter – date of policy
(formation of insurance contract) or other specified date

---------------------------------------------------------------------------------------------------------------

Attachment of risk is the commencement of liability under a contract of insurance to answer

for any loss or damage that may result from a risk insured against. The loss or damage should
be during the term of the insurance in an amount not exceeding the amount stipulated in the
contract.
Attachment of risk is also a stage in a transaction (usually the point of delivery) where the
buyer acquires the risk of loss of the purchased item.

======================================================================
1
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 Re-insurance
Insurer (cedant) contracts to transfer whole (fronting)/portion of (cession) risk under insurance
policy to another insurer (re-insurer)
Principles of insurance applicable to re-insurance also – insurable interest, good faith, indemnity,
subrogation, contribution, proximate cause, mitigation of loss, attachment of risk, following the
settlement & Claims control (specific to re-insurance)
London General Insurance Co v General Marine Underwriters Association (1921) 1 KB 104
Types of Re-insurance / Re-insurance methods:
a. Facultative re-insurance
b. Re-insurance treaties
c. Re-insurance pools
d. Joint & several co-insurance
e. Re-insurance companies
Retrocession:
re-insurer further transfers portion of transferred risk to another insurer (retrocessionaire)
Following the Settlement:
Unqualified clause to indemnify cedant in re-insurance contract - Re-insurer to follow the
settlement between assured and cedant
Claims cooperation / Claims control:
Express qualified clause in re-insurance contract - Re-insurer liability to indemnify cedant – if re-
insurer controls negotiations, adjustments, payments between assured and cedant – mandatory
approval of re-insurer before any settlement between assured and cedant
Re-insurance in India:
 Sec 114 Insurance Act 1938, Sec 14 & 26 IRDA Act 1999
 IRDAI (Lloyd’s India) Regulations 2016
 IRDAI Reinsurance Regulations 2018

----------------------------------------------------------------------------------------------------
1) What is Reinsurance -

Reinsurance is a risk transfer mechanism where under an insurance company passes on the risk
on an insurance policy to another entity called Reinsurer for consideration under a Reinsurance
treaty (contract).
In simple words, reinsurance is insurance that is purchased by an insurance company (reinsurer)
from an insurer as a means of risk management, to transfer risk from the insurer to the reinsurer.
The reinsurer and the insurer enter into a reinsurance agreement which details the conditions
upon which the reinsurer would pay the insurer's losses (in terms of excess of loss or
proportional to loss). The reinsurer is paid a reinsurance premium by the insurer, and the insurer
issues thousands of policies. It is an independent contract between the reinsurer and the insurer
and the original insurer is not a part of the contract.

London General Insurance Co v General Marine Underwriters Association in which the Court
of Appeal first held that the proposer of reinsurance should have known the contents of casualty
1
4
slips received from Lloyd's. So the proposer argued that by the same token there is no need to
disclose the contents to the reinsurer, for he should also have known the contents of the same
slip. The argument was rejected and the decision was in favor of the reinsured.
Lord Sterndale M R said that: "The defendants, supposing they had these slips, could not be
expected to have always present to their mind information which at the time they got it would
have no interest for them at all".

Types of Re-Insurance:

a. Facultative re-insurance

Facultative reinsurance is coverage purchased by a primary insurer to cover a single risk—or a

block of risks—held in the primary insurer's book of business. Facultative reinsurance is one of
two types of reinsurance (the other type of reinsurance is called treaty reinsurance). Facultative
reinsurance is considered to be more of a one-time transactional deal, while treaty reinsurance is
typically part of a long-term arrangement of coverage between two parties.

b. Re-insurance treaties

Treaty reinsurance is insurance purchased by an insurance company from another insurer. The
company that issues the insurance is called the cedent, who passes on all the risks of a specific
class of policies to the purchasing company, which is the reinsurer. Treaty reinsurance is one of
the three main types of reinsurance contracts. The two others are facultative reinsurance and
excess of loss reinsurance.

c. Re-insurance pools
Reinsurance Pool — a risk financing mechanism used by insurance companies to increase their
ability to underwrite specific types of risks. The insurer cedes risk to the pool under a treaty
reinsurance agreement. The insurer may be a part owner of the pool and may assume a quota share
of the pool risk.

Retrocession

The reinsuring of reinsurance, Retrocession is a separate contract and document from the
original reinsurance agreement between a primary insurance company (as the reinsured) and the
original reinsurer.

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 Unit 3 – Life Insurance (Synopsis)

M EANING: SEC 2(11) INSURANCE ACT 1938

life insurance business” means the business of effecting contracts of insurance upon
human life, including any contract whereby the payment of money is assured on death
(except death by accident only) or the happening of any contingency dependent on
human life, and any contract which is subject to payment of premiums for a term
dependent on human life and shall be deemed to include—
(a) The granting of disability and double or triple indemnity accident benefits, if so provided
in the contract of insurance;
(b) The granting of annuities upon human life; and
(c) The granting of superannuation allowances and annuities payable out of any fund
applicable solely to the relief and maintenance of persons engaged or who have been engaged
in any particular profession, trade or employment or of the dependents of such persons;]
31
[ Explanation. —For the removal of doubts, it is hereby declared that “life insurance
business” shall include any unit linked insurance policy or scrips or any such instrument or
unit, by whatever name called, which provides a component of investment and a component
of insurance issued by an insurer referred to in clause (9) of this section
----------------------------------------------------------------------------------------------------------------

DIFFERENCE BETWEEN LIFE INSURANCE & INDEMNITY : CHANDULAL HARJIVANDAS V CIT AIR 1967 SC
816

The word contingent means when an event or situation is contingent, i.e. it depends on some
other event or fact. Now, the ‘contingent contract’ means enforceability of that contract is
directly depends upon happening or not happening of an event. Section 31 of the Indian
Contract Act, 1872 defines the term ‘Contingent Contract’ as follows: ‘A contingent contract
is a contract to do or not to do something if some event collateral to such contract does or
does not happen’. In simple words, contingent contracts are the ones where the promisor
perform his obligation only when certain conditions are met. The contracts of insurance,
indemnity, and guarantee are some examples of contingent contracts.

Essentials of Contingent Contract:

 There must be a valid contract to do or abstain from doing something: Section 32 and
33 of the Act talks about enforcement of the contingent contract on the happening or
not happening of the events respectively. The contract will be valid only if it is about
performing or not performing an obligation.
  Performance of the contract must be conditional: The condition for which the contract
has been entered into must be a future event, and it should be uncertain. If the
performance of the contract is dependent on an event, which is although a future
event, but certain and sure to happen, then it’ll not be considered as a contingent
contract.
 The said event must be collateral to such contract
 The event on whose happening or non-happening of the event on which the
performance of the contract is dependent should not be a part of the consideration of
the contract. The happening or non-happening of the event should be collateral to the
contract and should exist independently.
 The event should not be at the discretion of the promisor The event so considered as
for contingency should not at all to be dependent on the promisor. It should be totally
a futuristic and uncertain event.

In a life insurance contract, the insurer pays a certain amount if the insured dies under certain
conditions. The insurer is not called into action until the event of the death of the insured
happens. This is a contingent contract.

Under English Law, the word indemnity carries a much wider meaning than given to it under
the Indian Act. Under English law, a contract of insurance (other than life insurance) is a
contract of indemnity. Life insurance contract is, however, not a contract of indemnity,
because in such a contract different considerations apply.

A contract of life insurance, for instance, may provide the payment of a certain sum of money
either on the death on a person or on the expiry of a stipulated period of time (even if the
assured is still alive) Indian Contract Act does not specifically provide that there can be on
implied contract of indemnity.

Meaning of Contract of Indemnity

Contract of indemnity meaning is a special kind of contract. The term indemnity literally
means security or protection against a loss or compensation. According to Section 124 of the
Indian Contract Act, 1872:

A contract, by which one party promises to save the other from loss caused to him by the
conduct of the promisor himself, or by the conduct of any other person, is called a contract of
indemnity.

Example: P contracts to indemnify Q against the consequences of any proceedings which R

may take against Q in respect of a certain sum of money.

Case Law: Chandulal Harjivandas v CIT AIR 1967 SC 816

In this case, on June 23, 1959, a policy known as “Children’s Deferred Endowment
Assurance” for a total of Rs. 50,000/- was issued by the Life Insurance Corporation of India.
The proposer was Harjivandas Kotecha, the father of the assessee (appellant) and therefore
the life assured was the assessee. The premium owed in respect of the aforesaid policy was
Rs. 1,925/- once a year.That amount was paid as premium out of the taxable income of the
assessee. Within the course of the assessment for the assessment year 1960-61, the assessee
claimed rebate on the payment of Rs. 1,925/- underneath the provisions of section 15(1) of
the Income Tax Act, 1922. The Income Tax officer rejected the claim on the ground that
underneath the aforesaid policy the lifetime of the minor assessee had not been assured.
Therefore, The Appellant Assistant Commissioner agreed with the Income Tax Officer and
held that the claim of the assessee was justly rejected. The assessee took the matter in further
appeal before the Appellant Tribunal but the appeal was dismissed or discharged. Thus, the
appellate Tribunal declared a case to the High Court on the following question of law:
Whether or not rebate under section 15(1) of the Income Tax Act, 1922 is admissible on the
premium owed as per Annexure ‘A’ throughout the minority of the assessee?

The Tribunal of Gujarat given the reference within the favour of the respondent and held that
the contract of assurance with the Life Insurance Corporation was entered into by the father
of the assessee and below the terms thence the contract was to become the assessee’s contract
solely by his adopting it on attaining majority. The Tribunal further held that an actual
interpretation of the terms of the contract, though the minor was alive on the postponed date
it had been ‘assessee’s’ father who was entitled to receive the money possibility unless the
assessee adopted the contract as his own. The Tribunal discovered that real contracting
parties were the father of assessee and therefore the Life Assurance and it had been solely
below sure contingency on the happening on that the contract was to become the contract of
the assessee.

----------------------------------------------------------------------------------------------------------------

FEATURES OF LIFE INSURANCE CONTRACT:

 Section 30, 30A, 31 LIC Act 1956

30. Corporation to have the exclusive privilege of carrying on life insurance business.—Except
to the extent otherwise expressly provided in this Act, on and from the appointed day the
Corporation shall have the exclusive privilege of carrying on life insurance business in India;
and on and from the said day any certificate of registration under the Insurance Act held by
any insurer immediately before the said day shall cease to have effect in so far as it
authorises him to carry on life insurance business in India.

30A. Exclusive privilege of Corporation to cease.—Notwithstanding anything contained in

this Act, the exclusive privilege of carrying on life insurance business in India by the
Corporation shall cease on and from the commencement of the Insurance Regulatory and
Development Authority Act, 1999 and the Corporation shall, thereafter, carry on life
insurance business in India in accordance with the provisions of the Insurance Act, 1938 (4 of
1938).

31. Exception in the case of insurance business in respect of persons residing outside India.—
(1) Notwithstanding anything contained in section 30 or in the Insurance Act, the Central
Government may, by order, permit any person who has made an application in that behalf,
to carry on life insurance business in India in respect of the lives of persons ordinarily
resident outside India, subject to such restrictions and conditions as may be specified in the
order and any such order shall be deemed to have effect as if it were a certificate of
registration issued by the 1[Authority] to such person under section 3 of the Insurance Act in
respect of that class of business.

(2) Nothing in sub-section (1) shall authorize any person permitted to carry on life insurance
business of the nature referred to in that sub-section, to insure the life of any person
ordinarily resident outside India, during any period of his temporary residence in India.

 Insurance interest – presumption in certain relationships

The general rule is that every person has an insurable interest in his own life. Accordingly, a
person may purchase a life insurance policy on his own life, making the proceeds payable to
anyone he wishes. Life insurance contract is not a contract of indemnity and a person
affecting a policy must have an insurable interest in the life to be assured. But when a person
seeks insurance on his own life, the question of insurable interest is immaterial. 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.

In case of Liberty National Life Insurance v. Weldon, the aunt of the of a two year old child
who was a nurse by profession, managed 3 life insurance policies by different 3 companies
on the life of the child. One day she mixed some poisonous thing into the milk and by that
milk child was died. And the lady claimed a huge amount from three companies. The father
filed a case against all the insurance companies that without knowing the fact that whether
she had any insurable interest in the life of child they issued the life insurance policies.

In this case Court held that the aunt has no insurable interest in the life of child therefore the
companies were not liable but the companies are liable to pay compensation to father of the
child. In the life insurance policy persons having relationship by marriage, blood or adoption
have been recognized as having insurable interest.

Few example of relationship which has insurable interest in the life of other:

On one own life, Husband and Wife, Parent and child,

Contractual Relationship:

On one 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
amount.

Husband and wife:

With the due development of the life insurance business, just as a person is presumed to have
a insurable interest in his own life, it is now well settled in England and America that a wife
has a insurable interest in the life of the husband and vice versa. Husband and wife have an
insurable interest of life of each other.

In case of Griffith v. Flemming, Griffith and his wife each signed a proposal from for a joint
life policy on their life and both contributed towards the premium. After the policy was taken,
the wife committed suicide and the husband claimed the sum assured. The insurer alleged
that at the time of taking the policy the husband had no insurable interest in his wife life as
required by the Life Assurance Act, 1774.

In this case Vaughan Williams L.J. held that the husband has an interest in his wife life which
ought to be presumed.

Parent and Child:

In England it has been laid down that a parent has no insurable interest in the life of the child
because mere love and affection is not sufficient to constitute an insurable interest. If the
parent has any interest in the life of the child, whether natural or adopted, he can take out an
insurance policy in the life of such child.

In case of Halford v. Kymer, it was held that a father has no insurable interest in the life of
his son unless he is getting some pecuniary benefit from him. Contractual Relationship:- A
wide variety of relations may acquire insurable interest by reason of contractual and some of
the common instances may be noted hereunder.

Debtor and Creditor:

Creditor has the insurable interest on life of the debtor to that extent on which amount he has
the position to recover from debtor. It was held in case of Godsall v. Boldero, that if a
creditor affects a policy of insurance upon the life of his debtor for greater amount than due,
then he will not be able to recover any greater sum than the amount or value of his interest.

Bailor and Bailee:

A bailor has an insurable interest in the property bailed to the extent of possible loss. The
bailor has a potential loss from two sources. Compensation as provided for in the contract of
bailment might be lost. Second, the bailee may be held legally liable to the owner if the bailee
negligence cause the loss.

.
  Utmost good faith: LIC v Channabasamma AIR 1991 SC 392; LIC v Mira Devi AIR
2011 Pat 144

Case Law: LIC vs. G.M. Channabasamma, (AIR 1991 SC 392)

In this landmark judgment, the Apex Court held that the onus of proving that the
policyholder has failed to disclose material facts lies in the corporation. It is the
fundamental principle of insurance law that utmost good faith must be observed by the
contracting parties and good faith forbids either party from non-disclosure of the facts
which the parties know.

Case note: Insurance - repudiation - appellant contended that respondent was guilty of
fraudulent misrepresentations and suppression of material facts with regard to his health -
High Court held that defendant had failed to prove that insured was suffering from diabetes
or tuberculosis at time of filing of proposal forms or suppressed any material facts -
Supreme Court observed that it is well settled that contract of insurance is contract uberrima
fides must be complete good faith on part of assured - assured under obligation to disclose
all material facts which may be relevant to insurer - after issuing policy, burden of proving
that insured made false representations and suppressed material facts is undoubtedly on
corporation - physician's statement does not lead to conclusion that respondent was
influenced by serious disease for long time - held, corporation had failed to discharge
burden of proving that respondent was suffering from any serious illness or had suppressed
any material fact.

Case Law: Life Insurance Corporation of India and Ors. vs. Mira Devi

Insurance - Payment of amount - Section 45 of Insurance Act, 1938 - Appellant filed this
First Appeal against impugned judgment passed by Subordinate Judge decreeing Plaintiff-
Respondent's suit for a sum of Rs. 2,12,000/- with interest at rate of 6 per cent per annum
pendente lite and future - Held, admittedly, repudiation was made after two years - As per
Section 45 of Act, Appellant was required to prove 3 facts (1) that statements must be on a
material matter or must suppresses facts which it was material to disclose - (2) suppression
must be fraudulently made by policy-holder and (3) that policy holder must have known at
time of making statement that it was false or that it suppressed fact which it was material to
disclose - Quarterly premium was regularly paid without any default - Next quarterly
premium was to be paid by June, 1991 but in meantime, husband of Plaintiff died -
Therefore, there was no question of lapse of policy arises - Burden of proving fact alleged
by Appellant that deceased suppressed correct information was on Appellant - Appellants
failed to prove allegation made by them that deceased suppressed material facts regarding
his age and health - Therefore, rejection order passed by Appellant rejecting death claim
was illegal - Defendant-Appellant could not have rejected claim on unfounded grounds - No
reason to interfere with findings of Court below - Appeal dismissed
  Lapse of policy for non-payment: applicability of Sec 64-VB Insurance Act: LIC v
Jaya Chandel AIR 2008 SC 1310

Section 64-VB of Insurance Act

64VB. No risk to be assumed unless premium is received in advance.—

(1) No insurer shall assume any risk in India in respect of any insurance business on which
premium is not ordinarily payable outside India unless and until the premium payable is
received by him or is guaranteed to be paid by such person in such manner and within such
time as may be prescribed or unless and until deposit of such amount as may be prescribed,
is made in advance in the prescribed manner.

(2) For the purposes of this section, in the case of risks for which premium can be
ascertained in advance, the risk may be assumed not earlier than the date on which the
premium has been paid in cash or by cheque to the insurer. Explanation.—Where the
premium is tendered by postal money order or cheque sent by post, the risk may be assumed
on the date on which the money order is booked or the cheque is posted, as the case may be.

(3) Any refund of premium which may become due to an insured on account of the
cancellation of a policy or alteration in its terms and conditions or otherwise shall be paid by
the insurer directly to the insured by a crossed or order cheque or by postal money order and
a proper receipt shall be obtained by the insurer from the insured, and such refund shall in
no case be credited to the account of the agent.

(4) Where an insurance agent collects a premium on a policy of insurance on behalf of an

insurer, he shall deposit with, or despatch by post to, the insurer, the premium so collected
in full without deduction of his commission within twenty-four hours of the collection
excluding bank and postal holidays.

(5) The Central Government may, by rules, relax the requirements of sub-section (1) in
respect of particular categories in insurance policies.] 1[(6) The Authority may, from time to
time, specify, by the regulations made by it, the manner of receipt of premium by the
insurer.]

Case Law: LIC v Jaya Chandel AIR 2008 SC 1310

Case Note:

Consumer Protection Act, 1986 - Sections 2 (1) (g) and 21--Insurance Act, 1938--Sections
43 and 64VB--Deficiency in service--Insurance claim -- Policy lapsed--Under condition 3 it
could be revived during life-time of assured--Cheque for premium admittedly received after
death of assured--Further revival takes effect only after same approved by appellant
Corporation--And specifically communicated to life insured--In present case, this is not
situation--Section 43 enumerates various sections of Insurance Act applicable to
Corporation--Section 64VB not one of them--Orders of consumer for a unsustainable--And
set aside.
Ratio Decidendi:

"Revival of a policy, which was lapsed due to non-payment of premium in time, takes effect
only after the same is approved by the Corporation and is specifically communicated to the
life insured."

 Backdating of policy: LIC v Dharam Veer Anand (1998) 7 SCC 348

Backdating in insurance language means altering the start date of the life insurance policy to
a time earlier than the originally date of buying the insurance policy. Suppose you bought a
policy on January 1, 2013 but you realize later that had you purchased the policy two months
earlier, you could have got it at better premium rates. Backdating allows you this. This will
help reduce the premium liability for the insured during the policy tenure.

Case Law: LIC v Dharam Veer Anand (1998) 7 SCC 348

Case Note: Insurance - policy - Section 12 of Consumer Disputes Act and Consumer
Protection Act, 1986 - appeal against Order of National Forum that appellant-Corporation
liable to pay entire sum of which life has been insured - date of policy must be held to be date
on which policy has commenced - death of assured having taken place after three years from
date of policy - Clause 4B will not be attracted - no infirmity in Order passed by National
Forum - appeal dismissed.

Facts: The respondent took a policy of Life Insurance on the life of his minor daughter
Kumari Rajan Anand. The proposal was submitted on 25.3.90 and the policy was issued on
31.3.90. The policy contained a Clause, Clause 4B which reeds as follows :

Clause 4-B

"Notwithstanding anything mentioned to the contrary, it is hereby declared and agreed that
in the event of death of Life assured occurring as a result of intentional self injury, suicide or
attempted suicide, insanity, accident other than an accident in a public place or murder at
any time on or after the date on which the risk under the policy has commenced but before
the expiry of three years from the date of this policy, the Corporation's liability shall be
Limited to the sum equal to the total amount of premiums (exclusive extra of premiums, if
any), paid under the policy without Interest. Provided that in case the Life Assured shall
commit suicide before the expiry of one year reckoned from the date of this policy, the
provisions of the Clause under the heading "Suicide" printed on the back of the policy."

The insurer called upon the insured to indicate whether the policy is to be backdated and if
so, the date from which it should be dated back. The Insured indicated that the policy should
be dated back to 10.5.89 and the premium for the period 10.5.89 till 25.3.1990 was
accordingly paid. The policy was issued to the Insured on 25.3.90. The minor girl whose life
had been insured under the policy committed suicide on 15.11.1992. The respondent
thereafter lodged a claim for payment of the entire sum for which life of the deceased had
been insured. The Corporation gave a reply to the respondent that his claim for the full sum
assured could not be entertained as the assured had committed suicide within three years of
the date of the issue of policy and Clause 4B of the policy would be attracted. The respondent
then filed a complaint Under Section 12 of the Consumer Disputers Act contending inter alia
that the risk under the policy having commences w.e.f. 10.5.89 and the assured having
committed suicide on 15.11.92, Clause 4-B will not apply and therefore, the entire sum for
which the life of the minor girl had been insured should be paid to the respondent together
with the Bonus and interest which accrued due. The appellant took the stand before the
District Forum contending that though risk under the policy has commenced w.e.f. 10.5.89
but the date of the policy is 31.3.90 and therefore, death of the assured having occurred
before expiry of three years from the date of the policy, the liability of the Corporation shall
be limited to the sum equal to the total amount of premium paid under the policy as per
Clause 4-B of the terms of policy. The District Forum however rejected the contention of the
appellant and being of the view that the policy in the eye of law having commenced w.e.f.
10.5.89, the three years period under Clause 4-B of the policy would run from the said date
and not from the date of issuance of the policy and, therefore, the Corporation cannot have a
limited liability as per Clause 4-B of the policy. The said view of the District Forum was
upheld in appeal by the State Forum as well as in revision by the National Forum and hence
the present appeal.

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ASSIGNMENT OF LIFE INSURANCE :

 Actionable claim u/section 3 Transfer of Property Act

Actionable claim is defined in Section 3 of the Transfer of Property Act, which was included
in the Act by the Amending Act II of 1990. Actionable claim is an intangible movable
property, and its transfer is dealt with in Chapter VIII of the Act.

According to Section 3 of the Act, actionable claim means:

1. Claim to an unsecured debt

2. Beneficial interest in a movable property

These are both claims that are recognized in the Courts of law as affording relief. There are
other types of claims also that afford relief and are actionable in the Courts of law, such as
secured debts and tortuous suits like defamation or nuisance. But those are not categorized
under the meaning of actionable claim. The term actionable claim only covers the above
mentioned two types of claims.

 Conditions for assignment: sec 38 Insurance Act (amended by 2015 Amendment):

LIC v Insure Policy Plus Services Ltd AIR 2016 SC 182
Assignment or transfer of a Policy should be in accordance with Section 38 of the Insurance
Act, 1938 as amended from time to time.

The extant provisions in this regard are as follows:

01. This Policy may be transferred/assigned, wholly or in part, with or without
consideration.

02. An Assignment may be effected in a Policy by an endorsement upon the Policy itself or
by a separate instrument under notice to the Insurer.

03. The instrument of assignment should indicate the fact of transfer or assignment and the
reasons for the assignment or transfer, antecedents of the assignee and terms on which
assignment is made.

04. The assignment must be signed by the transferor or assignor or duly authorized agent
and attested by at least one witness.

05. The transfer of assignment shall not be operative as against an insurer until a notice in
writing of the transfer or assignment and either the said endorsement or instrument itself or
copy there of certified to be correct by both transferor and transferee or their duly authorised
agents have been delivered to the insurer.

06. Fee to be paid for assignment or transfer can be specified by the Authority through
Regulations.

07. On receipt of notice with fee, the insurer should Grant a written acknowledgement of
receipt of notice. Such notice shall be conclusive evidence against the insurer of duly
receiving the notice.

08. If the insurer maintains one or more places of business, such notices shall be delivered
only at the place where the Policy is being serviced.

09. The insurer may accept or decline to act upon any transfer or assignment or
endorsement, if it has sufficient reasons to believe that it is a. not bonafide or b. not in the
interest of the Policyholder or c. not in public interest or d. is for the purpose of trading of
the insurance Policy.

10. Before refusing to act upon endorsement, the Insurer should record the reasons in
writing and communicate the same in writing to Policyholder within 30 days from the date
of Policyholder giving a notice of transfer or assignment.

11. In case of refusal to act upon the endorsement by the Insurer, any person aggrieved by
the refusal may prefer a claim to IRDAI within 30 days of receipt of the refusal letter from
the Insurer.

12. The priority of claims of persons interested in an insurance Policy would depend on the
date on which the notices of assignment or transfer is delivered to the insurer; where there
are more than one instruments of transfer or assignment, the priority will depend on dates of
delivery of such notices. Any dispute in this regard as to priority should be referred to
Authority.
13. Every assignment or transfer shall be deemed to be absolute assignment or transfer and
the assignee or transferee shall be deemed to be absolute assignee or transferee, except

a. where assignment or transfer is subject to terms and conditions of transfer or assignment

OR

b. where the transfer or assignment is made upon condition that

i. the proceeds under the Policy shall become payable to Policyholder or nominee(s) in the
event of assignee or transferee dying before the insured

OR

ii. the insured surviving the term of the Policy Such conditional assignee will not be entitled
to obtain a loan on Policy or surrender the Policy.

This provision will prevail notwithstanding any law or custom having force of law which is
contrary to the above position.

14. In other cases, the insurer shall, subject to terms and conditions of assignment, recognize
the transferee or assignee named in the notice as the absolute transferee or assignee and such
person

a. shall be subject to all liabilities and equities to which the transferor or assignor was
subject to at the date of transfer or assignment and

b. may institute any proceedings in relation to the Policy

c. obtain loan under the Policy or surrender the Policy without obtaining the consent of the
transferor or assignor or making him a party to the proceedings

15. Any rights and remedies of an assignee or transferee of a life insurance Policy under an
assignment or transfer effected before commencement of the Insurance Laws (Amendment),
2014 shall not be affected by this section.

Case Law: LIC v Insure Policy Plus Services Ltd AIR 2016 SC 182

In this case, LIC vs Insure Policy Plus Services Ltd, the latter firm is engaged, among other
things, in the business of accepting and dealing in assignment of LIC policies. The Supreme
Court has ruled that Life Insurance Corporation cannot object to transfer or assignment of
policies, which is a global practice. It upheld the judgment of the Bombay High Court which
had stated that the insurance policies are “transferable and assignable in accordance with the
provisions of the Insurance Act and in terms of the contract of life insurance”.

In this case, LIC vs Insure Policy Plus Services Ltd, the latter firm is engaged, among other
things, in the business of accepting and dealing in assignment of LIC policies. It acquired
policies from policy-holders by paying them consideration. The assigned policy is registered
with LIC, and is then further assigned to third parties for consideration. LIC objected to this
practice and issued circulars asking its branches not to register such assignments.
According to LIC, these firms are acquiring lapsed policies from the original policy-holders
by paying them an attractive sum over and above the surrender value. The firm, then,
becomes the assignee and is entitled to all the rights of the policy. If this practice becomes
prevalent, “it would not only undermine the real purpose of life insurance but also allow
third parties to make windfall gains by such wagering contracts.”

The firm asserted that it has the right to trade in the policies according to the Insurance Act.
The high court allowed the petition of the firm, stating that the policies are the “personal,
movable property of the policy-holder, and can be said to be an actionable claim.” This view
was upheld by the Supreme Court after analysing the insurance law, including last year’s
amendment.

 Parties to assignment: Mithoolal Nayak v LIC AIR 1962 SC 814

Assignment refers to the transfer of certain or all (depending on the agreement)
rights to another party. The party which transfers its rights is called an assignor,
and the party to whom such rights are transferred is called an assignee. Assignment
only takes place after the original contract has been made. As a general rule,
assignment of rights and benefits under a contract may be done freely, but the
assignment of liabilities and obligations may not be done without the consent of
the original contracting party.
The liability on a contract cannot be transferred so as to discharge the person or
estate of the original contractor unless the creditor agrees to accept the liability of
another person instead of the first.
Illustration
P agrees to sell his car to Q for Rs. 100. P assigns the right to receive the Rs. 100 to
S. This may be done without the consent of Q. This is because Q is receiving his
car, and it does not particularly matter to him, to whom the Rs. 100 is being handed
as long as he is being absolved of his liability under the contract. However, notice
may still be required to be given. Without such notice, Q would pay P, in spite of
the fact that such right has been assigned to S. S would be a sufferer in such case.
In this case, that condition is being fulfilled since P has assigned his right to S.
However, P may not assign S to be the seller. P cannot just transfer his duties
under the contract to another. This is because Q has no guarantee as to the
condition of S’s car. P entered into the contract with Q on the basis of the merits of
P’s car, or any other personal qualifications of P. Such assignment may be done
with the consent of all three parties – P, Q, S, and by doing this, P is absolved of
his liabilities under the contract.

Case Law: Mithoolal Nayak v LIC AIR 1962 SC 814

The case questioned whether repudiation of the life policy by the company after two years,
was proper, when the said policy was obtained by deliberate mis-statement and fraudulent
suppression - It further questioned whether the appellant was liable to get the refund of the
money paid as premium - The Court ruled that the policy holder was guilty of fraudulent
suppression of material facts and the company was entitled to avoid the contract under
Section 45 of the Insurance Act, 1938 - Moreover, the appellant was not entitled to a refund
of the money paid as premium.

 Types of assignment: absolute (sec 38(8) & conditional (sec38(10)

The assignment of an insurance policy can be made in two ways;

Absolute Assignment – Under this process, the complete transfer of rights from the Assignor
to the Assignee will happen. There are no conditions applicable.

Example: Mr. PK Khan owns a life insurance policy of Rs 1 Crore. He would like to gift this
policy to his wife. He wants to make ‘absolute assignment’ of this policy in his wife’s name,
so that the death benefit (or) maturity proceeds can be directly paid to her. Once the absolute
assignment is made, Mrs. Khan will be the owner of the policy and she may again transfer
this policy to someone else.

Conditional Assignment – Under this type of assignment, the transfer of rights will happen
from the Assignor to the Assignee subject to certain conditions. If the conditions are fulfilled
then only the Policy will get transferred from the Assignor to the Assignee.

Example: Mr. Mallya owns a term insurance policy of Rs 50 Lakh. He wants to apply for a
home loan of Rs 50 Lakh. His banker has asked him to assign the term policy in their name to
get the loan. Mallya can conditionally assign the policy to the home loan provider to acquire
a home loan. If Mallya meets an untimely death (during the loan tenure), the banker can
receive the death benefit under this policy and get their money back from the insurance
company.

If Mallya repays the entire home loan amount, he can get back his term insurance policy. The
policy would be reassigned to Mallya on the repayment of the loan.

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NOMINATION IN LIFE INSURANCE : SEC 39

 Eligibility and rights of nominee
 Conditions for nomination: sec 39(2), 39(3)
Cancellation of nomination

What is Nomination?

Nomination is the process by which the policyholder appoints a person or persons to receive
policy benefits in case of a death claim. So in case of an eventuality, the life insurance
company pays the policy proceeds to the appointed person - called Nominee.

Who can be a Nominee?

A nominee is appointed by the policyholder and can be anyone to whom the policyholder
wants the financial benefits to accrue, in case of his/her death during policy tenure.
General practice is to appoint spouse, children or parents as the nominee.

Earlier, due to lack of regulatory clarity, there were confusions about the actual status of
nominees - as legal heirs (other than nominees) too used to make claims on the money. To
solve this problem and to ensure that the insurance money goes to the real and intended
recipients, a concept of Beneficial Nominee was introduced in 2015.

Section 39

(2) Any such nomination in order to be effectual shall, unless it is incorporated in the text of
the policy itself, be made by an endorsement on the policy communicated to the insurer and
registered by him in the records relating to the policy and any such nomination may at any
time before the policy matures for payment be cancelled or changed by an endorsement or a
further endorsement or a will, as the case may be, 419 [but unless notice in writing of any such
cancellation or change has been delivered to the insurer, the insurer shall not be liable for
any payment under the policy made bona fide by him to a nominee mentioned in the text of
the policy or registered in records of the insurer].

[(3) The insurer shall furnish to the policy-holder a written acknowledgement of having
registered a nomination or a cancellation or change thereof, and may charge a fee not
exceeding one rupee for registering such cancellation or change.]

----------------------------------------------------------------------------------------------------------------

DIFFERENCE BETWEEN ASSIGNMENT & NOMINATION:

 Mode of creating

 Object

 Effect on rights & interests in policy

 Revocable or not

 Passing of property in policy

 Differences between Nomination and Assignment in Insurance

The following are the major differences between nomination and assignment:

1. How made: Nomination can be made either by mentioning the name of the nominees in the
policy or by an endorsement thereon. Separate instrument is not required. On the contrary,
assignment may be made either by an endorsement on the policy itself or by the execution of
separate instrument in writing.

2. Purpose: A nomination is made to provide facility to the beneficiary so that he can recover
the money when the policy matures for payment after the death of the assured but the
assignment is meant for transferring all the rights and interests under the policy in favour of
the assignee.
3. Effect: In nomination, the property in the policy remains at the disposal of the assured
during his life time. A nominee only has a beneficial interest in the policy, whereas in the
case of assignment, the property in the policy passes to the assignee, who gets the rights of
the owner of the policy.

4. Right of disposal: In nomination, the nominee gets the right of disposal only on the death
of the assured, whereas in assignment, the assignee can dispose of the policy in any way he
likes.

5. Revocability: Nomination can be revoked anytime before the maturity of the policy but
assignment is irrevocable and shall amount to the cancellation of nomination except when it
is made in respect of a loan granted on the security of the policy by the insurer. However,
there can be re-assignment in favour of the policyholder.

6. Consideration: Nomination need not be supported by a consideration but assignment must

be supported by a consideration.

7. Witness: Witness is not required for nomination but assignment must be witnessed
otherwise it will be invalidated.

8. Right to sue: Nominee has no right to sue under the policy, but the assignee has right to sue
under the policy.

9. Minor: In nomination, where nominee is a minor, appointment of an appointee by the life

assured only is required, whereas in assignment, where assignee is a minor, guardian is to be
appointed by the father of the assignee.

10. Creditors: In nomination, creditors of the life assured can attach the policy moneys,
whereas in assignment, creditors cannot attach the property unless the assignment was made
to defraud the creditors.

11. Execution: Nomination is effected where Insurance Act 1938 applies i.e., India or similar
enactment apply viz in Pakistan and Ceylon but assignment can be executed anywhere in the
world according to the law of the country.

12. Vested interest: No vested interest in favour of nominee is created but vested interest is
created in favour of assignee.

13. Policy amount: In case of nomination, money is to be paid to the nominee only when he
survives the assured, whereas in case of assignment, the policy money is to be paid to the
assignee.

14. Death: Nomination becomes ineffective at the death of the nominee. If a conditional
assignee dies, the right under the policy reverts to the life assured depending upon the terms
of assignment. If an absolute assignee dies, the right devolves upon his / her heirs.

----------------------------------------------------------------------------------------------------------------
 SETTLEMENT OF CLAIMS:

Persons entitled to receive sum insured: assured, nominee, legal heirs, coparceners, assignee

Sarojini Amma v Neelakantha Pillai AIR 1969 Ker 126 FB; Parbati Kuer v Sarangdhar AIR
1960 SC 403

Death claim settlement process

Step One: Intimation to the insurance company about the Claim

The nominee should inform the insurance company as soon as possible to enable the
insurance company to start with the claim process. The details required for intimation are
policy number, name of the insured, date of death, cause of death, place of death, name of the
nominee etc. The claim intimation form can be obtained from the nearest insurance company
branch or even by downloading it from the insurance company website. Alternatively, many
insurance companies also have online forms these days on their website for claim intimation.

Step Two: Documents required

The nominee will be asked to furnish the following documents:

 Death certificate

 Age of the life insured (if not already given)

 Original Policy document

 Any other document as per requirement of the particular insurer or case related

For early death claims i.e the claim that has arisen within three years of the policy being in
force the company will do extra investigation to ensure it is a genuine claim. They might do
the following:

 Check with the hospital if the deceased was admitted to hospital.

 In case of an air crash confirmation from the airline authorities check if the policy
holder was a passenger on the plane.

 In case of death from medical causes, the insurance company will ask the hospital to
provide doctor’s certificate, treatment records etc If the policy holder dies due to
murder, suicide, accident then police FIR report, panchanama, post mortem report etc
shall be required.

Step Three: Submission of required Documents for Claim Processing

For quicker claim processing, it is essential that the nominee submits complete
documentation as early as possible and any other documents that the company needs to pass
the claim.
Step Four: Settlement of Claim

As per the regulation 8 of the IRDAI (Policy holder's Interest) Regulations, 2002, the insurer
is obligated to settle a claim within 30 days of receipt of all necessary documents including
extra documents sought by the insurer. If the claim requires further investigation, the insurer
needs to complete its procedures within 6 months from receiving the written intimation of
claim.

Maturity & Survival Claims

The payment made by the insurance company on completion of term of policy or maturity
date is called maturity payment. The amount payable consists of sum assured plus any
bonus/incentives.

The insurance company informs the policy holder in advance by sending bank discharge form
for filling details in it. The form needs to be returned back to the insurance company with
original policy document, ID proof, Cancelled Cheque and copy of pass book.

Case Law: Parbati Kuer v Sarangdhar AIR 1960 SC 403

Case Note:

Property - Family assets - High Court held that insurance policies formed assets of
coparcenaries, to which Plaintiffs were entitled as survivors - Hence, this Appeal - Whether,
premium were paid to detriment of joint family fund or not - Held, there were asterisks in
extracts, which had been filed to show that some portions of entries had been omitted -
Further, use of that money towards purpose of family also indicated that it was joint family
asset and not separate property - However, evidence to show that deceased was in receipt of
an allowance per month, and this also he kept with Bihar Bank - Thus, entire family was
dealing with Bihar Bank as also deceased - Moreover, Account books showed that payment
for all policies had made from moneys of Press, which admittedly was joint family business
and income of which belonged to family as whole - Hence, High Court was justified in
conceding that joint family incurred expenses for purchasing various policies and account
books had not shown in any way that this concession was erroneous - Appeal dismissed.

Ratio Decidendi:

"Income belonged to joint family business shall not be considered as separate property.'
 UNIT 5 – SYNOPSIS
MARINE INSURANCE

Definition & meaning:

Section 2(13A) Insurance Act-“marine insurance business” means the business of effecting
contracts of insurance upon vessels of any description, including cargoes, freights and other
interests which may be legally insured, in or in relation to such vessels, cargoes and freights,
goods, wares, merchandise and property of whatever description insured for any transit by land
or water, or both, and whether or not including warehouse risks or similar risks in addition or as
incidental to such transit, and includes any other risks customarily included among the risks
insured against in marine insurance policies;

Sections 3- Marine insurance defined.—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, the losses incidental to marine adventure

2(d)- “marine adventure” includes any adventure where—

(i) any insurable property is exposed to maritime perils;

(ii) the earnings or acquisition of any freight, passage money, commission, profit or other
pecuniary benefit, or the security for any advances, loans, or disbursements is endangered by
the exposure of insurable property to maritime perils;

(iii) any liability to a third party may be incurred by the owner of or other person interested in
or responsible for, insurable property by reason of maritime perils;

2(e)- “maritime perils” means the perils consequent on, or incidental to, the navigation of the
sea, that is to say, perils of the sea, fire, war perils, pirates, rovers, thieves, captures, seizures,
restraints and detainments of princes and peoples, jettisons, barratry and any other perils which
are either of the like kind or may be designated by the policy;

Types of Marine insurance subject-matter:

Hull insurance – Hull Insurance covers the hull & torso of the transportation vehicle. It covers
the transportation against damages and accidents.
Cargo insurance – Marine cargo policy refers to the insurance of goods dispatched from the
country of origin to the country of destination.
Freight insurance – In freight insurance, if the goods are damaged in transit, the operator would
lose freight receivables & so the insurance will be provided on compensation for loss of freight.
Liability insurance- Marine Liability insurance is where compensation is bought to provide any
liability occurring on account of a ship crashing or colliding.

Types of Marine insurance policies:

Time policy – Time policy is generally issued for a year’s period. One can issue for more than a
year or they may extend to complete a specific voyage. But it is normally for a fixed period. Also
under marine insurance in India, time policy can be issued only once a year.
Voyage policy – A specific policy can be taken for a single lot or consignment only. The exporter
needs to purchase insurance cover every time a shipment is sent overseas. The drawback is that
extra effort and time is involved each time an exporter sends a consignment. With open policies,
on the other hand, shipments are insured automatically.
Mixed policy – Mixed policy is a mixture of two policies i.e Voyage policy and Time policy.
Valued policy – A valued marine policy is a type of marine insurance coverage that places a
specific value on the insured property, such as the hull or cargo of a shipping vessel, prior to the
event of a loss. In the absence of fraud, a valued marine policy will pay the specified value if a
loss occurs. It differs from an unvalued, or open, marine policy, in which the value of the property
would need to be proven subsequent to a loss through the production of invoices, estimates and
other evidence.
Unvalued/open policy – An unvalued marine policy is an insurance policy that does not specify
the value of the marine asset covered, such as a ship's hull or cargo. Unlike with a valued marine
policy, the insurer only assesses property value and damages after the policyholder files a claim,
rather than determining it beforehand.
Floating policy- Large exporters may opt for an open policy, also known as a blanket policy,
instead of taking insurance separately for each shipment. An open policy is a one-time insurance
that provides insurance cover against all shipments made during the agreed period, often a year.
The exporter may need to declare periodically (say, once a month) the details of all shipments
made during the period, type of goods, modes of transport, destinations, etc.

Features of Marine insurance contract:

∙ Insurable interest: For effecting marine insurance like any other insurance, the assured must
have an insurable interest. If there is no such interest, the policy would be a wagering contract
and thus it will be void. Any person does have an insurable interest who is interested in a
marine journey or who can get affected due to the losses and damages caused in the marine
journey or adventure. The interest must subsist either at the time of effecting the insurance or at
the time of loss. Any interest which is defeasible or contingent or partial can be insured. A
lender under a bottomry bond or respondentia bond has insurable interest as well as master’s
and seamen’s wages, advance freight are insurable, a mortgagee has also insurable interest.

Sec 6, 7, 8 Marine Insurance Act

5. INSURABLE INTEREST DEFINED

1. Subject to the provisions of this Act, every person has an insurable interest who is interested
in a marine adventure.

2. In particular a person is interested in a marine adventure where he stands in any legal or

equitable relation to the adventure or to any insurable property at risk therein, in consequence
of which he may benefit by the safety or due arrival of insurable property, or may be prejudiced
by its loss, or damage thereto, or by the detention thereof, or may incur liability in respect
thereof.

6. WHEN INTEREST MUST ATTACH

1. The assured must be interested in the subject-matter insured at the time of the loss though he
need not be interested when the insurance is effected: Provided that where the subject-matter is
insured "lost or not lost", the assured may recover although he may not have acquired his
interest until after the loss, unless at the time of effecting the contract of insurance the assured
was aware of the loss, and the insurer was not.

2. Where the assured has no interest at the time of the loss, he cannot acquire interest by any act
or election after he is aware of the loss.

7. DEFEASIBLE OR CONTINGENT INTEREST

1. A defeasible interest is insurable, as also is a contingent interest.

2. In particular, where the buyer of goods has insured them, he has an insurable interest,
notwithstanding that he might, at his election, have rejected the goods, or have treated them as
at the seller’s risk, by reason of the latter’s delay in making delivery or otherwise.

8. PARTIAL INTEREST
A partial interest of any nature is insurable.

Sutherland v Pratt (1843) 11 M&W 296 -The rule in relation to “lost or not lost” clauses was on
the basis of the judgement in Sutherland v Pratt where the assured sued on a marine policy
termed with a “lost or not lost” clause; the assured was supported by the court in his claim to
recover for the loss of the insured subject of cotton which had been pledged to him in order to
secure an advance, though the loss of the cotton damaged by bad weather had occurred before
he acquired the interest by virtue of the pledge. Of course, this rule only applied where the
assured was not aware of the loss, just as in this case where neither parties to the insurance
contract had realised the partial loss from goods in transit at sea. Also, where the parties under
the CFR (Cost and Freight) sale contract suffered loss from the damage of cotton as the insured
subject before shipment, the court held that the assured was covered under the marine policy,
termed with the “lost or not lost” clause. It also should be noted that the “lost or not lost” clause
covers partial loss as well as total loss.

∙ Utmost good faith:The doctrine of utmost good faith is covered in section 19, 20, 21 and 22
of the Marine Insurance Act 1963. Contracts regarding insurances are based on the principle of
uberrimae fides which means utmost good faith. If any party to the contract fails to comply
with this principle then the contract can be avoided by the other party.
The duty of the utmost good faith applies also to the insurer. He may not urge the proposer to
affect an insurance which he knows is not legal or has run off safely. The obligation of utmost
good faith and disclosure of correct facts is more on assured as compared to insurer because he is
aware of the material common in other branches of insurance are not used in marine
insurance.The assured shall disclose all the material information which may affect the contract in
any manner. Any non-disclosure of a material fact enables the underwriter to avoid the contract,
irrespective of whether the non-disclosure was intentional or inadvertent. The assured is expected
to know every circumstance which in the ordinary course of business ought to be known by him.
He cannot rely on his own inefficiency or neglect.
Thames & Mersey Marine Insurance Co v Gunford Ship Co Ltd (1911) AC 529- Gunford
was grossly over-insured, not only by the over-valuation of the subject matter insured, but also
by additional ppi policies.The underwriters of the hull were not informed of the master’s
record, nor of the freight and disbursements policies or the policies on behalf of the manager.
The House of Lords ruled that the underwriters were not liable for the loss, because the
assured’s failure to inform the insurers of the over-insurance amounted to the non-disclosure of
a material fact. It was also stated that as the master’s competency was covered by the warranty
of seaworthiness there was no duty on the owners to disclose to the underwriters his record, and
that in the circumstances the master was not proved to have been incompetent so as to put the
owners in breach of the warrant of seaworthiness; but, reversing judgment of the First Division,
that there was a duty on them to disclose the other policies of insurance, these being material
circumstances which would influence the mind of a prudent insurer in fixing the premium and
determining whether he would take the risk, and that the policies were therefore voidable and
the underwriters not liable.

∙ Indemnity: 2 exceptions in marine insurance: full value of property or sum insured (not actual
loss amount) & anticipated profits- Marine insurance is an indemnity policy under which an
insurer agrees to compensate for losses or damages in consideration of the timely payment of
premium. The contract of marine insurance shall cover the clause for indemnity as in no case
Assured shall be allowed to make profits out of the claimed amount. There is a possibility of
making profits by the party in the absence of indemnity clause in the marine insurance
contract.
The insurer agrees to indemnify the assured only to the extent agreed upon. Marine insurance
contract does not often includes complete indemnity due to the large and varied nature of the
marine voyage.
This value may be either the insured or insurable value. If the value of the subject matter is
determined at the time of taking the policy, it is called ‘Insured Value’. When loss arises the
indemnity will be measured in the proportion that the assured sum bears to the insured value.
Transportation cost and anticipated profits are added to the original value so that in case of loss
the insured can recover not only the cost of goods or properties but a certain percentage of profit
also.
Indemnity applies where the value of subject-matter is determined at the time of loss.Where the
value for the goods has not been fixed in the beginning but is left to be determined the time of
loss, the measurement is based on the insurable value of the goods. However, in marine insurance
insurable value is not common because no profit is allowed in estimating the insurable value.
However Indemnity clause has exceptions which are as follows:
1. Profits Allowed
The market value of the loss should be indemnified and no profit is allowed in general
commercial contracts, but in marine insurance contracts a certain profit margin is also allowed as
covered in the Marine Insurance Act.
2. Insured Value
The doctrine of indemnity covers the insurable value, wherein the marine insurance covers
insured value. The purpose of the valuation is to determine the value of the insured in advance.

∙ Subrogation: This doctrine means that the assured shall not get more amount than the actual
loss or damage caused. The insurer has the right to receive compensation from the third party
from whom he is actually liable to receive the amount after the payment of the loss/damage
amount. In marine insurance the right of subrogation arises only after the payment. The assured
shall assist the insurer in every possible manner to receive money from the third party.
sec 79 Marine Insurance Act - Right of subrogation.—
(1) Where the insurer pays for a total loss, either of the whole, or in the case of goods of any
apportionable part, of the subject-matter insured, he thereupon becomes entitled to take over the
interest of the assured in whatever may remain of the subject-matter so paid for and he is thereby
subrogated to all rights and remedies of the assured in and in respect of that subject-matter as
from the time of the casualty causing the loss.
(2) Subject to the foregoing provisions, where the insurer pays for a partial loss, he acquires no
title to the subject-matter insured, or such part of it as may remain, but he is thereupon
subrogated to all rights and remedies of the assured in and in respect of the subject-matter
insured as from the time of the casualty causing the loss, in so far as the assured has been
indemnified, according to this Act, by such payment for the loss.

∙ Contribution: Sec 80 Marine Insurance Act- Right of contribution.—

(1) Where the assured is over-insured by double insurance, each insurer is bound, as between
himself and the other insurers, to contribute ratably to the loss in proportion to the amount for
which he is liable under his contract.
(2) If any insurer pays more than his proportion of the loss, he is entitled to maintain a suit for
contribution against the other insurers, and is entitled to the like remedies as a surety who has
paid more than his proportion of the debt.

∙ Proximate cause- Proximate cause means the active, efficient cause that sets in motion a train
of events which brings about a result, without the intervention of any force started and working
actively from a new and independent source - Pawsey v.Scottish Union and National (1908).

An effective and efficient means that there is a direct relation between the cause and the result,
and that the cause is strong enough that in each stage of the events one can logically predict what
the next event in the series will be, until the result under consideration takes place. Proximate
cause can be direct, dominant, effective, immediate cause.

In Leyland Shipping Company v Norwich Union Fire Insurance Society 1918, a vessel was hit by
an enemy torpedo at the first World war in the English channel by a German U -boat, she was
badly holed and in danger of sinking. The master managed to reach port and the repairs work
started but a storm blew up raising the danger of sinking alongside the quay. The harbour
authorities, accordingly, ordered the vessel to be shifted onto the outer harbour. In the course of
this transfer, the vessel grounded and succumbed to the storm outside the port and sank. Since the
danger of sinking had never been removed, the war was deemed to be the proximate cause. The
storm was a remote cause but not the active and efficient cause.

In other case law, Ionides v. Universal Marine Insurance Co. (1863). A captain lost his course
and took his ship grounded to try to pick out a lighthouse. Due to hostilities (the American Civil
War) the navigation light in Cape Hatteras was went out by order of the military authorities and
the vessel ran aground. The hostilities and loss were deemed to be too remote to be the proximate
cause.

The burden of proof is always on the Assured to show that one of the specifically named perils
has operated to bring about the loss. If the policyholder does not know how a loss occurred then
the Assured will not be able to show that the loss was caused by one of the specified perils and
will be unable to recover under the policy.Unless the policy covers all risk, the insured has to do
some work to show what has happened, rather than just having to show the operation of a fortuity
and nothing else. Accordingly, the insurers need to demonstrate that the cause of loss falls within
the area of exclusions, if they wish to reject the claim.

Warranties:
Promissory warranties: sec 35 Marine Insurance Act- Nature of warranty.—
(1) A warranty, in the following sections relating to warranties, means a promissory warranty,
that is to say a warranty by which the assured undertakes that some particular thing shall or shall
not be done, or that some condition shall be fulfilled, or whereby he affirms or negatives the
existence of a particular state of facts.
(2) A warranty may be express or implied.
(3) A warranty, as above defined, is a condition which must be exactly complied with, whether
it be material to the risk or not. If it be not so complied with, then, subject to any express
provision in the policy the insurer is discharged from liability as from the date of the branch of
warranty but without prejudice to any liability incurred by him before that date.

Characteristics of warranties:
a. must be strictly complied with
b. need not be material to risk
c. breach discharges insurer from liability
d. no remedy for breach of warranty
e. breach of warranty excused if: ceases to be applicable due to change in circumstances of
contract, or compliance with warranty rendered illegal due to change in law, or breach
waived by insurer
Forshaw v Chabert (1821)- In Forshaw v Chabert85 it was held that the implied warranty of
seaworthiness obligated the vessel on a voyage from Cuba to Liverpool to sail with a crew of 10
and that this was a continuing obligation. Two of the crewmembers had not signed for the whole
voyage and departed the vessel at a Jamaican port. Despite the fact that two replacements were
taken aboard, the fact that the whole crew had not signed on for the whole voyage was enough to
breach the warranty, discharging the liability of the insurer.
P Samuel & Co Ltd v Dumas 1924 AC 431- Samuel & Co. v. Dumas, where it was held by a
majority of the Lords that where a ship insured by the mortgagee was lost by being scuttled by
the deliberate act or procurement of the mortgagor, it was not in insurance law to be deemed a
loss by perils of the seas. The proximate cause was the intentional and fraudulent act which let in
the sea water and sank the vessel.
Canada Rice Mills Ltd v. Union Marine and General Insurance Co- Cargo was on a voyage from
Rangoon to British Columbia and insured against perils of the sea. It was damaged by reason of
heating occasioned when cargo hold ventilators were closed to prevent ingress of water in heavy
weather. The Court of Appeal of British Columbia had held that the cause of the loss was not a
peril of the sea because the weather encountered was normal, and such as to be normally expected
on a voyage of the character, and there was no weather bad enough to endanger the safety of the
ship if the ventilators had not been closed.

Kinds of warranties: express & implied- In the field of ocean marine insurance there are two
general types of warranties that must be considered: express and implied. Express warranties are
promises written into the contract. There are also three implied warranties, which do not appear
in written form but bind the parties nevertheless.
Examples of expressed warranties are the FC&S warranty and the strike, riot, and civil
commotion warranty. The FC&S, or “free of capture and seizure,” warranty excludes war as a
cause of loss. The strike, riot, and civil commotion warranty states that the insurer will pay no
losses resulting from strikes, walkouts, riots, or other labour disturbances. The three implied
warranties relate to the following conditions: seaworthiness, deviation, and legality. Under the
first, the shipper and the common carrier warrant that the ship will be seaworthy when it leaves
port, in the sense that the hull will be sound, the captain and crew will be qualified, and supplies
and other necessary equipment for the voyage will be on hand. Any losses stemming from lack of
seaworthiness will be excluded from coverage. Under the deviation warranty, the ship may not
deviate from its intended course except to save lives. Clauses may be attached to the ocean
marine policy to eliminate the implied warranties of seaworthiness or deviation. The implied
warranty of legality, however, may not be waived. Under this warranty, if the voyage itself is
illegal under the laws of the country under whose flag the ship sails, the insurance is void.

Implied warranties:
∙ as to seaworthiness: sec 41 Marine Insurance Act
Warranty of seaworthiness of ship.—
(1) In a voyage policy there is an implied warranty that at the commencement of the voyage the
ship shall be seaworthy for the purpose of the particular adventure insured.
(2) Where the policy attaches while the ship is in port, there is also an implied warranty that she
shall, at the commencement of the risk, be reasonably fit to encounter the ordinary perils of the
port.
(3) Where the policy relates to a voyage which is performed in different stages, during which
the ship requires different kinds of or further preparation or equipment, there is an implied
warranty that at the commencement of each stage the ship is seaworthy in respect of such
preparation or equipment for the purposes of that stage.
 (4) A ship deemed to be seaworthy when she is reasonably fit in all respects to encounter the
ordinary perils of the sea of the adventure insured.
(5) In a time policy there is no implied warranty that the ship shall be seaworthy at any stage of
the adventure, but where, with the privity of the assured, the ship is sent to sea in an
unseaworthy state, the insurer is not liable for any loss attributable to unseaworthiness.

∙ as to legality: sec 43 Marine Insurance Act- Warranty of legality.—There is an implied warranty

that the adventure insured is a lawful one, and that, so far as the assured can control the matter,
the adventure shall be carried out in a lawful manner.
Wilson v Ranking (1865) LR 1 QB 162

Rules for construction of policy:

1. Lost or not lost clause
Risk attaches to insurer – even if loss occurred before contract formed – if assured has no
knowledge of such loss at time of forming contract
2. From clause
Risk attaches to insurer – from time of departure & not earlier
3. At and from clause
Risk attaches to insurer – at particular place & continues through departure & voyage

4. From the loading thereof

Risk attaches only after goods loaded onboard the ship – not during transit from shore to
ship
5. Touch & stay clause
Ship authorized to touch and stay at different ports necessary for fueling, unloading/loading cargo
– ports to be in ordinary course of voyage – in geographical order
6. Perils of sea
Cover damage to ship in course of voyage by immediate act of God without intervention of
human agency – natural & ordinary action of winds & waves excluded – natural decay from sea
water excluded
7. Barratry
Wrongful act willfully committed by master/crew of ship, contravening their duties, to the
prejudice of owner/charterer, loss covered in policy – breach of trust by master/crew against
owner/charterer
8. Jettison
Throwing overboard part of cargo or other goods to lighten ship in emergency – Casting away
masts, rigging or sails to lighten ship - General average loss – with intention to protect ship &
marine adventure from marine perils – not accidental – cargo of fruit rotted due to heat/leakage
not jettison

9. Voyage, delay & deviation (Section 44 to 52 Marine Insurance Act)

Change in voyage:
• Risk not attached to insurer, if – (i) place of departure specified in policy & ship sails from
other place or (ii) place of destination specified in policy & ship sails to other place • If voyage
specified (place of departure, destination & course specified) – change in voyage – insurer
discharged from liability from time of manifestation of change in voyage • destination
voluntarily changed after risk commences / ship changes route & again resumes original route /
ship returns to port of departure after sail
• Ship to set sail from agreed port within reasonable time (if not specified) & voyage to be
completed within reasonable time – delay in any one is ground for discharging insurer • deviation
without lawful excuse – insurer discharged from date of deviation – irrespective of ship
regaining/resuming original course after deviation
• delay or deviation excused: authorized by express term in policy - caused by circumstances
beyond control of owner / master - reasonably necessary to comply with express/implied
warranty - reasonably necessary for safety of ship / insured property - for purpose of saving
human life or aiding ship in distress, where human life in danger - reasonably necessary to
obtain medical aid for person onboard ship - due to barratrous conduct of master / crew, if
barratry covered as insured peril
10. Sue and labour clause (section 78 Marine Insurance Act)
expenses properly incurred to take reasonable steps to preserve property after insured peril to
avert or minimize or mitigate loss reasonable steps that rational prudent uninsured person would
take in similar circumstances, except general average loss & salvage charges
11. Stranded clause
Insurer liable for loss if ship stranded by act of God after risk attached to
insurer

12. Warehouse to warehouse clause

Risk attaches to insurer from originating warehouse to terminating warehouse (places of storage,
outside ship or port)
13. Inchmaree clause
Inclusion of new perils, in addition to perils in policy – negligence, latent defects of
machinery/hull
Marine Loss
2 kinds – Total loss & Partial loss
Total loss- There is an actual total loss where the subject matter insured is destroyed or so
damaged as to cease to be a thing of the kind insured or where the assured is irretrievably
deprived thereof. Losses are deemed to be total or complete when the subject- matter is fully
destroyed or lost or ceases to be a thing of its kind. It should be distinguished from a partial loss
where only part of the property insured is lost or destroyed. In case of total loss, the insured
stands to lose to the extent of the value of the property provided the policy amount was to that
limit.
Partial Loss-
Total loss (sec 56(3) Marine Insurance Act)
Actual total loss & Constructive total loss
Actual total loss: The actual total loss is a material and physical loss of the subject-matter
insured. Where the subject- matter insured is destroyed or so damaged as to cease to be a thing of
the kind insured, or where the insured is irretrievably deprived thereof, there is an actual total
loss. When a vessel is foundered or when merchandise is so damaged as to be valueless or when
the ship is missing it will be an actual total loss.
The actual total loss occurs in the following cases:
1. The subject-matter is destroyed, e.g., a ship is entirely destroyed by fire.
2. The subject-matter is so damaged as to cease to be a thing of the kind insured. Here, the
subject- matter is not totally destroyed but damaged to such an extent as the result of the
mishap; it is no longer of the same species as originally insured. The examples of such
losses are—foodstuff badly damaged by sea water became unfit for human consumption,
hides became valueless as hides due to the admission of water. These damaged foodstuffs
or hides may be used as manure. Since the characters of the subject-matters are changed
and have lost their shapes, they are all actual total loss.
3. The insured is irretrievably deprived of the ownership of goods even they are in physical
existence as in the case of capture by the enemy, stealth by a thief or fraudulent disposal
by the captain or crew.
4. The subject-matter is lost. For example, where a ship is missing for a very long time and
no news of her is received after the lapse of a reasonable time. An actual total loss is
presumed unless there is some other proof to show against it.
In case of actual total loss, notice of abandonment of property need not be given. In such total
losses, the insurer is entitled to all rights and remedies in respect of damaged properties. In no
case, amount over the insured value or insurable value is recoverable in a total loss form the
insurers.
If the property is under-insured, the insured can recover only up to the amount of insurance. If it
is over insured he is not over-benefited but only the actual loss will be indemnified.
Where the subject-matter had ceased to be of the kind insured, the assured will be given the full
amount of total loss provided there was insurance up to that amount, and the insurer will
subrogate all rights and remedies in respect of the property.
Any amount realized by the sale of the material will go to the insurer.

insured property completely destroyed or ceases to be in original condition Constructive total

loss: (sec 60(1) Marine Insurance Act) - Where the subject-matter is not actually lost in the above
manner but is reasonably abandoned when its actual total joss is unavoidable or when it cannot be
preserved from total loss without involving expenditure which would exceed the value of the
subject-matter.
For example,
The cost of repair and replacement was estimated to be $50,000, whereas the ship was estimated
to be $40,000, the ship may be abandoned and will be taken as a constructive total loss.
But if the value of the ship was more than $50,000 it would not be a constructive total loss. Here
it is assumed that retention of the subject-matter would involve financial loss to the insured.
The constructive total loss will be where;
1. The subject-matter insured is reasonably abandoned on account of its actual total loss
appearing to be unavoidable;
2. The subject-matter could not be preserved from actual total loss without an expenditure
which would exceed its repaired and recovered value.
The insured is not compelled to abandon his interest, where the goods are abandoned, the insurer
will have to pay the full insured value.
Where awe is a constructive total loss, the assured may either treat the loss as a partial loss or
abandon the subject-matter insured to the insurer and treat the loss as if it was an actual total loss.

Insured property reasonably abandoned due to actual loss seeming to be unavoidable or

impossible to preserve without incurring expenses more than value of property – mandatory
notice of abandonment to insurer in reasonable time
Dilip Kumar Ghosh v New India Assurance Co Ltd AIR 1990 Cal 303; Priya Blue Industries Ltd
v New India Assurance Co Ltd (2005) CPJ 94 (NC)
Partial loss (sec 56(5) Marine Insurance Act) -Any loss other than a total loss is a partial loss. The
partial loss is there where only part of the property insured is lost or destroyed or damaged partial
losses, in contradiction from total losses, include;
1. Particular average losses, i.e., damage, or total loss of a part,
2. General average losses (general average) le., the sacrifice expenditure, etc., done for the
common safety of subject-matter insured,
3. Particular or special charges, i.e., expenses incurred in special circumstances, and
4. Salvage charges.

General average loss & Particular average loss & Salvage charges
General average loss: (sec 66 Marine Insurance Act) - General average is a loss caused by or
directly consequential on a general average act which includes a general average expenditure as
well as general average sacrifices.
The general average loss will be there where the loss is caused by an extraordinary sacrifice or
expenditure voluntarily and reasonably made or incurred in time of peril for the purpose of
preserving the property imperiled in common adventure.
The following elements are involved in general average.
The loss must be extraordinary in nature. The sacrifice or expenditure must not be related to the
performance of routine work.
A state of affairs may compel the master to do something beyond his ordinary duty for the
preservation of the subject-matter.
1. The whole adventure must be imperiled. The peril should be something more than the
ordinary perils of the sea. It should be imminent and real.
2. The general; average act must be voluntary and intentional accidental loss or damage is
excluded.
3. The toss, expenses or sacrifice must be incurred or made reasonably and prudently. The
master of the ship is the proper person to decide the reasonableness of a particular
circumstance.
4. The sacrifice, loss or expenditure should be made for the preservation of the whole
adventure. It should be made for the common safety.
5. If the sacrifice proved abortive, it will be allowed as the total loss. Therefore, to call it the
general average, it must be successful at least in part.
6. In absence of contrary provision, the insurer is not liable for any general average loss or
contribution where the loss was not incurred for the purpose of avoiding, or in connection
with the avoidance of a peril insured against.
7. The loss must be a direct result of a general average act. Indirect losses such as demurrage
and market losses are not allowed as the general average.
8. The general average must not be due to some default on the part of the person whose
interest has been sacrificed.
The adjustment of general average losses is entrusted to an average adjuster.

expenses voluntarily incurred or cargo sacrificed intentionally by master/captain to preserve the

rest of insured property from destruction - shared between all parties (ship owner, charterer, cargo
owner) – insurer liable to indemnify assured to extent of assured’s share of contribution towards
GAL only
Particular Average Loss: (sec 64, 69, 70 Marine Insurance Act) - The particular average loss is ‘a
partial loss’ of the subject-matter insured caused by a peril insured and is not a general average
loss.
The general average loss or expense is voluntarily done for the common safety of all the parties
insured.
But, the particular average loss is fortuitous or accidental. It cannot be partially shifted to others
but will be borne by die persons directly affected. The particular average loss must fulfill the
following conditions:
1. The particular average loss is a partial loss or damage to any particular interest caused to
(hat interest only by a peril insured against.
2. The loss should be accidental and not intentional.
 3. The loss should be of the particular subject-matter only.
4. It should be the loss of a part of die subject-matter or damage thereto or both. The
distinguishing feature in this matter is that where the properties insured are all of the same
description, kind and quality and they are valued as a whole in the policy, the total loss of
a part of this whole is a particular loss, but where the properties insured are not all of the
same description, kind and quality and they are separately valued in the policy, the loss of
an apportionable part of the interest is a total loss.
In case of total loss of a part of recoverable either as a total loss or as a particular average loss, the
basis of the settlement will be on the total loss of the whole lot or the insurer will be liable to pay
in proportion according to the insured or insurable value of the whole interest.

partial loss of cargo or hull or freight falling entirely on one party – no contribution by other
parties - PAL on ship: assured entitled to claim repair charges or if not repaired - PAL on cargo:
assured entitled to proportionate sum of value of goods damaged - PAL on freight: assured
entitled to proportionate sum of freight amount lost
Salvage charges - Where actual total loss occurred, and die subject-matter is so damaged as to
cease to be a thing of the kind insured or when they have been sold before reaching the
destination, there is a constructive total loss. The usual form of settlement is that the net sale
proceeds will be paid to the assured.
The net sale proceeds are calculated by deducting expenses of the sale from the amount realized
by die sale.
The insured will recover from the insurer the total loss less the net amount of sale. This amount
received from the insurer is called a ‘salvage loss’.
Salvage: cost of saving insured property from peril as well as saved insured property Salvor to be
third party, not party to insurance or crew - Salvor can act with / without consent of ship-owner
& with / without knowledge of insurer – Salvor’s lien over salvage property till reward paid
Madgavkars Salvage & Towage Co v United India Insurance Co Ltd 2014 (7) BomCR 396
 UNIT 6 – SYNOPSIS –MOTOR VEHICLE INSURANCE

Meaning of Motor Vehicle: Sec 2(28) MV Act

Section 2(28) in The Motor Vehicles Act, 1988

(28) “motor vehicle” or “vehicle” means any mechanically propelled vehicle adapted for use
upon roads whether the power of propulsion is transmitted thereto from an external or
internal source and includes a chassis to which a body has not been attached and a trailer;
but does not include a vehicle running upon fixed rails or a vehicle of a special type adapted
for use only in a factory or in any other enclosed premises or a vehicle having less than four
wheels fitted with engine capacity of not exceeding 4[twenty-five cubic centimetres];
1[twenty-five cubic centimetres];"

----------------------------------------------------------------------------------------------------------------

For purposes of MV insurance (Chapter 11 MV Act):

Chapter 11 of the Motor Vehicles Act 1988 deals with the insurance of Motor Vehicles
against third party risk.

The Motor Vehicles Act, 1988 which came into force on 1st July,1988 and which is divided
into XIV Chapters, 217 Sections and two schedules, makes it compulsory for every motor
vehicle to be insured. Chapters X,XI and XII of the 1988 Act deals with compensation
provisions. Sections 140 to 144 (Ch.X) deal with liability with out fault in certain cases.
Chapter XI (Ss. 145 to 164) deal with insurance of motor vehicles against third party risks.

Motor Vehicle in use

Damage arising out of use

Use by policyholder or allow any other person to use

Use in public place

Case Law: Pandurang v New India Life Insurance Co AIR 1988 Bom 248

Motor Vehicles Act (Act IV of 1939), Sections 95, 2(24), -- 'Public place' -- Connotation of --
Private road or private place to which public have permissive access whether 'public place'
within meaning of Section 2(24) and Section 95 -- Words and phrases.

The definition of 'public place' under the Section 2(24) of the Motor Vehicles Act, 1939, is
wide enough to include any place which members of public use and to which they have a
right of access. The right of access may be permissive, limited, restricted or regulated by oral
or written permission, by tickets, passes or badges or on payment of fee. The use may be
restricted generally or to particular purpose or purposes. What is necessary is that the place
must be accessaible to the members of public and be available for their use, enjoyment,
avocation or other purposes.

It is also necessary to bear in mind the distinction between the expression "right of access"
and "access as of right". The latter expression denotes a place where the members of public
have a right of its use as members of public and as a matter of right, whether regulated,
restricted or not. They cannot, however, be denied the said right except on legal grounds. On
the other hand, where there is only a right of access, the owner of the place, if he happens to
be a private owner, may deny the access to any member of the public on any ground which he
chooses. The definition under the Motor Vehicles Act, 1939 uses the expression 'right of
access'. What is, therefore significant to note is that under the present definition even a place
the right to use of which is restricted is a public place.

The Legislature was concerned not so much with the nature of the place where the vehicle
causes the accident as where it was likely to do so. Hence all places where the members of
public and/or their property are likely to come in contact with the vehicles can legitimately be
said to be in its view when the legislature made the relevant provisions for compulsory
insurance. It will have, therefore, to be held that all places where the members of public have
an access, for whatever reasons, whether as of right or controlled in any manner whatsoever,
would be covered by the definition of "public place" in Section 2(24) of the Act. To hold
otherwise would frustrate the very object of Chapter VIII of the Motor Vehicles Act, 1939
and the object of the Motor Vehicles Act, 1939.

Stroud's Judicial Dictionary, 5th Edn. P. 2094 and Black's Law Dictionary, 5th Edn. P. 1187
referred to.

For the purposes of Chapter VIII of the Motor Vehicles Act, 1939, the expression 'public
place' will cover all places including those of private ownership where members of public
have an access whether free or controlled in any manner whatsoever.

It was adjudged that as per Sections 2(24), 95 of the Motor Vehicles Act, 1939 the private
place to which the public has a permissive access would be termed as 'public place'

----------------------------------------------------------------------------------------------------------------

Types of MV insurance policies

Act policy - Third party policy - Comprehensive policy

Types of Motor Vehicle Insurance

Motor vehicle owners in India can select between different types of motor vehicle insurance
available here. The foremost objective is to protect vehicle owners against damage and
accidents.

Motor insurance policies online are based on coverage refer to the type of insurance plan
selected, which can be categorized into the following:
  Comprehensive Insurance.
 Third-party Liability Insurance.

Each of the categories has been discussed in detail in the following sections.

Comprehensive Insurance

A comprehensive vehicle insurance plan includes third-party liability as well as any expense
incurred by the policyholder due to theft or accident of the vehicle. In case the policyholder is
injured, the personal accident cover entitles the policyholder to claim compensation due to
death or injury due to an accident.

The benefit of taking on a comprehensive motor insurance policy is that the add-on plans or
riders extend added benefits to the policyholder without taking out multiple policies.
Therefore, this type of insurance plan extends security and protection to the policyholder for
almost any situation that they might encounter.

Third-Party Liability Insurance

Third-party liability insurance is mandatory for every vehicle owner in India, by law.
Essentially, these insurance plans protect the policyholder’s interests from damages caused to
a property or an individual by the policyholder.

It can be said that a third-party cover helps lower the risk and liability of the policyholder in a
number of situations. Also, this cover is recommended for inexpensive and old vehicles that
are cheaper to repair.

Understanding How Third-Party Insurance Cover Works

The first step in understanding how a third-party insurance cover works are to make a note of
the terminologies used. Some of the commonly used term associated with third-party cover
includes:

First-party: Policyholder or person who has purchased an insurance policy

Second-party: Insurer or insurance company

Third-party: Claimant or person who raises a claim for damages caused by the first party

If the policyholder is involved in an accident with a third-party, then the policyholder is liable
to pay for damages or injuries caused. When an accident takes place, the policyholder must
inform the insurance company at the earliest and apprise them of the situation.

Liability Only Policy: This covers Third Party Liability for bodily injury and/ or death and
Property Damage. Personal Accident Cover for Owner Driver is also included. This policy is
also known as ACT only policy etc.

----------------------------------------------------------------------------------------------------------------
Case Law: National Insurance Co v Nitin Khandelwal (2008) 11 SCC 259

Case Note:

Consumer Protection Act, 1986 - Sections 2 (1) (g) and 21 (b)--Deficiency in service--Theft
of comprehensively insured car--In case of theft of vehicle, nature of use of vehicle cannot be
looked into--And insurer cannot repudiate claim on that basis--No fault can be found with
view taken by State Commission as correctly upheld by National Commission.

Ratio Decidendi:

"In case of theft of vehicle, violation of condition of policy as to the nature of use of vehicle,
could not be a ground to repudiate the claim"

----------------------------------------------------------------------------------------------------------------

Case Law: National Insurance Co v Meena Aggarwal (2009) 2 SCC 523

Case Note:

Consumer Protection Act, 1986 - Section 2 (1) (g)--Deficiency in service--Insurance claim--

Insured Maruti Van meeting with accident--Extensive damage to vehicle caused--Vehicle
insured for personal use--Was used for commercial purposes as taxi--Vehicle driven by
person not having valid driving licence--State Commission and National Commission -- Did
not practically indicate any reason for conclusion that there was no fundamental breach of
terms of policy--Impugned orders unsustainable--And set aside.

Ratio Decidendi:

Owner of the vehicle has got the liability to Verify the fact that the driver of the vehicle
possessed a valid licence or not

----------------------------------------------------------------------------------------------------------------

Case Law: Lal Chand v Oriental Ins Co Ltd (2006) 7 SCC 318

Case Note:

Motor Vehicles Act, 1988-- Section 149(2)(a)(ii)--Ambit and requirements of--Held--If the
driver produces a driving licence which on the face of it looks genuine the owner is not
expected to find out whether the licence has in fact been issued by a competent authority or
not--The owner would then take test of driver and if he finds that the driver is competent to
drive vehicle he will hire the driver. [Para--7 and 8]

Ratio Decidendi:

Where owner is satisfied himself that the driver has a license and is driving competently there
would be no breach of section 149(2)(a)(ii)

----------------------------------------------------------------------------------------------------------------
Compulsory MV Insurance – Chapter 11 MV Act

Motor vehicle insurance is mandatory in India for a number of reasons. It becomes all the
more important considering the high number of motor vehicle accidents that take place in
India, and the mounting number of accidents is a figure to be concerned about.

What is the Motor Vehicles Act?

In India, as per the Motor Vehicles Act, it is mandatory that all vehicles that operate in any
public space must have a motor vehicle insurance cover. Policyholders must have at least
‘third party liability’ motor insurance cover even when opting for the basic insurance plans.

The third-party cover is essential in the event of an accident caused by the vehicle owner or
another person driving the other vehicle. It is important to note that vehicle insurance
coverage may or may not cover damages caused by the owner.

What Does the Motor Vehicles Act State?

The Indian Parliament amended the Motor Vehicles Act of 1988 that reviewed all aspects
concerning transport vehicles and was implemented on 1st July 1989. The act lists out the
various provisions related to licenses of conductors, licenses of drivers, registration of
vehicles, controlling vehicles using permits, traffic rules, liability, offenses, insurance covers,
and penalties.

For this reason, all vehicle owners are urged to carry their motor vehicle
insurance documents with them at all times. However, the question that most people often
wonder about is why motor insurance mandatory, which often goes unanswered.

----------------------------------------------------------------------------------------------------------------

Mandatory third party insurance for all motor vehicles – sec 146

146 Necessity for insurance against third party risk. —

(1) No person shall use, except as a passenger, or cause or allow any other person to use, a
motor vehicle in a public place, unless there is in force in relation to the use of the vehicle by
that person or that other person, as the case may be, a policy of insurance complying with the
requirements of this Chapter: 26 [Provided that in the case of a vehicle carrying, or meant to
carry, dangerous or hazardous goods, there shall also be a policy of insurance under the
Public Liability Insurance Act, 1991 (6 of 1991).] Explanation. —A person driving a motor
vehicle merely as a paid employee, while there is in force in relation to the use of the vehicle
no such policy as is required by this sub-section, shall not be deemed to act in contravention
of the sub-section unless he knows or has reason to believe that there is no such policy in
force.

(2) Sub-section (1) shall not apply to any vehicle owned by the Central Government or a
State Government and used for Government purposes unconnected with any commercial
enterprise.
(3) The appropriate Government may, by order, exempt from the operation of sub-section (1)
any vehicle owned by any of the following authorities, namely:—

(a) the Central Government or a State Government, if the vehicle is used for Government
purposes connected with any commercial enterprise;

(b) any local authority;

(c) any State transport undertaking:

Provided that no such order shall be made in relation to any such authority unless a fund has
been established and is maintained by that authority in accordance with the rules made in
that behalf under this Act for meeting any liability arising out of the use of any vehicle of that
authority which that authority or any person in its employment may incur to third parties.
Explanation. —For the purposes of this sub-section, “appropriate Government” means the
Central Government or a State Government, as the case may be, and—

(i) in relation to any corporation or company owned by the Central Government or any State
Government, means the Central Government or that State Government;

(ii) in relation to any corporation or company owned by the Central Government and one or
more State Governments, means the Central Government;

(iii) in relation to any other State transport undertaking or any local authority, means that
Government which has control over that undertaking or authority.

----------------------------------------------------------------------------------------------------------------

Conditions for compulsory MV insurance (sec 147):

 Policy issued by authorized insurer

 Insures persons specified: (a) death or bodily injury to any person or damage to
any property of third party – caused by or arising out of use of MV in public
place (b) death or bodily injury to any passenger of public service – caused by or
arising out of use of MV in public place
 Presumption: death or bodily injury to person or damage to property of third
party deemed to have been caused by or arisen out of use of MV in public place
 Certificate of insurance in prescribed form to be issued by insurer to assured
 MV registered in reciprocating territory operating in common areas – sec 148
r.w sec 164B
 Limits of liability (MV Amendment Act 2019): Base premium & liability of
insurer fixed by Central govt with IRDA – MV Rules

----------------------------------------------------------------------------------------------------------------

Section 147

147 Requirements of policies and limits of liability. —

(1) In order to comply with the requirements of this Chapter, a policy of insurance must be a
policy which—

(a) is issued by a person who is an authorised insurer; and

(b) insures the person or classes of persons specified in the policy to the extent specified in
sub-section (2)—

(i) against any liability which may be incurred by him in respect of the death of or
bodily 27 [injury to any person, including owner of the goods or his authorised representative
carried in the vehicle] or damage to any property of a third party caused by or arising out of
the use of the vehicle in a public place;

(ii) against the death of or bodily injury to any passenger of a public service vehicle caused
by or arising out of the use of the vehicle in a public place:

Provided that a policy shall not be required—

(i) to cover liability in respect of the death, arising out of and in the course of his
employment, of the employee of a person insured by the policy or in respect of bodily injury
sustained by such an employee arising out of and in the course of his employment other than
a liability arising under the Workmen's Compensation Act, 1923 (8 of 1923) in respect of the
death of, or bodily injury to, any such employee—

(a) engaged in driving the vehicle, or

(b) if it is a public service vehicle engaged as conductor of the vehicle or in examining tickets
on the vehicle, or

(c) if it is a goods carriage, being carried in the vehicle, or

(ii) to cover any contractual liability.

Explanation. —For the removal of doubts, it is hereby declared that the death of or bodily
injury to any person or damage to any property of a third party shall be deemed to have been
caused by or to have arisen out of, the use of a vehicle in a public place notwithstanding that
the person who is dead or injured or the property which is damaged was not in a public place
at the time of the accident, if the act or omission which led to the accident occurred in a
public place.

(2) Subject to the proviso to sub-section (1), a policy of insurance referred to in sub-section
(1), shall cover any liability incurred in respect of any accident, up to the following limits,
namely:—

(a) save as provided in clause (b), the amount of liability incurred;

(b) in respect of damage to any property of a third party, a limit of rupees six thousand:
Provided that any policy of insurance issued with any limited liability and in force,
immediately before the commencement of this Act, shall continue to be effective for a period
of four months after such commencement or till the date of expiry of such policy whichever is
earlier.

(3) A policy shall be of no effect for the purposes of this Chapter unless and until there is
issued by the insurer in favour of the person by whom the policy is effected a certificate of
insurance in the prescribed form and containing the prescribed particulars of any condition
subject to which the policy is issued and of any other prescribed matters; and different forms,
particulars and matters may be prescribed in different cases.

(4) Where a cover note issued by the insurer under the provisions of this Chapter or the rules
made thereunder is not followed by a policy of insurance within the prescribed time, the
insurer shall, within seven days of the expiry of the period of the validity of the cover note,
notify the fact to the registering authority in whose records the vehicle to which the cover
note relates has been registered or to such other authority as the State Government may
prescribe.

(5) Notwithstanding anything contained in any law for the time being in force, an insurer
issuing a policy of insurance under this section shall be liable to indemnify the person or
classes of persons specified in the policy in respect of any liability which the policy purports
to cover in the case of that person or those classes of persons.

----------------------------------------------------------------------------------------------------------------

Settlement of claims – sec 149 & 150:

 Offer to claimant by insurer before MV Claims Tribunal – 30 days & if

accepted, payment by insurer in 30 days
 MV Claims Tribunal determine claim amount – not limited to policy terms only

----------------------------------------------------------------------------------------------------------------

149. Duty of insurers to satisfy judgments and awards against persons insured in respect of
third party risks.—

(1) If, after a certificate of insurance has been issued under sub-section (3) of section 147 in
favour of the person by whom a policy has been effected, judgment or award in respect of any
such liability as is required to be covered by a policy under clause (b) of sub-section (l) of
section 147 (being a liability covered by the terms of the policy) 1[or under the provisions of
section 163A] is obtained against any person insured by the policy, then, notwithstanding
that the insurer may be entitled to avoid or cancel or may have avoided or cancelled the
policy, the insurer shall, subject to the provisions of this section, pay to the person entitled to
the benefit of the decree any sum not exceeding the sum assured payable thereunder, as if he
were the judgment debtor, in respect of the liability, together with any amount payable in
respect of costs and any sum payable in respect of interest on that sum by virtue of any
enactment relating to interest on judgments.
(2) No sum shall be payable by an insurer under sub-section (1) in respect of any judgment
or award unless, before the commencement of the proceedings in which the judgment or
award is given the insurer had notice through the Court or, as the case may be, the Claims
Tribunal of the bringing of the proceedings, or in respect of such judgment or award so long
as execution is stayed thereon pending an appeal; and an insurer to whom notice of the
bringing of any such proceedings is so given shall be entitled to be made a party thereto and
to defend the action on any of the following grounds, namely:—

(a) that there has been a breach of a specified condition of the policy, being one of the
following conditions, namely:—

(i) a condition excluding the use of the vehicle—

(a) for hire or reward, where the vehicle is on the date of the contract of insurance a vehicle
not covered by a permit to ply for hire or reward, or

(b) for organised racing and speed testing, or

(c) for a purpose not allowed by the permit under which the vehicle is used, where the vehicle
is a transport vehicle, or

(d) without side-car being attached where the vehicle is a motor cycle; or

(ii) a condition excluding driving by a named person or persons or by any person who is not
duly licensed, or by any person who has been disqualified for holding or obtaining a driving
licence during the period of disqualification; or

(iii) a condition excluding liability for injury caused or contributed to by conditions of war,
civil war, riot or civil commotion; or

(b) that the policy is void on the ground that it was obtained by the non- disclosure of a
material fact or by a representation of fact which was false in some material particular.

(3) Where any such judgment as is referred to in sub-section (1) is obtained from a Court in a
reciprocating country and in the case of a foreign judgment is, by virtue of the provisions of
section 13 of the Code of Civil Procedure, 1908 (5 of 1908) conclusive as to any matter
adjudicated upon by it, the insurer (being an insurer registered under the Insurance Act,
1938 (4 of 1938) and whether or not he is registered under the corresponding law of the
reciprocating country) shall be liable to the person entitled to the benefit of the decree in the
manner and to the extent specified in sub-section (1), as if the judgment were given by a
Court in India: Provided that no sum shall be payable by the insurer in respect of any such
judgment unless, before the commencement of the proceedings in which the judgment is
given, the insurer had notice through the Court concerned of the bringing of the proceedings
and the insurer to whom notice is so given is entitled under the corresponding law of the
reciprocating country, to be made a party to the proceedings and to defend the action on
grounds similar to those specified in sub-section (2).
(4) Where a certificate of insurance has been issued under sub-section (3) of section 147 to
the person by whom a policy has been effected, so much of the policy as purports to restrict
the insurance of the persons insured thereby by reference to any condition other than those in
clause (b) of sub-section (2) shall, as respects such liabilities as are required to be covered
by a policy under clause (b) of sub-section (1) of section 147, be of no effect: Provided that
any sum paid by the insurer in or towards the discharge of any liability of any person which
is covered by the policy by virtue only of this sub-section shall be recoverable by the insurer
from that person.

(5) If the amount which an insurer becomes liable under this section to pay in respect of a
liability incurred by a person insured by a policy exceeds the amount for which the insurer
would apart from the provisions of this section be liable under the policy in respect of that
liability, the insurer shall be entitled to recover the excess from that person.

(6) In this section the expression “material fact” and “material particular” means,
respectively a fact or particular of such a nature as to influence the judgment of a prudent
insurer in determining whether he will take the risk and, if so, at what premium and on what
conditions, and the expression “liability covered by the terms of the policy” means a liability
which is covered by the policy or which would be so covered but for the fact that the insurer
is entitled to avoid or cancel or has avoided or cancelled the policy.

(7) No insurer to whom the notice referred to in sub-section (2) or sub-section (3) has been
given shall be entitled to avoid his liability to any person entitled to the benefit of any such
judgment or award as is referred to in sub-section (1) or in such judgment as is referred to in
sub-section (3) otherwise than in the manner provided for in sub-section (2) or in the
corresponding law of the reciprocating country, as the case may be. Explanation.—For the
purposes of this section, “Claims Tribunal” means a Claims Tribunal constituted under
section 165 and “award” means an award made by that Tribunal under section 168.

----------------------------------------------------------------------------------------------------------------

Sec 150 of Motor Vehicle Act, 1988 provides for the rights of Third parties in the event of
the insolvency of the insured or in the event of winding up when the insured is a Company.Â
The Act provides that if, either before or after that event, any third party liability is incurred
by the insured, his rights against the insurer under the policy are transferred to the third party
to whom the liability was incurred.

When such transfer takes place, the insurer will be under the same liability to the same
liability to the third party as he would have been to the insured person, but

1. If the liability of the insurer to the insured person EXCEEDS the liability of the
insured person to the third party, the insured persons; rights against the insurer in
respect of the excess are not affected. Examples: The Act provides for TPPD to the
extent of Rs. 6000/- only whereas the insurers liability under Private car policy is Rs.
7,50,000. Thus the TP claimant will be entitled to claim up to Rs. 7,50,000.
 2. If the liability of the insurer to the insured person is less than the liability of the
insured person to the third party. The rights of the third party against the insured
person in respect of the balance are not affected.

In the event of an insured becoming insolvent of making arrangements with his creditors
(insured is a company, being would up) the rights of the Insured under the Policy will be
transferred to and vest in the injured third party.

In other words the injured third party is able to recover compensation direct from the
insurers. In the absence of this provision, any sum revered by the insolvent insured from his
insurance company would have formed part of his assets to which his creditors would lay a
claim in proportion to their debts.

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Case Law: National Insurance Co v Anjana Shyam AIR 2007 SC 2870

Case Note:

Insurance - Motor vehicles - Vehicle over loaded - Number of passengers killed or injured in
an accident more than originally insured - Liability of insurer - Determination of - Sections
147(1)(b)(ii), 149 and 166 of the Motor Vehicles Act - Bus having carrying capacity of 42
passengers insured with the Appellant insurance Company met with an accident - Bus
contended to be overloaded - Claim petition filed by the legal representatives of the deceased
and the injured - Appellant resisted the claim contending bus to be overloaded and being
driven by an unauthorized driver, hence not liable - Further alleged owner of committing
fundamental breach of the contract by permitting overloading of bus - Objections not
considered by the Tribunal and the award was passed - Award challenged before the High
Court by the Appellant dismissed - Hence present Appeal - Whether Appellant can be held
liable to meet the award beyond the contract of insurance itself - Appellant contended that the
liability of the insurance company could not be enlarged and confined only to the passengers
insured - Held, Instant case falls under Section 147(1)(b)(ii) of the Act which obliges the
owner to take out insurance compulsorily against the death of or bodily injury to any
passenger of a public service vehicle caused by or arising out of the use of the vehicle in a
public place - Provision of the Section to be construed harmoniously with other provisions of
the Act, namely, Sections 58 and 72 - Insurance taken out for the number of permitted
passengers can alone determine the liability of the insurance company in respect of those
passengers - Section 149 could not be understood as compelling an insurance company to
make payment of amounts covered by decrees not only to those covered by the policy but
also to those not covered and who were loaded into the vehicle against the terms of the permit
and condition of registration of the vehicle and in terms of violation of a statute - Liability of
the Appellant would be to pay the compensation awarded to 42 out of the 90 passengers

Insurance - Motor Vehicles - Extent of liability - Insurance Company - Vehicle overloaded -

Mode of quantification of compensation when no means available to ascertain who out of the
overloaded passengers constitute the passengers covered by the insurance policy - Held,
purpose of the Act is to bring benefit to the third parties who are either injured or dead in an
accident - Practical and proper course would be to bound the insurance company, in such a
case, to cover the higher of the various awards and to deposit the higher of the amounts of
compensation awarded to the extent of the number of passengers covered by the insurance
policy - In the instant case 42 passengers were the permitted passengers - 90 persons either
died or got injured in the accident and awards were passed for varied sums - Tribunal should
take into account, the higher of the 42 awards made, add them up and direct the insurance
company to deposit that lump sum - Liability of the insurance company thus would be to pay
the compensation awarded to 42 out of the 90 passengers - Tribunal thereafter to direct
distribution of the money so deposited by the insurance company proportionately to all the
claimants, 90 in the instant case and leave all the claimants to recover the balance from the
owner of the vehicle - Insurance company granted a decree to recover the excess amount
deposited, from the owner - Appeal allowed accordingly

Words and Phrases - Expression 'any passenger' must be understood as passenger authorized
to be carried in the vehicle and 'use of the vehicle' as permitted use of the vehicle

Ratio Decidendi:

"Section 149 of the Motor Vehicles Act could not be understood as compelling an insurance
company to make payment of amounts decreed not only to those covered by the policy but
also to those not covered."

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Defences available to insurer – sec 150

Insurer can deny payment to third party if:

 Policy obtained by non-disclosure/misrepresentation of material facts

 Premium not paid
 Breach of specified conditions in policy: excluding use of MV for certain purposes
(hire, racing etc); excluding driving of MV by person not duly licensed

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Case Law: National Insurance Co v Swaran Singh (2004) 3 SCC 297

Case Note:

Motor Vehicles Act, 1988 - Section 149 (2) (a) (ii) with provisos to sub-sections (4) and (5)
of Section 149--Driving licence vis-a-vis liability of insurer to pay compensation for motor
accidents:

(1) Motor Vehicles Act, 1988--Section 5--Owner of vehicle to see in terms of Section 5 that
no vehicle driven by person without licence--Where driver of vehicle having no licence
consciously allowed by owner to drive vehicle--Insurer entitled to succeed in its defence and
award liability--Matter different where disputed question of fact arises.
Proviso appended to sub-section (4) of Section 149 of the Motor Vehicles Act, 1988 is
referable only to sub-section (2) of Section 149 of the Act. It is an independent provision and
must be read in the context of Section 96 (4) of the Motor Vehicles Act, 1939. Furthermore, it
is one thing to say that the insurer will be entitled to avoid its liability owing to breach of
terms of a contract of insurance but it is another thing to say that the vehicle is not insured at
all.

Sub-section (5) of Section 149 which imposes a liability on the insurer must also be given its
full effect. The insurance company may not be liable to satisfy the decree and, therefore, its
liability may be zero but it does not mean that it did not have initial liability at all. Thus, if the
insurance company is made liable to pay any amount, it can recover the entire amount paid to
the third party on behalf of the assured. If this interpretation is not given to the beneficent
provisions of the Act, having regard to its purport and object, one fails to see a situation
where beneficent provisions can be given effect to. Sub-section (7) of Section 149 of the Act,
must be read with sub-section (1) thereof. The right to avoid liability in terms of sub-section
(2) of Section 149 is restricted. It is one thing to say that the insurance companies are entitled
to raise a defence but it is another thing to say that despite the fact that its defence has been
accepted having regard to the facts and circumstances of the case, the Tribunal has power to
direct them to satisfy the decree at the first instance and then direct recovery of the same from
the owner. These two matters stand apart and require contextual reading.

The owner of a motor vehicle in terms of Section 5 of the Act has a responsibility to see that
no vehicle is driven except by a person who does not satisfy the provisions of Section 3 or 4
of the Act. In a case, therefore, where the driver of the vehicle admittedly did not hold any
licence and the same was allowed consciously to be driven by the owner of the vehicle by
such person, the insurer is entitled to succeed in its defence and avoid liability. The matter,
however, may be different where a disputed question of fact arises as to whether the driver
had a valid licence or whether the owner of the vehicle committed a breach of the terms of
the contract of insurance as also the provisions of the Act by consciously allowing any person
to drive a vehicle who did not have a valid driving licence. In a given case, the driver of the
vehicle may not have any hand at all, e.g., a case where an accident takes place owing to a
mechanical fault or vis-major.

(2) Motor Vehicles Act, 1988--Sections 3 and 10--Licence for one type of vehicle but driver
driving another type of vehicle--If accident was caused solely because of some other
unforeseen or intervening causes like mechanical failures having no nexus with driver--
Insurer not to be allowed to avoid its liability merely for technical breach of conditions of
driving licence--Insurer liable to satisfy liability.

If a person has been given a licence for a particular type of vehicle as specified therein, he
cannot be said to have no licence for driving another type of vehicle which is of the same
category but of different type. As for example, when a person is granted a licence for driving
a light motor vehicle, he can drive either a car or a jeep and it is not necessary that he must
have driving licence both for car and jeep separately.
Furthermore, the insurance company with a view to avoid its liabilities is not only required to
show that the conditions laid down under Section 149 (2) (a) or (b) are satisfied but is further
required to establish that there has been a breach on the part of the insured. By reason of the
provisions contained in the 1988 Act, a more extensive remedy has been conferred upon
those who have obtained judgment against the user of a vehicle and after a certificate of
insurance is delivered in terms of Section 147 (3), a third party has obtained a judgment
against any person insured by the policy in respect of a liability required to be covered by
Section 145, the same must be satisfied by the insurer, notwithstanding that the insurer may
be entitled to avoid or to cancel the policy or may in fact have done so. The same obligation
applies in respect of a judgment against a person not insured by the policy in respect of such a
liability, but who would have been covered if the policy had covered the liability of all
persons, except that in respect of liability for death or bodily injury.

In each case on evidence led before the Tribunal, a decision has to be taken whether the fact
of the driver possessing licence for one type of vehicle but found driving another type of
vehicle, was the main or contributory cause of accident. If, on facts, it is found that accident
was caused solely because of some other unforeseen or intervening causes like mechanical
failures and similar other causes having no nexus with driver not possessing requisite type of
licence, the insurer will not be allowed to avoid its liability merely for technical breach of
conditions concerned driving licence.

Minor breaches of licence conditions, such as want of medical fitness certificate, requirement
about age of the driver and the like not found to have been the direct cause of the accident,
would be treated as minor breaches of inconsequential deviation in the matter of use of
vehicles. Such minor and inconsequential deviations with regard to licensing conditions
would not constitute sufficient ground to deny the benefit of coverage of insurance to the
third parties.

On all pleas of breach of licensing conditions taken by the insurer, it would be open to the
Tribunal to adjudicate the claim and decide, inter se liability of insurer and insured ; although
where such adjudication is likely to entail undue delay in decision of the claim of the victim,
the Tribunal in its discretion may relegate the insurer to seek its remedy of reimbursement
from the insured in the civil court.

(3) Motor Vehicles Act, 1988--Sections 4 (3), 7 (2), 10 (3) and 14--Learner's licence--Person
holding learner's licence is also duly licensed--Insurer cannot avoid its liability.

Motor Vehicles Act, 1988, provides for grant of learner's licence. A learner's licence is, thus,
also a licence within the meaning of the provisions of the said Act. It cannot, therefore, be
said that a vehicle when being driven by a learner subject to the conditions mentioned in the
licence, he would not be a person who is not duly licensed resulting in conferring a right on
the insurer to avoid the claim of the third party. It cannot be said that a person holding a
learner's licence is not entitled to drive the vehicle. Even if there exists a condition in the
contract of insurance that the vehicle cannot be driven by a person holding a learner's licence,
the same would run counter to the provisions of Section 149 (2) of the said Act.
A person holding learner's licence would, thus, also come within the purview of "duly
licensed" as such a licence is also granted in terms of the provisions of the Act, and the Rules
framed thereunder.

New India Assurance Co. Ltd. v. Mandar Madhav Tambe, (1996) 2 SCC 328, distinguished.

(4) Fake licence--Insurer to prove breach of conditions of insurance by owner of vehicle.

(5) Propositions of law laid down.

The liability of the insurance company to satisfy the decree at the first instance and to recover
the awarded amount from the owner or driver thereof has been holding the field for a long
time.

Summary of findings on various issues are as follows :

(i) Chapter XI of the Motor Vehicles Act, 1988, providing compulsory insurance of vehicles
against third party risks is a social welfare legislation to extend relief by compensation to
victims of accidents caused by use of motor vehicles. The provisions of compulsory
insurance coverage of all vehicles are with this paramount object and the provisions of the
Act have to be so interpreted as to effectuate the said object.

(ii) Insurer is entitled to raise a defence in a claim petition filed under Section 163A or
Section 166 of the Motor Vehicles Act, 1988, inter alia in terms of Section 149 (2) (a) (ii) of
the said Act.

(iii) The breach of policy condition, e.g., disqualification of driver or invalid driving licence
of the driver, as contained in sub-section (2) (a) (ii) of Section 149, have to be proved to have
been committed by the insured for avoiding liability by the insurer. Mere absence, fake or
invalid driving licence or disqualification of the driver for driving at the relevant time, are not
in themselves defences available to the insurer against either the insured or the third parties.
To avoid its liability towards insured, the insurer has to prove that the insured was guilty of
negligence and failed to exercise reasonable care in the matter of fulfilling the condition of
the policy regarding use of vehicles by duly licensed driver or one who was not disqualified
to drive at the relevant time.

(iv) The insurance companies are, however, with a view to avoid their liability must not only
establish the available defence(s) raised in the said proceedings but must also establish
'breach' on the part of the owner of the vehicle ; the burden of proof wherefor would be on
them.

(v) The Court cannot lay down any criteria as to how said burden would be discharged,
inasmuch as the same would depend upon the facts and circumstance of each case.

(vi) Even where the insurer is able to prove breach on the part of the insured concerning the
policy condition regarding holding of a valid licence by the driver or his qualification to drive
during the relevant period, the insurer would not be allowed to avoid its liability towards
insured unless the said breach or breaches on the condition of driving licence is/are so
fundamental as are found to have contributed to the cause of the accident. The Tribunals in
interpreting the policy conditions would apply "the rule of main purpose" and the concept of
"fundamental breach" to allow defences available to the insured under Section 149 (2) of the
Act.

(vii) The question as to whether the owner has taken reasonable care to find out as to whether
the driving licence produced by the driver, (a fake one or otherwise), does not fulfil the
requirements of law or not will have to be determined in each case.

(viii) If a vehicle at the time of accident was driven by a person having a learner's licence, the
insurance companies would be liable to satisfy the decree.

(ix) The Claims Tribunal constituted under Section 165 read with Section 168 is empowered
to adjudicate all claims in respect of the accidents involving death or of bodily injury or
damage to property of third party arising in use of motor vehicle. The said power of the
Tribunal is not restricted to decide the claims inter se between claimant or claimants on one
side and insured, insurer and driver on the other. In the course of adjudicating the claim for
compensation and to decide the availability of defence or defences to the insurer, the Tribunal
has necessarily the power and jurisdiction to decide disputes inter se between insurer and the
insured. The decision rendered on the claims and disputes inter se between the insurer and
insured in the course of adjudication of claim for compensation by the claimants and the
award made thereon is enforceable and executable in the same manner as provided in Section
174 of the Act for enforcement and execution of the award in favour of the claimants.

(x) Where on adjudication of the claim under the Act, the Tribunal arrives at a conclusion
that the insurer has satisfactorily proved its defence in accordance with the provisions of
Section 149 (2) read with sub-section (7), as interpreted by this Court above, the Tribunal can
direct that the insurer is liable to be reimbursed by the insured for the compensation and other
amounts which it has been compelled to pay to the third party under the award of the
Tribunal. Such determination of claim by the Tribunal will be enforceable and the money
found due to the insurer from the insured will be recoverable on a certificate issued by the
Tribunal to the Collector in the same manner under Section 174 of the Act, as arrears of land
revenue. The certificate will be issued for the recovery as arrears of land revenue only if, as
required by sub-section (3) of Section 168 of the Act, the insured fails to deposit the amount
awarded in favour of the insurer within thirty days from the date of announcement of the
award by the Tribunal.

(xi) The provisions contained in sub-section (4) with proviso thereunder and sub-section (5)
which are intended to cover specified contingencies mentioned therein to enable the insurer
to recover amount paid under the contract of insurance on behalf of the insured can be taken
recourse of by the Tribunal and be extended to claims and defences of insurer against insured
by relegating them to the remedy before regular court in cases where on given facts and
circumstances, adjudication of their claims inter se might delay the adjudication of the claims
of the victims.
Case Law: Beli Ram v Rajinder Kumar AIR 2020 SC 4453

Case Note:

Motor Vehicles - Compensation claim - Driving license valid but expired - Section 4 of the
Workmen's Compensation Act, 1923 - Section 149 of the Motor Vehicles Act, 1988 -
Accident suffered during the course of employment -Claimant employed as driver had valid
driving license but expired - Insurer absolved from the liability but Appellant/ Owner
fastened therewith - Appellant was held guilty of negligence and thus liable - Hence, the
present appeal - Whether the insured/ Appellant in such situation gets absolved of its
liability?

Facts:

The first Respondent (R1) met with an accident while driving a truck owned by the
Appellant, under whom he was gainfully employed. R1, who suffered 20% permanent
disabilityfiled a petition under the Workmen's Compensation Act, 1923 ('the Compensation
Act') to claim compensationimpleading the Appellant and the Insurance Company (R2)
which had insured the vehicle. Award was granted for the injuries suffered and towards
medical expenses with interestfrom the date of filing till the date of payment. The
compensation amount was mulled on to the second Respondent as insurer, while the interest
was directed to be paid by the Appellant herein. All the parties went in appeal, where issue of
R1's license validity came up at the time of the accident. The licence was expired and there
was no endorsement for renewal thereafter. Thus, the R1 was driving the vehicle as the
driver for almost three years without the licence being renewed. High Court vide impugned
judgment absolved the insurance company of any liability and fastened the same upon the
Appellant herein on account of there being a material breach of the insurance policy.The
appeals of Insurer and Claimant were allowed. Hence, the present appeal by insured, the
employer/ owner of vehicle.

Held, while dismissing the Appeals:

Once the basic care of verifying the driving licence has to be taken by the employer, though a
detailed enquiry may not be necessary, the owner of the vehicle would know the validity of
the driving licence as is set out in the licence itself. It cannot be said that thereafter he can
wash his hands off the responsibility of not checking up whether the driver has renewed the
licence. It is not a case where a licence has not been renewed for a short period of time. The
licence in the instant case, has not been renewed for a period of three years and that too in
respect of commercial vehicle like a truck. The Appellant showed gross negligence in
verifying the same.

In the present case the beneficiary is the driver himself who was negligent but then this is not
a claim under the MV Act but under the Compensation Act, which provides for immediate
succor, not really based on a fault theory with a limited compensation as specified being paid.

Present is clearly a case of lack of reasonable care to see that the employee gets his licence
renewed, further, if the original licence is verified, certainly the employer would know when
the licence expires. And here it was a commercial vehicle being a truck. The Appellant has
to, thus, bear responsibility and consequent liability of permitting the driver to drive with an
expired licence over a period of three (3) years.

In view of the aforesaid, the appeals were dismissed by settling the aforesaid question of law
and leaving the parties to bear their own costs.

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 Unit 6 - Health Insurance

 Meaning of health insurance business: Sec 6(c) Insurance Act 1938

Features of Health insurance:

 Insurable interest between policyholder and health insured

 Good faith: Satwant Kaur Sandhu v New India Assurance Co Ltd (2009) 8 SCC 316
 Indemnity: insurer has option to reimburse assured after assured pays medical charges
or cashless facility by paying hospital through TPA (Third Party Administrator)
 Subrogation: applicable for accidents caused due to fault of third party

Types of Health Insurance:

1. Individual medical expense insurance

Health insurance is an agreement between an insurance provider and an individual wherein

the former guarantees to take care of certain medical costs of the latter based on the
investment made. Some plans offer health insurance for individuals while others offer health
insurance for family and group.

The Individual Health Insurance plan covers only one individual, the policyholder, who will
gain the benefits of the health insurance for his investment.

Key Features:

 This kind of health insurance for individuals offers cover only for the insured
individual.

 The insurance provider covers certain medical costs of the insured based on the
premium paid.

 Hospitalization- The policy covers hospitalization charges.

 Lifetime renewal.

 Tax deductions under section 80D of the Income Tax act.

 Covers surgery costs, room rent, physician’s fee and laboratory tests.

 The insured has to pay a predetermined amount for certain health care services. This
is called co-payment.

 Pre and post hospitalization expenses are covered under this plan.

 Provides coverage for critical illness

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2. Comprehensive major medical insurance

A comprehensive health insurance policy offers extensive coverage and acts as a financial
pillow in case of medical emergencies. Unlike basic health insurance plans, a comprehensive
policy covers outpatient as well as inpatient treatments, including consultations, medical tests
as well as hospital stay.

Some insurance companies offer comprehensive health insurance that even provides limited
cover for physiotherapy, homeopathy, acupuncture, and osteopathy. Few plans also cover the
expenses of oral surgery, the use of a private ambulance and home nursing. Moreover, by
paying some extra cost, you can even add a routine dental and optical cover to your medical
plan.

----------------------------------------------------------------------------------------------------------------

3. Special individual insurance

----------------------------------------------------------------------------------------------------------------

4. Long-term care insurance

Long-term care (LTC) insurance is coverage that provides nursing-home care, home-health
care, and personal or adult day care for individuals age 65 or older or with a chronic or
disabling condition that needs constant supervision. LTC insurance offers more flexibility
and options than many public assistance programs, such as Medicaid.

 Long-term care insurance usually covers all or part of assisted living facilities and in-
home care for people 65 or older or with a chronic condition that needs constant care.

 It is private insurance available to anyone who can afford to pay for it.

 Long-term care insurance offers more flexibility and options than Medicaid.

----------------------------------------------------------------------------------------------------------------

5. Disability income insurance

What is Disability Income (DI) Insurance?

Disability income (DI) insurance provides supplementary income in the event an illness or
accident results in a disability that prevents the insured from working at their regular
employment. Benefits are usually paid monthly so the insured can maintain a comparable
standard of living and pay recurring expenses.

Understanding Disability-Income (DI) Insurance

Disability income (DI) insurance is designed to replace between 45% and 65% of the
insured’s gross income on a tax-free basis. Some policies include bonuses and commissions
as income. The benefits are tax-free because the policyholder used after-tax dollars to pay
premiums. The policy pays a benefit in the event illness or injury prevents the policyholder
from earning their usual income in their occupation.

Although some employer-offered plans and Worker Compensation can provide help during a
disability, the quality and scope of the coverage may leave the disabled employee short of the
protection they require. Many employer-offered plans are part of a suite of coverage and may
not pay to the levels an employee needs to meet their expenses. Also, Worker Compensation
only covers injuries as a result of employment.

Self-employed individuals and small business owners must go it alone when it comes to
disability income. Even if an injury is work-related, an independent business owner may not
claim Worker's Compensation for them.

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Renewal of Medical Insurance

 Mediclaim policies with clauses for automatic renewal on payment of premium &
requisite charges by assured
 Assured not entitled to renewal without acceptance of insurer

In Biman Krishna Bose v. United India Insurance Co. Ltd.12, the Supreme Court has
declared and interpreted the provisions in respect of renewal of insurance policy in para No.
5, which is reproduced as under: A renewal of an insurance policy means repetition of the
original policy. When renewed, the policy is extended and the renewed policy in identical
terms from a different date of its expiration comes into force. In common parlance, by
renewal, the old policy is revived and it is a sort of substitution of obligations under the old
policy unless such policy provides otherwise. It may be that on renewal, a new contract
comes into being, but the said contract is on the same terms and conditions as that of the
original policy. Where the mediclaim policy of an insured is not renewed, any disease which
an insured contacts during the period the policy is not renewed cannot be covered under a
fresh insurance policy in view of the exclusion clause which provides that pre-existing
diseases would not be covered under a fresh insurance policy. So, if in the case of wrongful
refusal to renew, the view is taken that the mediclaim policy cannot be renewed with
retrospective effect, it would give a handle to the Insurance Company to refuse the renewal of
the policy on extraneous or irrelevant considerations thereby deprive the claim of the insured
for treatment of diseases which have appeared during the relevant time and further deprive
the insured for all time to come to cover those diseases under an insurance policy by virtue of
the exclusion clause. This being the disastrous effect of wrongful refusal of renewal of the
insurance policy, the mischief and harm done to the insured must be remedied. Therefore
once it is found that the act of an insurance company was arbitrary in refusing to renew the
policy, the policy is required to be renewed with effect from the date when it fell due for its
renewal.
Case Law: United India Insurance Co v Manubhai Gajera AIR 2009 SC 446

There is distinction between private player & public sector insurance company – Pvt Player is
bound by statutory regulations only, public sector insurance co also bound by directions
issued by GIC & Central govt. Policyholders not entitled to automatic renewal but entitled to
be treated fairly

Case Law: Biman Krishna Bose v United India Insurance Co (2001) 6 SCC 477

If act of insurer found to be arbitrary in refusing renewal of policy – policy required to be

renewed with effect from date when it fell due for renewal (retrospective effect)

Case Law: Dr. T Suresh v Oriental Insurance Co AIR 2010 AP 86

In renewal without break in period, mediclaim policy will be renewed without excluding any

disease already covered in existing policy which may be contracted during period of expiring

Policy.