INSURANCE REGULATORY AND DEVELOPMENT AUTHORITY

In India, during the last decade of the last century, there was a wave of liberalization
in all economic sectors including the Insurance sector. Preliminary Insurance sector
was Nationalised and was in the public sector. To bring changes in Insurance sector,
the government appointed a committee in April 1993 under the chairmanship of R N
Malhotra ex-governor of The Reserve Bank of India. Examine the structure of the
insurance industry and submitted its report on 7th January 1994 by recommending
changes to make it more efficient and competitive keeping in view the structural
changes in other parts of the financial system of the economy. Following the
recommendations of the Malhotra committee, in 1999 the insurance regulatory and
Development Authority was constituted to regulate and develop the insurance
industry and was incorporated in April 2000. The objectives of the IRDA include
promoting competition, to enhance customer satisfaction with increased consumer
choice and lower premiums while ensuring the financial security of the insurance
market.

INSURANCE REGULATORY AND DEVELOPMENT ACT, 1999

SECTION 4 - COMPOSITION OF AUTHORITY

The Authority shall consist of the following members, namely:-

(a) a Chairperson;
(b) not more than five whole-time members;
(c) not more than four part-time members,
to be appointed by the Central Government from amongst persons of ability,
integrity and standing who have knowledge or experience in life insurance, general
insurance, actuarial science, finance, economics, law, accountancy, administration or
any other discipline which would, in the opinion of the Central Government, be
useful to the Authority:

Provided that the Central Government shall, while appointing the Chairperson and
the whole-time members, ensure that at least one person each is a person having
knowledge or experience in life insurance, general insurance or actuarial science,
respectively.
 CHAPTER IV – SECTION 14 – DUTIES, POWERS AND FUNCTIONS OF
AUTHORITY

(1) Subject to the provisions of this Act and any other law for the time being in force,
the Authority shall have the duty to regulate, promote and ensure orderly growth of
the insurance business and re-insurance business.
(2) Without prejudice to the generality of the provisions contained in sub-section (1),
the powers and functions of the Authority shall include, -

(a) issue to the applicant a certificate of registration, renew, modify, withdraw,

suspend or cancel such registration;

(b) protection of the interests of the policy holders in matters concerning assigning of
policy, nomination by policy holders, insurable interest, settlement of insurance
claim, surrender value of policy and other terms and conditions of contracts of
insurance;

(c) specifying requisite qualifications, code of conduct and practical training for
intermediary or insurance intermediaries and agents;

(d) specifying the code of conduct for surveyors and loss assessors;

(e) promoting efficiency in the conduct of insurance business;

(f) promoting and regulating professional organisations connected with the

insurance and re-insurance business;

(g) levying fees and other charges for carrying out the purposes of this Act;

(h) calling for information from, undertaking inspection of, conducting enquiries and
investigations including audit of the insurers, intermediaries, insurance
intermediaries and other organisations connected with the insurance business;

(i) control and regulation of the rates, advantages, terms and conditions that may be
offered by insurers in respect of general insurance business not so controlled and
regulated by the Tariff Advisory Committee under section 64U of the Insurance Act,
1938 (4 of 1938);

(j) specifying the form and manner in which books of account shall be maintained
and statement of accounts shall be rendered by insurers and other insurance
intermediaries;

(k) regulating investment of funds by insurance companies;

(l) regulating maintenance of margin of solvency;

(m) adjudication of disputes between insurers and intermediaries or insurance

intermediaries;

(n) supervising the functioning of the Tariff Advisory Committee;

(o) specifying the percentage of premium income of the insurer to finance schemes
for promoting and regulating professional organisations referred to in clause (f);

(p) specifying the percentage of life insurance business and general insurance
business to be undertaken by the insurer in the rural or social sector; and

(q) exercising such other powers as may be prescribed.

 ASSIGNMENT

The term ‘assignment’ literally means transfer. Assignment of insurance policy

Means transfer of rights and liabilities of an insured to another person who has
acquired insurable interest in the property insured. This person, called the assignee,
become the new insured to whom the benefit of Insurance is passed. He is entitled to
deal with the insurance in his name and recover directly any claim under the policy.

The transfer of the right to receive the payment under an insurance policy is known
as an assignment. Assignments can always be made out of love and affection (without
monetary consideration) or for valuable consideration (assignment in exchange for a
loan). Assignment can be absolute (where the policy holder does not have any further
control over the policy) or conditional (where the assignment loses its validity after a
particular condition, for example the assignment will become invalid on the survival
of the policyholder to the maturity date). Whether the assignment is with or without
consideration, it is necessary that it be made by an endorsement upon the policy
itself or by a separate instrument. It should be signed by the transfer or his duly
authorised agent and attested by at least one witness.

In India, insurance policies are regarded as actionable claims as defined in section 3

of the Transfer of Property Act, 1882. The assignment of actionable claim shall be in
accordance with section 130 of Transfer of Property Act, 1882.

The following are the effects of assignments of an actionable claim:

1. All the rights and remedies of the transferor vest in the transferee upon the
execution of the instrument
2. The transferee of an actionable claim may, upon the execution of such
instrument of transfer, sue or institute proceedings for the same in his own
name without obtaining the transferor’s consent to such suit and without
making him a party thereto.
3. The assignment takes effect from the date of execution of the writing and its
effect is to vest all the rights and remedies of the transferor in the transferee.

Assignment of rights on the policy of insurance against fire:

Insurance policies are regarded as actionable claims under section 3 of the Transfer
of Property Act 1882 and hence they are assignable. Section 135 of the Transfer of
Property Act Lays down the every assignee, by endorsement or other writing, policy
of insurance against fire, in whom the property in the subject insured shall be
absolutely vested at the date of the assignment, shall have transferred and vested in
him all rights of suit as if the contract contained in the policy had been made with
himself.

Assignment of life policies under insurance act:

After the passing of the insurance act, the assignment of life policies is governed by
section 38 of the insurance act, 1938 and not by section 130 of the Transfer of
Property Act, 1882.
Essential conditions for the valid assignment of an insurance policy

1. They must be competent to contract within the meaning of section 11 of the

Indian Contract Act, 1872.
2. the Assignor (transferor) must have absolute interest in the subject matter
and right in the property.
3. The assignment must be made in writing. The writing may be either as an
endorsement on the policy itself or by a separate document.
4. The assignment must be signed by the assignor or his authorised agent and
must be attested by at least one witness.
5. It was specifically set forth the fact of transfer or assignment
6. Assignment person not be opposed to public policy.

The rules of assignment with regard to fire and marine policies differ with respect to
the following:
1. A fire policy cannot be assigned without the consent of the insurance but the
Marine policy can be transferred without such consent
2. A fire policy can be assigned only before the loss of the property, what a
Marine policy may be assigned a before or after the loss of the property.

Assignment and transfer of insurance policies – Section 38

1. A transfer or assignment of a policy, wholly or in part, with or without

consideration, may be made only be an endorsement upon the policy itself or
by a separate instrument, signed in either case by the assignor/transferor or
his authorised agent and attested by at least one witness, specifically setting
forth the fact or transfer or assignment and the reasons thereof, the
antecedents of the assignee and the terms on which the assignment is made.
2. An insurer may, accept the transfer or assignment, or decline to act upon
endorsement where it has sufficient reason to believe that such transfer or
assignment is not bonafide or is not in the interest of the policy holder or in
public interest or is for the purpose of trading insurance policy.
3. the insurer shall before refusing to act upon such endorsement record in
writing the reasons for refusal and communicate the same to the policyholder
not later than 30 days from the date of the policyholder giving notice of such
transfer or assignment.
4. Any person aggrieved by the decision of an insurer to decline to act upon such
transfer or assignment may within a period of 30 days from the date of receipt
of such communication from the insurer prefer a claim to the authority i.e.
IRDAI
5. The transfer or assignment shall be complete and effectual upon the execution
of such endorsement or instrument duly attested
6. 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.
7. Fee to be paid for assignment or transfer can be specified by the Authority
through Regulations. 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.
8. 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.
9. 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.
10. 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
 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
 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.

11. 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

However, 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.
 HISTORY

In India insurance was mentioned in the writings of Manu (Manusmrithi),

Yagnavalkya (Dharmasastra) and Kautilya (Arthashastra), which examined the
pooling of resources for redistribution after fire, floods, epidemics and famine. The
life-insurance business began in 1818 with the establishment of the Oriental Life
Insurance Company in Calcutta; the company failed in 1834. In 1829, Madras
Equitable began conducting life- insurance business in the Madras Presidency. The
British Insurance Act was enacted in 1870, and Bombay Mutual (1871), Oriental
(1874) and Empire of India (1897) were founded in the Bombay Presidency. The era
was dominated by British companies.

In 1914, the government of India began publishing insurance-company returns. The

Indian Life Assurance Companies Act, 1912 was the first statute regulating life
insurance. In 1928 the Indian Insurance Companies Act was enacted to enable the
government to collect statistical information about life and non-life-insurance
business conducted in India by Indian and foreign insurers, including Provident
Insurance Societies. In 1938 the legislation was consolidated and amended by the
Insurance Act, 1938, with comprehensive provisions to control the activities of
insurers.

The Insurance Amendment Act of 1950 abolished principal agencies, but the level of
competition was high and there were allegations of unfair trade practices. The
Government of India decided to nationalize the insurance industry.

An ordinance was issued on 19 January 1956, nationalizing the life-insurance sector,

and the Life Insurance Corporation was established that year. The LIC absorbed 154
Indian and 16 non-Indian insurers and 75 Provident Societies. The LIC had a
monopoly until the late 1990s, when the insurance industry was reopened to the
private sector.

General insurance in India began during the Industrial Revolution in the West and
the growth of sea-faring commerce during the 17th century. It arrived as a legacy of
British occupation, with its roots in the 1850 establishment of the Triton Insurance
Company in Calcutta. In 1907 the Indian Mercantile Insurance was established, the
first company to underwrite all classes of general insurance. In 1957 the General
Insurance Council (a wing of the Insurance Association of India) was formed,
framing a code of conduct for fairness and sound business practice.

Eleven years later, the Insurance Act was amended to regulate investments and set
minimum solvency margins and the Tariff Advisory Committee was established. In
1972, with the passage of the General Insurance Business (Nationalization) Act, the
insurance industry was nationalized on 1 January 1973. One hundred seven insurers
were amalgamated and grouped into four companies: National Insurance Company,
New India Assurance Company, Oriental Insurance Company and United India
Insurance Company. The General Insurance Corporation of India was incorporated
in 1971, effective from 1 January 1973.

The re-opening of the insurance sector began during the early 1990s. In 1993, the
government set up a committee chaired by former Reserve Bank of India governor R.
N. Malhotra to propose recommendations for insurance reform complementing
those initiated in the financial sector. The committee submitted its report in 1994,
recommending that the private sector be permitted to enter the insurance industry.
Foreign companies should enter by floating Indian companies, preferably as joint
ventures with Indian partners.

Following the recommendations of the Malhotra Committee, in 1999 the Insurance

Regulatory and Development Authority (IRDA) was constituted to regulate and
develop the insurance industry and was incorporated in April 2000. Objectives of the
IRDA include promoting competition, to enhance customer satisfaction with
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 an invitation for registration
applications; foreign companies were allowed ownership up to 26 percent. The
authority, with the power to frame regulations under Section 114A of the Insurance
Act, 1938, has framed regulations ranging from company registrations to the
protection of interests of policy-holders, since 2000.

In December 2000, the subsidiaries of the General Insurance Corporation of India

were restructured as independent companies and the GIC was converted into a
national re- insurer. Parliament passed a bill de-linking the four subsidiaries from
the GIC in July 2002. There are 28 general insurance companies, including the
Export Credit Guarantee Corporation of India and the Agriculture Insurance
Corporation of India, and 24 life- insurance companies operating in the country.
With banking services, insurance services add about seven percent to India’s GDP.

In 2013 the IRDAI attempted to raise the foreign direct investment (FDI) limit in the
insurance sector to 49 percent from its current 26 percent. The FDI limit in the
insurance sector was raised to 100 percent according to the budget 2019.

History of insurance in India can be studies in the following 5 important stages

1. Period of Mushroom growth (1900-1912) – during this period there was a

mushroom growth of Indian companies and this was mainly due to the
swadeshi movement which prompted the boycott of British goods, British
institutions and everything British. The indiscriminate mushroom growth of
insurance companies led to the appearance of some evil which had to be
checked by passing Indian Life Assurance Act, 1912. For the first time
publishing of returns of life insurance began from 1914.
2. Period of struggle & steady growth (1913-1938) – the period between two
world wars. The indigenous companies had to pass through tough time.
Sudden growth of companies due to impetus given by swadeshi movement
brough with it evil of accumulation of wealth and inexperience in business.
This has led to economic slump, business had to struggle for its growth. Many
small offices had to be wound up and few that survived had to face the
competition of many flourishing foreign offices.

Government was compelled to protect the interest of Indian insurance

business and hence in 1934 Sri SC Sen was appointed as special officer to
investigate and report on reform of insurance law in India. In 1936 a
committee under chairmanship of Sri NN Sircar was appointed to examine the
report of special officer, which led to the passing of Insurance Act, 1938 which
provides for uniform control by government over all insurers. Foreign offices
discontinued their business in India.

3. Period of stability & Consolidation (1938-1950) – being free from foreign

competition Indian offices gained stability. After second world war swadeshi
movement gained strength and national spirit increased. Large amounts of
capital were available with them for investment in the developing industries.
In 1945 Cowasji Jehangir committee condemned the malinvestment by
insurance companies, this led to regulation of investment and Insurance Act
 1938 had to be amended several times. Partition of the country had made
situation worse. Sri SR Ranganathan committee reviewed the entire insurance
law and based on this report amendment of 1950 was carried out which made
far reaching changes to make insurance institutions more useful for the
country’s economic growth.

4. Period of Boom & Nationalization (1950- up to date) – by Five-Year Plans

India has grown from agrarian society to industrialised society. Confidence in
domestic companies increased. All this contributed to a boom in insurance
business. Huge amount of capital was available with insurers and government
found in handy to utilise these funds for its developmental plans and also to
ensure the investing public, a better security. Later in 1956 Life Insurance Act,
1956 was passed nationalising life insurance business in India. Further in 1972
the General insurance was nationalised by passing of General Insurance
(Emergency Provisions) Act, 1972. General insurance corporation was formed
with four subsidiaries.

5. Era of Privatization (1991 onwards) – insurance sector open to private entities

on the recommendations of Malhotra Committee. Both public and private
companies played important role simultaneously. Growth of more private
entities has led to the passing of Insurance Regulatory and Development
Authority Act, 1999 to control and regulate insurance sector in India.
 NATURE OF INSURANCE CONTRACT

1. Contract is aleatory
2. Contract of utmost good faith
3. Contract of indemnity
4. Contract of wager

1. Contract is aleatory
Insurance contract is an aleatory contract. The insurance contract, whatever may be
the type is a 'contract of speculation'. Webster's new international dictionary says
that contracts of insurance are aleatory contracts ' depending on an uncertain event
or contingency as to both profit and loss'. If we take an example of a person taking a
fire insurance policy on his house, he pays a little and if the house is not burnt, he
loses that small amount. But if the house is destroyed by fire, he is entitled to recover
a huge amount, the value of the house. Thus, it is apparently a gamble in which if the
event happens in a certain way, the insured will have a small loss of premium and if
the event happens in another way the insurance loses heavily in that, he has to pay
the huge sum, the value of the house.

2. Contract of utmost good faith

In England till the passing of the misrepresentation act 1967, it is a Cardinal
principle of commercial law that he who buys should be wear, caveat emptor, and
therefore in business transactions each party must take care of his interest when he
buys the promise of the other and the other party is not bound to disclose any defect
which an ordinary inquisition would reveal. However, contracts of insurance stand
on a different footing and form an exception to this rule because the parties do not
stand on equal footing either with regard to the knowledge of the subject matter or
with regard to the economic aspect of the obligation.
The underwriter knows nothing and the man who comes to him to ask him to insure
knows everything it is the duty of the assured, the man who desires to have a policy,
to make a full disclosure to the underwriters without being asked of all the material
circumstances, because the underwriters know nothing and the assured knows
everything. Thus, a contract of insurance, is justly made an uberrima fides
transaction and an exception to the commonly accepted commercial rule of Caveat
emptor.
The law relating to good faith requirement is contained in the marine insurance act
and these rules mutatis mutandis apply to all classes of insurance.

SECTION 19 - INSURANCE IS UBERRIMAE FIDEI – A contract of marine

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

SECTION 20 - DISCLOSURE BY ASSURED

(1) Subject to the provisions of this section, the assured must disclose to the
insurer, before the contract is concluded, every material circumstance which,
is known to the assured, and the assured is deemed to know every
circumstance which, in the ordinary course of business, ought to be known to
him. If the assured fails to make such disclosure, the insurer may avoid the
contract.
(2) Every circumstance is material which would influence the judgment of a
prudent insurer in fixing the premium, or determining whether he will take
the risk.
(3) In the absence of inquiry the following circumstances need not be disclosed,
namely:—
a) any circumstance which diminishes the risk;
b) any circumstance which is known or presumed to be known to the insurer.
The insurer is presumed to know matters of common notoriety or
knowledge, and matters which an insurer in the ordinary course of his
business as such ought to know;
c) any circumstance as to which information is waived by the insurer; (d) any
circumstance which it is superfluous to disclose by reason of any express or
implied warranty.
(4) Whether any particular circumstance, which is not disclosed, be material or
not is, in each case, a question of fact.
(5) The term “circumstance” includes any communication made to, or
information received by, the assured.
SECTION 21 - DISCLOSURE BY AGENT EFFECTING INSURANCE – Subject to the
provisions of the preceding section as to circumstances which need not be disclosed,
where an insurance is effected for the assured by an agent, the agent must disclose to
the insurer—
 a) every material circumstance which is known to himself, and an agent to insure
is deemed to know every circumstance which in the ordinary course of
business ought to be known by, or to have been communicated to, him; and
b) every material circumstance which the assured is bound to disclose, unless it
comes to his knowledge too late to communicate it to the agent.

Scope of duty of disclosure

i. The duty to disclose extends only to material facts. So every material fact must be
disclosed which he knows got to know. Failure to disclose maybe wilful or
inadvertent or even may be due to parties erroneous believe that the fact not
disclosed is not material. Whether or not a fact is material, does not depend on
what the particular insured thinks or what the insurers think but whether 'a
prudent inexperienced insurer would be influenced in his judgement if he knew
it'. The final judgement therefore, does not lie with either party but with the
court. In LIC v. Shakuntalabai the assured did not disclose that he had
suffered from indigestion for a few days; the court held that it is not a material
Fact and non-disclosure did not affect the validity of the policy.
In March Carbaret Clum v. London Assurance Co. the non-disclosure of a
conviction in a criminal case of the assured was held to be a ground for
invalidating the policy.

ii. The duty extends only to those material facts about which he knows or ought to
know. Ignorance of the fact is an excuse but ignorance of the materiality is not.
There is no breach of good faith, if the party to the contract is not aware of the
fact. In Gouri Sethi v. The Divisional manager of LIC it was held that the
suppression of illness not effecting the expectation of life cannot be a ground to
repudiate the policy.

iii. The duty of disclosure extends to the authorised agents of the insured; but this
duty of the agent is limited to facts within the knowledge of the principal which
are presumed to have been communicated in due course to the agent or to facts
which the agent must have come to know during the course of his agency.

iv. Utmost good faith is required not only from the insured but also from the insurer,
the duty to disclose all relevant factors a mutual duty of the insured as well as the
 insurer. In Hanil Era Textiles v. Oriental Insurance Co. Ltd. the
policyholder insured the Spinning Mill together with its blow-room without
suppressing any material facts. The insurer company did not inform the insured
that the insured should install certain machineries. Subsequently, the insurance
company demanded additional premium from the insured on account of non-
installation of such devices and it was held that the insurance company was not
entitled to claim additional premium on account of its failure to inform the
insured about the installation of such device.

v. The duty of disclosure applies only to negotiations preceding the formation of the
contract. When a relevant fact comes to the knowledge of either party after the
completion of the contract, there is no duty to disclose and as such non-disclosure
of such facts does not offend the rule of good faith. The duty to disclose is not a
continuing duty; it must be observed throughout the negotiation and continues
only until they are completed and the contract is concluded. For example non-
disclosure does not apply when the assured finds out about a medical condition
can a subsequent medical check-up after the policy is issued.

vi. The duty of disclosure is deemed to have been cast on the insured when the
insurer specifically asks a question. Generally, the negotiations for insurance
contract comments with the printed proposal form supplied by the insurer. The
proposal form contains question seeking answers from the insured. Whether the
question are therein is logically relevant or not, will be deemed to be a material
fact and so either a false answer or a dubious answer to such questions may
amount to a breach of duty of disclosure.

vii. The duty does not extend to certain types of facts their material. The insured is
not bound to disclose the following facts unless the insurance expressly questions
him about them:
 Facts which he is not aware of
 Facts within the knowledge of the insurers
 Facts of which information is waived by the insurer
 Facts which tend to diminish the risk
 Any circumstances, which is superfluous to disclose by reason of any
express or implied warranty.
The duty of disclosure is on both parties though it is more onerous on the insured
because most of the facts related to the subject matter of the contract within his
exclusive knowledge and they may be such that the insurer cannot find them out on
reasonable enquiry.

The rules of utmost good faith have been relaxed to some extent by the insurance act
1938 and now with reference to ' life Insurance contracts ' on the expiry of 2 years if
the premium has been paid regularly, the insurance policy cannot be set aside on the
ground that a fact has not been disclosed, unless there is a deliberate concealment,
amounting to fraud on the Insurance Company.

In LIC of India v. state of Rajasthan it was held that the insurer was not liable
when the insured suppressed information on the proposal form that he was suffering
from a particular element and as a result of that element when insured died.

In Sakhitombi Devi v. Zonal Manager, LIC of India, the insured fraudulently

suppressed the material fact that he was having stomach element at the time of
taking the policy as well as revival of the policy. On the death of the insured, when
the claim for the policy money was made by the widow of the insured and the insurer
repudiated the policy on ground of fraud even though the insured paid premiums for
more than 2 years. It was held that the insurer was entitled to cancel the policy.

3. Contract of Indemnity
All contracts of insurance cannot be strictly called contracts of indemnity. The
principle of indemnity of an important element in non-life insurance policies. The
word indemnity means a promise to save another from harm or from loss caused as a
result of a transaction entered into at the instance of the promisor. Therefore, the
liability of the promise are in a contract of insurance is a contingency itself. Contract
of insurance is, like a contract of indemnity, a contract of contingency. It therefore
follows that any variation of the risk must be on mutual consent and if it is not so, the
contract becomes voidable at the hands of the rightful party.
Some writers and judges even classify the contract of insurance is indemnity contract
and non-indemnity contract and plays in the latter category Life Insurance, personal
accident insurance and sickness insurance.
In Dalby v. India and London Life Assurance Company it was held that the
policies of insurance against fire and marine insurance risks, a contract of indemnity
and the insurer agrees to compensate the loss sustained by the insured.

If we analyse the principles applicable to Marine and fire insurance we can come to
the conclusion that they are strictly contract of indemnity. To illustrate a few:
 The insured will not be permitted to make profit in the transaction. For
example, if you recover anything by selling the damaged goods, he has to
account for it to the insurance company.
 In Marine and fire insurance the insurer will pay only compensation, that is
the actual loss or damage.

Divergent opinions are expressed on the applicability of the principle of indemnity to

contracts of life insurance. Lord Mansfield observed that a life insurance contract is a
contract of indemnity. Principle was recognised in Godsall v. Boldero.
But this dictum was criticized in subsequent cases and it was laid down in Dalby v.
Indian and London Assurance co. that a life insurance contract is not a contract
of indemnity. In a life insurance contract the amount mentioned in the policy is not
the estimation of value of life because human life cannot be estimated in value
correctly, that is, the loss or damage that may be caused by death of a human being is
incapable of exact estimation. A person takes out a life insurance policy for the value
usually based upon his capacity to pay premium. Therefore, life Insurance contract is
not a contract of indemnity. A life insurance contract with reference to one's own life
is not a contract of indemnity; but a life insurance contract with reference to life of
another person may be regarded as a contract of indemnity.

In conclusion, it may be said that though there is a doubt whether a contract of life
insurance is a contract of indemnity or not, it is well settled and without doubt it may
be said that contract of fire and marine insurance are all contract of indemnity.

4. Contract of Wager
According to Sir William Anson all insurance contracts are wagering contracts. He
said that all contract of insurance a wagering contract even though there is an
insurable interest; but they are permissible under law. According to him 'a wager is a
promise to give money or money's worth upon the determination or ascertainment of
an uncertain event, the consideration being in the something given or promised to be
given by the other party in the event determining in a particular way'.
However, Hawkin says that insurance contract is not wagering contract.

In Lucena v. Crawford it was observed that " there is a material distinction

between a contract of wager and contract of insurance. The wager may have a
speculative chance or expectation as the subject matter, but in an insurance contract
a chance or expectation cannot be the subject matter as it definitely presupposes loss
of some right of property either in and possession or ownership.

Insurance is intended to cover a risk of loss whereas in a wager there is no risk.

Where the event insured against materialises, it may cause varying degrees of loss
and the amount payable under an internet insurance will vary according to the extent
of loss. In a wager, a fixed amount changes hands one way or the other.
 FUNCTIONS OF INSURANCE

The various functions of insurance like risk sharing, life insurance and annuities
relief for members of society, sharing burden of state to provide relief to destitute
and aged citizens, making available finance for social investment etc. The
fundamental function of insurance is to shift the loss suffered by a sole individual to
a willing and capable professional risk-bearer in consideration of a comparatively
small contribution called premium. In this process the professional risk-bearer i.e.
the insurer collects some small rate of contribution from a large number of people
and if there is any unfortunate person among them, the risk-bearer i.e. the insurer
relieves the sufferer from the effects of the loss by paying the insurance money. Thus,
it serves the social purpose and it is “a social device whereby uncertain risks of
individuals may be combined in a group and thus, made more certain; small periodic
contribution of the individuals providing a fund out of which those who suffer losses
may be reimbursed”. The insurers collect the contributions of numerous
policyholders and those funds are invested in organized commerce and industry.
They help the running of giant industries and mobilize the capital formation.

In simple terms, “insurance is a protection against financial loss taking place on the
happening of an unexpected event”. All the individuals have assets tangible i.e. the
house, car, factory etc. or intangible like voice of a singer, leg of a footballer, the hand
of an author etc. All these can be insured because they run the risk of becoming non-
functional either through a disaster or an accident.

1. PRIMARY FUNCTIONS

a) Provide protection - The primary function of insurance is to offer protection

against future risk, accidents and uncertainty. Insurance is actually a shield
against economic loss, by sharing the risk with others.
b) Collective risk - Insurance is a device to contribute to the financial loss of a
few among many. Insurance is a mean by which little losses are shared among
larger number of people. All the insured share the premiums towards a fund
and out of which the persons exposed to a particular risk is paid.
c) Evaluation of risk - Insurance concludes the probable volume of risk by
evaluating various factors that give rise to risk. Risk is the origin for
determining the premium rate also.
 d) Provide assurance - Insurance is a device, which helps to modify from
uncertainty to certainty. Insurance is a mechanism whereby uncertain risks
may be made more certain.
e) Provides certainty of payment at the uncertainty of loss.

2. SECONDARY FUNCTIONS

a) Avoidance of losses - Insurance alarms individuals and businessmen to adopt

suitable device to prevent unfortunate consequences of risk by observing
safety instructions; installation of automatic sparkler or alarm systems, etc.
prevention of losses causes smaller payment to the assured by the insurer and
this will encourage for more savings by way of premium. The condensed rate
of premiums motivate for more business and better protection to the insured.
b) Small capital to cover larger risks - Insurance relieves the businessmen from
security investments, by paying small amount of premium against superior
risks and uncertainty.
c) Encourage towards the development of larger industries - Insurance provides
development opportunity to those larger industries having additional risks in
their setting up. Even the financial institutions may be prepared to give credit
to ailing industrial units which have insured their assets including plant and
machinery.
d) Insurance provides capital to the society by increasing the investment in
productive channels. The death of capital of the society is minimised to a great
extent with the help of investment of insurance.
e) Insurance improves efficiency. It eliminates worries and miseries of losses at
that and destruction property
f) Insurance helps in economic progress. With the surplus funds available with
the Insurance Corporation, the government can get capital to invest in public
undertakings.

3. OTHER FUNCTIONS

a) Way of savings and investment - Insurance serves as savings and investment,

insurance is a compulsory way of savings and it limits the unnecessary
expenses by the insured. For the reason of availing income-tax exemptions
also people invest in insurance.
b) Source of earning foreign exchange - Insurance is a worldwide business. The
country can earn foreign exchange by way of issue of marine insurance
policies and various other ways. 3. Risk-Free trade - Insurance promotes
exports insurance, which makes the foreign trade risk-free with the assistance
of different types of policies under marine insurance cover.
 REGISTRATION OF INSURANCE COMPANIES

The Insurance Regulatory and Development Authority Act by amending the

Insurance Act 1938, prescribes that no person shall start a new business on any
branch of the insurance business, after the commencement of the Insurance
Regulatory and Development Authority Act 1999, unless he has obtained a certificate
of registration for the particular class of insurance business he proposes to carry out.

PROCEDURE OF REGISTRATION 

An insurance company must be first incorporated under the Companies Act 1956 and
must also be registered with the Insurance Regulatory and Development Authority
which is governed by both the Companies Act 1956 and the Insurance Regulatory and
Development Authority Act 1999)

Section 3 of the Insurance Act provides that every application for registration shall be
made in such a manner as may be determined by the Insurance Regulatory and
Development Authority and shall be accompanied by the documents mentioned
therein. Separate Regulations are passed by IRDA, called the IRDA Registration of
Indian Insurance Companies Regulations 2000. As per that a new entrant Indian
insurance company desiring to carry on insurance business in India shall make an
application for registration in form IRDA/R1. This form requires the applicant to
give his details prescribed therein with which the Insurance Regulatory and
Development Authority will screen his status and if it is satisfied that he can carry on
all functions in respect of the insurance business including management of
investments within his own organisation and is a bona fide applicant, and that his
previous application has not been rejected in the previous five financial years, and
his previous certificate has not been withdrawn or cancelled and his name contains
the words insurance company or assurance company, the Authority gives him an
application for registration in form IRDA/R2; otherwise it will reject his application
after giving him a reasonable opportunity for hearing as to why his application shall
not be rejected. The order rejecting the application must be communicated to him by
the Authority within 30 days of such rejection.
The applicant on receipt of the rejection order may apply to the to the Authority
within 30 days for reconsideration of its decision. An applicant whose application has
been finally rejected may make a fresh application after a period of 2 years with a
new set of promoters or for a new type of insurance business.

If his application in form IRDA/R1 is accepted, the Authority will furnish him with
an application in form IRDA/R2. Generally a filled in application in form IRDA/R2
must be accompanied with the documents mentioned in Reg 10(2) including
evidence that he has paid the requisite Rs 50,000 thousand rupees for each kind of
insurance business for as for, and made the deposit required under s 7 of the
Insurance Act 1938. The Authority gives preference in granting of the 'certificate of
registration' to those applicants who propose to carry on the business of providing
health covers to individuals or groups of individuals. On receipt of application in
form IRDA/R2, the Authority makes an inquiry as it deems fit and if it is satisfied in
that inquiry that:
1. the applicant is eligible, and in its opinion, is likely to meet effectively its
obligations imposed under the Act;
2. the financial condition and the general character of management of the
applicant is sound;
3. the volume of business likely to be available to, and the capital structure and
earning prospects of the applicant will be adequate;
4. the interests of the general public will be served if the certificate is granted to
the applicant in respect of the class of insurance business specified in the
applications; and
5. the applicant has complied with the provisions of ss 2(c), 5, 31(a), 32 and
32(a) has fulfilled all the requirements of these sections applicable to him,
may register the applicant as an insurer for the class of business for which the
applicant is found suitable and grant him a certificate in form IRDA/R3. The
certificate issued in the beginning will be valid for a year. Thereafter, there
shall be an annual renewal. 

RENEWAL OF REGISTRATION

An insurer who has been granted a certificate under s 3 of the Act, shall make an
application in form IRDA/R5 for the renewal of the certificate, to the Authority
before 31 December each year, and such an application shall be accompanied by
evidence of the payment of the fee which shall be the higher of:
(i) fifty thousand rupees for each class of insurance business, and
(ii) one-fifth of one per cent of total gross premium written direct by an
insurer in India during the financial year preceding the year in which the
application for renewal of certificate is required to be made, or Rs 5 crores,
whichever is less; and in the case of an insurer solely carrying on
reinsurance business, instead of the total gross premium written direct in
India, the total premium in respect of facultative reinsurance accepted by
him in India shall be taken into account.

If the insurer fails to apply for the renewal of registration before the date specified .in
sub-reg (1) the Authority may accept an application for renewal of registration on
receipt of the fee payable with the application along with an additional fee 1)-37 way
of penalty of 10 per cent of the fee payable with the application. 

Manner of payment of fee for renewal of certificate

The fee for renewal shall be paid to the account of the IRDA with the Reserve Bank of
India.

Issue of Duplicate Certificate

The Authority may, on receipt of a fee of Rs 5,000, issue a duplicate certificate to the
insurer, if the insurer makes an application to the Authority in form IRDA/R4.

Cancellation or Suspension of Certificate

Without prejudice to any penalty which may be imposed or any action taken under
the provisions of the Act, the registration of an Indian insurance company or insurer
who;
1. conducts its business in a manner prejudicial to the interests of the policy
holders;
2. fails to furnish any information as required by the Authority relating to its
insurance business;
3. does not submit periodical returns as required under the Act or by the
Authority;
4. does not cooperate in any inquiry conducted by the Authority;
5. indulges in manipulating the insurances business;
 6. indulges in unfair trade practices;
7. fails to make investment in the infrastructure or social sector specified under
sub-s 1(a) of s 27(d) of the Act;

may be suspended for a class or classes of insurance business for such period as
may be specified by the Authority by an order.

It is also provided that the Authority for reasons to be recorded in writing may, in
case of repeated defaults of the type mentioned above, impose a penalty of
cancellation of Certificate.

Manner of Making Order of Suspension or Cancellation of Certificate

No order of suspension or cancellation shall be imposed except after holding an
inquiry in accordance with the procedure specified in the above regulation.

Manner of Holding Inquiry Before Suspension or Cancellation

For the purpose of holding an inquiry regarding the malpractices of insurance, the
Authority may appoint an inquiry officer. The inquiry officer shall issue to the insurer
a notice at the registered office or the principal place of business of the insurer. The
insurer may, within 30 days from the date of receipt of such notice, furnish to the
inquiry officer a reply, together with copies of documentary or other evidence relied
on by it or sought by the Authority from the insurer. The inquiry officer shall give a
reasonable opportunity of hearing to the usurer to enable it to make submissions in
support of its reply made under the sub-regulation The insurer may either appear in
person or through any person duly authorised by the insurer before the inquiry
officer. An advocate shall be permitted to represent the usurer at the inquiry if it is
considered necessary, the inquiry officer may ask the Authority to appoint a
presenting officer to present its case.

The inquiry officer shall, after taking into account all relevant facts and submissions
made by the insurer, submit a report to the Authority and recommend the penalty to
be yarded as also the justification of the penalty proposed.

Show-cause Notice and Order

On receipt of the report from the inquiry officer, the Authority shall consider the
same and if considered necessary by it, issue a show-cause notice as to why a penalty
as it considers appropriate should not be imposed. The insurer shall, within 21 days
of the date of receipt of the show-cause notice, send a reply to the Authority. The
Authority after considering the reply to the show-cause notice, if received shall as
soon as possible but not later than 30 days from the receipt of the reply, if an pass
such orders as it deems fit. If no reply is furnished to the Authority by the insurer
within 90 days of the service of the notice, the Authority can proceed to decide the
issue ex parte. The order passed shall give reasons therefore including justification of
the penalty imposed by that order. The Authority shall send a copy of the order to the
insurer.

Publication of Order
The order of the Authority passed shall be published in at least two daily newspapers
in the area where the insurer has his principal place of business.

Effect of Suspension or Cancellation of Certificate

From the date of suspension cancellation of the certificate, the insurer shall cease to
transact new insurance business.

Existing Insurers
The existing insurers are regulated by a separate set of guidelines for registration.
They are required to make an application in form IRDA/R2 (the same form as in the
case of new insurers) for grant of certificate of registration within three months from
the commencement of the IRDA Act 1999.

Every application shall be accompanied by: 

a) original certificate of registration;
b) confirmation that the requirements of s 7 of the Act have been met; 
c) evidence of having paid Rs 100 crores or more paid up share capital, in case of
an application for grant of certificate of registration for reinsurance business;
d) an affidavit by the principal officer of the applicant certifying that the
requirements of s 6 of the Act have been compiled with;
e) a certified copy of the standard forms of the insurer and statements of the
assured rates, advantages, terms and conditions to be offered in connection
with insurance policies together with a certificate in case of life insurance
business by an actuary that such rates, advantages, terms and conditions are
workable and sound;
 f) the original receipt showing payment of fee of Rs 50,00 for each class of
business and;
g) any other information required by the authority during the processing of the
application for registration.
The authority shall register every applicant, who submits an application in
accordance with the sub-regulation, and grant a certificate in form IRDA/R3. This
brings the existing insurer on par with new insurers in respect of paid up capital
requirements. •an extension. further With The existing insurers are also required
under the transitory provisions to con1PlY all the regulations, as in case of new
insurers. However, of the compliance of the regulations relating to accounts, assets,
liabilities, solvency margins and reinsurance a 12 months period is given and on. an
application the Authority may grant a period of not more than 12 months if it is
satisfied that there are valid reasons for such an extension.

The existing insurers need not requisition an application for obtaining a form for the
registration in form IRDA/R1 and the first screening is done at this stage. From
contents of form RI which contains the complete biography A of the applicant the IR1
decides whether the applicant can run the proposed business or not.
 DOCTRINE OF SUBROGATION

'Subrogation' means 'a substitution of one person or thing for another’. It is

substitution of one person in place of another with reference to a lawful claim,
demand or right. In law of insurance, 'subrogation' is the transfer of rights and
remedies of the insured to the insurer who has indemnified the insured in respect of
the loss.

The doctrine of subrogation refers to the right of the insurer to stand in the place of
the insured, after settlement of a claim, in so far as the insured's right of recovery
from an alternative source is involved. If the insured is in a position to recover the
loss in full or in part from a third party due to whose negligence the loss may have
been precipitated, his right of recovery is subrogated to the insurer on settlement of
the claim. The insurer, thereafter, recover the claim from the third party. The right of
subrogation may be exercised by the insurer before payment of loss. The effect of
subrogation is that the insured does not receive more than the actual amount of his
loss and recovery effected from the third party goes to the benefit of the insurer to
reduce the amount of his loss.

The doctrine of subrogation may be illustrated by the following examples:

i) If cargo is damaged due to the negligence of a carrier (e.g. railways, truck
operators, shipping companies etc.) who have an obligation to make good
the loss of the insured, the benefit of this obligation passes to the insurer.
ii) A private car may be damaged in a collision caused by the rash and
negligent driving of a truck. The private car owner's right of recovery
against the truck owner is transferred to the insurer who has indemnified
the loss.
iii) Under products liability policies, if a retailer is indemnified in respect of a
claim preferred against him for a defective product, the insurer can recover
from the wholesaler or manufacturer who supplied the product, if liability
can be established against him.
iv) Under fidelity guarantee policy, the insurer after payment of the loss is
entitled to claim reimbursement from the defaulting employee. 

In Vasudeva v. Caledonian Insurance Company, it has been observed that an

insurer, when he has indemnified the assured gets into the shoes of the assured that
is subrogated to his rights and remedies against against third parties who have
occasioned the loss. On the other hand, an assignment or a transfer vests in the
insurer the assured’s interest rights and remedies and the insurer will be in a
position to maintain suit against third parties in his own name.

ESSENTIALS OF DOCTRINE OF SUBROGATION

i) Corollary to the Principle of Indemnity – The doctrine of subrogation is the

supplementary principle of indemnity. The latter doctrine says that only the actual
value of the loss of the property is compensated so the former follows that if the
damaged property has any value left, or any right against a third party the insurer
can subrogate the left property or right of the property because if the insured is
allowed to retain, he shall have realised more than the actual loss, which is contrary
to principle of indemnity.

ii) Subrogation is the substitution. – The insurer, according to this principle,

becomes entitled to all the rights of insured subject matter after payment because he
has paid the actual loss of the property. He is substituted in place of other persons
who act on the right and claim of the property insured.

iii) Subrogation only up to the amount of payment – The insurer is subrogated all the
rights, claims, remedies and securities of the damaged insured property after
indemnification, but he is entitled to get these benefits only to the extent of his
payment. The insurer is thus, subrogated to the alternative rights and remedies of the
insured only up to the amount of his payment to the insured. In the same way if the
insured is compensated for his loss from another party after he has been indemnified
by his insurer he is liable to part with the compensation up to the extent that the
insurer is entitled to. If the insurer, having Paid the claim to the insured, recovers
from the defaulting third party in excess of the amount paid under the policy, he has
to pay this excess to the insured though he may charge the insured his share of
reasonable expenses incurred to collecting.

iv) The subrogation may be applied before payment – If the assured got certain
compensation from third party before being, fully indemnified by the insurer, the
insurer can pay only the balance of the loss. 
v) Does not apply to Personal Insurance – The doctrine of subrogation does not
apply to life and personal accident insurance because the doctrine of indemnity is not
applicable to such insurance. In personal insurances, the insurers have no right of
action against the third party in respect of the damage. For example, if an insured
dies due to the negligence of a third party his dependent has right to recover the
amount of the loss from the third party along with the policy amount. No amount of
the policy would be subrogated by the insurer.

The doctrine of subrogation was derived by English Courts from the system of
Roman Law. The doctrine has been widely applied in English body of law as, for
example, to sureties and to matters of ultra vires as well as to the insurance. In
connection with insurance it was recognised in the beginning of the eighteenth
century.

The doctrine of subrogation is given statutory recognition in Section 79 of the Marine

Insurance Act, 1963. It provides,
(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."

As subrogation means substitution where the assured himself cannot bring an action
the insurer also cannot claim anything by subrogation. In Midland Insurance v.
Smith, it has been held that the insurers cannot recover the insurance money as the
assured had no right of action against his wife, where the wife of the assured set fire
to his house and the insurers paid.
In Simpson v. Thompson, it has been observed that were two ships belonging to
the same owner collide by the fault of one, the insurers of the ship not in fault will
not be entitled to any claim on the owner for acts of the other ship, though the
insurers of the cargo owned by a third party would have had a claim against him.
Limitation on doctrine:
1. Does not apply to life and personal accident policies
2. Insurer must pay before he claims subrogation
3. Assured must have been able to bring action.
DOCTRINE OF CONTRIBUTION