General Principles of

Insurance Law
Module 2
• Insurance contract is an agreement, whereby one party (insurer)
agrees to pay to the other party (insured ) on the happening of a
certain event in consideration of a certain sum of money ( periodical
payment) called premium.
- Insured/Assured/ Policy holder
- Insurer/Assurer/Underwriter
- Premium/Premia
- Insurance policy ( is merely evidence of the contract)
- Both parties provide consideration- (Insured – premium; Insurer- promise to
compensate the insured upon the happening of the contingency)
- Payment of the first premium- consideration.
- Second/later premiums – cannot strictly be called- part of consideration- because
insurer cannot compel the insured to pay them
- Default in payment of subsequent premiums- insurer may be released from the
promise – but remains bound by subsidiary promises e.g. surrender value

- Competent parties – valid contract ( age of majority, sound mind,

disqualification..)
- Incompetent person can be a beneficiary under the insurance contract
- A minor’s property can be insured- persons competent to act for him
-Free consent of the parties

- Lawful object- illegal, immoral or opposed to public policy

- No person is allowed to benefit from his own crime
Nature of Insurance Contract

In contract of insurance there must be some uncertainty

- Event itself is uncertain ( e.g. fire insurance)
- The event is certain- time at which it will happen is uncertain ( e.g. life insurance)

1. Aleatory Contract- i.e. contracts which is based upon chance

2. Utmost good faith/ Uberrimae fides
3. Indemnity- governing principle of the law of insurance
- actual loss
-except life insurance
Conclusion of Insurance Contract/Commencement of Risk

- Offer and Acceptance ( mutual agreement between insured and insurer)

- Offer by one & unqualified acceptance of it by the other

- The contract of insurance will be concluded- party to whom an offer has

been made accepts it unconditionally & communicates acceptance to the
person making the offer

- Whether final acceptance is that of assured/insurer – depends on the way

the negotiations for insurance have progressed

- Judicial decisions- Acceptance has occurred or not

-Proposal form filled by the applicant ( proposer for insurance)

- Declaration – warrants truth of the statements made in the proposal form- agrees
that it shall be the basis of contract

- Enables the insurer to decide whether to accept/decline the risk/ to determine

the rates, terms and conditions of a cover to be granted

- The insurer informs- applicant- that he is agreeable to enter into a contract if the
proposer pays the first premium quoted in the acceptance letter ( conditional
acceptance/counter offer), the unqualified acceptance- payment of premium by
the proposer
1. LIC of India v. Raja Vasireddy Kambar AIR 1984 SC 1014
Facts/ Claim/Contention Timeline
Raja Vasireddy death -Jan 12, 1961
Filled a proposal form – Rs. 50,000 insurance amount -Dec 27, 1960
Medical examination- issued two cheques towards Encashed on Dec 29,
payment of premium to the local agent- ( Rs.500) 1960 and Jan 11, 1961
Claim made by the widow Jan 16, 1961
-overt act of encashing cheques amounted to acceptance
of proposal- valid contract

Contention of the insurer-denied the liability

- Two cheques that were encashed was not credited
towards premium account but were kept in deposit in
suspense account
- No acceptance of proposal / concluded contract
- Divisional Manager was competent party to accept the Account books were
proposal produced for the
- Amt. would be transferred to the premium register same
after acceptance of the proposal
Holding

"The mere receipt and retention of premiums until after the death of applicant
does not give rise to a contract, although the circumstances may be such that
approval could be inferred from retention of the premium. The mere execution of
the policy is not an acceptance; an acceptance, to be complete, must be
communicated to the offeror, either directly, or by some definite act, such as
placing the contract in the mail. The test is not intention alone. When the
application so requires, the acceptance must be evidenced by the signature of one
of the company's executive officers”

- Insurer not liable

LIC v. Venkatdru Koteshwaramma AIR 2003 AP 153
• Venkatdru- insured his life for Rs. 25000
• Proposal was submitted on 15/3/1982 along with premium through agent
• Administrative Officer- signed the proposal review slip- in token of acceptance on
the same day
• Insured -medical examination on 28/3/1982
• Insured died on 2/4/1982
• The policy document signed on 23/6/1982 forwarded to the address of the
insured-but was returned
• Wife- nominee- insurer denied claim /repudiated on the grounds-
1. non-disclosure of the fact that he was suffering from Diabetes, while submitting
the proposals for the policy
2. No acceptance of the policy
Whether the proposal of the deceased for insurance has been
accepted before his death i.e. 2-4-1982.
• In this case, the proposal emanated from the insured. The decision to
accept is at the end of the appellant. That brought about a concluded
contract before the insured died
LIC v. Munesh, NCDRC (15 July 2015)

• Madan Lal submitted the proposal form along with premium- Insurer on
11.10.2001 for Rs.1,00,000/-
• Died on 14.10.2001
• Premium receipt issued on 15.10.2001 depicting date of risk from 13.10.2001
• Policy was issued on 20.10.2001
• Nominee ( Munesh) submitted claim - denied by the insurer- insured died before
acceptance of proposal form
• The proposal submitted by the assured Madan Pal was accepted by the
competent authority on 15.10.2001, consequent upon which, the cash receipt
dated 15.10.2001 was issued followed by the insurance policy issued on
20.10.2001

• Undisputedly, Madan Pal, proposer, died on 14.10.2001 before the acceptance of

proposal. Therefore, acceptance has no meaning at all because the life assured at
the time of acceptance of proposal was no more alive and there could be no valid
contract with the dead person.
Please note that the renewal notice is an offer by the insurance
company
Commencement of Risk/Policy

• The date of commencement of policy depends upon the intention of

the parties as shown in the language of the policy/by the
circumstances of the case.

• Policy takes effect from the date and time mentioned in the policy
e.g- 20th July 1994 at 2pm
20th July 1994- in the absence of specific time, it shall take effect
from the commencement of the day i.e. previous midnight 12 am
( New India Assurance Co. v. Ram Dayal (1990) 2 SCC 680)
64VB of the Insurance Act, 1938
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 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 dispatch 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.
The Insurance Act mandates under section 64VB- no insurer shall
assume risk unless premium is received in advance

1. When the premium is paid through cheque & cheque is dishonored

before/after happening of the contingency

2. When premium paid to an agent who is expressly prohibited under

the rules to receive the premium on account of insurer & the
premium is not received by the insurer before happening of the
event
When the premium is paid through cheque & cheque is dishonored
before/after happening of the contingency

1. Cheque is dishonored after issuing the policy- policy cancellation

may be communicated by the insurer to the insured, insurer need not
perform his part of promise (because it is an agreement without
consideration and applicability of section 64 VB)
Oriental Insurance Company v. Inderjit Kaur (1998) 1 SCC 371
Facts/Claim/Contention Timeline
Bus met with an accident- collided with 19th April, 1990
truck- truck driver died
Policy of insurance was issued by the 30th November, 1989
appellant
The premium for the policy was paid by
cheque-dishonored. Letter sent by the 23rd January, 1990
appellant
The premium was paid in cash 2nd May, 1990
The widow of truck driver filed the claim petition

The appellant denied the claim asserting that

under the terms of Section 64-VB of the
Insurance Act, 1938, no risk can assumed by an
insurer unless the premium thereon had been
received in advance.
Section 146, MV Act 1988- Insurance against third party risks
compulsory

Sect 147(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.''
Section 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 (1) of section 147 (being a
liability covered by the terms of the policy) (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
judgment
• The appellant was not absolved of its obligations to third parties under the policy
because it did not receive the premium. Its remedies in this behalf lay against the
insured (By reason of the provisions of Section 147(5) and 149(1) of the Motor
Vehicles Act )

• It must also be noted that is was the appellant itself who was responsible for its
predicament. It had issued the policy of insurance upon receipt only of a cheque
towards the premium. The public interest that a policy of insurance serves must,
clearly, prevail over the interest of the appellant.
United India Insurance Co. Ltd. v. Laxmamma, (2012) 5 SCC 234

Ss. 149, 146 and 147 - Insurer's liability against third-party risk - Extent of, when
cheque issued for payment of premium was dishonored and subsequent to the
accident, insurer cancelled policy of insurance - Held, in such circumstances,
statutory liability of insurer to indemnify third parties which policy covered subsists
and insurer has to satisfy award of compensation unless policy of insurance was
cancelled by insurer and intimation of such cancellation had reached insured
before the accident
National Insurance Company v. Seema Malhotra (2001) 1 SCR 1131

• Is the insurer liable is to honor the contract of insurance in case of

dishonor of cheque?

• There is no dispute that the insurer is liable as against third parties

because it is covered by the statutory provisions contained in the
Motor vehicles Act 1988

• The liability of insurer when the claim is made by insured

himself/legal heirs????
• When the insured fails to pay the premium promised, or when the cheque issued
by him towards the premium is returned dishonored by the bank concerned the
insurer need not perform his part of the promise.

• Under Section 25 of the Contract Act an agreement made without consideration

is void.

• However, if the insured makes up the premium even after the cheque was
dishonored but before the date of accident it would be a different case as
payment of consideration can be treated as paid in the order in which the nature
of transaction required it.
Harshad J Shah v. LIC of India (1997) 3 SCC 151

• SC declined to invoke the apparent authority of the agent to bind

principal as provided under s.237 of the Contract Act & applied the
express clause stipulated in the statutory rules that agent were not
authorised to collect money and accept any risk on behalf of the
insurer
Proposal form containing blanks: Effect?

• If the proposal form is not completely filled & there are blanks in it, the
presumption would be that the answers were in negative.

• If such negative answers were later found false, that would amount to
suppression of material facts
( Roberts v. Avon Insurance Co. Ltd. (1956)2 Lloyds Rep 240)

• A blank form was accepted by the insurance company ( only 6 out 16 questions
answered)- conclusion of concealment of fact cannot be drawn
( United India Assurance Co. Ltd. v. Gurdeep Singh Oberoi 1999 2 CPR NC)
Proposal form filled by the agent: Effect?

• The court observed that its shall be presumed that the proposer had
read and understood the questions & declaration before answering
and signing the proposal form

• The agent filling the form was not filling it as agent of the insurance
company- instead acting as the agent of the proposer

(Bigger v. Rock life Insurance Company (1902) 1 KB 516)

(Maniluxmi Patel v. Hindustan Co-operative Insurance Society Ltd. AIR
1962 Cal 625)
 Cover note
• Well established practice to send cover-notes even prior to completion of proper
proposal/policy is in preparation for delivery

• Temporary and limited agreement ( usually 60 days)

• Insurer must issue policy of insurance before the date of expiry of cover note

• In case of MV insurance- insurer requires insurance protection immediately

• Any claim arising during currency of the cover note will be determined by
reference to the terms of cover note and not the terms of subsequent policy