UNIT- 5- Marine Insurance

The oldest form of insurance business. It is a device to secure protection from loss or
damage to property while in shipment. It covers loss or damage to vessels or to
cargo or passengers during transportation on the high seas.
Marine Insurance consists in insurance of property against losses due to marine
perils, that is perils consequent on or incidental to the navigation of the sea.

A HISTORY: Marine Insurance is the oldest form of Insurance; it originated in 1347

in the form of Bottomry and was legally regulated in 1369. Under bottomry policy
the ship is protected from financial loss of his ship was destroyed. It had its origin in
Roman and Greek Time and was developed in England in late 1600’s when England
became an important port of Trade. Lloyd’s Coffee House in England was where the
standardization of clauses of took place and laid the foundation of Maritime
Insurance Market and giving it a legal identity. With globalization and liberalization
in today’s time and movement of goods across nations, the importance of Marine
Insurance has increased manifold. It provides protection to the various members and
intermediaries involved in export and import of goods. The Marine Insurance in
India is regulated by Marine Insurance Act, 1963 which is based on Marine
Insurance Act, 1906 of United Kingdom.

B.-Definition:
A contract of Marine Insurance can be defined as a contract whereby one party for
an agreed consideration, undertakes to indemnify the other against loss arising from
certain perils and sea risks to which a shipment merchandised and other interests in
a marine adventure may be exposed during a certain voyage or certain period of
time.

According to Section 3, Marine Insurance Act,1963, ‘a contract of marine insurance

is a contract whereby the insurer undertakes to indemnify the assured in the
losses incidental to a maritime adventure.’

Marine Insurance consists in insurance of property against losses due to marine

perils. It does not protect the ship or cargo rather what is really insured is the risk of
adventure, that is, the pecuniary interest of the assured in the subject matter in or in
respect of the property exposed to the peril and not the subject matter itself.

C Subject Matter of Marine Insurance: (Classification)

The statute states that every lawful marine adventure may be the subject matter of a
contract of marine insurance. Thus ship being used for smuggling or for piracy
cannot be the subject matter of a contract of marine insurance as it is not a lawful
adventure. The insurance of property in marine insurance may be divided into 4
broad categories;
(A)  Hull - Hull or vessel is a valuable asset in the voyage which carries cargo from
one destination to another. Hull insurance refers to the insurance of the actual ship
or vessel and its machinery, as it moves from one port to other. These policies are
normally taken on an annual basis and cover all perils of the sea.
(B)  Cargo- Cargo insurance covers “goods carried in a ship” or “merchandise
carried by the ship”. When the goods are or cargo to be carried from the port of
departure to the port of destination forms the subject matter of insurance, it is called
cargo insurance
(C)  Freight- The term ‘freight’, means payment received for the transportation of
goods. The freight interest is owned by the person who is operating the vessel.
Generally, the ship-owner and the freight receiver are one and the same person.
Freight may be paid either in advance or on the arrival of the goods at the port of
destination. If the freight is paid in advance, and the goods are lost, the freight
receiver does not lose anything but the cargo owner will lose it. Hence the cargo-
owners usually insure it along with the goods. If the freight is to be paid on the port
of destination, then it becomes payable only if the goods reach the port of
destination, in case they fail to reach the destination on account of being lost in the
way or due to any marine perils, the shipping company or the freight receiver loses
freight, in order to protect itself from such a loss, the freight receiver purchases a
marine insurance policy known as freight insurance.
(D) Liability- This is the liability of the owner of ship to a third party by reason of
marine perils. This may include liability hazards such as collision or running down.
For example: if a ship collides with another ship in its voyage, the owner of the ship
shall be liable to the owner of other ship (third party).
By obtaining an insurance policy, such a risk can be transferred to the marine insurer
and this is known as liability insurance.

D ESSENTIALS OF MARINE INSURANCE CONTRACT

The following are the essential elements of marine insurance contract;

(1) Essentials of a valid contract

Marine Insurance is a contract and therefore it must satisfy the essential elements of
a valid contract as provided under Indian Contract Act,1872, such as proposal and
its acceptance, competency to contract, free consent, consideration, legality of object,
enforceability etc. In the absence of these essentials, the contract of marine insurance
becomes void.

(a) Proposal :
The broker will prepare a slip upon receipt of instructions to insure from ship
owner, merchant or other proposers. The original slip is accompanied with other
material information which the broker deems necessary for the purpose. The brokers
are expert and well versed in marine insurance law and practice.
(b) Acceptance :
The original slip is presented to the Lloyd’s Underwriters or other insurers or to the
Lead of the insures, who initial the slip and the proposal is formally accepted. But
the contract cannot be legally enforced until a policy is issued. The slip is evidence
that the underwriter has accepted insurance and that he has agreed subsequently to
sign a policy on the terms and conditions indicated on the slip. If the underwriter
should refuse to issue or sign a policy, he could not legally be forced to do so.
(c) Consideration:
The premium is determined on assessment of the proposal and is paid at the time of
the contract. The premium is called consideration to the contract.
(d) Issue of Policy:
Having effected the insurance, the broker will now send his client a cover note
advising the terms and conditions, on which the- insurance has been placed. The
broker’s cover note is merely an insurance memorandum and naturally has no value
in enforcing the contract with the underwrites.
The policy is prepared, stamped and signed without delay and it will be the legal
evidence of the contract. However, after issue of the policy the court has power to
order the rectification of the policy to express the intention of the parties to the
contract as evidenced by the terms of the slip.

(2) Insurable Interest

Section 7, 8 and 9 to 16 provide for insurable interest A contract of marine insurance
made without insurable interest has been expressly declared by Section 6 of the
Marine Insurance Act to be by way of wagering and void. This section says that a
contract of marine insurance shall be deemed to be a wager;
 Where the insured does not have an insurable interest in the subject matter of
insurance and the contract is entered into with no expectation of acquiring
such an interest or,
 Where the policy is made “interest or no interest”, or “without further proof
of interest than the policy itself”, or “without benefit of salvage to the insurer”
or subject to any other like term.
The definition of the term insurable interest is given in Section 7 of the Act. The
section says that every person who is interested in a marine adventure is deemed to
have insurable interest.
Since marine insurance is frequently affected before the commercial transactions to
which they apply are formally completed it is not essential for the assured to have an
insurable interest at the time of effecting insurance, though he should have an
expectation of acquiring such an interest. If he fails to acquire insurable interest in
due course, he does not become entitled to indemnification.
Exceptions :
There are two exceptions of the rule in marine insurance.
1. Lost or Not Lost :
A person can also purchase policy in the subject-matter in which it was known
whether the matters were lost not lost. In such cues the assured and the underwriter
are ignorant about the safety or otherwise of the goods and complete reliance was
placed on the principle of Good Faith.
The policy is terminated if anyone of the two parties was aware of the fact of loss. In
this case, therefore, the insurable interest may not be present at the time of contract
because the subject-matter would have been lost.
2. P.P.I. Policies :
The subject-matter can be insured in the usual manner by P.P.I. (Policy Proof of
Interest), /. e., interest proof policies. It means that in the event of claim
underwriters may dispense with all proof of insurable interest.
In this case if the underwriter does not pay the claims, it cannot be enforced in any
court of law because P.P.I, policies are equally void and unenforceable. But the
underwriters are generally adhering on the terms and pay the amount of claim.
The insurable interest in marine insurance can be of the following forms:
I. According to Ownership
The owner has insurable interest up to the full value of the subject-matter. The
owners are of different types according to the subject-matter.
(a) In Case of Ships :
The ship-owner or any person who has purchased it on charter-basis can insure the
ship up to its full price.
(b) In Case of Cargo:
The cargo-owner can purchase policy up to the full price of the cargo. If he has paid
the freight in advance, he can take the policy for the full price of the goods plus
amount of freight plus the expense of insurance.
(c) In Case of Freight:
The receiver of the freight can insure up to the amount of freight to be received by
him.
II. Insurable Interest in Re-insurance ;
The underwriter under a contract of marine insurance has an insurable interest in his
risk, and may reinsure in respect of it.
III. Insurable Interest in other Cases :
In this case all those underwriters are included who have insurable interest in the
salary and own liabilities. For example, the master or any member of the crew of a
ship has insurable interest in respect of his wages. The lender of money on bottom or
respondent a has insurable interest in respect of the loan.

Section 8: When interest should exist

The insurable interest should exist at the time of loss. It is not necessary that it
should exist at the time when the policy is affected. The following parties may be
said to have insurable interest:

 Owner of the ship

 Buyer of the ship becomes interested only when the property has been
passed to him.
 Cargo-owner can insure cargo and freight if paid in advance.
  Shipping company entitled to receive freight on the arrival of goods at
destination.
 Insurer under a contract of marine insurance has an insurable interest in his
risk and may re-insure it.
 The master or any member of the crew of a ship.
 Lenders of money on Bottomry bond and Respondentia bond.
 The mortgager has an insurable interest in the full value of the subject-
matter.
 A trustee or bailee in the property entrusted to his care.

(3) Utmost good faith

Marine Insurance contracts are also based on utmost good faith, when this is not
observed by either of the parties; the contract can be avoided by the other. According
to Section 19,20, 21 and 22 of the Marine Insurance Act, 1963. Some important facts
about utmost good faith are s under:
  It is the prime responsibility of the assured to observe utmost good faith. He
must disclose all material facts before the insurer of which he has full
knowledge.
 Even in the case of affecting the marine insurance through the agent of the
assured, all the material facts must be disclosed in good faith.
 It is expected from every assured or his agent that he has full knowledge of
important matters as one would have in the ordinary course of business.
 The statement may be of fact or of trust, but it should be expressed in utmost
good faith.
 If the assured or his agent expresses any untrue statement in connection with
the insurance contract, the insurer has the right to declare the contract as void.

The doctrine of caveat emptor (let the buyer beware) applies to commercial
contracts, but insurance contracts are based upon the legal principle of uberrimae
fides (utmost good faith). If this is not observed by either of the parties, the contract
can be avoided by the other party. 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 duty of the disclosure of all material facts falls even
more heavily on the broker. He must disclose every material fact which the assured
ought to disclose and also every material fact which he knows.
Exception :
In the following circumstances, the doctrine of good faith may not be adhered to:
(i) Facts of common knowledge.
(ii) Facts which are known should be known to the insurer.
(iii) Facts which are not required by the insurers.
(iv) Facts which the insurer ought reasonably to have in furred from the details
given to him.
(v) Facts of public knowledge.

(4) Indemnity
A contract of marine insurance is a contract of indemnity. The basis of indemnity is
always a cash basis as underwriters cannot replace the lost ship and cargoes and the
basis of indemnification is the value of the subject matter. If the value of the subject
matter is determined at the time of taking policy, it is called insured value. When the
loss arises, the indemnity will be measured in the proportion that the assured sum
bears to the insured value.

Extent of Liability of Insurer for loss: In case of an unvalued policy, the full extent
of insurable value can be recovered by the assured and in the case of valued policy,
that of the value fixed by the policy. If there are more than one insurers, they are
liable to contribute such proportion of the measure of indemnity as the amount of
When there is total loss of subject matter, in case of valued policy, the measure of
indemnity is the sum fixed by the policy and in case of unvalued policy, the
insurable value of the subject matter insured can be recovered.

Exceptions:
1. Profits allowed: The doctrine of indemnity says that the market price of the loss
should be indemnified and no profit should be permitted, but in marine a certain
margin of anticipated profit is also permitted. Such profit is also treated as loss
and hence payable under the policy.
2. Insured value: The doctrine of indemnity is based on the insurable value
whereas marine insurance is mostly based on insured value.
The subscription bears to the value fixed by the policy in case of valued policy or to
the insurable value in case of unvalued policy.

(5) Doctrine of Subrogation

Section 79 of the Act explains doctrine of subrogation. The aim of doctrine of
subrogation is that the insured should not get more than the actual loss or damage.
After the payment of the loss, the insurer gets the right to receive compensation or
any sum from the third party from whom the assured is legally liable to get the
amount of compensation.
The main characteristics of subrogation are as follows:
1. The insurer subrogates all the rights, remedies and liability of the insured after
payment of compensation.
2. The insurer has right to pay the amount of loss after reducing the sum received
by
the insured from third party. But in marine insurance, the right of subrogation arises
only after payment has been made.
3. After indemnification, the insurer gets all rights of the insured towards the third
parties, but insurer cannot file suit in his own name. Therefore, the insured must
assist the insurer for receiving money from third party. If the insured fails in filing
suit against third party, the insurer can receive the amount of compensation from the
insured.

(6) Contribution
The principle of contribution applies to marine insurance also. The Marine Insurance
Act provides that, where the assured is over assured by double insurance, each
insurer is bound as between himself and other insurers to contribute rateably to the
loss in proportion to the amount for which he is liable under the contract. If insurer
pays more than his proportion of the loss, he is entitled to maintain a suit for
contribution against other insurers and is entitled to the like remedies as a surety
who has paid more than his proportion of the debt.

(7) Proximate cause

According to Section 55 (1) Marine Insurance Act,’ Subject to the provisions of the
Act and unless the policy otherwise provides the insurer is liable for any loss
proximately caused by a peril insured against, but subject to as aforesaid he is not
liable for any loss which is not proximately caused by a peril insured against.’

 The insurer is not liable for any loss attributable to the wilful misconduct of
the assured, unless the policy otherwise provides , but he is liable for any loss
proximately caused by a peril insured against.
 The insurer will not be liable for any loss caused due to delay unless
otherwise provided.
 The insurer is not liable for any wear and tear, ordinary leakage and breakage
or for any loss proximately caused by rats or vermin, or for any injury to the
machinery not proximately caused by maritime perils.

The insurer is liable for any loss proximately caused by a peril insured against but is
not liable for any loss which is not proximately caused by a peril insured against
given above. Thus the proximate cause is the actual cause of the loss. There must be
direct and non-intervening cause. The insurer will be liable for any loss proximately
caused by peril insured against.

*******
(write a short note of warranties in essentials of insurance contract)
WARRANTIES

A warranty is that by which the assured undertakes that some particular thing shall
or shall not be done, or that some conditions shall be fulfilled or whereby he affirms
or negatives the existence of a particular state of facts.
Warranties are the statements according to which the insured person promises to do
or not to do a particular thing or to fulfil or not to fulfil a certain condition. It is not
merely a condition but statement of fact.
Warranties are more vigorously insisted upon than the conditions because the
contract comes to an end if a warranty is broken whether the warranty was material
or not. In case of condition or representation the contract comes to end only when
these were material or important.

Further, in insurance law the warranty may be either a condition precedent tor
condition subsequent. The marine insurance act defines it to mean 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 exitance of a particular state of facts. In short,
the term warrant is used in two different senses, namely, one is in sense of a
condition to mean the breach of which gives rides to a right to avoid the contract and
secondly, to denote a mere limitation or, or an exception from, the general tenure of
the policy.
Warranties are of two types:
(1) Express Warranties, and (2) Implied Warranties.
1. Express Warranties:
Express warranties are those warranties which are expressly included or
incorporated in the policy by reference.
2. Implied Warranties :
These are not mentioned in the policy at all but are tacitly understood by the parties
to the contract and are as fully binding as express warranties.
Warranties can also be classified as (1) Affirmative, and (2) Promissory. Affirmative
warranty is the promise which insured gives to exist or not to exist certain facts.
Promissory warranty is the promise in which the insured promises that he will do or
not do a certain thing up to the period of policy. In marine insurance, implied
warranties are very important. These are:
1. Seaworthiness of Ship.
2. Legality of venture.
3. Non-deviation.
All these warranties must be literally complied with as otherwise the underwriter
may avoid all liabilities as from the date of the breach.
However, there are two exceptions to this rule when a breach of warranty does not
affect the underwriter’s liability: (1) where owing to a change of circumstances the
warranty is no longer applicable. (2) Where compliance would be unlawful owing to
the enactment of subsequent law.
1. Seaworthiness of ship :
The warranty implies that the ship should be seaworthy at the commencement of the
voyage, or if the voyage is carried out in stages at the commencement of each stage.
This warranty implies only to voyage policies, though such policies may be of ship,
cargo, freight or any other interest. There is no implied warranty of seaworthiness in
time policies.
A ship is seaworthy when the ship is suitably constructed, properly equipped,
officered and manned, sufficiently fuelled and provisioned, documented and
capable of withstanding the ordinary strain and stress of the voyage. The
seaworthiness will be clearer from the following points:
1. The standard to judge the seaworthiness is not fixed. It is a relative term and may
vary with any particular vessel at different periods of the same voyage. A ship may
be perfectly seaworthy for Trans-ocean voyage.
A ship may be suitable for summer but may not be suitable for winter. There may be
different standard for different ocean, for different cargo, for different destination
and so on.
2. Seaworthiness does not depend merely on the condition of the ship, but it includes
the suitability and adequacy of her equipment, adequacy and experience of the
officers and crew.
3. At the commencement of journey, the ship must be capable of withstanding the
ordinary strain and stress of the sea.
4. Seaworthiness also includes “Cargo-Worthiness”. It means the ship must be
reasonably fit and suitable to carry the kind of cargo insured. It should be noted that
the warranty of seaworthiness does not apply to cargo. It applies to the vessel only.
There is no warranty that the cargo should be seaworthy.
It should be noted that the ship should be seaworthy at the port of commencement
of voyage or at the different stages if voyage is to be completed in stages.
Section 41(3) of the Marine Insurance Act 1963 says that a ship is seaworthy when
she is reasonably fit in all respects to encounter the ordinary perils of the seas of the
adventure insured. The seaworthiness of a vessel includes the crew, in terms of both
numbers and competence with reference to foreseeable circumstances of voyage.

2. Legality of Venture;
This warranty implies that the adventure insured shall be lawful and that so far as
the assured can control the matter it shall be carried out in a lawful manner of the
country. Violation of foreign laws does not necessarily involve breach of the
warranty. There is no implied warranty as to the nationality of a ship. The implied
warranty of legality applies total policies, voyage or time. Marine policies cannot be
applied to protect illegal voyages or adventure. The assured can have no right to
claim a loss if the venture was illegal.
The example of illegal venture may be trading with an enemy, violating national
laws, smuggling, breach of blockade and similar ventures prohibited by law.
Illegality must not be confused with the illegal conduct of the third party e.g.,
barratry, theft, pirates, rovers. The waiver of this warranty is not permitted as it is
against public policy.

3.Supervening illegality by subsequent hostility: In the case of Geismar v Sum

Alliance of London Insurance, the court held that, a declaration of war by England
operates as an act of parliament prohibition gall trading and business intercourse
with the enemy. So, when a policy is taken on a voyage to a port and war is declared
and the destination port become an enemy port, the voyage becomes illegal and
must be abandoned.

3. Other Implied Warranties :

There are other warranties which must be complied in marine insurance.
(a) No Change in Voyage :
When the destination of voyage is changed intentionally after the beginning of the
risk, this is called change in voyage. In absence of any warranty contrary to this one,
the insurer quits his responsibility at the time of change in voyage. The time of
change of voyage is determined when there is determination or intention to change
the voyage.
(b) No Delay in Voyage :
This warranty applies only to voyage policies. There should not be delay in starting
of voyage and laziness or delay during the course of journey. This is implied
condition that venture must start within the reasonable time. Moreover, the insured
venture must be dispatched within the reasonable time. If this warranty is not
complied, the insurer may avoid the contract in absence of any legal reason.
(c) Non deviation:
The liability of the insurer ends in deviation of journey. Deviation means removal
from the common route or given path. When the ship deviates from the fixed
passage without any legal reason, the insurer quits his responsibility.
This would be immaterial that the ship returned to her original route before loss. The
insurer can quit his responsibility only when there is actual deviation and not mere
intention to deviation.
Exceptions:
There are following exceptions of delay and deviation warranties:
1. Deviation or delay is authorised according to a particular warranty of the policy.
2. When the delay or deviation was beyond the reasonable approach of the master or
crew.
3. The deviation or delay is exempted for the safety of ship or insured matter or
human lives.
4. Deviation or delay was due to barratry.

Warrants implied from an express warranty:

a. Warranty of neutrality: Section 36(1) of the Marine Insurance Act 1963 says
where insurable property, whether ship of goods, is expressly warranted neutral,
there is an implied condition that the property shall have a neutral character at
the commencement of the risk, and that so far as the assured can control the
matter, its neutral character shall be preserved during the risk. This clause deals
with the cases where the subject-matter of the policy is either a ship or goods.
The net clause deals with the cases subject-matter of the policy is a ship and it is
expressly warranted to be ‘neutral’ in with case section 36(2) says that there is an
implied condition that so far as the assured can control the matter, she shall be
properly documented.
b. Warranty of good safety: when the assured knows the condition of the subject-
matter of insurance or but for his wilful abstention form inquiry which he ought
to have made or gross negligence he would have known it is his duty to disclose
the fact under his ‘duty of disclosure’ delt with under section 18, and if he fails to
do it in spite of his knowledge, actual or constructive, the insurer can avoid the
contract.
No implied warranty: the statue make it clear the there is no implied warranty of
nationality and that the goods are seaworthy.

Case Laws:

 IN THE CASE OF PIPON V. COPE, where the ship is arrested in England for
the smuggling operations of the master with the connivance of the owner, it was
held that the insurer was not liable.
 IN THE CASE OF DOUGLAS V. SCOUGALL, the ship sailed and soon after
encountered a storm, became leaky, put back, and was found on the survey to be
materially decayed, and damage discovered which could not be fairly considered
as the effect of the storm. It was held that the ship was not seaworthy when she
sailed on the voyage insured.

Characteristics of warranty:
1. A warranty must be exactly complied with Section 35(3), which lays down that
subject to any express provision in the policy, the insurer is discharged from
liability as from the date of the breach of warranty.
2. The warranty need not be material to the risk {Section 35(3)}.
3. There is no remedy for breach.
4. No defence for breach.

Effect of breach of warranty:

A breach of warranty has the same effect as a breach of condition in other branches
of law. The assured is discharged from further liability on proof of breach of
warranty. Section 36(2) provides that it is no defence for the assured that the breach
has been remedied and the warranty complied with before loss.
IN THE CASE OF QUEBEC MARINE INSURANCE V. COMMERCIAL BANK OF
CANADA, a ship was insured for a voyage partly on inland waters and partly by
sea, from, Montreal to Halifax. She commenced the voyage from Montreal with a
defective boiler which made her unfit for voyage in salt water. This was discovered
only when she got into the sea at the end of the river. She returned to Montreal, had
it repaired and sailed again from Montreal, but was lost is a sea hurricane. The
insurers were held not liable as the ship was not seaworthy at the commencement of
the voyage, even though the breach was remedied before the loss.

Breach when excused (Section 36): Non-compliance with a warranty is excused in

the following cases;
  When, on account of change of circumstances, the warranty ceases to be applicable
to the circumstances of the contract.
  By statute, when compliance with the warranty is rendered unlawful by any
subsequent law.
  By volition, a breach of warranty may be waived by the insurer.

8. Assignment: (mention in essentials)- A marine policy is assignable unless it

contains terms expressly prohibiting assignment. It may be assigned either before or
after loss. A marine policy may be assigned by endorsement thereon or on other
customary manner. A marine policy is freely assignable unless assignment is express
prohibited. A marine policy is not an incident of sale. So, if there is intention to
assign a policy when interest passes, there must be an agreement to this effect.
Sections 53 of the Marine Insurance Act, 1963 states, Where the assured has parted
with or lost his interest in the subject-matter insured and has not, before or at time of
so doing, expressly or impliedly agreed to assign the policy, any subsequent
assignment of the policy is inoperative. ‘
Section 17 of the Act states, “Where the asserted assigns or otherwise parts with his
interest in the subject-matter insured, he does not thereby transfer to the assignee his
rights under the contracts of insurance.

Chinnaswamy Nadar v Home Insurance Company, Madras; held that where cargo
was damaged by sea water on sea becoming rough, held that insurer is liable to
indemnify cargo owner. Thus what is really insured is the risk of adventure, that is
the pecuniary interest of the assured in the subject-matter in or in respect of the
property exposed to the peril and not the subject-matter itself. (EXTRA CASE
LAW)
Kinds of Marine insurance Policies

1. Valued policy: A valued policy is one in which the agreed value of the subject
matter insured is specified in the policy and in absence of fraud such agreed
value is conclusive of the insurable value as between the insurer and the insured
whether the loss be total or partial. In the absence of fraud or misrepresentation,
the declared value of the policy is the measure of indemnity. In case of total loss
of the goods, the insurance company is required to pay the declared amount to
the insured and in case of partial losses, the liability of the insurance company is
determined on the basis of the assessment made by then officials of the partial
damaged goods.
In valuing the subject matter insured there may be just valuation or over-
valuation or under- valuation. If the valuation is just and bona fide, the
valuation is a valued policy and is deemed to be conclusive between the
parties.
If there is over-valuation, it was thought that it would become a wagering
policy because a contract of marine insurance is a contract of indemnity.
IN the case of THAMES MERSEY INSURANCE CO V. GUNFORD, it was held
that a valued policy is not a wagering policy just because the value is excessive.
In case of under-valuation, the insured is deemed to be his own insurer in
respect of uninsured balance.

2. Unvalued policy: An unvalued policy or open policy is the one in which the
value of the subject matter of insurance is not stated, but is left to be ascertained
and proved later on when the loss occurs.
The insurable value is to be ascertained as per the provisions set out in Section 18.
It is ascertained as follows;
 As regards the ship, the insurable value is the value of the ship at the
commencement of risk and it includes her output, provisions and stores, money
advanced for wages and disbursement to make the ship fit for the voyage plus
the charges of insurance on the whole.
 As to freight, the value is the gross freight at the risk of the assured including
charges of insurance.
 As regards goods and merchandise, the value is the prime cost of the property
insured plus the expenses of and incidental to shipping and the charges of
insurance.
 The residuary clause provides that in the case of any other subject-matter, the
insurable value is the amount at the risk of the assured when the policy attaches
plus charges of insurance.

3. Floating policy: These policies are taken in general terms and the particulars as
filled by subsequent declarations. Therefore, a floating policy is defined as a
policy which describes the insurance in general terms, and leaves the name of the
ship or ships and other particulars to be defined by subsequent declarations. The
subsequent declaration or declarations may be made by endorsement on the
policy, or in other customary manner. The declarations, must in the case of
goods, comprise all consignments within the terms of the policy and the value of
the goods or other property must be honestly stated. Where an assured bona fide
make an erroneous declaration or omits to make one in regard to the valuation, it
may be rectified even after loss or arrival. Unless otherwise provided, if a
declaration of value is not made until notice of loss or arrival the policy should be
treated as an unvalued policy. In the case of UNION INSURANCE SOCIETY OF
CANTON V. WILLS AND CO, a floating policy was effected on goods with a
provision that declarations of interest to be made to insurer’s agents ‘as soon as
possible’. The ship sailed on 21st August and it was destroyed by fire on 12th
September. The assured made declaration on the next day, that is, September
13th. It was held by the Privy Council that the declaration was too late and the
assured cannot recover.

4. Time policy: A time policy is defined as a policy in which the contract is to

insure the subject-matter for a definite period of time. When the contract is for
insuring a subject-matter for a definite period of time irrespective of the number
of voyages made, the policy is called a “time policy”. Where a ship is insured for
a particular time “from” a particular date “to” a particular date, the policy is
called a time policy. The period should not exceed one year though it may
contain one or several voyages. Section 27(2) says that a time policy which is
made for any time exceeding 12 months is invalid.
in the case of MERCANTILE MARINE INSURANCE CO V. TITHERINGTON,
the assured took a policy in the ordinary form with the added provision that the
ship was to be covered ‘during 30 days’ stay in her last port of discharge, and the
ship arrived on 25th May at 7 pm and was lost on 24th June at 3 pm. It was held
 that the company is liable as 30 days must be added to the 24 hours given by the
policy as the risk on ship under ordinary form of policy terminates when she has
been ‘moored for 24 hours in good safety’.
Generally, the time policy contains a “continuation clause” providing that if at
the end of the period, the ship is yet at sea, the policy will continue for a
reasonable time thereafter pro rata monthly premium till the ship arrives safely
at the port of destination.

5. Voyage policy: When the contract is to insure the subject matter at and from, or
from one place to another or others e.g. Bombay to Karachi or Calcutta to Tokyo
or Madras to London, the policy is called a “voyage policy”. The voyage insured
must be accurately described in a voyage policy i.e. the local limit of risk must be
specified. It is generally done by specifying the port where the voyage is to
commence called ‘terminus quo’ and the port where the voyage is concluded
called ‘terminus ad quem’.
It also may be noted that the policy may cover the risk ‘from a port’ or ‘at and
from a port’. If the policy is from a port, the risk starts when the ship sails from a
particular port. But, if the policy is at and from a port, it protects the subject
matter insured both while ship is at the port of departure and also from the time
of the sailing of the ship on her voyage till it reaches port of destination. This
policy is more suitable for cargo insurance.

6. Mixed Policy
A contract for both voyage and time included in the same policy is called mixed
policy. A mixed policy combines the characteristics of a time policy and a voyage
policy. For example: “From Bombay to Liverpool for six months”, or from 1st
January to 30th June, “Madras to Bombay”. These policies are also known as
“Time and Voyage Policies” and are issued for ships and steamers operating over
particular routes, or sailing between certain fixed ports.

Apart from the above, there are certain other marine insurance policies such as:
(a)  PPIPolicies
These are also called wager policies. The letters P, P and I stand for ‘Policy Proof
of Interest’ and such policies are also familiarly called ‘Interest or no interest’
policies. The subject matter can be insured in the usual manner by PPI Policy.
(b)  Single Vessel and Fleet Policy
When the owner of the vessels or ships insures his individual vessels separately,
it is called ‘Single Vessel Policy’, but when an individual or corporation insures
whole fleet of liners or steamers under one policy, it is called ‘Fleet Policy’. Fleet
literally means “number of ships, aircraft, buses, etc moving or working under
one command or ownership.

(c)  Construction Policy

This is to insure the vessel in the course of its construction from its
commencement until its trials are completed.
Change Of Voyage And Deviation.

A voyage policy contains a contract to insure the subject-matter ‘at and from’ or
‘from’ one place to another or others. Sections 44-51 of the Marine Insurance Act
1963 deal with voyage.
The voyage to be performed by a ship must be described in the policy. The ship
must follow the course mentioned in the policy or if no course is specified, it must
follow the usual and customary course, otherwise the risk will not attach. A voyage
is defined if the place where it is to commence and the place where it is to end are
specified in the policy.
Where after the commencement of the risk/voyage, the destination of the ship is
voluntarily changed from the destination contemplated by the policy, there is said to
be a change of voyage. When there is a change of voyage, the insurer is discharged
from the liability from the time the determination to change the voyage is
manifested, unless the policy otherwise provides. It is therefore of great importance
that:
 The voyage should be accurately described.
 The voyage should be properly performed and
 There should be the literal fulfilment of this condition.
If the ship sails from the port of departure, changes the route and again resumes
back to the original route, or she returns to the port of departure after sail, there is
change of voyage.
Change of voyage discharges the insurer of his liability as there is no contract to
cover the new voyage and the covered voyage under the policy is deemed to have
been abandoned unless the policy contains a clause which states that insured will be
‘held covered in the event of the voyage being changed or of any deviation at a
premium to be arranged’.
Sec 45 deals with change of voyage. Change of voyage amounts to breach of
warranty.
DELAY
It is imperative that;
 The vessel must sail from the agreed port within a reasonable time and;
 The voyage should be completed within a reasonable time; otherwise the
underwriter will not be responsible.
When the insurance policy is taken, ship must start sailing from the specified port
without unreasonable delay. If the voyage is not commenced as described in the
policy, the underwriter is discharged, not only the port of discharge be proceeded to
without delay but the venture should also be completed within reasonable time.
Hence, there should be neither unreasonable delay in commencing the adventure
nor in completing the adventure, failing which; the underwriter is discharged from
liability from the time when the delay became unreasonable.

DEVIATION
In common usage, deviation means “turning aside or away”. But in marine
insurance, deviation occurs when a vessel departs from the course of the voyage
described in the policy, or where the course is not specifically designated one, from
the customary course. In simple words, deviation means a departure or deviation
from the voyage described in the marine insurance policy. The Act provides that
there is a deviation from the voyage: (Sec 49)
 If the course of the voyage is specifically designated by the policy and that
course is departed from; or
 Where the course of voyage is not mentioned in the policy the usual and
customary course is departed from; or
 Where several ports of discharge are specified in the policy, the ship may go
to any of them, but that should be in the order designated in the policy. Any
change of the order will be a deviation. (when ship does not sail in the
geographical order)

The effect of deviation is the same. If the ship without any lawful excuse, deviates
from the voyage contemplated or mentioned by the policy the insurer is
discharged from liability as from the date of deviation and it is immaterial that
the ship may have regained its course before any loss occurs. (Sec 48)

Reardon Smith Lives Ltd V. Black Sea And Baltic General Insurance Co Ltd, a vessel
to sail from Poti in the Black Sea to Sparrow’s point in the USA sailed to Constanza
which is not on her direct geographical route, to take in oil fuel and was stranded
there. The evidence showed that about a quarter of the oil burning vessels proceeded
from the Black Sea port bunker at Constanza and so it was held that there was no
deviation.

Difference between change of voyage and deviation.

CHANGE OF VOYAGE
 The port of destination of the ship as agreed is
changed.
 The liability of the insurer comes to an end
from the time the decision to change the
voyage is take.
 The policy is void from the moment a change
of voyage is contemplated even though at the
time of loss the ship is on that part of the
course which is common to both the voyages.
DEVIATION
  In deviation, the destination of the
ship is the same as agreed, but the
course thereto is deviated from.
 Whereas in deviation, the mere
intention of deviation is immaterial.
There must be actual deviation to
discharge the insurer of the liability.
 In deviation of voyage, however,
deviation must become a fact before
the validity of policy can be
challenged.

WHEN DEVIATION OR DELAY IS EXCUSED? SEC 51

1. Where it is authorized by a Special Term in the Policy: If deviation or delay is
authorized by any special term in the policy, such deviation or delay is excused.
Usually, this authorization is in a special form by inserting a ‘Deviation clause’
or ‘Change of Voyage clause’, for which prompt notice is to be given to the
insurer and the additional premium is to be paid. This clause comes into
operation only when the vessel has commenced its described voyage and then
changed either the route or the destination.
2. Where it is caused by circumstances beyond the control of the Master or his
employer: When a vessel is blown of the track and thereby deviated from its
course off voyage it comes under this clause. In all cases, it is not necessary that it
must be by the violence of natural elements, some circumstances may compel the
master to change his course of voyage such as rough weather, storm, cyclone,
hurricane, typhoon or returning to homeport for fear of attack by pirates, or the
threat of the crew to leave the ship.
3. Where it is reasonably necessary to comply with an express or implied
warranty: If the deviation is on account of the compliance of an express warranty
or implied warranty i.e. to make the vessel seaworthy, for making repairs, or for
making the journey lawful, the contract will remain valid in spite of deviation.
4. If it is reasonably necessary for the safety of the ship or subject matter insured:
When it is necessary to deviate or to make deliberate delays for saving the ship or
cargo, the deviation is justifiable. Example: putting into port for repair of the ship
which has been severely hit by violent weather.
5. Where it is for the purpose of saving human life or aiding a ship in distress
where human life is in danger: Example: for providing food supplies to the
other ship, where these have exhausted or to supply floating object to keep the
victims of the other ship afloat in the water.
6. Where it is reasonably necessary for the purpose of obtaining medical or
surgical aid for any person on board the ship: Such as obtaining lifesaving
 drugs for patients or emergency help to the victim of heart-attack etc., deviation
or delay is excused purely on grounds of humanity.
7. If it is due to the Barratrous conduct of the Master or crew if Barratry be one of
the perils insured against: When the cause excusing deviation or delay ceases to
operate, the ship must resume her course and prosecute her voyage with
reasonable despatch. There should be no further or unnecessary delays in
resuming the voyage after a justifiable deviation or excusable deviation has taken
place otherwise it would amount to deviation which would not be excused i.e.
the contract will not remain valid in spite of excusable deviation.
Sec 50- Delay of Voyage- The voyage must commence & reach the destination
within a reasonable time. Any loss caused by delay is not covered under the policy
even though it shall be as a result of an insured peril.
Perils of the Sea (Read)

Peril of the sea may be defined to cover everything that happens to the ship in the
course of a voyage by the immediate act of God without the intervention of human
agency. It refers only to fortuitous accidents or casualties not attributable to the free
will and desire of a human being. Even if acts of God it does not include the natural
and ordinary action of the winds and waves.
It may be noted that the expression is ‘perils of the sea’ but not ‘perils on the seas’.
All the ‘perils of the sea’ are maritime perils but all maritime perils are not ‘perils of
the sea’. Maritime perils include peril of the seas, fire, war perils, pirates, rovers,
thieves, captures, seizures, restraints, detainments of princes and peoples, jettisons,
barratry and any other peril either of the like kind, or which may be designed by the
policy.
The term peril or accident involves the idea of something unexpected and
unforeseen and Lord Halsbury expressed this in HAMILTON V. PENDROFF,
where the cargo was damaged by sea water which entered through a hole caused by
the rats in the galvanizing pipe. The House of Lords held that the loss was caused by
the perils of the sea. The burden of proving a loss by perils of the sea lies on the
insured.
Examples of perils of the sea: Collision, sinking of vessel when it strikes upon a
sunken rock, shoals and heavy storms.

Losses not regarded as Perils of the sea:

(a) Wear and Tear- This term is used to denote the natural decay and deterioration,
which invariably happens to a ship or any portion of a ship due to the action of the
winds and waves. In the case of a ship it means decay of the body of the ship and its
appurtenances e.g. splitting of a sail, breakage or anchor, rope or cable and in cases
of cargo of perishable nature like fruits, hides etc, their decay or deterioration on
account of their natural qualities.
(b) Springing a leak- If a ship develops a leak, it is not a peril of the sea unless it is
due to an accident.
(c) Breakage of Goods- If the goods are broken or damaged during the voyage due
to movement of the ship it is not a peril of the sea, but if it is due to the violent action
of waves and consequent laboring of the ship, it is a peril of the sea.
(d) Inherent Vice- The insurer will not be liable for any loss caused due to the defect
in the goods, e.g. if the fruits become rotten or wine become bad due to inherent
decomposition.
(e)  Death of Animals etc. due to the Nature’s cause- It may be noted that death of
animals etc; due to natural causes is not a peril of the sea.
(f)  Loss by rats and vermin- If loss is caused by rats, etc., it will not be deemed to be
a peril of the sea.

Other perils insured in a Marine Policy:

(a)  Loss by fire – If fire is caused on board the ship and if the goods or ship is
damaged, the
insurance company will be liable, but it will not include a loss caused by the
explosion of steam, nor a fire caused by the inherent vice of the subject-matter
insured. It also covers a fire voluntarily caused in order to avoid a capture by an
enemy.
(b)  Loss by capture, seizure or taking at sea
(c)  Loss by arrest and detention: Loss due to any restraint by political or executive
acts generally called “restraint of Princes, Kings, etc” will be included under the
marine policy; but does not include loss by a mob in a riot, or arrest by judicial
process i.e. order of the government prohibiting a ship or goods from a port.
(d)  War risks and FCS clause – Under a marine policy risks due to war are
included. The standard form of English Marine Policy covers these risks and also
risks of capture and seizure, and other similar risks. Generally we find the FCS
clause i.e. Free from capture and seizure clauses under which loss due to hostilities
and war-like operations will be excluded from the ordinary policy, if the parties
wish to include these risks, this is normally done by deleting the usual FCS clause
and attach the then current war clause.
(e)  Loss caused by Pirates and Thieves
(f)  Barratry – Barratry includes every wrongful act wilfully committed by the master
of crew in contravention of their duties, thereby causing prejudice to the owner of
charterer and is covered by the policy. It is a fraudulent or criminal against the
owners of the ship or goods by the mariner.
Examples: Wrongfully scuttling a ship, intentionally running her on shore, or setting
fire to her or cargo, or both.
(g)  Stranded – Where the ship has stranded, the insurer is liable for the expected
losses although the loss is not attributable to the stranding, provided, that when the
stranding takes place the risk had attached and, if the policy be on goods that the
damaged goods are on board.
(h)  Jettison- it is the loss sustained by the owner of the cargo thrown overboard
which generally falls under general average loss, that is, the owner of the ship and
the owners of the rest of the cargo proportionately reimburse the loss.
(i)  Men of war- The term refers to armed ships belonging to the country’s navy for
example, the vessels authorized and maintained by nations for the purpose of
defence or attack in the event of hostilities. The insurer is liable for any damage to
the goods on board arising out of collision against men of war enemies.
(j)  Enemies- Enemy literally means one who tries or wishes to harm or attack OR
one who has ill feeling or hatred towards another. It includes all damage or loss
sustained owing in the hostile acts of an enemy.

Types of Marine Losses

If the loss takes place on account of any of the perils insured against with the insurer,
the insurer will be liable for it and shall have to make good the losses to the assured.
If the peril is insured, the insurer will indemnify the assured, otherwise not. The
doctrine of causa-proxima is to be applied while calculating the amount of loss. It
means for payment of losses, the real or proximate cause is to be taken into account.
If the proximate cause is insured, the insurer will pay, otherwise not.

Marine losses can be divided into two main parts containing several subparts;
A. Total loss;
1. Actual total loss
2. Constructive total loss
B. Partial loss/ Average loss;
1. Particular average losses
2. General average losses
3. Particular charges
4. Salvage charges

A 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.

1. 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 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.

2. Constructive total loss

Where the subject-matter is not actually lost in the above manner but is reasonably
abandoned when its actual total loss 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.
Difference between actual and constructive total loss
The actual total loss is related with the physical impossibility and the constructive
total loss is related with the commercial impossibility.
For example, If the hides are so damaged that it is impossible to prevent the hides
from the destruction and it may become a mass of putrefied matter, die case is of an
actual total loss. But if it was possible to restore the hides to their original condition,
though die cost of so doing would exceed their value at the destination, the damaged
hides can be claimed as constructive total loss because the completion of the
adventure has become commercially impossible.

Salvage loss
Where actual total loss occurred, and the 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 the 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’.

B Partial/ Average loss

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.

1. Particular average loss

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 the persons directly affected. The particular
average loss must fulfil the following conditions:
1. The particular average loss is a partial loss or damage to any particular interest
caused to that 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 the 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.

The particular average on cargo

The particular average loss may be either the damage or depreciation of a particular
interest or a total loss of its part.
If the property is insured under one value for the whole and is all the same kind,
quality or description, a total loss of part will be recovered as a particular average
loss. In the case where goods are delivered in a damaged condition or where the
value is depreciated, the resulting particular average loss will be adjusted upon the
basis of comparison between the gross sound value and damaged value.

The process of valuation is as follows:

1. The gross sound value of the goods damaged is found out. This is the value for
which the goods would have been sold if the goods had reached the port of
destination in sound condition.
2. After calculating the above value, the gross damaged value of the goods
damaged or depreciated is found out on the basis of market price at that time.
3. Deduct the gross damaged value from the gross sound value. The difference is
the measure of the actual damage or depreciation.
4. The ratio of the damage or depreciation is calculated by dividing the amount of
damage or depreciation by the gross sound value.
5. Apply the above ratio to the value (insured or insurable value as the case may be)
of the damaged or depreciated goods which will give the amount of particular
average loss.
6. Of the amount thus arrived at, the insurer is liable for that proportion which his
sum insured bears to the value (insured or insurable).

2. General average Loss

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 imperilled 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 imperilled. 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 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.

Particular charges
Where the policy contains a “sue and labour” clause, the engagement thereby
entered into is deemed to be supplementary to the contract of insurance and the
assured may recover from the insurer any expenses properly incurred pursuant to
the clause. The clause requires the insurers to pay any expenses properly incurred by
the assured or his agents in preventing or minimizing loss or damage to the subject-
matter by an insured peril. The essential features of the clause are as below:
The expenses must be incurred for the benefit of the subject matter insured. The
expenses incurred for the common benefit will be a part of the general average.
The expenses must be reasonable and be incurred by “the assured, his factors, his
servants or assigns” and this provision effectively excludes salvage charges.
They are recoverable only when incurred to avert or minimize a loss from a peril
covered by the policy.
 UNIT 1

Insurance? Elements of contract of insurance. Principles.

The aim of all insurance is to protect the owner from a variety of risks which he
anticipates. He who seeks this protection is called the assured or insured and the
other person who takes the risk by undertaking to protect the other from loss is
called the underwriter or insurer and he does this for a small consideration call
premium.

The fundamental function of insurance is to shift the loss suffered by a sole

individual to a willing and a capable professional risk-bearer in consideration of a
comparatively small contribution called premium. From the viewpoint of an
economist, insurance is a process whereby the risk of financial loss arising from
death or disability of person or damage, deterioration, destruction or loss of
property owing to perils to which they are exposed, is assumed by another.

A contract of insurance is a contract either to indemnify a person against a loss

which may arise on the happening of an even or to pay a sum of money on the
happening of some or any event for an agreed consideration. To put in in other
words it is a contract under which one party undertakes to pay to another person a
sum of money or its equivalent on the happening of a specified event. Under such a
contract one party agrees to take the risk of another person’s life, property or liability
in consideration of certain comparatively small periodical payments. The person to
be paid or indemnified is called the insurer or assured, the person who undertakes
to indemnify or pay money is called the insurer or assurer or underwriter. The
consideration received in the form of periodical payments is called the premium and
the document containing the contract is called the insurance policy.

The essential elements of a contract of insurance are:

1. There must be a contract between parties who are called the ‘insurer’ and the
‘insured’.
2. The contract must be that the insurer undertakes to protect the insured from any
loss or damage to be insured on the happening of the event.
3. In consideration for the above, the assured undertakes to make the insurer a
periodical payment of a sum of money called premium.
4. The contact must be in writing and the document is call the insurance policy.

Basic principles of insurance:

Though there exist different kinds of insurances which cover different subject
matters and different kinds of risk, there are certain general principles applicable to
all forms of insurance. These general principles serve as a guide to the purpose of the
insurance contracts in their diversified forms. The basic principles of insurance are:
1. Existence of risk: It is vital to every contract of insurance that the subject matter
should be exposed to the contingency of loss or risk. Risk involves the happening
of uncertain events adverse to the interest of the assured. In marine insurance the
ship or cargo is exposed to the loss by perils of the sea. In fire insurance the risk is
in the destruction of the property by fire. In life insurance, the risk is in the death
of the assured, though a certainty, but uncertain as to the time of its happening.
In an abstract sense risk may be defined as the change of loss. It can either be
uncertain as to the outcome of some event or events, or loss as a result of at least
one possible outcome.
2. Principle of indemnity: insurance is essentially a contract of indemnity. All the
claims of the assured will be adjusted only with reference to the actual loss
sustained by him. Thus, it is implied in every contract of insurance that the
assured in a case of loss against which the policy has the actual loss, is to prevent
fraud on the part of the assured. It checks the temptation to gain by unfair means
and wilful causing of loss. However, the factual basis of the principle of
indemnity is not the prevention of crime or consideration of public policy but it
derives from the inherent nature of bargain.
3. Difference between the contract of insurance and wager agreement: the basic
principle of indemnity on which the greater part of law of insurance is based,
negatives any treatment of insurance on part with wagering contracts. A
 wagering contract is made with a view to secure profits. The profitability of the
happening of an event is comparatively irrelevant to the interest of the parties
except for the change of a gain. On the other hand, a contract of insurance is
made with a view to compensate for a loss that may occur due the happening an
uncertain event.
4. Principle of insurable interest: the test for a valid insurance contract is the
existence of the insurable interest. The insurable interest is nothing but an interest
of such nature that the occurrence of the event insured against would cause
financial loss to the insured and such an interest which can be or is protected by a
contract to insurance. The interest is considered as a form of property in the
contemplation of law.
5. Principle of utmost good faith: A contract of insurance is based on the legal
maxim ‘the utmost good faith’. The observance of the utmost good faith by the
parties is vital to a contract of insurance. Insurance is also called as uberrimae
fidei contract because the parties are required to confirm to a higher degree of
good faint than in general law of contract.

6. Subrogation- This principle says that once the compensation has been paid, the
right of ownership of the property will shift from the insured to the insurer. So
the insured will not be able to make a profit from the damaged property or sell it.
Subrogation means that one party stands in for another. In the insurance context,
subrogation will arise if you are injured by a negligent third party, and your
insurance company reimburses you for your damages. Under the principle of
subrogation, your insurance company can stand in your shoes and recover the
pay-out from the negligent party. The goal of this principle is to encourage
responsibility and accountability by holding negligent parties responsible for
injuries they cause.

7. Contribution- This principle applies if there are more than one insurers. In such a
case, the insurer can ask the other insurers to contribute their share of the
compensation. If the insured claims full insurance from one insurer he losses his
right to claim any amount from the other insurers.  For example, imagine that
you own a truck that is insured by both Company A and Company B. If another
driver hits your truck and it will cost you $5,000 to fix it, you can submit your
claim to Company A, Company B, or to both companies. If Company A
compensates you fully, then it can claim a proportionate contribution from
Company B. However, if both companies compensate you fully, you can't keep
the full amount and turn a profit, because this would amount to an unfair
windfall.

8. Proximate Cause- This principle states that the property is insured only against
the incidents that are mentioned in the policy. In case the loss is due to more than
 one such peril, the one that is most effective in causing the damage is the cause to
be considered. The principle of proximate cause, or nearest cause, comes into
play when more than one event or bad actor causes an accident or injury. An
example would be if two separate landowners carelessly burn piles of leaves, and
the fires eventually join together and burn down your house. The insurance
principle of proximate cause dictates that nearest or closest cause should be taken
into consideration to decide the liability.

9. Loss Minimization- As the owner of an insurance policy, you have an obligation

to take necessary steps to minimize the loss of your insured property. The law
doesn't allow you to be negligent or irresponsible just because you know you're
insured. For example, if a fire breaks out in your kitchen, you have an obligation
to take reasonable steps to put it out, like using a fire extinguisher or calling the
fire department. You can't just stand back and allow the fire to burn down your
house because you know that insurance will pay for it.

********

CONTRACT OF INSURANCE. ITS NATURE AND ESSENTIAL ELEMENTS.

A contract of insurance is a contract either to indemnify a person against a loss

which may arise on the happening of an event or to pay a sum of money on the
happening of some or any event for an agreed consideration. Under such a contract,
one party agrees to take the risk of another person’s life, property or liability in
consideration of small periodic payments. The person to be paid or indemnified is
called the insurer; the consideration received in form of periodic payments is called
the premium and the document containing the contract is called the insurance
policy.

According to Justice Channell, insurance contract is defined as “A contract whereby

one person called the insurer, undertakes in return for the agreed consideration
called premium, to pay another person called the insured, a sum of money or its
equivalent on specified event”.

In Medical Defence Union Ltd v. Department of Trade, some medical and dental
practitioners formed the ‘Medical Defence Union’ which was to conduct legal
proceedings on behalf of its members, indemnifying members against claims for
damages and costs and giving advice to members on various matters and providing
educational guidance. Members had the right to request for the Unions help. The
members in return had to pay an appropriate annual subscription for their class of
membership. The Department of Trade sought a declaration that the Union was
doing insurance business under the general law and therefore within the 1974 Act.
The union sought a declaration that they did not carry on any class of insurance
business.
The court held that on the occurrence of some event, there had to be a right to
receive money or money’s worth and where the entitlement was merely to some
benefit other than money or money’s worth, the contract was not one of insurance,
and so the union was not an insurance company.

NATURE OF INSURANCE CONTRACT

A contract of insurance is one in which one person agrees to take risk of another
person’s life, limb or property. In this sense, there are many different views about
the nature of contract of which the following are predominant:

(a) Insurance contract is “Aleatory” Contract- It is commonly said that an insurance

contract is an aleatory contract i.e. contracts which is based upon fate or chance.
Lord Mansfield said that there is no doubt and in reality, the insurance contract
whatever may be the type is a ‘contract of speculation’. Aleatory is a French word
which means one in which the equivalent consists in chances of gain or loss.
Example: 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 there is
speculation and so it is called an ‘Aleatory contract’.

(b) Insurance contract is a contract of utmost good faith. - A contract of insurance is

a contract of uberrimae fides and there must be complete good faith on the part of
the assured. The assured is under full obligation to make full disclosure of material
facts which may be relevant to the insurer while deciding whether proposal must be
accepted or not.

(c) Insurance contract is a contract of indemnity. -Indemnity is the governing

principle of the law of insurance. Indian law regards all insurance contracts as
contingent contract under section 31 of the Indian Contract Act, but the principle of
indemnity applies to all insurance contract except life, personal and sickness
insurance. The very purpose of indemnity is to restore the insured to the same
financial position on happening of loss as he enjoyed immediately prior to loss or
damage.
Under English law general insurance, i.e. marine, fire etc are contracts of indemnity
and life insurance is contingent contract.

ESSENTIAL ELEMENTS OF INSURANCE CONTRACT

A contract of insurance, like any other contract, must fulfil the following essential
requirements of a valid contract as laid down under section 10 of the Indian Contract
Act:

 Agreement: Insurance is a contract between the insurer and the insured. Like every
other contract, a contract of insurance is also concluded through proposal and its
acceptance between the insurer and the insured. Mere mental assent to an offer does
not conclude a contract. The offeror may, however, indicate the mode of
communication acceptance of his proposal. Acceptance will only be completed when
it is communicated to the offeror.

General Assurance Society v Chandmull Jain, where it was observed that contract is
formed when insurer accepts the premium and retains it, the decision further said
that in case of assured, a positive act on his part by which he recognizes or seeks to
enforce the policy amounts to an affirmation to it.

 Legal relationship: When 2 parties enter into an agreement their intention must
be to create a legal relationship between them. Informal or social agreements
such as arrangement to give a friend a lift in one’s car or inviting a friend for
dinner, in such cases there is never any intention of legal consequences should
the agreement for some reason be carried out.

 Lawful consideration: The agreement is legally enforceable only when the

contract is supported by a legal consideration i.e. when both parties get
something and give something in return. In insurance both parties give
consideration i.e. the payment of first premium is the consideration for the
insurer and the insurers promise to indemnify the assured from risk is the
consideration to assured.

 Capacity of the parties: The parties to the agreement must be competent of

entering into a valid agreement. He must attain age of majority, must be of sound
mind and must not be disqualified from contracting by any law to which he is
subject. A minor’s property may be insured by persons competent to act for him.
He would be entitled to recover the insurance money.

 Free and Genuine consent: There must also be free and genuine consent of the
parties to the agreement. If the agreement is induced by coercion, undue
influence, fraud, misrepresentation etc, then there is absence of free consent, such
 a contract would be voidable at the option of the insurer under section 45 of
Insurance Act, 1938.

 Lawful object: The object of the contract must be lawful. It must not be illegal,
immoral or opposed to public policy. If agreement suffers from any legal flaw, it
would not be enforceable by law.

In New India Insurance co ltd v Kesavan Ramamurthy, it was held that there is
nothing unlawful in a vehicle insurance policy providing that no compensation
would be payable if the vehicle was being driven at the time of the accident by an
unlicensed person or by a learning license holder.

 Agreement not declared void: The agreement must not have been expressly
declared void by any law in force in the country, such agreements are void.
For example: Insurance on goods being traded with an enemy national in times of
war.

 Certainty and possibility of performance: It is essential to the creation of every

contract that the terms of the agreement must be certain and not vague, indefinite or
ambiguous. An agreement to do an act impossible in itself cannot be enforced.
 Legal formalities: The agreement may be either oral or writing, if it’s in writing it
must comply with necessary legal formalities as to writing, registration, attestation,
stamps and must be issued under seal.

Scope of Insurance Contract-

Life insurance is seen as a safety net for a family in the event of a tragedy. In today’s
dynamic world, anything can happen at any moment, so life insurance is a good way
to protect your family and provide them with a stable and stress-free life. In essence,
life insurance provides financial security to a family’s dependents in the event of an
unexpected event or untimely death. The Insured would be charged a fee by the
insurance provider on a regular basis. The insurance agent will pay the insured
family a fixed lump sum amount based on the sum guaranteed after the insured’s
death or at the end of a specific term. Since the year 2000, life insurance has grown at
a rapid rate. The Insurance Regulatory and Development Authority of India
regulates life insurance companies in India (IRDA).

Benefits of Life Insurance

Death Advantage: This is the most important benefit of life insurance; in the event of
the insurer’s untimely death, the insurance provider pays a lump sum amount
depending on the amount insured. Individuals can save tax on the premium sum
charged under section 80C, up to a maximum of one lakh rupees. Some insurance
firms will also lend you money if you take out a policy. The loan amount is normally
determined by the Sum Assured and the length of the loan.

Maturity Benefits: The provider is entitled to assured dividends as well as other

additional benefits until the policy reaches maturity.

Riders: Certain life insurance policies have Riders, which are additional benefits to
the regular insurance policy, in addition to life insurance coverage. Riders are
beneficial in extending the insurance coverage.

History and development of Life Insurance in India

The quick pace of industrialization of the modern age has rendered man and his
property most vulnerable to different types of risk and uncertainties in life. Thus,
while uncertainties of death, unemployment, sickness are constantly staring at the
face of a man, his property is exposed to the risks arising from fire, water, accident,
sea perils, floods etc. However with growth of the industrialized society and
consequently a rapid increase in number of situations in which human life and
property get exposed to risk, an effective solution of reducing the burden of losses
has been devised by shifting these risks to agencies or persons willing to share them.
This is known as Insurance. There are various types of insurance i.e. Life, Marine,
Fire, Motor vehicle.

MEANING
Life insurance is one of the most popular forms of insurance. Life insurance is a
contract in which one party agrees to pay a given sum upon the happening of a
particular event contingent upon the duration of life in exchange of payment of
consideration. The person who guarantees the payment is called the insurer, amount
guaranteed is the policy amount and the person on whom life payment is
guaranteed is called the insured. The particular event on which payment is to be
made is called death or maturity and consideration paid is called premium.

HISTORY AND DEVELOPMENT OF LIFE INSURANCE

As early as 600 BC there was evidence that greeks & romans recognised societies &
provided death benefits & funeral expenses for members. First insurance policies
hasd been made on lives of slaves in voyages. In the origins of England life
insurance took the form of society arrangements for death & funeral expenses & life
insurance was recognised in England since the 15 th century. By 1830’s between 30-
50% of lives were insured in UK.

Insurance has been written about in the ancient texts of Manu (Manusmrithi),
Yagnavalkya (Dharmasastra) and Kautilya (Arthasastra), where emphases were laid
upon pooling of resources. When disaster struck, this pool of resources would get
redistributed to help those affected within the community or village the distressed
was part of. Taking care of dependents of the deceased has also been mentioned
from the times of the Indus valley civilization.

In 1818, the first insurance company in India was established in Calcutta (modern
day Kolkata), The Oriental Life Insurance Company. Similarly, Bombay (Mumbai)
had the Bombay Mutual Assurance Society and Madras (Chennai) had the Madras
Equitable Assurance Company, which were started in and around 1870. In the initial
days, Indians had to pay an extremely high premium than compared to the British
residents. It was the Bombay Life Assurance Company, which became the first
insurance company established by an Indian that started insuring Indians without
charging extra premiums.

The history of the first half century may be divided into the following periods:

 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 promoted the boycott of British goods, British institutions etc.
This gave encouragement to the indigenous talent and capital. Many life
insurance offices were established with Indian capital completely. This
mushroom growth led to the appearance of some evil which had to be checked
for which the Indian Life Insurance Act 1912 was passed on the lines of the
English Assurance Companies Act 1909.
 Period of Struggle and Steady Growth(1913-1938) – This is the period between 2
world wars, during this stage the life insurance offices had to pass through a
critical period. The sudden growth of business which was given by the national
movement brought with it evils of its own due to accumulation of wealth and
inexperience in business. When this was checked by the Life Assurance act 1912,
business had to struggle for this steady growth. Many offices had to be wound
up and few that survived had to face competition of many foreign offices.
After First World War, when Britishers refused to grant the promised dominion
status, there was again a united national movement demanding complete
independence and once again to boycott British institutions. This anti-British
movement gave life to Indian life offices and their business as government was
compelled to protect them.
In 1934, Sri SC Sen was appointed as special officer to investigate and report on
reform of insurance law. In 1936, a committee under chairmanship of Sri NN Sircar
was appointed to examine report of special officer. In 1937, a draft bill was
introduced and 1938 Insurance Act was passed.
(in 1928 the Indian Insurance Companies Act was enacted for enabling the govt. to
collect statistical information on both life & non-life insurance businesses; in 1928
the earliest legislation consolidated the insurance act with the aim of safeguarding
the interests of the insuring public.)

 Period of stability and consolidation (1938-1950) – being free from foreign

competition, Indian offices gained stability and they brought necessary changes
in their office organization, terms, policies etc to conform the provisions of 1938
Act. After Second World War, the Swadeshi movement gained strength and
national spirit increased. Indian industries also started developing. There was
sometimes mal-investment of insurance funds for selfish purposes of the people
in charge of the offices therefore in 1945, a committee was appointed by the
government under chairmanship of Cowasji Jehangir which condemned the
malpractices in matter of investing funds available with the insurers. This led to
regulation of investments and the Insurance Act has been amended several times.

 Period of Boom and Nationalization (1950 up to date) – Political independence

under supervision of our first Prime minister Jawaharlal Nehru, the people of
India moved to achieve their economic independence. The agrarian society was
to be industrialized by governmental planning. The level of education was also
rising as a consequence of which insurance consciousness in the people
increased. The leading insurers also indulged in vigorous developmental
programs. All this contributed to a boom in insurance business. The Life
Insurance business was first nationalized in 1956 by passing of the Life Insurance
Corporation Act 1956. Along with life, fire and marine and other insurances like
motor, aviation, burglary and other liability insurances also developed.
On September 1, 1956, the Life Insurance Corporation of India (LIC of India) was
established with the intent of covering all Indians across the length and breadth of
the nation.

1972
In 1972, the General Insurance Business (Nationalisation) Act was passed which
nationalised all general insurance companies in India. The 107 odd companies
existing around the time were all merged into four companies:
 New India Assurance Company Ltd.
 National Insurance Company Ltd.
 Oriental Insurance Company Ltd.
 United India Insurance Company Ltd.

 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.

1999
As per the recommendations made by the Malhotra Committee, two things
happened in the year 1999: one, the private sector was permitted to enter the
insurance business and, two, the Insurance Regulatory and Development Authority
of India (IRDAI) was constituted. IRDAI was incorporated in April 2000 and is now
an autonomous body that works towards growing the insurance industry.

Till date, IRDAI frames regulations under Section 114A of the Insurance Act, 1938.
History And Development Of General Insurance In India

The history of general insurance dates back to the Industrial Revolution in the

west/ England 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
Association 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 1 st 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 34 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.

Development of Insurance in India.

Mention about Malhotra committee, privatisation etc.

Insurance Industry plays a vital role in the Indian market. Today there exist around
34 general insurance companies and 24 life insurance companies.

- The life insurance sector in India has recorded growth of around 12% (2016-17)
by receiving a premium income of around 1.87 trillion rupees during the year.
- The Life insurance sector offers about 360 million policies, considered as the
largest in the world. There exists lots of opportunities in the Indian insurance
market. Currently general insurance business in Indian market accounts for more
than 70,000 crore premiums yearly and has been growing at a positive rate.

Major developments- The IRDA has formulated guidelines for insurance companies
in India.
HDFC ergo car insurance and max life insurance co are now merged and expected to
establish India’s largest private sector insurance company.
Best development in Indian insurance market is Lloyd’s – Uk based which entered
into the Indian market in 2017 after IRDA’s approval.
A number of initiatives have been taken by the govt to boost insurance sector in
India as well such as:
- Union budget made a provision that foreign investment would be allowed up to
49% through automatic route.
- GST fixed at 18%.
- IRDA created 2 committees to explore, suggest and promote e-commerce in the
insurance sector.
- IRDA formulated a regulation imposing obligations on insurance providers
towards offering insurance coverage to rural and financially weaker sections of
the societies.
- The GOI has also announced several insurance schemes .

Thus the future of the life insurance industry is promising with various changes in
its way of functioning.

History of Fire Insurance

The real establishment of the insurance came only after the great fire which took
place in London in Sept. 1666. It lasted for four days and nights, burning over 436
acres of ground and destroying over 13,000 buildings. During that time also fire
insurance did not developed with great speed because of slow progress of commerce
and trade. The first fire insurance company was established in 1681, named as “The
first office”.
The next fire insurance company came in London as “Corporation of London”. In
1696 “Hand in Hand Society” was established. After that the “sun Fire Office” was
formed in 1710 to transact insurance of goods. In 1714, “Union Fire Office” was
created. The “West Minister” was established in 1717. The development of the fire
insurance is linked industrial revolution and has resulted into the growth of fire
business in India.

In 1825 the alliance British and foreign fire insurance company was established in
Delhi. In 1938, the general insurance council constituted a tariff committee operating
in Bombay, Delhi and Madras which dealt with fire, marine insurances.

Marine Insurance History

Insurance on vessels and their cargoes are an expansion of the sea trade.
13th century- the lombards were responsible for the introduction of marine insurance

• Hull insurance was initially in the form of “bottomry”, an arrangement whereby

the assured was paid a sum in advance of the voyage by the insurers, that sum to
be repaid with interest if the vessel arrived safely ( that vessel or the bottom) as
security for repayment of loan but retained by assured if vessel was lost or
expenditure was required to effect repairs.
• It became obsolete in the nineteenth century.
Royal exchange in lombard street gave a boost to the development of marine
insurance
• Earliest policy found to date was written in 1547 in Italian with subscribing
underwriters, and insured the vessel Santa Maria Venetia.
• Earliest English language policy – 1555 on vessel Santa cruz.
• 1601- sufficient activity for parliament to establish a special court to hear claims
on hull policies, although it fell into disuse by the middle of the century
following a series of cases which limited its scope.

CLASSIFICATION OF CONTRACT OF INSURANCE/ INSURANCE

Insurance is classified (i) basis of business point of view; (ii) risk point of view; (iii)
as per nature of event.

A Business Point Of View

1. Life Insurance- the subject matter of insurance is the life of a human being. The
insurer will pay the fixed amount of insurance at the time of death or at the
expiry of a certain period. At present, life insurance enjoys maximum scope
because life is the most important property of an individual. Each and every
person requires insurance. This insurance provides protection to the family at the
premature death or gives an adequate amount at the old age when earning
capacities are reduced. Under personal insurance, a payment is made at the
 accident. The insurance is not only a protection but is a sort of investment
because a certain sum is returnable to the insured at the death or the expiry of a
period.

Nature of Life Insurance contract

1) Aleatory contract-
• element of chance or uncertainty
• No mutual exchange of equivalent value
2) Uni-lateral contract- Unilateral contract is one where one party to the contract
makes a legally enforceable promise.
3) Conditional and contingent contract- Conditioned on the timely payment of
premiums. Else relieved of his basic promise of paying the sum assured.
4) Contract of adhesion- A life insurance contract is said to be a contract of adhesion
meaning thereby that the terms of the contract are not arrived at by the mutual
negotiations between the parties as in the case of ordinary contracts.
5) It is of a certain amount- Unlike contract of indemnity

2. General Insurance- General insurance includes Property Insurance, Liability

Insurance, and Other Forms of Insurance. Fire and Marine Insurances are strictly
called Property Insurance. Motor, Theft, Fidelity and Machine Insurances include
the extent of liability insurance to a certain extent. The strictest form of liability
insurance is fidelity insurance, whereby the insurer compensates the loss to the
insured when he is under the liability of payment to the third party.
Thus,
• Non-life insurance
• Provides insurance for valuables other than life.
• Damage, loss, theft to valuable. Eg: Motor insurance, crop insurance etc.
• Types-
• Motor Insurance
• Health Insurance
• Travel Insurance
• Home insurance
• Commercial insurance

3. Social Insurance- aims at providing protection to weaker sections of society who

are unable to pay premium for adequate insurance. Pension plans, disability
benefits, unemployment benefits, sickness insurance and industrial insurance are
the various forms of social security provided by the government.

B Risk Point Of View

1. Personal Insurance- The personal insurance includes insurance of human life
which may suffer a loss due to death, accident, and disease Therefore, personal
insurance is further sub-classified into life insurance, personal accident
insurance, and health insurance.

2. Property Insurance- The property of an individual and of the society is insured

against loss of fire and marine perils, the crop is insured against an unexpected
decline in deduction, unexpected death of the animals engaged in business,
break-down of machines and theft of the property and goods. Under the
property insurance property of person/persons are insured against a certain
specified risk. The risk may be fire or marine perils, theft of property or goods
damage to property at the accident.

3. Liability Insurance- The general Insurance also includes liability insurance

whereby the insured is liable to pay the damage of property or to compensate for
the loss of persona; injury or death. This insurance is seen in the form of fidelity
insurance, automobile insurance, and machine insurance, etc.
4. Fidelity Insurance (guarantee)- The guarantee insurance covers the loss arising
due to dishonesty, disappearance, and disloyalty of the employees or second
party. The party must be a party to the contract. His failure causes loss to the first
party. For example, in export insurance, the insurer will compensate the loss at
the failure of the importers to pay the amount of debt.

As Per Nature Of Event Affected

1. Life
2. Fire
3. Marine
4. Miscellaneous.
Marine Insurance- Marine insurance provides protection against the loss of
marine perils. The marine perils are; collision with a rock or ship, attacks by
enemies, fire, and captured by pirates, etc. these perils cause damage, destruction or
disappearance of the ship and cargo and non-payment of freight. So, marine
insurance insures ship (Hull), cargo and freight. Previously only certain nominal
risks were insured but now the scope of marine insurance had been divided into two
parts; Ocean Marine Insurance and Inland Marine Insurance. The former insures
only the marine perils while the latter covers inland perils which may arise with the
delivery of cargo (gods) from the go-down of the insured and may extend up to the
receipt of the cargo by the buyer (importer) at his go down.

Fire Insurance- Fire Insurance covers the risk of fire. In the absence of fire
insurance, the fire waste will increase not only to the individual but to the society as
well. With the help of fire insurance, the losses arising due to fire are compensated
and the society is not losing much. The individual is preferred from such losses and
his property or business or industry will remain approximately in the same position
in which it was before the loss. The fire insurance does not protect only losses but it
provides certain consequential losses also war risk, turmoil, riots, etc. can be insured
under this insurance, too.

Other Forms of Insurance- Besides the property and liability insurances, there are
other insurances that are included in general insurance. Examples of such insurances
are export-credit insurances, State employees’ insurance, etc. whereby the insurer
guarantees to pay a certain amount at certain events. This insurance is extending
rapidly these days.

Miscellaneous Insurance- The property, goods, machine, Furniture, automobiles,

valuable articles, etc. can be insured against the damage or destruction due to
accident or disappearance due to theft. There are different forms of insurances for
each type of the said property whereby not only property insurance exists but
liability insurance and personal injuries are also the insurer.
Motor Insurance-
• Motor vehicles act 1988 – all vehicles should be insured.
• Covers-
• Third party liability cover- Third party Damage to another party’s vehicle- bodily
injuries, permanent disablement, accident.
• Comprehensive motor insurance policy- theft, fire, accidental claims- non-
mandatory and optional.

Health Insurance
• Cover for medical and surgical expenses
• Room rent waiver, Maternity cover, critical illness cover, Hospital cash.
• Comprehensive health insurance cover, family floater cover, surgery cover,
individual cover.

Travel insurance
• Baggage, trip delay, and other incidental expenses.
• Flight delay, loss of baggage or passport, medical emergencies, hijack, distress
allowance, Accidental death while travel, Financial emergency assistance.
• International travel insurance, Student travel insurance, Group travel insurance,
Senior citizen travel insurance, Domestic travel insurance, Corporate travel
insurance

Home Insurance
• Protection to the entire house and secures all the belongings.
• Fire and Peril (Due to Fire, Explosion, Aircraft damage, lightning, missile testing,
earthquake, storm, hurricane, landslide, cyclone, riot, strike, theft, burglary)

Commercial insurance
• Profit making organisations
• Risk of business related requirements.
• Automotive, aviation, construction, chemicals, foods and beverages,
manufacturing, oil and gas, pharmaceutical, power, technology, telecom, textiles,
transport and logistics.
• Marine insurance- ship and cargo inside
• Liability insurance- insurance from risk of liabilities.
• Energy insurance- Insurance for refineries, Petrochemicals and chemical plants,
Gas works, Terminals and Tank farms, Underground storage and chemical
fertilizer plants.

Insurance, Definition of Insurance, Characteristics of Insurance, Nature of

Insurance, Functions of Insurance
Insurance: in law and economics, is a form of risk management primarily used to
hedge against the risk of a contingent, uncertain loss. Insurance is defined as the
equitable transfer of the risk of a loss, from one entity to another, in exchange for
payment. An insurer is a company selling the insurance; an insured or policyholder
is the person or entity buying the insurance policy. The insurance rate is a factor
used to determine the amount to be charged for a certain amount of insurance
coverage, called the premium. Risk management, the practice of appraising and
controlling risk, has evolved as a discrete field of study and practice. The transaction
involves the insured assuming a guaranteed and known relatively small loss in the
form of payment to the insurer in exchange for the insurer’s promise to compensate
(indemnify) the insured in the case of a large, possibly devastating loss. The insured
receives a contract called the insurance policy which details the conditions and
circumstances under which the insured will be compensated.
General Insurance: Insuring anything other than human life is called general
insurance. Examples are insuring property like house and belongings against fire
and theft or vehicles against accidental damage or theft. Injury due to accident or
hospitalisation for illness and surgery can also be insured. Your liabilities to others
arising out of the law can also be insured and is compulsory in some cases like motor
third party insurance.

Definition of Insurance

  Insurance is an instrument of distributing the loss of few among many.-

Disnadle
 The collective bearing of risk is Insurance. – W. Beverideges
 Insurance is a cooperative form of distributing a certain risk over a group of
persons who are exposed to it. – Ghosh and Agarwal

Nature of Insurance: 
1. By nature insurance is a devise of sharing risk by large number of people among
the few who are exposed to risk by one or the other reason.
2. If a large number of subscribers to insurance serve the purpose of compensation to
few among them exposed to uncertain risks appears as a co-operative look.
3. Valuation of risk is determined as per predefined terms and conditions of the
insurance policies.
4. Insurance provides facility of financial help in case of contingency.
5. However it depends on the value of insurance for which payment is made in case
of contingency. This provides basis of the amount to be paid.
6. Insurance is a policy regulated under laws and therefore the amount of insurance
can neither be paid as gambling nor as charity.
Need of Insurance: 
Life of everyone is full uncertainties. Nobody knows what is going to happen in next
moment. This element of unknown situation always hounds around the mind of a
person and keeps him worried to think as to what will happen in future in case of
any mis happening. This worry is to think about the future of the person and his
family. Among a number of worries the main and very important is economic
uncertainty of himself or his family. If anyone is satisfied with his present earnings,
he also thinks whether or not his present day capacity of earning will last for long.
Perhaps there remains an iota of fear that it may not last for the long. On this very
point everyone thinks about to secure his future. Under the impression of securing
future one thinks about the adoption of saving and investment plans. . He not only
thinks about himself but also about his family. In case of any miss happening
everyone is worried as to what shall happen to his family.
Everyone knows that there is no substitute in case of death of an earning member of
the family and no compensation is able to fulfil the gap in case of death of the
earning member. But for supporting economically upto some extant the method
adopted is known as insurance. The life insurance is such a cover that provides
security to the family of insured in case of his death. Life Insurance in such cases
provides some solutions to the worries of family members.
Once upon a time it was very difficult to convince people for getting an insurance
cover but today it has become a need of the day. Today the life insurance does not
cover the risk of life only but also provides many added benefits also in the field of
saving and investments. People need insurance because the unexpected does
happen. Whether it is a fire, a car wreck, illness or a death, the financial
consequences can be devastating if you are uninsured. Insurance helps people have
peace of mind when life’s unexpected events happen.
1. You never know what is going to happen
2. You can’t trust nature
3. You can’t trust other people
4. It’s not as expensive as you might think
5. For your peace of mind

Characteristics of Insurance
 It is a contract for compensating losses.
 Premium is charged for Insurance Contract.
 The payment of Insured as per terms of agreement in the event of loss.
 It is a contract of good faith.
 It is a contract for mutual benefit.
 It is a future contract for compensating losses.
 It is an instrument of distributing the loss of few among many.
 The occurrence of the loss must be accidental.
 Insurance must be consistent with public policy.
Nature of Insurance (summary)
  Sharing of Risks
 Co-operative Device
 Valuation of Risk
 Payment made on contingency
 Amount of Payment
 Large Number of Insured Persons
 Insurance is not gambling
 Insurance is not charity

7 Functions of Insurance

A Primary Functions of Insurance

1. Insurance provides certainty- Insurance provides certainty of payment at the

uncertainty of loss. The uncertainty of loss can be reduced by better planning and
administration. But, the insurance relieves the person from such a difficult task.
Moreover, if the subject matters are not adequate, the self-provision may prove
costlier. There are different types of uncertainty in a risk. The risk will occur or not,
when will occur, how much loss will be there? In other words, there is the
uncertainty of happening of time and amount of loss. Insurance removes all these
uncertainties and the assured is given certainty of payment of loss. The insurer
charges the premium for providing the said certainty.

2. Insurance provides protection- The main function of insurance is to protect the

probable chances of loss. The time and amount of loss are uncertain and at the
happening of risk, the person will suffer the loss in the absence of insurance. The
insurance guarantees the payment of loss and thus protects the assured from
sufferings. The insurance cannot check the happening of risk but can provide for
losses at the happening of the risk.

3. Risk-Sharing- The risk is uncertain, and therefore, the loss arising from the risk is
also uncertain. When risk takes place, the loss is shared by all the persons who are
exposed to the risk. The risk-sharing in ancient times was done only at the time of
damage or death; but today, based on the probability of risk, (he share is obtained
from every insured in the shape of premium without which protection is not
guaranteed by the insurer.

B Secondary Functions of Insurance

Besides the above primary functions, the insurance works for the following
functions:
4. Prevention of loss- The insurance joins hands with those institutions which ate
engaged in preventing the losses of the society because the reduction in loss causes
the lesser payment to the assured arid so more saving is possible which will assist in
reducing the premium. Lesser premium invites more business and more business
causes lesser share to the assured. So again premium is reduced to which will
stimulate more business and more protection to the masses. Therefore, the insurance
assists financially to the health organization, fire brigade, educational institutions
and other organizations which are engaged in preventing the losses of the masses
from death or damage.

5. It Provides Capital- The insurance provides capital to society. The accumulated

funds are invested in the productive channel. The death of the capital of the society
is minimized to a greater extent with the help of investment in insurance. The
industry, the business, and the individual are benefited by the investment and loans
of the insurers.

6. It Improves Efficiency- Insurance eliminates worries and miseries of losses at

death and destruction of property. The carefree person can devote his body and soul
together for better achievement, it improves not only his efficiency but the
efficiencies of the masses are also advanced.

7. It helps Economic Progress -The insurance by protecting the society from huge
losses of damage, destruction, and death, provides an initiative to work hard for the
betterment of the masses. The next factor of economic progress, the capital, is also
immensely provided by the masses. The property, the valuable assets, the man, the
machine and the society cannot lose much at the disaster.
 Re- Insurance and Double Insurance

RE-INSURANCE
When an insurer issues a policy to the insured he is said to have entered into a
contract of insurance. In doing insurance business it may issue a number of policies
and at a particular stage it may feel that the risk undertaken by it is beyond its
capacity, then it may retain the risk which it can bear and the balance may be
transferred to another insurer called the reinsurer under contract of insurance.
In other words, Re-insurance refers to insurance that is purchased by one insurance
company from one or more other insurers and risk is shared among the insurers.
Thus a contract of insurance creates in the insurers an insurable interest sufficient to
support reinsurance to the full amount of their liability on the original policy.

There are two basic methods of reinsurance:

1. Facultative Reinsurance -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 normally purchased by ceding
companies for individual risks not covered, or insufficiently covered, by their
reinsurance treaties, for amounts in excess of the monetary limits of their reinsurance
treaties and for unusual risks.
2. Treaty Reinsurance means that the ceding company and the reinsurer negotiate
and execute a reinsurance contract under which the reinsurer covers the specified
share of all the insurance policies issued by the ceding company which come within
the scope of that contract. There are two main types of treaty reinsurance:
a) Proportional reinsurance- Under proportional reinsurance, the reinsurer's share
of the risk is defined for each separate policy.
b) Non-proportional reinsurance - the reinsurer's liability is based on the aggregate
claims incurred by the ceding office.

DOUBLE INSURANCE
Double Insurance is a situation in which the same risk is insured by two overlapping
but independent insurance policies. It is lawful to obtain double insurance, and the
insured can make claim to both insurers in the event of a loss because both are liable
under their respective polices. The insured, however, cannot profit (recover more
than the loss suffered) from this arrangement because the insurers are law bound
only to share the actual loss in the same proportion they share the total premium. It
is also called as dual insurance.
Features of double insurance are:
1. The subject matter is insured with two or more insurance companies.
2. The insured can claim the amount from the policies.
3. The insurer cannot claim more than the actual loss.
 Assignment of Life, Fire and Marine policies.

ASSIGNMENT OF LIFE POLICIES

When the legal right or interest in a policy is transferred to a third person the policy
is said to have been assigned. The person who transfers the policy is called the
‘assignor’ and person to whom policy has been assigned is called the ‘assignee’.

Till 1938, the general rules relating to assignment of actionable claims governed the
assignment of life policies. Section 130 of the Transfer of Property Act which is now
repealed provided that the transfer of an actionable claim, with or without
consideration is effected by the execution of an instrument in writing signed by the
transferor or his duly authorized agent and the same becomes complete and
effectual upon the execution of the instrument of transfer and all rights and remedies
of the transfer vest in the transferee whether any notice of such transfer is given or
not except in case of transfers of marine and fire policies.
Therefore under Transfer of Property Act, before 1938, for an assignment of a claim
under life policy to be valid, it must be affected only by an instrument in writing and
signed by assignor or his authorized agent. But after passing of Insurance Act 1938,
assignment of life policies is governed by Section 38 of Insurance Act 1938.

Section 38(1) provides for transfer or assignment of policy of life insurance. Every
assignment must satisfy the following requirements:
 It should be in writing. This writing may be either (a) as an endorsement on
the policy itself, or (b) by a separate document.
 In either case it must be signed by the assignor, transferor or his duly
authorized agent.
 It must be attested at least by one witness, and
 It must specifically set forth the fact of transfer or assignment.
 It may be made with or without consideration.
 Assignment must be attested by at least one witness.
such as:
Apart from the above requirements, there are certain other conditions of a valid
assignment
 The assignment must not be opposed to any law for the time being in force in
the country.
 The assignment must be either for valuable consideration or without
consideration. When it is for consideration it may be by way of sale or
mortgage but when it is for no consideration it may be a gift or a legacy or
even a donation mortis causa.
WHO CAN EFFECT AN ASSIGNMENT?

Any person competent to contract and having title to the policy of life insurance or
authority to transfer the policy of life insurance if it is not his own, may assign a
policy. If a transferor himself has no title to a property, he may still transfer it
provided he has the authority to do so by virtue of law or express power granted to
him by the owner

TO WHOM POLICY CAN BE ASSIGNED: A life policy can be transferred to

anyone who is not a person legally disqualified to be a transferee, as the section does
not put any restriction in that regard.

NOTICE: In order to make assignment binding on the insurer, it is necessary to

deliver a notice thereof to the insurer. Section 38(2) provides that such notice should
be accompanied by the instrument or endorsement assigning the policy or copies
thereof certified to be correct either by both the parties or by their duly authorized
agent.
Section 38(2) does not specify who should give the notice in writing to the insurer.
Hence either the transferor or transferee may give the notice required.
Section 38(3) provides that the date on which the notice referred to in sub-section (2)
is delivered to the insurer shall regulate the priority of all claims under a transfer or
assignment as between persons interested in the policy; where there is more than
one instrument of transfer or assignment the priority of claims shall be governed by
the order in which the said notices are delivered.
Section 38(4) provides that on receipt of the notice of assignment the insurer is
required to record the fact of assignment, the date thereof and the name of the
assignee. The insurer, if requested, is also bound to grant a written acknowledgment
of the receipt of the notice, on payment of a fee not exceeding one rupee to the
person who issues the notice or the assignee.

Once the formalities prescribed by this section for assignment are one through
subject to the terms and conditions of the transfer, the insurer shall recognize the
assignee as the only person entitled to claim under the policy.

TYPES OF ASSIGNMENT:
1. Absolute- absolute assignment is one by virtue of which all the rights; title and
interest which revert to the former or his estate in any event. The policy vests
absolutely in the assignee and forms a part of the assignee’s estate on his death.
2. Conditional – conditional assignment is an assignment which provides that the
policy will revert to the assured in the event of his surviving the date of maturity
or on the death of the assignee, as the fulfillment of the condition does not
depend on the will of the assignor. The effect of such assignment is that assignee
 obtains an immediate vested interest in the policy and the assignment would
become inoperative upon the subsequent happening of either of the conditions
mentioned in the assignment.

A life insurance policy once assigned and validly executed cannot be cancelled or
rendered ineffectual at the mere will of the assignor. But the only way in which
an assignment may be cancelled or rendered ineffective is to have the policy
properly reassigned in the assignors favor by the assignee or a person claiming
title through him provided he is a major and competent to contract.

ASSIGNMENT OF FIRE POLICIES

The fire policies cannot be assigned unless and until the consent of the insurer is
obtained. Fire policies are personal contracts and, therefore, the consent of the
insurer is necessary for the assignment. The insured must have insurable interest in
the fire policy not only at the time of taking it out but also at the time of actual loss. It
is therefore desirable that the assignment of a policy should be with the express
consent of the insurer. If this is not done, the assignment will not confer any rights
on the assignee and the policy can be avoided by the insurer on the ground that the
assignee was not having any insurable interest at the time of taking out the policy.
The assignment must be by endorsement on the policy or by a separate deed of
assignment.

ASSIGNMENT OF MARINE POLICIES

A marine policy is assignable, that is, transferable to any other person unless there is
some provision in the policy itself prohibiting the transfer. But a policy on goods is
generally freely assignable. Policies on ship or on freight are subject to restriction on
assignment. Assignment may be made either before or after loss.
An assignment by the assured of his interest in the subject matter insured does not
transfer his rights in the policy of insurance thereon to the assignee, unless there is
an express or implied agreement to that effect.
On assignment, the assignee will be entitled to sue in his own name. An assignment
may be made either by endorsement on the policy or in any other customary manner
and the assignee must have insurable interest in the subject matter of the policy.
 Composition, duties, powers and functions of Insurance Regulatory and
Development Authority Act (IRDA Act).

Section 2 of the Insurance Act, 1938, had authorized the Central Government to
appoint the Controller of Insurance to regulate the insurance business of India. It
had the supervisory and regulatory powers. However, after the nationalization of
the life insurance industry in 1956 and the general insurance industry in 1972, the
role of Controller of Insurance had diminished in significance. The Government of
India in April, 1993 setup a high powered committee known as The Malhotra
Committee , to examine the structure of insurance industry and recommended
changes to make it more efficient and competitive.

The recommendations of the committee were discussed at different forums. It was

widely supported that an autonomous Insurance Regulatory Authority be set up. In
view of this, The Insurance Regulatory and Development Authority Act, 1999 was
passed which replaced the Controller of Insurance.

Objectives of IRDA Act:

 Establishing an authority to protect the interests of the holders of the insurance

policies.
 To regulate, promote and ensure orderly growth of the insurance industry and
matters connected there with and incidental thereto.
 To amend The Insurance Act,1938, The Life Insurance Act,1956, and The General
Insurance Business(nationalization) Act,1972.

Composition of IRDA Act:

The authority consists of a Chairperson and other members not exceeding 9 in

number, of whom not more than 5 shall serve full time. Section 4 of the Act provides
for the composition of the authority. It states that the authority shall consist of the
following members namely:

 A chairman,
 Not more than five whole time members, and
 Not more than four part time members.

The chairman and the members are 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 which would be useful in the opinion of Central Government.
The chairperson and other whole time members shall hold office for 5 years or until
the age of 65 in the case of chairman and 62 in case of other whole time members
whichever is earlier and they are eligible for reappointment subject to age
consideration. A part time member can hold office for a term not exceeding 5 years.

The Central Government may remove a member from office if he has or at any time
has been adjudged as:

 An insolvent, or
 Has become mentally or physically incapable of acting as a member, or
 Has been convicted of any offence involving moral turpitude, or
 Has acquired financial interest as is likely to affect prejudicially his functions as a
member, or
  Has abused his position as to render his continuation detrimental to the public
interest.

He can be removed only after giving him a reasonable opportunity of being heard in
the matter.

DUTIES, POWERS AND FUNCTIONS OF IRDA

Section 14 of the Act provides for the duties, powers ad functions of IRDA. The only
duty of the Authority is to regulate, promote and ensure orderly growth of the
insurance and the reinsurance business.

Section 14(2) describes and delineates the powers and functions of the Authority
and it contains clauses (a) to (q).

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
claims, 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 organizations 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 inquiries and
investigations including audit of the insurers, intermediaries, insurance
intermediaries and other organizations 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;

(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 organizations referred to in clause (f);

(p)Specifying the percentage of the 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.

 SALIENT FEATURES of IRDA ACT.

The Insurance Regulatory Development Authority Act, 1999 marked the end of

government monopoly in the insurance business. The IRDA Act received the assent
of the President of India on 29 December 1999. The IRDA Act has ramifications on
The Insurance Act (1938), The Life Insurance Corporation Act (1956) and The
General Insurance Business(Nationalisation) Act (1972).
 
The following are salient features of the IRDA Act (1999):
 
 The insurance sector in India has been thrown open to the private sector and the
private insurance companies can now transact both life and general insurance
businesses in India.
 An Indian insurance company is a company registered under the Companies Act,
1956, in which foreign equity does not exceed 26 per cent of the total equity
shareholding, including the equity shareholding of NRIs, FIIs and OCBs.
 After commencement of an insurance company, the Indian promoters can hold
more than 26 per cent of the total equity holding for a period of ten years, the
balance shares being held by non-promoter Indian shareholders which will not
include the equity of the foreign promoters, and the shareholding of NRIs, FIIs
and OCBs.
 After the permissible period of ten years, excess equity above the prescribed level
of 26 per cent will be disinvested as per a phased programme to be indicated by
IRDA. The Central Government is empowered to extend the period of ten years
in individual cases and also to provide for higher ceiling on shareholding of
Indian promoters in excess of which disinvestment will be required.
 On foreign promoters, the maximum of 26 per cent will always be operational.
They will thus be unable to hold any equity beyond this ceiling at any stage.
 The Act gives statutory status for the Interim Insurance Regulatory Authority
(IRA) set up by the Central Government through a Resolution passed in January
1996.
 All the powers presently exercised under the Insurance Act, 1938, by the
Controller of Insurance (CoI) will be transferred to the IRDA.
 The IRDA Act also provides for the appointment of Controller of Insurance by the
Central Government when the Regulatory Authority is superseded.
 The minimum amount of paid-up equity capital is Rs.100 crore in case of life
insurance as well as general insurance, and Rs.200 crore in the case of re-
insurance.
 Solvency margin (excess of assets over liabilities) is fixed at not less than Rs.50
crore for life as well as general insurance; for reinsurance solvency margin is
stipulated at not less than Rs.100 crore in each case.
 Insurance companies will deposit Rs.10 crore as security deposit before starting
their business.
 In the non-life sector, IRDA would give preference to companies providing health
insurance.
 Safeguards for policy holders’ funds include specific provision prohibiting
investment of policy holders’ funds outside India and provision for investment of
funds in accordance with policy directions of IRDA, including social and
infrastructure investments.
 Every insurer shall provide life insurance or general insurance policies (including
insurance for crops) to the persons residing in the rural sector, workers in the
unorganized or informal sector or for economically vulnerable or backward
classes of the society and other categories of persons as may be specified by
regulations made by IRDA.
 Failure to fulfil the social obligations would attract a fine of Rs.25 lakh; in case the
obligations are still not fulfilled, licence would be cancelled.
 Principle Of Utmost Good Faith

A. Introduction
Ubberima fides (uberrimae fidei) is a latin phrase meaning utmost good faith and is
a legal doctrine governing insurance contracts. Every insurance contract is a contract
of utmost good faith (uberrimae fidei). It is a condition of every insurance contract
that both the parties should display utmost good faith towards each other in regard
to the contract. This implies that at the time of entering into an insurance contract
both parties must disclose all the material facts and circumstances to each other. The
insured should not make any misrepresentation and at the same time disclose all
facts. Utmost good faith requires each party to tell the other “the truth, the whole
truth and nothing but the truth.

Commercial contracts are generally subjected to the principle of Caveat emptor i.e.
let the buyer beware but in insurance contracts this principle does not apply.

Lord Mansfield is said to be the father of the principle of good faith. The principle
was laid down in the land mark case of CARTER V. BOEHM, 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
risk as if it did not exist.

The other jurist who is greatly associated with this principle i.e. Jessel M.R. who held
in LONDON ASSURANCES V. MANSEL , 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.

In India, the same principle has been followed by the Supreme Court in LIFE
INSURANCE CORPORATION OF INDIA V. ASHA GOEL , where it was held that,
contracts of insurance are contracts uberrimae fidei and every material fact must be
disclosed, otherwise there is a good ground for recession of the contract.
The duty to disclose material facts continues right up to the conclusion of the
contract.

B. Good faith expected from both the parties

The contracting parties are places under a special duty towards each other to make
full disclosure of all material facts within their knowledge in good faith and to
refrain from active misrepresentation .

C. Parties of Insurance Contract.

There are 2 parties i.e. insurer and insured, the insurer has a duty to inform the
insured of all the terms and conditions of the contract/ of the policy that will be
issued to the insured and the assured has a bigger duty to disclose most of the facts
such as relating to health, habits, personal or family history etc which form the basis
of a life insurance policy which only the insured is aware of.

In United India Insurance Co Vs. MKJ Corp, held that just as insured has a duty to
disclose it is the duty of the insurer and their agents to disclose all material facts
within their knowledge since obligation of good faith applies to them equally with
the assured.

D. Duty To Disclose Material Facts: The assured must disclose to the insurer before
the contract is concluded, every material circumstances which is known to the
assured. If he fails to make such disclosure, the insurer may avoid the contract. The
insurer too cannot withhold information in his private possession to the detriment of
the insured although occasions for such disclosure by the insurers are rare. The
insurer must also inform the insured about the terms and conditions of the policy
that is going to be issued to him. He must issue the policy in conformity with the
terms mutually agreed with the insured. The duty to disclose is absolute. It is
positive and not negative. Utmost good faith requires that there should be no
concealment, misrepresentation, wrong statements, half-truths or any silence on a
material fact.

Materiality of facts: Utmost good faith requires the disclosure of material facts. A
material fact is one which goes to the root of the contract of insurance. Every
circumstance is material which would influence the judgment of a prudent insurer in
fixing premium or determining the risk. What is material in the technical sense
cannot be left entirely to the discretion of the party concerned, in every case it is a
matter of fact, to be decided by the court, if necessary. Material facts are of 2 types:
(a) those facts which affect the nature of incidence of risk, and,
(b) those facts which affect the character of the insured.

In the case of BANARASI DEVI V. NEW INDIA ASSURANCE CO ., it was laid down
that a material fact is one:
1. Which increases the risk, or
2. Whether the insurer would have rejected to give a policy on these terms if the
fact had been disclosed.

Examples of material facts:

Life Insurance- Suffering from lung infection or a damaged kidney.
Fire Insurance- Building having a thatched roof or being used for manufacturing
explosives. Marine Insurance- Ship has unrepaired damage affecting its handling.
E. Facts required to be disclosed
 A fact which is immaterial but becomes material later must be disclosed if has
been expressly mentioned in the terms & conditions of the policy.
 A fact that increases risk must be disclosed in all circumstances.
 Previous losses incurred and claims under previous policies needs to be
disclosed.
 Special terms and conditions under previous policies if any.
 Fact of existence of non-indemnity is to be disclosed.
 Description of subject matter to be stated properly.
 Facts suggesting any special motive to take the insurance.
 Facts suggesting existence of any moral hazards relating to moral integrity of the
proposer.

F. Facts which need not be disclosed

 Facts which the insured in aware of.
 Facts of common knowledge which everyone is supposed to know such as
government policies etc.
 Facts of law like rules, regulations which have already been made available to all.
 Facts which a survey would have revealed.
 Illogical facts.
 Facts within knowledge of insurers.
 Facts waived by insurer himself.

G. Breach Of Utmost Good Faith: The various circumstances under which the
parties may be guilty of breach of utmost good faith may be classified into 4
categories:
(a) Non-disclosure : Omission to disclose unintentionally or inadvertently or
because the proposer did not recognize that the fact in question was material.
(b) Concealment: Intentional suppression of a fact which is material, e.g. failure to
disclose that his proposal with some other insurance company was not accepted.
(c) Innocent misrepresentation: A statement which is inaccurate but which is made
without any fraudulent intention.
(d) Fraudulent misrepresentation: A statement made knowingly or without belief in
its truth or recklessly without caring whether it be true or false.
When there is breach of duty of utmost good faith, the contract may be either void
or voidable but if there is fraudulent misrepresentation, contract is void.
is returnable.

In LAMBERT V. COOPERATIVE INSURANCE SOCIETY, a lady renewed a

policy of insurance on her jewelry, owned partly by her and partly by her husband,
who had been convicted twice for two crimes involving dishonesty in the year
before. She did not disclose these convictions of her husband while seeking renewal.
It was held that she had a duty to disclose this though her husband was not the
insured.

H. Conclusion
Thus, it can be concluded that contracts of insurance are contracts of utmost good
faith and both the parties must disclose all material facts. The reason of the rule is to
prevent fraud and to encourage good faith.
 Third Party or Compulsory Insurance Of Motor Vehicles Act

Every person who runs a motor vehicle is under a duty not to use or to cause or
permit any other person to use it on a road unless any liability, which may be
incurred thereby in respect of death or bodily injury to any person caused by or
arising out of the use is covered by a policy of insurance. The object of this type of
policy is to protect the insured against his liability to third parties arising out of an
accident caused by the use of a motor vehicle on a public road and it is also made
compulsory.

A policy of motor vehicles insurance is, in the ordinary course, a combined

insurance it insures the damage to the motor vehicle and its accessories, liability for
the damage to property, death of, or injury to, the assured himself or spouse and it
also insures the motor vehicle against the risk of liability for injury to, or the death of
their parties caused by the driver’s negligence.

In law of torts, if a person negligently drives his vehicle and causes injury or death to
third party, the driver whose negligence caused the death is liable to the third party.
The insurance policies that deal with the liability of the owner to third party for
causing them injury or death by the use of the motor vehicle is known as third party
or compulsory insurance of motor vehicles.

The contract in this type of policy is also one of indemnity like any other contract of
insurance. The object of this type of policy is to protect the insured against his
liability to third parties arising out of an accident caused by the use of a motor
vehicles on a public road and it is also made compulsory. The general effect of the
act is that every person who runs a motor while is under a duty not to use or to
cause or permit any other person to use in on a road unless any lability, which may
be incurred thereby in respect of the death or bodily injury to any person caused by
or arising out this user is covered by a policy of insurance.

Section 146 of the Motor Vehicles Act 1988 says that 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
other person as the case may be, a policy of insurance complying with the
requirements of this chapter.

Third party insurance is a must for running a motor vehicle in a public place.

Persons required to insure:

 One who uses a motor vehicle except as a passenger i.e. driver of the vehicle and,
 One who causes or allows any other person to use a motor vehicle.

However, the vehicles belonging to the Central and State government and used by
them for purposes unconnected with their commercial enterprises need not be
insured.

Section 196 of the Act provides a punishment for driving an uninsured motor
vehicle by stating that whoever drives a motor vehicle or causes or allows a motor
vehicle to be driven in contravention of the provisions of Section 146 shall be
punished with imprisonment which may extend to three months or with fine which
may extend to Rupees 1000 or with both.

A person driving an uninsured motor vehicle merely as a paid employee, shall not
be deemed to act in contravention of Section 146(1) unless he knows or has reason to
believe that there is no such policy in force.

A public vehicle cannot ply without permit and the rules framed by the State
Governments prescribe in the Insurance Certificate is a condition precedent for the
insurance of a permit.

Persons Governed
It applies to all persons. It includes any company or association or body of
individuals, whether incorporated or not. The duty imposed under the section is
absolute. The only category of persons exempted from this duty is passengers.
Normally the duty imposed by the section is on the owner of a vehicle because
generally an owner uses his vehicle or causes or allows it to be used on a public
road.

The question of motor insurance arises only if it is a ‘motor vehicle’ and is in ‘use’.

When motor vehicle in ‘use’:

The word ‘use’ covers all employments of the vehicle including its driving, parking,
repairing or leaving it unattended on the road for any other purpose. The word ‘use’
even covers the period when the vehicle is not moving and is stationery or when it is
not in a position to move due to some breakdown or mechanical defect.

Arising out of use of motor vehicle:

The expression “arising out of” has a wider connotation as compared to the
expression “caused by”. The words “injury caused by or arising out of the use of
the vehicle” postulates a causal relationship between the use of the vehicle and the
injury. If it is prima facie shown that the death of permanent disability was caused
due to the use of motor vehicle belonging to another person, it is sufficient to claim
compensation under the provisions of the Act.

Use or allow any other person to use:

A person cannot “allow any other person” to use the vehicle when the use of the
vehicle by that other person is not covered by compulsory insurance and to do so is
an offence under Section 196. He is also liable for damages to a third party who has
been injured by the negligent driving of the uninsured person. The permission need
not be by the owner alone. It can be granted by any person who has even care,
management or control of a vehicle.

The use must be in a public place.

Public place has been defined as a road, street, way or other place to which the
public have a right of access and includes any place or stand at which passengers are
picked up or set down by a stage carriage. The Indian definition includes a bus
stand, taxi stand whether they are private or public sites.

IN THE CASE OF BUGGE V. TAYLOR, where a motor vehicle was left unattended
during hours of darkness on the forecourt of a hotel to which the public has access,
the defendant was held to have been properly convicted of leaving an unattended
vehicle on a road even though the place where it was left was a private property.

A Policy of Insurance should be in force.

There must be a policy of insurance and the same must be in force. The insurance
company is not liable if the accident occurred before the policy came into effect. If
the policy still exists and an accident occurs before cancellation of the policy, insurer
is liable. However if accident occurs after cancellation of the policy, the insurer is not
liable. Before giving an insurance policy, a cover note is commonly issued by
insurers which can be treated as policy insurance.

******
 RIGHTS OF THIRD PARTIES

The statutory rights, as against the insurers of the injured third party are not
governed by Section 149 and 150 of Motor vehicles Act, 1988. Following essentials
must be satisfied before imposing a duty:
 A certificate of insurance must have been delivered to the policy holder under
Section 148(4).
 Judgment must have been obtained against any person insured in respect of
any such liability as is required to be covered by a policy under Section 148. If
no claim is made and no decree is passed against the insured, the insurance
company is not liable.
 Subject to Section 149(2) such liability must be covered by the policy.
 The fact that the insurer is entitled to avoid or cancel, or may have avoided or
cancelled the policy is no defence against the third party.

LIMITATION ON THIRD PARTY’S RIGHTS

(1) By Section 149(2), the insurer is not made liable to pay any money under such
judgment where;
(i) He had not been given notice, before or after the commencement of the
proceedings in which judgment is given, of the bringing of the proceedings or;
(ii) Execution on the judgment is stayed pending an appeal.
(2) By Section 149(2) it is provided that when the insurer is given notice of the
proceedings he shall be entitled to be made a party thereto. When he is made a party
he can defend the action on any of the following grounds:
1. (a)  That there has been a breach of a specified condition of the policy, being one
of the following conditions namely;
1. (i)  A condition excluding the use of vehicle:
 For hire or reward
 For organized racing and speed testing
 For a purpose not allowed by the permit under which the vehicle is used,
where the vehicle is a transport vehicle or
 Without a side-car being attached, where vehicle is a motor-cycle.
2. (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 license
3. (iii)  A condition excluding liability for injury caused by condition of war, civil war,
riot or civil commotion or;
2. (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 a fact which was false in
some material particulars.
The conditions mentioned in clause (2)(b) can be availed of by the insurer on his
defence only if they have been incorporated in the policy and not otherwise.

TRANSFER OF CERTIFICATE OF INSURANCE

A policy has no effect for the purposes of the Act unless and until the insurer
delivers a “certificate of insurance” to the person by whom the policy is affected.
This is a very important document as without it the owner is unable to obtain a
license for his vehicle. Thus, where a vehicle is transferred the certificate should also
be transferred.
`According to Section 157(1), where the holder of a certificate of insurance in respect
of a motor vehicle in accordance with the provisions of the Act transfers to another
person, the ownership of the motor vehicle along with the policy of insurance shall
be deemed to have been transferred in favor of the person to whom the motor
vehicle is transferred with effect from the date of its transfer.
According to Section 157(2), provides only for a procedure to intimate the fact of
transfer of vehicle to the insurer in order to make necessary changes in the certificate
of insurance and the policy to bring in conformity with the deemed transfer under
Section 157(1) for the purpose of indemnifying the transferee relating to the risk
covered under the policy.
If the insurer refused the transfer, he shall refund to such transferee the amount, if
any, which is under the terms of the policy.
Wherever a policy of insurance is cancelled or suspended by the insurer, he shall
within 7 days notify such cancellation or suspension to the registering authority or to
such authority as the state government may prescribe.

DEATH OF PARTIES
 Where the owner of the motor vehicle dies in the accident and the injured third
party is alive, the injured third party can make his claim against the estate of the
deceased owner unless he died before the accident;
 Where the third party dies as a result of the accident his legal representative can
make a claim for the compensation before the appropriate tribunal;
 Where both the owner and third party die in the accident, the estate of the
deceased owner will be liable to the estate of the dead third party;
 Where the third party is not dead in the accident, he can himself make the claim
within 6 months of the accident, in such a case it does not matter whether the
motor vehicle owner is alive or dead in the accident.

********
 CLAIMS TRIBUNAL

Sections 110-110F of the Motor Vehicles Act 1939 provided for the establishment of
motor claims tribunals with the object of providing an expeditious and cheap mode
of enforcing the liability of the person who caused motor accidents. These sections
provided for the constitution and functions of the tribunals as an alternative forum
with a self-contained code and complete machinery for the purpose. The Supreme
Court held that the change in law under section 110-110F was merely a change of
forum. It is a change of procedural but not of substantive law. The substitution of the
Claims Tribunals in the place of civil courts intended to provide quick relief also
failed and hence a change in the substantive law also is made by Motor Vehicles Act
1988 by providing “no fault liability”. The Motor Vehicles Act 1988 re-enacted the
provision in section 110-110F of the Motor Vehicles Act 1939 under section 165-176.

Constitution of the Claims Tribunal SEC 165

The state government may, by notification in the official gazette, constitute one or
more motor accidents claims tribunal for such area as may be specified in the
notification. The tribunal has exclusive jurisdiction to the exclusion of the civil
jurisdiction and it also insured against an injunction form a civil court while
exercising its jurisdiction. The tribunal shall consist of such number of members as
the state government may think fit to appoint and where it consists of two or more
members, one of them shall be appointed as the chairman thereof. Where two or
more tribunals are constituted for any area, the state government may by general or
special order regulate the distribution of business among them. The minimum
qualification to be a member of the Claims Tribunal are:
1. The member is or has been a Judge of a High Court, or
2. The member or has been District Judge; or
3. The member is qualified for appointment as a judge of the High Court
Functions of the Tribunal
The tribunals are constituted to adjudicate upon claims made by the injured or
aggrieved party for compensation in respect of accidents which:
1. Involve fatal injury, or
2. Bodily injury to person and
3. Loss or damage to property of the third party arising in the course of the use
of the motor vehicle
It is provided that in cases where such claims include a claim for compensation in
respect of damage to property exceeding Rs. 2000, the claimant may, at his option,
refer the claim to a civil court for adjudication and where a reference is so made, the
claims tribunal shall have no jurisdiction to entertain any question relation to such a
claim.

Application for compensation

An application for compensation under this Act must be in a prescribed form and
shall contain such particulars as may be prescribed. The application shall be filed
within six months of the occurrence of the accident’ but the delay in filing an
application may be condoned by the tribunal provided the application can prove to
its satisfaction that he was prevented by a sufficient cause.

Who can apply for compensation:

An application for compensation can be made:
1. By the person who has sustained the injury; or
2. By the owner of the property; or
3. Where death has resulted from the accidents, by all or any of the legal
representatives of the deceased; or
4. By any agent duly authorised by the person injured or all of any of the legal
representatives of the deceased as the case may be.

How and Where can compensation be claimed

Claim Petition can be filed –
 to the Claims Tribunal having jurisdiction over the area in which the accident
occurred or,
 to the Claims Tribunal within the local limits of whose jurisdiction the claimant
resides, or carries on business or,
 within the local limits of whose jurisdiction the defendant resides 12

Procedure and powers of the Claims Tribunal

On receipt of an application, the claims tribunal shall follow the procedure fixed by
the rules framed for this purpose. The state governments are empowered to make
rules providing form of application, fees to be paid thereon, the procedure to be
followed, the powers vested in a civil court exercisable by the tribunal, the for of
appeal and any other matter which is to be or may be prescribed. It shall have all the
powers or a regular court, subject to any rules that may be made in this behalf.
Proceedings before the tribunal are summary in nature. Strict compliance with rules
of evidence and pleadings are not required to be followed.

Award of the Claims Tribunal

After making a proper inquiry the tribunal is empowered to make an award
determine the amount of compensation which appears to it to be just and specifying
the person or person to whom compensation shall be paid and also shall specify the
amount which shall be paid by the insurer, or owner or driver of the vehicle in the
accident or by all or any of them as the case may be. In passing the award the
tribunal has to apply the general law of torts and also the crucial rule of evidence
which are founded on principles of natural justice.
 National Ins. Co. Ltd. Vs R. K Pasawan(AIR 1997 Pat. 236) .The onus of proving
whether a motor vehicle is insured with a particular company is on the owner of
the motor vehicle.
 Skandia Insurance Co. Ltd. v. Kokilaben Chandra Vadan( AIR 1987 SC 1184)-
In this case the driver had no driving licence when he met an accident with the
motor vehicle he was driving. The right of compensation of victim is not affected
by the fact that motor vehicle was driven by a man who was not having driving
license to do so. Even if the insurance policy mentions something contrary to this
rule.
 ‘If the vehicle is not insured any legal liability arising on account of third party
risk will have to be borne by the owner of the vehicle.’ ( Iyyapan vs M/s United
India Insurance Co. Ltd. and another ,2013)10
 Rajasthan Road Transport Corpn. vs Kailash Nath Kothari(AIR 1997 SC 3444) –
Kailash Nath Kothari was the registered owner of the bus which met an accident.
At the time of accident the vehicle was driven by a driver who was employed by
the registered owner of the vehicle. At the same time the registered owner was
not in possession of the bus. He had rented it to the Corporation. Court held in
this case that the Corporation was liable to pay compensation and not the
registered owner. This was in accordance with Section 2(30) of the Motor
Vehicles Act,1988 which defines ‘owner’ for the interpretation of the Act.

Claim Application
For the claimant to file a claim application he has two options :
First, under Section 163 A of the Act where the claim is assessed based on
‘Structured Formula’. 
Second, under Section 166 of the Act where the judge assesses the case based on the
evidence available. 
 The application can be against any of the following people  :
 Owner of the vehicle
  Driver 
 Insurer
Once the complaint about the accident has been registered by the police it is then
forwarded to the Claims Tribunal within 30 days from the date the report was
prepared. 

***********
 NO FAULT LIABILITY IN MOTOR VEHICLES ACT

Sec 140 of Motor Vehicles Act, 1988 deals with the liability without fault. The
claimant involved in a motor vehicle accident is not required to prove wrongful act,
neglect, or default on the part of the owner of the vehicle or by any other person.
The claim under these provisions is neither defeated or affected in any way, by any
wrongful act, neglect or default on the part of the claimant; nor can be of the
claimant’s share of responsibility for the accident. In other words, the legal defence
of ‘contributory negligence’ is not available to the motorist and his insurer.
These provisions apply in cases where the claimant suffers death or permanent
disablement, as defined in the Act. The amounts of compensation are fixed as
follows:

 Death, Rs, 50,000

 Permanent Disablement Rs. 25,000

The object behind no-fault principle is to give minimum statutory relief

expeditiously to the victim of the road accident or his legal representative. To that
extent, these provisions constitute a measure of social justice.
Where no-fault liability is concerned, there is clearly a departure from the usual
common law principle that a claimant should establish negligence on the part of the
owner or driver of the motor vehicle before claiming any compensation for death or
permanent disablement arising out of a motor vehicle accident.
The right to claim compensation U/S 140 in respect of death of permanent
disablement of any person shall be in addition to any other right to claim
compensation in respect thereof under any other provision of this Act or of any other
law for the time being in force.
Thus the claims for death or permanent disablement can also be pursued under
other provisions of the Act on the basis of negligence. The motorist i.e. the owner of
the vehicle or driver of the vehicle is liable to pay compensation on the basis of ‘no
fault’ as well as on the basis of ‘fault’ or negligence he has to pay first the
compensation on ‘no fault’ basis i.e. Rs. 55,000 or Rs. 25,000 as the case may be, for
death or permanent disablement.
If such compensation paid is less than the compensation awarded on the principle of
‘fault’ or negligence, the motorist is liable to pay the balance. For example, if Rs.
30,000/- is awarded for permanent disablement on the basis of negligence, the
claimant is entitled to receive only Rs. 5,000 being the excess over the no-fault
compensation settled first. In any claim for compensation under this Section, the
claimant shall NOT be required to plead or establish that the death or permanent
disablement in respect of which the claim has been made was due to any wrongful
act or neglect or default of the owner/s of the vehicle/s concerned or any other
person.
Sec. 143 of the Act will also apply in relation to any claim for compensation in
respect of death or permanent disablement of any person under the Workmen’s
Compensation Act, 1923, resulting from a motor accident. Time limit for depositing
compensation under this section is one month.

No fault liability
Section 140 in The Motor Vehicles Act, 1988
140. Liability to pay compensation in certain cases on the principle of no fault.—
(1) Where death or permanent disablement of any person has resulted from an
accident arising out of the use of a motor vehicle or motor vehicles, the owner of the
vehicle shall, or, as the case may be, the owners of the vehicles shall, jointly and
severally, be liable to pay compensation in respect of such death or disablement in
accordance with the provisions of this section.
(2) The amount of compensation which shall be payable under sub-section (1) in
respect of the death of any person shall be a fixed sum of fifty thousand rupees and
the amount of compensation payable under that sub-section in respect of the
permanent disablement of any person shall be a fixed sum of twenty-five thousand
rupees.
(3) In any claim for compensation under sub-section (1), the claimant shall not be
required to plead and establish that the death or permanent disablement in respect
of which the claim has been made was due to any wrongful act, neglect or default of
the owner or owners of the vehicle or vehicles concerned or of any other person.
(4) A claim for compensation under sub-section (1) shall not be defeated by reason of
any wrongful act, neglect or default of the person in respect of whose death or
permanent disablement the claim has been made nor shall the quantum of
compensation recoverable in respect of such death or permanent disablement be
reduced on the basis of the share of such person in the responsibility for such death
or permanent disablement.
(5) Notwithstanding anything contained in sub-section (2) regarding death or bodily
injury to any person, for which the owner of the vehicle is liable to give
compensation for relief, he is also liable to pay compensation under any other law
for the time being in force: Provided that the amount of such compensation to be
given under any other law shall be reduced from the amount of compensation
payable under this section or under section 163A.
 WHAT ARE RISKS AND ITS SCOPE AND ELEMENTS?

Risk and Insurance are interwoven with each other. The life-blood of an insurance
contract is the risk it deals with. A contract of insurance is a contract which the
insurer undertakes to protect the insured from loss if it occurs. The insured is afraid
of loss which is called the risk of loss and the insurer undertakes to indemnify him
from the loss if it occurs for a consideration called premium. The insurer is able to
make an estimate of premium only if he knows the nature and degree of likely risk;
on part of the assured, it is of great importance to know the exact extent of his cover,
so as to avoid unnecessary double or over insurance.

However, all the risks cannot be insured, though hundreds of risks can be insured in
which the degree of such risks is measurable. The following points must be taken
into note:
 Risk should be uncertain.
 Loss arising from such risks should be capable of approximate calculation.
 The greater the risk, the higher the cost of insurance, and
 The risk should not be a speculative one, but a real one.

SCOPE OF RISK
IN XANTHOS’S CASE, the scope of the risk is described as: ‘It is open to the parties
by agreement to extend or limit the liability of the insurer in respect of the operation
of the risk’. In the absence of such agreement:
 the risk includes:
(a) the loss caused, i.e., risk brought about by the negligence not only of the insured
but even by his servants or strangers and
(b) risk brought about wilfully or maliciously by the insured’s servants or strangers,
but,
 the risk does not include:
a)  loss caused by the wilful misconduct of the insured or caused with his
convenience whether it amounts to a crime or not;
(b)  loss due to ordinary wear and tear and
(c)  inherent vice of the subject matter insured
(d)  the risk is such that it must happen
(e)  the risk in insurances is that which may happen and not which must happen.

ELEMENTS OF RISK
Risk depends upon various elements of the event insured against in its happening
soon or later. These circumstances must be disclosed by the insured and the insurers
generally calculate the premium with reference to these elements.
IN LIFE INSURANCE, the risk depends upon;
 habits in life or mode of living
 occupation
 environment
 position and status in life
 character
 heredity
 previous illness, and
 Opportunities for exposure to special damages.

IN PROPERTY INSURANCE, the risk depends upon;

 The nature of the property like movable or immovable, perishable or
otherwise
 Character and constitution
 Situation and locality
 Exposure to outside dangers
 Inherent defect
 Use and habits of the assured
 The title to the property

IN MARINE INSURANCE, the risk depends upon;

 Voyage and its nature
 The route of the voyage
 The winds and storms in the locality
 The danger of war, capture and seizure
 Pirates
 Mutiny of the crew
 Insurrection of natives and dangerous coasts.

TERMINATION OF RISK
Generally the risk terminates on the expiry of the term of the policy, i.e., the time
fixed for the duration of the risk in the policy. However, the termination may also be
brought unilaterally by the insurer or insured in exercise of their rights to terminate
the policy under the policy. Both insurer and insured may agree to terminate the
policy and substitute a new one in its place.
 LIFE INSURANCE
Synopsis: Introduction
Definition of Life Insurance
Meaning of Life Insurance
Nature of Life Insurance
Kinds of Life Insurance
Rules governing the assignment of Life Insurance

-Introduction: In India, some Europeans started the first life insurance company in
Bengal called the Orient Life Insurance Company in 1818. In Independent India,
there was a boom in the insurance business and there were about 250 Insurance
Companies by 1955. As there was no protection or guarantee to the policy holders’
money, the central government nationalized the life insurance industry and formed
the Life Insurance Corporation of India on 1/09/1956. Later, on the recommendation
of the Malhotra Committee, the government opened the insurance sector for
participation by the private insurance entities. The Government then enacted the
Insurance Regulatory and Development Authority (IRDA) Act, 1999 to protect the
interests of holders of insurance policies, to regulate, promote, and ensure orderly
growth of the insurance industry.

 Definition of life insurance:

Benson – “Life insurance is a contract between two persons; one person agreeing to
pay a given sum on the happening of an event, contingent upon the duration of
human life; the other person agreeing to pay the prescribed amount in installments
or in lump sum; the period of payment being death or efflux of the agreed period,
whichever is early”.

Dalby Vs. London and Indian Life Insurance co. – In this case life insurance was
defined as “ a contract to pay a certain sum of money on the death of a person on a
consideration of a due payment of certain annuity for his life calculated according to
the probable duration of life”.

Section 2(11) of the Insurance Act – provides that a life insurance contract
comprises of any contract in which one party agrees to pay a given sum upon
happening of a particular event contingent upon the duration of human life”.
 Meaning of life insurance: Life insurance is a contract of insurance whereby the
insured agrees pay certain sums called premiums, at specified times, and in
consideration thereof the insurer agrees to pay certain sum of money on certain
conditions and in a specified way, upon happening of a particular event contingent
upon the duration of human life.
Life insurance imports a mutual agreement whereby the insurer, in consideration of
the payment by the assured of a named sum annually or at certain times, stipulates
to pay a large sum at the death of the assured. The insurer takes into consideration,
among other things the age and health of the parents and relatives of the applicant
for insurance together with the applicant’s own age, course of life, habits, present
physical condition, and the premium extracted from the insured, probable duration
of his life, calculated upon the basis of past experience in the business of insurance.
Thus, Life insurance is protection given to a person against the damage he may
suffer through the death of another.

Nature of Life Insurance: Life insurance is in nature of contingency insurance and it

does not provide an indemnity. The sum to be paid is not measured in terms of loss.
The policy states the amount payable. The sum undertaken to be paid becomes
payable irrespective of the value of the limb or life lost. When properly considered,
the life insurance is a mere contract to pay a certain sum of money on the death of a
person, in consideration of due payment of a certain annuity of his life, the amount
of annuity being calculated in the first instance according to the probable duration of
his life and when once fixed, it is constant and invariable. The stipulated amount of
annuity is to be uniformly paid on one side, and the sum to be paid in the event of
death is always (except when bonus have been given by prosperous offices) the
same, on the other. The species of insurance in no way resembles a contract of
indemnity. One of the effect of life insurance not being a contract of indemnity is that
on the happening of the event the insured against the insurer should pay the agreed
amount irrespective of whether the assured suffers any loss or not.

Kinds of Life Insurance:

Based on duration
1. Whole-life Insurance Policy: Under the whole-life insurance policy, premium
payments are made during the life time of the life assured and the sum assured is
payable only on death. It is exactly a term assurance plan for an indefinite term; the
term being linked to the duration of human life. The whole-life policies can be
affected either by payment of single premium or continuous premium payment or
limited premium.

2. Limited Payment Whole-life Policy: Premium under this plan is higher than the
premium payable under a whole-life plan. This plan is suitable for persons in whose
 case the need for money would arise not only on the happening of death, but who
either on account of personal and family history are not eligible for a whole life plan
or do not want to extent the premium paying period beyond their earning years.

3. Convertible Whole-life Policy: Under this plan, the policy is originally issued as a
whole-life limited payment plan with a premium ceasing at age 70 with an option to
convert into an endowment plan after 5 years. This plan will be ideally suited for
young persons with a limited income to start with and possibility of increase in later
years. If the policy is converted into endowment, the premium is suitably increased.

Based on Term Insurance Policies – term between 3 month to 7 years

1. Straight Term (Temporary) Insurance Policies: The Corporation issues term-
insurance for two years, which is also called two-year temporary assurance policy.
2. Renewable Term Policy: These policies are renewable at the expiry of term for an
additional period without medical examination; but the premium rate will be altered
according to the age at the time of renewal.

Based on Endowment:
An endowment policy is essentially a life insurance policy which, apart from
covering the life of the insured, helps the policyholder save regularly over a specific
period of time so that he/she is able to get a lump sum amount on the policy
maturity in case he/she survives the policy term. This maturity amount can be used
to meet various financial needs such as funding one's retirement, children's
education and/or marriage or buying a house. Endowment plans, thus, fulfill the
dual need for a life cover and savings under a single plan. The key benefits of any
endowment plan include financial protection of loved ones, goal-based savings, tax
benefits under section 80C and 10(10D) of the Income Tax Act and the options to
obtain loan against the policy, in case of any financial emergency. Thus, any life
insurance plan with a saving component and lump sum maturity benefit can be
termed as an endowment plan.

Based on Premium Payment

1. Single Premium Policy: In this policy, the whole premium is paid at the beginning
of the policy in lump sum.
2. Level Premium Policy: Under this policy regular and equal premium are paid at a
definite interval. This premium is lesser than the single premium and convenient to
make.

Based on Participating in Profits:

1. Without Profit Policies or Non-Participating Policies: The holders of without profit
policies are not entitled to share the profits of the insurer. These policy-holders get
only the sum assured and no bonus is given to them.
2. With Profit Policies or Participating Policies: The holders of participating policies
are entitled to share the profit of the insurer. If there is loss, the policy holders cannot
get bonus i.e. there is bonus only when there is profit. The amount of bonus depends
on the profits after deducting the provisions of taxes, contingency etc.
Based on the Number of Persons Insured:
1. Single Life Policy: Under this policy, only one individual is insured.

2. Multiple Life Policy: In this policy more than one person is insured. It may be:
a) Joint Life Policy: This policy covers two or more lives and the policy amount
is payable on the first death.
b) Last Survivorship: This policy amount is payable at the last death. So as long
as any one of the insured is alive, no payment will be made.

Based on the method of payment of policy amount

1. Lump Sum Policies: Where the sum assured is paid in lump sum at the events
insured against.
2. Installment or Annuity Policies: Under this policy, the policy amount is payable in
installments.
Based on Non-Conventional Policies
1. Policies under LIC Mutual Fund: LIC under mutual funds provides a promise to
the investors to provide high returns along with safety and security of investment.
2. Pension Plans: Pension plans are investment plans that lets you allocate a part of
your savings to accumulate over a period of time and provide you with steady
income after retirement.
3. For Children Benefits: A child insurance plan is a combination of insurance and
investment that ensure a secure future for your child. This policy enables the
policyholder to secure their children's future; while simultaneously building up an
investment corpus to help meet the major milestones in a child's life. In case of a
child insurance plan, the parent is the policy owner while the child is the beneficiary.
4. Jeevan Sneha: LIC Jeevan Sneha is a money back plan that offers a periodic return of
sum assured with a facility to encash 20% of sum every five years till the tenure of
the policy. This plan is exclusively designed for women and provides fund in times
of needs like education, sickness, and marriage.
5. Jeevan Adhar: Jeevan Aadhar is an insurance plan meant for those with a
handicapped dependent. The plan provides life insurance cover throughout the
lifetime of the assured. The benefits under the plan are for the handicapped
dependent which are partly in lump sum and partly in the form of an annuity.

 Rules governing the assignment of Life Insurance and Fire Insurance : Interest
in a life insurance policy can be transferred from the policyholder to a lender or
relative by assignment of policy. Here the policyholder is known as the assignor
and the person in whose favor the policy has been assigned is called assignee.
 DOCTRINE OF SUBROGATION AND DOCTRINE OF CONTRIBUTION
Synopsis for Doctrine of Subrogation:
Definition of Subrogation
Meaning of Subrogation
Ways in which the right to Subrogation may arise
Limitation of the Doctrine of Subrogation

Synopsis for Doctrine of Contribution:

Meaning of the Doctrine of Contribution
When does insurer’s right to contribution accrue?
Application of the Principle of Contribution:

Doctrine of Subrogation

 Definition of Subrogation
1. Black’s Law Dictionary – “The Principal 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”.
2. Evelyn Thomas, subrogation is defined as “right to which one person has to stand in
the place of another and avail himself of all the rights and remedies of that other”.
3. Dan B. Dobb’s Law of Contract – “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 owned by the
defendant.”

 Meaning of Subrogation – Subrogation means substitution of a person or group by

another in respect of a debt in insurance claim, accompanies by the transfer of any
associated rights and duties. In Insurance law, subrogation is the name given to the
right of the insurer who has paid a loss to be put in the place of the assured so that
he can take advantage of any means available to the assured to extinguish or
diminish the loss for which the insurer has indemnified the assured. The right of
subrogation is said to be a corollary of the principle of indemnity.

The term subrogation is derived from the Latin words: sub, meaning “under” and
rogare, meaning “to ask”. Thus, subrogation literally means “asking (for payment)
under another’s name.”
 Subrogation means restitution of the rights of an assured in favor of the insurer
against third party for any damages caused by the third party, after the insurer has
indemnified the assured for the loss.
In accordance with this principle the insurance company acquires the right of the
insured to sue the third party to compensate for the loss inflicted, when it
indemnifies the insured for the losses suffered by him. The principle of subrogation
is applicable to all insurance contracts which are by their nature contracts of
indemnity. Subrogation occurs in property/casualty insurance when a company
pays one if its insured’s for damages, then makes its own claim against others who
may have caused the loss, insured the loss, or contributed to it

EXAMPLE: Suppose another driver runs a red light and hits your car. You have
insurance policy on your car, so you call your insurance company and they pay you
for all your expenses related to the accident. Your insurance company, realizing that
the other driver had an insurance policy, then seeks reimbursement from the at fault
party’s insurance company

 Ways in which the right to Subrogation may arise: The right of subrogation may
arise in any of the following ways:
(a) Right arising out of tort: A tort is a “civil wrong” and the most common types of
tort being negligence and nuisance. When a duty owed to a third party is breached,
the injured person will have a right of claiming damages from the wrong doer.
When an insured has suffered a loss due to a negligent act of another then the
insurer having indemnified the loss is entitled to recover the amount of indemnity
paid from the wrong doer. The insurer has a right in tort to recover the damage from
the individuals involved.
(b) Right arising out of contract: Where a contract imposes on a third person the
obligation of making compensation to the insured in respect of the loss, the benefit
of the obligation shall pass over the insurer.
(c) Right arising by Statue: Sometimes, Acts of Parliament give subrogation rights
which might not otherwise exist, for e.g. in marine insurance, subrogation arises by
statute, i.e. by operation of Section 79 of the Marine Insurance Act, 1963.
(d) Subrogation arising out of salvage: Where an insured is paid for a total loss,
ignoring the monetary value of the wreckage or remains of the insured article, the
subrogation rights arise out of the subject-matter of the insurance.

 Limitations of the Doctrine of Subrogation: The doctrine of subrogation does not

provide absolute right to the insurer. It is a remedy rather than a right; it is subject to
following limitations:
(a) Insurer must pay before he claims subrogation. The right of subrogation of
insurer arises only when the assureds claim has been fully paid and not till then,
though it may be modified in terms of the policy.
(b) The right of subrogation does not arise where the assured himself has no cause of
action against the third party.
Simpson Vs. Thomson – In this case, where there was a collision between two ships
which were owned by the same person, due to the fault of one of the ship. The
owner could not recover from the ship at fault as that was also owned by him. Hence
the insurer of the ship not at fault could not sue the ship at fault under the right of
subrogation.
(c) The insurer cannot enforce his right in his own name but in the name of insured.
(d) The insurer could not claim better or higher rights or remedies than what were
available to the insurer.
(e) The insurer cannot get any proprietary right in the policy.
(f) The principle of subrogation does not apply to life, it only applies to marine, fire
and other non-life policies.

Doctrine of Contribution

Meaning of Doctrine of Contribution: The principle of contribution enables the

total claim to be shared in a fair way. Principle of contribution has application where
there is a person insuring the same interest with more than one office. As per the
doctrine of contribution the indemnity provided for the loss occurring on the asset
which is insured with several insurers has to be proportionately shared among them
according to the relevant proportion of the loss. Thus, where there are two or more
insurances against one risk, the insurer can call upon other insurers similarly (but
not necessarily equally) liable to the same insured to share the cost of an indemnity
payment. This doctrine ensures equitable distribution of losses between different
insurers. By mere double insurance also, the right of contribution does not arise
unless there is over insurance and where the assured is over insured by double
insurance, each insurer is bound to contribute relevant proportion of the loss in
proportion to the amount for which he is liable under the contract. If any insurer
pays more than his proportion of loss, he is entitled to maintain a suit for
contribution against the other insurers.

When does insurer’s right to contribution accrue: Where there is no relevant

proportion clause, the insured can on the date of loss or damage choose the insurer
from whom to recover his indemnity. However, where there is relevant proportion
clause and the insurer pays more than his relevant share, such insurer cannot claim
contribution from other insurers for the excess paid by him, because he cannot claim
contribution for voluntary payments.
EXAMPLE: Two insurers A and B have independently covered a risk. Both the
policies contain the usual relevant proportion clause that the insurer will not pay
more than his share of the loss. A fully indemnifies the insured and claims 50%
contribution from B. B is not bound to reimburse A, because the excess paid by A
was voluntary
Application of the Principle of Contribution:
The application of principle of contribution can take two forms-

(a) Contribution in proportion to sum insured i.e. ‘maximum liability’ basis:

Under this method the insurers pay proportionately according to the insurance
cover provided by them.
EXAMPLE: A insures his house against loss by fire with insurer ‘X’ for 40,000, with
‘Y’ for 60,000 and with ‘Z’ for 1, 00,000. Fire broke out and the insured suffered a loss
of 50,000. X, Y and Z will contribute according to the sum insured by them i.e.
rupees 10,000/-, rupees 15,000/- and rupees 25,000/- respectively.

(b) Contribution in proportion to liability i.e. ‘independent liability’ basis: Under

this method, the amount payable by each insurer is calculated independently, totally
ignoring the fact that insurance has also been affected by other insurers.
EXAMPLE: Insurer ‘A’ has provided a cover of Rupees 8,000/- and the insurer ‘B’ of
Rupees 4,000/- and the loss sustained is Rupees 3,000/-. Under this method both A
and B will contribute 1,500/- each, because each policy would have paid the whole
amount of loss if there would have been no other insurance and so each contributes
equally towards the loss.
 FIRE INSURANCE

Synopsis:
Introduction
Definition of Fire Insurance
Meaning of Fire Insurance
Nature of Fire Insurance
Scope of the Fire Insurance
Who can insure the property against Fire
Rights and duties of insured in Fire insurance
Rights and duties of the insurer under Fire Insurance policy
Doctrine of proximate cause in Fire Insurance
General conditions of standard Fire Insurance policy

Introduction: A contract of fire insurance is a contract, usually in the shape of a

policy, whereby one person known as the insurer agrees, in consideration of a sum
of money called the premium to indemnify for any loss or damage to the insured
property or the insured goods of the insured. Generally, a contract of fire insurance
is a contract from year to year only and the insurance automatically comes to an end
after the expiry of the year. But it can be continued for a further period, if before the
expiry of the year, the insured expresses his intention to continue and pays the
premium. It must satisfy all the requirements of an ordinary contract given in the
Indian Contract Act, 1872.

Definition of Fire Insurance:

 According to Halsbury - “Fire Insurance is a contract of insurance by which the
insurer agrees for consideration to indemnify the assured upon a certain extent and
subject to certain terms and conditions against loss or damage by fire which may
happen to the property of the assured during a specified period”.

 In case of Castellion Vs. Perton - “ Fire Insurance is a contract whereby one person
undertakes in return for the agreed consideration to indemnify another person
against loss or damage occasioned by fire up to the agreed amount”.
  Section 2(6) of the Insurance Act, 1938 defined the fire insurance “as a legal contract
between an insurance company and the policyholder which guarantees that any loss
or damages caused to the policyholder's property in a fire will be paid by the
insurance company. Fire insurance provides coverage against incidents of accidental
fire, lightning, explosion, etc.”.
Meaning of Fire Insurance: Fire insurance is an agreement whereby one party (the
insurer), in return, for a consideration undertakes to the indemnify the other party
(the insured) against financial loss which he may sustain by reason of certain defined
subject matter being damaged by the destroyed by fire or other defined perils up to
an agreed amount.
The term ‘fire’ must satisfy two conditions:

(a) There must be actual fire or ignition;

(b) The fire should be accidental.

The property must be damaged or burnt by fire. If the property is damaged by heat
or smoke without ignition it will not be covered under the word ‘fire’.

Nature of Fire Insurance:

1) Offer & Acceptance : It is a prerequisite to any contract. Similarly, the property will be
insured under fire insurance policy after the offer is accepted by the insurance company.
Example: A proposal submitted to the insurance company along with premium on
1/1/2011 but the insurance company accepted the proposal on 15/1/2011. The risk is
covered from 15/1/2011 and any loss prior to this date will not be covered under fire
insurance.

2) Payment of Premium: An owner must ensure that the premium is paid well in advance
so that the risk can be covered. If the payment is made through cheque and it is
dishonored then the coverage of risk will not exist. It is as per section 64VB of Insurance
Act 1938. (Details under insurance legislation Module).

3) Contract of Indemnity: Fire insurance is a contract of indemnity and the insurance

company is liable only to the extent of actual loss suffered. If there is no loss, there is no
liability even if there is fire. Example: If the property is insured for Rs 20 lakhs under
fire insurance and it is damaged by fire to the extent of Rs. 10 lakhs, then the insurance
company will not pay more than Rs. 10 lakhs.

4) Utmost Good Faith: The property owner must disclose all the relevant information to
the insurance company while insuring their property. The fire policy shall be voidable
 in the event of misrepresentation, mis-description or non-disclosure of any material
information. Example: The use of building must be disclosed i.e whether the building is
used for residential use or manufacturing use, as in both the cases the premium rate will
vary.

5) Insurable Interest: The fire insurance will be valid only if the person who is insuring the
property is owner or having insurable interest in that property. Such interest must exist
at the time when loss occurs. It is well known that insurable interest exists not only with
the ownership but also as a tenant or bailee or financier. Banks can also have the
insurable interest. Example: Mr. A is the owner of the building. He insured that
building and later on sold the building to Mr. B and the fire took place in the building.
Mr. B will not get the compensation from the insurance company because he has not
taken the insurance policy being an owner of the property. After selling to Mr. B, Mr. A
has no insurable interest in the property.

6) Contribution: If a person insured his property with two insurance companies, then in
case of fire loss both the insurance companies will pay the loss to the owner
proportionately. Example: A property worth Rs. 50 lakhs was insured with two
Insurance companies A and B. In case of loss, both insurance companies will contribute
equally.

7) Period of fire Insurance: The period of insurance is to be defined in the policy. Generally
the period of fire insurance will not exceed by one year. The period can be less than one
year but not more than one year except for the residential houses which can be insured
for the period exceeding one year also.

8) Deliberate Act: If a property is damaged or loss occurs due to fire because of deliberate
act of the owner, then that damage or loss will not be covered under the policy.

9) Claims: To get the compensation under fire insurance the owner must inform the
insurance company immediately so that the insurance company can take necessary
steps to determine the loss.

Scope of a fire insurance: Though it is called ‘Fire Insurance’, apart from the risk of
fire, it also offers cover against lightning, explosion/implosion, aircraft damage, riot,
strike and malicious damage, storm, cyclone, typhoon, hurricane, flood and
inundation, impact damage, subsidence and landslide including rockslide, bursting
and/or overflowing of water tanks, apparatus and pipes, missile testing operations,
accidental leakage from automatic sprinkler installations, bush fire etc.
A fire insurance policy usually does not cover a certain amount known as “excess”
under the policy. Loss or damage caused by war and warlike operations, nuclear
perils, pollution or contamination, electrical/mechanical breakdown, burglary and
 housebreaking are excluded. Certain perils like earthquake, spontaneous
combustion etc can be covered on payment of additional premium.
Fire insurance policies are issued for one year except for dwellings, where a policy
may be issued for long term (with a minimum period of three years).

Who can insure the property against fire:

The following are among the class of persons who have been held to possess
insurable interest in the property and can insure such property:
(a) Owners of the property
(b) The vendor and purchaser both have right to insure
(c) The mortgager and mortgagee
(d) Trustees are legal owners and beneficiaries the beneficial owners of the trust
property and each can insure it.
(e) Bailee such as carriers, pawnbrokers or warehouse men are responsible for the
safety of the property entrusted to them and so can insure it.

Who cannot insure against fire?

One who has no insurable interest in a property cannot insure it. For example: A
unsecured creditor
cannot insure his debtor’s property, because his right is only against the debtor
personally.

Rights and duties of insured in fire insurance:

Rights of the insured:

1. Right of nominee/ assignee to claim amount for damage
2. Right to cancel/return the policy
3. Right to switch funds
4. Right to modification and alteration in the policy
5. Right to surrender the policy

Duties of the insured: It refers to the responsibilities of the policyholder, which

generally requires the exercise of good faith and maintenance of fair dealing. The
inability of the insured to comply with their duties is a ground for breach of contract,
cancellation of the policy, and forfeiture of the premiums paid. These duties are
often listed in the conditions section of the insurance contract. Some of the duties of
the insured include the following:

 Disclose material information,

 Avoid concealment and misrepresentation,
 Report loss or damage to the authorities,
 Provide notice of claim to the insurer,
 Prepare an inventory of the damaged property, and
 Provide proof of loss to the insurer.

Rights and duties of the insurer under Fire policy:

(a) Implied rights: The insurers have rights implied by law in view of the liability
they have undertaken to indemnify. Thus, they have a right to:
(i) Take all reasonable measures to extinguish the fire and to minimize the loss to
property, and
(ii) For the purpose, to enter upon and take possession of the property.

(b) Express rights: On happening of any damage the insurer and every person
authorized by the insurer may enter, take or keep possession of the building or
premises where the damage has happened or require it to be delivered to them and
deal with it for all purposes like examining, arranging, removing, selling or
disposing off the same for the account of whom it may concern.

Apart from the above, insurer has various other rights such as:
(i) Right of disclosure: A fire insurance contract is a contract of good faith. The
insured is bound to disclose to the insurer before the conclusion of the contract every
material circumstance which, in the ordinary course of business, ought to be known
by him. If the insured fails to make such disclosures, the insurer can avoid the
contract.

(ii) Right of control over the property: The insurer has an implied right to assume
control over the damaged property instead of leaving it in the possession of the
person having the right to obtain indemnity.

(iii) Right of entering the property: The insurer is entitled to enter upon the
premises insured or wherein the things insured are. But in order to do so, the
insured is required to give an immediate notice of the fire with the particulars of
damage done.

(iv) Right of subrogation: Subrogation is a right which equity has given in order to
enable the insurer to recoup, as far as may be, his loss under the contract.
(v) Right to salvage: When the insured property is destroyed or damaged by fire, the
insurer has a right to take possession of the salvage i.e. the property or things saved
after fire.

(vi) Right of reinstatement: The insurer has a right that instead of paying the loss to
the policy-holder in cash, he can replace or repair the property which is known as
the insurer’s right of re-instatement. This right gives option to the insurer either to
pay the indemnity money in cash or to restore to the insured the property damaged
or destroyed by fire.

(vii) Right of contribution: When the same property has been insured with more
than one insurer and if in case of loss one of the insurers has paid the full amount of
loss to the insured, the insurer has a right to claim contribution from the other co-
insurers in reasonable proportion.

Doctrine of proximate cause in Fire Insurance: In a fire insurance policy, it is

necessary that fire must be the proximate cause of the loss. The words “loss or
damage occasioned by fire” means the loss or damage either by ignition of the article
consumed or by the ignition of a part of the premises when the article is located so in
one case there is loss entirely and in the other case there is damage and both are
occasioned only through fire. The rule is that the immediate and not the remote
cause is to be regarded as ‘cause proxima non-remota spectature’. Proximate cause is
very important in a fire insurance policy. The insurer always takes the proximate
cause while paying the claim. If the property insured is burnt but the fire was
preceded and brought into operation by an expected peril, the legal position
depends upon whether the expected peril was the proximate.

Determination of Proximate Cause: The losses may occur as a result of a single cause
or a chain of events or more than one cause:
1. Loss caused by a single cause: When a loss is caused as a result of a single cause,
such as house being damaged by earthquake or car being damaged due to collision,
proximate cause can be easily found. It can easily be verified as to whether the
damage comes within the purview of the policy or not. If the proximate cause is an
insured peril, then the insurer will be liable.

2. Loss caused by more than one cause or chain of events: Generally, losses occur as
a result of more than a single cause or due to a chain of events, where it is difficult to
isolate the immediate cause of the loss.

(A) Unbroken sequence: Where perils are acting consecutively in unbroken

sequence i.e. one peril is caused by and follows from another peril. This means there
is a connected line of events which have taken place in uninterrupted succession. It
is further sub-divided into two categories:
 Unbroken sequence, no excepted perils involved: If the chain of events are not
broken and involves only insured perils and no expected perils. Insurer is liable to
compensate all losses.
 Unbroken sequence, with excepted perils involved: Where a chain of events is in
unbroken sequence and involves an excepted peril, the liability to compensate will
depend on whether the excepted peril occurred before or after the insured peril.
(a) Where an excepted peril is involved and it precedes an insured peril, insurer is
not liable.
(b) Where an excepted peril follows an insured peril, the insurer is not liable if the
loss caused by each is undistinguishable. If the loss caused is distinguishable, then
insurer is liable.

(B) Broken sequence: Broken sequence means that there is no connected line of
events which have taken place in succession. In broken sequence each peril is
independent of the other. It can be of two types:
 Broken sequence, no excepted perils involved: When a new and independent cause
arises which breaks the chain of sequence and no excepted peril is involved insurers
will be liable as all the causes are insured perils.
 Broken sequence, with excepted perils involved: When the chain of events are
broken by a new and independent cause and one of the event is excepted peril, the
insurers liability will depend on whether the excepted peril occurred before or after
the insured peril.

(a) If excepted peril is involved and it precedes the insured peril, insurer is liable for
the loss caused by the insured peril.
(b) If the excepted peril follows the insured peril, the insurer is liable only for the
loss caused by the insured peril up to the time of intervention of the excepted peril.
(c) Where the perils acting simultaneously, as in, where the causes do not succeed
one another, but operate simultaneously and produce the loss and with excepted
peril involved and it is possible to isolate the effects of both insured and uninsured
perils, the insured can claim only for the insured perils and not for excepted perils.

Everett Vs. London Assurance – In this case a certain property was insured against
fire. A quantity of gunpowder belonging to a person at some distance from the
plaintiff’s property exploded, the shock of which shattered the windows and
damaged the plaintiff’s property. It was held that as the proximate cause of the
damage was the concussion of air and not fire, the plaintiff thus could not recover
damages.
 Marsden Vs City and Country Assurance Co. – In this case, a fire broke out in the
adjoining premises and spread to the rear of the plaintiff’s shop but no further.
While plaintiff was shifting his stock to safety, a mob attracted by the fire, tore down
the shop shutters and broke the windows for the fire to enter into the plaintiff’s
shop. It was then held that the proximate cause of the damage was not fire, but the
lawless act of the mob.

General conditions of standard Fire policy: Policy conditions are simply provisions
of an insurance policy which along with the insuring agreement and exclusions
complete the contract. These conditions may or may not be incorporated in the
policy. These policy conditions are of two types:
(a) Implied conditions- are those conditions which are not in writing and as such
are not included in the policy itself. These implied conditions are:
 That the property described in the policy which is the subject matter of the insurance
is actually in existence at the time the insurance is effected,
 That the description of the property given in the policy is correct so that when a
claim arises it will readily identify the property destroyed as that intended to be
insured,
 That the insured has an insurable interest,
 That the insured observes good faith towards the insurer’s at all material times and
in all material particulars.

(b) Express conditions- Express conditions are created by specific words of the
parties and are set forth or expressed in the policy. A breach of express conditions
will either absolve the insurer from liability or postpone liability until they are
complied with. They are mandatory in nature and direct the insurer to perform
certain duties not only at the time of loss but throughout the period of policy. They
protect the insurer against anything being done or omitted to be done to their
prejudice.
These express conditions are of two types:
 General Express Conditions which are printed in the body of the policy itself and are
common to all types of contracts;
 Special Express Conditions which are applicable to a specific contract only and are
written or typed on the policy, or may be embodied in a policy by reference to a
printed slip attached.
 PREMIUMS

Synopsis:
Introduction
Definition and Meaning
How is premium charged
When the right to claim a return of premium exists / What are the circumstances when
premiums can be recovered back
Conclusion

Introduction: In an insurance contract, the risk is transferred from the insured to the
insurer. For taking this risk, the insurer charges an amount called the premium. The
premium is a function of a number of variables like age, type of employment,
medical conditions, etc. The actuaries are entrusted with the responsibility of
ascertaining the correct premium of an insured. The premium paying frequency can
be different. It can be paid in monthly, quarterly, semiannually, annually or in a
single premium. Any valid contract has a consideration, and the consideration you
pay for an insurance policy is called its insurance premium.

Definition and Meaning: Premium is an amount paid periodically to the insurer by

the insured for covering his risk.

According to the MacMillan Dictionary, " regular payment made to an insurance

company so that you are protected by the insurance."

National Insurance Company Limited defines premium as, "premium is the fixed
amount of sum paid over the period by ensured to the insurer in order to secure an
insurance policy and to complete the contract of insurance
 In Lucena Vs Crawford, Lawrence J defined premium as "a price paid adequate to
the risk".
An insurance premium is the sum paid for insurance or reinsurance cover and is the
consideration paid by the (re)insured for the (re)insurer’s contractual obligation to
indemnify it against risks specified in the policy.

The premium is used by (re)insurers primarily to:

 establish reserves for known and unknown losses
 pay claims
 generate investment returns
 purchase reinsurance to protect its net account
 comply with regulatory solvency margin requirements
 pay Insurance Premium Tax (IPT) to HMRC.

How is premium charged: It is the role of underwriters and actuaries to calculate the
premium in accordance with their assessment of the risk. How it is calculated
depends greatly on the particular class of insurance. Calculating a life and health
premium is mainly a mathematical task carried out by actuaries based on large data
sets of longevity and morbidity statistics, taking into account the prevailing and
long-term inflation rates and anticipated returns on investments. Certain classes of
general insurance, such as motor, may also be rated in this way where there is a
sufficiently large body of statistical data and where the number of policies
underwritten on similar terms is large enough to price policies by reference to
aggregate data rather than factors specific to each particular risk. The emergence of
sophisticated algorithms and artificial intelligence is fundamentally changing how
insurance is priced and sold.

Factors that affect the premium amount:

1. Your age. Insurance companies look at your age because that can predict the likelihood
that you'll need to use the insurance. With health insurance, younger people are less
likely to need medical care, so their premiums are generally cheaper. Premiums increase
as people age and have a higher chance of needing more medical services. And teenage
drivers are still working on building experience, so they're more expensive to insure.
Likewise, older drivers—who tend to have slower reflexes—will also pay more.
2. The type of coverage. In general, you have several options when you buy an insurance
policy. The more comprehensive coverage you get, the more expensive it will be. For
example, if you have an auto insurance policy that covers liability only, it will be
cheaper than if you have a plan with collision, comprehensive, liability, medical
payments, and uninsured/underinsured motorist coverage.
3. The amount of coverage. The less coverage, the cheaper the premiums—no matter what
you're insuring. If you buy health insurance, for example, you'll pay lower premiums
for the same type of coverage if you have a higher deductible and higher out-of-pocket
maximum. Similarly, it will cost more to insure a $400,000 home than a $200,000 home.
4. Personal information. Depending on the type of insurance you're shopping for, the
insurance company may take a close look at things like your claims history, driving
record, credit history, gender, marital status, lifestyle, family medical history, health,
smoking status, hobbies, job, and where you live.
5. Actuarial tables. Most insurance companies employee actuaries, who are business
professionals that assess the risk of financial loss using mathematics and statistics to
predict the likelihood of an insurance claim, based on much of the aforementioned
criteria. They typically produce something called an actuarial table that is provided to
an insurance company's underwriting department, who uses the input to set policy
premiums.
6. Expenses and profit margins: The premium amount varies across several insurers
because the premium not only depends on the factors related to the policyholder but
also on factors related to the insurer, that is, the expenses incurred by the insurer in
writing the policy. For life insurance plans the premiums may differ because insurers
will have different cost structures, assessment of risk and investment returns. So,
although the factors used to determine premium are the same the outcomes will be
different.

What circumstances can premiums be recovered back: Generally, the entire

premium is refunded or returned in the following cases:

1. Where there has been fraud

A. On the part of the insurer: If the insurer or his agent indulges in fraud in
inducing the insured to take the policy, the contract of insurance is voidable and
the insured can repudiate the contract or cancel the contract and can claim the
return of the premium. Under section 65 of the contract act, 1872, the insured can
claim the refund of premium by avoiding the contract. In insurance contract, the
insurer has to return the premium if there is a fraudulent representation or some
breach of good faith on the part of the insurer.

Tajore Life Assurance Co. Vs. Kuppannorao, in this case it was held that fraud on
the part of the insurer entitled the insured to get back the premium paid by him.

Kettlewell Vs. Refuge Assurance Co. Ltd., it was held in this case that the holder of
the policy is entitled to recover from the company the premiums paid upon the faith
of the representation.
 B. On the part of the insured : If there has been fraud on the part of the assured, the
insurer may resort to the following resources:
i. Refuse to receive the further premium and repudiate the contract;
ii. To apply to the court for cancellation of the policy;
iii. If the policy is matured, the defense of fraud may be set up for recovery of
the amount;
iv. If the evidence is more likely to be lost, a suit may be filed for a
declaratory decree under the specific relief act.
Prince of Wales etc. Assurance Co,Vs. Palma : In this case the insurer filed a suit for
the declaration of the policy to void when it was found that the defended took the
life insurance policy in the name of his brother who died due to poisoning. The court
granted the declaration, on the condition that the premium be returned and it should
be applied towards the costs of all parties.

2. Where the policy has become void ab initio: Void ab initio means from the very
beginning. The contract of insurance may become void ab initio for the following
reasons:
A. When the parties were never ad idem – In the law of contracts, when there is no
consensus or error in consensus, the contract becomes void. Parties are not said to be
at ad idem when they do not think at the same time about the same thing in the
same manner. There must be a meeting of minds. If the parties intending to enter
into a legal contract of insurance, entered by mistake an illegal contract, the
premium is returnable. However, if it is a mistake of law, the premium is not
returnable even though the mistake is due to the innocent representation made by
the agent.
B. Ultra-Vires to the Powers of the Company: When the policy is issued by a company
which is ultra-virus to its powers, the policy is void and the company is liable to
return the premium.
C. Where the terms of the contract are uncertain: As per section 29 of the contract act,
1872 the contact is void where the terms of contract are not certain or not at least
capable of being made certain. When the insurer cannot answer the subject matter of
a section contained in the policy, the contract of insurance is void for uncertainty.
D. Where the object or consideration is illegal: Under section 23 of the contract act, a
contract of insurance may become void when the object or consideration is unlawful
or opposed to public policy and the insurer is bound to return the premium under
such circumstances.

3. Where no risk is incurred by the insurer: Risk refers to the loss or destruction of
property as a consequence of peril(s) insured against. The peril in life policies is death,
in the fire policies it is the loss of property due to fire and in marine policies it is
collision, shipwreck, stranding, foundering at sea etc. Risk is a consideration for
 premium to be paid. If the risk-insurance against is absent, the consideration fails and
the insured is entitled to the refund of the premium.

4. Return of partial premium: In marine insurance the risk is generally considered as

divisible and there will be partial return where there is partial failure of consideration.
In fire insurances risk is not divisible and there is no question of return of proportionate
premium return. In life insurance, the risk is generally indivisible but in certain cases
the risk is divisible, according to porter in such cases proportionate part of the premium
is returnable.

For example: if a person agrees to pay a high rate of premium for extra-ordinary risk
like military service, he may get returns of proportionate premium if he does not take
up the military service.