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N.

BHAGYA LAKSHMI

LAW OF
INSURANCE
UNIT – 1
What is

5
What is the
Insurance?
Purpose?

How is it
Helpful?

Is it a New
What are
Concept?
the types
of
Insurances
?
CE
AN
U R
IN S PROTECTION
CONFIDENCE

COVERAGE

SAFETY

SECURITY

HELP
Simply….means
Insurance

o ……is an important tool for risk
management
o ……….and the mitigation of loss.
o When people suffer a loss or damage to
their property or persons,
o ……insurance coverage is vital.
o …..is an intricate economic
o and social device for the handling of risks
to life and property
Cont…

 …insurance….
 protection or safe guard the person
from various risks…..

 Risk…Chance of loss

 Risk cannot be eliminated…..but loss
can be….
Definition….

 The term ‘insurance’ may be defined …
 ……….as a co-operative mechanism
 to spread the loss
 caused by a particular risk over a number
of persons
 who are exposed to it
 and who agree to ensure themselves
against that risk.
In financial sense….

 ….is a social device
 …..providing financial compensation for the
consequences of adversity
 ……the payment being made from the
accumulated contributions
 Of all parties participating in the
arrangement
In Legal sense…

 Insurance is a ‘contract’ ….
 wherein one party (the insurer)
 agrees to pay the other party (the insured)
 or his beneficiary,
 a certain sum upon a given contingency (the
insured risk)
 against which insurance is required.
Need of.....

 All assets have some economic value
attached to them.
 .......a possibility
 these assets may get damaged/destroyed
or become non-operational
 due to risks
 ........like breakdowns, fire, floods,
earthquake etc
Purpose.....

 The primary...... of insurance
 .......is to provide economic protection
against losses
 that may be incurred due
 to a chance of an event happening such as death,
illness, or accident
????

 Risk………Peril …………
Hazard

Are one & the same?
Is there any difference?
What is Risk?
 Risk can be defined......

 An uncertain event or condition, which if occurs,
would have an undefined or unknown impact on
achievement of objective
 ...... as uncertainty regarding loss
 the inability to work and earn an income due to
disability is a risk
 the destruction of a home due to hurricane......
Cont......

 The loss of family income due to
death of a person…..
 The potential for an automobile
accident is a risk
 The chance of someone slipping on
icy driveway is a risk
Types of risk

  
 Pure Risk
 Speculative Risk
 Particular Risk
 Fundamental Risk
peril

 Peril is a cause of loss.
 Most of the insurance policies
 Will have specific recitals
regarding……
 The perils insured against and
exclusions.
Perils.....

Exclude
d

Uninsur
ed
Insured Perils

o Those named in the policy as insured
o example – fire, sea, water, lightening, storm theft etc.

Excluded Perils
o Those stated in the policy as excluded either as causes of insured
perils
o e.g. riots, earthquake, war etc.
Cont….

 Uninsured perils – those perils not mentioned in the
policy at all as insured and excluded perils.
 Smoke and water may not be excluded nor
mentioned as insured in a fire policy.
  It is possible for a water
damage claim to be covered under a
fire policy, if for example, a fire occurs
and the fire brigade extinguishes it
with water.
Cont…

 A hazard is a condition that
increases the possibility of loss.
 For ex…. Fire is a peril because it
causes losses,
 While a fireplace is a hazard
because it increases the
probability of loss from fire.
Insurance ……law…?

 Contract of insurance……is also
concluded …..
 Through proposal and its acceptance
 Mere mental assent to an offer…..
 The offerer …must indicate the mode
of communicating acceptance
Cont….

 Insurance law is the name.......
 ......... Given to practices of law surrounding
insurance,
 ....Including insurance policies and claims.
 Insurance regulation that governs ......
 The business of insurance is typically
 .....Aimed at assuring the solvency of
insurance companies
???????

General Assurance Society
Ltd.
Vs.
Chandumull Jain and Anr.
AIR1966 SC 1644
??????

 The appellant ...... general insurance company
 On June 2, 1950 .......the respondents submitted
proposals to the company
 ...... with a view to insuring houses in Dhullian
 for Rs. 51,000 and Rs. 65,000 respectively
 against fire
 and including loss or damage by cyclone, flood
and/or change of course of river or erosion of
river, landslides and subsidence
Cont....

 ....... Dhulian is situated on the banks of the
Ganges
 and for several years the river had been
changing its course
 and in 1949 a part of the town was washed
away.
 The insurance was obviously effected with this
risk in sight.
 The period of insurance was to be from June 3,
1950 to June 2, 1951.
Cont…

 The Company accepted the proposals ...
 ..........by two letters on June 3, 1950
 and the letters stated that in accordance
with the proposal
 ......the assured was held covered under
cover notes enclosed with the letters.
 At the back of these letters of acceptance,
there was description of the houses
Endorsement....

 "Including Cyclone, Flood and/or
loss by change of course of river
diluvium and/or Erosion of River
Landslide and/or subsidence. It is
further noted that there is a
thatched building of residence
within 50 ft. of the above premises."
Cont....
 The said property is hereby held insured
 against damage by Fire, subject to the terms of
the Applicant's proposal
 and to the usual Conditions of the Society's
policies.
 ......... expressly stipulated that this protection
Note cannot, under any circumstances be
applicable for a longer period than Thirty Days
 and that it is also immediately terminated before
that date
Cont......

o On June 7........
o .......the assured sent the premium
by cheque
o As no policy was received by them,
o the assured wrote a letter on July 1 
asking for the policy or for extension
of the cover notes.
o This was not done.
Cont....

On July 6, 1950 the Company wrote to the
assured
In accordance with the terms & conditions
.......cancel the risk from 6th July, 1950 as
noted below.
The relative Endorsement is under
preparation and will be forwarded ... in due
course.
The above cover note is cancelled ....... from 6th July, 1950
Cont....

 On July 15, 1950 the assured stated......
 ........the Company bound because
although there was no erosion by the
river
 when the proposals were submitted and
accepted,
 the Company was trying to get out of the
contract when the river was eroding the
banks.
Cont....
 Further stated that...
 as the risk had already "commenced" and "taken place",
 there could be no cancellation as there was no time left for the
assured to take precautionary measures by reinsuring.

condition 10
 In reply .......the Company referred to of
the Fire policy under which the Company claimed to cancel the
policy at any time
Condition 10 of the Fire
Policy .......
 “This insurance may be terminated at any time at
the request of the Insured,
 in which case the Society will retain the customary
short period rate for the time the policy has been in
force.
 This insurance may also at any time be terminated
at the option of the Society,
 on notice that effect being given to the Insured,
 in which case the Society shall be liable to repay on
demand a rateable proportion of the premium for the
unexpired terms from the date of the cancellation."
Cont....

 In reply the assured wrote......
 on August 2...... that the condition did not apply
to any risk except that of fire and could not, in
any event, protect the Company after the risk had
commenced.
 On 13th and 15th August the houses were
washed away.
 After unsuccessfully demanding payment under
the policies,
 the assured filed the present suit before the
Calcutta High Court.
 It was dismissed with costs
On appeal....

o .........the claim was decreed to
the extent of Rs. 1,10,000 with
costs, the decree amount to carry
interest at 3% per annum.
o Next......
o ....... Present appeal has been
filed by the Company.
Issues raised.....

 Did condition 10 apply to the facts?

 If it did, how is it to be construed?

 Was the cancellation of the policy valid in law?
S.C explained.....

....... held that condition 10 of the policy applied to all the
risks covered by the policy and not the risk from fire only.

Although the policy was not ready, the proposal not
having been declined during the period of the cover note,

the learned Judge held, the policy was bound to issue
and the extent of the protection would thus be according
to the company's usual terms and subject to the
conditions in the policy.
Cont...
Insurance of property is not a bet …….but a well -
known commercial deal.
Acceptance of the proposal read with the cover notes 
clothed the assured
with a right to demand a policy in relation to the kind 
of  insurance 
he had bought and he could only claim to be covered
against risk 
…….in the manner laid down in the policy.
The cover notes were an integral part of the acceptance
of the proposals and the two had to be read together.
Interpretation of....

……..contract of insurance 
…………is a species of commercial transactions 
and there is a well established……
Commercial practice
……. to send cover notes even prior to the
completion of a proper proposal
While the proposal is being considered or a
policy is in preparation for delivery.
Cont….

A cover note is a temporary and limited
agreement.
It may be self – contained or it may
incorporate by reference to the terms and
conditions of the future policy.
When the cover note incorporates the policy
in this manner
……it does not have to recite the terms and
conditions
……but merely to refer to a particularly
standard policy
Cont…
If the proposal is for a standard policy and the cover note
refers to it
……the assured is taken to have accepted the terms of that
policy.
The reference to the policy and its terms and conditions
may be expressed in the proposal or the cover note
……even in the letter of acceptance including the cover
note.
The incorporation of the terms and conditions of the policy
may also arise from a combination of references in
……two or more documents passing between the parties.
Cont…

Documents like the proposal

……cover note and the policy are commercial documents
and

……to interpret the commercial habits and practice cannot
altogether be ignored.

During the time the cover note operates

……the relations of the parties are governed by its terms
and conditions of the policy bargained for and to be issued.
Cont...
When this happens the terms of the policy are
incipient but after the period of temporary cover
......the relations are governed only by the terms
and conditions of the policy unless insurance is
declined in the meantime.
Delay in issuing the policy makes no difference.
The relations even then are governed by the
future policy
if the cover notes give sufficient indication that
it would be so.
Cont…

In interpreting documents relating to a contract of
insurance
……the duty of the court is to interpret the words in
which the contract is expressed by the parties
……because it is not for the court to make a new
contract, however reasonable
……if the parties have not made it themselves.
Looking at the proposal, the letter of the acceptance
and the cover notes
……it is clear that a contract of insurance under the
standard policy for fire and
……extended to cover flood, cyclone etc. had come
into being
Cont...

The four essentials of a contract
of insurance are:-
The definition of the risk
The duration of the risk
The premium
The amount of insurance
Cont...

Even if no terms are specified
……..the terms contained in a policy customarily issued in such
cases, would apply.
There is ample authority for the proposition.

...“Where the contract to insure or issue a policy of the fire
insurance does not specify the terms and conditions of the policy,
it is a general rule that the parties will be presumed to have
contemplated a form of policy containing such conditions and
limitations are as usual in such cases...”
Cont…

If property is insured against flood
……it is not open to the insurance company to send
couriers on motor cycles ahead of the floods to cancel the
policy.
But if it is thought that a particular dam was not quite safe
……the insurance company will be entitled to cancel the
policy against flood before the dam has actually started to
crumble or has crumbled.
Cancellation is reasonably possible before the liability
under the policy has commenced or
……has become inevitable and it is a question of fact in
each case whether the cancellation is legitimate or
illegitimate.
Cont…

In the present case, it was always clear that the
Ganges would get into the floods in the rainy
season
……but it was not clear that it would begin to
erode the bank in such a way that these houses,
…which were at a distance of 400/500 ft. from
the bank would inevitably was washed away.
The question thus is whether the cancellation
was done after liability of the assurer under the
policy had commenced or the commenced or the
loss had become inevitable.
Cont…
concerned with two dates in particular and they are 18 th
June, 1950 when inspection officer visited Dhulian and
when the policy was cancelled (July 6).
The houses were 400/500 ft. away when the proposal
was made.
The river remained calm till the second week of June.
It only began to rise in third week of June.
Thus on, when …..I.O…. visited the place, there was no
flood and no erosion.
……only estimated the possibility of loss and no more
Cont…

Even in the third week of June there was no erosion
and it began by the end of June.
In these circumstances,
…….it cannot be said that the loss had commenced
or that it had become so certain as to be inevitable
or that the cancellation was done in anticipation
and with knowledge of inevitable loss.
The cancellation was done at a time when no one
could say with any degree of certainty that the
houses were in such danger that the loss had
commenced or became inevitable
Cont…
The assurers were, therefore, within their rights
under condition 10 of the policy to cancel it.
As the policy was not ready they were justified in
executing it and cancelling it.
The right of the plaintiff to the policy and to enforce
it was lost by the legal action of cancelling
In the result the appeal must succeed.
It is allowed.
The decree passed by the divisional bench is set
aside dismissing the suit is restored.
PREMIUM
??????

 An insurance premium……
 The amount of money that an
individual or business
 Must pay for an insurance policy
 ……considered income by the
insurer
 And also represents a liability
Case-law

Petitioner:
National Insurance company Ltd.
Vs.
Respondent:
Seema Malhotra and ors.
(2001)3 SCC 151
Facts….

 The insured was one Yash Paul Malhotra.
 He and the appellant insurance company entered
into an insurance contract on 21st December, 1993
 …….by insuring a Maruti car for a sum of Rupees
one lakh and fifty thousand.
 On the same day, the insured gave a cheque for
Rs.4492/- towards the first installment of the
premium
 and the insurance company issued a cover note
Cont….

 But unfortunately,
 the last day in the year 1993 became the last day of
the insured
 as well as his Maruti car
 because the insured died and the car was
completely damaged in an accident
 which occurred on 31.12.1993.
Cont….

 On 10.1.1994 the bank on which the cheque was drawn by the
insured sent an intimation to the insurance company
 that the cheque was dishonoured
 Due to insufficient funds.
 On 20.1.1994 the insurance company informed the business
concern of the insured……..
Cont….

 “Notwithstanding anything contained to the
contrary,
 it is hereby agreed and declared that your cheque
has been dishonoured by the bank.
 So …….. cancelling the above said policy with
immediate effect.
 The company is not at risk”.
???????

 The respondents ……who are the widow and
children of the insured,
 …..filed a claim for the loss of the vehicle.
 …….the claim was repudiated,
 the respondents moved the State Consumer
Protection Commission
 ???????????
Question arose….

 Is the insurer liable in such a situation to honour the
contract of insurance?
Judgment….

 As per…….. the said claim was rejected
 …….In so far the facts of the present case are
concerned,
 it is a settled law
 that the insurer even if it had issued a cover note
 ……is entitled to cancel the policy
 if it fails to cash the cheque for premium.
 The concept of contract in essence envisages a
proposal, acceptance and passing of consideration.
Cont…..

 In the absence of any consideration there can be no contract
 ……. recognised by sec. 64-VB of the Insurance Act.
 The insurer was justified in repudiating the contract
 and it has done it in time and soon after the cheque bounced.
Aggrieved…..

 …….. moved the High Court
 the division bench which heard the
matter
 reversed the order passed by the State
Consumer Commission
 and held the insurance company liable to
honour the claim.
 ????????????
Cont…..

 because it chose to cancel the
policy
 with effect from the date of
bouncing of the cheque,
 whereas the liability was incurred
prior to it.
 While ordering the cancellation of
policy in question…….
Cont….

 …….. insurance company instead of
cancelling the same due to dishonour
of cheque of the premium from the
date it was issued i.e. 21.12.1993,
 chose to cancel it with immediate
effect.
 This clearly indicates that till the
issuance of this communication
 respondent insurance company itself
treated the policy subsisting.
Also……

o ………directed the State Commission to
assess the compensation in
accordance with law
o and pay the same after deducting the
amount of premium
o (as the cheque was dishonoured).
Next……

 Insurance company……being
aggrieved with the order of…
 Preferred…..
Interpretation….S.C

 The essence of the insurance
business is the coverage of the
risk
 by undertaking to indemnify the
insured against loss or damage.
 They agree to pay the damages
arising out of any accident
Cont…

 by taking a chance that no
accident might happen.
 Motivation of the insurance
business
 is that the premium would turn
to be the profit of the business
in case no damage occurs.
Cont….

 ……Such business of the insurance company
 …… can be carried on only with the premium
 The only profit……….of the insurance business
is the premium paid when no accident or
damage occurs.
 But to ask the insurance company
 to bear the entire loss of damages of
somebody else
 without receiving a pie towards premium is
contrary to the principles of equity
Cont…..

 In a contract of insurance…..
 …….. a cheque towards payment of
premium or part of the premium,
 such a contract consists of reciprocal
promise.
 The drawer of the cheque promises the
insurer
 ……that the cheque, on presentation, would
yield the amount in cash.
Cont…..

o Thus, when the insured fails to pay the
premium promised,
o or when the cheque issued by him towards
the premium is returned dishonoured by the
bank
o the insurer need not perform his part of the
promise.
o The corollary is that the insured cannot claim
performance from the insurer in such a
situation.
Finally……

 uphold the contention of the appellant
insurance company.
 …….. allow this appeal and set aside
the impugned judgment of the Division
Bench of the High Court.
 The order passed by the State
Consumer Commission will stand
restored.
History & Origin…..
History & Origin

 The first methods of transferring or
distributing risk in a monetary
economy------------practiced by Chinese &
Babylonian
 Greeks & Romans introduced -----origins of
Health & Life insurances
Cont...

 Chinese merchants to reduce their
risks, split the shipment into small
portions and placed them on several
boats
 The first written insurance
policy.....Babylonian
Cont....
The Insurance idea is an old-institution of
transactional trade.
………..insurance was the marine insurance.

…….nothing like disaster to set men’s
minds to work.
Consequently, in due course of time fire and
life insurance made their appearance.
Cont….

Within the last hundred years the
insurance principle is being extended
wider.

Today ….. finds insurance cover for
accidents motor vehicles, glass, life
stock, cargo, burglary and various
other disasters.
History in India

InIndia………..has deep rooted
history
…explained in the Manu,
Yagnavalkya and Kautilya
…….Pooling resources re-
distributed in times of calamities…
precursor to modern day insurance
Cont….

1818- Oriental Life Insurance Company…Calcutta…
this company failed in 1834
1829- Madras equitable Life Insurance
History of Insurance
Legislation…..

 Up to the end of 19th century,
 ….the insurance was in its inception stage in India.
 Therefore, no legislation was required till that
time…….
Cont….
 Usually the Indian Companies Act, 1883
was applicable to business concern;
 banking & insurance companies
 …… like New Indian Insurance Companies
and Provident Societies started during the
time of independence movement
 but most of them were financially
unsound.
 It was asserted that the Indian Companies
Act, 1883 was inadequate for the purpose.
Cont….
 Therefore, two Acts were passed in 1912…
 Provident Insurance Societies Act ,1912
 and the Indian Life Insurance Companies
Act, 1912.
 These two Acts were in pursuit of the
English Insurance Companies Act, 1909.
 These two enactments were governing
only life insurance.
Cont….

o In 1870, Bombay Mutual Life Assurance
Society became the first Indian Insurer
o Subsequently ….many insurance
companies came in to existence
o The oldest existing insurance company
in India---National Insurance
Company----found in 1906
o LIC came in to existence in the year----
1956
Cont…

 Until the passage of the Insurance
Regulatory and Development Authority Act
in 1999,
 it was a public sector monopoly
 Insurance is an important element of
financial planning.
 However, more so as a risk-management
tool rather than an investment.
Cont…

 Tracing back in time for a few years,
insurance policy was considered to be useful
to safeguard the revenues in the future.
 However, in this day and age, the mounting
risk of financial uncertainties makes it
necessary to have an insurance cover.
 The recognition of the importance of an
insurance cover has helped the Indian
insurance industry bloom in the recent years.
Main reason….

 ….to insure ones interest is protection
against future financial losses.
 It offers the insured a peace-of-mind to
help him achieve a higher productivity.
 It helps to attain a sense of security that
he will remain safe from financial hardship.
 These hardships could be the result of
theft, loss of income or medical
emergencies.
CLASSIFICATION
CLASSIFICATION……..

NON – LIFE
LIFE INSURANCE
INSURANCE
Classificatio
n of
Insurance

Whole life
Motor
Endowme
insurance
nt
Fire
Life
insurance
annuity
Etc…
Etc…
What is Life Insurance?

 ……….Contract between the insured person and
the company or “carrier” that is providing the
insurance
 …that gives out a certain amount to the insured
 ……or their nominated beneficiaries upon a
certain event ………death of the individual ……
insured
 Means….it offers way to replace the loss of
income ..
 Simply….LI related to human life
Cont...

 It’s basically long term investment &
requires periodic payments......
 Either monthly or quarterly or
annually.....
 The risks......covered by life insurance
include...
 Premature death
 Income during retirement
 Illness...etc.
NON-LIFE INSURANCE....

 .......to protect an individual against losses and
damages other than those covered by life
insurance
 Coverage period......usually one year
 Premiums ...normally paid on a one time basis
 The risks covered under.......
 Property loss
 Motor insurance
 Personal accident insurance etc.....
THANK YOU