UNIT 1- INSURANCE LAW NOTES

I. HISTORY AND DEVELOPMENT of INSURANCE IN INDIA

• In India, insurance has a deep-rooted history. Even before British invasion,

Insurance finds mention in the writings of Manu (Manusmrithi), Yagnavalkya
(Dharmasastra) and Kautilya (Arthasastra).
• It is not exact concept of insurance but the way they followed looks similar to the
modern concept of insurance.
• There was a pooling of resources made to any particular person, such as the king
at times and the same has been re-distributed during various calamities that were
caused over the curse of time due to floods, famine, fire, etc.
• There are evidences present that even during King Pandian and Mughals, there
was an insurance type system established and used for the trade through seas.

There are mainly two types of insurance- Life Insurance and General Insurance.
All insurance contracts that do not come under ambit of life insurance are called general
insurance. (Fire, marine, motor, accident, and other miscellaneous non-life insurance)

HISTORY OF LIFE INSURANCE IN INDIA-

1818 - Advent of life insurance business in India. Establishment of Oriental Life Insurance
Company. The company however failed in 1834.

1870- The enactment of the British Insurance Act

1870-1900- Establishment of some Insurance companies and it was dominated by the British
insurance offices which did good business in India namely Albert Life Insurance, Liverpool,
London Globe.

1912- The Indian Life Assurance Companies Act, 1912. This was the first statutory measure to
regulate life insurance business.
1938- The need to protect the interests of the insured public was seen and thus the previous act
was amended by the Insurance Act 1938. It had comprehensive provisions for effective
control over activities of insurers.

1950- The Insurance Amendment Act 1950 was brought in and many agencies were abolished.
Still there were a large number of agencies and the competition was high. Allegations of unfair
trade practices was also there. Govt. of India decided to nationalize the business.

1956- Ordinance is issues in 1956 nationalizing the life insurance sector and LIC came into
existence in the same year. LIC absorbed 154 Indian, 16 non-Indian insurance companies
and 75 provident societies. LIC had monopoly till the late 90s when the Insurance sector was
reopened to the private sector.

HISTORY OF GENERAL INSURANCE-

1850-The British established in Insurance Company, Triton insurance company ltd. In Calcutta.

1907- Another Company Indian Mercantile Insurance Ltd. Was set up and this was the first
company to transact all classes of general insurance business.

1957- General insurance council, framed a code of ensuring conduct and sound business
practices.

1972- General Insurance Business (Nationalization) Act, was passed. General Insurance business
was nationalized with effect from 1st Januray 1973.

THE PROCESS OF RE-OPENING-

• The millennium has seen insurance come a full circle in a journey extending to nearly 200
years.

• The process of re-opening began early in 1990s (LPG, reforms, liberalization, privatisation,
globalisation, New Economic Policies, etc.)
• In 1993 a committee was set up under the chairmanship of Mr. R N Malhotra, former
Governor to RBI.

• The committee gave recommendations for reforms in the insurance sector.

The objective was to complement the reforms introduced in financial sector.

The committee submitted its report in 1994, among many recommendations, main
recommendations were-

1. the private sector be permitted to enter the insurance industry.

2. They stated that foreign companies be allowed to enter through joint venture with
indian partners.
3. Establishment of IRDA- Insurance Regulatory and Development Authority

2000 APRIL- The recommendations of the Malhiotra Committee Report in 1999 was
implemented. Following the same, IRDA - INSURANCE REGULATORY AND
DEVELOPMENT AUTHORITY was constituted as an autonomous body.
The IRDA was incorporated as a statutory body.

AUGUST- IRDA opened up the market with the invitation for application for
registrations. Foreign companies were allowed ownership of upto 26%.

The IRDAI has the power to frame regulations under Section 114A of the Insurance Act
and has from 2000 onwards framed various regulations ranging from registration of
companies for carrying on insurance business to protection of policy Holder's interests.

DECEMBER- The subsidiaries of General insurance corporation were restructured as

independent companies and at the same time GIC was converted into a national re-insurer.

There are around 33 general insurance companies in India presently.

II. INSURANCE REGULATORY AUTHORITY (Role and Functions)

Insurance Regulatory and Development Authority of India is the main authority regulating
the insurance market in India.
It was established following the recommendations of Malhotra Committee.
It was established in 1999 through a statute, thus it is a statutory body.
Insurance Regulatory and Development Authority Act 1999 (IRDA Act)
It is an autonomous body.

Main Objective: To safeguard the interests of policy holders and ensure growth and
stability of the insurance industry.

IRDA formulates a set of guidelines, regulations and norms that govern various aspects of
the insurance industry. Some of its roles and responsibilities are:

1. Licensing and Registration- regulates licensing and registration of insurers,

intermediaries and insurance agents. Sets the eligibility criteria, qualifications and
other requirements for obtaining licenses in the insurance business.

2. Policy Holder Protection- mandates insurers to maintain high standard of

service, transparency in policy terms and conditions and timely claim settlements.
There are also guidelines provided for policy-related diclosures and resolves
grievances through an integrated grievance redressal mechanism.

3. Solvency Margin- (The extra capital the companies must hold over and above the
claim amounts they are likely to incur). IRDA mandates that insurers must
maintain a solvency margin, ensuring their financial stability and ability to fulfill
policy holder claims.

4. Product Approval- Insurance policies must me approves by the IRDA before

being introduced in the market. (to check for reasonable terms and conditions and
require standards)
 5. Investment Guidelines- The investment experts working with insurance
companies calculate the probability of claims every year and accordingly set the
investment portfolio for the company for maximum returns. These investments
are subject to IRDA guidelines to reduce the potential risks associated with these
investments.

6. Market Conduct and Anti-Fraud Measures- IRDA guidelines promote fair

market conduct, prohibiting fraudulent activities, misrepresentation and unfair
trade practices.

7. Consumer Awareness- Creating awareness among the public about insurance

products, their benefits and the need for insurance.

8. Intermediary Regulation- IRDAI regulates insurance intermediaries such as

agents. It established qualification requirements. Guidelines for ensuring
adherence to ethical practices and professionalism.

9. International Cooperation- collaborates with international insurance regulators

and organisation to exchange knowledge, best practices and regulatory experiences.
Promoting global standards withing Indian Insurance industry.

10. Market Development- IRDA works towards promoting the development and
expansion of the insurance sector in India. It encourages innovation,
diversification and technological advancements in insurance product and services.

11. Facilitates the entry of new players and promotes healthy competition within the
industry.

III. INSURANCE CONTRACT

An Insurance Contract may be defined as an agreement between two parties whereby one
party is called an insurer and the other is called insured. The Insurer which is the Insurance
Company undertakes, in exchange of fixed premium to pay the Insured fixed amount of
money on the happening of a certain event.
It must have essentials of a valid contract specified under the Contracts Act, 1872-

1. Offer and Acceptance- Offer can be by both parties. Acceptance is important.

2. Consideration- Premium is agreed to by the insured and the insurance company

agrees to pay a fixed amount of cover.

3. Competent Parties- The contracting parties must be of Major and of Sound mind.

4. Legal Purpose: the objects are not forbidden by law or are not immoral or opposed
to public policy.

2. It is both a unilateral and a conditional contract.

Unilateral contract- a one sided contract agreement in which an offeror promises to

pay only after the completion of a task by the offeree.
In a unilateral contract, legal action is not pursued because the offeree has no
obligation to complete the task and the offeror will only pay if the request is
completed.

Thus, insurance companies cannot sue the person if the premium is not paid. Also
in such cases company is not liable to pay.

It is also a Conditional contract- a contract conditional upon a specific event, the

occurrence of which at the date of the agreement, is uncertain.

Insurance Contracts play a vital role in managing risks and providing financial protection
Contracts establish a legal agreement between an insurance company and an individual or
organisation seeking coverage against potential losses or damages.
IV. Classification of Contracts and Nature of these contracts

1. Life Insurance Contracts

• Whole life Insurance- Insurer guarantees coverage for the entire lifetime of the
insured, provided premiums are paid. Offers a death benefit to beneficiaries upon
the insured's demise.

• Term Life Insurance- It provides coverage for a specified term, typically ranging
from 1 to 30 years. If the insured individual passes away during the policy term,
the death benefit is fixed. No maturity.
NO MATURITY here implies that policy does not accumulate cash value or have
any value beyond its primary purpose, which is to provide a death benefit to the
policy holder.
If the insured person does not die during the term, there is no payout and the
policy simply expires.

• Endowment Policies- Provide coverage for a specific term but also provide a
maturity benefit if the insured survives the policy term. These contracts combine
the elements of protection and savings, making them suitable for long-term
financial planning

BASIS WHOLE LIFE TERM-LIFE ENDOWMENT

INSURANCE INSURANCE POLICIES

Duration of Coverage for the Coverage for a Fixed term/ Maturity

Coverage entire lifetime of the specific period, date.
insured person, as ranging from 1-30.
long as premiums are
paid. No predefined
term.

Premiums Higher premiums Lower premiums. Typically higher than

compared to term Premiums stay same both.
 insurance for the for the term. May
same amount of increase substantially
coverage. Stay same if policy renewed.
for the term.

Cash Value Accumulates over Do Not accumulate Have cash value, paid
time and a portion of any cash value. Purely as lump sum at the
the same goes into a death benefit maturity date, if the
cash value account. policy. policy holder survives
Policyholders can the same.
borrow against or
withdraw from this
cash during their
lifetime but it reduces
death benefit if not
repaid.

Death Guaranteed death A death benefit if the If dies during the term,
Benefit benefit. person dies during death benefit, if
the term. survives maturity
benefit.

Purpose Lifelong protection, Temporary financial Combination of

saving or investment protection insurance coverage
vehicle due to cash with savings element.
value Wealth accumulation
goals.

1. General Insurance Contracts- Also known as non-life insurance contracts

covers risks other than those related to life.

• Property Insurance-
- Mostly works on indemnity principle (Restore the insured to the same
financial position they were in before the loss, without allowing for any
profit.
 - The property must have a legally recognized insurable interest in the
property. (ownership, mortgage lender, landlords and tenants, property
managers, beneficiary in a trust, partnership, inheritors of property)

- Generally the claim which the insurer will pay has a limit.

- Many times the policy holder has to pay the deductibles before getting the
claim (deductibles is the part of the loss, the insured is responsible for).

- Issued mostly for a specified term. Renewal allowed.

- At times subrogation is there. (Subrogation is when the insurer pays the

claim, they may seek to recover the amount paid from the responsible third
party)

- Policyholders are required to take steps in their power to mitigate risks and
maintain the property in good condition.

• Liability Insurance-
- against legal liabilities arising from personal injury, property damage or
financial losses caused to third party. To protect themselves from potential
litigation and financial obligations.

- The insured party is the policyholder, while the third party is the claimant.

- Similar to property insurance, liability insurance operates on the principle

of indemnity.

- There can be General Liability Coverage, Professional Liability Coverage,

Product Liability Coverage.

- Liability insurance policies have coverage limits, which represent the

maximum amount the insurer will pay for a covered claim.
 - Might also have a deductible clause.

- Might cover the cost of legal representation of the insured.

- Liability insurance policies also specify exclusions—situations or events

that are not covered by the policy.

• Motor Insurance:

1. Third Party Liability Insurance- Mandatory by law, it covers third party bodily
injury and property damage caused by a vehicle.

2. Comprehensive Motor Insurance- Provides coverage for damages to the insured

vehicle in addition to third-party liability. This includes theft, fire, accidents, and
natural disasters.

• Health Insurance-

- Health insurance is a form of risk-sharing.

- Health insurance operates on the principle of indemnity. The insurer's

primary obligation is to compensate the policyholder for covered medical
expenses incurred as a result of illness, injury, or other eligible healthcare
needs.

- Health insurance policies offer various types of coverage, including:

Hospitalisation Coverage
Outpatient Coverage
Maternity Coverage
Dental and Vision Coverage
Emergency Care
 - In addition to premiums, most health insurance policies include cost-
sharing mechanisms, such as deductibles, co-payments, and coinsurance,
which require the insured to share in the cost of medical expenses.

- Health insurance plans often have networks of healthcare providers,

including doctors, hospitals, and clinics

- Many health insurance policies are now required to cover pre-existing

conditions, meaning they cannot exclude coverage for health conditions
that existed before the policy was obtained.

- Exclusions may be there.

- Health insurance policies are typically renewable, allowing policyholders to

maintain coverage as long as they continue to pay premiums.

- Insurance primarily focuses on curative care, which involves the diagnosis

and treatment of medical conditions. Preventive care, such as routine
check-ups and vaccinations, is usually the responsibility of the individual.
(there may be some exceptions)

Renewal Process:

- Insurance companies usually send out renewal reminders to policyholders

well in advance of the policy expiration date.

- coverage limits, exclusions, waiting periods, and premiums may change.

- To renew your policy, you'll need to pay the renewal premium.

- The renewal application may include questions about your health and any
changes in your personal details.
 - If you have not made any claims during the policy year, you may be eligible
for a no-claim bonus (NCB), which can result in a discount on your
premium.

- changes to your policy, such as adding or removing family members,

increasing or decreasing the sum insured, or changing the policy type can
be done at the time of renewal.

- In India, insurance policies often have a grace period of 15 to 30 days after

the policy expiry date during which you can renew without a break in
coverage. If the grace period expires it might result in-

i) The most immediate consequence is that your health insurance

coverage will lapse.

ii) may lose benefits such as no-claim bonus (NCB) or waiting

period reductions that you have accrued over the years.

iii) If you allowed your policy to lapse and then decide to renew it
later, you may have to serve waiting periods again for certain
coverage

iv) Some policies offer continuity benefits, which provide certain

advantages when transitioning between policies or insurers.

The purpose of a waiting period is to manage risk for the insurance company and
prevent individuals from purchasing insurance coverage only when they anticipate
needing costly medical care.

V. THE PRINCIPLE OF GOOD FAITH NON-DICLOSURE

Doctrine of Good Faith- a minimum standard, legally obliging all the parties entering into
a contract to act honestly and not mislead or withhold critical information from one
another.
 It is one of the most fundamental doctrine of Insurance Law.

How does this principle of work?

The doctrine requires all parties to reveal any information that could feasibly influence
their decision to enter into a contract with one another.

Insurer/ Agent must reveal all the terms and conditions and other critical information.

Applicant must present all material facts including precise details on whatever need to be
insured and also if they have been refused insurance coverage in the past.

Repercussions for Violations of Good Faith Non-Disclosure

1. A contract created with inaccurate information from intentional misinformation is

fraudulent concealment and results in a voidable contract.

2. May lead to legal action if the contract has already been served in part or whole.

VI MISREPRESENTATION IN INSURANCE CONTRACT

The word misrepresentation simply refers to giving false statements and untrue accounts
or claims.
Thus it will imply that Misrepresentation is the act of entering into a contract with a company or
organization on a false basis by making statements that are not true.

Types of Misrepresentation in Insurance:

Positive Misrepresentation: A positive misrepresentation happens when the (potential)

insured says something not true about a fact that is vital to the insurer (a material fact).
Example: giving a wrong answer on purpose to a question during the underwriting process.
Negative Misrepresentation: a negative misrepresentation happens when the (potential)
insured doesn’t tell the insurer about a fact that is important.
Example: if the (potential) insured did not tell the insurance company about a medical
condition they knew about when they filled out the life insurance proposal form.

Insurance company may also indulge in misrepresentation and may misrepresent any
necessary condition for a payout.

Material Facts: A party is said to be misrepresenting any material fact when:

1. The information wrongly told or withheld is vital to the acceptance.

2. If the statement could change whether the person is eligible for holding the policy
or not.

3. If the statement could affect the extent of the coverage the policy in question might
provide.

CASE LAW: Reliance Life Insurance Ltd v Rekhaben Nareshbhai Rathod

FACTS: On 10 July 2009 the insured took out a life insurance policy with Max New York
Life Insurance worth Rs110,000. On 16 September 2009 the insured submitted a proposal
to Reliance Life Insurance for another life insurance policy worth Rs100,000.
Among the questions that the insured was required to answer in the Reliance proposal
form was whether he was currently insured or had previously applied for life insurance,
critical illness or accident benefit cover. The insured answered this question in the negative.
The insured also had to answer specific questions regarding other insurance. His response
to these questions was "NA" or "not applicable".
The” insured also provided following declaration –
“I understand and agree that the statements in this proposal form shall be the basis of the
contract between me and Reliance Life Insurance Company Limited ("the Company") and
that if any statements made by me are untrue or inaccurate or if any of the matter material
to this proposal is not disclosed by me then the Company may cancel the contract and all the
premiums paid, will be forfeited.”
On 22 September 2009 Reliance issued the policy to the insured. On 8 February 2010 the
insured died of a heart attack.
On 24 May 2011 the insured's wife (the nominee and respondent in the present case)
notified Reliance and claimed Rs100,000.
On 30 August 2011 Reliance repudiated the claim due to the suppression of material facts
(ie, the insured's failure to provide details of his policy with Max).

The Insured’s wife approached the District Consumer Forum. On 31st August, the
Consumer Forum dismissed the complaint on the ground of non-disclosure.
Appeal in State Consumer Forum- Appeal was allowed and decision in favour of the
Insured’s wife. National Consumer Forum upheld the same. The reasoning both State and
National Consumer Forum gave was- “the omission of the insured to disclose a previous
policy of insurance would not influence the mind of a prudent insurer”.

Matter went to the Supreme Court

The Supreme Court observed:

• the nature of the disclosure made by the insured in the proposal form. In this
respect, the court held that "there was evidently a non-disclosure of the earlier
cover for life insurance held by the Insured"; and

• the validity of the ground for repudiation of the claim. In this respect, the court
held that it was "of the view that the failure of the insured to disclose the policy of
insurance obtained earlier in the proposal form entitled the insurer to repudiate the
claim under the policy".

The court referred to a number of earlier Indian and UK decisions in coming to the above
decision.
While deciding in favour of the Insurance Company, the Court also observed that:
• It is standard practice for the insurer to set out in the application a series of specific
questions regarding the applicant's health history and other matters relevant to
insurability.

• The object of the proposal form is to gather information about a potential client,
allowing the insurer to get all information which is material to the insurer to know
in order to assess the risk and fix the premium for each potential client.

• Proposal forms are a significant part of the disclosure procedure and warrant
accuracy of statements. Utmost care must be exercised in filling the proposal form.
In a proposal form the applicant declares that she/he warrants truth.

• The contractual duty so imposed is such that any suppression, untruth or

inaccuracy in the statement in the proposal form will be considered as a breach of
the duty of good faith and will render the policy voidable by the insurer.

• The system of adequate disclosure helps buyers and sellers of insurance policies to
meet at a common point and narrow down the gap of information asymmetries.

• This allows the parties to serve their interests better and understand the true extent
of the contractual agreement.

• The finding of a material misrepresentation or concealment in insurance has a

significant effect upon both the insured and the insurer in the event of a dispute.
The fact it would influence the decision of a prudent insurer in deciding as to
whether or not to accept a risk is a material fact.

• In more recent cases it has been held that all-important element in such a
declaration is the phrase which makes the declaration the 'basis of contract'. These
words alone show that the proposer is warranting the truth of his statements, so
that in the event of a breach this warranty, the insurer can repudiate the liability on
the policy irrespective of issues of materiality.
VII INSURABLE INTEREST

Insurable interest refers to the interest of a person, financial, or otherwise, in obtaining

insurance for a person or property. A person or an organization having insurable interest
are likely to suffer a loss due to damage or destruction of the insured object or person.
The person having insurable interest insures the property or person through an insurance
policy which mitigates the risk of loss.

In insurance contracts, it is essential for the party to have an insurable interest in the
property or goods or person. Otherwise, the insurance policy is not a legal contract and
hence not enforceable. In general, persons who do not suffer any financial loss due to
damage or destruction of the property or person do not have an insurable interest.

Example: Many companies buy insurance on their staff, especially the top management, to
cover for the risk of loss due to death or disability.
a sports team may insure one of their key players.
In property insurance, anyone who has an interest in the property can buy an insurance
and not necessarily just the owner.

VIII THE RISK

Managing your risk involves a little bit of thought and planning to identify where you might
be vulnerable to loss or damage. You do your best to protect your property, but you can
also protect yourself from the impact of a natural disaster or if an unexpected event
happens.

In insurance terms, risk is the chance something harmful or unexpected could happen.
This might involve the loss, theft, or damage of valuable property and belongings, or it
may involve someone being injured. Insurers assess and price various risks to work out
how much they would need to pay out if a policyholder suffered a loss for something
covered by the policy.
This helps the insurer determine the amount (premium) to charge for insurance. To be
able to put a financial value on a risk, insurers calculate the probability that the insured
item or property might be accidentally lost, stolen, damaged or destroyed, how often this
might occur and how much it would cost to repair or replace.

Self-Study cases in this Unit:

Branch Manager, Bajaj Allianz Life Insurance Company Ltd. And Ors. V. Dalbir
Kaur Civil Appeal No. 3397 of 2020 (SC)

Sushilaben Indravadan Gandhi and Anr. V. New India Assurance Co. Ltd. And
Ors. CIVIL APPEAL NO. 2235 OF 2020 (SC)