Professional Documents
Culture Documents
Concept Nature and Scope of Banking
Concept Nature and Scope of Banking
CHAPTER - 2
CONCEPT, NATURE AND SCOPE OF INSURANCE
1
Law of Insurance, MBL –Part II, (Distance Education Department, National Law School of India
University, Bangalore) at page 9
2
Ibid.
3
Ibid.
2
The risk protection has been a primary goal of humans and institutions
throughout history. Insurance is all about protecting against such risks.
4
Law of Insurance, MBL –Part II, (Distance Education Department, National Law School of India
University, Bangalore) at page 9
5
R. M. Ray, Life Insurance In India Its History, Law, Practice And Problems, available at
http://www. archive.org/.../lifeinsuranceini032041mbp/lifeinsuranceini032041mbp_djvu. Txt
accessed on 10/10/2011 at page11
3
to cover the possibility of loss. In effect, ship owners were the insured and
lenders were the underwriters.6
Life insurance came about a little later in ancient Rome, where burial
clubs were formed to cover the funeral expenses of its members, as well as help
survivors monetarily. With the fall of Rome, around 450 A.D., most of the
concepts of insurance were abandoned, but aspects of it did continue through the
Middle Ages, particularly with merchant and artisan guilds. These provided
variety of insurance covering risks like fire, flood, theft, disability, death, and
even imprisonment.7
6
R. M. Ray, Life Insurance In India Its History, Law, Practice And Problems, available at
http://www. archive.org/.../lifeinsuranceini032041mbp/lifeinsuranceini032041mbp_djvu. Txt
accessed on 10/1 0/2011 at
7
Ibid.
8
Ibid.
9
Ibid. at page 8
4
insured against the risk of losing property to which they were naturally exposed
in times when robbery of caravans and piracy on the open sea were considered
as respectable means of livelihood. The efforts to relieve this intolerable
situation were made in Babylonia and India at a fairly early stage of their
history.10
2. The contract was for a true loan and not a partnership, and in others
3. The merchandise or money advanced was under the custody of and used
4. The rate of interest was very much higher (usually 100 percent) than
10
R. M. Ray, Life Insurance In India Its History, Law, Practice And Problems, available at
http://www. archive.org/.../lifeinsuranceini032041mbp/lifeinsuranceini032041mbp_djvu. Txt
accessed on 10/10/2011 at page 9
11
Ibid. at page10
12
Ibid. at page 11
5
5. The trader was free from liability for the debt on the happening of
2. The rate of interest instead of being 100 percent, in all cases was
arranged with regard to the risks to be run and length of time for which
the money was required,
3. This rate of interest (or price of risk) was fixed by valuers skilled in
sea voyages or journeys by land who were able to proportion the rate to
the time required and to the risk to be incurred,
5. The borrower was excused from payment not only if he was robbed of
his goods but also if the goods did not arrive in good order at the place or
time agreed upon by the contracting parties.
13
R. M. Ray, Life Insurance In India Its History, Law, Practice And Problems, available at
http://www. archive.org/.../lifeinsuranceini032041mbp/lifeinsuranceini032041mbp_djvu. Txt
accessed on 10/10/2011 at page 12
14
Ibid.
6
were developed independently, as both the countries must have been carrying on
trade amongst other people.15
. R. M. Ray, Life Insurance In India Its History, Law, Practice And Problems, available at
15
16
Ibid.
17
Ibid.
18
Ibid.
7
of the middle ages. There is evidence that members of these early guilds(unions/
association ), known as the Frith guilds, bound themselves to render mutual
support in the event, particularly, of fire destroying property, or shipwreck, and
to this extent created a definite insurance principle in respect of two important
human needs. "Membership was confined to followers of the common religion.
All classes seem to have been united in the Frith Guilds and each man paid a
fixed amount to the common fund which was expended on feasts, fines, mass for
the dead, burials and brothers in need”. 19 During the middle ages the mediaeval
craftsman not only made his own wares but was his own agent in selling them,
and thus had a dual capacity as manufacturer and merchant. Such people when
they became numerous, in the Merchant Guilds, separated and formed Craft
Guilds. With the progressive specialization in trade such Crafts Guilds grew up
all over Europe.20
Modern life insurance commenced first in England and Europe about the
sixteenth century but the early attempts, though they resembled modern life
insurance, were actually gambling, because the bases of life insurance business,
i.e., mortality tables, were practically unknown. Further, the use of loan capital
for production purposes did not develop on any large scale till about the
beginning of the eighteenth century.21 Investments of life insurance funds were
therefore almost impossible. Thus we can broadly divide the development of life
insurance into two periods, (a) attempts at co-operation prior to the eighteenth
century which may be regarded as the precursors of modern insurance, and (b)
the modern period of scientific insurance which began in the eighteenth
century.22
19
R. M. Ray, Life Insurance In India Its History, Law, Practice And Problems, available at
http://www. archive.org/.../lifeinsuranceini032041mbp/lifeinsuranceini032041mbp_djvu. Txt
accessed on 10/10/2011 at page 12
20
Ibid.
21
Ibid. at page 14
22
Ibid.
8
and Canada followed the same. The early insurance companies in India issued
policies in sterling on the lives of Europeans who were engaged in the services
of the East India Company and later on in those of the Government of India.23 A
few companies who attempted to write business on Indian lives either came to
grief sooner or later or were absorbed by others. The failure of two large English
companies, the European and the Albert, about the year 1870, affected a large
number of persons in this country who had reposed their faith in them.
Consequent upon this, an attempt was made to float companies in India to
underwrite business on Indian lives also. Thus the “Bombay Mutual" was
established in 1871. It was closely followed by the "Oriental" in 1874. The
Colonial Life Assurance Company also decided, in 1870, to extend its
business.24
(1) The joint family system of the Hindus applies the principle of
insurance to its maximum advantage. It automatically provides for
minors and widows whenever necessary,
(2) For centuries very little had happened to disturb the Indian way of
thinking, and thus tradition had secured an unusual stronghold on the
people. Life assurance appeared to conflict with their spiritual and
23
R. M. Ray, Life Insurance In India Its History, Law, Practice And Problems, available at
http://www. archive.org/.../lifeinsuranceini032041mbp/lifeinsuranceini032041mbp_djvu. Txt
accessed on 10/10/2011 at page14Ibid. at page 15
24
Ibid.
25
Ibid.
26
Ibid.
9
philosophical ideas which were thousands of years old, and the notion of
providing for one's dependents by means of an instrument which
functions on the death of a person was a most disturbing one,
(4) The influence of Islam, too, is against usury. As the modern system
of insurance allows full play to interest, it was unlikely to find favour
among the Muslims of this country and this is an important hindrance to
progress,
(5) The poverty, ignorance and prejudice of Indians have hindered the
growth and expansion of insurance business in India.
27
R. M. Ray, Life Insurance In India Its History, Law, Practice And Problems, available at
http://www. archive.org/.../lifeinsuranceini032041mbp/lifeinsuranceini032041mbp_djvu. Txt
accessed on 10/10/2011 at page14
10
Assurance Companies in India in the year 1914. The first issue of this
publication contains a reference and we find the following statement in the
preface of the Indian Insurance Manual (published by Messrs. Thacker Spink &
Co., Calcutta) in 1907: "This publication has been called into existence by the
entire absence of any suitable treatise dealing with the business of Life and Fire
Insurance in India”. The name of the same was changed from the ninth issue to
"The Indian Life Assurance Year Book" and from the 15th issue to "The Indian
Insurance Year Book”.28
It will be seen that the oldest of the Indian companies were established in Madras about
80 years ago. Bombay has none older than the Bombay Mutual, the Oriental, and the
Bombay Widows Pension Fund which were established about 40 years ago. Life
assurance seems not to have been started in Bengal until much later, and it was not until
1906 that many companies were established either in that Presidency or elsewhere in
India.29
That this statement is obviously not correct and is clear from the
following statement made by Mr. N. R. Sirkar, Chairman of the Reception
Committee, to the Indian Insurance Conference held in Calcutta in 1937 in his
welcome speech:
As far back as 1818 an insurance company, named Oriental Life Assurance Company,
was started in Calcutta mainly by Europeans. Eventually this company failed in 1834 and
was transformed into 'New Oriental'. Let me add here that this company has no
connection whatever with our premier Indian company of Bombay. It was through the
efforts of Babu Muttylal Sen that the company was prevailed upon to accept Indian lives.
Since then Indian enterprise made very good progress in Bengal and leading people of the
province such as Dwarkanath Tagore, Ramtanu Lahiri and Rustomji Cowasji took an
active part in the development of insurance business in this country. It was also left to a
great reformer and eminent son of Bengal, Raja Ram Mohan Roy, to direct the nation's
attention to the need of protection of widows and orphans, and as early as 1822 he issued
an appeal through the columns of the Calcutta Journal requesting the wealthy Hindus of
30
Calcutta to start an institution for the maintenance of the poor widows .
28
R. M. Ray, Life Insurance In India Its History, Law, Practice And Problems, available at
http://www. archive.org/.../lifeinsuranceini032041mbp/lifeinsuranceini032041mbp_djvu. Txt
accessed on 10/10/2011 at page15
29 Ibid.
30 Ibid.
11
One can find a reference to this company and also to another Indian life
insurance office in the Insurance Encyclopedia by Walford published in 1872-
80:
Bombay Life Assurance Company was founded in Bombay on 1st May 1823. The
company issued no whole-term life policies. It had three classes of short-term insurance,
viz., for one year, not renewable without the certificate of health premium - aged 30
years. For 3 years renewable without fresh certificate of health annual premium -aged 30
years. For 5 years renewable without fresh certificate of health annual premium - aged 30
years.
31
R. M. Ray, Life Insurance In India Its History, Law, Practice And Problems, available at
http://www. archive.org/.../lifeinsuranceini032041mbp/lifeinsuranceini032041mbp_djvu. Txt
accessed on 10/10/2011 at page16
31
Ibid.
12
There must be either some uncertainty whether the event will ever happen or not, or if the
event is one which must happen at some time or another, there must be uncertainty as to
the time at which it will happen.
33 Law of Insurance, MBL –Part II, (Distance Education Department, National Law School of
India University, Bangalore) at page 13
34 (1904)2KB658
35
Law of Insurance, MBL –Part II, (Distance Education Department, National Law School of
India University, Bangalore) at page 14
13
36
Dr. G. Gopalakrishna, Essentials and Legalities of an Insurance Contract, available at
https://www.insuranceinstituteofindia.com/.../Journal08_%20pg06-14_ess.pdf accessed on
27/06/2009 at page 6
37
Ibid.
38
Ibid.
14
funds. The savings component puts the life insurance in straight competition
with other financial institutions and savings instruments.39
39
“Insurance Sector in India”,(December 2005)(Law Z magazine) at page 10
40
Tapen Sinha, “An Analysis of the Evolution of Insurance in India” available at
http://www.icpr.itam.mx/papers/IndiaChapter.pdf accessed on 21/05/2009 at pp 1-10
41
M.N. Srinivasan, Principles of Insurance Laws, (6th ed. 1997-98) (Ramanuja Publishers,
Bangalore) at page 37
15
formal social security protection. Although the government has a few centrally
funded social assistance programmes like National Old Age Schemes and
National Family Benefit Schemes, the number of people covered as well as the
benefits is very meager. Furthermore, in a country like India, where there is no
provision for unemployment benefits, the concept of insurance becomes extremely
important.42
The law of insurance forms part of the general law of contract and
whatever type of contract of insurance may be, it always represents the
agreement between the assured and the insurer. The essential ingredients of a
contract under law, for example, offer and acceptance, consideration, capacity of
the parties, mutuality of understanding and legality of object are of equal
application to a contract of insurance. But there is the existence of a separate
set of principles
42
Jatinder S. Bedi , “Pre –launch Survey Report of Insurance Awareness Campaign”, available at
http://www.policyholder.gov.in/.../Insurance%20Awareness%20Survey%20Report. pdf accessed
on 20/07/2013 at page 3
43
Dr. G. Gopalakrishna , “Essentials and Legalities of an insurance contract” available at
https://www.insuranceinstituteofindia.com/Indiainsurance/insurance/ insurancemain/earlierIssues
accessed on 27/06/2009 at page 7
16
Though insurance has been differentiated into marine, fire, life etc., there
are certain general principles applicable to all forms of insurance. These general
principles serve as a guide to the sound interpretation of the purpose of the
insurance contracts in their diversified forms. The principles of indemnity,
insurable interest, uberrima fides (utmost good faith) and the existence of risk
are some of the principles having common application.
44
Dr. G. Gopalakrishna , “Essentials and Legalities of an insurance contract” available at
https://www.insuranceinstituteofindia.com/Indiainsurance/insurance/ insurancemain/earlierIssues
accessed on 27/06/2009 at page 7
45
Ibid.
46
Ibid.
17
47
Dr. G. Gopalakrishna , “Essentials and Legalities of an insurance contract” available at
https://www.insuranceinstituteofindia.com/Indiainsurance/insurance/ insurancemain/earlierIssues
accessed on 27/06/2009 at page 7
48
Ibid.
18
by paying the premiums is effecting a saving, the cumulative sum which he can
recover after the expiry of the fixed period.49
The basic principle of indemnity on which the greater part of the law of
insurance is based, prima facie, negatives any treatment of insurance on par with
wagering contracts. The wagering contracts are those, wherein “two persons,
professing to hold opposite views touching the issue of a future uncertain event,
mutually agree that, dependent upon the determination of that event, one shall
win
49
Dr. G. Gopalakrishna , “Essentials and Legalities of an insurance contract” available at
https://www.insuranceinstituteofindia.com/Indiainsurance/insurance/ insurancemain/earlierIssues
accessed on 27/06/2009 at page 7
50
Ibid.
51
Ibid. at page 8
19
from the other, and that the other shall pay and hand over to him, a sum of
money”.52
Insurance was placed on a different ground from a pure wager merely because it is
permitted by law. Insurance was regarded as no better than a wagering contract despite
the presence of insurable interest. But this view has been modified by him later on and
now he affirms insurance is described as having only a ‘superficial resemblance’ to a
wager. Though the distinction is subtle, it is the intention of the parties rather than the
form of the contract that distinguishes insurance from wager.
52
Dr. G. Gopalakrishna , “Essentials and Legalities of an insurance contract” available at
https://www.insuranceinstituteofindia.com/Indiainsurance/insurance/ insurancemain/earlierIssues
accessed on 27/06/2009 at page 7.
53
Ibid.
54
Ibid.
55
Ibid. at page 9
20
against a heavy loss. But such undertakings will normally be with reference to
actuarial practice and therefore insurance always stands apart from a mere
speculative venture.56
56
Dr. G. Gopalakrishna , “Essentials and Legalities of an insurance contract” available at
https://www.insuranceinstituteofindia.com/Indiainsurance/insurance/ insurancemain/earlierIssues
accessed on 27/06/2009 at page 9
57
Ibid.
58
Ibid.
59
Ibid.
21
The test for a valid insurance contract is the existence of the insurable
interest. The ‘insurable interest’ is nothing but an interest of such a 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 of
Insurance. This interest is considered as a form of property in the contemplation
of law.61
60
Dr. G. Gopalakrishna , “Essentials and Legalities of an insurance contract” available at
https://www.insuranceinstituteofindia.com/Indiainsurance/insurance/ insurancemain/earlierIssues
accessed on 27/06/2009 at page 9
61
Ibid.
22
that an insured person suffers no loss under a policy if at the time of loss or
damage to the property; he has no interest in it either as full or partial owner. 62
According to McGillivray63 ---
If the assured has no interest at the time the event happens it is clear that he cannot
recover anything, because he suffers no loss, and therefore has no claim to an indemnity.
Similarly, if he has an interest which is limited to something less than the full value of the
subject-matter, he suffers no greater loss than the value of his interest at the time of the
loss, and therefore, his claim to an indemnity cannot exceed the value of his interest.
62
Dr. G. Gopalakrishna , “Essentials and Legalities of an insurance contract” available at
https://www.insuranceinstituteofindia.com/Indiainsurance/insurance/ insurancemain/earlierIssues
accessed on 27/06/2009 at page 10
63
Ibid.
64
Ibid.
65
Ibid.
66
Ibid.
23
67
Dr. G. Gopalakrishna , “Essentials and Legalities of an insurance contract” available at
https://www.insuranceinstituteofindia.com/Indiainsurance/insurance/ insurancemain/earlierIssues
accessed on 27/06/2009 at page10.
68
Ibid.
24
70
Ibid.
71
Ibid.
72
Ibid.
25
It is the duty of the assured to disclose all material facts within their knowledge. In cases
of life insurance, certain specific questions are proposed as the points affecting in general
to all mankind. But there may be circumstances also affecting particular individuals,
which are not likely to be known to the insurer, and which had they been known, would
no doubt, have been made subject to specific enquiries.
The onus of good faith lies equally on both the parties to the contract, but
in the nature of things the assured has to pay more particular attention to the
observance of the principles. The selection of a life for insurance by the
company depends to a large extent on the information supplied by the proposer.
As the company solicits proposals from the general public whose members are
total strangers to the company, there is an urgent need for disclosing all material
facts within the knowledge of the proposer to enable the company to come to a
decision. The proposer has within his knowledge all the facts, which are material
to the risk. The proposer is morally and legally bound to disclose all matters,
which in point of fact are material to the contract.75
73
Dr. G. Gopalakrishna , “Essentials and Legalities of an insurance contract” available at
https://www.insuranceinstituteofindia.com/Indiainsurance/insurance/ insurancemain/earlierIssues
accessed on 27/06/2009 at page 9
74
Ibid.
75
Ibid.
26
premium or determining whether he will take the risk - this definition has been
embodied in the Marine Insurance Act, 1906 and is equally applicable to the life
insurance. Nevertheless, the proposer is excused from explicitly disclosing
certain facts. These are76:
76
Dr. G. Gopalakrishna , “Essentials and Legalities of an insurance contract” available at
https://www.insuranceinstituteofindia.com/Indiainsurance/insurance/ insurancemain/earlierIssues
accessed on 27/06/2009 at page 9
77
Ibid.
78
Ibid.
27
warranty. The Marine Insurance Act, 1906 (England), gives the following
definition of a warranty79 -
A warranty is a statement 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 existence of a particular state of fact. This Act states further that a
warranty as above defined is a condition which must be exactly complied with, whether it
be material to the risk or not.
The other replies given by the proposer, which are not intended to have
the force of warranty, are known as representations. In life insurance, there is a
recital clause by which the answers given in the proposal and the replies made to
the medical examiner are made as the basis of the contract and thereby given the
effect of warranty.80 The present tendency of the offices is to treat the replies as
representation. Any misstatements are, therefore, judged from this approach and
if the company thinks that the misstatement is material, that is, the knowledge of
the correct statement would have influenced the decision of the company
adversely; the insurer can seek to avoid the policy on the ground of non-
disclosure or misstatement and must also offer to return the premiums.81
The courts also do not favour any unfair rigidity in the interpretation of
answers to the questions in the proposal form. Even then it is always desirable
on the part of the proposer to warrant the answers to the best of his knowledge
and belief. This materially safeguards his interests.
79
Dr. G. Gopalakrishna , “Essentials and Legalities of an insurance contract” available at
https://www.insuranceinstituteofindia.com/Indiainsurance/insurance/ insurancemain/earlierIssues
accessed on 27/06/2009 at page 12
80
Ibid.
81
Ibid.
28
This sub-chapter deals with the various functions of insurance like risk
sharing, life insurance and annuities relief for members of society, sharing
burden of state to provide relief to destitute and aged citizens, making available
finance for social investment etc.
82
S.Krishnamurthy and et al, “Insurance Industry in India: Structure, Performance and Future
Challenges”, Vikalpa, Volume 30, No.3, July –September 2005 93-105.
83
Ibid.
29
84
S.Krishnamurthy and et al, “Insurance Industry in India: Structure, Performance and Future
Challenges”, Vikalpa, Volume 30, No.3, July –September 2005 93-105.
30
86 Law of Insurance, MBL –Part II, (Distance Education Department, National Law School
of India University, Bangalore) at page 22.
32
The insurance sector has a huge potential not only because incomes are
increasing and assets are expanding but also because the increasing instability in
the system. In a sense, we are living in a extra risky world. Trade is becoming
more and more global. Technologies are changing and getting replaced at a
faster rate. In this more uncertain world, for which enough evidence is available
in the recent period, insurance have an imperative role to play in reducing the
risk burden that the individuals and businesses have to bear. The approach to
insurance should be in tune with the changing times.87
87
Dr. C. Rangarajan, “The widening scope of Insurance”, available at
http://www.eac.gov.in/aboutus/chspe/rep13_widescop.doc accessed on 12/10/2012 at page 2 .
88
Ibid.
89
M.N. Srinivasan, Principles of Insurance Laws, (6th ed. 1997-98) (Ramanuja
Publishers, Bangalore) at page 40
33
Thus, one can understand the term ‘insurance’ better from its legal
nature, principles and functions as discussed above and is the base for all the
types of insurances.
90
M.N. Srinivasan, Principles of Insurance Laws, (6th ed. 1997-98) (Ramanuja
Publishers, Bangalore) at page 40