INSURANCE LAW: ESSENTIAL TENETS

A project submitted in fulfillment for the course (Law of Insurance) for attaining the
degree B.A., LL.B (Hons.) during the Academic year 2022-23.

A Submission made by Mohammad Asif Abbas

Roll No.- 39
B.A., LL.B (Hons.)

A Submission submitted to Ms. Mona Arya

Faculty of Law, Jamia Millia Islamia, Jamia Nagar, New Delhi-110025

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 ACKNOWLEDGEMENT

Any project completed or done in isolation is unthinkable. This project, although prepared by me, is
a culmination of efforts of a lot of people. Firstly, I would like to thank our Professor Ms. MONA
ARYA for, helping me in making the project on “INSURANCE LAW: ESSENTIAL TENETS”
for her valuable suggestions towards the making of this project.

Further to that, I would also like to express my gratitude towards our seniors who did a lot of
help for the completion of this project. The contributions made by my classmates and friends
are, definitely, worth mentioning.

I would like to express my gratitude towards the library staff for their help also. I would also
like to thank the persons asked for help by me without whose support this project would not
have been completed.

I would like to express my gratitude towards the Almighty for obvious reasons. Moreover, thanks to
all those who helped me in any way be it words, presence, Encouragement or blessings.

MOHAMMAD ASIF ABBAS

ROLL NO- 39
B.A., LL.B. (Hons.), X SEMESTER

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 TABLE OF CONTENTS
SERIAL PAGE
NO. NAME OF CHAPTERS NO.

1. INTRODUCTION 5-8

2. MEANING AND CONCEPT OF INSURANCE 9-11

3. PRINCIPLES OF INSURANCE LAW 12-34

4. CONCLUSION 34-35

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 1. INTRODUCTION

Insurance may be described as a social device to reduce or eliminate risk of life and property.
Under the plan of insurance, a large number of people associate themselves by sharing risk,
attached to individual. The risk, which can be insured against include fire, the peril of sea, death,
incident, & burglary. Any risk contingent upon these may be insured against at a premium
commensurate with the risk involved.
Insurance is a contract in which for a financial consideration, (called premium), the insurer incurs
the risk of paying a large sum of money to the insured or to his legal representative on the
happening of a contingency, or a specified event.
The concept of insurance has been prevalent in India since ancient times amongst Hindus.
Overseas traders practiced a system of marine insurance. The joint family system, peculiar to
India, was a method of social insurance of every member of the family on his life. The law
relating to insurance has gradually developed, undergoing several phases from nationalisation of
the insurance industry to the recent reforms permitting entry of private players and foreign
investment in the insurance industry. The Constitution of India is federal in nature in as much
there is division of powers between the Centre and the States. Insurance is included in the Union
List, wherein the subjects included in this list are of the exclusive legislative competence of the
Centre. The Central Legislature is empowered to regulate the insurance industry in India and
hence the law in this regard is uniform throughout the territories of India.

History of Insurance Law in India:

The story of insurance is probably as old as the story of Mankind. Though the concept of
insurance is largely a development of the recent past, particularly after the Industrial Era, yet its
beginnings date back to almost 6000 years.

The Indian life insurance industry has its own origin and history, since its inception. It has passed
through many obstacles, hindrances to attain the present status. Life insurance is a social security
tool. This is more pronounced in rural areas that promote and sustain the life links of the
economy.

In India, insurance has a deep-rooted history. It finds mention in the writings of Manu
(Manusmrithi), Yagnavalkya (Dharmasastra) and Kautilya (Arthasastra). The writings talk in terms
of pooling of resources that could be re-distributed in times of calamities such as fire, floods,

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epidemics and famine. This was probably a pre-cursor to modern day insurance. Ancient Indian
history has preserved the earliest traces of insurance in the form of marine trade loans and carriers’
contracts. Insurance in India has evolved over time heavily drawing from other countries, England in
particular.

1. Formation of the Insurance Industry in India:

The development and growth of the insurance industry in India has gone through three distinct
stages. Insurance law in India had its origins in the United Kingdom with the establishment of a
British firm, the Oriental Life Insurance Company in 1818 in Calcutta, followed by the Bombay
Life Assurance Company in 1823, the Madras Equitable Life Insurance Society in 1829 and the
Oriental Life Assurance Company in 1874. However, till the establishment of the Bombay
Mutual Life Assurance Society in 1871, Indians were charged an extra premium of up to 20% as
compared to the British. The first statutory measure in India to regulate the life insurance
business was in 1912 with the passing of the Indian Life Assurance Companies Act, 1912 (“Act
of 1912”) (which was based on the English Act of 1909). Other classes of insurance business
were left out of the scope of the Act of 1912, as such kinds of insurance were still in rudimentary
form and legislative controls were not considered necessary.

General insurance on the other hand also has its origins in the United Kingdom. The first general
insurance company Triton Insurance Company Ltd. was promoted in 1850 by British nationals in
Calcutta. The first general insurance company established by an Indian was Indian Mercantile
Insurance Company Ltd. in Bombay in 1907. Eventually, with the growth of fire, accident and
marine insurance, the need was felt to bring such kinds of insurance within t he purview of the
Act of 1912 While there were a number of attempts to introduce such legislation over the years,
non-life insurance was finally regulated in 1938 through the passing of the Insurance Act, 1938
(“Act of 1938”). The Act of 1938 along with various amendments over the years continues till
date t o be the definitive piece of legislation on insurance and controls both life insurance 1 and
general insurance. General insurance, in turn, has been defined to include “fire insurance
business” 2 , “marine insurance business” 3 and “miscellaneous insurance business” 4 , whether
singly or in combination with any of them.

1 Section 2(11), Insurance Act, 1938 defines “Life Insurance Business”

2 Section 2(6-A), Insurance Act, 1938 defines “Fire Insurance business”
3Section 2(13-A), Insurance Act, 1938 defines “Marine Insurance Business”

4 Section 2(13-B), Insurance Act, 1938 defines “Miscellaneous insurance business”

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2. Nationalization of the Insurance Business in India:

On January 19, 1956, the management of life insurance business of two hundred and forty five
Indian and foreign insurers and provident societies then operating in India was taken over by the
Central Government. The Life Insurance Corporation (“LIC”) was formed in September 1956 by
the Life Insurance Corporation Act, 1956 (“LIC Act”) which granted LIC the exclusive privilege
to conduct life insurance business in India. However, an exception was made in the case of any
company; firm or persons intending to carry on life insurance business in India in respect of the
lives of “persons ordinarily resident outside India” provided the approval of the Central
Government was obtained. The exception was however not absolute and a curious prohibition
existed. Such company, firm or person would not be permitted to insure the life of any “person
ordinarily resident outside India”, during any period of their temporary residence in India.
However, the LIC Act, 1956 left outside its purview the Post Office Life Insurance Fund, any
Family Pension Scheme framed under the Coal Mines Provident Fund, Family Pension and
Bonus Schemes Act, 1948 or the Employees' Provident Funds and the Family Pension Fund Act,
1952.

The general insurance business was also nationalised with effect from January 1, 1973, through
the introduction of the General Insurance Business (Nationalisation) Act, 1972 (“GIC Act”).
Under the provisions of the GIC Act, the shares of the existing Indian general insurance
companies and undertakings of other existing insurers were transferred to the General Insurance
Corporation (“GIC”) to secure the development of the general insurance business in India and for
the regulation and control of such business. The GIC was established by the Central Government
in accordance with the provisions of the Companies Act, 1956 (“Companies Act”) in November
1972 and it commenced business on January 1, 1973. Prior to 1973, there were a hundred and
seven companies, including foreign companies, offering general insurance in India. These
companies were amalgamated and grouped into four subsidiary companies of GIC viz. the
National Insurance Company Ltd. (“National Co.”), the New India Assurance Company Ltd.
(“New India Co.”), the Oriental Insurance Company Ltd. (“Oriental Co.”), and the United India
Assurance Company Ltd. (“United Co.”). GIC undertakes mainly re-insurance business apart
from aviation insurance. The bulk of the general insurance business of fire, marine, motor and
miscellaneous insurance business is under taken by the four subsidiaries.

3. Entry of Private Players:

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Since 1956, with the nationalization of insurance industry, the LIC held the monopoly in India's
life insurance sector. GIC, with its four subsidiaries, enjoyed the monopoly for general insurance
business. Both LIC and GIC have played a significant role in the development of the insurance
market in India and in providing insurance coverage in India through an extensive network

From 1991 onwards, the Indian Government introduced various reforms in the financial sector
paving the way for the liberalization of the Indian economy. It was a matter of time before this
liberalization affects the insurance sector. A huge gap in the funds required for infrastructure was
felt particularly since much of these funds could be filled by life insurance funds, being long
tenure funds.

Consequently, in 1993, the Government of India set up an eight-member committee chaired by

Mr. R. N. Malhotra, a former Governor of India's apex bank, the Reserve Bank of India to review
the prevailing structure of regulation and supervision of the insurance sector and to make
recommendations for strengthening and modernizing the regulatory system. The Committee
submitted its report to the Indian Government in January 1994. Two of the key recommendations
of the Committee included the privatisation of the insurance sector by permitting the entry of
private players to enter the business of life and general insurance and the establishment of an
Insurance Regulatory Authority.

It took a number of years for the Indian Government to implement the recommendations of the
Malhotra Committee. The Indian Parliament passed the Insurance Regulator y and Development
Act, 1999 (“IRD Act”) on December 2, 1999 with the aim “to provide for the establishment of an
Authority, to protect the interests of the policy holders, to regulate, promote and ensure orderly
growth of the insurance industry and to amend the Insurance Act, 1938, the Life Insurance
Corporation Act, 1956 and the General Insurance Business (Nationalization) Act, 1972”.

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 2. MEANING AND CONCEPT OF INSURANCE

Insurance is one of the devices by which risks may be reduced or eliminated in exchange for
premium. Insurance policies are a safeguard against the uncertainties of life. As in all insurance,
the insured transfers a risk to the insurer, receiving a policy and paying a premium in exchange.
The risk assumed by the insurer is the risk of death of the insured in case of life insurance.

Insurance policies cover the risk of life as well as other assets and valuables such as home,
automobiles, jewellery etc. On the basis of the risk they cover, insurance policies can be
classified into two categories:

(a) Life Insurance

(b) Non-Life Insurance or General Insurance

Life insurance products cover risk for the insurer against eventualities like death or disability.
Non-life insurance products cover risks against natural calamities, burglary, etc. Insurance is
system by which the losses suffered by a few are spread over many, exposed to similar risks.
With the help of Insurance, large numbers of people exposed to a similar risk make contributions
to a common fund out of which the losses suffered by the unfortunate few, due to accidental
events, are made good. Insurance is a protection against financial loss arising on the happening
of an unexpected event. Insurance policy helps in not only mitigating risks but also provides a
financial cushion against adverse financial burdens suffered.5

Insurance is defined as a co-operative device 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.

The definition of insurance can be seen from two view points:

(a) Functional Definition

Insurance is a co-operative device of distributing losses, falling on an individual or his family

over large number of persons each bearing a nominal expenditure and feeling secure against
heavy loss.

(b) Contractual Definition

5 http://www.investopedia.com/university/insurance/insurance2.asp

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Insurance may be defined as a contract consisting of one party (the insurer) who agrees to pay to
other party (the insured) or his beneficiary, a certain sum upon a given contingency against
which insurance is sought.

Insurance is a contract in which a sum of money is paid by the assured in consideration of the
insurer's incurring the risk of paying larger sum upon a given contingency.6

Insurance is based upon:

(a) Principles of Co-operation

Insurance is a co-operative device. If one person is providing for his own losses, it cannot be a
strictly insurance because in insurance the loss is shared by a group of persons who are willing to
co-operate. Insurance is a co-operative endeavour. People, who are exposed to similar risks come
together and pool up a fund out of which the loss suffered by a single person is met. Pooling of
risks and resources is the essence of insurance.

(b) Principles of Probability

The loss in the form of premium can be distributed only on the basis of theory of probability.
The chances of loss are estimated in advance to affix the amount of premium. Since the degree
of loss depends upon various factors, the affecting factors are analyzed before determining the
amount of loss.

With the help of this principle, the uncertainty of loss is converted into certainty. The insurer will
not have to suffer loss as well as gain windfall. Therefore, the insurer has to charge only so much
of amount which is adequate to meet the losses.

The insurance, on the basis of past experience, present conditions and future prospects, fixes the
amount of premium. Without premium, no co-operation is possible and the premium cannot be
calculated without the help of theory of probability, and consequently no insurance is possible.

NATURE AND CHARACTRISTIC OF INSURANCE:

Insurance contracts like other contracts are governed by the general principles of the law of
contract as codified in the Indian contract act 1872, which prescribed the following essential
elements in order for contract to be legally valid:

a) Offer and acceptance

6 Singh, Avtar, “Law of Insurance”, Eastern Book Company, 2Nd Edition, 2010. Page no. 19.

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b) Consideration

c) Agreement between parties

d) Capacity of the parties

e) Legality of the contract

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 3. PRINCIPLES OF INSURANCE LAW
I. PRINCIPLE OF UTMOST GOOD FAITH/ UBERRIMA FIDES:

Utmost Good Faith

Utmost Good Faith can be defined as “A positive duty to voluntarily disclose, accurately and
fully all facts material to the risk being proposed whether requested for or not”.

In Insurance contracts Utmost Good Faith means that “each party to the proposed contract is
legally obliged to disclose to the other all information which can influence the others decision to
enter the contract”.

The following can be inferred from the above two definitions:

(1) Each party is required to tell the other, the truth, the whole truth and nothing but the truth.

(2) Unlike normal contract such an obligation is not limited to any questions asked and

(3) Failure to reveal information even if not asked for gives the aggrieved party the right toregard
the contract as void.7

MATERIAL FACT

Material fact is every circumstance or information, which would influence the judgement of a
prudent insurer in assessing the risk or those circumstances which influence the insurer decision
to accept or refuse the risk or which effect the fixing of the premium or the terms and conditions
of the contract must be disclosed. Test of Determination- Whether a particular fact is material
depends upon the circumstances of a particular case. The test to determine materiality is whether
the fact has any bearing on the risk undertaken by the insurer.

If the fact has any bearing on the risk it is a material fact, if not it is immaterial. Only those facts,
which have a bearing on the risk, are material facts. Otherwise, they are not material facts, which
need to be disclosed.

(Rohini Nandan V/s. Ocean Accident and Guarantee Corporation)8

7 Srinivasan, M.N., Joga Rao, S.V., “Principles of Insurance Law”, Lexis Nexis Butterworths Wadhwa, 9th
Edition, Nagpur, 2009. Page no. 87.
8 AIR6 1960 Kolkata 696

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Materiality is a question of fact, to be decided in the circumstances which would influence the
judgment of a prudent insurer in fixing the premium on determining whether he will take the risk
and if so, at what premium and on what conditions.

FACTS, WHICH MUST BE DISCLOSED

i. Facts, which show that a risk represents a greater exposure than would be expected from its
nature e.g., the fact that a part of the building is being used for storage of inflammable materials.
ii. External factors that make the risk greater than normal e.g. the building is located next to a
warehouse storing explosive material.

iii. Facts which would make the amount of loss greater than that normally expected e.g. there
isno segregation of hazardous goods from non-hazardous goods in the storage facility.

iv. History of Insurance (a) Details of previous losses and claims (b) if any other
InsuranceCompany has earlier declined to insure the property and the special condition
imposed by the other insurers; if any.

v. The existence of other insurances

vi. Full facts relating to the description of the subject matter of Insurance

Details of previous losses are a material fact which is relevant to all policies.

FACTS, WHICH NEED NOT BE DISCLOSED

a) Facts of Law: Everyone is deemed to know the law. Overloading of goods carrying vehicles
islegally banned. The transporter cannot take excuse that he was not aware of this provision.

b) Facts which lessen the Risk: The existence of a good fire-fighting system in the building.

c) Facts of Common Knowledge: The insurer is expected to know the areas of strife and
areassusceptible to riots and of the process followed in a particular trade or Industry.

d) Facts which could be reasonably discovered: For e.g. the previous history of claims which
theInsurer is supposed to have in his record.

e) Facts which the insurers representative fails to notice: In burglary and fire Insurance it is often
the practice of Insurance companies to depute surveyors to inspect the premises and in case the
surveyor fails to notice hazardous features and provided the details are not withheld by the
Insured or concealed by him them the Insured cannot be penalized.

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f) Facts covered by policy condition: Warranties applied to Insurance policies i.e. there is
awarranty that a watchman be deployed during night hours then this circumstance need not be
disclosed.

Duration of Duty of Disclosure

The duty of disclosure remains in force throughout the entire negotiation stage and till the
contract is finalized. Once the contract is finalized then the contract is subject to ordinary simple
good faith. However when an alteration is to be made in an existing contract then this duty of
full disclosure recovers in respect of the proposed alteration.
Ratan Lal Vs. Metropolitan Insurance Co. Ltd.9:

Pyare Lal (insured) died on 19-4-1946, plaintiff in this case were his sons (successors and heirs).
On accord of his policy, it so happened that before the acceptance could be supplemented with
regular policy, the assured died on 19-4-1946. But the amount which had been paid up by the
deceased was first kept in suspense account and thereafter on 28-3-1946 was adjusted it first
annual premium. Therefore it could be said that on the date of adjustment of account, the policy
was deemed to be a binding contract between the parties. But the company contended that
though deceased died after the acceptance of policy but illness which was responsible for
bringing about his death had already set in since 23-3-1946, much within the time the policy was
still under consideration before the company. On this, plaintiff replied that the illness had set in
for the first time on 23-3-1946 and not any time before that, and the intimation was made to the
company about the illness.

Trial court held the company liable to pay the sum to the insured, but defendants didn’t find their
way to make any payment to the plaintiffs and hence this appeal came before the High Court.
Court on the facts observed that:-

Principle of uberrima fidea would follow till the conclusion of the contract is made by the
company. And if breach occurs the contract would be voidable the instance of the party to whom
“ubarrima fides” is due.

Great care must be taken in deciding the difference as to what would be mere illness or what’s
ordinary simple disorder, and what would constitute material change in health there’s a great
danger for one being take for another. Therefore, if in his honest judgment there was no illness

9 AIR 1959 Pat 413

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or any change of health but only an ordinary disorder, the mere non-communication of that event
to the company cannot be a ground for the insurer to avoid the policy. Therefore, the moment the
proposal was accepted by the company, the condition as to the remittance of the first installment
by the assured and the acceptance of the same by the company also automatically stood
complied with, 26th March, 1946. He had already sent for the doctor on the previous evening,
namely, on 27th March, 1946, but on that day the complaint, if any, was nothing more than
exhaustion or what we may call ordinary simple disorder otherwise had there been anything
serious, the doctor should have undoubtedly prescribed some medicine to the patient. And
therefore the complaint was of an ordinary disorder character and not illness. If that is so then
there was no breach of warranty by Pyare Lal if he did not send any information of his illness
which began on the 28th March, 1946 and wherein the policy had already been accepted by
company.

The duty of disclosure also revives at the time of renewal of contract since legally renewal is
regarded as a fresh contract. For example: a landlord at the time of proposal has disclosed that
the building is rented out and is being used as an office. If during the continuation of the policy
the tenants vacate the building and the landlord subsequently rents it out to a person using it as a
godown then he is required to disclose this fact to the Insurer as this is a change in material facts
and effects the risks.

BREACHES OF UTMOST GOOD FAITH:

Breaches of Utmost Good Faith occur in either of 2 ways:-

(1) Misrepresentation, which again may be either innocent or intentional. If intentional then
theyare fraudulent;

(2) Non-Disclosure, which may be innocent or fraudulent. If fraudulent then it is

calledconcealment. It is important to distinguish between the two: Misrepresentation and Non-
Disclosure.

Misrepresentation:

Innocent: This occurs when a person states a fact in the belief or expectation that it is right but it
turns out to be wrong. While taking out a Marine Insurance Policy the owner states that the ship
will leave on a specific date but in fact the ship leaves on a different date.

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Intentional: Deliberate misrepresentation arises when the proposer intentionally distorts the
known information to defraud the insurer. The selfish objective is somehow to enter the contract
or to get a reduction in the premium e.g., If an applicant for motor Insurance stated that no one
under 18 would drive the vehicle when in fact his 17 years old son drives frequently. Such a
misrepresentation would be material as it would affect the decision of the insurer.

Non-Disclosure:

Innocent: This arises when a person is not aware of the facts or when even though being aware of
fact does not appreciate its significance e.g. A proposer at the time of effecting the contract has
undetected cancer therefore does not disclose it or A proposer had suffered from Rheumatic
fever in his childhood but he does not disclose this not knowing that people who have this are
susceptible to heart diseases at a later age.

Deliberate: This is done with a deliberate intention to defraud the insurer entering into a contract,
which he would not have done had he been aware of that fact.

A proposer for fire Insurance hides the fact knowingly by not disclosing that he has an outhouse
next to his building, which is used as a store for highly inflammable material.10

How to Deal With Breaches

How breaches are dealt with depends upon whether the breaches are

1) Innocent

2) Deliberate

3) Material to the risk

4) Immaterial to the risk

When Breach of Utmost Good Faith occurs the aggrieved party gets the right to avoid the
contract. The contract does not become automatically void and it must decide on the course to be
taken. The options available are on case-to-case basis like:-

1) The contract becomes void from the very beginning if deliberate misrepresentation or
nondisclosure is resorted to with the intention of misleading the insurer to enter into a contract.

10
https://www.google.co.in/url?
sa=t&rct=j&q=&esrc=s&source=web&cd=2&cad=rja&uact=8&ved=0CCMQFjAB&url=http
%3A%2F%2Fwww.belmontint.com%2F_uploads%2FBelmont_Virtual_Academy%2FThesixprinciples.pdf&ei=_b
9DVZiFL42puwTRnoGwCQ&usg=AFQjCNEh1Kk3ucTxpAMW5bDC8
UyGiKaJaQ&sig2=1VqRoq9OZxynI5oloU0llg&bvm=bv.92189499,d.c2E

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2) To consider the contract void, the bereaved party, must notify the offending party that
breachhas been noticed and as per the conditions of the contract he is no longer governed with
the terms of the contract agreed upon in covering the risk. In case the breach is discovered at the
time of claim he will refuse to honour his promise and will not pay the claim. This again occurs
when there has been a deliberate breach.

3) When the breach is innocent but it is material to the fact then the insurer may impose a
penaltyin the form of additional Premium.

4) Where the breach is found to be innocent and is not material the insurer can choose to
ignorethe breach or waive off the breach.

II. PRINCIPLE OF INSURABLE INTEREST:

One of the essential ingredients of an Insurance contract is that the insured must have an
insurable interest in the subject matter of the contract. Insurance without insurable interest would
be a mere wager and as such unenforceable in the eyes of law. The subject matter of the
Insurance contract may be a property or an event that may create a liability but it is not the
property or the potential liability which is insured but it is the pecuniary interest of the insured in
that property or liability which is insured.

The concept is the basis of the doctrine of insurable interest and was cleared in the case of
Castellain v/s Preston11 as follows:

“What is it that is insured in a fire policy? Not the bricks and materials used in building the
house but the interest of the Insured in the subject matter of Insurance.”

The subject matter of the contract is the name given to the financial interest, which a person has
in the subject matter and it is this interest, which is insured.

The insurable interest is the pecuniary interest whereby the policy-holder is benefited by the
existence of the subject-matter and is prejudiced by the death or damage of the subject-matter.12

In India it is strange that the Insurance Act, 1938 does not contain a definition of insurable
interest the only section, namely Section 68 which makes a passing reference to the words
'insurable interest' stands repeated by Section 48 of The Insurance Amendment Act, 1950.

11 (1883) 11 QBD 380, CA

12http://law.freeadvice.com/insurance_law/insurance_law/insurable_interests.htm

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Briefly stated there is no legislative guidance in Indian law on the subject but still marine
insurance defines under Section 7 of the Marine Insurance Act, 1963 defines insurable interest.

Insurable Interest is defined as “The legal right to insure arising out of a financial relationship
recognized under the law between the insured and the subject matter of Insurance”.

There are four essential components of Insurable Interests as follow:

1) There must be some property, right, interest, life, limb or potential liability capable of
beinginsured.

2) Any of these above i.e. property, right, interest etc. must be the subject matter of Insurance.

3) The insured must stand in a formal or legal relationship with the subject matter of
theInsurance. Whereby he benefits from its safety, well-being or freedom from liability and
would be adversely affected by its loss, damage existence of liability.

4) The relationship between the insured and the subject matter must be recognized by law.

HOW IS INSURABLE INTEREST CREATED:

There are a number of ways by which Insurable Interest arises or is restricted.

1) By Common Law: Cases where the essential elements are automatically present can
bedescribed as Insurable Interest having arisen by common law. Ownership of a building, car
etc, gives the owner the right to insure the property.

2) By Contract: In some cases a person will agree to be liable for something which he would
notbe ordinarily for. A lease deed for a house for example may make the tenant responsible
for the repair and maintenance of the building. Such a contract places the tenant in a legally
recognized relationship with the house or the potential liability and this gives him the
insurable interest.

3) By Statute: Sometimes an Act of the Parliament may create an insurable interest by

grantingsome benefit or imposing a duty and at times removing a liability may restrict the
Insurable Interest.

4) Anti-Wagering Legislations

Insurable Interest is applicable in the Insurance of property, life and liability. In case of property
Insurance, insurable interest arises out of ownership where the owner is the insured but it can

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arise due to other situations & financial interests which give a person who is not an owner,
insurable interest in the property and some of the situations are listed below.

1) Mortgagee and Mortgagers: The practice of Mortgage is common in the area of house
&vehicle purchase. The mortgagee is the lender normally a bank or a financial institution, and
the mortgager is the purchaser. Both have an insurable interest; the mortgager because he is
the owner and the mortgagee as a creditor with insurable interest limited to the extent of the
loan.

As per Section 72 of the Transfer of property Act, 1882 where the property is by its nature
insurable, the mortgagee may also, in the absence of a contract to the contrary, insure and keep
insured against loss or damage by fire the whole or any part of such property, and the premiums
paid for any such insurance shall be 5[added to the principal money with interest at the same rate
as is payable on the principal money or, where no such rate is fixed, at the rate of nine per cent.
per annum]. But the amount of such insurance shall not exceed the amount specified in this
behalf in the mortgage-deed or (if no such amount is therein specified) two-thirds of the amount
that would be required in case of total destruction to reinstate the property insured.

2) Seller and Buyer:

In The Transfer of Property Act, 1882 Section 49 talks about transferees’ right under policy.
Where immoveable property is transferred for consideration, and such property or any part
thereof is at the date of the transfer insured against loss or damage by fire, the transferee, in case
of such loss or damage, may, in the absence of a contract to the contrary, require any money
which the transferor actually receives under the policy, or so much thereof as may be necessary,
to be applied in reinstating the property.

3) Bailee: Bailee is person legally holding the goods of another, may be for payment or
otherreason. Motors garages and watch repairers have a responsibility to take care of the items
in their custody and this gives them an insurable interest even though he is not owner.

4) Trustees: They are legally responsible for the property under their charge and it is
thisresponsibility which gives rise to insurable interest.

5) Part Ownership: Even though a person may have only part interest in a property he can
insurethe entire property. He shall be treated as a trustee or the co-owners; and in the event of

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 a claim he will hold the money received by him in excess of his financial interest in trust for
the others.

6) Agents: When the principal has an insurable interest then his agent can insure the property.But
only that agent can insure who is having possession of the property.

7) Liability: In Liability Insurance a person has insurable interest to the extent of any
potentialliability which may be incurred due to damages and other costs. It is not possible to
foretell how much liability or how often a person may incur liability and in what form or
shape it arises. In this way Insurable Interest in Liability Insurance is different than Insurable
Interest in life & property - where it is possible to predetermine the extent of Insurable
Interest.

Therefore in liability assurance the insured is asked to choose the amount of sum insured as the
maximum figure that he estimates is ever likely to be required to settle the liability claims.

Insurable Interest in Life Insurance

The object of Insurance should be lawful for this purpose; the person proposing for Insurance
must have interest in the continued life of the insured & would suffer pecuniary loss if the
insured dies. If there is no insurable interest, the contract becomes wagering (gambling) contract.
All wagering contracts are illegal & therefore null & void.

Own Life Policy

So long as the Insurance is on one’s own life, the “Insurance Interest” presents no difficulty. A
person has insurable interest in his own life to an unlimited extent. The absence of a limit in this
case is reasonable. When a person insures his life he obtains protection against loss to his estate;
for in the event of his untimely death the estate would not benefit by the future accumulation he
hopes to make during the normal span of life. It is not easy to compute with any degree of
certainty what the future earnings of a person would be. Hence no limit may be fixed in respect
of life Insurance he may effect. Where, however, insurer rejects a proposal for an amount of
assurance, which is disproportionate to the means of the proposer, it is not normally for lack of
Insurable interest but on considerations of “moral hazard”. Indeed it may also be presumed in a
case where a person proposes for a policy for a large amount, which he may not be able to
maintain having regard to his income, that it will be financed by some other person and that there
is no insurable interest.

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Insurance on the Life of Spouse (Husband and Wife)

As a wife is normally supported by her husband, she can validly effect an insurance on her life
for adequate amount. The service and help rendered by the wife used to be thought of as the
basis of insurable interest which supports any policy which a man takes on the life of his wife. In
Griffiths v. Elemming13, the Court of Appeal in England stated that it was difficult to uphold
such interest on the basis of pecuniary interest but thought that such interest could be presumed
on broader grounds.

Parent and Child

Following the practice in U.K. in India also a parent is not considered to have insurable interest
in the life of the child unless he/she has pecuniary interest in the life of the child. The same is the
case with a child in respect of his parent’s life. Whether this position requires to be reviewed
now appears to be engaging the attention of people here.

A Hindu is under a legal obligation to maintain his parents. Even as per traditional law Sec.20 of
the Hindu Adoption and Maintenance Act has given statutory form to the legal obligation. The
parents have, therefore, a right to maintenance subject to their being aged or infirm. An order for
maintenance of parents may also be passed under Section 125 of the Code of Criminal
Procedure, 1973. It may be stated, therefore, that a parent has pecuniary interest in the life of the
child, and an assurance effected on that basis cannot be hit by Section 30 of the Contract Act as a
wagering contract. However, it may be noted that the pecuniary interest is not a present interest
unless the parent is unable to maintain himself or herself at the time when the Insurance is
effected. It may therefore, be argued that a parent cannot have insurable interest in the life of the
child until the right to maintenance arises; but when a person is not able to maintain oneself how
can he be expected to have the means to insure the life of his children? As a matter of fact in
India, even today a child is a potential breadwinner for the parents in their old age. The present
affluent circumstances of a parent do not alter that situation. Under the traditional law a right to
maintenance could be claimed only against the sons; the statute has now extended the obligation

13

to the daughters as well. Having regard to the social and economic set up of the people in the
country a review of the question seems to be appropriate.

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On the life of other relations

In the case of other relations, insurable interest cannot be presumed from the mere existence of
their relationship. Moral obligations or duties are not sufficient to sustain an insurable interest.

In every other case, the insurable interest must be a pecuniary interest and must be founded on a
right or obligation capable of being enforced by Courts of law.

Creditor – debtor: A creditor has insurable interest in the life of his debtor upto the amount of
the debt; This is not a satisfactory basis; for in the event of death of the debtor after the debt has
been repaid, the creditor would still be entitled to the policy moneys and thus can be in a position
to gain by the death of the debtor once the loan is repaid. The better arrangement would be for
the debtor to take out a policy for the required amount and mortgage the policy to the creditor.
The creditor then cannot take benefits under the policy in excess of his dues.

Partner: A partner has insurable interest in the life of his co-partner to the extent of the capital
to be brought in by the latter.

As a life Insurance contract is not one of indemnity, the existence of insurable interest and the
amount thereof will have to be considered at the time of effecting the contract since lack of such
interest would render the contract void. If insurable interest existed at the inception of the policy,
the contract would be enforceable though such interest might cease later.

WHEN SHOULD INSURABLE INTEREST EXIST

In a marine insurance contract the presence of insurable interest is necessary only at the time of
the loss. It is immaterial whether he has or does not have any insurable interest at the time when
the marine insurance policy was taken.

(i) In Life Insurance Insurable Interest must exist at the time of inception of Insurance and it
isnot required at the time of claim

(ii) In Marine Insurance Insurable Interest must exist at the time of loss / claim and it is
notrequired at the time of inception.

(iii) In Property and other Insurance Insurable Interest must exist at the time of inception as
wellas at the time of loss/ claims.

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Other Salient Features of Insurable Interest:

(i) Insurable Interest of Insurers: Once the Insurers have accepted the liability they derive
aninsurable interest, which arises from that liability thus they are free to insure a part or whole of
the risk with another insurer. This is done by reinsurance.

(ii) Legally Enforceable: The Insurable Interest must be legally enforceable. The
mereexpectation that one may acquire insurable interest in the future is not sufficient to create
insurable interest.

(iii) Possession: Lawful possession of property together with its responsibility creates
aninsurable interest.

(iv) Criminal Acts: A person cannot avail benefits from Insurance to cover penalties because
of acriminal act but insurance to take care of civil consequences arising out of his criminal act
can be done. This is applicable in the case of motor Insurance where a driver found guilty of an
offence which is involved in an accident receives the claim for damage to his own car and also
liability incurred due to damage to another’s property but he shall not be insured for the amount
of penalty that was imposed for his offense.

(v) Financial Value: Insurable interest must be capable of financial evaluation. In the case
ofproperty and liability incurred it is easily evaluated but in life it is difficult to put a value on
the life of a person or his spouse and this depends on the amount of premium the individual can
bear. However in cases where lives of others are involved a value on life can be placed i.e.
creditor can put a value on the life of debtor restricted to the extent of the loan.

III. PRINCIPLE OF INDEMNITY:

Indemnity according to the Cambridge International Dictionary is “Protection against possible

damage or loss” and the Collins Thesaurus suggests the words “Guarantee”, “Protection”,
“Security”, “Compensation”, “Restitution” and “Reimbursement” amongst others as suitable

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substitute for the word “Indemnity”. The words protection, security, compensation etc. are all
suited to the subject of Insurance but the dictionary meaning or the alternate words suggested do
not convey the exact meaning of Indemnity as applicable in Insurance Contracts.

In Insurance, the word indemnity is defined as “financial compensation sufficient to place the
insured in the same financial position after a loss as he enjoyed immediately before the loss
occurred.” Indemnity thus prevents the insured from recovering more than the amount of his
pecuniary loss. It is undesirable that an insured should make a profit out of an event like a fire or
a motor accident because if he was able to make a profit there might well be more fires and more
vehicle accidents. As in the case of Insurable Interest, the principle of indemnity also relies
heavily on the financial evaluation of the loss but in the case of life and disablement it is not
possible to be precise in terms of money.

USES:

To avoid intentional loss: According to the principle of indemnity insurer will pay the actual loss
suffered by the insured. If there is any intentional loss created by the insured the insurer’s is not
bound to pay. The insurer’s will pay only the actual loss and not the assured sum (higher is
higher in over-insurance).

To avoid an Anti-social Act: If the assured is allowed to gain more than the actual loss, which us
against the principle of indemnity, he will be tempted to gain by destruction of his own property
after it insured against a risk. So, the principle of indemnity has been applied where only the
cash-value of his loss and nothing more than this, through he might have insured for a greater
amount, will be compensated.13

Conditions of Indemnity Principle

The following conditions should be fulfilled in full application of principle of indemnity.

• The insured has to prove that he will suffer loss on the insured matter at the time of
happeningof the event and the loss is actual monetary loss.

13http://www.uslegalforms.com/?auslf=definitions-ad&page=/i/indemnity
principle/&adid=default_ad_3

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• The amount of compensation will be the amount of insurance. Indemnification cannot be
morethan the amount insured.

• If the insured gets more amount then the actual loss; the insurer has right to get the
extraamount back.

• If the insured gets more amount then from third party after being fully indemnified by
insurer,the insurer will have right to receive all the amount paid by the third party.

• The principle of indemnity does not apply to personal insurance because the amount of
loss isnot easily calculable there.

Insurance may be for less than a complete indemnity but it may not be for more than it.

However there are two modern types of policy where there is a deviation from the application of
this principle. One is the agreed value policy where the insurer agrees at the outset that they will
accept the value of the insured property stated in the policy (sum insured) as the true value and
will indemnify the insured to this extent in case of total loss. Such policies are obtained on
valuable pieces of Art, Curious, Jewellery, Antiques, Vintage cars etc. The other type of policy
where the principle of strict indemnity is not applied is the Reinstatement policy issued in Fire
Insurance. Here the Insured is required to insure the property for its current replacement value
and the Insurer agrees that in the event of a total loss he shall replace the damaged property with
a new one or shall pay for the replacement in full.

Other than these there are Life and Personal Accident policies where no financial evaluation can
be made. All other Insurance policies are subjected to the principle of strict Indemnity. In most
policy documents the word indemnity may not be used but the courts will follow this principle in
case of any dispute coming before them.

HOW IS INDEMNITY PROVIDED?

The Insurers normally provide indemnity in the following manner and the choice is entirely of
the insurer:

1. Cash Payment

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In majority of the cases the claims will be settled by cash payment (through cheques) to the
assured. In liability claims the cheques are made directly in the name of the third party thus
avoiding the cumbersome process of the Insurer first paying the Insured and he in turn paying to
the third party.

2. Repair

This is a method of Indemnity used frequently by insurer to settle claims. Motor Insurance is the
best example of this where garages are authorized to carry out the repairs of damaged vehicles.
In some countries Insurance companies even own garages and Insurance companies spend a lot
on Research on motor repair to arrive at better methods of repair to bring down the costs.

3. Replacement

This method of Indemnity is normally not preferred by Insurance companies and is mostly used
in glass Insurance where the insurers get the glass replaced by firms with whom they have
arrangements and because of the volume of business they get considerable discounts. In some
cases of Jewellery loss, this system is used specially when there is no agreement on the true
value of the lost item.

4. Reinstatement

This method of Indemnity applies to Property Insurance where an insurer undertakes to restore
the building or the machinery damaged substantially to the same condition as before the loss.
Sometimes the policy specifically gives the right to the insurer to pay money instead of
restoration of building or machinery.

Reinstatement as a method of Indemnity is rarely used because of its inherent difficulties e.g., if
the property after restoration fails to meet the specifications of the original in any material way
or performance level then the Insurer will be liable to pay damages. Secondly, the expenditure
involved in restoration may be much more than the sum Insured as once they have agreed to
reinstate they have to do so irrespective of the cost.

Limitations on Insurers Liability

1. The maximum amount recoverable under any policy is the sum insured, which is
mentionedon the policy. The amount is not the agreed value of the property (except in Valued
policies) nor is it the amount, which will be paid automatically on occurrence of loss. What will
be paid is the actual loss or sum insured whichever is less.

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2. Property Insurance is subjected to the Condition of Average. The underlying principle
behindthis condition is that Insurers are the trustees of a pool of premiums from which they meet
the losses of the few who suffer damage, so it is reasonable to conclude that every Insured
should bring a proper contribution to the pool by way of premium. Therefore if an insured
deliberately or otherwise underinsures his property thus making a lower contribution to the pool,
he is not entitled to receive the full benefits.

The application of this principle makes the insured his own Insurer to the extent of
underinsurance i.e. the pro-rata difference between the Actual Value and the sum insured.

The amount of loss will be shared between the Insurer and the insured in the proportion of sum
insured and the amount underinsured. The formula applicable for arriving at the amount to be
paid by the Insurance Co. is Claim = Loss X (Sum Insured / Market Value).

IV. PRINCIPLE OF SUBROGATION:

Subrogation is the right of insurers, once they have paid the insurance money due, to exercise
any rights or remedies of the insured arising out of the insured event to recover their outlay from
a culpable third party.
It has already been established that the purpose of Indemnity is to ensure that the Insured does
not make a profit or gain in any way as a consequence of an accident. He is placed in the same
financial position, which he had occupied immediately before the loss occurred. As an off shoot
of the above it is also fair that the insurer having indemnified the insured for damage caused by
another (A Third Party) should have the right to recover from that party the amount of damages
or part of the amount he has paid as indemnity.
This right to recover damages usually lies with the bereaved or injured party but the law
recognises that if another has already paid the bereaved or injured party then the person who has
paid the compensation has the right to recover damages.

In case the insured after having received indemnity also recovers losses from another then he
shall be in a position of gain which is not correct and this amount recovered from another shall
be held in trust for the insurer who have already given indemnity. Subrogation may be defined as
the transfer of legal rights of the insured to recover, to the Insurer.

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Why Subrogation is called a corollary of Indemnity and not treated as a separate basic Principle
of Insurance can be traced to the judgement given in the case of Casletlan V Preston (1883) in
U.K. It was said in this case:

“That doctrine (Subrogation) does not arise upon any terms of the contract of Insurance, it is
only the other proposition, which has been adopted for the purpose of carrying out the
fundamental rule i.e. indemnity. “It is a doctrine in favour of the underwriters or insurers, in
order to prevent the insured from recovering more than a full indemnity; it has been adopted
solely for that reason.”

Subrogation does not apply to life and personal accidents as these are not contracts of Indemnity.
In case death of a person is caused by the negligence of another than the legal heirs of the
deceased can initiate proceedings to recover from the guilty party in addition to the policy
proceeds. If the insured is not allowed to make profit the insurer is also not allowed to make a
profit and he can only recover to the extent he has indemnified the Insured.

Subrogation can arise in 4 ways

a) Tort

b) Contract

c) Statute

d) Subject matter of Insurance

1) Tort: When an insured has suffered a loss due to a negligent act of another then the
Insurerhaving indemnified the loss is entitled to recover the amount of indemnity paid from the
wrongdoer. The Insured has a right in Tort to recover the damages from the individuals involved.
The Insurers assume these rights and take action in the name of the insured and take his
permission before starting legal proceedings.

2) Contract: This can arise when a person has a contractual right to compensation regardless
of afault then the Insurer will assume the benefits of this right.

3) Statute: Where the Act or Law permits, the insurer can recover the damages from
Governmentagencies like the Risk (Damage) Act 1886 (UK) gives the right to insurers to
recover damages from the District Police Authorities in respect of the property damaged in Riots
which has been indemnified by them.

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4) Subject Matter of Insurance: When the Insured has been indemnified and the property
treatedas lost he cannot claim salvage as this would give him more than indemnity.

Therefore when Insurers sell the salvage as in the case of damaged cars it can be said that they
are exercising their right of subrogation.14

Subrogation – When?

Subrogation means substituting one creditor for another. Principle of Subrogation is an extension
and another corollary of the principle of indemnity. It also applies to all contracts of indemnity.
According to the principle of subrogation, when the insured is compensated for the losses due to
damage to his insured property, then the ownership right of such property shifts to the insurer.
This principle is applicable only when the damaged property has any value after the event
causing the damage. The insurer can benefit out of subrogation rights only to the extent of the
amount he has paid to the insured as compensation.

According to common law the right of subrogation arises once the Insurers have admitted the
claim and paid it. This can create problems for the Insurers as delay in taking action could at
times hamper their chance of recovering the damages from the wrongdoer or it could be
adversely affected due to any action taken by the Insured. To safeguard their rights and to ensure
that they are in control of the situation from the beginning Insurers place a condition in the
policy giving themselves subrogation rights before the claim is paid. The limitation is that they
cannot recover from the third party unless they have indemnified the insured but this express
condition allows the insurer to hold the third party liable pending indemnity being granted.

Many individuals having received indemnity from the Insurer lose interest in pursuing the
recovery rights they may have. Subrogation ensures that the negligent do not get away scot free
because there is Insurance. The rights which subrogation gives to the Insurers are the rights of
the Insured and it places certain obligations on the Insured to assist the Insurers in enforcing their
claims and not to do anything which would harm the Insurers chances to recover losses.

V. PRINCIPLE OF CONTRIBUTION:

Principle of Contribution is a corollary of the principle of indemnity. It applies to all contracts of

indemnity, if the insured has taken out more than one policy on the same subject matter.

14 http://injury.findlaw.com/accident-injury-law/insurance-law-what-is-a-subrogation-action.html

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According to this principle, the insured can claim the compensation only to the extent of actual
loss either from all insurers or from any one insurer. If one insurer pays full compensation then
that insurer can claim proportionate claim from the other insurers.
Contribution is a right that an insurer has, who has paid under a policy, of calling other interested
insurers in the loss to pay or contribute rateably to the payment. This means that if at the time of
loss it is found that there is more than one policy covering the same loss then all policies should
pay the loss proportionately to the extent of their respective liabilities so that the insured does not
get more than one whole loss from all these sources. If a particular insurer pays the full loss than
that insurers shall have the right to call all the interested insurers to pay him back to the extent of
their individual liabilities, whether equally or otherwise. So, if the insured claims full amount of
compensation from one insurer then he cannot claim the same compensation from other insurer
and make a profit. Secondly, if one insurance company pays the full compensation then it can
recover the proportionate contribution from the other insurance company.

Conditions when Contribution operates

Before contribution can operate the following conditions must be fulfilled:

(i) There must be more than one policy involved and all policies covering the loss must be
inforce.

(ii) All the policies must cover the same subject-matter. If all the policies cover the same
insuredbut different subject-matters altogether then the question of contribution would not
arise.

(iii) All the policies must cover the same peril causing the loss. If the policies cover
differentperils, some common and some uncommon, and if the loss is not caused by a
common peril, the question of contribution would not arise.

(iv) All the policies must cover the same interest of the same insured.

(v) All the policies must operational in the eyes of law.

It should be remembered that if any of the above four factors is not fulfilled, contribution will not
apply.

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VI. PRINCIPLE OF LOSS MINIMISATION:

According to the Principle of Loss Minimization, insured must always try his level best to
minimize the loss of his insured property, in case of uncertain events like a fire outbreak or blast,
etc. The insured must take all possible measures and necessary steps to control and reduce the
losses in such a scenario. The insured must not neglect and behave irresponsibly during such
events just because the property is insured. Hence it is a responsibility of the insured to protect
his insured property and avoid further losses.

For example: Assume, Mr. John's house is set on fire due to an electric short-circuit. In this
tragic scenario, Mr. John must try his level best to stop fire by all possible means, like first
calling nearest fire department office, asking neighbours for emergency fire extinguishers, etc.
He must not remain inactive and watch his house burning hoping, "Why should I worry? I've
insured my house.15"

VII. PRINCIPLE OF PROXIMATE CAUSE:

Properties are exposed to various perils like fire, earthquake, explosion, perils of sea, war, riot
and so on and every event is the effect of some cause. The law however refuses to enter into a
subtle analysis or to carry back the investigation further than is necessary. It looks exclusively to
the immediate and proximate cause, all causes preceding the proximate cause being rejected as
too remote.

Proximate cause

Proximate cause is a key principle of insurance and is concerned with how the loss or damage
actually occurred and whether it is indeed as a result of an insured peril. The doctrine of
proximate cause, which is common to all branches of insurance, must be applied with good sense
so as to give effect to and not to defeat the intention.

Wherever there is a succession of causes which must have existed in order to produce the loss, or
which has in fact contributed, or may have contributed to produce it, the doctrine of proximate
cause has to be applied for the purpose of ascertaining which of the successive causes is the
cause to which the loss is to be attributed within the intention of the policy.16

15 https://insurancecompanyblog.wordpress.com/2012/08/15/in-the-advent-o/
16 http://www.irmi.com/online/insurance-glossary/terms/p/proximate-cause.aspx

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“Proximate Cause” is defined as “The active, efficient cause that sets in motion a chain of events,
which brings about a result, without the intervention of any new or independent force” Proximate
cause refers to an action that leads to an unbroken chain of events; events that end with someone
suffering a loss. Proximate cause is used to examine how a loss occurred and how many may
have played a role in causing the loss. Proximate cause refers to the initial action that caused a
loss. Proximate cause is the starting point in the chain of events that led to a loss. As the well
known maxim of lord Bacon runs: “It was infinite for the law to consider the causes of causes
and their impulsions one of another therefore it contended itself with the immediate cause” and
rejects all causes preceding the proximate cause as too remote.

Sometimes the direct cause is easy to determine; someone throws a ball through a window and
breaks a window. In this case, the direct cause is the act of throwing and it is easy to make the
connection between the cause and the loss. However, if a child lights a firecracker, then fearing
that the firecracker will explode in his or her hands, tosses the firecracker to a second child.

The second child also fears the impending explosion and proceeds to toss the firecracker to a
third child. This third child is the unlucky recipient of the firecracker at the precise moment of
explosion; a loss occurs as the child is injured. The question of proximate cause becomes
important in determining who is responsible for the injuries to the third child. Direct cause is
very easy to connect to the loss.

The second child tossed the firecracker to the third child knowing that there would be an
explosion. This act demonstrates either malicious intent or at least a degree of wanton disregard
for another‟s safety. The second child is then directly responsible for the third child‟s injuries;
the direct cause of loss.

Perils Relevant to Proximate Cause:

There are three types of relevant perils, which are as follows:

• Insured Perils: Those which are stated in the policy as insured, such as fire, burglary,
flood andlightning.

• Excepted or Excluded Perils: Those stated in the policy as excluded either as causes of
insuredperils, such as riot or earthquake or as a result of insured perils.

• Uninsured or Other Perils: Those not mentioned in the policy at all. Storm, smoke and
water arenot excluded nor mentioned as insured in a fire policy. It is possible for a water damage

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claim to be covered under a fire policy, if for example, a fire occurs and the fire brigade
extinguishes it with water.

Proximate Cause v. Remote Cause

The practical solution devised by law for fixing the cause of the loss is the doctrine of proximate
cause, expressed in the legal maxim, Causa Proxima Non Remota Spectator, which means that
proximate and not remote cause shall be taken as the cause of the loss. “Where various factors or
causes are concurrent and has to be selected, the matter is determined as one of fact and choice
falls upon the one to which may be variously ascribed the qualities of reality, predominance,
efficiency”

Test for Determining Proximate Cause:

Courts have formulated some general rules for determining proximate cause in cases where
perils are acting consecutively or concurrently as follows:

A. Where perils are acting consecutively in an unbroken sequence, that is, one peril is caused by
and follows from another peril, “where perils are acting consecutively in an unbroken
consequence, that is one peril is caused by and follows from or each cause in the sequence is the
reasonable and probable consequence, directly and naturally resulting in the ordinary course of
events from the cause which precedes it.

The difficulty arises when the consequence can be assigned with precision neither to the peril nor
to the excepted cause:

a) The excepted peril precedes an insured peril, the insurer is not liable. Where an
earthquake fire(an excepted peril) spread by natural means and burnt the insured premises, the
insurer was not liable as the loss was proximately caused by the excepted peril.

b) The excepted peril follows an insured peril; the insurer is not liable if the loss caused by
eachis undistinguishable. Lawrence v. Accident Insurance Co. Wherein it was held that the death
of a person falling from a railway platform in a fit and being killed by a passing train is not
proximately caused by the fit.

B. Where perils are acting in consecutively in broken sequence, each peril is independent of
other,

a) If no excepted peril is involved, the insurer will be liable for losses caused by the insured peril.

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b) If an expected peril is involved and precedes an insured peril the insurer is liable for the
losscaused by the insured peril. Thus a plate glass insurance policy covered breakages from
any risk except fire. A fire occurred in the neighbouring premises and taking advantage of it a
mob broke the insured plate glass to commit theft. It was held that mob action was the cause
of loss and not fire and so the insurer was liable.

C. Where the perils are acting concurrently that is simultaneously. Where the loss is caused by
the action of two concurrent and independent causes one of which is the peril insured against the
other an excepted cause, the loss is not within the policy since it may be accurately described as
caused by the excepted cause and it is immaterial that it may be described in another way that
would not bring it within the exception.

a) The insurer is liable if one of them is an insured peril and none of them is an excepted
peril orthe losses caused by the insured and excepted peril can be distinguished.

b) The insurer is not liable if the losses cannot be distinguished. Where the cases are
verycomplicated, the strict legal provision is not invoked but settled by compromise usually by
the insurers by a generous interpretation of the facts.

Burden of Proof in Relation to Proximate Cause

In the majority of claims, the cause is obvious and so it is relatively easy to establish whether it is
a peril covered by the Policy. Difficulties arise when there are exceptions in the Policy or when
more than one cause has operated and not all are covered. As already discussed, the proximate
cause must be identified before it is possible to decide whether the loss or damage is covered by
the Policy. There is a general rule that applies to the burden of proof.

The Policyholder (Assured) must demonstrate that an insured peril has caused the loss or damage
and, having done so, it is then for the Insurer to demonstrate the operation of any exclusion (if
they wish to deny policy liability).

The situation is slightly different with an „All Risks Policy‟. In this instance, the Policyholder
need only demonstrate that damage has occurred to the insured property during the period of
insurance. If an Insurer wishes to apply exclusion, the Insurer must then prove that the cause was
one of the excluded events.

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 4. CONCLUSION & SUGGESTIONS

Human life is exposed to many risks, which may result in heave financial losses. Insurance is one
of the devices by which risks may be reduced or eliminated in exchange for premium. "Insurance
is a contract in which a sum of money is paid by the assured in consideration of the insurer's
incurring the risk of paying larger sum upon a given contingency". In its legal aspects it is a
contract whereby one person agrees to indemnify another against a loss which may happen or to
pay a sum of money to him on the Occurring of a particular event. All contracts of insurance (
except marine insurance ) may be verbal or in writing, but particularly contracts of assurance are
included in a document.

The main motive of insurance is cooperation. Insurance is defined as the equitable transfer of
risk of loss from one entity to another, in exchange for a premium. Insurance is one of the
devices by which risks may be reduced or eliminated in exchange for premium. Insurance
policies are a safeguard against the uncertainties of life. As in all insurance, the insured transfers
a risk to the insurer, receiving a policy and paying a premium in exchange.

The Indian insurance industry is highly developed and technology adopted sector. In fact LIC
has the highest technology spend in the entire country and is in possession of the best possible
technology. Therefore, hike in FDI is not required for technology import. The Indian insurance
industry has a large number of products designed to suit the needs of every section of population
and there are continuous innovation of products to benefit the customers. Even on this count,
there is absolutely no need for FDI. The hike in FDI would allow foreign capital to gain greater
access and control over our domestic savings. This surely cannot be in national interests.

Insurance industry plays the important role of providing security to the policyholders and
converting the small savings into capital for investment in critical infrastructure sector. At a time
when the government has to make heavy investments in infrastructure to create domestic
demand, the savings mobilized through insurance play a very important role. Therefore, the
government must gain total control over the domestic savings rather than allowing the foreign
capital to use them for their speculative endeavors.

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 BIBLIOGRAPHY
BOOKS:

• Singh, Avtar, “Law of Insurance”, Eastern Book Company, 2Nd Edition, 2010.
• Srinivasan, M.N., Joga Rao, S.V., “Principles of Insurance Law”, Lexis Nexis
Butterworths Wadhwa, 9th Edition, Nagpur, 2009.

WEBSITES:

• http://www.investopedia.com/university/insurance/insurance2.asp
• http://www.lawyersclubindia.com/articles/Utmost-Good-Faith-in-Insurance-Contracts-
3098.asp#.VUPAR9KUemY
• http://law.freeadvice.com/insurance_law/insurance_law/insurable_interests.htm
• http://www.uslegalforms.com/?auslf=definitions-ad&page=/i/indemnity
• http://injury.findlaw.com/accident-injury-law/insurance-law-what-is-a-subrogation-
action.html
• https://insurancecompanyblog.wordpress.com/2012/08/15/in-the-advent-o/
• http://www.irmi.com/online/insurance-glossary/terms/p/proximate-cause.aspx

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