Introduction and Development of

Insurance Law.

Dr. Anita A. Patil

Associate Professor, RCL
Nature of Insurance

 Yat bhavati tat nasyati- whatever is created will be

destroyed
 Creation is inevitably followed by destruction.
 Change is a natural course & its occurrence involves
risk
 Risk is closely connected with ownership
 The owner want to save themselves from risk and out
of this desire, is the business of insurance born
 Insurance
 Insurance is a process whereby the risk of financial loss arising from death or
disability of a person or damage, deterioration, destruction or loss of property
owing to perils to which they are exposed, is assumed by another.
 In this process, the professional risk-bearer collects some small rate of contribution
from a large number of people and if there is any unfortunate person amongst
them, the risk-bearer i.e. the insurer, relieves the sufferer from the effects of the loss
by paying the insurance money.
 The fundamental function of insurance is to shift the loss suffered by a sole
individual to a willing and capable professional risk-bearer in consideration of a
comparatively small contribution called the premium.
 According to Maclean,“Insurance is a method of spreading over a large number of
persons a possible financial loss too serious to be conveniently borne by an individual”.
Insurance
 Insurance is a technique of equitable transfer of risk from one entity to another in
exchange for payment called Premium

 It is a form of Risk Management primarily used to hedge against the risk of a probable loss
arising out of a contingency or an uncertain event

 An insurer is the carrier of risk, the insured or the policyholder is the transferor of risk.

 Insurance is mainly protection against future loss.

 It can be better described as promise of reimbursement in any case of loss.
 Insurances are paid to people or companies by the insurance company against any kind of
hazards or calamities.
 Insurance thus reduces the fears of future risk to the individual insured and by capital
formation it helps the growth of industry, accelerates production, lubricates the
machinery of production and distribution and improves the economy of the nation.
 It mobilises the resources, accelerates and stabilises growth and helps in the
establishment of a welfare state.
 Contd.
 The aim of all insurance is to protect the owner from a variety of risks
which he anticipates.
 Collection of small contribution from all as premium & given to the
sufferer.
 Mainly Two purposes
i. Immediate- short range- individual get the loss
ii. Far sighted- long range- remote purpose- to accelerate the economic
growth of the nation- funds are invested in organized commerce &
Industry (even 5 yr plans)- help in mobilizing capital formation.
 Life Insurance are those agencies that improves the mental, moral &
national circumstances & raises conditions of the community
 Insurance reduces the fear of future risk.
 Insurance (Elements)
• Any risk that can be quantified can potentially be insured
• Specific kinds of risk that may give rise to claims are known as perils
• An insurance policy will set out in detail which perils are covered by the
policy and which are not.
• The insured receives a Contract called the Insurance Policy which details out
the conditions and circumstances under which the insured will be financially
compensated and to what extent
 Emergence of Insurance

• Methods of transferring or distributing risk were practiced by Chinese and

Babylonian traders as long ago as the 3rd & 2nd millennia BC respectively
• Chinese merchants travelling 1750 BC, and practiced by early Mediterranean
sailing merchants would redistribute their wares across many vessels to limit the
loss due to any single vessel's capsizing
• If a merchant received a loan to fund his shipment, he would pay the lender an
additional sum in exchange of the lender's guarantee to cancel the loan should the
shipment be stolen or lost at sea
Methods of Insurance
• Co-insurance – risks shared between insurers
• Dual insurance – risks having two or more policies with same coverage
• Self-insurance – situations where risk is not transferred to insurance companies and solely
retained by the entities or individuals themselves
• Reinsurance – situations when Insurer passes a risk or a part thereof to another Insurer called
Reinsurer
• When an insurer issues a policy to the insured he is said to have entered into a contract of
insurance.
• In doing insurance business it may issue a number of policies. At a particular stage it may feel
that the risk undertaken by it, is beyond its capacity, then it may retain the risk which it can bear
and the balance may be transferred to another insurer called the reinsurer under a contract of
reinsurance.
• Though the original insurer has no interest in the subject-matter of insurance he is said to have
acquired an insurable interest under its contract of insurance.
• It cannot insure for more than the original insurance. Thus a contract of insurance creates in the
insurers an insurable interest sufficient to support a reinsurance to the full amount of their
liability on the original policy.
 Contract of Indemnity v/s Contract of
Guarantee

• Guarantees and Indemnities are both long established legal concepts - there
are some important distinctions between them

• For example a guarantor says: “if he does not pay you, I will”

• An indemnifier says: “I understand that this deal with me may cause you to
lose money. If you do, I will make good the loss if any suffered by you”

• A guarantee is usually a simple promise to pay if someone else fails to fulfill his
obligations whereas an indemnity is invoked on the happening of a pre-
defined event and may be subject to various conditions
 Contract of Indemnity v/s Contract of
Guarantee

• Guarantees and Indemnities are both long established legal concepts - there
are some important distinctions between them

• For example a guarantor says: “if he does not pay you, I will”

• An indemnifier says: “I understand that this deal with me may cause you to
lose money. If you do, I will make good the loss if any suffered by you”

• A guarantee is usually a simple promise to pay if someone else fails to fulfill his
obligations whereas an indemnity is invoked on the happening of a pre-
defined event and may be subject to various conditions
 Distinction between Indemnity &
Guarantee

• In a contract of indemnity one person (Insurer) promises to save the other

(Insured) from a loss arising out of a specified peril, whereas in a contract of
guarantee, one person (Guarantor) gives guarantee to a 3rd party (Creditor)
for the performance of the contract by the 2nd party (Principal Debtor)
• Under a contract of Indemnity, there are two parties, whereas under a contract
of Guarantee, there are three parties
Distinction between Indemnity &
Guarantee

 Under indemnity contract, the basic liability falls on the

indemnifier, whereas under guarantee contract, surety has the
secondary liability and the primary liability rests with the
Principal Debtor
 Under the indemnity contract, there is one contract only, but under
a guarantee contract, there must be at least three contracts
 In case of indemnity contract, indemnifier has the interest in
earning premium, whereas in case of guarantee contract,
guarantor has no interest except to earn guarantee commission
Distinction between Indemnity &
Guarantee

• In case of Indemnity, the indemnifier in most of the

cases cannot sue the third party for recovery on his own,
whereas in case of a guarantee, Guarantor is entitled to
proceed against the principal debtor in his own name if
he has paid the debt
• In a contract of Indemnity, occurrence of loss depends
upon the happening of a pre-defined event, whereas in a
contract of Guarantee, there is an existing debt or duty
performance about which guarantee is given
Introduction

 The Insurance Act of 1938 was the first

legislation governing all forms of
insurance to provide strict state control
over insurance business.
 Purpose:- to safe guard the interest of
insured, setting the norms for carrying
out the business of insurance smoothly,
minimizing disputes.
INSURANCE LAW

 The origins of modern insurance contracts are to be found in

the practices adopted by Italian merchants from fourteenth
century onwards. The then insurance contracts were dominated
by maritime risks, the risk of losing ships and cargo at sea, and
other related risks.

 The Insurance Act was introduced in 1938 in India to help

facilitate the legal growth of the field of Insurance in the
country. The Indian Insurance Industry was later modified by
enacting.
INSURANCE ACT 1938
 Dictionary of business and Finance defines “Insurance as a form of
contract agreement under which one party agrees in return for a
consideration to pay an agreed amount of money to another party to
make good a loss, damage or injury to something of value in which the
insured has a interest as a result of some uncertain event.
 An insurance company must be first incorporated under the Companies
Act 1956 and must also be registered with the Insurance Regulatory
and Development Authority which is governed by both the Companies
Act 1956 and the Insurance Regulatory and Development Authority Act
1999.
Procedure of Registration- Sec 3 – Insurance Act, 1938

 Section 3 of the Insurance Act provides that every application for registration shall be
made in such a manner as may be determined by the Insurance Regulatory and
Development Authority and shall be accompanied by the documents mentioned
therein.
 Separate Regulations are passed by IRDA called the IRDA Registration of Indian
Insurance Companies Regulations 2000. As per that a new entrant Indian insurance
company desiring to carry on insurance business in India shall make an application
for registration in form IRDA/R1.
 This form requires the applicant to give his details prescribed therein with which the
Insurance Regulatory and Development Authority will screen his status and if it is
satisfied that he can carry on all functions in respect of the insurance business
including management of investments within his own organisation and is a bona fide
applicant, and that his previous application has not been rejected in the previous five
financial years, and his previous certificate has not been withdrawn or cancelled and
his name contains the words insurance company or assurance company, the
Authority gives him an application for registration in form IRDA/R2; otherwise it will
reject his application after giving him a reasonable opportunity for hearing as to why
his application shall not be rejected.
Contd.
 The order rejecting the application must be communicated to him by the
Authority within 30 days of such rejection.
 The applicant on receipt of the rejection order may apply to the Authority
within 30 days for reconsideration of its decision. An applicant whose
application has been finally rejected may make a fresh application after a period
of two years with a new set of promoters or for a new type of insurance
business.
 If his application in form IRDA/R1 is accepted, the Authority will furnish him
with an application in form IRDA/R2. Generally a filled in application in form
IRDA/R2 must be accompanied with the documents mentioned in Reg 10 (2)
including evidence that he has paid the requisite Rs 50,000 thousand rupees for
each kind of insurance business applied for, and made the deposit required
under s 7 of the Insurance Act 1938.
 The Authority gives preference in granting of the certificate of registration to
those applicants who propose to carry on the business of providing health
covers to individuals or groups of individuals.
Contd.
 On receipt of application in form IRDA/R2, the Authority makes an inquiry as it
deems fit and if it is satisfied in that inquiry that:
 1. the applicant is eligible, and in its opinion, is likely to meet effectively its
obligations imposed under the Act;
 2. the financial condition and the general character of management of the
applicant is sound;
 3. the volume of business likely to be available to, and the capital structure and
earning prospects of the applicant will be adequate;
 4. the interests of the general public will be served if the certificate is granted to
the applicant in respect of the class of insurance business specified in the
applications; and
 5. the applicant has complied with the provisions of ss 2 (c), 5, 31 (a), 32 and 32
(a) has fulfilled all the requirements of these sections applicable to him, may
register the applicant as an insurer for the class of business for which the
applicant is found suitable and grant him a certificate in form IRDA/R3.
 The certificate issued in the beginning will be valid for a year. Thereafter, there
shall be an annual renewal.
Renewal of Registration
 An insurer who has been granted a certificate under s 3 of the Act, shall make an
application in form IRDA/R5 for the renewal of the certificate, to the Authority
before 31 December each year, and such an application shall be accompanied by
evidence of the payment of the fee which shall be the higher of:
 (i) fifty thousand rupees for each class of insurance business, and
 (ii) one-fifth of one per cent of total gross premium written direct by an insurer
in India during the financial year preceding the year in which the application for
renewal of certificate is required to be made, or Rs 5 crores, whichever is less; and in
the case of an insurer solely carrying on reinsurance business, instead of the total
gross premium written direct in India, the total premium in respect of facultative
reinsurance accepted by him in India shall be taken into account.
 If the insurer fails to apply for the renewal of registration before the date specified in
sub-reg (1) the Authority may accept an application for renewal of registration on
receipt of the fee payable with the application along with an additional fee by way of
penalty of 10 per cent of the fee payable with the application.
Contd.
 Manner of Payment of Fee for Renewal of Certificate
 The fee for renewal of certificate shall be paid to the account of the Insurance Regulatory and Development
Authority with the Reserve Bank of India.
 Issue of Duplicate Certificate
 The Authority may, on receipt of a fee of Rs 5,000, issue a duplicate certificate to the insurer, if the insurer
makes an application to the Authority in form IRDA/R4.
 Cancellation or Suspension of Certificate
 Without prejudice to any penalty which may be imposed or any action taken under the provisions of the Act,
the registration of an Indian insurance company or insurer who;
 1. conducts its business in a manner prejudicial to the interests of the policy holders;
 2. fails to furnish any information as required by the Authority relating to its insurance business;
 3. does not submit periodical returns as required under the Act or by the Authority;
 4. does not cooperate in any inquiry conducted by the Authority;
 5. indulges in manipulating the insurances business;
 6. indulges in unfair trade practices;
 7. fails to make investment in the infrastructure or social sector specified under sub-s 1 (a) of s 27 (d) of the
Act; may be suspended for a class or classes of insurance business for such period as may be specified by the
Authority by an order.
 It is also provided that the Authority for reasons to be recorded in writing may, in case of repeated defaults of
the type mentioned above, impose a penalty of cancellation of Certificate.
Contd..
 Manner of Making Order of Suspension or Cancellation of Certificate No order of
suspension or cancellation shall be imposed except after holding an inquiry in
accordance with the procedure specified in the above regulation.
 Manner of Holding Inquiry Before Suspension or Cancellation For the purpose of
holding an inquiry regarding the malpractices of insurance, the Authority may appoint
an inquiry officer. The inquiry officer shall issue to the insurer a notice at the
registered office or the principal place of business of the insurer. The insurer may,
within 30 days from the date of receipt of such notice, furnish to the inquiry officer a
reply, together with copies of documentary or other evidence relied on by it or sought
by the Authority from the insurer.
 The inquiry officer shall give a reasonable opportunity of hearing to the insurer to
enable it to make submissions in support of its reply made under the sub-regulation.
The insurer may either appear in person or through any person duly authorised by
the insurer before the inquiry officer. An advocate shall be permitted to represent the
insurer at the inquiry if it is considered necessary, the inquiry officer may ask the
Authority to appoint a presenting officer to present its case.
 The inquiry officer shall, after taking into account all relevant facts and submissions
made by the insurer, submit a report to the Authority and recommend the penalty to
be awarded as also the justification of the penalty proposed.
Contd.
 Show-cause Notice and Order On receipt of the report from the inquiry officer, the
Authority shall consider the same and if considered necessary by it, issue a show-cause
notice as to why a penalty as it considers appropriate should not be imposed.
 The insurer shall, within 21 days of the date of receipt of the show-cause notice, send a
reply to the Authority.
 The Authority after considering the reply to the show-cause notice, if received, shall as
soon as possible but not later than 30 days from the receipt of the reply, if any, pass such
orders as it deems fit.
 If no reply is furnished to the Authority by the insurer within 90 days of the service of
the notice, the Authority can proceed to decide the issue ex parte. The order passed shall
give reasons therefore including justification of the penalty imposed by that order. The
Authority shall send a copy of the order to the insurer.
 Publication of Order The order of the Authority passe shall be published in at least two
daily newspapers in the area where the insurer has his principal place of business.
 Effect of Suspension or Cancellation of Certificate From the date of suspension or
cancellation of the certificate, the insurer shall cease to transact new insurance
business.
 Existing Insurers The existing insurers are regulated by a separate set of guidelines for
registration. They are required to make an application in form IRDA/R2 (the same form as in
the case of new insurers) for grant of certificate of registration within three months from the
commencement of the IRDA Act 1999.
 Every application shall be accompanied by:
 a) original certificate of registration;
 b) confirmation that the requirements of s 7 of the Act have been met;
 c) evidence of having paid Rs 100 crores or more paid up share capital, in case of an
application for grant of certificate of registration for reinsurance business;
 d) an affidavit by the principal officer of the applicant certifying that the requirements of s 6
of the Act have been compiled with;
 e) a certified copy of the standard forms of the insurer and statements of the assured rates,
advantages, terms and conditions to be offered in connection with insurance policies
together with a certificate in case of life insurance business by an actuary that such rates,
advantages, terms and conditions are workable and sound;
 f) the original receipt showing payment of fee of Rs 50,00 for each class of business and;
 g) any other information required by the authority during the processing of the application
for registration.
Contd.
 The authority shall register every applicant, who submits an application in
accordance with the sub-regulation, and grant a certificate in form IRDA/R3. This
brings the existing insurer on par with new insurers in respect of paid up capital
requirements.
 The existing insurers are also required under the transitory provisions to comply
with all the regulations, as in case of new insurers. However, of the compliance of
the regulations relating to accounts, assets, liabilities, solvency margins and
reinsurance a 12 months period is given and on an application the Authority may
grant a further period of not more than 12 months if it is satisfied that there are
valid reasons for such an extension.
 The existing insurers need not requisition an application for obtaining a form for
registration in form IRDA/R1 and the first screening is done at this stage. From the
contents of form R1 which contains the complete biography of the applicant the
IRDA decides whether the applicant can run the proposed business or not.
IMPORTANCE OF INSURANCE

 Provides protection against occurrence of uncertain events.

 Device for eliminating risks and sharing losses.
 Co-operative method of spreading risks.
 Facilitates international trade.
 Serves as an agency of capital formation.
 Financial support.
 Medical support.
 Source of employment.
DEFINITION OF INSURANCE
 Insurance has no definite legal definition.
 For regulatory purposes however , insurance is any contract whereby one
party assumes the risk of an uncertain event which is not within his control
happening at a future time, in which event the other party has an interest and
under which contract the first party is bound to pay money or provide its
equivalent if the uncertain event occurs. Insurance is a form of risk
management primarily used to hedge against the risk of a
contingent, uncertain loss.
 It is the equitable transfer of the risk of a loss, from one entity to another, in
exchange for payment. An insurer is a company selling the insurance; the
insured, or policyholder, is the person or entity buying the insurance policy.
 The amount to be charged for a certain amount of insurance coverage is called
the premium. Risk management, the practice of appraising and controlling
risk, has evolved as a discrete field of study and practice.
Insurance Acts in India

 The Insurance Sector in India is regulated by a number of

acts. The insurance Acts in India are as follows:
i. The Insurance Act, 1938
ii. General Insurance Business (Nationalisation) Act, 1972
iii. Life Insurance Corporation Act, 1956
iv. Marine Insurance Act, 1963
v. Insurance Regulatory and Development Authority (IRDA)
Act, 1999
Insurance Policies in India

Insurance Policies in India is usually

categorized as follows:
i. General Insurance Policies
ii. Life Insurance Policies
Types of insurance
Life insurance:

 Life insurance is a contract between the policy owner and the insurer,
 where the insurer agrees to reimburse the occurrence of the insured
individual's death or other event such as terminal illness or critical
illness.
 The insured agrees to pay the cost in terms of insurance premium for the
service. Specific exclusions are often written in the contract to limit the
liability of the insurer, for example claims related to suicide, fraud, war,
riot and civil commotion is not covered.
General Insurance

 Insuring anything other than human life is called general insurance.

 Examples are insuring property like house and belongings against fire
and theft or vehicles against accidental damage or theft.
 Injury due to accident or hospitalisation for illness and surgery can also
be insured.
 Your liabilities to others arising out of the law can also be insured and is
compulsory in some cases like motor third party insurance
Fire Insurance

 Insurance that is used to cover damage to a property caused by fire.

 Fire insurance is a specialized form of insurance beyond property insurance,
and is designed to cover the cost of replacement, reconstruction or repair
beyond what is covered by the property insurance policy.
 Policies cover damage to the building itself, and may also cover damage to
nearby structures, personal property and expenses associated with not being
able to live in or use the property if it is damaged.
Health insurance

 A type of insurance coverage that pays for medical and surgical expenses that are
incurred by the insured.
 Health insurance can either reimburse the insured for expenses incurred from
illness or injury or pay the care provider directly.
 Health insurance is often included in employer benefit packages as a means of
enticing quality employees.
Marine Insurance

 Marine Insurance covers the

loss or damage of ships, cargo,
terminals, and any transport or
cargo by which property is
transferred.
 Contract of Insurance

 A contract of insurance is a contract either to

indemnify a person against a loss which may arise
on the happening of some or any event for an
agreed consideration.
 To put it in other words it is a contract under which
one party undertakes to pay to another person a
sum of money or its equivalent on the happening of
a specified event.
Contd
 Under such contract one party agrees to take the risk
of another person’s life, property or liability in
consideration of certain comparatively small periodic
payments.
 The person to be paid or indemnified is called the
‘insured’ or ‘assured’, the person who undertakes to
indemnify or pay money is called the ‘insurer’ or
‘assurer’ or ‘underwriter’, the last word be in generally
used in marine insurance; the consideration
received in the form of periodic payments is called
the premiums or premia; and the document
containing the contract is the ‘insurance policy’.
Every contract of insurance must have
the following essential elements

i. There must be a contract between parties who are called the insurer and
the insured
ii. The contract must be that the insurer undertakes to protect the insured
from any loss or damage to be insured on the happening of the event.
iii. In consideration for the above, the assured undertakes to make the insurer a
periodical payment of a sum of money called premium.
iv. The contract must be in writing and the document is called the insurance
policy.
Classification of contracts of
insurance

According to the Nature of the Event:

i. Life Insurance: the sum insured becomes payable on
the death of the insured or on the attained of a
particular age.
ii. Fire Insurance: in this class of contracts, the sum is
payable on the accident of fire by which the insured
property is destroyed or damaged, Here the loss
insured is the damage caused by fire.
Contd

iii. Marine Insurance: Here the sum becomes

payable on the happening of a perilous event at
sea.
iv. Miscellaneous Insurance: This includes a variety
of new insurances which go in the modern
times under the terms ‘social Insurance or
Liability Insurance, Industrial Insurance, Motor
Vehicles Insurance, Aviation Insurance’, etc.
Nature of the Insurance Contract
 Nature of Insurance Contract
 Contract is Aleatory: contract of speculation; ‘depending on uncertain event or
contingency as to both profit and loss’
 Contract of Utmost Good Faith (Uberrima fides)
 Contract of Indemnity
 Contract of Wager
 Insurable Interest
 Principles of Insurance
 Principle of Contribution
 Principle of Subrogation
 Principle of Loss Minimization
 Principle of Causa Proxima (Nearest Cause)
Contract is Aleatory

 It is commonly said that an insurance contract is an aleatory contract. Lord

Mansfield said that there is no doubt, and in reality, the insurance contract,
whatever may be the type is a contract of speculation.
 Websters New International Dictionary says that “contracts of insurance are
aleatory contracts depending on an uncertain event or contingency as to both
profit and loss. If we take an example of a person taking a fire insurance policy
on his house, he pays a little and if the house is not burnt, he loses that small
amount, but if the house is destroyed by fire he is entitled to recover a huge
amount, the value of the house”.
 Thus it is apparently a gamble in which if the event happens in a certain way,
the insured will have a small loss, the loss of premium and if the event
happens in another way the insurer loses heavily in that, he has to pay the
huge sum, the value of the house. Thus there is speculation and so it is called
an Aleatory Contract.
 Contract of Utmost Good Faith
 In England till the passing of the Misrepresentation Act 1967, it is a cardinal principle of
commercial law that he who buys should beware, caveat emptor, and thereof in business
transactions each party must take care of his interest when he buys the promise of the other and
the other party is not bound to disclose any defect which an ordinary inquisition would reveal.
 With regard to the knowledge about the subject matter of insurance the one party, say the
insured, has better or all the means of knowledge than the other party, the insurer. Scrutton L J
observed:
As the underwriter knows nothing and the man who comes to him to ask him to insure knows
everything it is the duty of the assured, the man who desires to have a policy, to make a full disclosure to
the underwriters without being asked of all the material circumstances, because the underwriters know
nothing and the assured knowseverything. This is expressed by saying that it is a contract of utmost good
faith uberrima fides.
 For these reasons of economic inequality in the status of the contracting parties and of the
superior knowledge of one party about the subject matter of the insurance, a contract of
insurance, is justly made an uberrima fides transaction and an exception to the commonly
accepted commercial rule of caveat emptor.
 The law relating to good faith requirement is contained in the Marine Insurance Act and these
rules mutatis mutandis apply to all classes of insurance.
Insurance is uberrimae bidei:
 A contract of marine insurance is a contract based upon the utmost good faith, and, if the utmost good faith
be not observed by either party, the contract may be avoided by the other party.
 Disclosure by Assured: (i) Subject to the provisions of this section, the assured must disclose to the insurer,
before the contract is concluded, every material circumstances which is known to the assured; and the
assured is deemed to know every circumstance which, in the ordinary course of business, ought to be known
by him. If the insured fails to make such disclosure, the insurer may avoid the contract.
 (ii) Every circumstance is material which would influence the judgment of a prudent insurer in fixing
thepremium, or determining whether he will take the risk.
 (iii) In the absence of inquiry the following circumstances need not be disclosed, namely: (a) Any
circumstance which diminishes the risk.
 (b) Any circumstance which is known or presumed to be known to the insurer. The insurer is presumed to
know the matters of common notoriety or knowledge, and matters which an insurer in the ordinary course
of his business, as such, ought to know.
 (c) Any circumstances as to which information is waived by the insurer.
 (d) Any circumstance which is superfluous to disclose by reason of any express or implied warranty.
 (iv) Whether any particular circumstance, which is not disclosed, be material or not is, in each case, a
question of fact.
 (v) The term circumstance includes any communication made to, or information received by, the assured.
Disclosure by Agent Effecting Insurance:
 Subject to the provisions of the preceding section as to circumstances which need not
be disclosed, where an insurance is affected for the assured by an agent, the agent must
disclose to the insurer:
 (a) Every material circumstance which is known to himself, and an agent to insure is
deemed to know every circumstance which in the ordinary course of business ought to
be known by, or to have been communicated to, him; and
 (b) Every material circumstance which the assured is bound to disclose, unless it
comes to his knowledge too late to communicate it to the agent.
 It is now well settled that an insurance contract is a contract of utmost good faith and
therefore, the contracting parties are placed under a special duty towards each other,
not merely to refrain from active misrepresentation but to make full disclosure of all
material facts within their knowledge. It has been said that there is no class of
documents to which the strictest good faith is more rightly required in courts of law
than policies of insurance.
 Scope of Duty of Disclosure
 The rule of good faith imposes the duty to make disclosure of all material facts, known or
imputed, but it must be noted that a non-disclosure is not the same thing as concealment.
 Concealment involves a positive breach of a negative duty while non-disclosure is a negative
omission of a positive duty. In considering the scope of this duty of disclosure the following points
may be noted:
 1. The duty to disclose extends only to material facts. So every material fact must be disclosed
which he knows or ought to know. Failure to disclose may be willful or inadvertent or even may be
due to the party's erroneous belief that the fact not disclosed is not material. Whether or not a fact
is material, is a question of fact. This question does not depend upon what the particular insured
thinks nor even what the insurers think but whether a prudent and experienced insurer would be
influenced in his judgment if he knew it. The final judgment therefore, does not lie with either
party but with the court.
 In LIC v Sakunthalabai the assured did not disclose that he had suffered from indigestion for a
few days; the court held that it is not a material fact and non-disclosure did not affect the validity
of the policy. Non-disclosure of a conviction in a criminal case of the assured was held to be a
ground for invalidating the policy. The test generally applied by the court is whether it is a fact
which increases the risk or whether the insurer would have rejected to give a policy on those
terms if the fact had been disclosed.
Contd.
 In Rohini Nandan v Ocean Accident and Guarantee Corp the plaintiff insured
against fire and burglary in respect of furniture, household goods, personal effects
and jewels on his house in the first floor of a building from 1 July 1954. On 5 August
1974 there was a burglary and he claimed indemnity. The insurer refused the claim
on the ground that he suppressed the fact that there was a burglary in the ground
floor of the premises in 1949 in his brothers house.
 The Court held that the earlier burglary in the ground floor of the premises was not
a material fact as it has no bearing on the risk undertaken by the insurer. The
Marine Insurance Act, both in England and in India, applies this objective test of
the judgment of an ordinary prudent insurer. Since marine and non-marine
insurance law is identical in this respect, that is the proper test. The Privy Council
also applied the same test.
 The insured had taken a life insurance policy through his brother, who was a
authorised agent of the Insurer. Before taking the policy the insured had undergone
an operation for adenoma thyroid but he did not disclose the same in the
application form at the time of taking the policy. The insurer repudiated the claim
when the insured made a claim on the ground of non-disclosure of material fact and
it was held that the insurer was right in doing so.
Contd.
 In East and West Insurance Co v Venkayya, one Venkayya had a policy of
insurance. He failed to pay thepremium and the policy lapsed. He applied for the
renewal of the policy.
 In the application form for renewal, one of the questions was whether between the
date of lapse of the policy and the application for the renewal of the policy, he
suffered from any illness. Venkayya answered no.
 The renewal was granted, but subsequently the company came to know that during
that period Venkayya underwent treatment for some skin trouble. It was held that
under the rule of utmost good faith, the insurance company was not liable under
the contract.
 The approach of LIC in the matter of repudiation of a policy admittedly issued by it
should be one of the extreme care and caution. It should not be dealt with in a
mechanical and routine manner.
 It was held that the insurer was not liable when the insured suppressed the
information in the proposal form that he was suffering from a particular ailment
and as a result of that ailment when insured died.
Contd.
 The insured fraudulently suppressed the material fact that he was having stomach
ailment at the time of taking the policy as well as revival of the policy.
 On the death of the insured, when the claim for the policy money was made by the
widow of the insured and the insurer repudiated the policy on ground of fraud even
though the insured paid premiums for more than two years. It was held that the
insurer was entitled to avoid the policy.
 The insurer alleged that deceased-insured had obtained life insurance policy by
suppressing material information about ailments in proposal form. However there
was a gap of six years between date of discharge of deceased and obtaining policy.
 It was held that even though there was suppression of material facts by the insured
because of large gap, the dependents were entitled to claim the policy.
 The insured gave wrong answers willfully while taking the policy and at the same
time he took sick leave. It was held that the insurer was entitled to repudiate the
policy.
Effect of Non-disclosure
 A contract of insurance is made a contract of utmost good faith for the reasons stated
supra.
 The insurer believes all that is stated by the insured and the insured, being in a better
position to know about the subject matter of the contract is cast with a duty to
disclose all material facts. If he fails to disclose all material facts the question is what
is its effect on the validity of the contract of insurance?
 In the explanation to s 17 of the Indian Contract Act it has been said that mere
silence does not amount to fraud unless there is a duty to speak or silence amounts to
speech. So where he knows a material fact and suppresses it knowing that it is
material to the contract it amounts to fraud; but where he does not know about the
materiality of the fact, it may have the same effect as misrepresentation.
 Therefore the effect of mere non-disclosure does not amount to fraud. In case of fraud,
the party defrauded can not only avoid the contract but can also claim damages. In the
case of all non-disclosures the insurer can avoid the contract and whether he would
be entitled to damages is a different question depending upon his knowledge of
materiality.
Contd.
 In Lambert v Cooperative Insurance Society, a lady renewed a policy of
insurance on jewelry owned partly by her and partly by her husband who had
been convicted twice for two crimes involving dishonesty in the year before.
 She did not disclose these convictions of her husband while seeking renewal. It
was held that she had a duty to disclose this though her husband was not an
insured. Again the non-disclosure of the conviction of one of the directors of the
insured company of handling stolen property was held to be a non-disclosure and
would entitle the insurer to repudiate the policy.
Contract of Indemnity

 According to Porter indemnity is the controlling principle of insurance law

and it is by reference to this principle that all problems in insurance can be
solved. This statement of Porter is generally true except with some supposed
qualifications.
 It is well settled that a contract of insurance is a contract of indemnity, but in
some cases this indemnity is not complete. All contracts of insurance cannot
be strictly called contracts of indemnity.
 The principle of indemnity is an important element in non-life insurance
policies. The word indemnity means a promise to save another person from
harm or from the loss caused as a result of a transaction entered into at the
instance of the promisor. Therefore the liability of the promisor in a contract
of insurance is the contingency itself.
Contd.
 The Indian Contract Act defines indemnity as a contract by which one party
promises to save the other from loss caused to him by the conduct of the promisor
himself or by the conduct of another person. This principle of indemnity is
associated in contract law with the principle of guarantee where there are three
parties, the creditor, the principal debtor and the surety or the favoured debtor.
Insurance law does not have the element of guarantee. This is clear from the fact that
there are only two parties to the insurance contract.
 On the other hand, indemnity is coupled with the principle of subrogation or
substitution of the rights of the assured by those of the insurer. Further, indemnity is
based upon the occurrence of the contingency which itself is really the risk insured
against. In short, the risk is the contingency.
 Thus a contract of insurance is, like a contract of indemnity, a contract of
contingency. It therefore follows that any variation of the risk must be on mutual
consent and if it is not so, the contract becomes voidable at the hands of the rightful
party.
 Some writers and judges even classify the contracts of insurance as indemnity
contracts and non-indemnity contracts and place in the latter category life
insurance, personal accident insurance and sickness insurance.
 It is well settled that contracts of fire and marine insurance are contracts of
indemnity.
Contd.
 In Castellain v Preston,
 Cotton LJ, observed that a marine policy is usually a contract to indemnify the person for the loss
which he has sustained in consequence of the peril insured against. In the same case Brett LJ
observed:
 The very foundation, in my opinion, of every rule which has been applied to insurance law is this,
namely, that the contract of insurance contained in a marine or fire policy is a contract of indemnity,
and of indemnity only, and that this contract means that the insured, in case of a loss against which
the policy has been made, shall be fully indemnified; but shall never be more than fully indemnified.
That is a fundamental principle of insurance and if ever a proposition is brought forward which is at
variance with it that is to say, which either will prevent the insured from obtaining a full indemnity,
or which will give the assured more than a full indemnity, that proposition must certainly be wrong.
 Again it was observed in Dalby v India and London Life Assurance Company that policies of
insurance against fire and marine insurance risks, are contracts of indemnity and the insurer
agrees to compensate the loss sustained by the insured. If we analyse the principles applicable to
marine and fire insurance we come to the conclusion that they are strictly contracts of indemnity.
Contd.
 To illustrate a few:
 (i) the insured will not be permitted to make a profit in the transaction. For example, if
he recovers anything by selling the damaged goods, he has to account for it to the
insurance company;
 (ii) in marine and fire insurance the insurer will pay only compensation, that is the
actual loss or damage;
 (iii) the principle of subrogation is applied, for example, if the insured suffers damage
by the negligence of a third party, the insured may have two claims, one against the
insurance company under the policy and the second, against the third party who
caused by his negligence, the damage.
 In such a case the insurance company, after payment of the claim is entitled to be
subrogated to all the rights of the insured against thethird party and can proceed
against such party.
Contd.
 As observed in Castellain v Preston:
 As between the underwriter and the assured, the underwriter is entitled to the
advantage of every right of the assured whether such right consists in contract,
fulfilled or unfulfilled, or in a remedy for tort capable of being insisted on or already
insisted on, or in any other right, whether by way of condition or otherwise, legal or
equitable which can be or has been exercised or has accrued and whether such right
could or could not be enforced by the insurer in the name of the assured, by the
exercising or acquiring of which right or condition the loss against which the assured
is insured, can be, or has been diminished.
 Where insurer pays to insured value of goods lost due to negligence of a third party,
held, rights and remedies of insured against such third party stand transferred to and
vested in the insurer. Such equitable assignment of rights and remedies of insured in
favour of insurer, implied in contract of indemnity is known as subrogation.
Contd.
 (iv) The principle of contribution is applied to marine and fire insurance contracts. If the insured
takes out a number of policies from different companies and if the loss occurs, the insurer who
so pays can call upon the other insurers to contribute equally or rateably the payment made by
him and they will be liable to contribute according to their respective assurances.
 (v) Again in fire insurance the principle of reinstatement is applied and the insurance company
has an option to reinstate the building or repair the damaged property. Though a contract of
insurance is said to be a contract of indemnity, this is not completely true for the following
reasons:
 (a) The principle that the assured should not recover more than the loss suffered by him, may be
modified by the express terms of the policy. The insured, a co-sharer of a building, insured the
whole building by paying the premium for the whole building. When the building was damaged
completely, the insureds claim for loss for the whole building was repudiated by the insurer. It
was held that, having accepted the premium for the whole building, the insurer was liable to pay
the loss for the whole building.
 (b) The parties may estimate the loss and value the policy. If there is no gross over valuation, the
contract is enforceable though the amount recovered is slightly more than the actual loss
suffered by him. Valued policies are common in the case of insurances on ships and profits.
 (c) Again in every contract of insurance there will be a sum insured and though the contract of
insurance is described as a contract of indemnity, on the happening of the event the insured can
recover no more than the sum insured though it does not completely indemnify the assured. It is
only upon the proof of the actualloss, that the assured can claim reimbursement of loss to the
extent it is established, not exceeding the amount stipulated in the contract of insurance which
signifies the outer limit of the insurance companys liability.
Contd.
 Though prima facie the insurer indemnifies the assured, as his liability may be limited in
several respects, a contract of insurance cannot be said to be a contract of perfect indemnity.
Divergent opinions are expressed on the applicability of the principle of indemnity to contracts
of life insurance.
 Lord Mansfield observed that a life insurance contract is a contract of indemnity. This
principle was recognised in Godsall v Boldero.
 But this dictum was criticised in subsequent cases and it was laid down in Dalby v The Indian
and London Assurance Co, that a life insurance contract is not a contract of indemnity. If we
analyse a life insurance contract we find that the amount mentioned in the policy is not the
estimation of the value of life because human life cannot be estimated in value correctly, that is,
the loss or damage that may be caused by the death of a human being is incapable of exact
estimation. A person takes out a life insurance policy for a value usually based upon his
capacity to pay premium. Therefore, a life insurance contract is not a contract of indemnity. It
has been pointed out in some cases that a life insurance contract with reference to ones own
life is not a contract of indemnity; but a life insurance contract with reference to the life of
another person may be regarded as a contract of indemnity and to that extent
 Lord Mansfields dictum may be justified and the statement made by Porter may apply. For
example, if a creditor takes out a policy of insurance on the life of the debtor, the creditor will
be paid only the compensation with reference to the damage he may suffer due to the death of
the debtor.
 In conclusion, it may be said that though there is a doubt whether a contract of life insurance is
a contract of indemnity or not, it is well settled and without doubt it may be said that contracts
of fire and marine insurance are all contracts of indemnity.
EVOLUTION OF INSURANCE INDUSTRY
 Historical Background Marine Insurance

 Marine Insurance was the oldest type of Insurance in

England.
 It was imported from Northern Italy where it probably
began at about the end of the 12th Century.
 Business was being carried on by engaging ships.
 Bubble Act passed in 1720
 Two companies
 i. London Assurance and
ii. Royal Exchange Assurance started the monopoly
business
 Contd
 Bubble Act created a monopoly in favour of these two corporations.
 It prohibited other corporations, partnership companies and societies from
engaging in marine insurance as a business.
 This did not prevent individual merchants from carrying on the business of
marine insurance.
 Coffee-houses were the common meeting places for businessmen and business
transactions of importance were negotiated there during the later half of the 17th
century and the early 18th century. Of such coffee-houses, Lloyds coffee-house
named after its proprietor Edward Lloyd, who opened the coffee-house in Tower
Street, London, became a rendezvous for the ship owners, seamen and merchants.
 Some time later, the proprietor of Lloyds started a business newspaper called
Lloyds List (1734) which is published even today.
 Slowly it gained influence and found place in the premises of the Royal Exchange
and some time later moved to its own building adjacent to that and became a
worldwide organisation
 Contd.
 The Royal Exchange Assurance and the London Exchange from the corporate side,
and Lloyds, being a common meeting place for individual underwriters started and
developed marine insurance in England.
 The corporations monopoly was repealed after a little over a century, in 1824,
when a few joint stock companies entered the field.
 Many companies were formed after the passing of the Joint Stock Companies Act
1862. By about this time the steamship was invented and foreign trade improved.
As a result marine insurance also expanded and provided sufficient business to
both the joint stock companies and the individual underwriters, who created a
world market for marine insurance.
 The marine insurance business today is regulated by the provisions of the English
Marine Insurance Act 1906.
Indian Marine Insurance

 Calcutta was the first place where this business gained

popularity.
 A number of British Companies had their offices in
Calcutta.
 In 1963 the Indian Marine Insurance Act was passed
which is a replica of the 1906 Act of England
Historical Background Fire
Insurance
 Fire Insurance was to develop in England after the marine insurance.
 The great fire of London 1666, was mainly responsible for the establishment of
this branch of insurance. Added to this the effects of the Industrial Revolution
in England enormously exposed the properties to the risk of fire and the need
for fire insurance increased. Again impetus for organised action was given by
the disaster of the Tooley Street Fire in, 1861.
 The Great Calamity of fire in London in 1666 actually prompted the
business community to cover the risk by way of insurance.
 Thus this branch of general insurance was born.
 Subsequently in the Tooky Street Fire in 1861 the organization for fire
insurance had to be streamlined.
 Fire officer’s committee consisting of representatives of all insurers formed.
 It established, for public benefit, a fire testing station with the
collaboration of government departments and ultimately established the
joint fire research association (1946)
 Contd
 If the first great fire originated this branch of insurance the second became
responsible for streamlining the organisation and blended the two paradoxical
principles of competition and collaboration.

 The fire officers committee consisting of representatives of all insurers was formed. It
established, for public benefit, a fire testing station with the collaboration of
government departments and ultimately established the joint fire research association
(1946). The fire offices had enough business both at home and abroad.

 In India most of the initial fire insurance business was done through agents of foreign
companies of Britain, America, & even Japan.

 Then Royal Ins Co, The Liverpool & London & Globe, North British & Commercial
Union Started many branch offices at Bombay, Calcutta.
Historical Background Life Insurance

 In England short term insurances prevailed in 17th Century.

 Policies of Assurance Act 1867
 Life Assurances Companies Act 1870
 Assurance Companies Act 1909 (repealed Act of 1867)
In India
 Life Insurance commenced in 1871 with the starting of the Bombay
Mutual followed in 1874 by the Oriental, both in Bombay.
 The Indian Life Assurance Companies Act, 1912 was passed. The
English Act of 1909 was the model for this legislation.
 In 1938 Insurance Act was passed. Act provides for uniform control
by the Govt over all the insurers.
 In 1956 Life Insurance business was nationalized by passing the Life
Insurance Corporation Act, 1956 ( by merging 245 private insurance
companies) and the exclusive privilege of carrying on life insurance
business in India was conferred on the Life Corporation of India (LIC).
Contd

 In 1968 the Govt amended Insurance Act 1938 to

impose more control to regulate the functions of general
insurance companies.
 Inspite of this, there was a demand for nationalization of
the general insurance companies.
 Finally in 1972 the general insurance business was
also nationalized and the General Insurance
Corporation (GIC) (by merging 106 private insurance
companies) with four subsidiaries to carry on the
general insurance business was setup.
General Insurance - 4 subsidiary
companies are

1. New India Assurance Company

2. National Insurance Company
3. Oriental Insurance Company
4. United India Insurance Company
Insurance Laws (Amdt) Bill, 2008

 To amend the Insurance Act, 1938,

 The General Insurance Business
(Nationalisation) Act, 1972
 The Insurance Regulatory and Development
Authority Act, 1999.
 Evolution of Insurance Law in
India
1. Period of Mushroom growth
(1900-1912)
1. Period of Struggle & Study Growth
(1913-1938)
3. Period of Stability & Consolidation
(1938-1950)
4. Period of Boom & Nationalization
(1950 -1999)
5. Period of Privatization (1999 upto date)
1. Period of Mushroom growth
(1900-1912)

- Swadeshi Movement – boycott of British goods,

institutions and everything
- Mushroom growth of Indian companies
- This led to the appearance of some evil which had
to be checked for which the Indian Life Assurance
Act 1912 was passed on the lines of the English
Assurance Companies Act 1909.
 2.Period of Struggle & Steady Growth
(1913-1938)
 Period during and after first world war
 Due to Life Assurance Act, 1912 and first world war- there was a
consequent economic slump, business had to struggle for its steady
growth.
 Many small offices had to be wound up and the few that survived had to
face the competition of many flourishing foreign offices.
 Once again anti-British national spirit again gave life to the Indian life
offices and their business.
 In 1936, a committee under the Chairmanship of Shri. N.N.Sircar
submitted report to reform Insurance business. In1937a bill was
drafted.
 Accordingly Insurance Act 1938 was passed. Then uniform control by
govt. over all insurers.
 3.Period of Stability & Consolidation
(1938-1950)
 Being free from the competition of the foreign offices, the Indian offices gained stability and
they brought about the necessary changes in their office organization, terms and conditions
in their policies etc, to conform to the provisions of the 1938 Act.
 After the second world war, once again the swadeshi movement gained strength and
national spirit increased.
 After the Partition of the country S.R.Ranganath revived the entire Insurance law and
submitted his report- i.e. Insurance Amendment Act 1950 was passed.
 The Act made far reaching changes to make insurance institutions more useful for the
country's economic growth.
 It provided for amongst other things, appointment of a controller of insurance, constitution
of a life insurance council and a general insurance council and also made provisions for the
appointment of investigators and administrators for ill-managed and sick companies.
Provisions regarding investments are also made.
 To reduce drain of foreign exchange compulsory reinsurance with Indian insurers was
insisted upon.
 Indian Insurance offices got stability.
4. Period of Boom & Nationalisation
(1951 -1992)
 Political and Economic Independence
 Prime Minister Jawaharlal Nehru started 5 year plan- Amount invested for
the growth of the Nation.
 Leading insurers indulged in vigorous developmental programmes.
 All these contributed to a boom in the insurance business and in
particular in life business.
 The life insurance business was first nationalised in 1956 by the passing
of the Life Insurance Corporation Act 1956. The Life Insurance Corporation
was created on 1 September 1956 conferring on it the exclusive privilege
of carrying on life insurance business in India
 Life Insurance Corporation Act, 1956- Nationalization
 General Insurance Corporation Act, 1972- Nationalization
 5. Period of Privatization (1993 upto date)
 The Nationalization of the Insurance business could not come up to the
expectation of the customers, Policyholders’ grievances started piling up
against LIC and GIC.
 Hence, in 1993, Central Govt appointed Malhotra Committee, headed by
Mr. R.N.Malhotra, former Governor of the RBI, to review the working of
the insurance industry and recommend steps to improve the working of
the industry.
 Malhotra Committee submitted report in January 1994 and categories
recommending opening of the insurance sector to the private insurers-
domestic and foreign to the Indian insurance market.
 However it took over five years to build a consensus among the political
parties on the issue of the insurance reforms.
 Finally the Insurance Regulatory and Development Authority (IRDA) Act
1999 was passed by the Central Govt. It came into force from 19-04-
2000
Seven Principles of
Insurance
• Principle of Utmost Good Faith

• Principle of Insurable Interest

• Principle of Indemnity

• Principle of Contribution

• Principle of Subrogation

• Principle of Loss Minimization

• Principle of Causa Proxima (Nearest Cause)

Utmost Good Faith

• All commercial contracts are based on good faith, but

Contract of Insurance is subject to utmost good faith

• Very basic and primary principle of insurance

• Insurance contract must be signed by both parties (i.e.

insurer and insured) in an absolute good faith, belief &
trust
 Utmost Good Faith
• Both parties to have good faith against each other

• Insured to provide to the insured complete, correct & clear information of the subject
matter

• Insurer to provide to the insured complete, correct & clear terms & conditions of the
contract of insurance

• Applicable to all contracts of insurance i.e. Life & Non-Life

• Insurer's liability gets void (i.e. legally revoked or cancelled) if any fact about the
subject matter of insurance is either omitted, hidden, falsified or presented in a wrong
manner by the insured
1. UTMOST GOOD FAITH

 All types of contracts of insurance depend upon the contracts

of utmost good faith. Both parties (insurer and the insured) in
the contract must disclose all material facts for the benefit of
each other. False information or non-disclosure of any
important fact makes the contract voidable. So, the conditions
to show utmost good faith are very strict on the part of the
insured.
 Insurable Interest
• Insured must have insurable interest in the subject matter of insurance

• Insurable Interest is a relation between the insured and the peril insured
against, so that the occurrence of the event will cause loss or injury of some
kind to the insured
• One is said to have insurable interest as long as he is the owner of the
insured property and/or stands to gain with the existence of the subject
matter of insurance or stands to lose with its loss
• In life insurance it refers to the life insured. Every person has an insurable
interest in his own life. A husband has insurable interest in his wife.
Similarly, a creditor has insurable interest in his debtor
 Insurable Interest

• Applicable to all contracts of insurance

• In marine insurance, it is enough if it exists at the time of

occurrence of loss

• In fire and general insurance, it must be present both at the

time of taking policy and also at the time of occurrence of loss
INSURABLE INTEREST -

 The insured must possess an insurable interest in the object

insured. It may be defined as a financial interest in the subject
matter of contract.

 The presence of insurable interest is a legal requirement. So, an

insurance contract without the existence of insurable interest is
not legally valid and cannot be claimed in a Court.

 The object of this principle is to prevent insurance from

becoming a gambling contract.
 Principle of Indemnity
• Indemnity means a guarantee or assurance to make good the loss & to put the
insured in the same position in which he was immediately prior to the happening
of the uncertain event.

• Applicable to fire, marine and all other contracts of general insurance.

• Under this principle, the insurer agrees to compensate the insured for the actual
loss suffered.

• Insurance is only for giving protection against losses and not for making profit.

• The amount of compensation is limited to the sum insured or the actual loss
suffered, whichever is less.
 Principle of Indemnity
• Compensation is not paid if the specified loss does not happen due to a peril
insured against &/or not during the period of insurance.

• Since the insurance company indemnifies or compensates the insured in the

case of certain losses only up to the insured's interest, an Insurance Contract
is a contract of Indemnity.

• To "indemnify" means to make whole again, or to be reinstated to the

position that one was in, to the extent possible, prior to the happening of a
specified event or peril.

• Accordingly, Life Insurance is generally not considered to be indemnity

insurance, but rather "contingent" insurance i.e. a claim arises on the
occurrence of a specified event.
PRINCIPLE OF INDEMNITY -

 All types of contracts, except life and personal accident insurance, are contracts of
indemnity. According to them, the insurer undertakes to indemnify the insured against
a loss of the subject matter of insurance due to insured cause.

 In life insurance/assurance, the question of loss and, therefore, of its indemnification

does not rise. This is because the loss of life cannot be estimated in terms of money.

 The principle of indemnity is based on the idea that the insured/assured in the case of
loss only shall be compensated against the actual total loss. But if no event happens,
the insured has not to receive any amount, so in this case, the premiums paid by him
become the profit of the Insurer.
 Principle of Contribution

 This principle is a corollary of the principle of indemnity.

 Applicable to all contracts of indemnity.

 Under this principle, the insured can claim compensation only

to the extent of actual loss either from any one insurer or all
the insurers.

 If one insurer pays full compensation then it can claim

proportionate amount from the other insurer(s).
 Principle of Subrogation

• This principle is also a corollary of the principle of indemnity.

• After the insured is compensated for the loss of/damage to the

insured property, then the right of ownership of such property passes
on to the insurer.

• Applicable to all contracts of indemnity.

• This principle is applicable only when the damaged property has

some value after the loss. The insurer can benefit out of subrogation
right only to the extent of compensation paid to the insured.
DOCTRINE OF
SUBROGATION
 This principle applies to the contract of indemnity only, i.e., marine and fire.

 It lays down a principle which is quite equitable. According to this doctrine, where a
loss occurs and the insurer pays as for a total loss, he is entitled to all the rights and
remedies which the insured has against a third party in respect of loss so paid for. It
prevents the insured being indemnified from two sources in respect of the same loss.

 Suppose ‘A’ has damaged ‘B’s’ motor car negligently. If he pays ‘B’s’ loss in full, B
cannot collect the same from the insurance company.

 On the other hand, if B applied to his insurance company for indemnity under his
policy, he will not be permitted to collect the damages from A. In the latter case, the
insurance company will be entitled to collect that amount.
Principle of Loss of Minimization

 Under this principle it is the duty of the insured to take all

possible steps to minimize the loss of/damage to the
insured property on the happening of the peril insured
against i.e. Insured is to act as if uninsured.
Principle of ‘Causa Proxima’

• Loss of/damage to the insured property can be caused by more than one
causes in succession to another while the property may be insured against
some causes and not against all causes.

• In such an instance, the proximate cause or the nearest cause of loss is to be

found out.

• If the proximate cause is the one which is insured against, then the insurer is
bound to pay the compensation.

• However, in case of life insurance, the principle of Causa Proxima does not
apply. Whatever may be the reason of death (whether a natural death or an
unnatural death) the insurer is liable to pay the amount of insurance
 DOCTRINE OF
PROXIMATE CAUSE
 This principle is found very useful when the loss occurred due to a series of events.

 It means that in deciding whether the loss has arisen through any of the risks insured
against, the proximate or the nearest cause should be considered.

 Let us take an illustration in one case where a policy holder sustains an accident while
hunting. He was unable to walk after the accident, and as a result of lying on wet
ground before being picked up, he suffered pneumonia. There was an unbroken chain
between the accident and the death, and the proximate cause of the death, therefore,
was the accident and not the pneumonia.
 CANCELLATION
 Both parties have the right to cancel the policy before its expiry date.

 The period of the policy comes to an end on the cancellation of the policy. So, the
protection provided by the insurer to the insured stops from the date of such
cancellation.

 The premium received by the insurance company is also returnable to the insured.

 ATTACHMENT OF RISK –

 Without the attachment of definite risk to the policy, the contract of insurance cannot
be in force. So in this case, the consideration fails, and the premium received by the
insurance company must be returned.
 MITIGATION OF LOSS

 When the event insured against takes place, the policy holder must do everything to
minimize the loss and to save what is left.

 This principle makes the insured more careful in respect of this insured property.

 CLAIMS
 Claims and loss handling is the materialized utility of insurance; it is the actual "product"
paid for.

 Claims may be filed by the insured directly with the insurer or through brokers or agents.
ARBITRATION

 - Most fire and accident insurance policies contain an arbitration clause which
provides setting disputes by arbitration.

 The arbitrator is to be appointed in writing by the parties in difference.

 The object of this clause is to reduce litigation.

TYPES OF RISKS COVERED BY AN INSURANCE
CONTRACT

 Risk does not mean threat to life only.

 It also includes other risk, such as economic, social, and political and many
others.

 The risks can be classified into various categories such as:

FINANCIAL RISK -

 The risk that is concerned with financial loss is known as financial risk.
Generally, the financial risk is related to business activities.

 Business may face financial risk such as bad debts, loss due to
investments, possibility of interest loss on the amount of credit given,
etc.

 An Insurance policy can compensate for this kind of financial risk.

NON-FINANCIAL RISK

 A risk that cannot be measured in financial terms is known as non- financial

risk.

 Even business activity can deal with non-financial risks, such as resignation of
a versatile employee, non-cooperation from employees, etc.

 Other than business, there are other factors, such as death of a member in a
family and so forth, which can be regarded as non-financial risk.
STATIC RISK

 Static means no change.

 This type of risk occurs even when there is no change in the economy.
 Fire, theft, misappropriation of cash, etc., can be an example of static
risk.
 Static risks are sometimes predictable
 DYNAMIC RISK
 Dynamic risks are just the opposite of static risk.
 Dynamic risks are mostly unpredictable.
 Dynamic risk may take place due to changes in environment,
technological changes, etc.
 Many businesses are made victims due to sudden changes in the
economy.
FUNDAMENTAL RISK

 Fundamental risk is also known as group risk.

 Fundamental risk occurs due to changes in major factors related to
population.
 Train accidents, flood, war, etc., are examples of fundamental risks.
PARTICULAR RISK

 Particular risks are contradictory to fundamental risk.

 Particular risk involves only losses caused/aroused to individuals.

 Particular risk is also known as personal risk. House theft, illness, death,
etc., is the only thing that insurance will take off
PURE RISK

 Pure risk is a kind of risk where there is either loss or no loss, but
there is no gain.
 Pure risk generally involves activities related to goods.
 For instance, if a factory faces a shut-down due to employee strike
and is not able to supply goods on proper time, it is pure risk and
can be insured.
 Pure risk is further divided into categories such as personal risk,
property risk and liability risk.
SPECULATIVE RISK -

 Speculative risk cannot be insured, as insurance covers only those risks

which result in loss.
 Speculative risk may also result in profits.
 Speculative risk in general includes gambling or betting.
 Here, the risk is in control of the person to some extent.
 The risks such as playing the horses are considered as speculative risks.
Insurance Regulatory and Development
Authority of India Act,1999
(IRDA)
 The Preamble of the Act
 An Act to provide for the establishment of an authority to protect the interests
of holders of insurance policies, to regulate, promote and ensure orderly
growth of the Insurance industry and for matters connected therewith or
incidental thereto and further to amend the Insurance Act 1938, the Life Insurance
Corporation Act 1956 and the General Insurance Business (Nationalisation) Act
1972.
 IRDA- Objectives
 The regulatory framework in relation to insurance is desired to take care of
three major concerns, viz,
 (a) the protection of the interest of the consumers;
 (b) to ensure the financial soundness of the insurance industry, and
 (c) to pave the way to help a healthy growth of the insurance market,
where both the government and private parties play simultaneously.
Insurance Regulatory and Development
Authority of India(IRDA)

1. It was established under the IRDA Act of 1999 it is an

independent regulator authority mandated to govern the
insurance industry in the country.
2. The main object to protect the consumers (policy holders)
3. It is involving the policy holders, consumer groups and the
public through consultations, discussions etc.
The Insurance Regulatory and Development
Authority Act 1999

Establishment of IRDA
 Chapter 2 of the Act 2 provides for the establishment of the Insurance
Regulatory and Development Authority.
 It declares the Authority to be a body corporate with perpetual
succession and common seal.
 It can hold property, enter into contracts and is entitled to sue and is
liable to be sued by its name.
 The Authority shall have its head office at such a place as the Central
Government notifies and it may establish its branches at other places in
India.
 Section 13 provides for the transfer of all properties rights and liabilities
of the Provisional Insurance Regulatory and Development Authority to
the present authority
Composition
 It should consist of a chairperson, not more than five full-time and not more than four part-time members to be
appointed by the Central Government.

 The chairperson and other members shall hold office for 5 years and are eligible for reappointment.

 The chairperson shall not be above 65 years and other persons above 62 years.

 The members are permitted to relinquish their offices and are also liable to be removed from office in accordance with
the provisions of s 6.

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

 (i) an insolvent or

 (b) has become mentally or physically incapable of acting as a member or

 (c) has been convicted of any offence involving moral turpitude or

 (d) has acquired financial interest as is likely to effect prejudicially his functions as a member or

 (e) has abused his position as to render his continuation detrimental to the public interest. He can be removed only after
giving him a reasonable opportunity of being heard in the matter.

 (ii) their salaries and allowances are to be prescribed by rules (s 7).

 The chairperson and the whole-time members cannot accept for a period of two years from the time they cease to hold
office any government appointment, central or state, or in a company in the insurance sector without previous
approval of the Central Government.

 The chairperson should have the power of general superintendence and direction in respect of all administrative
matters of the Authority.
Contd.
 Meetings
 The Authority shall hold its meetings at such times and places and shall observe
such rules and procedures including quorum as determined by the regulations
made by itself.
 If the chairperson is absent, a member present may be elected to preside over that
meeting and the decision of the Authority is by majority and if they are divided equally
the president has a second casting vote.
 Any vacancy or defect of appointment or mere irregularity in proceeding does not
invalidate the proceeding.
 The Authority can recruit necessary staff and their terms and conditions of service shall
be according to the regulations under Chapter 13.
 All the assets and liabilities of the Interim Insurance Regulatory and Development
Authority are transferred to the Authority under the Act.
 Duties
 The only duty of the Authority is to regulate, promote and ensure orderly growth of
the insurance and the reinsurance business.
 This is subject to the provision of the Act and any other law for the time being in force
Powers and Functions
 Section 14 (2)
 (a) issue to the applicant a certificate of registration, renew, modify, withdraw, suspend or cancel
such
 registration;
 (b) protection of the interests of the policy-holders in matters concerning assigning of policy,
nomination by
 policy-holders, insurable interest, settlement of insurance claim, surrender value of policy and other
terms
 and conditions of contracts of insurance;
 (c) specifying requisite qualifications, code of conduct and practical training for intermediary or
insurance
 intermediaries and agents;
 (d) specifying the code of conduct for surveyors and loss assessors;
 (e) promoting efficiency in the conduct of insurance business;
 (f) promoting and regulating professional organisations connected with the insurance and re-
insurance
 business;
 (g) levying fees and other charges for carrying out the purposes of this Act;
 (h) calling for information from, undertaking inspection of, conducting inquiries and investigations
including audit of the insurers, intermediaries, insurance intermediaries and other organisations
connected with the insurance business;
Contd.
 (i) control and regulation of the rates, advantages, terms and conditions that may be
offered by insurers in respect of general insurance business not so controlled and
regulated by the Tariff Advisory Committee under s 64 U of the Insurance Act 1938 (4 of
1938);
 (j) specifying the form and manner in which books of account shall be maintained and
statement of accounts shall be rendered by insurers and other insurance intermediaries;
 (k) regulating investment of funds by insurance companies;
 (l) regulating maintenance of margin of solvency;
 (m) adjudication of disputes between insurers and intermediaries or insurance
intermediaries;
 (n) supervising the functioning of the Tariff Advisory Committee;
 (o) specifying the percentage of premium income of the insurer to finance schemes
for promoting and regulating professional organisations referred to in clause (f);
 (p) specifying the percentage of life insurance business and general insurance
business to be undertaken by the insurer in the rural or social sector; and
 (q) exercising such other powers as may be prescribed.
 Contd.
 Power of the Central Government
 Chapter 6, though captioned as miscellaneous, still contains very important provisions. Sections 18-20
preserves the control of the Central Government over the Authority which intends to control the
insurance sector.
 By s 18 the Central Government is secured of the power to give direction to the Authority on the question
of policy, other than those relating to technical and administrative matters and cl 2 provides that the
decision of the Central Government is final on the question as to whether a particular matter is one of
policy or not.

 Supercession
 The Central Government is also invested with the power to supercede the Authority by notification in
the official gazette when the Authority does not discharge its duties properly or defies the
directions of the Central Government.
 On the notification of the supercession of the chairman, the members should vacate their offices
and a new Authority may be constituted. There is no prohibition for nominating the vacating members
as the chairperson of the newly appointed authority.

 Parliamentary Control
The ultimate control is vested with Parliament by requiring the notification of supercession and the
full report of the action is therefore, to be laid before each House of Parliament at the earliest.
A duty is cast under s 20 on the Authority to furnish an annual report of its activities including the
activities for promotion of the development of the insurance business during the previous financial years and
copies of these reports shall be laid before each house of Parliament.
Insurance Advisory Committee

 The Act in s 25 also provides for establishment of an Insurance Advisory

Committee.
 The chairperson and members of the Authority shall be ex-officio
members of the advisory committee.
 The advisory committee shall consist of not more than 20 members to
represent the interests of commerce, industry, transport, agriculture,
consumer fora, surveyors, agents, intermediaries and research bodies
engaged in the study
Rule Making Power

 Section 24 empowers the state and Central Governments to make rules and s 26 empowers the Insurance
Regulatory Authority to make regulations on the subjects mentioned in the respective sections.
 The rules and regulations so made shall be laid before each House of Parliament.
 Section 28 makes it clear that the provisions of the Act shall be in addition to and not in derogation of any
law for the time being in force.
 Three schedules are attached to the Act making amendments in the Insurance Act 1938 in Schedule 1, the
Life Insurance Corporation Act 1956 in Schedule 2 and the General Insurance Business (Nationalisation) Act
1972 in Schedule 3.
 The second and third schedules contain only one section each, which abolish the exclusive privilege of the
Corporations of conducting life insurance business by LIC (s 30) and general insurance business by the GIC
and its subsidiaries (s 24A) and directing them to conduct their respective business in India.
 In accordance with the provisions of the Insurance Act 1938, they are not abolished but their sole privilege
to run the business is withdrawn.
 These entities have to carry on the business side-by-side with the newly permitted private entities. It is
made possible for the private entities even to collaborate with foreign investors within certain limits and
subject to certain conditions.
 In the emerging scene of the gradual privatisation it is rightly felt that there should be government
regulation through an independent authority and so the Insurance Regulatory Authority originally set up
provisionally, is no permanently constituted under the Act.
 It is but proper in view of the change that there should be greater control to safe-guard interests of the
policy holders and to improve the methods of conducting the insurance business in India
Contd.
 The first schedule introduces a good number of amendments to the Insurance Act 1938. Particularly
to shift all the powers and the duties of the Central Government, the Controller of Insurance and to a
limited extent the Insurance Tariff Commissioner to the chairperson of the Insurance Regulatory
Authority.
 The Insurance Regulatory Authority is empowered to make Regulations under s 32, and s 114 A of
the Insurance Act 1938 and under s 26 of the Insurance Regulatory and Development Authority Act
1999.
 Under s 26, the IRDA can make regulations on the advice of the Insurance Advisory Committee.
 The Insurance Regulatory and Development Authority is to insurance law what SEBI is to company
law. Both make regulations which by the doctrine of delegated legislation have the same force as law
made by the Parliament itself.
 Both the Central Government and Parliament exercise control over this part of the law. Whenever
the insurance company wants to take approval from IRDA, it has to follow Regulations, Guidelines
and Circulars of IRDA and all those are binding on the insurance companies.
Insurance Regulatory and Development Authority (Insurance
Advertisements and Disclosure) Regulations 2004

 This regulation was issued by the IRDA on 14th July 2000. This regulations focus on
advertisements issued by the insurance companies. The most grievances have their
source in misleading and exaggerated advertisements.
 Every insurer or intermediary or insurance agent is bound to follow the norms
specified by the IRDA will issuing advertisements.
 The advertisements released by the insurance companies should not be unfair or
misleading.
Insurance Regulatory and Development
Authority (Insurance Advertisements and
Disclosure) Regulations 2004

 Describes benefits that do not match the policy provisions

 Gives information in a misleading way
 Uses words or phrases in a way which hides or minimizes the
costs of the hazard insured against or the risks inherent in the
policy
 Illustrate future benefits on assumptions which are not realistic
nor realizable in the light of insurer’s current performance.
Insurance Regulatory and Development
Authority (Insurance Advertisements and
Disclosure) Regulations 2004

 The regulation requires every insurance company to designate

a Compliance Officer who shall be responsible to oversee
the advertising program.
 The name of the official and his position in the insurance
company should be informed to the IRDA.
 Right to reject the policy and refund of premium
 The policy document issued by the insurer should also contain
information about the fact that he has told.
 The 15 days time to review the terms and conditions of the
policy and where the insured disagrees to any of these terms or
conditions, he has the option to return the policy stating the
reasons for his objection.
Insurance Regulatory and Development
Authority (Insurance Advertisements and
Disclosure) Regulations 2004

 Procedure for preferring claims in respect of life insurance

policy
 Within the period of 15 days from the receipt of the claim
 A claim relating to life insurance policy is to be settled
within 30 days from the date of receipt of all relevant papers
and clarifications required.
 If any investigation is necessary it should complete at the
earliest & settle the claim not later than 6 months.
 In case there is a delay on the part of the insurer in processing
the claim for a reason other than that of non-identifying the
payee, the life insurer shall pay interest on the claim
amount of the rate which is 2 percent above the bank.
 How to make a complaint
 If you are unhappy with your insurance company


Approach the Grievance Redressal Officer of its branch or any other office that you deal with.

 Contact the Grievance Redressal Officers, GRO, of all insurance companies

 Give your complaint in writing along with the necessary support documents

 Take a written acknowledgement of your complaint with the date.

 The insurance company should deal with your complaint within 15 days.

 If that does not happen or if consumer is not unhappy with their solution :

 Approach the Grievance Redressal Cell of the Consumer Affairs Department of IRDA:

 Call Toll Free Number 155255 (or) 1800 4254 732 or

 Send an e-mail to complaints@irda.gov.in

 Make use of the Integrated Grievance Management System:

 Register and monitor your complaint at www.igms.irda.gov.in

 Send a letter or fax to IRDA with your complaint:

 Consumer can download Complaint Registration Form

 Fill and send by post or courier to:

Consumer Affairs Department
Insurance Regulatory and Development Authority
3-5-817/818, United India Towers, 9th Floor
Hyderguda, Basheerbagh
Hyderabad – 500 029

 Or Fax to
040-66789768
 Integrated Grievance Management
System
 IRDA has launched the Integrated Grievance Management System (IGMS).
Apart from creating a central repository of industry-wide insurance grievance
data, IGMS is a grievance redress monitoring tool for IRDA.
 Policyholders who have grievances should register their complaints with
the Grievance Redress Channel of the Insurance Company first.
 If policyholders are not able to access the insurance company directly for any
reason, IGMS provides a gateway to register complaints with insurance
companies.
 Complaints shall be registered with insurance companies first and only if need
be, be escalated them to IRDA (Consumer Affairs Department).
 IGMS is a comprehensive solution which not only has the ability to provide a
centralized and online access to the policyholder but complete access and
control to IRDA for monitoring market conduct issues of which policyholder
grievances are the main indicators.
 Contd..

 IGMS has the ability to classify different complaint types based on pre-defined
rules.
 The system has the ability to assign, store and track unique complaint IDs. It
also sends intimations to various stakeholders as required, within the workflow.
 The system has defined target Turn Around Times (TATs) and measures the actual
TATs on all complaints.
 IGMS sets up alerts for pending tasks nearing the laid down Turn Around Time. The
system automatically triggers activities at the appropriate time through rule based
workflows.
 A complaint registered through IGMS will flow to the insurer's system as well as the
IRDA repository.
 Updating of status will be mirrored in the IRDA system. IGMS enables generation
of reports on all criteria like ageing, status, nature of complaint and any other
parameter that is defined.
 Thus IGMS provides a standard platform to all insurers to resolve policyholder
grievances and provides IRDA with a tool to monitor the effectiveness of the
grievance redress system of insurers.
INSURANCE OMBUDSMAN
OMBUDSMAN IN INSURANCE
SECTOR
Insurance Regulatory
Authority of India - IRDA

 Introduction
 Consumer Protection Measures by IRDA
 Powers of IRDAI
 Integrated Grievance Management System
 Insurance Ombudsman
Ombudsman

 In general, an ombudsman is a State

official appointed to provide a
check on government activity in the
interests of the citizen, and to
oversee the investigation of
complaints of improper
government activity against the
citizen.
 In the present time when consumerism is one of the main tenets of a good working
economy, the protection of the consumer and his rights become all the more
important.
 With increasing standards of living and changing lifestyles consumers have become
more empowered and can afford and desire greater luxuries in services that are owed
to them.
 This has also caused the providers of these services to have a significant amount of
power over the lives of the consumers and this power only increases with increasing
consumer demands.
 The real problem arises when public authorities under various wings of the
government who have a great amount of sway over people’s daily lives infringe upon
consumers’ rights and thus lead to exploitation of the consumers.
 This is especially true as the power and influence of public authorities is huge as they
provide various services which are absolutely indispensable and have a profound effect
on our day-to-day lives. Also, the ever-increasing influence and power of these
authorities make it imperative that these powers be kept in check somehow to ensure
the well-being of consumers.
Contd.
 In addition to this, today’s fast lifestyle doesn’t allow people to go through the lengthy process of
proceedings which are according to the pre-existing laws and this causes people to not get to the
proper authorities to address their grievances and help them in restoring their rights.
 Therefore, the need for an agency which can function much more speedily and efficiently than our
existing means of getting redressal such as the Courts and Consumer Commissions arises.
 This will encourage the consumers to approach these agencies to enforce their rights which in turn
will create a cleaner and more transparent structure in these sectors and also lessen the load on our
already burdened legal framework.
 Keeping all these points in view the services of an ombudsman were devised.
 An ombudsman is an appointed official tasked with the responsibility to keep a check on the
actions of a government authority to ensure that abuse of power or the infringement of rights of
consumers does not take place and the authorities discharge their duty responsibly and
correctly.
 The word 'ombudsman' comes from Swedish Justlieombudsman which was a
position established in 1809 to overlook government administration.
 It meant “citizen's defender” or “representative of the people”. Since then,
many countries have adopted such concept, in government as well as private
industry (eg. banking and insurance) by setting up ombudsman offices.
 Amongst the English-speaking countries, the first one to appoint an
ombudsman was New Zealand. This was followed by the establishment of the
Ombudsman office in the United Kingdom.
 In Australia, an ombudsman was appointed in Western Australia in 1971. The
UK's Financial Ombudsman Service is a service that aims at resolving disputes
that arise between the customers and the financial service providers. The
ombudsman service is provided free of cost to the customers.
 Background
 The Institution of Ombudsman is one of the world’s oldest grievance redressal institutions.
 It has been in existence in different forms at different periods of development.
 In Ancient China- Officials ( Censors) for their lapses existed from time immemorial. The
performance of individuals was watched at every stage by the special officers appointed by
the kings. Those responsible for delays were beaten with bamboos.
 Ancient Rome- Tribunes of People similar to Ombudsman
 In Mughal Emperor had put a chain outside the palace which was attached to a bell inside
the king’s bedroom. The citizen who had any grievance had to pull the chain so that the king
come out and hear the grievance of the citizens.
 The concept of Ombudsman today has the origin from Sweden
 Concept of Ombudsman has been widely adopted by several other countries either on their
own or on the recommendations of the institutions like United Nations, World Bank,
International Monetary Fund, Asian Development Bank etc.
 In Finland & Sweden the institution of Ombudsman has been most successful as a device
for redressal of citizens’ grievances.
 The Ombudsman has also been instrumental for taking corrective measures against cases of
mal-administration.
 Scheme of Insurance Ombudsman.

 With an objective of providing a forum for resolving disputes and complaints from the aggrieved
insured public or their legal heirs, nominee or assignee against Insurance Companies, the
Government of India, in exercise of powers conferred by section 24 of the Insurance Regulatory
and Development Authority Act, 1999(41 of 1999) framed "Insurance Ombudsman Rules, 2017",
which came into force w.e.f. 25th April, 2017.
 These Rules aim at resolving complaints relating to the settlement of disputes with Insurance
Companies and their agents and intermediaries on personal lines of insurance, group insurance
policies, policies issued to sole proprietorship and micro enterprises in a cost effective, efficient and
impartial manner.
 These Rules apply to all the Insurance Companies operating in General Insurance business and Life
Insurance business, in Public and Private Sector.
 To implement the above Rules, the Institution of Insurance Ombudsman has been established and is
functioning since 1999.
 The Insurance Ombudsman is provided with a Secretarial Staff by the IRDAI as may be determined
by the Executive Council of Insurers.
 Need for Ombudsman

 Scope of Administration has widened due to expanding programs of new social

security & other public services
 Due to existing institutions for dealing with people grievances are inadequate &
ineffective.
 Citizens have lost confidence in these grievance handling mechanisms
Meaning & Object
 Ombudsman is a person who is supposed to prevent abuse of powers by
authorities and protect the interests of the citizens.
 The ombudsman is also defined as a watchdog designed to look into the
entire workings of administration.
 He is the person who is supposed to prevent abuse of powers by authorities
and protect the interests of the citizens.
 In general, an ombudsman is a state official appointed to provide a check on
government activity in the interests of the citizen, and to oversee the
investigation of complaints of improper government activity against the
citizen.
Essentials of Effective Ombudsman

 Independence
 Impartiality
 Power of Authority
 Accountable
 Transparent
 Fair & Impartial
Brief Note of Insurance Ombudsman

 The Institution of Insurance Ombudsman was created by a Government of India

dated 11th November, 1998 conferred by Sub-Section (1) of the Section 114 of the

Insurance Act, 1938.

 The Rules may called the Redressal of Public Grievances Rules, 1998.
 Object of the Rules

 These rules are to resolve all complaints relating to settlement of claim on the
part of insurance companies in cost effective, efficient and impartial
manner.
.

These rules apply to both general insurance as well as life

insurance.
Common Causes of Grievances

• Address and telephone numbers of policy servicing office not given

• Tel. no of customer care/grievance managers not responsive

• Misselling by intermediaries

• Misinformation on products

• Delay in issuance of policy bond

• Disputes over free look period

Common Causes of Grievances – Non-Life

• Policy terms & conditions not attached

• Claims rejected on grounds of delay in reporting/ submission of documents
• Charging high premium on renewal of health insurance especially in case of
senior citizens
• Disputes over service provided by TPA-cashless facility not granted since
hospital concerned not covered under preferred provider network
• Health Insurance reasonable expenses, proportionate costs, advancement in
technology
• Repudiation of claims – proper reasons for repudiation of claim not spelt out
• Review of claims rejected by TPA’s by the Insurer
• Motor Insurance vast difference in assessment made by surveyor and
workshop estimate
 Institution of Insurance
Ombudsman
• Established under Redressal of Public Grievance Rules, 1998 (RPG)
• Central Government, in exercise of its powers under Section 114 of
the Insurance Act, 1938, notified these Rules on 11th November,
1998
• These rules were amended on 18.12.1998 and again on 21.06.1999
• Applicable to all Insurers – Life as well as Non-life
• Objective being resolution of complaints relating to settlement of
claims in a cost effective, efficient & impartial manner
Territorial Jurisdiction of Insurance Ombudsman

• The Office of the Ombudsman shall be located at such place as may

be specified by the Insurance Council

• The Governing Body shall specify the territorial jurisdiction of each

Ombudsman

• At present there are 17 centres across the country

• The Ombudsman may hold sitting at various places within his area of
jurisdiction in order to expedite disposal of complaints
 Entertainable Complaints
Ombudsman may receive & consider complaints relating to:-

• Partial/Total Repudiation of Claims

• Dispute regarding Premium payable/paid in terms of the Policy

• Dispute regarding Legal Construction of the Policy relating to

Claims

• Delay in settlement of Claims

• Non-issue of insurance document after receipt of premium

• Cases of mis-selling also brought into Ombudsman’s jurisdiction
Rule 5. Governing body of Insurance
Council

1. Which shall consist of one representative for each of the

insurance companies.
2. The Representative will be of an insurance company will be
Chairman or Managing director or any one of the Directors
of such company.
3. The Representatives of an insurance company shall
ordinarily be Chairman or Managing Director or any of
one the directors of such company
4. The Governing body shall formulate its own procedure for
conducting its business including the election of the Chairman
Rule. 6 Appointment of Ombudsman

1. The Governing body shall appoint one or more persons as

ombudsman.
2. The persons who are retired or about to retire as Chairman or
Managing Director, Executive Director or General Manager of
Public Sector
3. Persons who are retired or about to retire from IAS or IRS.
4. The candidate should have held a post equivalent to or above the rank
of Additional Secretary to GOI or any equivalent post under
State Government or
5. Who have retire or about to retire as High Court Judge or District
or Sessions Court Judge.
6. Age not more that 62 years
7. The Appointment will be for a term of 3 years up to the ager of 65
years
Rule 8. Removal of office

1. An Ombudsman may be removed from service for gross

misconduct committed by him during his term of the
office.
2. The Governing Body may appoint such person as it thinks fit
to conduct enquiry in relation to misconduct of the
Ombudsman
3. All enquires on misconduct will be sent to Insurance
Regulatory Authority which may be take decision action
to be taken against the Ombudsman.
4. On recommendations of the Insurance Regulatory Authority if
the Governing Body is of opinion that the Ombudsman is
guilty of misconduct, it may terminate his services.
Rule 9. Remuneration

1. There shall be paid to Ombudsman a salary which is equal

to the salary of the judge of a High court

2. The other allowances and requisites of the Ombudsman shall

be such as may be specified by the Central Government or

the State Government.

Rule 12 . Power of Insurance Ombudsman

1. Insurance ombudsman is open to all individuals

2. Partial or total repudiation of claims by an insurer
3. Delay in settlement of claims
4. Legal construction of policy(policy wordings)
5. Any dispute regard to Premium paid or payable in terms of
policy
6. Non-issue of insurance documents to customers after
receipt of premium.
7. Where the claim amount is less than Rs.20 lakhs.
8. The Ombudsman shall act as counsellor and mediator in
matters which are within his terms of reference.
 Rule 13. Manner in which complaint is made

1. Any person who has a grievance against an insurer, may himself or through his
legal heirs make a complaint in writing to the Ombudsman, within those
jurisdiction the branch or office of the insurer.
2. The complaint shall be in writing duly signed by the complainant or through
his legal heirs and shall state clearly the name and address of the complaint.
3. The name and address of the complaint is made, the fact giving rise to
complaint supported by documents, if any.
4. The Complaint and either insurer had rejected the compliant or the
complainant had not received any reply within a period of one month
5. If the insurer concerned received his representation or the complainant is not
satisfied with the reply given to him by the insurer.
6. The Fact giving rise to complaint supported by documents.
7. The complaint is made not later than one year after the insurer had rejected the
representation or sent his final reply on representation of the complaint.
8. The Complaint is not the same subject matter, for which any proceedings before
any court, or Consumer forum or arbitrator is pending etc.
Rule 15. Recommendations made by
Ombudsman

1. When a complaint is settled, through mediation of the

Ombudsman, by him in pursuance of request made in writing
by complainant and insurer through mutual agreement
2. The Ombudsman shall make a recommendation which he
thinks fair in the circumstances of the case.
3. The copies of the recommendation shall be sent to the
complainant and the insurance company concerned.
4. Such recommendation shall be made not later than one month
from the date of the receipt of the complaint .
5. If a complainant accepts the recommendation of the
Ombudsman, he will sent a communication in writing within
15 days of the date of the receipt of the recommendation.
6. In terms of recommendations made by the Ombudsman in full
and final settlement of complaint.
Rule 16. Award by Insurance Ombudsman

1. If the complaint is not settled by agreement through the

Ombudsman shall pass an award which he thinks fair in the
facts and circumstances of a claim.
2. An award shall be in writing and shall state the amount
awarded to the complainant.
3. The Ombudsman shall pass an award within a period of three
months from the receipt of the complaint.
4. A copy of the award shall be sent to the complainant and the
insurer named in the complaint.
5. The Complainant shall furnish to the insurer within a period
of one month from the date or receipt of the award,
6. The Insurer shall comply with the award within 15 days of the
receipt of the acceptance letter and shall intimate the
compliance to the Ombudsman.
Insurance Ombudsman
Centres
South North
Chennai Delhi
Hyderabad Chandigarh
Bengaluru Jaipur
Kochi Noida

East West
Kolkata Mumbai
Guwahati Ahmadabad
Bhubaneshwar Pune
Lucknow Bhopal
Patna
Institution of Insurance Ombudsman was established by the Government of India under the
Redressal of Public Grievances Rules- 1998.
The Governing Body of Insurance Council (GBIC), which consists of one representative from
each insurance company, appoints Insurance Ombudsman who are from the Civil services, or the
Judiciary, or the Insurance Industry.
The objective behind establishing this institution was to provide affordable, impartial, quick
and efficient redressal to the grievances of the policyholders.
Representatives shall be Chairman or Managing Director or any one of the Directors of the
company
Shall formulate its own procedure for conducting its business including the election of the
Chairman.
The Institution of Insurance Ombudsman was created by a Government of India dated 11th
November, 1998 conferred by Sub-Section (1) of the Section 114 of the Insurance Act, 1938. The
Rules may called the Redressal of Public Grievances Rules, 1998.
 Executive Council of Insurers (ECOI)

 The Executive Council of Insurers (ECOI) has been established under Insurance
Ombudsman Rules 2017, to set-up and facilitate the Institution of Insurance
Ombudsman in India.
 The Executive Council of Insurers consists of two representatives nominated by the
Life Insurance Council, two representatives from General insurers, other than stand-
alone health insurers and one representative representing stand-alone health insurers
nominated by the General Insurance Council,
 one representative of the IRDAI
 one representative of the Central Government in the Ministry of Finance from the
Department of Financial Services not below the rank of Director;
 and the Chairman, Life Insurance Corporation of India(LIC of India) or the Chairman,
General Insurers’(Public Sector) Association of India (GIPSA) of 1972) provided they
are not acting as Chairperson of the Executive Council of Insurers.
 Contd.

 The Insurance Ombudsman Rules, 2017 (IO Rules - 2017) contain provisions
in respect of appointment and office term, etc for Insurance Ombudsman and
also include stipulations in respect of staffing and administration of
Ombudsman Centre, powers of Ombudsman, manner of lodging complaint and
disposal of complaint by Ombudsman either by way of Recommendation or
Award. Miscellaneous Provisions of the notification relate to constitution of
Advisory Committee, submission of annual report, etc.
Contd

 Insurance Ombudsmen are appointed by the Executive Council of Insurers and

are empowered to entertain complaints against insurance companies and their
agents and intermediaries on the following aspects in respect of personal line
insurances, group insurance policies, policies issued to sole proprietorship and
micro enterprises:
APPOINTMENT & TERM OF OMBUDSMAN

 The governing body shall appoint one or more persons as ombudsman from a
panel prepared by the committee consisting of Chairman of IRDA, Two
representatives of the Insurance Council (one from life and one from non-life), one
representative of the Central Government.

 The Ombudsman selected may be drawn from a wider circle including those who
have experience in industry, civil service, administrative service, judicial service
etc.

 An Ombudsman shall be appointed for a term of three years or till the incumbent
attains the age of 65 years, whichever is earlier. Re-appointment is not permitted.
Territorial Jurisdiction
 The Office of the Ombudsman shall be located at such place as may be specified by the Insurance Council
 The Governing Body shall specify the territorial jurisdiction of each Ombudsman.
 At present there are 17 Centres in India
 The Ombudsman may hold sitting at various places within his area of jurisdiction in order to expedite disposal of
complaints
 17 Ombudsman Centres, covering the country, established in Ahmedabad, Bengaluru, Bhopal, Bhubaneswar,
Chandigarh, Chennai, Delhi, Guwahati, Hyderabad, Jaipur, Kochi, Kolkata, Lucknow, Mumbai, Pune, Patna and
Noida.
 Procedure is quick and free of cost.
 Apart from regular hearings at the Centres, Insurance Ombudsmen hold outstation hearings within their territorial
jurisdiction for the convenience of complainants.
 BENGALURU - Smt. Neerja Shah
 (As on 23-04-2018 taken charge)
Office of the Insurance Ombudsman,
Jeevan Soudha Building,PID No. 57-27-N-19
Ground Floor, 19/19, 24th Main Road,
JP Nagar, Ist Phase,
Bengaluru – 560 078.
Tel.: 080 - 26652048 / 26652049
Email: bimalokpal.bengaluru@ecoi.co.in
Source: IRDA Website
Procedure to Lodge a Complaint with Insurance Ombudsman

 If one has a Insurance Policy on personal lines, group insurance policies, policies
issued to sole proprietorship & micro enterprises and have a grievance against an
insurer and their agents and intermediaries complaint can be filed by Policyholder or
claimant/legal heirs, nominee or assignee.
 Can write to the Insurer.
 The insurer should deal with your complaint within 30 days.
 If the solution is unsatisfactory or if there is no response to your complaint from the
insurer for 30 days, then you can approach the Office of Insurance Ombudsman as
per jurisdiction for value of the claim including expenses not exceeding 30 lakhs,
within 1 year from date of rejection/repudiation/partial settlement of claim by the
Insurer.
 One should not have approached any other forum/court/arbitrator on the same
subject matter of your claim.
 The forum of Insurance Ombudsman does not charge any fees for filing the
complaint
Time limit to approach the
Ombudsman

 Within one year of the rejection by the insurer of the

representation of the complainant or the Insurer's final
reply to the representation or after expiry of one month
from the date of sending written representation to the insurer
and the insurer fails to furnish the reply.
 NATURE OF COMPLAINTS ENTERTAINED
 Delay in settlement of claims.

 Any partial or total repudiation of claims by an insurer.

 Any dispute over premium paid or payable in terms of the policy.

 Misrepresentation of policy terms and conditions at any time in the policy document or policy contract.

 Any dispute on the legal construction of the policies in so far as such disputes relate to claims.

 Policy servicing related grievances against insurers and their agents and intermediaries

 Issuance of life insurance policy, general insurance policy including health insurance policy which is not in conformity with the
proposal form submitted by the proposer.

 Non-issue of any insurance policy to customers after receipt of premium in life insurance and general insurance including health
insurance.

 Any other matter resulting from the violation of provisions of the Insurance Act, 1938 or the regulations, circulars, guidelines or
instructions issued by the IRDAI from time to time or the terms and conditions of the policy contract, in so far as they relate to issues
mentioned at clauses(a) to (f)

 The complaint shall be in writing duly signed by the policyholder or claimant/ legal heirs/ assignee/nominee.

 Documentation- Complaint letter along with the photocopies of the supporting documents to the Office of Insurance Ombudsman.

 Policy copy ( all pages of policy under which complaint is lodged)

 Copies of all old policies for covering of Insurance since last 48 months prior to this policy if claim is rejected on grounds of pre-
existing diseases/waiting period.

 Repudiation/Denial letter/Partial settlement letter issued by the Insurer.

 Representation letter sent to the Insurer.

 Any other correspondence exchanged with Insurer & TPA.

 Contd
 The maximum limit for the amount under dispute for which the Ombudsman
can entertain a complaint is upto Rs. 30 lakhs.
 Any complainant, whose complaint on the same subject matter is or was
before a Court/Consumer Commission cannot approach Ombudsman.
 In case both parties agree for mediation, the Ombudsman shall give his
Recommendation within 1 month of date of receipt of mutual written consent
for such mediation, otherwise, he shall pass his Award within 3 months of
the receipt of all requirements from the complainant.
Recommendations made by the Ombudsman
 Ombudsman to give recommendation when there is Mutual agreement.
 Complainant to communicate his acceptance for the recommendation
 The Insurer to comply with the recommendation within 15 days of the receipt of the consent
from the complainant and report to the Ombudsman of the compliance.

Award made by the Ombudsman

 Where the complaint is not settled by agreement, the Ombudsman shall conduct hearing and
pass a speaking award.
Power to make ex-gratia payment
 If the Ombudsman deems fit he may award an ex-gratia payment under Rule 18.
 Complainant to give consent on receipt of the award within 1 month to the insurer
 The Insurer to comply within 15 days
 The Ombudsman has the authority to pass an ex-gratia payment, which benefits the
policyholder. It is paid as a goodwill to a claimant who was under no obligation to receive it.
Consequences of non-acceptance of award
 The award may not be implemented by the insurer if the consent from the complainant is not
received within the timeframe specified.
 The complainant has the right to approach other forums.
Rule 14 of The Insurance Ombudsman Rules, 2017
Published vide Notification No. G.S.R. 413(E), dated 25th April, 2017-
GROUNDS FOR REJECTION OF COMPLAINT

 (3) No complaint to the Insurance Ombudsman shall lie unless-

 (a) the complainant makes a written representation to the insurer named in the complaint and-
 (i) either the insurer had rejected the complaint; or
 (ii) the complainant had not received any reply within a period of one month after the insurer received his
representation; or
 (iii) the complainant is not satisfied with the reply given to him by the insurer;
 (b) The complaint is made within one year-
 (i) after the order of the insurer rejecting the representation is received; or
 (ii) after receipt of decision of the insurer which is not to the satisfaction of the complainant;
 (iii) after expiry of a period of one month from the date of sending the written representation to the insurer if the
insurer named fails to furnish reply to the complainant .
 (4) The Ombudsman shall be empowered to condone the delay in such cases as he may consider necessary, after
calling for objections of the insurer against the proposed condonation and after recording reasons for condoning
the delay and in case the delay is condoned, the date of condonation of delay shall be deemed to be the date of
filing of the complaint, for further proceedings under these rules.
 (5) No complaint before the Insurance Ombudsman shall be maintainable on the same subject matter on which
proceedings are pending before or disposed of by any court or consumer forum or arbitrator.
 SETTLEMENT

 First of all, the ombudsman aims to settle the received complaint either through mediation between the complainant
and the insurance company.

 When such a settlement is made, the Ombudsman makes recommendations which he thinks are reasonable
considering the facts of the case.

 The complainant has to send a communication of the acceptance of the recommendation within 15 days of the
receipt of the recommendation. A copy of the recommendation and the acceptance is sent to the insurance
company and it has to agree with the terms mentioned in the recommendations within 15 days of its receipt.

 AWARD

 If the settlement is not complete under Rule 15, the ombudsman might pass an award considering the situations
of the case. The award should contain directions to the bank to pay compensation for the loss suffered by the
complainant, but not more than the harm suffered.

 The award has to be in writing and should be passed within three months of the receipt of the complaint. If the
complainant does not furnish a letter showing his acceptance to the insurer that the award passed by the
ombudsman is the full and final settlement of the claim within a month of the award, the insurance company is
not bound to implement the award.
 The decision of the ombudsman is the full and final settlement of the claim and there
lies no possibility to appeal against the same.
 This might sometimes be harsh for the customer as well because if the decision of the
ombudsman goes against him, he cannot appeal against the decision and will have to
accept it.
 There are various advantages of approaching the Consumer Commissions as against the
ombudsman such as possibility of complaints by welfare associations and the government,
the presence of redressal authorities at the local level as well and the possibility to appeal
to the Supreme Court, and the provision of penalty in case of non-compliance, and a larger
limitation period (2 years compared to 1 year with the ombudsman).
 Due to these reasons people prefer approaching the consumer forums instead of the
ombudsman for getting their grievances resolved. Also, most of the people lack awareness
about the presence of Ombudsman offices and their working in the Insurance Sector.
Contd..
 No fees / charges are required to be paid. Nor there is any provision to engage a lawyer for representation before
Ombudsman. The complainant himself represent his case before the Ombudsman.
• Wherever considered necessary, the Ombudsman will conduct hearing of both the Parties. Hearings may be
conducted outside headquarters, where warranted. The policy holder can accept the award in writing. The insurance
company will also be informed of the decision within 30 days. The Insurance Company is under obligation to comply
with the award. This should be done within 15 days post the award.
 Complaints can be lodged against any Insurer both in Public Sector and Private Sector in both Life and Non-Life
sectors.
 A Sole Proprietor of a business can approach the Ombudsman for a complaint arising out of business interests.
 Only individual policyholders, sole proprietorship or micro enterprises who have taken insurance on personal lines
are eligible. However, a member covered under a Master Policy or a Group Insurance (or if deceased, the legal heir
/nominee) can approach the Ombudsman, provided the payment of the claim under such policy is to be made to the
individual, as beneficiary.
 The Recommendation or Award of the Insurance Ombudsman are both subject to acceptance by the complainant in
full and final settlement of the complaint. If such acceptance is not agreeable, the complainant may exercise the right
to take recourse to the normal process of law against the insurance company. Further, dismissal of a complaint by the
Insurance Ombudsman, does not vitiate the complainants' right to seek legal remedy against the insurers complained
against, as per normal process of law.
 Any administrative issues concerning agents (like non-issue of licence, non-receipt of commission etc.) or
employees' grievances and complaints against staff of the member companies also not be entertained by the
Ombudsman. Such matters do not fall within the terms of reference of the Ombudsman and hence are not to be
referred.
 Information be sought under the Right to Information Act-Information can be sought from the Public Information
Officer of the concerned Ombudsman Centre or the Executive Council of Insurers.
 COMPARATIVE CHART
Insurance Ombudsman & CPA
INSURANCE OMBUDSMAN CONSUMER PROTECTION ACT
Complainant Either the insurance customer The insurance customer, or
or his legal heir. his authorised representative, or bank
customer welfare associations, or state and
central governments.

Deficiency of Not defined. Properly defined.

Service
Redressal Insurance Ombudsman. District Forum, State
authorities Commission, National Commission and
finally Supreme Court.

Penalties for No Penalty. Penalty in the form of

non-compliance of imprisonment is possible if the order is not
order complied with.

Appeal No possibility of appeal. Appeal is possible.

Limitation Period 1 year. 2 years.

IRDAI Awareness-
Documentary Video

 Insurance Regulatory and Development Authority of India (IRDAI) celebrates its

formation day (19th April) as ‘Insurance Awareness Day.
 In order to sensitize general public about IRDA, its role and initiatives in
insurance sector regulation and development as well as policyholder protection
and welfare, a documentary film has been prepared for extensive use which has
been recently launched by IRDA. This documentary film not only disseminates
generic information about insurance but also highlights various initiatives taken
by IRDA in the field of educating customers and redressal of grievances.
 Source: IRDA Website
https://www.policyholder.gov.in/IRDA_Documentary_Film.aspx
 IRDA Awareness Video (9.31 minutes)
https://www.youtube.com/watch?v=9WDQsPiXf1g&feature=youtu.be
OMBUDSMAN AND ADDRESSES OF OMBUDSMAN CENTRES

OMBUDSMAN AND ADDRESSES OF OMBUDSMAN CENTRES IN KARNATAKA)

 BENGALURU - Smt. Neerja Shah

 (As on 23-04-2018 taken charge)
Office of the Insurance Ombudsman,
Jeevan Soudha Building,PID No. 57-27-N-19
Ground Floor, 19/19, 24th Main Road,
JP Nagar, Ist Phase,
Bengaluru – 560 078.
Tel.: 080 - 26652048 / 26652049
Email: bimalokpal.bengaluru@ecoi.co.in