Paper-V - Option (a) - Insurance Law

Unit-I
1) Meaning of Insurance
2) Definition of Insurance
3) Nature of Insurance
4) Functions of Insurance
5) Types of Insurance
6) Evolution of Insurance
7) Life Insurance
8) Definition of a Contract of Life Insurance
9) Difference between Life Insurance and other forms of Insurance,
Insurable Interest, Presumption of insurable interest, Presumption of insurable interest,
Procedure for effecting a Life Policy, Kinds of Life insurance policies, Assignment of Life
Policies, Nomination by the Policy Holder, Effect of Suicide, Settlement of Claims.

Unit-II
10) Fire Insurance
11) Definition of a Contract of Fire Insurance
12) Characteristics, What is 'Fire' and 'Loss or Damage by Fire' ?
13) Procedure for effecting Fire Insurance
14) Types of Fire Policies,
Assignment of Fire Insurance Policies,
Fire Insurance Claim
15) Marine Insurance
16) Definition of a Contract of Marine Insurance
Subject matter of a Contract of Marine Insurance, Maritime Derils,
Characteristics of Marine Insurance Contracts, Kinds of Marine Policies, Insurable Interest,
Warranties in a Contract of Marine Insurance, Kinds of Warranties, Marine Losses, Kinds of
Losses, Rights of Insurer on Payment.

UNIT-I
 Meaning of Insurance
Insurance is a contract, represented by a policy, in which a policyholder receives financial
protection or reimbursement against losses from an insurance company. The company pools
clients’ risks to make payments more affordable for the insured. Most people have some
insurance: for their car, their house, their healthcare, or their life.

Insurance policies hedge against financial losses resulting from accidents, injury, or property
damage. Insurance also helps cover costs associated with liability (legal responsibility) for
damage or injury caused to a third party.1

How Insurance Works

Many insurance policy types are available, and virtually any individual or business can find
an insurance company willing to insure them—for a price. Common personal insurance
policy types are auto, health, homeowners, and life insurance. Most individuals in the United
States have at least one of these types of insurance, and car insurance is required by state
law.

Businesses obtain insurance policies for field-specific risks, For example, a fast-food
restaurant's policy may cover an employee's injuries from cooking with a deep fryer.
Medical malpractice insurance covers injury- or death-related liability claims resulting from
the health care provider's negligence or malpractice. A company may use an
insurance broker of record to help them manage the policies of its employees. Businesses
may be required by state law to buy specific insurance coverages.2

Definition of Insurance

Insurance Definition
Insurance is generally defined as a contract which is also called a policy. An insurance policy
is a contract in which an individual or an organization gets financial protection and
compensation for any damages by the insurer of the insurance company. In simpler words,
one can answer what is an insurance policy as a form of protection from any unexpected loss
or damage. From this paragraph, one can get a clear overview of insurance meaning.

Nature Of Insurance:

 The Insurance is a contract. Thus all the essentials of contract must be fulfilled.
 The Insurance contract should be based on the subject matter which has an Insurable
Interest in it. Like for vehicle owner his vehicle is an insurable interest because in
case of loss or damage to the said vehicle he/she can suffer financial crises/loss. It can
be compensated through the insurance if he/she insured their vehicle.
  The Insurance is for pure risk. The person can't insure the subject matters in which the
probability of risk is not involved in it. So the contract of Insurance compensates for
loss or damages which an insurer will incur due to such risk.
 The Insurance is based on certain principles. The parties to the Insurance contract
must act in accordance with such principles and in-case of non-compliance the
aggrieved party can proceed in accordance with the due procedure of law or in
accordance with term of insurance contract.
 The nature of Insurance is a medium of sharing risk by a massive number of people
amongst the few who are open to risk by some or other reason.
 If a huge number of insured people serve the purpose of compensation for a few
among them exposed to uncertain risk, this nature of insurance is described as a co-
operative device.
 The amount of compensation in an insurance is predefined according to the terms and
condition of the insurance contract.
 Insurance provides aspects of financial help in case of an uncertain event.
 The payment of compensation in an insurance contract primarily depends on the value
of the insurance policy/contract.
 As insurance is contractual in nature, it is regulated under due procedure of law.
Because of which the amount of insurance can either be paid as a gambling or as
charity, it has to be paid according to the terms and condition of the insurance
contract.

2nd answer
Contract
Insurance is contract between two parties in which one party agrees to provide protection to
other party from losses in exchange for premium. The parties are insurer and insured. Insurer
guarantees compensation in occurrence of any contingency to insured and insured pays
premium to insurer for protection. Insurance companies accept the offer made by the
insurance policy holder and enter into contract. Contract for insurance is always in written.

Lawful Consideration
Existence of lawful consideration is must for insurance contract like any other lawful
contract. The insurance policy holder is required to pay premium regularly to the insurance
company. This premium is paid in exchange for protection against losses and damages
guaranteed by insurance companies.

Payment On Contingency
Insurer is required to compensate the insured only on happening of contingency for the
damages and losses done. Insured cannot make profit from insurance policy but can only
claim compensation from insurer in case of contingency. If no contingency occurs, insurer is
not required to pay any compensation to insured.
Risk Evaluation
Insurer evaluates the risk associated with subject matter of insurance contract. Proper risk
evaluation enables the insurer to calculate the right amount of premium to be paid by insured.
Insurer uses different techniques for risk evaluation. If insurance object is subject to heavy
losses, heavy premium will be charged. On the other hand, if there is less expectation of
losses then low premium will be charged.

Large Number Of Insured Persons

There are large numbers of insured person’s takes insurance policy from insurer. Larger the
number of insurance policy holders with insurance companies, smaller will be the degree of
risk on any individual. Risk arising from any contingency is shared among these large
numbers of insured persons.

Co-Operative Device
Insurance is a cooperative device to pool risk among large number of persons. Insurance is a
platform where different persons come together to share risk by taking insurance policy from
insurer. All persons pay premium regularly to insurance companies. If any of person incurs
losses or damages due to occurrence of any contingency, insurance company will compensate
him out of premiums paid by different persons.

Not A Charity Or Gambling

Insurance is a legal contract. It cannot be termed as a charity or gambling. Compensation paid
to insured by insurer is not in charity but is paid in exchange of premium deposited by him.
Insured pays premium to insurer for guarantee of compensation in happening of contingency.
Also, insured cannot make profit out of insurance policy and is meant for recovering him
from losses only. He is paid compensation only when he incurs losses due to contingency.
That is why it is not a gambling.

Functions of Insurance

Basic Functions of Insurance

It is important to understand that an insurance policy has both a financial and an emotional
aspect for the policyholder. There are certain functions that an insurance company must
promise to take care of while they are finalising the contract with the insured party. We will
attempt to explain those functions below:

 To provide safety and security to the insured – One of the prime reasons for
entering into an insurance contract is to seek financial security in the event of a loss
from an unexpected occurrence. Insurance offers support to the policyholder and
helps to reduce the uncertainties in the business or in human lives. With the help of a
policy, the insured party is protected against future hazards, vulnerabilities and
accidents. Although no insurer in the world can prevent the dangerous event from
occurring, they can certainly help by providing some sort of financial protection to
compensate the insured party.
 Protection for your loved ones – Medical insurance can help you and your family
get the right sort of treatment and cover hospitalisation expenses. It helps to take care
of their health in case of an accident, illness or any other unfortunate event. The well
being of your family comes before anything, and insurance helps take care of that in
the best possible manner.
 Collective Risks – Another function of an insurance contract is that it helps a number
of individuals get an insurance policy to safeguard themselves from the losses that
may occur due to an unfortunate event. This strategy works on the principle that not
all of the policyholders for a particular risk will face it at the same time. For example,
if a total of fifty thousand people are insured against damage to their cars due to
accidents, the most likely scenario is that only a few of them would have accidents in
a single year. So the amount that they can claim from the insurance company for the
financial losses due to the accidents would be adequately covered by the insurance
premiums from all fifty thousand policyholders.
 Risk Assessment – Insurance organisations play an important role in determining the
actual amount of risk from the occurrence of a particular event by assessing the
situation. They analyse all the aspects of a risk carefully to make an informed
decision. It helps them to arrive at the final insurance amount as well as fix the
premium to be paid by the insured.
 Certainty – One of the main benefits of taking a policy for the insured is that they
can feel secure about meeting the future losses after taking coverage for a particular
risk. It can be very reassuring for the insured party and can also help them to proceed
with their daily activities in a much more assured manner without fear or hesitation.
 It helps to forestall losses – An insurance contract can help the insured to mitigate
their losses by providing some sort of security in case of an unforeseen event. It helps
businesses have a contingency plan in case things do not go as planned. Insurance is a
very important tool for organisations as it allows them to cover their bases while
operating in a very risky environment where the losses can be huge if they do not play
their cards right. It also allows them to be able to cover these huge risks in their
businesses by paying a relatively small amount as the premium.
 Fulfil the legal requirements – In some countries, any business is required to have
certain insurance covers in order to engage in any economic activity. So the insurance
company can help organisations fulfil these requirements.
 It allows the development of big businesses – Any large-sized organisation is
exposed to a greater amount of risk. If the chances of loss are relatively higher, it may
prevent the management in those organisations from taking calculated risks, which
has the potential of bringing more profits. Insurance helps to mitigate that risk in a
way and encourage businesses to take bold decisions. Insurance takes away some of
the financial pressures and allows businesses to flourish in the long run.
 It can help in boosting the economy – When the businesses have sufficient
insurance cover, they can increase their scope of economic activity that will bring
 commensurate rewards. This can provide an impetus to the overall economy of a
country in the long run.

Conclusion
There are several functions of insurance in the everyday life of both an individual as well as a
business. It provides a safety net against the uncertainties of life and helps to minimise the
loss for the insured, and give them some sort of comfort in the face of a loss or tragedy. It is
important for us to look at insurance as a necessity in our life that can help protect us both
financially and emotionally in the long run.

Types of Insurance
Insurance policies provide protection against the various types of uncertainties that can occur
in the life of an individual. Having health insurance can help you cover up for the expenses
paid for any diseases, while an accident insurance can help you in getting cover for any kind
of accidents that may occur.
The types of Insurance that will be discussed are:

1. Life Insurance

2. General Insurance (which includes fire insurance, health insurance and marine insurance)

Let us discuss these types in detail.

1. Life Insurance:
Life insurance is a type of insurance policy in which the insurance company undertakes the
task of insuring the life of the policyholder for a premium that is paid on a
daily/monthly/quarterly/yearly basis.

Life Insurance policy is regarded as a protection against the uncertainties of life. It may be
defined as a contract between the insurer and insured in which the insurer agrees to pay the
insured a sum of money in the case of cessation of life of the individual (insured) or after the
end of the policy term.

For availing life insurance policy the person needs to provide some details like age, medical
history and any type of smoking or drinking habits.

As there are many requirements of persons for availing a life insurance, the requirements can
be needs of family, education, investment for old age, etc.

Some of the types of life insurance policies that are prevalent in the market are:
a. Whole life policy: As the name suggests, in this kind of policy the amount that is insured
will only be paid out to the person who is nominated and it is only payable on the death of the
insured.

Some insurance policies have the requirement that premium should be paid for the whole life
while others may be restricted to payment for 20 or 30 years.

b. Endowment life insurance policy: In this type of policy the insurer undertakes to pay a
fixed sum to the insured once the required number of years are completed or there is death of
the insured.

c. Joint life policy: It is that type of policy where the life insurance is availed by two persons,
the premium for such a policy is paid either jointly or by each individual in the form of
installments or a lump sum amount.

In the case of such a policy the assured sum is provided to both or any one of the survivors
upon the death of any policyholder. These types of policy are taken mostly by husband and
wife or between two partners in a business firm.

d. Annuity policy: Under this policy, the sum assured or the policy money is paid to the
insured on a monthly/quarterly/half-yearly or annual payments. The payments are made only
after the insured attains a particular age as dictated by the policy document.

e. Children’s Endowment policy: Children’s endowment policy is taken by any individual

who wants to make sure to meet the expenses necessary for children’s education or for their
marriage. Under this policy, the insurer will be paying a certain sum of money to the children
who have attained a certain age as mentioned in the policy agreement.

2. General Insurance:
General Insurance is related to all other aspects of human life apart from the life aspect and it
includes health insurance, motor insurance, fire insurance, marine insurance and other types
of insurance such as cattle insurance, sport insurance, crop insurance, etc.

We will be discussing the various types of general insurances in the following lines.

a. Fire Insurance: Fire insurance is a type of general insurance policy where the insurer
helps in paying off for any damage that is caused to the insured by an accidental fire till the
specified period of time, as mentioned in the insurance policy.

Generally, fire insurance policy is valid for a period of one year and it can be renewed each
year by paying a premium, which can be a lump sum or in installments.

The claim for a fire loss must satisfy the following conditions:

i. It should be an actual loss

ii. The fire must be accidental and not done intentionally

b. Marine Insurance: Marine insurance is a contract between the insured and the insurer. In
marine insurance, the protection is provided against the perils of the sea. The instances of
dangers in sea can be collision of ship with rocks present in sea, attacking of the ship by
pirates, fire in ship.

Marine insurance covers three different types of insurance which are ship hull, cargo and
freight insurance.

Ship or hull insurance: As the ship is exposed to many dangers at the sea, the insurance
covers for losses caused by damage to the ship.

Cargo Insurance: The ship carrying cargo is subjected to many risks which can be theft of
cargo, lost goods at port or during the voyage. Therefore, insuring the cargo is essential to
cover for such losses.

Freight Insurance: In the event of cargo not reaching the destination due to any kind of loss
or damage during transit, the shipping company does not get paid for the freight charges.
Freight insurance helps in reimbursing the loss of freight caused due to such events.

Marine insurance is a contract of indemnity where the insured can recover the cost of actual
loss from the insurer in event of any loss occurring to the insured item.

c. Health Insurance: Health insurance is an effective safeguard for protection against rising
healthcare costs. Health insurance is a contract that is made between an insurer and an
individual or a group where the insurer agrees to provide health insurance against certain
types of illnesses to the insured individual or individuals.

The premium can be paid in installments or as a lump sum amount and health insurance
policy is renewed every year by paying the premium.

The health insurance claims can be done either directly in cashless or reimbursement availed
after treatment is done. Health insurance is available in the form of Mediclaim policy in
India.

d. Motor vehicle insurance: Motor vehicle insurance is a popular option for the owners of
motor vehicles. Here the owners’ liability to compensate individuals killed by negligence of
motorists is borne by the insurance company.

e. Cattle Insurance: In case of cattle insurance, the owner of the cattle receives an amount in
the event of death of the cattle due to accident, disease or during pregnancy.

f. Crop Insurance: Crop insurance is a contract for providing financial support to the
farmers in the event of crop failure due to drought or flood.
g. Burglary Insurance: Burglary insurance comes under the insurance of property. Here the
insured is compensated in the event of a burglary for the loss of goods, damage occurred to
household goods and personal effects due to burglary, larceny or theft.

Evolution of Insurance

Evolution of insurance in India

In India, insurance has a deep-rooted history. It finds mention in the writings of Manu
(Manusmrithi), Yagnavalkya (Dharmasastra) and Kautilya (Arthasastra).

The writings talk in terms of pooling of resources that could be re-distributed in times of
calamities such as fire, floods, epidemics and famine. This was probably a pre-cursor to
modern day insurance. Ancient Indian history has preserved the earliest traces of insurance in
the form of marine trade loans and carriers’ contracts. Insurance in India has evolved over
time heavily drawing from other countries, England in particular.

The advent of life insurance business in India

1818
Advent of life insurance business in India
1818 saw the advent of life insurance business in India with the establishment of the
Oriental Life Insurance Company in Calcutta. This Company however failed in 1834. In
1829, the Madras Equitable had begun transacting life insurance business in the Madras
Presidency. 1870 saw the enactment of the British Insurance Act and in the last three decades
of the nineteenth century, the Bombay Mutual (1871), Oriental (1874) and Empire of India
(1897) were started in the Bombay Residency. This era, however, was dominated by foreign
insurance offices which did good business in India, namely Albert Life Assurance, Royal
Insurance, Liverpool and London Globe Insurance and the Indian offices were up for hard
competition from the foreign companies..

1914
Government of India started publishing returns
In 1914, the Government of India started publishing returns of Insurance Companies in India.
The Indian Life Assurance Companies Act, 1912 was the first statutory measure to regulate
life business. In 1928, the Indian Insurance Companies Act was enacted to enable the
Government to collect statistical information about both life and non-life business transacted
in India by Indian and foreign insurers including provident insurance societies. In 1938, with
a view to protecting the interest of the Insurance public, the earlier legislation was
consolidated and amended by the Insurance Act, 1938 with comprehensive provisions for
effective control over the activities of insurers.
1950
The Insurance Amendment Act of 1950 abolished Principal Agencies
The Insurance Amendment Act of 1950 abolished Principal Agencies. However, there were a
large number of insurance companies and the level of competition was high. There were also
allegations of unfair trade practices. The Government of India, therefore, decided to
nationalize insurance business..

1956
Life Insurance Corporation came into existance
An Ordinance was issued on 19th January, 1956 nationalising the Life Insurance sector and
Life Insurance Corporation came into existence in the same year. The LIC absorbed 154
Indian, 16 non-Indian insurers as also 75 provident societies—245 Indian and foreign
insurers in all. The LIC had monopoly till the late 90s when the Insurance sector was
reopened to the private sector.

The history of general insurance

The history of general insurance dates back to the Industrial Revolution in the west and the
consequent growth of sea-faring trade and commerce in the 17th century. It came to India as
a legacy of British occupation.

1850
The British establish the Triton Insurance Company Ltd
General Insurance in India has its roots in the establishment of Triton Insurance Company
Ltd., in the year 1850 in Calcutta by the British.

1907
The Indian Mercantile Insurance Ltd, was set up
In 1907, the Indian Mercantile Insurance Ltd, was set up. This was the first company to
transact all classes of general insurance business.

1957
General Insurance Council is formed
1957 saw the formation of the General Insurance Council, a wing of the Insurance
Association of India. The General Insurance Council framed a code of conduct for ensuring
fair conduct and sound business practices.

1968
Insurance Act was amended
In 1968, the Insurance Act was amended to regulate investments and set minimum solvency
margins. The Tariff Advisory Committee was also set up then.
1973
General insurance business was nationalized
In 1972 with the passing of the General Insurance Business (Nationalisation) Act, general
insurance business was nationalized with effect from 1st January, 1973. 107 insurers were
amalgamated and grouped into four companies, namely National Insurance Company Ltd.,
the New India Assurance Company Ltd., the Oriental Insurance Company Ltd and the United
India Insurance Company Ltd. The General Insurance Corporation of India was incorporated
as a company in 1971 and it commence business on January 1st 1973.

The process of re-opening

This millennium has seen insurance come a full circle in a journey extending to nearly 200
years. The process of re-opening of the sector had begun in the early 1990s and the last
decade and more has seen it been opened up substantially. In 1993, the Government set up a
committee under the chairmanship of RN Malhotra, former Governor of RBI, to propose
recommendations for reforms in the insurance sector.The objective was to complement the
reforms initiated in the financial sector. The committee submitted its report in 1994 wherein ,
among other things, it recommended that the private sector be permitted to enter the
insurance industry. They stated that foreign companies be allowed to enter by floating Indian
companies, preferably a joint venture with Indian partners.

April, 2000
The IRDA was incorporated as a statutory body
Following the recommendations of the Malhotra Committee report, in 1999, the Insurance
Regulatory and Development Authority (IRDA) was constituted as an autonomous body to
regulate and develop the insurance industry. The IRDA was incorporated as a statutory body
in April, 2000. The key objectives of the IRDA include promotion of competition so as to
enhance customer satisfaction through increased consumer choice and lower premiums, while
ensuring the financial security of the insurance market.

August 2000
The IRDA opened up the market
The IRDA opened up the market in August 2000 with the invitation for application for
registrations. Foreign companies were allowed ownership of up to 26%. The Authority has
the power to frame regulations under Section 114A of the Insurance Act, 1938 and has from
2000 onwards framed various regulations ranging from registration of companies for carrying
on insurance business to protection of policyholders’ interests.
December, 2000
the subsidiaries of the General Insurance Corporation of India were restructured as independent
companies
In December, 2000, the subsidiaries of the General Insurance Corporation of India were
restructured as independent companies and at the same time GIC was converted into a
national re-insurer.

July, 2002
Parliament passed a bill de-linking the four subsidiaries from GIC in July, 2002.
Today there are 34 general insurance companies including the ECGC and Agriculture
Insurance Corporation of India and 24 life insurance companies operating in the country.
The insurance sector is a colossal one and is growing at a speedy rate of 15-20%. Together
with banking services, insurance services add about 7% to the country’s GDP. A well-
developed and evolved insurance sector is a boon for economic development as it provides
long- term funds for infrastructure development at the same time strengthening the risk taking
ability of the country.

2nd answer
Evolution of the Indian Insurance Industry
The concept of pooling resources is as old as the hills for Indians. The writings of
Dharmashastra, Manusmrithi and Arthashastra speak about importance of pooling resources
to face calamities like floods, fire, epidemics and famine. The modern day Insurance is
conceived from this mythological archetype.

The insurance industry is the backbone of country’s Risk Management. The beginning of the
Indian insurance industry dates back to the nineteenth century. In 1818, Europeans started
Oriental Life Insurance Company in Kolkata (Calcutta) to exclusively serve their community.
Colonial masters with racial prejudice unfairly characterised the age and premium for
Indians. The Indian policy holders paid more premium than European counterparts. Indians
desperately wished for Indian insurance companies to set foot in the market. Bombay Mutual
Life Assurance Society started in 1870 was the first Indian insurance company to cover the
lives of the Indians at normal rates. Triton Insurance Company Ltd in the year 1850 is the
first general insurance company. Gradually insurance business fledged into a huge sector
boosting the economy of India.
Only during the early years of twentieth century new companies started mushrooming in
India. In order to regulate these insurance companies, Life Insurance Companies Act and
Provident Fund Act were passed in 1912. Evolution of insurance industry has undergone
three phases, Pre-Nationalisation, Nationalisation and Privatisation. The Insurance industry
was nationalised only after passing Life Insurance Corporation Act of 1956. There were more
than two hundred insurance companies of both Indian and European origin.

Even after the nationalisation, government Insurance companies were not making profit.
Privatisation was a preferable solution for effective distribution and implementation of
marketing strategies. With privatisation insurance industry almost changed overnight.
Competition forced providers to advertise their products effectively. Once the gates were
thrown open to the private players insurance industry improved remarkably. Along with
safeguarding lives and property, insurance companies also offered enormous job
opportunities. The privatization helped to increase efficiency of insurance business. Many
new private companies came up with attractive products. Some of the major private players
in the Indian market are ICICI Prudential, Bajaj Allainz Life Insurance, Tata AIG life, Kotak
Life Insurance, HDFC Standard Life, Reliance Life, ICICI Lombard etc.
This millennium marked drastic changes in Insurance administration with the introduction of
Computers. The internet has enabled the insurance business to become more accessible and
user- friendly. Now you can buy the policy of your choice sitting at home. The greatest
benefit buying online is you can compare life insurance policies offered by different
companies in a single website. E India Insurance is a combination of internet and insurance
revolution in India. Juxtaposing modern day with colonial era, we notice rapid growth
prospects of the insurance industry. According to Insurance Regulatory and Development
Authority ( IRDA ), Indian insurance industry registered a impressive growth rate of 120% in
the year 2008. Economic experts anticipate that Indian domestic insurance would touch US $
60.5 Billion by 2010.

Life Insurance

What is life insurance?Life insurance is a policy which covers the risk of premature
death. If, during the term of the policy, the life insured dies, the policy promises to pay a
death benefit. Life insurance policies are legal contracts where, against the coverage
offered by the insurance company, you are supposed to pay a premium for availing the
coverage. Moreover, besides premature death, many life insurance plans also cover
survival to the end of the policy tenure wherein a maturity benefit is paid.

Top 5 features of life insurance plans

Some of the salient features of life insurance policies are as follows –

1. The individual whose life is covered under the policy is called the life insured or life
assured
2. The individual who pays the premium for the policy is called the policyholder
3. The policyholder and the life insured can be same or different. When you buy a life
insurance policy on your life, you are the policyholder and life insured. However,
when you buy a policy on the life of your spouse or dependent child, you would be
the policyholder but the life insured would be the spouse of the dependent child
 4. Every life insurance policy has a specified duration and coverage level which you can
choose
5. There are different types of life insurance plans and each plan has a different benefit
structure

Importance of life insurance plans:

Here are the reasons why life insurance plans are important –

 Life insurance policies provide financial security. They promise to give your family
financial assistance in case of your premature death
 There are different types of life insurance plans and each plan helps you in fulfilling
your life’s financial goals
 By investing in life insurance policies you can buy peace of mind for yourself as far
are financial stability is concerned
 Life insurance policies also give you tax benefits and help in lowering your tax
liabilityGiven these benefits of life insurance plans, you should invest in a suitable
policy.

Definition of a Contract of Life Insurance

Life Insurance Contract

Definition u/s Section 2(11) in the Insurance Act, 1938

“Life Insurance Business” means the business of effecting contracts of insurance on human
life, including any contract whereby the payment is assured on death (except death by
accident only) and the happening of any contingency dependent on human life, and any
contract which is subject to payment of premiums for a term dependent on human life and
shall be deemed to include –

(a) the granting of disability and double or triple indemnity accident benefits, if so
provided in the contract of insurance;
(b) the granting of annuities upon human life; and
(c) the granting of superannuation allowances and annuities payable out of any fund
applicable solely to the relief and maintenance of persons engaged or who have
been engaged in any particular profession, trade or employment or of the
dependents of such persons.
(d) There is no formal definition of ‘ life insurance, ‘ but it may be defined as ‘ a
contract in which the insurer, taking into account a certain premium, offers in
return, either in a lump sum or in regular payments, to pay to the insured, or to the
person for whose benefit the policy is made, a given sum of money on the
occurrence of a particular event dependent on the term of the policy.
 Insurable Interest

Introduction
Due to the incidence and risk of expanded risks previously unknown to life, trade, and
commerce, the necessity for insurance coverage is increasing today. Insurance is designed to
protect a person against unforeseeable events that may be harmful to him. It assures him that
he will not suffer any financial loss as a result of the occurrence of any unanticipated
calamity affecting his life or possessions.

Definition of insurable interest

The term “insurable interest” refers to a sort of investment that protects against financial loss.
When the damage or loss of an item, event, or action will result in financial loss or other
problem, a person or entity has an insurable interest in it. A person or entity with an insurable
interest would purchase an insurance policy to cover the person, thing, or event in the issue.
If something occurs to the asset, such as it being destroyed or lost, the insurance coverage
would reduce the risk of losses.

Working principle of insurable interest

In this context, insurable interest has nothing to do with earning interest on a bank account or
a fixed-income investment. Consider if you would lose money if someone or something in
your life died, or whether you would lose money if a piece of property was destroyed. If you
do, you may have an insurable interest in that person’s, group’s, or thing’s survival. And life
and/or disability insurance, as well as property insurance, can safeguard that interest.

Difference between Life Insurance and other forms of Insurance

Life Insurance Vs. General Insurance

While both categories have various types of insurance plans, the below table will simplify the
key differences –
 Life Insurance General Insurance

Life insurance covers an individual’s life and General insurance covers non-life assets, such
Cover fixed health benefits like critical illnesses e.g. as houses, vehicles, health, events, travel, and
Cancer, heart ailments etc. more.

In case the insured dies during the policy

Compensation is paid only if there is loss or
term, the nominees receive the sum assured.
Compensation damage to the house or car, during travel, or in
Some plans pay this to the policyholder if he
case of hospitalisation for medical emergencies.
or she outlives the policy maturity.

The premium charged depends on many factors

You pay a fixed premium depending on the
of the asset insured. For e.g., medical insurance
Premium coverage amount and this does not change
premium will depend on medical history, habits,
during the premium payment period.
profession, and other lifestyle parameters.

Premium This can be paid annually, half-yearly, The premium has to be usually paid as a lump
Payment Term quarterly, monthly or as a lump sum. sum.

These are typically annual policies and can be

Life insurance policies are long term policies
renewed if required. However, they must be
Tenure which can continue for up to 99 years of age,
renewed within the stipulated time to avoid
depending on the plan.
lapsation.

The sum assured is paid out to the
Repayment
policyholder’s nominees, provided all terms
Amount
and conditions have been complied with.
In general insurance, the payout is called sum
insured. This amount is paid out if the insured
asset is lost or damaged.

The beneficiary can be anyone the

policyholder nominates to receive the
Beneficiary benefits in case of their death. For post The policyholder is mostly the beneficiary
maturity, the beneficiary can be anyone
including the policyholder.
 Presumption of insurable interest

The “presumption of insurable interest” is a legal principle in insurance law. It assumes that a
person or entity has a legitimate interest in the preservation of the life, health, or property that
is being insured. This interest is typically financial, meaning the insured would suffer a
financial loss if a peril were to occur.

In the context of life insurance, every person is presumed to have an insurable interest in their
own life. This means that they can take out a policy on their own life and name a beneficiary,
who will receive the policy’s proceeds upon the insured’s death. The law assumes that
everyone has an insurable interest in their own life because the death of a person can cause
financial hardship for their dependents.

Similarly, in property insurance, it is presumed that the owner of a property has an insurable
interest in that property. This is because the owner would suffer a financial loss if the
property were damaged or destroyed.

The presumption of insurable interest is important because it prevents people from taking out
insurance policies on lives or properties in which they have no legitimate interest. This helps
to prevent moral hazards, such as someone taking out a policy on another person’s life with
the intention of causing harm to that person to collect the insurance money.

In your legal studies, understanding the concept of insurable interest and its presumption is
crucial, especially when dealing with insurance law cases. It’s a fundamental principle that
ensures insurance serves its intended purpose - providing financial protection against
unforeseen events.

Procedures For Effecting Life Insurance Policy

A life insurance is a legal contract between two parties. Therefore, the parties who wishes to
successfully enter into the contract has to take a number of steps. These steps comprise the
procedures for effecting life insurance policy.

The following are the important steps that are taken to effect the life insurance policy.

1. Proposal

A life insurance policy has to be proposed by ab intending policyholder. Therefore, he has to

acquire printed proposal forms, which are available free of cost either with the insurance
company or its agents. The proposer is required to dully fill up the form and submit it to the
insurer with required enclosures. While filing up the form, he must give accurate information
on all the material references.
2. Personal health statement and medical examination report

One of the sections of the proposal form is designated as personal health statement and
medical examination of the prospective policy holder. Under this section, the proposer has to
record his personal medical history inclusive of bio-data. Usually, this section covers the
following aspects:

Bio-data
* Physical measurement and identification marks such as height, weight and special
identification marks.
* Smoking, drinking and drug habits, if any
* The disease that the proposer had in past, the treatments undergone and the profile of the
doctor attended.

3. Agent's confidential report

Since the insurer is not in direct touch with the proposer, the agent's report is very important
to it to decide whether or not to accept the proposed policy. The agents are usually required
by the insurer to supply information about socio-economic status of the proposers together
with their perception of the risk involved in the life of the assured.
1. Proof of age

The age certificate is an important document in life insurance contract, because it is on basis
that the insurance company estimates probable risk and ascertains the amount of premium to
be charged to the proposer.

5. Acceptance of proposal

The proposal form and the accompanying reports are thoroughly scrutinized by the insurance
company to take the decision on the proposal. If the proposal is good and the medical report
and agent's confidential report are favorable, then only the insurance company accepts the
proposal

6. Payment of premium

The payment of the first installment of premium is very important in the life insurance,
because it is from this date that the risk of loss of life is insured. Upon the receipt of the first
installment of premium, a receipt is sent to the policyholder which serves as the
acknowledgement of contract between him and the insurance company.
7. Issue of insurance policy

In due time, a formal document called 'life insurance policy' is prepared and sent to the
policyholder properly sealed, signed and stamped. This contract of life insurance describes all
the particulars of life insurance and the terms and conditions of life insurance contract.

Kinds of Life insurance policies

Different types of life insurance policies

As stated earlier, life insurance plans come in different variants. Let’s understand these
variants and their respective features-

Term Insurance

Term insurance is the most basic type of life insurance policy. The policy promises death
benefit during the term of the plan. On maturity, usually, nothing is paid. Term plans are the
cheapest form of life insurance which gives you unmatched financial protection.

Salient features of term insurance

 Term plans allow high coverage levels at a low cost

 Coverage can be taken for very long durations going up to 30 or 35 years or till 85
years of age. Different plans have different options available

There are different types of term plans which are as follows:

1. Increasing term plans where the sum assured increases every year
2. Decreasing term plans where the sum assured reduces every year
3. Level term plans where the sum assured does not change
4. TROP or Term Plan with Return of premium option where the premiums paid are
returned if the plan matures

Whole Life Insurance

Whole life plans, as the name suggests, run for your whole life and allow coverage till you
reach 99 or 100 years. These plans are like term insurance plans but with indefinite coverage
duration.
Salient features of whole life insurance plans

1. Coverage is allowed till 99 or 100 years of age

2. Different types of whole life plans are available in the market. You can buy
endowment oriented plans, money back whole life plans, pure protection plans or
even unit linked plans
3. Premiums under whole life plans are payable for a limited period
4. Under endowment oriented, money back or unit linked plans, there is also a maturity
benefit if you survive till 99 or 100 years of age

Endowment Assurance

Endowment plans are traditional savings-oriented life insurance plans. These plans provide
coverage against premature death. Moreover, on maturity, a guaranteed maturity benefit is
also promised. Endowment plans, therefore, promise insurance as well as savings.

Salient features of endowment assurance plans

1. Endowment assurance plans are a combination of insurance as well as investment

options
2. Coverage duration can range from 10 years to up to 30 years
3. The plan usually offers guaranteed benefits on death or maturity at 99 years of age
4. The plan can be a participating or a non-participating plan.

 Participating plans earn bonus

 Non-participating plans do not earn bonus

5. Guaranteed additions or loyalty additions are also promised under many endowment
assurance plans

Money Back Plan

Money back plans are also called anticipated endowment plans because they are like
endowment plans but with anticipated benefits. Under these plans, the sum assured is paid in
instalments at specified durations over the policy tenure. This allows liquidity while at the
same time providing life insurance notes coverage.

Salient features of money back plans

1. The money back benefits are called survival benefits

2. Money back plans are offered as participating plans where bonuses are added
3. In case of death of the insured, the entire amount of sum assured is paid irrespective
of the survival benefits already paid earlier
 4. The tenure of a money-back plan often ranges from 12 or 15 years till 20 or 25 years.

Unit Linked Insurance Plans

Unit linked insurance plans are unique life insurance plans which provide the double benefit
of insurance as well as investment returns. Premiums paid for these plans are invested in
market linked funds. This fund then grows as per the performance of the market. If the
insured dies during the policy tenure, a death benefit is paid. On maturity, the fund value is
paid which is equal to the premiums invested along with the returns that they earned over the
term of the policy.

Salient features of unit linked plans

1. There are different types of investment funds suitable for different risk appetites
2. You can choose the premium that you want to pay, the investment fund and the
duration of the plan
3. Partial withdrawals are allowed after the completion of 5 policy years wherein you
can withdraw from the fund
4. Switching is allowed for changing the selected investment fund
5. Many unit linked plans also allow additional premiums through top-ups
6. Higher of the sum assured or the fund value is paid on death. On maturity, however,
the fund value is paid

Child Plan

Child insurance plans are life insurance plans which are created to secure your child’s future.
Under these plans, there is an inbuilt premium waiver rider. This rider waives the premiums
in case of death of the parent who is also the policyholder. Though the premiums are waived,
the policy continues and pays a benefit after the end of the term when the child needs it for
higher education or marriage. Child insurance plans, therefore, ensure a corpus for the child’s
future whether the parent is alive or not.

Salient features of child insurance plans

1. Child plans can be traditional endowment or money back plans or unit linked plans
2. Only parents of minor children can buy the policy
3. The life insured can be parents or the minor child. The policyholder, however, would
always be the parent
4. When the child attains 18 years, he/she becomes the policyholder. The policy, then,
vests in the child’s name
5. If the parent is the life insured, in case of death during the term, a death benefit is
immediately paid. The plan, however, continues to run and the insurance company
pays the premiums. Thereafter, on maturity, a maturity benefit is paid again
Health Plan

Life insurance companies also offer health insurance policies. These policies either cover
specific illnesses or a list of critical illnesses. If the insured suffers from the illnesses covered
by the plan, a lump sum benefit is paid as per the policy’s benefit structure.

Salient features of health plans

1. The plans are offered for a period of 5 years to 30 years

2. The plans pay a lump sum benefit irrespective of the medical costs incurred
3. Heart related illnesses, cancer and other critical illnesses are some of the commonly
covered illnesses under health plans

Annuity

Annuity plans or pension plans are retirement oriented life insurance plans. Under these plans
you can either create a retirement corpus or avail lifelong incomes from an already
accumulated corpus. Pension plans help you plan for your financial needs post retirement.

Salient features of pension plans

2. There are two types of pension plans – deferred annuity plans and immediate annuity
plans
3. Under deferred annuity plans you can choose a policy tenure and pay premiums to
build up a retirement corpus
4. Under immediate annuity plans annuity payments commence immediately after you
buy the plan

Under deferred annuity plans, 1/3rd of the accumulated corpus can be withdrawn in cash
through commutation. The remaining would then be used to avail annuities

Assignment of Life Policies

What is assignment in life insurance?

A life insurance policy can be assigned when rights of one person are transferred to another.
The rights to your insurance policy can be transferred to someone else for various reasons.
The process is known as assignment.

An “assignor” (policyholder) is the person who assigns the insurance policy. An “assignee” is
the person to whom the policy rights have been transferred, i.e. the person to whom the
policy has been assigned.
In the event rights are transferred from an Assignor to an Assignee, the rights of the
policyholder are canceled, and the Assignee becomes the owner of the insurance policy.

People often assign their life insurance policies to banks. A bank becomes the policy owner
in this case, while the original policyholder continues to be the life assured whose death may
be claimed by either the bank or the policy owner.

Types of Assignment
There are two ways to assign an insurance policy. They are as follows:

1. Absolute Assignment
During this process, the rights of the assignor (policyholder) will be completely transferred to
the assignee (person to whom the policy rights have been transferred). It is not subject to any
conditions.

As an example, Mr. Rajiv Tripathi owns a Rs 1 Crore life insurance policy. Mr. Tripathi
wants to gift his wife this policy. Specifically, he wants to make “absolute assignment” of the
policy in his wife's name, so that the death benefit (or maturity proceeds) can be paid directly
to her. After the absolute assignment has been made, Mrs. Tripathi will own this policy, and
she will be able to transfer it to someone else again.

2. Conditional Assignment
As part of this type of assignment, certain conditions must be met before the transfer of rights
occurs from the Assignor to the Assignee. The Policy will only be transferred to the Assignee
if all conditions are met.

For instance, a term insurance policy of Rs 50 Lakh is owned by Mr. Dinesh Pujari. Mr.
Pujari is applying for a home loan of Rs 50 Lakh. For the loan, the banker asked him to
assign the term policy in their name. To acquire a home loan, Mr. Pujari can assign the
insurance policy to the home loan company. In the event of Mr. Pujari’s death (during the
loan tenure), the bank can collect the death benefit and get their money back from the
insurance company.

Mr. Pujari can get back his term insurance policy if he repays the entire amount of his home
loan. As soon as the loan is repaid, the policy will be transferred to Mr. Pujari.

In the event that the insurer receives a death benefit that exceeds the outstanding loan
balance, the bank will be paid from the difference between the death benefit and the loan and
the balance will be paid directly to the nominee. In the above example, the remaining amount
(if any) will be paid to Mr. Pujari’s beneficiaries (legal heirs/nominee).

Key Points to know Note About Assignment

In regards to the assignment, the following points should be noted:
  A policy assignment transfers/changes only the ownership, not the risk associated
with it. The person assured thus becomes the insured.
 The assignment may lead to cancellation of the nomination in the policy only when it
is done in favour of the insurance company due to a policy loan.
 Assignment for all insurance plans except for the pension plan and the Married
Women's Property Act (MWP), can be done.
 A policy contract endorsement is required to effect the assignment.

Nomination by the Policy Holder

What is Nomination?
Nomination is part of the process by which the Policyholder can nominate anyone to whom
the policyholder wants the financial benefits to accrue, in case of his/her death during policy
tenure. So in case of an eventuality, the insurance company pays the policy proceeds to the
appointed person – called Nominee.
Mostly, we appoint spouse, children or parents as the nominee. In case a nominee is a minor
then an appointee is designated who will remain a care taker of money till majority age of
minor.
There has always been confusion on rights of nominee. Nominee is considered to be a trustee
of money received for the beneficiaries of policy. This means that nominee and beneficiaries
can be different, For example. Ashok nominated his brother Arun as Nominee prior to Ashok
marriage. Ashok did not change nomination in policy and died. Insurance company
discharged responsibility by paying claim amount to Arun. However, Ashok wife challenged
and all claim amount was passed to wife of Ashok. These are common problem in
nomination and legal heirs. However, this problem has been resolved now with the
introduction of concept pf Beneficiary Nominee. This change was brought in 2015 and
Insurance Samadhan recommends all Policy Holders to change nominee to beneficiary
nominee as per provisions of 2015.

Section 39 - Nomination by policyholder

Nomination of a life insurance Policy is as below in accordance with Section 39 of the
Insurance Act, 1938 as amended by Insurance Laws (Amendment) Ordinance dtd
26.12.2014. The extant provisions in this regard are as follows::
 The policyholder of a life insurance on his own life may nominate a person or persons
to whom money secured by the policy shall be paid in the event of his death.
 Where the nominee is a minor, the policyholder may appoint any person to receive the
money secured by the policy in the event of policyholder's death during the minority
of the nominee. The manner of appointment to be laid down by the insurer.
 Nomination can be made at any time before the maturity of the policy.
  Nomination may be incorporated in the text of the policy itself or may be endorsed on
the policy communicated to the insurer and can be registered by the insurer in the
records relating to the policy.
 Nomination can be cancelled or changed at any time before policy matures, by an
endorsement or a further endorsement or a will as the case may be.
 A notice in writing of Change or Cancellation of nomination must be delivered to the
insurer for the insurer to be liable to such nominee. Otherwise, insurer will not be
liable if a bonafide payment is made to the person named in the text of the policy or in
the registered records of the insurer.
 Fee to be paid to the insurer for registering change or cancellation of a nomination can
be specified by the Authority through Regulations.
 On receipt of notice with fee, the insurer should grant a written acknowledgement to
the policyholder of having registered a nomination or cancellation or change thereof.
 A transfer or assignment made in accordance with Section 38 shall automatically
cancel the nomination except in case of assignment to the insurer or other transferee
or assignee for purpose of loan or against security or its reassignment after repayment.
In such case, the nomination will not get cancelled to the extent of insurer's or
transferee's or assignee's interest in the policy. The nomination will get revived on
repayment of the loan.
 The right of any creditor to be paid out of the proceeds of any policy of life insurance
shall not be affected by the nomination.
 In case of nomination by policyholder whose life is insured, if the nominees die
before the policyholder, the proceeds are payable to policyholder or his heirs or legal
representatives or holder of succession certificate.
 In case nominee(s) survive the person whose life is insured, the amount secured by
the policy shall be paid to such survivor(s).
 Where the policyholder whose life is insured nominates his
 parents or
 spouse or
 children or
 spouse and children
 or any of them
the nominees are beneficially entitled to the amount payable by the insurer to the
policyholder unless it is proved that policyholder could not have conferred such beneficial
title on the nominee having regard to the nature of his title.
 If nominee(s) die after the policyholder but before his share of the amount secured
under the policy is paid, the share of the expired nominee(s) shall be payable to the
heirs or legal representative of the nominee or holder of succession certificate of such
nominee(s).
 The provisions of sub-section 7 and 8 (13 and 14 above) shall apply to all life
insurance policies maturing for payment after the commencement of Insurance Laws
(Amendment) Ordinance, 2014 (i.e 26.12.2014).
  If policyholder dies after maturity but the proceeds and benefit of the policy has not
been paid to him because of his death, his nominee(s) shall be entitled to the proceeds
and benefit of the policy.
 The provisions of Section 39 are not applicable to any life insurance policy to which
Section 6 of Married Women's Property Act, 1874 applies or has at any time applied
except where before or after Insurance Laws (Ordinance) 2014, a nomination is made
in favour of spouse or children or spouse and children whether or not on the face of
the policy it is mentioned that it is made under Section 39. Where nomination is
intended to be made to spouse or children or spouse and children under Section 6 of
MWP Act, it should be specifically mentioned on the policy. In such a case only, the
provisions of Section 39 will not apply.

Life Insurance Nominee Rules

Read all the important key points of Nomination are given below:
1. If nominee is minor then appointee is required.

2. Though form has a provision of one name only but multiple percentage
nomination can be done through endorsement in Policy Document.

3. Although non family members can be made nominee but insurance companies are
expected do due diligence and it is difficult to prove insurable interest.

4. Nominees can be changed and should be changed without delay.

5. If nomination is not done then claim is paid under succession act which is time
consuming and has cost.

6. Nomination can be superseded with assignment when all policy rights are revoked
and given to assignee.

7. Nomination can also be superseded by will where claim amount distribution can
be specified. However, will has to be submitted to Insurer before discharge of
claim.

Effect of Suicide

In insurance law, the effect of suicide on a life insurance policy can vary depending on the
terms of the policy and the time elapsed since the policy was issued12345. Here are some key
points:
 Suicide Clause: Many life insurance policies contain a suicide clause, which typically
states that the insurance company will not pay a death benefit if the insured person
dies by suicide within a certain period of time after the policy is issued3. This period is
often two years but can vary35.
  After the Exclusion Period: If the insured person dies by suicide after this exclusion
period, the death benefit is usually paid out to the beneficiaries12345.
 Reason for the Clause: The suicide clause is designed to prevent people from buying
life insurance with the intention of leaving a large sum to their beneficiaries after their
death by suicide12.
 Policy Terms: It’s important to note that the specifics can vary greatly depending on
the individual policy and the insurance company12345. Therefore, it’s crucial to read
and understand the terms of a life insurance policy before purchasing it.
Here are some additional details:
 Suicide Coverage: Suicide is usually covered after 12 months from the date of the
purchase of the policy1. In such a scenario, during the policy term (post 12 months of
issuance), the policy will pay the family (whosoever is the nominee) the death benefit
(the sum assured) in case the policyholder commits suicide1.
 Reason for Providing Suicidal Death Cover: The sole reason for providing suicidal
death cover is to help the emotionally devastated family members by paying them
back some amount (as per the clauses) out of the premium paid by the departed family
member1.
 Suicidal Death Cover Applicability: In order to control the moral hazard risk,
insurance policies have suicide exclusion. In general, the clause is such that in case
the life insured (policyholder) commits suicide within 12 months from the date of
issue of the policy or from the date of any major revivals, the claims (sum assured)
are not payable by the insurer1. Hence, the suicide exclusion is applicable in the initial
period of one year and thereafter such deaths are covered under the policy1.

Settlement of Claims

7.0 INTRODUCTION
The Insurance Policy is taken by the consumers to compensate them in the event of
happening of an unforeseen event. It is a hedge against unavoidable circumstances. In general
insurance the loss is payable only on happening of some specific event. If the insured does
not suffer any loss no claim is paid to him. The premium is charged on yearly basis and no
accumulation takes place. However the scenario is different in case of life insurance. If the
insured dies during the policy period he gets the sum assured along with the bonus accrued
under the policy if any. If the insured survives the policy period he gets the maturity amount
accrued under the policy. In this lesson we shall learn the various aspects in settlement of life
insurance claim.

7.1 OBJECTIVES
After going through this lesson you will be able to z Learn the various categories of claim z
Enlist the documents required in settlement of claim z Recall the process of claim settlement
z Remember the guidelines issued by IRDA in respect of claim settlement
 7.2 CLAIM SETTLEMENT
Payment of claim is the ultimate objective of life insurance and the policyholder has waited
for it for a quite long time and in some cases for the entire life time literally for the payment.
It is the final obligation of the insurer in terms of the insurance contract, as the policyholder
has already carried out his obligation of paying the premium regularly as per the conditions
mentioned in the schedule of the policy document. The policy document also mentions in the
schedule the event or events on the happening of which the insurer shall be paying a
predetermined amount of money (S.A.). There may be three types of claim in life insurance
policies– 1. Survival Benefit Claim 2. Maturity Benfit Claim 3. Death Benefit Claim We
shall discuss hereunder the details of each category of claims.

7.2.1 Survival Benefit :

Survival benefit is not payable under all types of plans. It is payable in endowment or money
back plans after a lapse of a fixed period say 4 or 5 years, provided firstly the policy is in
force and secondly the policyholder is alive. As the insurer sends out premium notices to the
policyholder for payment of due premium, so it sends out intimation also to the policyholder
if and when a survival benefit falls due. The letter of intimation of survival benefit carries
with it a discharge voucher mentioning the amount payable. The policyholder has merely to
return the discharge voucher duly signed along with the policy document. The policy
document is necessary for endorsement to the effect that the survival benefit which was due
has been paid. The survival benefit can take different forms under different types of policies.

7.2.2 Maturity Claim

It is a final payment under the policy as per the terms of the contract. Any insurer is under
obligation to pay the amount on the due date. Therefore the intimation of maturity claim and
discharge voucher are sent in advance with the instruction to return it immediately. If the life
assured dies after the maturity date, but before receiving the claim, there arises a typical
problem as to who is entitled to receive the money. As the policyholder was surviving till the
date of maturity, the nominee is not entitled to receive the claim. The policy under such
conditions is treated as a death claim where the policy does not have a nomination. The
insurer in such a case shall ask for a will or a succession certificate, before it can get a valid
discharge for payment of this maturity claim. In case the policy has been taken under Married
Women’s Property Act, the payment of maturity claim has to be made to the appointed
trustees, as the policyholder has relinquished his right to all the benefits under the policy. It is
for this relinquishment of right that the policy money enjoys a privileged status of being
beyond the bounds of creditors etc. If the maturity claim is demanded within one year, before
the maturity it is called a discounted maturity claim. This amount is much less than the
maturity claim.

7.2.3 Death Claim

If the life assured dies during the term of the policy, the death claim arises. If the death has
taken place within the first two years of the commencement of the policy, it is called an early
death claim and if the death has taken after 2 years, it is called a non early death claim.
 Unit-II

Fire Insurance
What is Fire Insurance?

A fire insurance could be bought as a part of property insurance or as a stand-alone policy. It

offers compensation for the costs incurred in the replacement, repair or reconstruction of a
property that was damaged due to fire. Since the estimation of loss from fire is unpredictable,
this policy is issued with fixed value compensation as an upper limit set by the property
insurance policy. The actual loss or the maximum amount agreed beforehand is paid as
compensation when you file a claim for fire insurance.

Types of Fire Insurance Plans

To avoid ambiguity for the claim amount, certain types of clauses are included in this policy.
Such types give more clarity on premium payable and claim amount payable without any
scope of a dispute. Businessmen should be clear about the type of policy they need and
whether it suits his/her business operations. Let us look at some of the types of fire insurance.

a) Valued Policy: When it is difficult to ascertain the value of the property or articles at the
time of claim, a valued policy is issued. For example, the value of paint or art or jewellery is
not constant during all the days of the year. For such cases, the estimated value is fixed in
advance by the insurance company and policyholder, at the time of taking the insurance. In
case of an unfortunate event, the predetermined value is paid, and actual loss is not assessed.
Here the principle of indemnity is not applied, but the attempt is made to compensate the
losses to the insured at a predetermined rate without entering into debates or disputes at the
time of actual loss.

b) Specific Policy: Under this policy, the maximum amount payable is fixed in advance. In
case of an unfortunate event, the amount equivalent to the actual loss or prefixed amount,
whichever is less, is paid. For example, if a fire insurance policy is taken with a specific value
of Rs. 2 lakh, then in case the loss due to fire is worth Rs.3 lakh, the amount payable is Rs. 2
lakh. However, if the loss is worth Rs. 1.5 lakh, the full amount of Rs. 1.5 lakh will be
payable.

c) Average Policy: Many a times, the applicant prefers the insured amount to be less than the
value of the property. In such cases, the insurance company imposes the “average clause” to
penalise the insured for taking up a policy less than the value of the property. For example,
the valuation of your shop and goods inside the shop is Rs. 20 lakh, but you are taking a fire
insurance of Rs. 10 lakh. In such a situation, if a fire in the shop leads to damage worth Rs.
20 lakh, the insurance company will pay you Rs. 10 lakh only, under the average policy
clause.

d) Floating Policy: If a businessman has warehouses at different locations, s/he may opt for a
floating policy. With the help of this single policy, all the goods lying in different warehouses
can be insured together. Such an arrangement eliminates the need for buying separate policies
for every warehouse. Moreover, you can opt for an average clause if you want to reduce the
premium. However, at the time of loss, the amount payable is substantially lower than actual
loss, in case of the average clause.

e) Consequential Loss Policy: The loss due to fire is not the only loss an insured person
faces after fire break. Your factory may lose important machinery and the production line
could go down for several weeks or months after the fire. The loss of production is a loss of
business or profit. Such indemnity can be claimed under consequential loss policy. The
business in which continuous production is the essence must take consequential loss policy to
make good of such losses.

f) Comprehensive Policy: It can happen that business owners want to cover their properties
against all possible mishaps like fire, burglary, theft, explosion, earthquake, lightning, labour
unrest, and similar other reasons. In such a case, the business owner should go for
comprehensive policy or all risk policy, which can take care of all possible causes of loss.

g) Replacement Policy: The loss of property due to fire raises the need to get a new property
to restart business operations.

The policy comes with two variants. In the first option, it makes good of lost property on
depreciated value bases. Alternatively, it makes good to compensate for the actual cost of the
replaced property. While taking the fire insurance, you must understand the replacement
policy clause to get appropriate claim at the time of the unfortunate event.

Coverage under Fire Insurance Policy

It covers all the losses arising out of the accidental fire, subject to terms and conditions of the
fire policy which is limited by the policy value and not by the extent of damage sustained by
the property owner. In general, the following losses are covered:

 Actual loss of goods due to fire

 Additional living expenses due to damage to personal property
 Loss to adjacent building or property due to fire in the insured building
 Compensation paid to fire fighters
 Fire triggered by electricity
 Overflowing of a water tank or pipes

Assignment of Fire Insurance Policies, (Doubt)

The assignment of Fire Insurance Policies refers to the transfer of rights under the fire
insurance contract from one party (the assignor) to another (the assignee). In this
process, the assignee becomes the owner of the policy and enjoys all rights
thereunder. This means that the assignee is entitled to the benefits and is subject to the
liabilities of the policy, just as if the contract of insurance had been made with the
assignee. The assignee is, therefore, substituted in place of the original insured. This
 is typically done through an endorsement or other written document. Please note that
the specifics of this process can vary based on jurisdiction and the terms of the
insurance contract. Always consult with a legal expert or insurance advisor for advice
related to your specific situation.

Claim Process

If you happen to encounter an eventuality because of fire, you need to make claims under fire
insurance. To avoid rejection and fasten the claim process, you should be clear of the
procedure and the documents needed.

 Immediately inform the insurance provider either online or by calling on their 24/7
toll-free number
 Also, contact the fire brigade and the police
 Insurance company will appoint a surveyor for scrutiny of the situation
 Submit the duly filled in claim form and other proofs and photographs
 If approved, the claim can be settled from 15-30 days, as the time duration is different
for the insurance companies

Exclusions in Fire Insurance Policy

Not all situations and cases are covered by fire insurance. Some situations are excluded.

 Fire caused by war, nuclear risks, riot or earthquake

 Planned or intentional fire by the enemy or public authority for whatsoever reasons
 Underground fire
 Loss because of theft during or after the fire
 Malicious or hostile, human-made causes of fire

Definition of a Contract of Fire Insurance (doubt in ans)

A contract of fire insurance is a specific type of agreement where one party, the insurer, in
return for a consideration (usually a premium), undertakes to indemnify the other party, the
insured, against financial loss. This loss may be sustained because of a certain defined
subject-matter (such as a building, vehicle, or other property) being damaged or destroyed by
fire or other defined perils up to an agreed amount1234.

Here are some additional details:

 Parties Involved: The party responsible for indemnifying the loss is called the
insurer, and the party who is to be indemnified is called the insured2.
 Consideration for the Contract: The consideration for the contract is termed 'the
premium’2.
  Defined Subject Matter: The defined subject matter is termed 'the property insured’2.
 Assured Sum: The sum set forth in the contract is called the assured sum2.
 Policy Document: The document containing the terms and conditions of the contract
is known as 'the policy’2.
 Conditions for Fire: The term “fire” must meet two conditions: (a) There must be
actual fire or ignition; and (b) The fire must be accidental2. The property must have
been harmed or burned by fire. If the property is destroyed by heat or smoke without
being ignited, it is not protected by the term “fire”1.
 Exclusions: General exclusions such as war, nuclear risks, and similar perils are
common in fire insurance policies1.
 Fire Insurance as Property Insurance: Fire insurance is a form of property
insurance that offers extra compensation for loss or damage to a building that has
been damaged or destroyed by a fire1.

Characteristics, What is 'Fire' and 'Loss or Damage by Fire' ?

(doubt)

Fire12:

 Fire is the rapid oxidation of a material in the exothermic chemical process of

combustion, releasing heat, light, and various reaction products1.
 The term “fire” must meet two requirements: (a) There must be actual fire or ignition;
and (b) The fire must be accidental1.
 The property must have been harmed or burned by fire. If the property is destroyed by
heat or smoke without being ignited, it is not protected by the term “fire”1.

Characteristics of Fire12:

 Fire can grow and spread1.

 Fire consumes oxygen1.
 Fire is sensitive to its environment1.
 Fire produces smoke as a byproduct1.
 Fire needs fuel1.
 Fire behavior can vary greatly depending on the fuel and conditions1.
 Fire can cause physical damage through burning1.

Loss or Damage by Fire12345:

 Loss or damage by fire refers to the harm or destruction caused to the insured
property due to fire1245.
 This means that loss or damage must be either by the ignition of the article or property
or premises or part thereof1245.
 In other words, the damage should be occasioned by fire1245.
  Loss or damage caused by excessive fire heat cannot be included in 'loss or damage
by fire

Fire Insurance Claim

1.5 PROCEDURE TO SETTLE THE FIRE INSURANCE CLAIM:

A) If there are any damage or loss arising due to fire then the policy holder should
immediately inform the insurance company in writing and with estimated amount of loss.
B) Survey Report: If the amount of loss is small (i.e. up to Rs. 20,000/-), the insurance
company may depute an officer to survey the loss and decide on the settlement of the loss on
the basis of the claim form and the officer’s report. However, in large losses, an independent
surveyor duly licensed by the Government is appointed to give a report on the loss.
The survey report would generally deal with the following matters:
(i) Cause of loss
(ii) Extent of loss.
(iii) Under-Insurance, if any.
(iv) Details and value of salvage, and how it has been disposed of or proposed to be disposed
of.
(v) Details of expenses (e.g. fire brigade expenses).
(vi) Compliance with policy conditions and warranties.
(vii) Details of other insurance policies on the same property, and the apportionment of the
loss and expenses among co-insurers.
C) Claim form: The policy holder will submit the claim form with the following information :
(i) Name and address of the Insured.
(ii) Date of loss, time and place from where the fire started.
(iii) Cause of fire.
(iv) Details of the property damaged such as description, etc.
(v) Value at the time of fire, value of salvage and the amount of loss.
(vi) Details of other policies on the same property giving the name of the insurer, policy
number and sum insured.
(vii) Fire Brigade report details.
(viii)F.I.R. at the nearest police station regarding third party liability, if any.

D) Settlement of claim: On the basis of the claim form and the survey report, decision is
taken about the settlement or otherwise of the loss.

Types of Fire Insurance Plans in India

Standard Fire Insurance Plan

The standard fire insurance plan, similar to the ICICI Bharat Griha Raksha Plan, is the
foundation of fire insurance coverage. It provides essential protection against damages caused
by fire, lightning, explosion, and implosion. While this plan covers a broad range of risks, it's
important to note that customization is often necessary. Additional coverage may be required
to ensure full protection, depending on the nature of the property and assets.

Fire Indemnity Plan

The fire indemnity plan, which is similar to the ICICI Bharat Laghu Udyam Suraksha Plan,
focuses on providing coverage that matches the actual financial loss suffered by the insured.
The indemnity amount is determined based on factors such as the cost of reinstatement or
repair, considering depreciation. An important concept associated with this plan is the
"average clause." This clause comes into play if the property is underinsured. In such cases,
the insured might receive a partial claim amount, emphasizing the importance of accurate
coverage.

Valued Plan

The valued plan is centred around fixed-value assets, such as historical buildings, antiques, or
artefacts. In this plan, the asset's value is predetermined, and the coverage is provided
accordingly. While this approach simplifies the claims process, it might not consider market
fluctuations or value changes over time.

Floating Plan

The Floating plan, similar to the ICICI Bharat Sookshma Udyam Suraksha Plan, is ideal for
businesses with multiple locations or assets that frequently change location. The floating plan
offers flexibility and cost-effectiveness. It allows assets to be added or removed without the
need for individual endorsements. This plan is particularly advantageous for businesses that
require dynamic coverage due to their ever-changing operational landscape.

Consequential Loss Plan

The Consequential Loss Plan, also known as business interruption insurance, similar to the
ICICI Bharat Laghu Udyam Suraksha Plan, is the consequential loss plan that covers the
indirect financial losses a business might incur due to a fire incident. This includes factors
like loss of income, additional operating expenses, and potential reputational damage. This
type of coverage is invaluable for ensuring the survival and recovery of businesses after a
fire-related setback.

Factors Influencing Fire Insurance Premiums

Several factors come into play when calculating fire insurance premiums. Location is a
critical determinant, as properties in high-risk areas are more susceptible to fire hazards.
Property type and construction materials also impact premiums, as certain materials might be
more fire-resistant than others. Additionally, fire safety measures, such as fire alarms,
sprinkler systems, and fire exits, contribute to determining the level of risk associated with
the property.

Claims Process for Fire Insurance Plans

In the unfortunate event of a fire-related incident, the claims process for fire insurance begins
with immediate notification to the insurance company. Timely communication is crucial to
initiate the assessment and verification of the damages. The claims process involves
providing relevant documentation, such as the policy details, a detailed account of the
incident, and evidence of the losses incurred. After completing the assessment, the insurance
company's adjusters then evaluate the damages and determine the claim amount, which is
disbursed to the insured.

In a world where uncertainties lurk around every corner, fire insurance emerges as a beacon
of security and resilience. The various types of fire insurance plans cater to the diverse needs
of individuals and businesses, ensuring that financial losses due to fire-related incidents are
minimized. By understanding the nuances of fire insurance and its different plans, you can
make informed decisions that protect your assets and safeguard your future. Remember, fire
insurance isn't just a safety net—it's a powerful tool that empowers you to rise from the ashes
and rebuild, no matter how formidable the challenge. Don't leave your assets vulnerable;
embrace fire insurance protection and ensure your peace of mind today. and tomorrow

Marine Insurance

What is Marine Insurance?

Marine insurance refers to a contract of indemnity. It is an assurance that the goods

dispatched from the country of origin to the land of destination are insured. Marine insurance
covers the loss/damage of ships, cargo, terminals, and includes any other means of transport
by which goods are transferred, acquired, or held between the points of origin and the final
destination.

The term originated when parties began to ship goods via sea. Despite what the name implies,
marine insurance applies to all modes of transportation of goods. For instance, when goods
are shipped by air, the insurance is known as the contract of marine cargo insurance.

Importance of Marine Insurance

Marine insurance is required in many import-export trade proceedings. Admitting the terms,
both parties are liable for the payment of goods under insurance. However, the subject matter
of marine insurance goes beyond contractual obligations, and there are several valid
arguments necessary for buying it before dispatching the export cargo.

Goods in transit need to be insured by one of the three parties:-

  The Forwarding Agent
 The Exporter
 The Importer

Marine Insurance Act 1963

The Marine Insurance Act, in India, came into existence in 1963. As per section three of the
act, any time the term ‘marine insurance’ is used, expressed or even extended for the insuring
of goods against loss or damage, the insurer will be at risk to bear the charges. The insurer
will consider all the certainty of goods in case of misfortune sustained during marine
ventures.

Principles of Marine Insurance

 Principle of Good faith - Parties demand absolute trust on the part of both; the insurer
and the guaranteed.
 Principle of Proximate Cause - The proximate cause is not adjacent in time; also, it is
inefficient. Nevertheless, it is the definitive and adequate cause of loss.
 Principle of Insurable Interest - Any object presented as a marine risk and the assured
covering the insurance of goods - both should have legal relevance. Also, a series is
devoted called 'Incoterms' to respectfully assign the insurance of goods to each party.
 Principle of Indemnity - The insurance extended to the parties will only be applicable
up to the loss. The parties can't buy insurance to gain profits. If they do, they won't get
more than the actual loss.
 Principle of Contribution - Sometimes, the risk coverage for goods has more than one
insurer. In such cases, the amount has to be fairly distributed amongst the insurers.

How Marine Insurance works?

Marine insurance best transfers the liability of the goods from the parties and intermediaries
involved to the insurance company. The legal liability of the intermediaries handling the
goods is limited to begin with. The exporter, instead of bearing the sole responsibility of the
goods, can buy an insurance policy and get maritime insurance coverage for the exported
goods against any possible loss or damage.

The carrier of the goods, be it the airline or the shipping company, may bear the cost of
damages and losses to the goods while on board. However, the compensation agreed upon is
mostly on a ‘per package’ or ‘per consignment’ basis. The coverage so provided may not be
sufficient to cover the cost of the goods shipped. Therefore, exporters prefer to ship their
products after getting it insured the same with an insurance company.

Types of Marine Insurance

 Freight Insurance
 Liability Insurance
  Hull Insurance
 Marine Cargo Insurance
Freight Insurance
In freight insurance, for example, if the goods are damaged in transit, the operator would lose
freight receivables & so the insurance will be provided on compensation for loss of freight.

Liability Insurance
Marine Liability insurance is where compensation is bought to provide any liability occurring
on account of a ship crashing or colliding.

Hull Insurance
Hull Insurance covers the hull & torso of the transportation vehicle. It covers the
transportation against damages and accidents.

Marine Cargo Insurance

Marine cargo policy refers to the insurance of goods dispatched from the country of origin to
the country of destination.

Definition of a Contract of Marine Insurance

MARINE INSURANCE CONTRACT According to Section 3 of the Marine Insurance Act
of 1963, maritime insurance is defined as an arrangement in which the insurer agrees to
indemnify the assured against marine losses, that is, losses incidental to marine adventure, in
the manner and at the extent agreed upon. The nature of marine insurance is fundamentally an
indemnity contract, which means that the insurance company is only accountable for the
actual loss or damages incurred by the insured. The insurer, on the other hand, cannot be held
accountable for each and every loss. The loss of insurable property must occur as a result of a
maritime peril, according to the Act.

Subject matter of a Contract of Marine Insurance(not full answer)

The subject matter of a Contract of Marine Insurance typically includes:

1. Ship: The vessel being used for the transportation of goods can be insured against
various risks.
2. Cargo: The goods being transported from one place to another form a significant part
of the subject matter in marine insurance. Any loss of these goods during the journey
is indemnified by the insurance company.
3. Freight: The freight or the cost involved in the transportation of goods can also be
insured.

It’s important to note that in marine insurance, the insurable interest must exist at the time of
the loss. This means that the person taking out the insurance policy must stand to suffer a
financial loss if a peril insured against occurs. For example, the shipper or exporter of the
goods, or the buyer, by virtue of their ownership of goods or acquiring an interest in the
goods respectively, can take out a marine insurance policy.

Marine insurance does not consist of any clause related to the moral responsibility of the
cargo owner or the ship. It is purely a financial contract meant to provide compensation in
case of a loss. A profit margin of 10 to 15% is generally expected in terms of marine
insurance.

Maritime Perils

WHAT ARE MARINE PERILS?

Marine perils are defined as

the perils consequent on or incidental to, the navigation of the sea, that is to say, perils of the
seas, fire, war perils (enemies), pirates, rovers, thieves, captures, seizures, restraints and
detainment of princess and peoples, jettison, barratry and other perils, either of the like kind
or which may be designed by the policy.
The above said definition discloses the various types of marine perils. They are as follows:

1. PERILS OF THE SEA

They refer to all risks, perils and dangers peculiar to the sea. They include accidents, capture
of the ship or its cargo by pirates, losses by collision, etc. A point to note here is that losses
caused by perils of the sea cannot be prevented by any reasonable care, skill and diligence on
the part of human beings.

Thus, if a ship hits a sunken rock and sinks or collides with another ship and suffers a loss, it
is a case of loss by perils of the sea.

Other examples of such loss are:

1. Loss of cargo as a result of sea water entering the ship through a hole made by rats in the
bottom of the ship.

2. Loss resulting from negligent navigation, provided it was caused by a peril of the sea.

3. Loss of cargo due to heat produced by the closing of ventilators to prevent the entry of sea
water on rough weather.

2. FIRE

Fire is one of the most common perils of the sea and the underwriter is liable for loss caused
by it. Though every type of fire is not covered by the policy, damage caused by smoke or by
the heat of fire or damage by water used to put out or prevent the spread of fire or fire
resulting from lightning, spontaneous combustion, explosion, negligence of the master or
crew etc., are covered by the policy.

If the loss is caused by the wilful misconduct of the insured or the fire takes place on account
of the inherent vice or nature of the subject matter insured, the insurer is not responsible. It is
to be remembered that certain losses on account of perils of fire not covered by the standard
form can be covered by having special clauses and paying the extra charges.

3. ENEMIES:

Enemy literally means

one who tries or wishes to harm or attack or one who has ill feeling or hatred towards
another.
It includes all damages or losses sustained owing to the hostile acts of an enemy. Enemies
include all types of ships belonging to the foe or enemy countries and to their hostile acts,
provided such acts formed part of the enemy campaign.

4. JETTISON

Jettisoning is the voluntary and intentional throwing overboard or away a part of the cargo or
part of vessel’s equipment for the purpose of lightening or relieving the ship in case of
necessity or emergency to have a safe adventure or voyage.

If the cargo or any other thing is thrown overboard accidentally or fortuitously, then it does
not constitute jettison. It should, however, be remembered that no jettison of cargo owing to
its inherent vice is covered by the policy.

For example, the jettison of fruits which have become rotten on account of delay or of hemp
shipped in an improper condition which as a result has become dangerously heated, is not
covered.

5. BARRATRY

It refers to every wrongful act willfully committed by the master or crew to the prejudice of
the owner without the connivance of the owner.

6. MEN-OF-WAR

It refers to vessels authorized and maintained by nations for the purpose of defense or attack
in the event of hostilities and the loss arising out of collision against a man-of-war is covered
in a policy.

7. PIRATES, ROVERS, THIEVES

In the olden days, when means of communications and transport were not so developed, the
perils on account of pirates (it means sea robbers but it includes passengers of the ship who
rise in revolt or those who attack the ship from the shore), rovers (wanderers and pirates on
the high seas), and thieves (robbers using force for violence and not clandestine thieves or
pilferers or pickpockets from among the passengers or crew) were very common.

The acts by those persons are committed for the pursuit of private ends by robbery or
marauders plundering indiscriminately in places beyond the jurisdiction of a state. In the
modern time, however these cases are rare.

8. RESTRAINTS

The prevention to free use of a port by the government of the country is known as restraint. It
may cause interruption and possible loss of voyages involving such ports and sacrifice of
cargo.

9. DETAINMENT

It covers losses due to detention of a vessel and its cargo by blockage or possibly quarantine
regulation or other interference by the police of a nation while a vessel is in port. It does not
cover losses which are the result merely of delay or interruption of the voyage or loss of
market or some other remote result.

10. ARREST

It means forcibly taking away of the vessel and refers to political or executive acts.

11. LETTER OF MART

It means power granted by a state government to individual citizen who undertakes to attack
an enemies merchant ship in revenge for losses where they had themselves suffered.

12. LETTER OF COUNTER MART

It refers to the power granted by the opposing nation to other persons to resist and retaliate
such attacks.

13. TAKING AT SEA

It refers to stopping and taking into port a ship for examination in the event of any suspicion
of carrying contraband goods.

14. ALL OTHER PERILS

The term by the principle of ejusdem generis is intended to include perils of a like nature. The
term does not mean all risks or even all marine risks. Smoke will be ejusdem generis with
fire; sweat arising out of heavy weather would be peril of the seas and hence ice formed from
sea water is ejusdem generis with it and damage caused by contact with it will be covered.

Fresh water is not a peril of the seas and so neither rain nor fresh water, condensation as a
proximate cause of loss are perils embraced within the standard basic policy. If condensation
is as sequel to closure of hatches forced by heavy seas, then it would become a peril of the
seas.
 Characteristics of Marine Insurance Contracts
1. Proposal and Acceptance
It is based on a general proposal and acceptance concept. Coverage of risk will start from the
date of acceptance of the proposal by the insurance company. Any loss or damage to goods
in transit occurring prior to the date of acceptance of the proposal will not be covered under
the marine insurance policy.
2. Payment of Premium

Marine insurance cover will also start from the date of payment of the premium. If the
payments are made in a cheque, the date of realization of money will be considered for
providing the risk coverage.

3. Contract of Indemnity

Marine insurance is a contract of indemnity. That means, the insurance company is liable to
compensate only till the extent of the actual loss suffered. There is no liability lies on the part
of the insurance company if there is no actual loss suffered. For example, let’s say an insured
has a marine insurance policy for Rs.25 lacs. In the event of loss, the actual loss was
estimated as Rs.15 lacs. In this case, the insured will not receive compensation of more than
Rs.15 lac even if the coverage is Rs.25 lac.

4. Insurable Interest

Marine insurance gets applicable only if the insured has an insurable interest in the subject
matter (insurable property) at the time of loss. The requirement of insurable interest to be
present only at the time of loss makes the marine insurance policy ‘freely assignable’. The
policy can be assigned freely prior to or after the occurrence of damage or loss unless the
terms and conditions of the policy restrict it.

5. Utmost Good Faith

Marine insurance policies work on the principle of utmost good faith. The owner of the goods
or property to be transported must disclose all the required information accurately to the
insurance company at the time of availing the marine insurance. Non-disclosure,
misdescription, or misrepresenting of facts and information by the insured makes the marine
insurance policy voidable at the time of claim.

6. Principle of Subrogation
Marine insurance policy works on the principle of subrogation. But the right of subrogation
arises only after the payment has been made to the insured. After settling the
marine insurance claim, the insurer holds all the right to sue the third party who is
responsible for the loss. In this case, an insurer can recover the amount of compensation paid
to the insured from the third party. The aim of the principle of subrogation is to ensure that
the insured receives the compensation only for actual loss suffered.
7. Principle of Contribution

The principle of contribution applies in the case of multiple marine insurance policies. Losses
will be paid proportionately if the insured holds multiple policies for his goods or property.
For instance, goods worth Rs.40 lac are insured with two different insurers. And there is a
loss of goods in the marine event, the total amount of loss will be compensated to the insured
proportionately by both the insurance companies.

8. Comes with Warranty

A Marine insurance features is that its policies come with a warranty which is a legal
undertaking between an insurance company and the insured. It’s basically a legal obligation
by the insured. Marine insurance policy stands cancelled or terminated as soon as there is a
breach of warranty. Warranty can be an express warranty that is expressly included in the
policy or can be an implied warranty that is not included expressly in the policy but is
assumed and understood by both the parties in the contract.

Types of Marine Insurance policies –

based on the structure of the contract

A ‘policy is a document that embodies the terms and conditions of the contract of insurance.
It essentially is a written form of agreement between the insurance company and the person
insured. It generally contains the provisions regarding the coverage area, the limitations of
insurance policies, etc. Thus the different types of policies available under marine insurance
are –

 Open policy – An open policy, also called a floating policy, provides coverage for
an indefinite number of transit journeys during the subsistence of the policy. This
is especially beneficial for the companies which are involved in high-volume
trade, as they are saved from taking an insurance policy on each transit journey. It
covers all the transit journeys of the insured until the policy is canceled or until the
last of the payment is realized, whichever is earlier.

 Voyage policy – A voyage policy works on the same lines as the marine cargo
insurance. Under this policy, the insurance company agrees to cover the losses or
damages caused to the cargo during a specific voyage. It expires when the vessel
reaches its destination, irrespective of the time it takes to reach there. Usually, it is
bought by small exporters who ship their goods by sea only on some occasions.
 Time policy – A time policy, as the name suggests, is issued for a fixed period of
time. The vessel may make any number of voyages during this period. Generally,
the insurance company issues this policy for one year, however, the period may
vary depending on the agreement between both parties.

 Mixed policy – A mixed policy is a combination or a mix of voyage and time

policies. The insurance company, while issuing this policy, agrees to cover the loss
or damage to the ship for a particular voyage till a particular period of time.

 Single vessel policy – A single vessel policy insures only a single ship of the
insured.

 Fleet policy – The person insured has an option of either insuring a single ship by
a policy, or of insuring several ships under one policy. If he chooses the latter
option, he undertakes a ‘Fleet Policy’, under which a fleet of ships is insured under
a single policy.

 Unvalued policy – Every insurance policy is either an unvalued or a valued

policy. Under an unvalued policy, the insurance company does not assign a value
to the thing insured (the vessel or the cargo), at the time of underwriting the policy.
The valuation of the property is done only after the claim of insurance has been
filed. However, for a successful claim, the true value of the property has to be
proved by the insured by way of invoices or estimates, before the valuation.

 Valued policy – In a valued policy, the insured property is given a specific value
when the policy is issued, and before any claims are made. When the claim is
made by the insured, a pre-estimated or the specified amount is given, which does
not depend on the amount of loss incurred by the insured. The depreciation of the
property also does not affect the amount of claim, under a valued policy.

 Block policy – A block policy is an all risks policy. Unless a contrary intention is
expressed by the insurer, it essentially covers all the risks to which the goods are
exposed when they are in transit, bailment, and on the premises of the third party.
There are two popular types of block policy – furrier’s block policy, and jeweler’s
block policy since fur and jewelry are two high-value commodities that are
exposed to a greater threat of theft.

 Port-risk policy – A port-risk policy covers ships that are either docked or are
undergoing repair works at the port. It is an all-risk policy that covers all the risks
unless otherwise agreed between the parties. It provides coverage for physical
damages to the vessel as well as protection and indemnity but excludes any
liability arising on account of the crew and cargo.

 Named policy – A named policy is one in which the name or names of the ships is
mentioned in the contract of insurance.
  Wager policy – A wager policy protects from loss of the property of which the
insured does not have legal proof of possession. This means, when the insured is
not able to prove an insurable interest in the property, the insurance company may
issue a wager policy to him. Under it, the whole claim of the insured is subject to
the discretion of the insurer and the merits of the claim made. It is not a written
policy as it is issued in contravention of the law.

Insurable Interest

What is Insurable Interest?

It is a type of investment that protects anything from a financial loss. It is the basis of all
insurance policies. You have an insurable interest in an item, event or action when damage or
loss to them would result in financial loss or hardships for you.

To exercise this interest, you need to buy insurance for the item in question so you get a
payout when a loss occurs. You must also not intentionally cause a loss to happen just to
receive an insurance payout.

What is Insurable Interest Under Marine Insurance?

Insurable interest in marine insurance is essentially ‘your reason’ for buying the marine
insurance policy. It can be an object, action or event that you have a financial interest in. Any
loss regarding your insurable interest should result in a direct loss for you.

For example, if your financial interests lie in the safe shipment of your cargo, your insurable
interest would be safe delivery and you would most likely insure the vessel. In other words,
your interests and profit relate directly to the safe arrival/delivery of the cargo.

Moreover, similar to other insurance plans, you must ensure you have taken the necessary
precautions against potential losses to be eligible for the marine insurance payout when a loss
inevitably occurs, i.e., the loss should be accidental or out of your control.

Importance of Insurable Interest in a Marine Insurance Policy

Insurable interest plays a pivotal role in marine insurance. This is because ships, cargo and
other marine vessels/assets face significantly more risk when out at sea – Piracy, collisions,
mechanical failures and natural disasters like storms, hurricanes, typhoons, etc.

Without it, your policy would be meaningless and you may feel the need to take unnecessary
risks since you are not financially exposed to any consequences. Hence, you can say that
insurance interest serves three main purposes in marine insurance:
It prevents insurance fraud by ensuring that you only purchase insurance for property/assets
in which you have a financial stake.

It provides an incentive to take care of your insured property since it directly correlates to
your financial well-being.

Your entitlement to compensation is ensured if you suffer a loss/damage (subject to policy

terms) to the insured property since you have a financial stake in it.

Types of Insurable Interest in Marine Insurance

Insurable interest under marine insurance may or may not exist when the policy was affected
but must always be present at the time of loss under marine insurance. If you no longer have
an interest in the insured asset, the policy may become void.

This is the case for a marine open policy where insurable interest may not exist at the time of
policy purchase but may eventually come into the picture during the policy’s term.

This is a necessary modification when you consider the mercantile practice (import/export) of
maritime businesses, i.e., there is always a possibility of the sale and purchase of assets
during transit. Hence, there are two main types of insurable interest in marine insurance:

Insurable Interest in Marine Insurance

Under the Marine Insurance Act (MIA) of 1906, insurable interest is clearly defined as a
marine adventure (transit) or physical object that must be exposed to marine perils and the
policyholder must have a legal/equitable relationship with the insured asset.

They must benefit from its preservation and be prejudiced by its loss/damage, where it may
incur liability or detention. Here, partial interest also falls under insurable interests.

Contingent and Defeasible Interest in Marine Insurance

This is when the insured interest is defeasible, i.e., liable to rejection by the buyer/importer
under the terms of their sales agreement.

For example, an importer can reject a consignment and treat it as the seller’s risk if the
delivery is overdue/delayed.

Since contingent and defeasible interests are insurable under the MIA for “lost or not lost”
insured goods, the assured can recover this loss, even if they have not acquired the insurable
interest until after the loss.

Another way to circumvent this loss would be through contingent insurance that comes into
effect when the buyer rejects the consignment, so the risk reverts to the seller.
Examples of Insurable Interest in Marine Insurance

Case 1:

Company A is a major exporter delivering raw materials to a US buyer worth millions of

dollars. In this case, Company A has an insurable interest in the safe delivery of the raw
materials.

Upon safely reaching their destination, the insurable interest will not transfer to the buyer.
However, if the goods have been damaged after the transfer, the US buyer can file a claim to
the insurer to get reimbursed for any losses.

Case 2:

A logistics company that deals with the shipment of fragile items would have an insurable
interest in the safe delivery of said fragile cargo. Hence, they would need to insure the vessel
carrying the goods – ships, trucks, trains or planes.

If the vessel or inland transport has been financed/loaned through a bank, they would need
insurance. When this is the case, both parties have an insurable interest.

For the banks, it will be the vessel/transport and for the logistics company, it would be
ensuring a safe delivery. Hence, the insurable interest can be covered by:

The logistics company can buy marine insurance for the vessels and can cover all the costs in
case of a loss. So. they will repay the bank in case of a total loss.

The bank and the logistics company could take out separate insurance policies to insure their
interests separately.

The logistics company could buy insurance and assign it to the bank. In case of a loss, the
logistics company will still be reimbursed after the loan has been settled.

Warranties in a Contract of Marine Insurance

What are Warranties in Marine Insurance?

Warranties in a marine insurance plan refer to the promises or assurances that are made to the
insurer by the insured. These are regarding certain acts that the policyholder shall or shall not
commission. It is a promise made by the insured to the insurer regarding the usage of the
insured vessel or ship.
The conditions and warranties in a marine insurance plan also determine if the insurer shall
be held liable to consider the marine insurance claim filed by the insured.

Let us go into all the details regarding warranties under marine insurance.

Kinds of Warranties

Types of Warranties in a Marine Insurance Contract

Here are the two different types of warranties in marine insurance:

Express warranty in marine insurance

Express conditions and warranties in marine insurance are the statements and promises that
the insured makes. The express warranties in marine insurance are clearly stated in the policy
document or the deed. Some features of express warranty are:

Suitability of the ship to the journey that is intended.

Adherence of the insured party towards good safety and operational measures.

The insured declares all of the information that is relevant.

The legality associated with the voyage and consignment.

An accurate and true description of the cargo according to the laws and rules applicable.

Implied warranties in marine insurance

There are two different types of implied warranties in marine insurance i.e., legality of the
vessel and seaworthiness. Implied warranties have no special mention in the marine insurance
contract. Instead, creditworthiness and existence are assumed to form the basis of the marine
insurance contract.

It is explicitly stated that the insured must comply with all the conditions and warranties in
marine insurance. They must act in good faith and avoid any fraudulent activities. Moreover,
there should be absolute transparency in the dealing to avoid any problems later.

Marine loses
Marine losses in marine insurance refer to the financial losses incurred due to damage or loss
of ships, cargo, terminals, and any transport by which goods are transferred, acquired, or held
between the points of origin and the final destination1

Kinds of Losses
Types of Losses in Marine Insurance

1. Total Losses

The first among the various types of marine losses is Total Losses. A total loss occurs when
the insured property/cargo has lost 100% or near 100% of its value. If not, it is when the
insured is irretrievably deprived of them. You can further divide a total loss into two
subcategories: actual total loss and constructive total loss.

Actual Total Loss

An actual total loss is a material and physical loss of the subject matter insured. It happens
when the situation satisfies one or more of the following conditions:

It happens due to complete or irreparable damage to the insured cargo or goods. For example,
a storm or fire sinks a ship, or seawater spoils a cargo of perishable goods.

The insured cargo or goods are in a state the insured business cannot access. For example,
pirates or enemies capture a ship, or thieves steal a shipment of valuable goods.

The vessel transporting the shipment has gone missing, and there are no rational chances of
its recovery. For example, a ship goes missing at sea, and no concerned authority receives
any news about it for a long time.

When an actual total loss occurs, the insured business becomes entitled to the full value of the
insured goods per the policy. The insurance company becomes liable to pay the claim and
take over the ownership of the goods or their remains. If the goods are found or recovered in
the future, the insurance company will have the right to claim them.

For example, suppose you export some electronic goods from India to Canada and have paid
₹1 crore as their market value. Unfortunately, the ship carrying your goods collides with
another ship and sinks in the Atlantic Ocean. Since you lost your entire shipment of
electronic goods, your policy entitles you to a compensation of ₹1 crore. If salvageable parts
of your goods are ever found, the insurance company will also claim ownership.

Constructive Total Loss

A constructive total loss is a legal concept that allows you, as an insured, to claim a total loss
when the cost of saving or repairing the subject matter insured is more than its value after the
loss. It happens when one or more of the following conditions are met:
Your insured cargo or goods are not completely destroyed or damaged, but they are in such a
condition that you cannot restore them to their original state without incurring expenses
exceeding their value. For example, a fire or an explosion severely damages a ship, but it can
still float.

You can only access the cargo by incurring expenses exceeding their value. For example, a
ship is stranded on a remote island or a reef but can still be towed or salvaged.

You voluntarily abandon the cargo insured for your business because it is not worth saving or
repairing. For instance, your ship is in a war zone or a piracy area but can still escape.

In a constructive total loss, you can either abandon the insured goods for full policy value or
keep it for a partial loss claim based on its condition. The insurance company will decide on
acceptance and payment.

For example, suppose you import some furniture from Italy to India and have paid ₹50 lakhs
as their market value. You also take a marine insurance policy to cover the goods for any loss
or damage during transit. Unfortunately, the ship carrying your goods catches fire near Sri
Lanka, and most of your furniture is burned. You can salvage the remaining furniture, but it
will cost ₹40 lakhs. Since your furniture is worth only ₹10 lakhs after the fire, you choose to
abandon it to the insurance company and claim its total value as per your policy.

2. Partial Losses

A partial loss in marine insurance happens when only a portion of the insured goods suffer
loss or damage, reducing their value but not completely destroying them. As per the insurer,
this loss can either be particular average losses or general average losses.

Particular Average Losses

This loss affects only one party or interest in the marine venture. It happens when the loss or
damage is caused by a peril insured against and is not shared or distributed among other
parties or interests. For example, a cotton cargo is damaged by seawater due to a leak in the
ship's hull, or a mechanical failure damages a ship's engine.

You can claim per your policy if there is a particular average loss. The insurer compensates
based on the difference in the property's value before and after the loss. You retain ownership
and possession of the insured goods.

For example, suppose you export some spices from India to China and have paid ₹20 lakhs
as their market value. You also take a marine insurance policy to cover the goods for any loss
or damage during transit. Unfortunately, some of your spices are wet by seawater due to a
storm, and their quality has deteriorated. You sell them in China for ₹15 lakhs instead of ₹20
lakhs. Since you have suffered a partial loss of ₹5 lakhs, the insurance company will pay you
this amount, and you will keep the remaining spices.
General Average Losses

The general average in marine insurance occurs when the loss or damage is caused by a
deliberate sacrifice or expenditure for the ship's and cargo's safety. For example, the crew
dumps some cargo to cut down the ship's burden and prevent it from sinking, or a ship's
captain hires a tugboat to tow the ship to a port after an engine breakdown.

If a general average loss in marine insurance happens, your insurer will compensate you
based on the contribution rate determined by an average adjuster. This rate is calculated by
dividing your interest's value by the total value of all parties involved in the marine venture.
You can still own and possess the goods insured.

Here is a general example to help you understand this loss in cargo insurance.

Suppose a ship carrying cargo from India to France encounters a storm, and some cargo is
jettisoned to save the ship from sinking. The value of the ship is ₹100 lakhs, the value of the
cargo is ₹200 lakhs, and the value of the freight is ₹50 lakhs. The total value of all parties’
interests is ₹350 lakhs. The contribution rate for each party is:

Conclusion

Businesses inevitably experience marine losses in international trade, but you can reduce
them by selecting the right marine insurance policies. By understanding the different kinds of
losses in marine insurance and how they get assessed, you can pick the ideal policy for your
company, safeguard your interests against unexpected events, and be ready to make claims
and receive compensation promptly.

Rights of Insurer on Payment

79.Right of subrogation

(1)Where the insurer pays for a total loss, either of the whole, or in the case of goods of any
apportionable part, of the subject-matter insured, he thereupon becomes entitled to take over
the interest of the assured in whatever may remain of the subject-matter so paid for, and he is
thereby subrogated to all the rights and remedies of the assured in and in respect of that
subject-matter as from the time of the casualty causing the loss.

(2)Subject to the foregoing provisions, where the insurer pays for a partial loss, he acquires
no title to the subject-matter insured, or such part of it as may remain, but he is thereupon
subrogated to all rights and remedies of the assured in and in respect of the subject-matter
insured as from the time of the casualty causing the loss, in so far as the assured has been
indemnified, according to this Act, by such payment for the loss.

80.Right of contribution
(1)Where the assured is over-insured by double insurance, each insurer is bound, as between
himself and the other insurers,
to contribute rateably to the loss in proportion to the amount for which he is liable under his
contract.
(2)If any insurer pays more than his proportion of the loss, he is entitled to maintain an action
for contribution against the other insurers, and is entitled to the like remedies as a surety who
has paid more than his proportion of the debt.

81.Effect of under insurance

Where the assured is insured for an amount less than the insurable value or, in the case of a
valued policy, for an amount less than the policy valuation, he is deemed to be his own
insurer in respect of the uninsured balance.