Module I: Introduction

Insurance Law
Meaning: Insurance may be described as a social device to reduce or eliminate risks or loss to
life and property. It is a provision which a prudent man makes against inevitable contingencies,
loss or misfortune.
 Insurance provides financial protection against a loss arising out of happening of an
uncertain event. A person can avail this protection by paying premium to an insurance
company.
 A pool is created through contributions made by persons seeking to protect themselves from
common risk.
 Premium is collected by insurance companies which also act as trustee to the pool.
 Any loss to the insured in case of happening of an uncertain event is paid out of this pool.
 Insurance works on the basic principle of risk-sharing. A great advantage of insurance is that
it spreads the risk of a few people over a large group of people exposed to risk of similar
type.

Definition: Insurance is a contract between two parties whereby one party agrees to undertake
the risk of another in exchange for consideration known as premium and promises to pay a
fixed sum of money to the other party on happening of an uncertain event (like death) or after
the expiry of a certain period in case of life insurance or to indemnify the other party on
happening of an uncertain event in case of general insurance.
Parties-
 Insured: is the person whose risk/life is covered against the risk under the policy.
 Insurer or Assured: is the party (company) that provides the insurance cover.

Features of Insurance-
a) Principle of Indemnity: It aims to put the insured in the same financial position that he was
before the loss.
b) Pooling of risk principle:
c) Principle of spreading the risk:

Advantages of Insurance:
 Losses if occurred are compensated by insurer.
 Uncertainty is reduced and business can be transacted without having the fear of losing its
infrastructure and capabilities.
 The premium paid by the employers to insure their employees is considered a business
expense and is eligible for tax benefits. This expense is shown in the employer's profit and loss
account and is considered an expense of business which is shown in the expenditure column in the balance
sheet.
 In the case of certain insurances, especially in the nature of life insurance, mediclaim
insurance etc., income tax concessions are available.
 You can also avail certain value-added services from insurer like loss control advice,
exposure analysis, etc.

Benefits of Insurance:
 It is one of the techniques of risk management process.
 It reduces the fear and anxiety in the mind of an individual and also a business unit.
 It is compensatory in nature. It restores the insured position.
 When property or person is brought the umbrella of insurance cover, it adds to the credit
worthiness.

Historical Development of Insurance

In India, the history of insurance finds its roots in the mentions of the writings of Manu (i.e.
Manusmriti), Kautilya (i.e. Arthashastra), and Yagnavalkya (i.e. Dharmashastra).
The writings suggest pooling of resources that could be re-distributed in times of calamities like
epidemics, floods, fire, famine, etc.
The history of insurance in India goes back to as before as 3000 B.C.
- During this prehistoric period insurance existed in the primitive form.
- The basic concept of insurance which was in the form of pooling and sharing were practiced
in insurance in an unorganized manner during this period.
- When the insurance practice was started in India during this period, it was mainly in practice
in joint families.
- Later, the concept followed in various regions and spread out even in the nuclear families.
- The insurance gave them security during the sorrowful times when the family suffered from
losses.
This method of saving money in the joint families after spreading even to the nuclear families
during the modern era gave birth to different forms of life insurance policies in the country.

History of Insurance in Modern India:

The insurance sector in India has taken its shape inspired by the other countries, especially,
from England. The tale of insurance in modern India started during the 1800 AD. The foreign
insurance agencies started a marine insurance business which led to the start of the modern
history of insurance in India.
Timeline-
1818: In the year 1818, the birth of the first insurance company in India took place. The name
of the insurance company was, Oriental Life Insurance with its HQ at Calcutta.
1870: In the year 1870, the history of insurance in India received a native touch with Bombay
Mutual Life Insurance society becoming the first Indian insurance company to be established.
1912: The year of 1912 led to the beginning of The Indian Life Insurance Companies Act. The
act regulates the business of Life Insurance in the country.
1938: With the aim to protect the interests of the insured people the earlier consolidated
legislation was amended by the Insurance Act.
1956: The business of Life Insurance was nationalized on the 1st of September of 1956. The
year of 1956 also witnessed the formation of LIC Act that led to the formation of Life Insurance
Corporation of India.
- The Government of India made a capital contribution of rupees 5 crore.
- During that period a total of 170 companies and seventy-five provident fund societies were
doing the business of life insurance in the country.
- During the period between 1956 and 1999 the LIC held the solo rights of doing the business
of life insurance in the country.

1972: The year of 1972 led to the nationalization of the non-life insurance in the country. The
enactment of General Insurance Business Nationalization, the business of non-life insurance
was also nationalized.
- The four subsidiaries of General Insurance Corporation of India were also set up.
- During that period a total of 106 insurers were doing the business of non-life insurance in the
country and those were amalgamated with the formation of GIC’s four subsidiaries.

Commendable milestones in the history of insurance in India.

 In 1993 the establishment of the Malhotra committee took place. R.N Malhotra was the
chairperson of the committee.
 The year of 1994, witnessed the publishing of recommendations by the Malhotra committee.
 The year of 1995 led to the establishment of the Mukherjee committee.
 In 1996 the setting up of the (interim) Insurance Regulatory Authority (IRA) took place.
 The Mukherjee committee was set up in the year 1997 but wasn’t made public. In the year
1997 the Indian Government transfers greater authorities to General Insurance Corporation,
Life Insurance Corporation and the subsidiaries of those.
 It was with the respect to the flexibility of the insurance rules that were targeted to
channelize the funds to the structure of infrastructure.
 In the year of 1998, the cabinet decided to permit 40% of the foreign equity in the companies
of private insurance.
 In the year of 1999 the standing committee chaired by Mr. Murali Deora decided that the
equity in the sector of private insurance should be limited to a total of 26%.
 The year 1999 also witnessed the renaming of the bill of IRA as Insurance Regulatory and
Development Authority Bill.
- The year of 1999 witnessed the clearance of the Bill of Insurance Regulatory and
Development Authority.
- In the year 2000, the President of India gave assent to the Insurance Regulatory and
Development Bill.

Functions of Insurance

1. Provides Reliability: The main function of insurance is that eliminates the uncertainty of an
unexpected and sudden financial loss. This is one of the biggest worries of a business.
Instead of this uncertainty, it provides the certainty of regular payment i.e. the premium to be
paid.

2. Protection: Insurance does not reduce the risk of loss or damage that a company/person may
suffer. But it provides a protection against such loss that a company/person may suffer. So at
least the organization/person does not suffer financial losses that debilitate their daily
functioning.

3. Pooling of Risk: In insurance, all the policyholders pool their risks together. They all pay
their premiums and if one of them suffers financial losses, then the payout comes from this
fund. So, the risk is shared between all of them.

4. Fulfil the Legal Requirements: In a lot of cases getting some form of insurance is actually
required by the law of the land. Like for example when goods are in freight, or when you
open a public space getting fire insurance may be a mandatory requirement. So, an insurance
company will help us fulfil these requirements.

5. Capital Formation: The pooled premiums of the policyholders help create a capital for the
insurance company. This capital can then be invested in productive purposes that generate
income for the company.
6. 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.

Kinds of Insurance

There are various types of insurance in the market due to the presence of a large number of
insurance companies to protect the various aspects in life.
Discussing here the major types of Insurance-
1. Life Insurance
2. General Insurance (which includes fire insurance, marine insurance and motor vehicle
insurance)

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 motor insurance, fire insurance, marine insurance and various other types of insurance.
i. 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:
 It should be an actual loss
 The fire must be accidental and not done intentionally
ii. 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.
a) 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.
 b) 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.

c) 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.

iii. Motor vehicle insurance: Motor insurance covers the insurance of motor vehicles which
includes the private vehicles and commercial vehicles loading the motor vehicles.
- Insurance of Motor Vehicles are covered under the Motor Vehicles Act 1939.
- Insurance of motor vehicles against damage is not made compulsory, but the insurance
against third party liability arising out of the use of motor vehicles in public places is made
compulsory.
- Insurance Cover against damage is known as “Own Damages” and against injury or death to
a third party is known as “Third Party” claim. No motor vehicle can ply in a public place
without such insurance.

Principles of Insurance
To ensure the proper functioning of an insurance
contract, the insurer and the insured have to uphold the
7 principles of Insurances mentioned:

1. Principle of Utmost Good Faith: The fundamental principle is that both the parties in an
insurance contract should act in good faith towards each other, i.e. they must provide clear
and concise information related to the terms and conditions of the contract.
The Insured should provide all the information related to the subject matter, and the insurer
must give precise details regarding the contract.
Example- Jacob took a health insurance policy. At the time of taking insurance, he was a smoker
and failed to disclose this fact. Later, he got cancer. In such a situation, the Insurance company
will not be liable to bear the financial burden as Jacob concealed important facts.
2. Principle of Proximate Cause: This is also called the principle of ‘Causa Proxima’ or the
nearest cause. This principle applies when the loss is the result of two or more causes. The
insurance company will find the nearest cause of loss to the property. If the proximate cause
is the one in which the property is insured, then the company must pay compensation. If it is
not a cause the property is insured against, then no payment will be made by the insured.
Example- Due to fire, a wall of a building was damaged, and the municipal authority ordered it
to be demolished. While demolition the adjoining building was damaged. The owner of the
adjoining building claimed the loss under the fire policy. The court held that fire is the nearest
cause of loss to the adjoining building, and the claim is payable as the falling of the wall is an
inevitable result of the fire.
In the same example, the wall of the building damaged due to fire, fell down due to storm
before it could be repaired and damaged an adjoining building. The owner of the adjoining
building claimed the loss under the fire policy. In this case, the fire was a remote cause, and the
storm was the proximate cause; hence the claim is not payable under the fire policy.

3. Principle of Insurable interest: This principle says that the individual (insured) must have
an insurable interest in the subject matter. Insurable interest means that the subject matter for
which the individual enters the insurance contract must provide some financial gain to the
insured and also lead to a financial loss if there is any damage, destruction or loss.
Example- the owner of a vegetable cart has an insurable interest in the cart because he is
earning money from it. However, if he sells the cart, he will no longer have an insurable interest
in it.
To claim the amount of insurance, the insured must be the owner of the subject matter both at
the time of entering the contract and at the time of the accident.

4. Principle of Indemnity: This principle says that insurance is done only for the coverage of
the loss; hence insured should not make any profit from the insurance contract. In other
words, the insured should be compensated the amount equal to the actual loss and not the
amount exceeding the loss. The purpose of the indemnity principle is to set back the insured
at the same financial position as he was before the loss occurred.
Principle of indemnity is observed strictly for property insurance and not applicable for the
life insurance contract.
Example- The owner of a commercial building enters an insurance contract to recover the costs
for any loss or damage in future. If the building sustains structural damages from fire, then the
insurer will indemnify the owner for the costs to repair the building by way of reimbursing the
owner for the exact amount spent on repair or by reconstructing the damaged areas using its
own authorized contractors.
5. Principle of Subrogation: Subrogation means one party stands in for another. As per this
principle, after the insured, i.e. the individual has been compensated for the incurred loss to
him on the subject matter that was insured, the rights of the ownership of that property goes
to the insurer, i.e. the company.
Subrogation gives the right to the insurance company to claim the amount of loss from the
third-party responsible for the same.
Example- If Mr. A get injured in a road accident, due to reckless driving of a third party, the
company with which Mr. A took the accidental insurance will compensate the loss occurred to
Mr. A and will also sue the third party to recover the money paid as claim.

6. Principle of Contribution: Contribution principle applies when the insured takes more than
one insurance policy for the same subject matter. It states the same thing as in the principle
of indemnity, i.e. the insured cannot make a profit by claiming the loss of one subject matter
from different policies or companies.
Example- A property worth Rs. 5 Lakhs is insured with Company A for Rs. 3 lakhs and with
company B for Rs.1 lakhs. The owner in case of damage to the property for 3 lakhs can claim
the full amount from Company A but then he cannot claim any amount from Company B. Now,
Company A can claim the proportional amount reimbursed value from Company B.

7. Principle of Loss Mitigation: This principle says that as an owner, it is obligatory on the
part of the insurer to take necessary steps to minimise the loss to the insured property. The
principle does not allow the owner to be irresponsible or negligent just because the subject
matter is insured.
Example- If a fire breaks out in your factory, you should take reasonable steps to put out the
fire. You cannot just stand back and allow the fire to burn down the factory because you know
that the insurance company will compensate for it.
 Premium
What is an insurance premium?
In technical terms, an insurance premium is the cost of the financial risk that you transfer to the
insurance company. The insurance company promises to compensate you if you suffer a specific
financial loss.
For instance, in a life insurance policy, you insure the risk of premature death. The insurance
company promises to pay a death benefit to your benefactor, should an untoward incident occur
resulting in the loss of your life during the policy term. For this assurance, the company charges
a premium which includes the cost of risk that the company is undertaking to insure you.
In legal terms, the premium paid is the consideration for the insurance contract. You pay the
premium, and in exchange, the insurance company promises to cover your financial risk and
compensate you for the loss if the risk occurs.

How is the premium calculated?

There are different components to insurance premiums. Primarily, what the insurance company
charges is the basic cost of insuring the financial risk. Besides this cost, the premium includes
the following charges as well:
 The administrative costs incurred in issuing the policy
 The costs of managing the policy
 The sales and distribution costs
All these costs are added to calculate the premium payable for the policy. These calculations are
done by the insurance company internally. When you buy an insurance policy, you know the
aggregate premium payable for the coverage, generally, not the break-up. This is where the
difference in cost from provider to provider happens.

Factors affecting premium calculation:

While the insurance company fixes the basic premium for an insurance policy, the actual
premium payable depends on many factors. These factors either increase or decrease the
premium. Moreover, the factors vary depending on the type of policy that you buy.
So, here’s a look at some of the most common forms of insurance plans and the primary factors
that affect their premiums:
 Age: Early life insurance coverage is often recommended to reduce the impact of high life
insurance premiums. Insurers use age to calculate coverage amounts, so securing a policy at
a younger age can potentially result in lower premium rates.
 Gender: Insurers pay particular attention to the gender of insured individuals since research
indicates that women tend to live longer than men on average. Due to their longer life
expectancy, women may experience slightly lower life insurance premiums.

 Habits: Life insurance premiums are determined by the individual's risk of developing health
conditions, which can be impacted by certain habits, like smoking and drinking.

 Medical History: Considering the medical history of the insured is crucial because it informs
the insurer of the risks associated with his or her life. The insurance premium may be higher
if there is a family history of critical illnesses such as cancer and heart disease.

 Profession: Another factor affecting your insurance premium is the nature of your
occupation. It may be necessary to pay a higher premium for those in high-risk professions,
such as the mining industry or oil and gas sector.

 Hobbies: A life insurance premium can rise if your hobbies involve activities that can
endanger your life, such as adventure sports.

 Lifestyle Preferences: Insurers may set higher insurance premiums for those who regularly
engage in risk-taking activities like mountain climbing, racing, and similar pursuits.

 Marital Status & Dependents: Depending on your marital status and number of dependents,
you may be eligible for maximum life insurance coverage and premium payment capacity.
An insurer might reduce the premium and the sum assured cover in cases with numerous
dependents.

 Residential Location: Your residential location plays a significant role in your insurance
premiums, as crime rates and environmental risks vary by area.

 Income Level: It is often assumed that higher incomes are associated with higher coverage
and a lower perceived financial risk, so insurance premiums are often influenced by your
income level.

 Policy Term & Premium Payment Term: It is not possible to have a longer premium payment
term (PPT) than a longer policy term (PT). You will pay a lower premium if your PT is
lower.

 Loans & Liabilities: During the financial underwriting process, you must evaluate loans and
liabilities. It is the insurer's goal to ensure that you are committed to making regular
premium payments. Nevertheless, if you have multiple ongoing loans, the insurer may
 request a lower Premium Payment Term (PPT) or reduced premium amount to mitigate the
risk of policy lapse.

 Sum Assured Amount: The higher the sum assured, the higher the premium, but if the
premiums are paid in full, it is possible to get discounts on the premiums. A higher sum
assured indicates an increase in coverage, which means a higher premium.

 International Travel Record: When calculating your insurance premium, factors such as
frequency and destinations may be taken into account, since extensive travel to high-risk
regions may affect your overall coverage costs.

Risk
The concept is closely related to an uncertainty. Risk is defined as an uncertainty, related to the
occurrence of a loss.
Important features of risk are-
- unpredictable,
- uncertainty about the future event,
- deviation from desired outcome &
- not favorable.
In a competitive economy, risk bearing is essential. Since every one of us is exposed to some or other risk,
the best way is to accept the presence of risk and manage the affairs without being affected.

Scope of Risk:
The insurer indemnifies the insured only against the loss caused during the period insured, for
which the direct and proximate cause is the peril insured against.
In Xantho's case the scope of the risk is neatly described as:
The scope of the risk in Xantho's case involves delineating the extent of liability for the insurer
and the insured. It encompasses several key aspects:
 Agreement Parameters: The agreement between the insurer and the insured can either
extend or limit the insurer's liability concerning the operation of the risk.

 Inclusions: The risk includes losses caused by negligence, whether by the insured, their
employees, or third parties. It also covers losses caused deliberately or maliciously by the
insured's employees or third parties.

 Exclusions: The risk does not include losses caused by the willful misconduct of the
insured, losses due to ordinary wear and tear, or inherent vice of the subject matter insured.
 Impact of Alterations: The effect of any alteration on the policy depends on whether the
policy explicitly prohibits alterations and whether the alteration increases the risk.
Alterations without prior notice or sanction may affect the policy's validity, with the insurer
having the burden to prove the increase in risk.

 Policy Voidance: Certain alterations, even trivial ones, can render the policy void if there's
an express absolute prohibition. Moreover, the insurance company can avoid the policy if
there's an alteration, irrespective of whether the loss was caused by that alteration.

Pure Risk vs. Speculative Risk

Insurance companies typically cover pure risks. Pure risks are risks that have no possibility of
a positive outcome- something bad will happen or nothing at all will occur. The most common
examples are key property damage risks, such as floods, fires, earthquakes, and hurricanes.
Litigation is the most common example of pure risk in liability. These risks are generally
insurable.
Speculative risk has a chance of loss, profit, or a possibility that nothing happens. Gambling
and investments are the most typical examples of speculative risk. The traditional insurance
market does not consider speculative risks to be insurable.

Elements of Insurable Risk:

One of the criteria for an insurable risk is that it NOT be catastrophic. A principle of insurance
holds that only a small portion of a given group will experience loss at any one time. Risks that
would adversely affect large numbers of people or large amounts of property wars or floods, for
example are typically not insurable.
In order for a pure risk to be insurable, it must meet the following criteria.
 Loss Must Be Due to Chance- Any loss must be a mishap or of an accidental nature.

 Loss Must Be Definite and Measurable- The insurer must be able to explicitly identify the
loss and be able to calculate the extent of loss.

 Risk Must Be Predictable- Risk must be determinable through statistical data and expressed
as a percentage of a fraction.

 Loss Must NOT Be Catastrophic- The insurer's cost of disastrous events such as floods,
earthquakes, and hurricanes must be within the insurer's ability to pay claims costs.
 Exposure To Loss Must Be Large- Utilization of the law of large numbers.

 Loss Exposures Must Be Randomly Selected- Using methodical techniques and systematic
approaches could lead to adverse selection.
*Adverse selection refers to the tendency for those individuals who present less favorable insurance risks (i.e.,
people in poor health) to seek or continue insurance to a greater extent than other risks. The systematic selection
of loss exposures is prohibited due to the rules of adverse selection.