??????

GENERAL PRINCIPLES
 General principles……

Essentials:
Offer and acceptance
Legal consideration
Competent to make contract
Free consent
Legal object
 Offer and acceptance

 The intimation of the proposer’s intention to

buy insurance is the ‘offer’,
 while the insurer’s readiness to undertake
the risk stated, is the ‘acceptance’.
 The ‘offer’ in case of insurance is called
proposal.
 If other party accepts this proposal -
transformed into an agreement
 Legal consideration

…. the premium is the consideration

on the part of the insured.
Certainly, the insurer who promises to
pay a fixed sum at a given contingency
must have some return for his promise.
without payment of premium insurance
contract cannot be initiated.
 Competent to make contract

 Every person is competent to contract

 (a) who has attained the age of majority
according to the law;
 (b) who is of sound mind;
 (c) who is not disqualified from contracting
by any law to which he is subject.
 Insurance contracts are
• ….. only those insurers grant insurance policies
• licenses by Insurance
who have been issued
Regulatory and Development Authority
(IRDA).
• ……..minors, people of unsound mind and criminal
background cannot take on insurance contract.
• This applies to bankrupt persons.
• In case of a minor, the natural legal guardians enter into a
valid contract on behalf of the minor, till the minor attains 18
years of age.
 Free consent

• both the parties - same sense and spirit,

• they are said to have a free consent.
• The consent will be free when it is not caused by;
• (a) coercion; (b) undue influence; (c) fraud;
• (d) misrepresentation ; or mistake.
• When there is not free consent - contract - voidable at the
option of the party
• In case of fraud the contract - void.
 Legal object

• The object of the agreement should be lawful.

• An object that is;
• (i) not forbidden by law;
• (ii) is not immoral; or
• (iii) opposed to public policy; or
• (iv) which does not defeat the provisions of
any law, is lawful.
 Cont….
• In proposal form the object of insurance is
asked which should be legal
• and the object should not be concealed.
• If the object of an insurance agreement, like
the consideration is found to be unlawful, the
policy is void.
• Moreover, the object of the contract should
not be based on gambling nature.
 Specific principles…………………..

• Specific principles of
• ……………………insurance contract
 Cont…

• ….there are certain specific principles,

• which are of paramount significance to the contract of…..
• both the life and non-life insurance.
 Cont…..
• Uberrima fides or Principle of Utmost Good
Faith;
• Insurable Interest
• Indemnity
• Proximate Cause
• Subrogation
• Contribution
Key principles of….

Uberrimafides
Or
Utmost good faith
 Uberrima fides ….

 Key principle of insurance…

 ….Concerned with the information…disclosed
by the parties …..who are involved in
insurance contract
 If a party fails to adhere to the principle of
utmost good faith,
 to out come of the claim may be affected
 In general…..

Contracts are subject to the doctrine of ….

Caveat emptor (let the buyer beware)
Means ….each party must have all the
information they need before signing contract
….no misrepresentation or fraud
But ….these contract are not based on the
principle of ….
 Cont….

 Must disclose all relevant information …. in

the negotiation
 Particularly important ......because …. Relevant
information will typically only known to one
party…. i.e. the proposer/policy holder
 This is the principle of ….
All India General Insurance Co.
Vs
S.P. Maheswari

AIR 1960 Mad 484

 Brief out line...
Res- is wife of deceased.....
Deceased - policyholder of Appellant Company
After taking the policy - died within – 6 months
Then ....claim was disputed – by Appellant company
Suit filed by the deceased wife in trail court for
claim of insurance amount
Suit dismissed in trail court
Dist. Court – decreed the suit
Appeal before – Madras High Court
 FACTS....
 The plaintiff Maheswari is the wife of the deceased
Palanivel Nadar
 Thyagarajan was the agent of the defendant insurance
company, the All India General Insurance Company
Limited
 On 2-1-1948 the deceased Palanivel Nadar took out a
life assurance policy bearing No. 11096 for a sum of
Rs. 5,000/-
 Palanivel Nadar died on 13-6-1948 surviving him the
plaintiff Maheswari and two minor children.
 The claim of Maheswari was disputed by the defendant
company.
 Def..plea...
In answering the question in the personal
statement
.......he did not disclose two material particulars
within his knowledge regarding
.....his health and habits. 
"Do you take alcoholic liquor" - he took the
same occasionally in company,
"whether he had any infection of gonorrhoea,
syphilis etc” - No
 Cont...

o On the death of Palanivel Nadar at the early age of 35, it was

found that he had died on
o account of cirrhosis of the liver, ascites and syphilis.
o the same was proved by doctor certificate that Palanivel
Nadar was being treated by him for syphilis in 1946 and 1947.
o ......against column 5 of that certificate it is mentioned that
the blood was positive for Syphilis infection.
 Cont....
In these circumstances, the defendant insurance company
repudiated their liability
.....on the ground that the deceased did not make mention in
the personal statement made by him
before the medical examiner of the ailments he suffered from
prior to his application
Inasmuch as Palanivel Nadar died within six months of taking
out the policy,
his case would not attract the protection given under S. 45 of
the Insurance Act.
 SECTION 45 OF INSURANCE ACT 1938 –
INDISPUTABILITY CLAUSE

 No policy of Life Insurance shall, after the expiry of

two years from the date on which it was effected,
be called in question by an Insurer
 on the ground that a statement made in the proposal for insurance or any
report of a medical officer or referee or friend of the Insured or in any
other document leading to the issue of the Policy,
 was inaccurate or false, unless the insurer shows such statement was on
material matter or suppressed facts which it was material to disclose and
that it was fraudulently made by the policy holder
 and that the policy holder knew at the time of making it that the
statement was false or that it suppressed facts which it was material to
disclose
 Cont....

 the learned trial Judge upheld the contention of the

defendant company and dismissed the suit.
 On appeal- Dist. Judge- came to a contrary conclusion and
decreed the suit.
 Hence this appeal by the defendant company before Madras
High-Court
 Court’s interpretation

 One great principle of insurance law

 .....is that a contract of insurance is based upon
utmost good faith Uberrima fides
 in fact it is the fundamental basis upon which all
contracts of insurance are made.
 In this respect there is no difference between one
contract of insurance and another.
 Cont....
 ........ contract involves a risk and that it purports to
shift the risk from one party to the other,
 each one is required to be absolutely innocent of
every circumstance
 which goes to influence the judgment of the other
while entering into the transaction
 This duty to disclose not only exists at the time of
entering into the contract
 but continues during its subsistence and after the risk
has happened
 Cont....

A misrepresentation renders the policy void

......on the ground of fraud while miscompliance with
warranty operates as an express breach of the contract.
The rule that a policy of insurance based upon the absolute
truth
....of all the statements and representations in the proposal
or declaration is wrong, therefore vitiated
however trivial or immaterial the misstatements or
misrepresentations be and
however innocently and inadvertently they were made, is
undoubtedly too technical and hard
 Cont....
 To refuse to enquire into the materially of the
statement or the innocence of the assured
 though such statements and representations
cannot affect the judgment of a prudent insurer in
accepting the risk,
 is to deny justice and fair play.
 The object of providing warranties is to guard
against fraud
 and when fraud is absent the reason of the rule
vanishes.
 Cont.....
 The doctrine of Uberrima fides is certainly not
intended to be a one way traffic,
 but calls for reciprocal obligation resting on the
insurance company
 that the company through its agent and medical
officers has also obligations to carefully explain and
assist,
 in the case of the insurance agent, the proposer and
the life in correctly answering the printed questions.
 Cont....

This Uberrima Fides is a two-way traffic.

Contracts of insurance, being contracts of faith
imposition by either party will constitute good
ground for avoidance
Life Insurance is peculiar in that the assured is often
genuinely ignorant as to the fact most material in
assessing the premium, the state of his own health
 Cont....

The rule therefore is warranties apart,

the insurers may only avoid the policy of the
assured knowingly misrepresent his state of health,
as he is bound to disclose no more than he actually
knows.
He is not bound to disclose facts
which he does not know or facts within the
knowledge of the insurers.
 Cont.....

examine the facts of this case there can be no

doubt that the dismissal of the suit by the
learned trial Judge was the only possible
conclusion that can be came to on the
evidence on record
 H.C further focussed on....
 In regard to the syphilitic affliction,
 the deliberate non-disclosure would certainly avoid the
policy.
 In regard to the representation by the deceased that he
used to take alcohol occasionally in company,
 it is found to be a deliberate misrepresentation at the
time it was made and
 even if construed as a promissory representation,
 it proved thoroughly misleading.
 Cont....
 The deceased at all material times up to the time of his
death was heavy drinker and found to have had cirrohosis
at the time of his death.
 Need it be pointed out that but for this non-disclosure and
misrepresentation,
 embodied as the component parts of the contract and
operating as warranties,
 no prudent insurer would have accepted the deceased life
 if at all or at the least for the normal premium as has
happened in the instant case.
 Judgment
 In these circumstances,
 .....to set aside the decree and judgment of
dist.court,
 which do not flow either the evidence on record
of flow the settled law on the subject,
 and restore the dismissal of the suit by the learned
trial judge.
 Appeal is allowed
 but in the circumstances without costs.
 What is ….. Relevant Information?

• MATERIAL FACT
• Those circumstances which influence the insurer
decision
• to accept or refuse the risk or
• which effect the fixing of the premium or
• the terms and conditions of the contract must be
disclosed
 EX…..

• Details of previous losses is a material fact

which is relevant to all policies
• Full facts relating to the description of the
subject matter of Insurance
 Case-Law

Banarasi Devi
Vs
New India Assurance Co.
AIR 1959 Pat.540
 Material Fact
• In this case it was laid down….
• Material fact is one
i. Which increases the risk
ii. Whether the insurer would have rejected to give
a policy on these terms if the fact had been
disclosed.
 CHARACTERSTICS OF…….

• It is an obligation….
• To make a full and true disclosure of material facts
• It applies to all types of insurance
• The duty to disclose continues up to the conclusion
of ….
• Concealment of material fact on misrepresentation
may affect
• the validity of the contract
 This principle used in…..
• Life insurance – information relating to age, health, disease,
habits, family, history, nature of business or profession.
• Fire insurance – information relating to structure of assets,
nature of goods, condition of godown, activities of firm etc.
• Marine insurance – information relating to size of the ship,
nature of cargo, packaging of cargo etc.
• ...... that the under-writer can have a pre-survey for fire
insurance or medical examination for life or health
insurance, carried out....
 Cont....

• But even then there are certain aspects of risk which are
apparent at the time of pre-survey or medical examination.
• For ex: previous loss or medical history etc….
• Because of the aforesaid reasons
• ........the law imposes a greater duty of disclosures on both
the parties to an insurance contract than to other
commercial contracts.
• This is called Uberrima Fides.
• If the insurance contract is obtained by way of fraud or
misrepresentation is void.
 ???????

Legal provisions?
 Section 45

Insurance Act, 1938……

The effect of a material non disclosure
Or
A material misrepresentation by an insured
The contract……must avoid within 3 months
 SECTION 19 OF

 Marine insurance Act-1963…. Is a contract based

upon the utmost good faith, if …. It is not observed
by either party…. This may be avoided by any party
 Sec. 18(1) despite the title of the statute this
section is of general application in insurance law
 Remedies for breach of......

Avoid the
contract

Repudiating the Avoiding liability for

contract void an individual claim
ab-initio

If concealment or fraudulent misrepresentation is

involved

Waive the Contract - Within

rights unhindered reasonable time
 Legal consequences

 ...... in the absence of utmost good faith the contract

would be voidable at the option of the person who
suffered loss due to non-disclosure.
 The inadvertent concealment will be treated as fraud
and it is void-ab-initio.
 when the voidable contract has been validated by
the party not at fault
 the contract cannot be avoided by him later on.
 Case law

United India Insurance co.ltd

Vs.
MKJ corporation
(1996) 6 SCC 428
 Principle
• Court held that……both parties must disclose
the material facts.
• Duty lies on the insured as well as insurer
 Facts
• Respondent was holding fire insurance policy.
• Coverage…..riots, strikes & malicious damages
and spoilage
• According to policy spoilage means “Stocks or
leather of all kinds in process during soaking,
liming, fleshing taming, wet blue, splitting,
shaving, dye liquoring setting, vacuuming
drying”
 Cont…
• During Policy Period…..
• due to the employees' strike the leather in
process was damaged due to the spoilage
• Policy holder claimed the damages
• Company denied……
 ??????????????
• According to advisory committee
recommendations…..
• the Insurance does not cover if loss or damage
results from total or partial cessation of work
or the retarding or interruption or cessation of
any process of operation or omissions of any
kind
 Cont…
• insurer is not liable for the loss to the goods
while the leather remains unattended in its
process during the period of strike.
 Plea of Insured
• It is the duty of the company to give
intimation about the advisory committee
recommendations at the time of taking of the
policy.
Interpretation
• It is a fundamental principle of Insurance Law
that utmost good faith must be observed by
the contracting parties.
• Good faith forbids either party from
concealing (non-disclosure) what he privately
knows, to draw the other into a bargain, from
his ignorance of that fact and his believing the
contrary.
 Cont…

• Just as the insured has a duty to disclose,

"similarly, it is the duty of the insurers and
their agents to disclose all material facts
within their Knowledge, since obligation of
good faith applies to them equally with the
assured.
 Cont…

• The duty of good faith is of a continuing

nature. After the completion of the contract,
no material alteration can be made in its
terms except by mutual consent
 Cont…
• Insurer had not incorporated the above quoted
clause as part of the policy undertaken with the
insured
• Consequently, the insured is not bound by this
exclusionary clause of liability since the
appellant-insurer, admittedly, had undertaken
liability for the riot or strike, damage due to riot
or strike
• The appeals disposed accordingly.
Importance of Utmost Good faith
BURDEN OF PROOF
LIFE INSURANCE CORPORATION OF INDIA
VS.
SMT. G.M. CHANNABASEMMA

AIR 1991 SC 392

 Facts .....
 suit filed by the plaintiff-respondent for
 ……. Claim amount due for four insurance policies held
by her deceased husband.
 The defendant-appellant ……. denied the claim
 ………on the plea that the deceased,
 ………. while filling up the proposal forms for the
policies,
 ………was guilty of fraudulent misrepresentations
 and suppression of material facts with regard to his
health.
 The trial court

 accepted the defence

 ………and dismissed the suit.
 On appeal by the plaintiff,
 ………..the High Court reversed the decision and
passed a decree.
 Before H.C…….
 After the receipt of the claim from the plaintiff
 ……….the Corporation, feeling suspicious, made
an inquiry through its Administrative Officer
 ... ……..according to the defence

 …………collected sufficient material

 to establish fraudulent misrepresentation
 and suppression of material facts by the
insured
 ……….. at the time of taking out the policies.
 The insured died on 14.10.1961 in a hospital
for tubercular patients.
 Contention of appellant.....
 According to the case of the Corporation
 ……. the deceased was suffering from acute diabetes
and diseases of the lungs
 he was fully aware at the time of taking out the
policies in question,
 and fraudulently denied the same in the proposal
forms.
 …….that since last policy was of a date only about two
months before the death of the insured
 it cannot be believed that he did not know about his
illness.
 Cont....

Even the earlier three policies had been taken out

only a short time earlier,
and having regard to the nature of the diseases
………it must be assumed that the insured was
fraudulently suppressing the relevant fact
on enquiry…….
 informed by several doctors about the chronic
illness of the insured
 Plea of res......

 ……that it is true that her husband died of

tuberculosis
 but he or any member of the family had no
knowledge of his illness
 ………at the time taking out the policies
 He was keeping good health and actively taking part
in his business
 and the discovery of the disease which accounted
for his early demise was made very late.
 H.C observation.....
• ….on a consideration ………of the evidence led by the
parties and the arguments addressed on their behalf,
• ……….held that the defendant had failed to prove
• ……that the insured was suffering from diabetes or
tuberculosis
• at the time of filling of the proposals for the
insurance policies
• or that he had given any false answer in his
statements or suppressed any material fact which he
was under a duty to disclose.
 High court order

 In the result, ………

 …………..the appeal was allowed and the suit was
decreed.
 ………..This decision is under challenge in the
present appeal by special leave.
 Now- before- supreme court…….
 Appellant argument at SC
 ……in view of the evidence on the record and the
circumstances,
 the findings of the High Court are erroneous and fit to be
set aside.
 …… emphasized the fact
 …….that the policies in question were taken within a
short span of time and that the insured died only about
two months from the last policy.
 ……The argument is that the evidence of the witnesses
examined on behalf of the defendant is fit to be accepted
as reliable and is adequate to prove the defence case.
 S.C opinion......

 It is well settled that a contract of insurance is contract

uberrima fides
 and there must be complete good faith on the part of the
assured.
 The assured is thus under a solemn obligation
 to make full disclosure of material facts which may be relevant
for the insurer to take into account while deciding whether the
proposal should be accepted or not.
 Burden of proof lies on......

 The burden of proving that the insured had made false

representations and suppressed material facts
 ………..is undoubtedly on the Corporation
 …..evidence also does not necessarily lead to the conclusion
that deceased was inflicted by a serious disease for a long time.
 the evidence of the Corporation's doctors who had certified the
good health of the insured
 ….at the time of taking out the insurance policies
 and who have been examined as defence witnesses, disproves
the case of illness.
 Cont.....

o It has not been suggested that these doctors were either won
over by the insured
o or were negligent in performing their duty.
o They had submitted confidential reports about the health of
the insured
o and were of the opinion that he was in good health
o …..agree with the High Court that the defendant Corporation
has failed to discharge the burden of proving
 Finally.....

• ........ the defence story about the serious

illness of the insured at the time of taking out
the insurance policies
• and knowingly suppressing the material
information.
• Appeal is dismissed - without costs
 Burden proof
The burden of proving that the assured
had made false representation and
suppressed material facts is undoubtedly
upon the corporation.
 DO YOU LIKE TAJ MAHAL?

DO YOU LIKE AISWARYA RAI?

 ……..Insurable Interest
 ………..statutory requirement
 an insurance contract cannot valid…….
 Unless the owner has an insurable interest in the
subject matter of the policy
 ………….certain characteristics
 They must be capable of financial measurement
 There must be a large enough number of similar
risks.
 They must not be against public policy.
 For ex…..

• In the life of a relative by whom he is supported

• A creditor has insurable interest in the lie of his debtor
up to the amount of the debt at the time of the issue
of policy
• Servant has insurable interest in the life of his
employer to the extent of salary for the term of service
• Partner has insurable interest in the life of other
partners
 Cont……
• The premium needs to be reasonable.
• There must be an ‘insurable interest’ for the
person insuring.
• Insurable interest …..
• where the person has a valid reason to insure
• and stand to suffer a direct financial loss
• if the event insured against occurs.
 Cont…..
• Insurable interest exists
• when an insured derives a financial or other benefit
from the continuous existence of an insured object.
• ……..Acc to Webster's dictionary……. insurable
interest as the interest (as based on blood tie or
likelihood of financial injury) that is judged to give
an insurance applicant a legal right to enforce the
insurance contract against the objection that is
wagering contract.
 Cont…..
• According to Riegel & Miller:
• An insurable interest is an interest of such a
nature that the possessor would be financially
insured by the occurrence of the event
insured against.
• This term has not been defined in insurance
act,1938
• Acc to Marine Insurance Act……
 Definition……insurable interest
• Sec.7 …..defines – ‘a person interested in a marine
adventure where he stands in any legal
• or equitable relation to adventure to any insurable
property at risk therein,
• in consequence of which he may benefit by the safety
• or due arrival of insurable property,
• or may be prejudiced by its loss,
• or by damage there to,
• or by the detention thereof,
• or may incur liability in respect there of
 DO YOU LIKE TAJ MAHAL?

DO YOU LIKE AISWARYA RAI?

 ……..Insurable Interest
 ………..statutory requirement
 an insurance contract cannot valid…….
 Unless the owner has an insurable interest in the
subject matter of the policy
 ………….certain characteristics
 They must be capable of financial measurement
 There must be a large enough number of similar
risks.
 They must not be against public policy.
 For ex…..

• In the life of a relative by whom he is supported

• A creditor has insurable interest in the lie of his debtor
up to the amount of the debt at the time of the issue
of policy
• Servant has insurable interest in the life of his
employer to the extent of salary for the term of service
• Partner has insurable interest in the life of other
partners
 Cont……
• The premium needs to be reasonable.
• There must be an ‘insurable interest’ for the
person insuring.
• Insurable interest …..
• where the person has a valid reason to insure
• and stand to suffer a direct financial loss
• if the event insured against occurs.
 Cont…..
• Insurable interest exists
• when an insured derives a financial or other benefit
from the continuous existence of an insured object.
• ……..Acc to Webster's dictionary……. insurable
interest as the interest (as based on blood tie or
likelihood of financial injury) that is judged to give
an insurance applicant a legal right to enforce the
insurance contract against the objection that is
wagering contract.
 Cont…..
• According to Riegel & Miller:
• An insurable interest is an interest of such a
nature that the possessor would be financially
insured by the occurrence of the event
insured against.
• This term has not been defined in insurance
act,1938
• Acc to Marine Insurance Act……
 Definition……insurable interest
• Sec.7 …..defines – ‘a person interested in a marine
adventure where he stands in any legal
• or equitable relation to adventure to any insurable
property at risk therein,
• in consequence of which he may benefit by the safety
• or due arrival of insurable property,
• or may be prejudiced by its loss,
• or by damage there to,
• or by the detention thereof,
• or may incur liability in respect there of
 CHARACTERISTICS OF……
• There must be some subject-matter to insure
• namely, the life of a person, property like house, vehicle
etc.
• The insured must have ……
• some legally recognized relationship with the subject-
matter of the insurance
• The insured must be benefitted by the safety of the
subject-matter
• and suffers loss if the subject-matter is lost, damaged or
destroyed.
 Cont…
• The subject-matter should be definite
• and should be capable of being valued in terms of money
• ….is necessary to support every contract of insurance
• existence of ……..in a contract of insurance which
distinguishes – wagering contract
• ……not the owner alone, to take the case of fire / marine
insurance
• but every person who would suffer direct financial loss
• …if the property or goods damaged or destroyed who has
insurable interest
 Cont…

• The interest ……should not be a mere sentimental right

• ..should be a right in property or right arising out of contract
• Interest must be pecuniary
• Capable of estimation in terms of money
• The interest must be lawful
 Time or duration of interest

• Presence of Insurable interest …...varies with the nature of the

contract
• In Life ……necessary at the commencement of policy
• In Fire…necessary …..commencement of policy & at the time
of risk
• In Marine….interest must be shown to exist at the time of loss
Case – Law

Fender
Vs
St. John Mildmay
1938 AC 1
 Cont…
• It has been said that it is a general principle of common
law that every contract entered into by the parties is
enforceable at their instance irrespective of it’s subject
matter provided it is not either illegal, immoral or contrary
to public policy.
• Insurable interest is a basic requirement of any contract of
insurance. The absence of insurable interest renders the
contract void, because insurance provides protection to
the interest of the insured in the subject matter of
insurance and not the subject matter itself. If there is no
such interest then it will be gaming or wager.
 Case- law

Virmani Refrigeration & Cold Storage Pvt. Ltd.

v/s
New India Assurance Co. Ltd.
[(2005) 1 CPJ 767 Delhi State Commission]
 Facts….
• The complainant insured the property
• ……comprising of godowns and other offices against
fire for Rs. 7,40,000/-.
• A fire broke out engulfing the entire property
• as a result of which extensive damage was caused to
the building, furniture, fixtures, fitting, electricity and
sanitary system
• A claim was preferred by the complaint
 Cont….
A surveyor was appointed …..
and during course of investigation
…….. found that one M/s Anantraj Agencies Pvt. Ltd.
claimed themselves to be occupant of 60% of the building
The respondent - plea –
discovered during investigation that 60% of the property
was given to Anantraj Agencies
under various agreements whereas only 40% property
remained with the complainant had insurable interest of
only 40%
 Delhi State commission order….
• It does not mean that by virtue of this deed the
insurable interest of the complainant was to the
extent of 40%.
• While receiving the premium the Insurance Company
had assessed the insurance amount
• and therefore, to say at the end of the day that
insurable interest of the complainant was to the
extent of 40% is difficult to accept.”
• It is the insurer - to satisfy him self regarding
insurable interest before issuing policy.