Insurance

• In 1956, all 245 insurance companies were nationalized to form the

government-owned LIC.
• By the 1970s, OIC had become the synonym for life insurance in
India. Its role in providing an avenue for long-term guaranteed return
corpus building, at a time when there were few other choices, cannot
be discounted. “LIC kara lo (get an LIC)” is still a phrase heard in
middle-class homes as the young adults of the house begin to earn.
• The government set up the insurance regulator (IRDAI – Insurance
Regulatory and Development Authority of India) in April 2000 and by
August of the same year, the market was thrown open to the private
sector.
• The post-privatization period saw the launch of a new product: the
unit linked insurance plan (Ulip). This was the new improved,
transparent, market-linked product, the private entrants brought to
the market.
 Insurance
• Unfortunately, the ULIP product was not designed
properly as well as sold properly.
• Hence, IRDAI, in 2010, cleaned up the Ulip rules.
• Inspite of the regulations, the mis-selling in insurance
products continues even now.
• The industry is unable to keep even half its life insurance
business alive or in force after five years of sale of 15-20
year tenure life polices.
• The Rs. 29 trillion AUM of life insurance industry in India
does more fund management and less of life insurance.
The way ahead should be less of fund management and
more protection, as insurance is the core function of this
industry.
 Insurance
• Definition of Contract of Insurance:
• Insurance is a contract by which Insurer, in consideration
of premium paid by the assured, undertakes to
indemnify him for the loss that he (assured) may sustain
as a result of the occurrence of the peril insured against.
• The Contract may be oral or in writing.
• A written contract of Insurance is known as Insurance
Policy. It is stamped, signed and issued by the Insurance
Companies. However, in case of Marine Insurance, issue
of a marine or sea policy is a must and without it, the
contract is not valid and enforceable.
 Insurance
• General Principles of Insurance Contracts:
1. Insurable Interest.
2. Good Faith.
3. Indemnity (This does not apply to Life Insurance and
Personal Accident Insurance).
4. Attachment of Risk.
5. Causa Proxima and
6. Mitigation of Loss.
7. Contribution.
8. Subrogation.
 Insurable Interest
• Examples of Insurable Interest:
• If the house you own is damaged by fire, the value of your house has
been reduced by the damages sustained in the fire. Whether you pay
to have the house rebuilt or you end up selling it at a reduced price,
you have suffered a financial loss resulting from the fire. By contrast,
if your neighbour's house, which you do not own, is damaged by fire,
you may feel sympathy for your neighbour and you may even be
emotionally upset, but you have not suffered a financial loss from the
fire. You have an insurable interest in your own house, but in this
example you do not have an insurable interest in your neighbour's
house.
 Insurance – Insurable Interest
• The assured must have Insurance Interest (II) in the subject
matter of insurance.
• Absence of II would render the contract void.
• The existence of pecuniary interest in the subject matter so
that the assured would benefit from its existence and loss
from its destruction is called II.
• It is this essential requisite among other things, that
distinguishes Contracts of Insurance from Wagering
Contracts.
• In Marine Insurance, the assured should have II at the time
of the loss, though he may not have had such interest when
the insurance was effected.
 Insurance – Insurable Interest
• In Fire Insurance, too, the insured must have insurable
interest in the property at the time of loss.
• Persons who are legal or equitable owners of goods and
persons who have lawfully come into the possession of goods
not belonging to them (carriers, mercantile agents) can effect
insurance without the authority of the owners to the full
value of the goods.
• In the event of loss by fire, they can get from Insurer the full
value of loss, retain what is due to them and hold the balance
interest for the owners.
• Sellers of goods or immoveable property continue to have II
till the price remains unpaid.
 Insurance – Insurable Interest
• In Life Insurance, the assured should have II in the life at the
time of contract is effected; he may have ceased to have such
interest at the time of maturity of the policy.
• Existence of II in one’s own life or in the life of his wife/her
husband is presumed and no proof is required.
• But in other cases, to insure other’s lives, existence of pecuniary
interest (not mere natural love and affection) has to be proved.
• Thus, a father has no II in his son and vice versa unless he is
dependent on his son.
• However, a creditor will be considered to have II in the life of his
debtor and sureties; he (creditor) can claim under the policy on
the death of the debtor, though he has already recovered the
full amount of debt or it has become time barred.
 Insurance – Insurable Interest
• Thus A cannot insure a car belonging to B.
• But supposing the same car is hypothecated
with A (or to some Bank), A has an interest to
protect and, therefore, can insure the car.
• Hence, if there is no II, there can be no
insurance.
• To conclude, it is the existence of II in a
contract of Insurance that distinguishes it from
a mere Wager or Gambling.
 Insurance – Good Faith
• All contracts of Insurance are contracts of Uberrimae Fidei.
• This imposes a duty on both the parties to show utmost good
faith and to make a full, frank and honest disclosure of all
material facts known to them. They are deemed to know
things which they ought to know in the ordinary course of
business.
• This duty resolves itself into two obligations:
a) All the representations made by them in the course of
the contract which are material to the contract of
insurance must be true;
b) A full and honest disclosure of all material facts regarding
the subject matter must made.
 Insurance – Good faith
• For example - John took a health insurance
policy. At the time of taking policy, he was a
smoker and he didn't disclose this fact. He got
cancer. Insurance company won't pay anything
as John didn't reveal the important facts.
 Insurance – Good Faith
• A fact or representation is material if it is important for assessing
the risk, fixing the amount of premium and determining the risk
is to be insured or not.
• The duty of the proposer (would be insured) to observe utmost
good faith continues till the conclusion of contract of insurance .
• It extends to all facts which he (proposer) considers to be
material and to those facts which a reasonable man would
consider as material.
• If a representation material to the contract turns out to be
untrue or if there is non-disclosure of a material fact, there is
said to be breach of good faith; the contract becomes voidable
at the option of the Insurer.
• Now the insurer has to ensure whether the misrepresentation
or non-disclosure is innocent or fraudulent.
 Insurance – Good Faith
• If it is innocent, the premium is refundable.
• Hence the duty to inform the material facts to the Insurer is so
basic that any misstatement or concealment of a material fact
would entitle the insurer to avoid the contract. He need not
return the premium if such misstatement or concealment is
fraudulent.
• However as per Section 45 of The Insurance Act of 1935, in the
case of Life Insurance in India, after expiry of 2 years from the
date of effecting of the contract, the insurer cannot avoid the
contract on the ground of mis-representation or non-disclosure
of a material fact unless he proves that it was intentionally
committed by the assured with a fraudulent motive.
 Insurance – Indemnity
• Excepting Life Insurance and Personal Accident and
Sickness Insurance, all the other contracts of Insurance
are Contracts of Indemnity.
• The Insurer undertakes only to indemnify the assured
against the loss caused to him by the peril insured against.
• Liability of the insurer is restricted to the amount of
actual loss suffered by the assured, not exceeding the
maximum limit, i.e, the policy amount.
• The assured cannot make a profit out of insurance
contract and hence insurance is not wagering contract but
only a contract of indemnity.
 Insurance – Indemnity
• However, life insurance and personal accident
insurance are not contracts of indemnity because
the insurer undertakes to pay an agreed fixed
sum on the occurrence of the event whether the
assured suffers any pecuniary loss or not.
• Another reason why a life policy is excluded from
the category of contract of indemnity is that the
life of the insured cannot be evaluated or
measured.
 Insurance – Attachment of Risk
• A contract of insurance and the policy containing it become
operative only when the risk commences.
• If the risk does not commence, whether due to the fault of the
assured or not, the insurer must return the premium.
• For example, if the person whose life is insured had already died
before the commencement of insurance, the risk does not at all
begin and hence, premium is returnable.
• If, in life insurance, death occurs during the days of grace with
premium remaining unpaid, the insurer is liable to pay the policy
amount less the arrears of premium.
• In other types of insurance, unless the assured had agreed before
the year is over, to renew the contract, the insurer is not liable for
losses arising during the days of grace.
 Insurance – Causa Proxima
• The liability of the insurer under a contract of insurance,
arises only if the peril insured against was the proximate
cause of the loss.
• If the peril insured against was the only cause of loss, the
insurer is clearly liable.
• If on the other hand, a loss is caused by a number of causes,
the liability of the insurer depends on the answer to the
question which is the proximate cause.
• The insurer is liable only for losses proximately and directly
caused by the peril insured against.
• This principle is rigidly applied to contracts of marine
insurance.
 Insurance – Mitigation of Loss
• In the case of peril insured against
happenings, the insured must make all
reasonable efforts to save the insured
property and minimize the loss as though the
property was uninsured or not insured.
• For example - Ram took insurance policy fo his
house. In an cylinder blast, his house burnt.
He should have called nearest fire station so
that the loss could be minimised.
 Insurance - Contribution
• In case the insured took more than one insurance
policy for same subject matter, he/she can't make
profit by making claim for same loss more than once
• For example - Raj has a property worth Rs.5,00,000.
He took insurance from Company A worth Rs.3,00,000
and from Company B - Rs.1,00,000.
• In case of accident, he incurred a loss of Rs.3,00,000
to the property. Raj can claim Rs. Rs.3,00,000 from A
but after that he can't make profit by making a claim
from Company B. Now Company A can make a claim
from Company B to for proportional loss claim value.
 Insurance - Subrogation
• After the insured gets the claim money, the insurer
steps into the shoes of insured. After making the
payment insurance claim, the insurer becomes the
owner of subject matter.
• For example :- Ram took a insurance policy for his
Car. In an accident his car totally damaged. Insurer
paid the full policy value to insured. Now Ram
can't sell the scrap remained after the scrap and
the scrap becomes the property of the insurer.