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Insurance law notes

Insurance law (Karnataka State Law University)

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1) What do you understand by the term ‘insurance’ ?

Insurance means an arrangement by which a company or the
state undertakes to provide a guarantee of compensation for
specified loss, damage, illness, or death in return for payment of
a specified premium.

Insurance is a means of protection from financial loss. It is a

form of risk management primarily used to hedgeagainst the risk
of a contingent, uncertain loss.
An entity which provides insurance is known as an insurer,
insurance company, or insurance carrier. A person or entity who
buys insurance is known as an insured or policyholder. The
insurance transaction involves the insured assuming a guaranteed
and known relatively small loss in the form of payment to the
insurer in exchange for the insurer's promise to compensate the
insured in the event of a covered loss. The loss may or may not
be financial, but it must be reducible to financial terms, and must
involve something in which the insured has an insurable
interestestablished by ownership, possession, or pre-existing
relationship.
The insured receives a contract, called the insurance policy, which
details the conditions and circumstances under which the insured
will be financially compensated. The amount of money charged by
the insurer to the insured for the coverage set forth in the
insurance

policy is called the premium. If the insured experiences a loss

which is potentially covered by the insurance policy, the insured
submits a claim to the insurer for processing by a claims adjuster.

2) Discuss the essential features of contract of insurance ?

The contract of insurance is very useful to indemnify any loss. In

this light, contract of insurance is also called as contract of
indemnity in which insurer indemnifies the loss incurred due to
the happening or non-happening of any event depending upon
contingency.

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To make contract of insurance valid in the eye of law, some

essential elements must be considered in its process of validity.
The insurance contract, like any other contracts must satisfy the
usual conditions of a contract. The essentials of insurance
contracts are as follows:
i. Agreement
Agreement means communication by the parties to one another
of their intentions to create legal relationship. For a valid contract
of insurance, there must be an agreement between the parties,
i.e. one making offer or proposal and another accepting the
proposal or signifying his acceptance upon proposal.
ii. Free consent

There must be free consent between the parties to contract.

Consent means that parties to an agreement must agree on a
specific thing in the same sense or their understanding should be
the same. Consent must be given by the parties thereto in a
contract, freely, independently, without any fear and favor. The
consent is known to be free when it is not caused by, fraud,
misrepresentation, mistakes and other undue influences .
iii. Components to contract

The parties in an agreement must be legally competent to enter

into the contract. It means both parties in the insurance contract
must be age of majority, posses sound mind and not disqualified
by any ;aw of the country. It clears that a person who is minor,
lunatics, idiot and alike cannot enter into a insurance contract.
The contract entered into by these will be declared as void.
iv. Lawful object

In insurance contract, the object of the contract must be lawful as

in other types of contracts. The agreement must not relate to a
thing which is contrary to the provision of any law or has
expressly been forbidden by any law. It must not be of such

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nature that if permitted, it implies injury to the person or

property of other or immoral or opposed to public policy.

v. Lawful consideration

There must be due and lawful consideration in the insurance

contract. The consideration, for which the contract is entered and
created by the parties, must be lawful. To establish legal
relationship, to create obligation between them and to make it
enforceable by law there must be lawful consideration.

vi. Compliance with legal formalities

To make an agreement valid, prescribed legal formalities of

writing, registration, etc. must have been observed. In the
contract of insurance, the agreement between parties must be in
written form and dully signed by both parties, properly attested
by witness and registered otherwise, it may not be enforced by
the court.
3) What is meant by the term Risk ?

A risk that is specified in an insurance policy is

a contingency which might ormight not occur. The policy promise
sto reimburse the person who suffers aloss resulting from the risk
for theamount of damage done up to the
financial limits of the policy.
4) Discuss the various types of Risk ?

There are different types of risks — only some are preventable,

and only certain types of risk are insurable Risk can be
categorized as to what causes the risk, and to whom it affects.

Pure risk is a risk in which there is only a possibility of loss or no

loss—there is no possibility of gain. Pure risk can be categorized
as personal, property, or legal risk. Pure risk is insurable, because
the law of large numbers can be applied to estimate future

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losses, which allows insurance companies to calculate what

premium to be charged based on expected losses.

static risks are more predictable, and, therefore, more

insurable. Dynamic risks change with time, making them less
predictable and less insurable.

Personal risks are risks that affect someone directly, such as

illness, disability, or death. Property riskaffects either personal
or real property. Thus, a house fire or car theft are examples of
property risk.

Legal risk (aka liability risk) is a particular type of personal

risk that you will be sued because of neglect, malpractice, or
causing willful injury either to another person or to someone
else's property.
Speculative risk differs from pure risk because there is the
possibility of profit or loss, such as investing in financial markets.
Most speculative risks are uninsurable, because they are
undertaken willingly for the hope of profit.

Fundamental risk is a risk, such as an earthquake or terrorism,

that can affect many people at once. Economic risks, such as
unemployment, are also fundamental risks because they affect
many people. Particular risk is a risk that affects particular
individuals, such as robbery or vandalism. Insurance companies
generally insure some fundamental risks, such as hurricane or
wind damage, and most particular risks. In the case of
fundamental risks that are insured, insurance companies help to
reduce their risk of great financial loss by limiting coverage in a
specific geographic area and by the use of reinsurance, which is
the purchase of insurance from other companies to cover their
potential losses. However, private insurers do not insure many
fundamental risks, such as unemployment.

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5) How it is related to insurance policy ?

An insurable risk is a risk that meets the ideal criteria for

efficient insurance. The concept of insurable risk underlies nearly
all insurance decisions.

For a risk to be insurable, several things need to be true:

The insurer must be able to charge a premium high enough to cover not
only claims expenses, but also to cover the insurer's expenses. In other
words, the risk cannot be catastrophic, or so large that no insurer could
hope to pay for the loss.

The nature of the loss must be definite and financially measurable. That
is, there should not be room for argument as to whether or not payment
is due, nor as to what amount the payment should be.

The loss should be random in nature, else the insured may engage
inadverse selection (antiselection).

Insurance is not effective for risks that are not insurable risks.
For example, risks that are too large cannot be insured, or the
premiums would be so high as to make purchasing the insurance
infeasible. Also, risks that are not measurable, if insured, will be
difficult if not impossible for the insurer to quantify, and thus they
cannot charge the correct premium. They will need to charge a
conservatively high premium in order to mitigate the risk of
paying too large a claim. The premium will thus be higher than
ideal, and inefficient. Passing of risk involves both party to the
contract. The general rule is that unless otherwise agreed, risk
passes with title. An agreement to the contrary may be either
expressed or implied.
EXCEPTIONS TO THE GENERAL RULE:
(A) RISK INCIDENTAL TO TRANSIT:
The law provided that where the seller undertakes to make
delivery of the goods to the buyer, risk attendant to the system
of transportation or voyage contemplated will be borne by the

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buyer unless the parties agreed to the contrary. This is referred

to as insurable risk.
(B) RISK ATTRIBUTABLE TO FAULT OF EITHER PARTY: Any
damage or loss which arises as a result of the fault or neglect of
the seller or the buyer or their respective agents as the case may
be shall be borne by that party at fault.
(C) GOODS PERISHING: Goods perish not only when they cease
to exist physically but also when they cease to exist in a
commercial sense, e.g. fresh milk gone sour.

6) Nature and Scope of Marine Insurance

The nature and scope of marine insurance is determined by reference to s. 6 of
the Marine
Insurance Act and by the definitions of “marine adventure” and “maritime
perils”.
It is a contract of indemnity but the extent of the indemnity is determined by the
contract.
It relates to losses incidental to a marine adventure or to the building, repairing
or launching of a ship.

A marine adventure is any situation where the insured property is exposed to

maritime perils.
Maritime perils are perils consequent on or incidental to navigation.

 S.6 MIA

6. (1) A contract of marine insurance is a contract whereby the

insurer undertakes
to indemnify the insured, in the manner and to the extent agreed
in the contract,
against
(a) losses that are incidental to a marine adventure or an
adventure analogous to a

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marine adventure, including losses arising from a land or air peril

incidental to

such an adventure if they are provided for in the contract or by

usage of the trade;
or
(b) losses that are incidental to the building, repair or launch of a
ship.
(2) Subject to this Act, any lawful marine adventure may be the
subject of a contract.

S.2(1) “Marine Adventure”

"marine adventure" means any situation where insurable property

is exposed to maritime perils, and includes any situation where

(a) the earning or acquisition of any freight, commission, profit or

other pecuniary
Giaschi & Margolis 3www.AdmiraltyLaw.com

benefit, or the security for any advance, loan or disbursement, is

endangered by

the exposure of insurable property to maritime perils, and

(b) any liability to a third party may be incurred by the owner of,
or other person

interested in or responsible for, insurable property, by reason of

maritime perils;

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S.2(1) “Maritime Perils”

"maritime perils" means the perils consequent on or incidental to

navigation,

including perils of the seas, fire, war perils, acts of pirates or

thieves, captures,

seizures, restraints, detainments of princes and peoples,

jettisons, barratry and all

other perils of a like kind and, in respect of a marine policy, any

peril designated

7) Essentials of Life insurance contract ?

Like any other contract, a contract of life insurance must satisfy the
essentials of a valid contract. All the agreements are contracts if they are
made by the free consent of the parties competent to contract, for a lawful
consideration and with a lawful object, and are not hereby expressly declared
to be void.56

(a) Offer and Acceptance

The intimation of the proposer's intention to buy insurance is the 'offer', while
the insurer's willingness to undertake the risk, is the acceptance. The insurer
may also propose tomake the contract. From whichever side the offer may
be, the main fact is acceptance.
The offer in life insurance is usually made by the assured in the printed form
of the proposal supplied by the insurer. In life insurance the proposal is
contained in four parts, namely, (i) proposal form, (ii) medical report (iii)
agent's report, and friend's report.57 Generally, the acceptance of proposal is
to be made by the insurer. The insurer receiving the papers containing the
proposal scrutinizes them and when they are found in order he signifies his
assent thereto by a letter of acceptance. Until this is sent there is no

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acceptance, though a cheque for the premium is sent and the money is
received and retained till after the death of the insured.

(b) Consideration

The law of life insurance also requires a lawful consideration for its validity as
it is essential to a legal contract. 58 Consideration is the price for which the
promise of the insurer is purchased. The payment of first premium is the
consideration for the insurer and the insurer’s promise to indemnify the
assured from the stipulated risk in the policy is the consideration to the
assured.

In case of Raj Narain Das Mahapatra,59 it was settled that cashing of the
cheque was an acceptance of the risk whether policy was issued or not.

(c) Competence of Parties

The parties must be competent to enter into a contract, the parties must be
of the age of majority,60 of sound mind and not disqualified from contracting
by any law to which any of them is subject.
Regarding the insurance contracts only those insurers can grant insurance
policies who have been issued license under the Insurance Regulatory and
Development Authority.62

(d) Legality of Object

A contract will be invalid if the object is illegal or against public policy. The
object of life insurance contract will be legal if it is made for one's own
protection or for the protection of the family against financial losses. In brief,
the person desiring policy must have insurable interest in the life proposed
for insurance.63

The object of an agreement is lawful unless64:

(i) it is forbidden by law, or

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(ii) it is of such a nature, that if permitted would defeat the provisions of any
law, or

(iii) it is fraudulent

(iv) it involves injury to person or property of another

(v) the court regards it immoral or opposed to public policy.

In Northern India Insurance Company v. Kanhaya lal,65  the policy became

void because the insured caused his own death before the policy has been in
existence for one year.

(e) Free Consent of Parties

When parties to a contract agree on the terms and conditions of the contract
in the same sense and spirit, they are said to have free consent. The consent
is said to be free when it is not caused by coercion, or undue influence or
fraud or misrepresentation or mistake.66

In a contract of insurance the insurer and the insured must be in genuine

agreement as to the subject matter of insurance, that is, life to be insured,
sum assured and term of the insurance and every other particular relating to
the contract. When a person signs a proposal for insurance, he gives his free
consent to the contract. The proposer should understand the

contents of proposal in the same sense and make a written declaration on

the proposal. He is responsible for the proposal made by him. In Bernarsi
Das v. New India Assurance Co. Ltd,.67 a principle of law has been laid down.
It is well established rule of law that in case of a person who is illiterate or
who is not in a position to understand the contents of a document, the
contract cannot be imposed upon him simply because he had endorsed his
signature thereon.

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In Kulta Ammal v. Oriental Government Security Life Assurance Co. Ltd,.68 it

was held that in case of an illiterate person it is necessary to prove the fact
that he had knowledge of what was stated in the proposal.
8) Nature of Life insurance contract :

The nature of contract of life insurance may be summarized under the

following heads:

(a) Unilateral Contract

It is that type of contract where only one party to the contract makes legally
enforceable promise.52 Here it is the insurer who makes an enforceable
promise. The insurer can repudiate the contract of payment of full policy, but
he cannot compel the insured to pay the subsequent premiums. On the other
hand, if the insured continues to pay the premium, the insurer has to accept
them and continue the contract.53

(b) Contract of Utmost Good Faith

An insurance contract is a contract of utmost good faith and therefore, the
contracting parties are placed under a special duty towards each other, not
merely to refrain from active misrepresentation but to make full disclosure of
all material facts within their knowledge.54 It has been said that ‘there is no
class of documents to which the strictest good faith is more rightly required
in courts of law than policies of insurance’.55

(c) Conditional Contract

Life insurance is subject to the conditions and privilege provided on the back
of the policy. The conditions put the obligation on a party to fulfill certain
conditions before the proof of death or of disability are the parts of the
contract. The conditions whether precedent or subsequent of the legal rights
must be fulfilled in order to complete the contract.

(d) Aleatory Contract

In such a kind of contract, no mutual exchange of equal monetary value is
done. It is the happening of the contingency on which the payment is made.
If death occurs only after payment of a few premiums, full policy amount is
paid.

(e) Contract of Adhesion

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In such a contract, the terms of the contract are not arrived at by mutual
negotiations. Similarly, in a life insurance contract, the contract is decided
upon by the insurer only. The party on the other side has to choose between
the two options, i.e. either to accept or reject the policy.

(f) Contract of Certain Amount

Life insurance contract does not provide an indemnity. It is in the nature of a
contingency contract by providing for the payment of the agreed amount on
the happening of the event.

(g) Standard Form of Contract

In the life insurance, all the essentials of a general contract as provided by
the Indian Contract Act, 1872, for a valid contract are present.

9) Basic characteristics of Fire insurance ?

Fire Insurance Definition

Fire insurance means insurance against any loss caused by fire. Section 2(61 of
the Insurance Act defines fire insurance as follows: “Fire insurance business
means the business of effecting, otherwise than incidentally to some other class
of business, contracts of insurance against loss by or incidental to fire or other
occurrence customarily included among the risks insured against in fire
insurance policies.”

What is ‘Fire’?
The term fire in a Fire Insurance Policy is interpreted in the literal and popular
sense. There is fire when something burns. In English cases it has been held that
there is no fire unless there is ignition. Stanley v. Western Insurance Co. Fire
produces heat and light but either o them alone is not fire. Lighting is not fire.
But if lighting ignites something, the damage may be covered by a fire-policy.
The same is the case with electricity.

Characteristics of Fire Insurance

Fire insurance is a contract of indemnity. The insurer is liable only to the

extent of the actual loss suffered. If there is no loss there is no liability even
if there is a fire.

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Fire insurance is a contract of good faith. The policy-holder and the insurer
must disclose all the material facts known to them.
Fire insurance policy is usually made for one year only. The policy can be
renewed according to the terms of the policy.
The contract of insurance is embodied in a policy called the fire policy. Such
policies usually cover specific properties for a specified period.
Insurable Interest: A fire policy is valid only if the policy-holder has an
insurable interest in the property covered. Such interest must exist at the
time when the loss occurs. In English cases it has been held that the
following persons have insurable interest for the purposes of fire insurance-
owner; tenants, bailees, including carriers; mortgages and charge-holders.
In case of several policies for the same property, each insurer is entitled to
contribution from the others. After a loss occurs and payment is made, the
insurer is subrogated to the rights and interests of the policy-holder. An
insurer can reinsure a part of the risk.
Fire policies cover losses caused proximately by fire. The term loss by fire is
interpreted liberally. Example: A women hid her jewellery under the coal in
her fireplace. Later on she forgot about the jewellery and lit the fire. The
jewellery was damaged. Held, she could recover under the fire policy.
Nothing can be recovered under a fire policy if the fire is caused by
adeliberate act of policy-holder. In such cases the policy-holder is liable to
criminal prosecution.
Fire policies generally contain a condition that the insurer will not be liable
if the fire is caused by riot, civil disturbances, war and explosions. In the
absence of any specific expectation the insurer is liable for all losses
caused by fire, whatever may be the causes of the fire.
Assignment: According to English law a policy of fire insurance can be
assigned only with the consent of the insurer. In India such consent is not
necessary and the policy can be assigned as a chose-in-action under the
Transfer of Property Act. The insurer is bound when notice is given to him.
But the assignee cannot be recovering damages unless he has an insurable
interest in the property at the time when the loss occurs. A stranger cannot
sue on a fire policy.
Payment of Claims: Fire policies generally contain a clause providing that
upon the occurrence of fire the insurer shall be immediately notified so that
the insurer can take steps to salvage the remainder of the property and can
also determine the extent of the loss. Insurance companies keep experts on
their staff of value the loss. If in a policy there is an international over
valuation of the property by the policy-holder, the policy may be avoided on
the ground of fraud.

Discuss the salient features of Public Liability Insurance

10)
Act 1991 ?
 Salient Features

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 It is a modified version of public liability (Industrial) policy and the

term 'handling' is wide enough to include baileys or any other
intermediaries and transport operators. The transport operators who
transport substances like liquefied petroleum Gas, certain acids,
hexane and other toxic substances are required to compulsorily obtain
Public liability policy. 

Public Liability Insurance Act,1991

Public Liability Insurance Act,1991 is to provide the

compensation for damages to victims of an accident
of handling any hazardous substance or It is also calls, to
save the owner of production/storage of hazardous
substance from hefty penalties. This is done by proving
compulsory insurance for third party liability. As from the name of
the act, it is Public Liability.

First time owner is put on anvil to provide the

compensation/relief, when death or injury to any person (please
note-other than a workman) or damage to any property has
resulted from an accident of hazardous substance.

Actually the owner shall buy one or more insurance policies

before he/she starts handling any hazardous substance.
When any accidents come in knowledge of Collector, then he/she
verify the occurrence of accident and order for relief as he/she
deems fit.

The only restriction that is put on Public Liability Insurance Act

is that the application for relief should within five years of
the occurrence of the accident.

When Collector finds the guilty, the insurer (means person or

insurance company) is required to pay amount as deems
to be fit as per law within a period of thirty days of the
date of announcement of the award. The Owner shall also
pay the relief as Collector deems fit because it is duty of owner to
keep the hazardous material safe in his custody. The amount is
normally deposited in account of “Relief Fund” and Collector
arrange the relief to pay from the Relief Fund.

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The Collector shall have all the powers of Civil Court for the
purpose of taking evidence on oath and of enforcing the
attendance of witnesses and of compelling the discovery
and production of documents and material objects and for
such other purposes as may be prescribed.

Where an offence has been committed by any Department of

Government in case of hazardous chemical, the Head of the
Department shall be deemed to be guilty of the offence
and shall be liable to be punished.

Insurance policy taken out by an owner shall not be for

a amount less than the amount of the paid-up capital of the
under taking handling any hazardous substance and owned or
controlled by that owner and more than the amount, not
exceeding fifty crore rupees, as may be prescribed. “Paid-up
capital” in this sub-section means, in the case of an owner not
being a company, the market value of all assets and stocks of the
undertaking on the date of contracts of insurance.
Contribution of owner to the Environmental Relief Fund:

An owner shall contribute to the Environmental Relief fund a sum

equal to the premium payable to the insurer and every
contribution to the Environmental Relief Fund shall be payable to
the insurer, together with the amount of premium.

Powers of Collector:

The Collector may follow such summary procedure for conducting an inquiry on
an application for relief under the Act, as he thinks fit.

The Collector shall have all the powers of a Civil Court for the following
purposes namely:-

summoning and enforcing the attendance of any person and examining

him on oath.

requiring the discovery and production of documents;

receiving evidence on affidavits;

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subject to the provisions of sections 123 and 124 of the Indian Evidence
Act, 1872, requisitioning any public record or document or copy of such
record or document from any office;

issuing commissions for the examining of witness or documents;

dismissing an application for default or proceeding ex-parte;

setting aside any order of dismissal of any application for default or any
order passed by it exparte;

inherent powers of a civil court as-served under section 151 of the Code of
Civil Procedure, 1908.

Jurisdiction of Court of India :

No court shall take cognizance of any offence under this

Act except on a complaint made by

Any authority or office or person authorized by Central Government.

Any person after giving notice but should not less than 60 days for the alleged
offence and of his intention to make a complaint to the Central Government or
the authority or officer authorized as mentioned above.

 Advisory Committee

The Central Government constitutes an Advisory Committee for

the cases/matters relating to the insurance policy under this Act:

The Advisory Committee shall consist of–

3 officers nominated by Central Government;

2 persons on behalf of insurers;

2 persons on behalf of owners ; and

2 persons from amongst the experts of insurance or hazardous

substances, to be appointed by the Central Government.

Chairperson shall be one of the member nominated by Govt

of India. 

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Amount of Compensation

Reimbursement of medical expenses incurred up to a maximum of Rs. 12,500

in each case.

For fatal accidents the relief will be Rs. 25,000 per person in addition to
reimbursement of medical expenses if any, incurred on the victim up to a
maximum of Rs. 12,500.

For permanent total or permanent partial disability or other injury or sickness,

the relief will be

reimbursement of medical expenses incurred, if any, up to a maximum of

Rs. 12,500 in each case and

cash relief on the basis of percentage of disablement as certified by an

authorised physician. The relief for total permanent disability will be Rs.
25,000.

For loss of wages due to temporary partial disability which reduces the earning
capacity of the victim, there will be a fixed monthly relief not exceeding Rs.
1,000 per month up to a maximum of 3 months provided the victim has been
hospitalised for a period of exceeding 3 days and is above 16 years of age.

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