Subject: Insurance Law: PROJECT ON: Double Insurance & Re-Insurance - Indian Perspective
Subject: Insurance Law: PROJECT ON: Double Insurance & Re-Insurance - Indian Perspective
Subject: Insurance Law: PROJECT ON: Double Insurance & Re-Insurance - Indian Perspective
CONTENT
1) INTRODUCTION
2) HISTORY OF INSURANCE LEGISLATION IN INDIA
3) UBERRIMA FIDES OR UTMOST GOOD FAITH
4) INDEMNITY
5) PROXIMATE CAUSE OR CAUSA PROXIMA
6) DOUBLE INSURANCE
7) RE-INSURANCE
8) ASSIGNMENT
9) CONCLUSION
BIBLIOGRAPHY
INTRODUCTION
The insurance idea is an old institution of transactional trade. Even from olden
days merchants who made great adventures gave money by way of consideration, to other
person who made assurance, against loss of their goods, merchandise ships aid things
adventured. The rates of money consideration were mutually agreed upon. Such an
arrangement enabled other merchants more willingly and more freely to embark upon
further trading adventures. Insurance in the modern form originated in the Mediterranean
during 13/14th century. The use of insurance appeared in the account of North Italian
Merchant Banks who then dominated the international trade in Europe and that time.
Marine insurance is the oldest form of insurance followed by life insurance and fire
insurance.
The term insurance may be defined as a co-operative mechanism to spread the
loss caused by a particular risk over a number of persons who are exposed to it and who
agree to ensure themselves against that risk.
Insurance is a contract wherein one party (the insurer) agrees to pay the other
party (the insured) or his beneficiary, a certain sum upon a given contingency (the insured
risk) against which insurance is required.
Some authors defined insurance as a social apparatus to accumulate funds to meet
the uncertain losses arising through a certain hazard to a person insured for such hazard.
According to J.B. Maclean, Insurance is a method of spreading over a large
number of persons a possible financial loss too serious to be conveniently borne by an
individual.1
According to Riegel and Miller, Thus it serve the social purpose; it is a social device
whereby uncertain risks of individual may be combined in a group and thus made more
certain; small periodic contribution by the individual providing a fund out of wich those
who suffer losses may be reimbursed.2
The primary function of insurance is to act as a risk transfer mechanism. Under this
function of insurance, an individual can exchange his uncertainly for certainly. In return
1 J.B. Maclean; Life Insurance Pg.01
2 Riegel and Miller; Principles of Insurance and Practice; Pg-10
for a definite loss, which is the premium, he is relieved from the uncertainly of a
potentially much larger loss. The risk themselves are not removed, but the financial
consequences of some are known with greater certainly and he can budget accordingly.
Every subject or discipline has certain generally accepted and a systematically
laid down standards or principles to achieve the objectives of insurance. Insurance is not
exception to this general rule. In insurance, there is a body of doctrine commonly
associated with the theory and procedures of insurances serving as an explanation of
current practices and as a guide for all stakeholders making choice among procedures
where alternatives exit. These principles may be defined as the rules of action or conduct
that are universally adopted by the different stakeholders involved in the insurance
business. These principles may be classified into following categories:
The control and enquiry was slight. Non-compliance of rules and regulations was
not strictly penalized.
The foreign companies were to submit report of their total business both in Indian
and outside India. But separate particulars regarding business done in India were
not demanded and the absence of these made it impossible to get any idea of the
cost of procuring business in India for foreign companies and comparing them
with similar data of the Indian companies.
The government actuary was not vested with the power to order investigation into
the conduct of a company even when it appeared that the company was insolvent
under the power of exemption.
Any one can start life insurance business only with the sum of Rs. 25000/-. It was
too law to prevent the mushroom growth of companies. Foreign insurer was not
bound to deposit a certain sum of life policy issued in India.
discovery of breach or it will be assumed that he has decided to waive his right. Legal
consequences It is worth mentioning that in 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 void Ab-initio. However, as
and when the party not at fault has validated the voidable contract, the contract cannot be
avoided by him later on.
In United India Insurance Co. Ltd. v/s M.K.J. Corporation 3 observed, it is the
fundamental principle of insurance that utmost good faith must be observed by the
contracting parties. It is different than the ordinary contract where the parties are
expected to be honest in the dealings but they are not expected to disclose all the defeats
about the transaction, further observed that it is the duty of the insurer and their agents
to disclose all material facts within their knowledge since obligation of good faith applies
to them equally with the assured.
Burden of Proof In L.I.C. of India v/s Channasbasamma 4, The burden of proving that
the assured had made false representation and suppressed material facts is undoubtedly
upon the corporation.
PRINCIPLE OF INDEMNITY
Indemnity is the controlling principle in insurance law. All insurance policies accept the
life policies and personal accident policies are contract of indemnity. This principle may
be defined as under the indemnity contract the insurer undertakes to indemnify the
insured against the loss suffered by the insured peril. Literally, indemnity is make good
the loss. This principle is based on the fact that the object of the insurance is to place the
insured as far as possible in same financial position in which he was before the happening
of the insured peril under this principle the insured is not allowed to make any profit out
of the happening of the event because the object is only to indemnify him and profit
making would be against the principle. An example If a house is insured for Rs. 10
Lakhs against the risk of fire and is damaged in fire causing a loss of Rs. 1 Lakh only.
Then the insured would be paid only one Lakh because the principle of indemnity is with
3 (1996) 6 SCC 428
4 AIR 1991 SC 392
him. Likewise, this principle also limits the amount of compensation, if the loss caused is
more than 10 Lakh, he cannot recover more than the amount for which the house was
insured.
The principle of indemnity has been explained in an English Case Law Castellain
v/s Preston5
Every contract of Marine and Fire insurance is a contract of indemnity and of indemnity
only, the meaning of which is that the insured in case of loss is to receive full indemnity
but is never to receive more. Every rule of insurance law is adopted in order to carryout
this fundamental rule, and if ever any proposition brought forward the effect of which is
opposed to this fundamental rule, it will be bound to be wrong.
The main characteristics of the principle of indemnity are:
1.
That it applies to all contract of insurance except the life and personal accident
insurance.
2.
3.
If there are more than one insurer for the property, if destroyed, the amount of loss
could be recovered from any of them but not from all of them, and
4.
The insurers takes all the rights that the insured hard, after the payment of
compensation.
How Indemnity is provided?
Cash
Replacement
Indemnity
Re-installment
Repair
Merits of the principle of indemnity The principle of indemnity offers the following
advantages:
5 1883 2 Q B 380
1.
2.
3.
one of them. No money value can be placed on human life and therefore the insurer
undertakes to pay a fixed or guaranteed sum irrespective of the loss suffered. A life
insurance contract comes near to guarantee than to indemnity.
Insured Perils Those named in the policy as insured example fire, sea, water,
lightening, storm theft etc.
2.
10
3.
Uninsured Perils Those perils not mentioned in the policy at all as insured and
excluded perils. Smoke and Water may not be excluded nor mentioned as insured
in a fire policy.
Need for the principle of proximate cause When the loss is the result of two or
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In New India Assurance Co. Ltd. v/s Vivek cold Storage8, divided by the National
Commission on 15/04/1999, The Comprehensive policy (Fire Insurance Policy) had
covered fire risk as well as other risks to Building, machinery etc. and also deterioration
of stocks of potatoes stored in the complainants cold storage The accident clause covered
the breakdown of machinery due to unforeseen circumstances. There was leakage of
ammonia gas and therefore the plant was closed causing loss to the stock of potatoes in
the godown. The Insurance Co. denied the claim as their was no breakdown of the plant
and machinery. This contention was negative and it was held that as plant and machinery
of cold storage developed leakage and ammonia gas escaped the plant had to be
shutdown for repairs of the leak, which resulted in damage to the stored potatoes. Thus
the Insurance Co. was held liable.
1.It is the responsibility of the assured to prove, in case of loss that the loss was caused by
insured perils.
2.
In case the insurer gives the argument that the loss was caused by excluded perils
and not by insured or proximate perils he is to prove.
3.
4.
It is the duty of the assured to prove that the loss was not caused by excluded
perils but the loss was caused by itself without the interference of excluded perils.
DOUBLE INSURANCE
Double Insurance is possible in all types of Insurance Contracts. A person can
insure his life in different policies for different sums. In life insurance the assured can
claim the sum insured with different policies on maturity on to his nominee after his
death. This becomes possible in life insurance because life insurance is not indemnity
insurance. Where risk connected with a particular subject matter is insured under mare
8 (1999)2 CPJ 26
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than one policies taken out from different Insurance Co., it is called Double Insurance.
Double Insurance may not be of much advantage in case of indemnity insurance because
insured can recover only one amount which is equal to his loss and not more than that.
Same Risk
Same Insured
In New India Assurance Co. Ltd. v/s Krishna Kumar9, In this case the truck in
question was purchased by the complainant after obtaining loan from the Bank in return,
the truck was hypothecated with the Bank. The complainant insured it with Oriental
Insurance Co. Ltd. for one year, no information given to the finance (the Bank) and the
financer also got the same truck insured. Fortunately no untoward incident happened
during the period of insurance. After the expiry of the period of insurance, the
complainant allegedly discovered about the Double Insurance and a filed a complaint for
the return of the premium. The commission while dismissing the complaint observed:
It would see that there was a communication gap between the respondent and his
financing bank for which obviously enough the appellant Insurance Co. cannot and
penalized.
There are some rules with respect to the concept of double insure, they are here under.
Actual loss recovery: The insured can enter into contract of insurance with any number
of insurers. When the loss occurs, the insured can claim only the loss amount. The
insured cannot claim the sum more than the occurred loss.
Excess recovery and the trust: The insured in any case collects or recovers excess sum
from the insurers, that is more amount collected than the actual loss, the excess sum shall
be held in trust and the insured is the trustee.
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Insurers liability: The insured can enter into contract of insurance with many insurers.
When the loss occurs, the insurers are liable to the insured and all the insurers must pay
the assured sum proportionately. If any insurer pays more than the assured sum payable,
that insurer has every right to collect the same from the co-insurers who actually paid less
assured sum.
The most common double insurance clauses include one or a combination of the
following:
"Notification" clauses: These are clauses providing that unless the insured gives
a written notice to the insurer about the existence of a second insurance covering
the same risk, the policy will be void. Typical wording would be: "No claim shall
be recoverable if the property insured be previously or subsequently insured
elsewhere, unless the particulars of such insurance be notified to the company in
writing.10
"Escape" clauses: The effect of these clauses is to relieve the insurer from any
liability under the policy in the event of double insurance. Typical wording would
be: "We will not pay any claim if any loss, damage or liability covered under this
insurance is also covered wholly or in part under any other insurance except in
respect of any excess beyond the amount which would have been covered under
such other insurance had this insurance not been effected."12
14
"Excess" clauses: The effect of these clauses is to turn the policy into an excess
insurance whereby it will only come into play if the loss exceeds the limit of the
other insurance. Typical wording would be: "If at the time of the occurrence of
any injury, loss, or damage, there shall be any other indemnity or insurance of any
nature wholly or partly covering the same, the underwriters shall not be liable to
pay or contribute towards any such injury, loss or damage except in excess of the
sum or sums actually recovered or recoverable under such other indemnity or
insurance."13
Two "notification" clauses: Each insurance policy will become void if the
insured fails to notify the insurer of the existence of the other insurance. However,
if the insured fails to notify the second insurer, and that policy becomes void, then
the first insurance will be valid as there will be no other valid insurance to provide
notification of.
13 Austin v Zurich General Accident & Liability Insurance Co Ltd (1944) 77 Ll L Rep 409
15
first cover), the first insurer will only be liable for Rs. 10,000 and the second
insurer will be liable for Rs. 20,000. Thus, the first insurer will bear 1/3 of the
claim, the second 2/3.
Two "escape" clauses: Where both policies contain "escape" clauses, they have
the effect of cancelling each other so that each insurer is liable for an equal
proportion of the loss claimed.
Two "excess" clauses: Where both policies contain "excess" clauses, they have
the effect of cancelling each other so that each insurer is liable for an equal
proportion of the loss claimed.
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cover for the same risk, the excess clause was triggered and the HSBC policy did not
cover the buyer. Accordingly there was no "other insurance" within the scope of the NFU
ratable proportion clause and the NFU was liable for the loss in full.
This decision confirms the importance insurers understanding the implications of their
policy clauses. Determining whether or not there is double insurance, and if so, how
much is each insurer liable for, will largely depend on interpreting the policy wording in
any particular circumstances.
RE-INSURANCE
Re-Insurance is a contract between two or more Insurance Company by which a
portion of risk of loss is transferred to another Insurance Company This happens only
when an Insurance Company has undertaken more risk burden on its shoulder than its
bearing capacity. In the words of Riegel and Miller Re-Insurance is the transfer by an
Insurance Company a portion of its risk to another Company.
According to the Federation of Insurance Institute, Mumbai. Re-Insurance is an
arrangement where by an insurer who has accepted an insurance, transfers a part of the
risk to another insurer so that his liability on any one risk is limited to a figure
proportionate to his financial capacity.
A Re-Insurance does not affect the contract between the original insurer and the
assured. Re-Insurance contracts are contract of indemnity, even though the original policy
may not the one of indemnity, such as a life or personal accident policy. Re-Insurance is
dealt within section 101-A of the Insurance Act, 1938. Chapter II of the Insurance
Regulatory and Development Authority (General Insurance Re-Insurance) Regulation,
2000 prescribes procedure for Re-Insurance section 3 read as under:
Section 03: (1) The Re-Insurance program shall continue to be guided by the
Following objectives to:
a)
b)
c)
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d)
(2) Every insurer shall maximum possible retention commensurate with its
financial strength and volume of business. The authority any require an insurer
to justify its retention policy and may give such directions as considered
necessary in order to ensure that the Indian insurer is not merely fronting for a
foreign insurer;
(3) Every insurer shall cede such percentage of the sum assured on each
policy for different classes of insurance written in India to the Indian ReInsurance as may be specified by the authority in accordance with the
provision of Part IV-A of the Insurance Act, 1938.
Characteristics of Re-Insurance
(i) It is an Insurance contract between two Insurance Company.
(ii) The insurer transfers the risk beyond the limit of his capacity to another
Insurance Company.
(iii) The relationship of the assured remains with the original insurer only. The Re
Insurance is not liable directly towards the assured.
(iv) Re-Insurance does not affect the right of insured.
(v) The original insurer cannot do Re-Insurance more than the insured sum.
(vi) Re-Insurance is a contract of indemnity.
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CONCLUSION
In India, insurance sector, moved from being an unregulated sector to a
completely regulated sector to partly deregulated sector now. India being a developing
country and one of the least penetrated insurance markets in the world, there is
tremendous scope of growth for insurance and reinsurance business. Since the
reinsurance business involves managing risks of the entities that themselves manage
risks, it involves not only immense expertise but also huge amount of capital to run the
business profitably for a considerable amount of time. It is these risks and the expertise
required that makes it very difficult to become profitable. Presently, India has only one
specialized reinsurer General Insurance Corporation of India (GIC Re). Besides GIC
Re, other Indian insurance companies or foreign reinsurers enter reinsurance contracts.
Furthermore, the attempt by the IRDA (Insurance Regulatory and Development
Authority) regulations to retain maximum reinsurance business in India mandates
insurance companies to try to offer these products to other Indian insurance companies
first and then to foreign reinsurers. Rather than this, attempt should be made to
appropriately capitalize Indian reinsurance sector by easing FDI limits from existing
26%. Even though the proposed Insurance (Amendment) bill plans to increase FDI limits
to 49% only, it would be even better if this limit were increased to 74% or 100% for
specifically reinsurance service providers due to huge amount of capital requirements for
that sector. This would lead to reduce dependence of insurance companies on the
obligatory services of GIC Re and unregulated foreign reinsurers.
Even though foreign reinsurers should enjoy a rating of at least BBB (with
Standard & Poor) or equivalent rating of any other international rating agency before any
business is placed with them, it would still be a wise idea to collect some amount in the
nature of security from them as mentioned above. Furthermore, some slight regulations
on their operations with regard to Indian businesses are needed except just a mere review
of the reinsurance treaty between insurer and reinsurer by IRDA.
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BIBLIOGRAPHY
Important Reference Books:
1. Singh, Bridge Anand, New Insurance Law (2000) Union Book Publisher,
Allahabad
2. Ivamy, Case Book on Insurance Law (1984), Butterworths
3. Ivamy, General Principles of Insurance Law (1983), Butterworths
4.
John Brids, Modern Insurance (2003), Universal Law Publishing Co. Pvt. Ltd.
5. Murthy & Sharma, Modern Law of Insurance (Fourth Edition), Lexis Nexis,
Butterworth Wadhwa, Nagpur
6. Srinivasan, M.N., Principles of Insurance Law (2006), Wadhwa & Company,
Nagpur
7. Mishra, M.N., Law of Insurance (2006), Central Law Agency, Allahabad
8. Jaiswal , J.V.N., Law of Insurance (2008), Eastern Book Company, Lucknow
9. Singh, Avtar, Law of Insurance (2008), Eastern Book Company, Lucknow
10. Mathew, M.J., Insurance : Principles & Practice (2005), RBSA Publishers, Jaipur.