MODULE_4

MODULE 4

BASICS OF INSURANCE

4.1. MEANING OF INSURANCE
The term Insurance is used as a social device to reduce the risk of life and property. The meaning
of Risk: Risk is a part of human life to try hard or to achieve a goal from taking that risk. The
risk, can be insured against sea, death and accidents. Insurance is a means from the protection of
financial loss of a person.
4.1.1. BASIC CATEGORY OF RISK
With regards to Insurance risk involves two types of categories:
§ Dynamic risk
§ Pure or Static risk
4.1.1. Dynamic Risk
Dynamic risk refers to the situation where either there is a possibility of profit OR the loss. In the
daily business level, the conduct of its affairs depends on the situation either to earn profit or the
loss.
For Example: Risks in betting on a horse race etc. Dynamic risk are generally uninsurable in
nature.
4.1.2. Pure or Static risk
The second category of risk involves Pure or Static risk. It is a situation in which the outcome of
the possibility is only the occurrence of the loss. They are never beneficial.
For Example: Premature death, Medical Expenses, Flood, Damage to property due to fire etc.

Insurance is a contract by which the one party in consideration of a price paid to him adequate to
the risk becomes security to the other that he shall not suffer loss, damage, or prejudice by the
happening of the perils specified to certain things which may be exposed to them.1

4.2. INSURANCE IN INDIA

4.2.1. WHAT IS INSURANCE LAW?

Insurance law is a contract between two parties whereby one party known as the “insurer”
undertakes in exchange for a fixed sum called “premium” the other party for a happening of a
certain event.

§ An Insurer is a company selling the insurance.
§ "Insurer" means-

(a) An Indian Insurance Company, or
(b) A statutory body established by an Act of Parliament to carry on insurance business,
(c) An insurance co-operative society, or
(d) A foreign company engaged in re-insurance business through a branch established in
India.
§ An Insured or policyholder2 is the person or entity buying the insurance. The insured,
receives a contract, called the insurance policy which contains the situations and
circumstances where will that policy work and where the suffered person will get
compensation.

The need for an insurance policy arises when there is a risk for a happening of a certain event.
That is totally unpredictable in a nature. It is used for the purpose of economic growth for the
lower income and middle income families.

1 Lucena Craufurd (1806)2 BOS,&PNR.
2 "policy-holder" includes a person to whom, the whole of the interest of the policy-holder in the policy is assigned
once and for all, but does not include an assignee thereof whose interest in the policy is defeasible or is for the time
being subject to any condition.

In the case of Liberty Insurance Company Limited v. John3 where indemnity relates to payment
of money to the insured, and the court held that the insurer was legally bound to pay the money
or provide the equivalent pecuniary compensation to the insured.

4.2.2. FORMATION OF INSURANCE IN INDIA

Insurance is quite an ancient thing. The concept of insurance can be found in the Babylonian
Civilization, as well as in the Economics of Arya Chanakya. When the British ruled the world,
most of the trades and travel was done by the sea. The transactions done by the sea with the ships
carried high risk of damage. The British businessmen thought of forming an organization to
reimburse the person who suffered loss. From this practice the concept of insurance born.

Insurance law in India had its origins in the United Kingdom with the establishment of a British
firm, the Oriental Life Insurance Company in 1818 in Calcutta, followed by the Bombay Life
Assurance Company in 1823, the Madras Equitable Life Insurance Society in 1829 and the
Oriental Life Assurance Company in 1874, Indians were charged an extra premium of up to 20%
as compared to the British.

The first act that establishes in India was in 1912 that covers the provisions of Life Insurance of
India however the scope of insurance was left out to the scope of 1912 act. The first general
Insurance Company was established by an Indian “Indian Mercantile Insurance Company
Limited” in Bombay.

With the growth of fire, accident, and marine Insurance and other kind of Insurance also took a
place in the scenario of the Insurance with the scope of the Act 1912. The first Indian Insurance
Companies Act was passed in 1912. The next was passed in 1938. But the framing of act and the
regulations about the act was passed only in 1998.

The Parliament passed the IRDA Act in 1999, and the Insurance and Development Authority
was established. This institution now exercises control over all the insurance business in the
country.

3 (1966)1 NWLR Pt.423.

The need for the insurance business grew at a faster pace with the development of industry
in India after Independence despite the growth of the business the need for the insurance
witnessed.

§ Nationalization of insurance in India

Since 1956 with the nationalization of Insurance industry in India, the LIC hold the
monopoly in India’s Life Insurance sector. GIC wit four subsidiaries, enjoyed the monopoly
for General Insurance. Both the LIC&GIC, have played significant role in the development
of the insurance market in India. The Insurance act 1938 was the first legislation governing
the life insurance and non-life insurance to provide strict control over insurance business.

At that time there were 154 Indian life insurance companies. In addition there were 16 non-
Indian companies and 75 provident societies issuing life insurance policies.

§ Nationalization of General Insurance

Sixteen years later in 1972, non-life insurance was finally nationalized. The general
insurance business act 1972 provides that the central government shall form a government
company, in accordance with the provision of the company’s act 1956, to be known as
general Insurance Corporation of India.

4.3. TYPES OF INSURANCE IN INDIA

Section 64 C of Part II-A of the Indian Insurance Act 1938 states that there shall be two Councils
of the Insurance Association of India, namely4:

§ The Life Insurance Council consisting of all the members and associate members of the
Association, who carry on life insurance business in India, and,

§ The General Insurance Council consisting of all the members and associate members of the
Association who carry on general insurance business in India.

4.3.1. LIFE INSURANCE

The need for life insurance came with the need of the fact that the life of the human beings
depends upon uncertainties and the person’s life is itself is uncertain. It is well said that “life is
full of risk. For property, there are fire risk, for shipment of goods, there are perils of sea, for
human life, there is a risk of death or disability and so on and so forth5”.

Life Insurance is the privilege given to the human being in terms of scheme to provide an
assurance that if any event happens which enlighten for the risk in terms of person’s life would
get financial assurance to bear the loss for his family.

4.3.1.1. Definition of Life Insurance

“Life Insurance is the contract to pay a certain sum of money on the death of a person
consideration of the due payment of certain amenity for his life calculated according to the
probable duration of life6”.

In light of the above definitions the essential features of life insurance can be summed up as
under:

§ It is a contract relating to human life
§ There need not be an express provision that the payment is due on the death of the person.
§ The contract provides for payment of lump sum money.

4 Section 64C, Insurance Act, 1938.
5 G.Gopalkrishna, “The social security character of life insurance, “The ICFAI University Journal of insurance law,
Vol.VI, no, (2008), P.12.
6 Dalby v.India & London life Assurance Co.(1854) 15CB.365:139 AII ER465

§ The amount is paid at the expiration of certain period or on death of the person.

4.3.1.2 Types of Life Insurance

§ Term insurance

A term insurance provides a fixed amount of price of money on death during the course of the
contract. This type of insurance provides for life insurance protection for the given period of
time. In this case if the person whose life is insured under the policy dies during the period of
that given time, the benefit as a insurance money will be payable who are the nominees of that
policy.

§ Whole life insurance

Whole life insurance policy provides for a sum of fixed amount of money on death. The whole
life insurance policies provide Life Insurance protection over one's lifetime. Under these policies,
the payment of the assured sum is a certainty in contrast to the term insurance contracts.

§ Endowment Assurance

Endowment Assurance policy provides a fixed amount of money either on death during the
period of contract or at the expiry of contract if life assured is alive.

§ Universal Life Insurance

The product category is a hybrid of ULIP and Traditional products. Like a ULIP product each
contract has underlying funds and like a traditional product returns (bonus) are agreed as a part
of the contract. Under this type of policy (ULI), the policyholder pays an initial premium, which
should not be less than a minimum for the given face value and the attained age of the Life to be
insured.

4.3.2. GENERAL INSURANCE

The general insurance industry in India become nationalized as a general insurance corporation
by the Central Government in 1972. Non-Life –Insurance refers to the property and liability
insurance. Every business enterprise is associated to a large number of risks when they start a

business i.e. premises of the business, and plant and machinery of the business or the raw
materials.

Non-Life insurance is a different concept of insurance from the general insurance policies. A life
insurance policy is basically a policy for a purpose of long run. While general insurance policy is
renewed every one year.

Section 2(6B) of thee Insurance Act 1938, defines General insurance business. According to the
general insurance business means fire, marine, or miscellaneous insurance whether carried
separately or in combination.

The insurance companies collects the premium from a group of business firms for the protection
to their property from the risk of damage caused by any uncertainties during the course of time.

Types of General Insurance:

§ Motor vehicles Insurance
§ Fire Insurance
§ Health Insurance
§ Marine Insurance

4.3.2.1. Motor Vehicles Insurance

Under the provision of the Motor Vehicles Act 1988, it has been stated that insurance is
mandatory for every vehicles used for any purpose should be under the policy of motor vehicles
insurance law. It is also known as third party Insurance of India or third party liability. In this
type of insurance the owner of the vehicle is liable to claim money from the third party if any
damage is cause to him in a public place by arising out of use of the vehicle.

The Government. National Insurance Co. Ltd. v. Fakir Chand7, “third party” should include
everyone (other than the contracting parties to the insurance policy), be it a person traveling in
another vehicle, one walking on the road or a passenger in the vehicle itself which is the subject
matter of insurance policy.

7 AIR 1995 J&K 91.

4.3.2.2. Fire Insurance

A fire insurance is a type of policy in which the insurer indemnify the person who suffered loss
due to the destruction caused by the occurrence of fire and has caused destruction to the property
and goods. This kind of insurance is important for the enterprises which have high risk of
occurrence of fire in the enterprise.

The fire insurance business is defined as follows: “Fire insurance business means the
business of effecting, otherwise than independently 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 policies8”.

4.3.2.3. Health Insurance

Health insurance covers the aspects the classes of insurance related to medical expenses. It is a
very important kind of insurance for every individual. To cover the risk related to health issues.

“Health insurance business” means the effecting of insurance contracts which provide for
sickness benefits or medical, surgical or hospital expense benefits, travel health insurance and
personal accident cover9”

Need of Health Insurance

§ Health insurance helps in solving high unexpected costs arising at the time of emergency
§ By taking health insurance the person can make the treatment affordable.
§ It helps in taking tax benefit too.

4.3.2.4. Marine insurance

Marine insurance is important for the risk at the Maritime perils. “Maritime perils” means the
perils consequent on, or incidental to, the navigation of the sea, that is to say, perils of the sea,
fire, war perils, pirates, rovers, thieves, and any other perils.10

8 Section 2(6A) Insurance Act 1938.
9 Section 1(f) Insurance Regulatory And Development Authority (Health Insurance) Regulatons,2012.
10 Indian Marine Insurance Act, 1963, Section 2(e).

Marine Insurance business means the business of effecting contracts of Insurance upon vessels of
any descriptions, including cargos, freights and other interests which may be legally insured in or
in relation to such vessels, cargos and freights, goods, wares, merchandise and property of
whatever description insured for any transit by land or water or both, whatever or not including
warehouse risk or similar risk in addition or as incidental to such transit and include any other
risk customarily included among the risk insured against in Marine Insurance policies. 11

4.4. MEANING AND TYPES OF CLAIMS

The meaning of Insurance claim is that when the person who has suffered the loss, asks for the
claim of insurance after the happening of the even that has caused loss to the claimant. The
timely settlement of the valid claim is very important for the insurance company.

There are three types of claims under life insurance policy:

§ Survival Benefit Claim
§ Maturity Benefit Claim
§ Death Benefit Claim

4.4.1. SURVIVAL BENEFIT CLAIM

Survival benefit refers to the payment of money after the fixed period of time duration for
example say 4 to 5 years and the policy should be in force and secondly the policy holder should
be alive also. In this kind of insurance the insurer has to send a premium to the policy holder for
how much amount is to be paid under this policy. He also discharge voucher under this kind of
insurance.

After the discharge of the policy by the insurer the policy holder has to duly sign the discharge
document for the benefit of the survival claim.

4.4.2. MATURITY BENEFIT CLAIM

If the life insured survives to the full term, then basic sum assured is payable. This payment by
the insurer to the insured on the date of maturity is called maturity payment. The amount payable

11 Section 3(13) of The Marine Insurance Act, 1938

at the time of the maturity includes a sum assured and bonus/incentives. The insurer sends in
advance the intimation to the insured with a blank discharge form for filling various details in it.
It is to be returned to the office along with-

§ Original Policy document
§ Age proof if age is not already submitted
§ Assignment /reassignment, if any.12

4.4.3. DEATH BENEFIT CLAIMS

In this kind of insurance occurs when the death arises of the policy holder. This kind of insurance
is very important for the members of the policy holder. After the death arises the money will be
payable to the nominee mentioned in the document of the policy of the policy holder.

In case of a death claim the following necessities has to be there for the claim of the insured
money:

§ Proof of death,
§ Proof of title
§ Proof of age are required.

After completing the above formalities the insurance company issues a discharge form for
completion which is to be signed by the person entitled to receive the policy money.

4.4.4. OTHER KINDS OF CLAIMS UNDER GENERAL INSURANCE

4.4.4.1. Vehicle Accident Claims

In this type of insurance after the accident of the insured vehicle the insurer sends a person for
the inspection of the damage caused to the vehicle and according to that the insurer reports the
same to the insurance company. According to the terms of the policy of the insurance the policy
holder will get the amount arising out of the damage.

4.4.4.2. Health insurance claim

12 http://sol.du.ac.in/mod/book/view.php?id=1226&chapterid=873

The health insurance claim are of two types:

§ Claims pertaining to cash less
§ Reimbursement of medical expenses

4.4.4.3. Claims pertaining to cash less

This kind of insurance refers to treatment of the insured person without cash. In this type of
insurance the person first goes to the hospital which are covered under the terms of the insurance
company and after that the insurance company after checking the scheme authorizes the hospital
to do the treatment under cashless scheme.

4.4.4.4. Reimbursement of medical expenses

In the cases where the customer does not use the cashless health insurance, he raises the claim
for reimbursement of medical expenses incurred.

4.5. PRINCIPLES OF INSURANCE LAW

There are seven important Principles of Insurance Law.
4.5.1. UTMOST GOOD FAITH

The Principle of Utmost Good Faith which is also known as “UBERRIMAE FIDER” is the first
basic principle of insurance law. According to this principle, the insurance policy must be sign
by both the parties who are involved in the contract of the policy (insurer as well as insured).

The signature must be signed by both the parties in the utmost faith. The person wants to make
insurance is supposed to be under an obligation to disclose all the material facts about the policy
and the insurer should also disclose all the facts of the insurance company. Any
misrepresentation by any of the party of the policy will make the insurance policy void under the
provisions of the Contract Act.

In a landmark decision the SC has held that the onus of proving that the policy holder has failed
to disclose information on material facts lies on the corporation. In this case the assured who
suffered from 19 tuberculosis and died a few months after the taking of the policy, the court
observed that it is well settled that a contract of insurance is contract Uberrimae fides, but the

burden of proving that the insured had made false representation or suppressed the material facts
is undoubtedly on the corporation13

4.5.2. INSURABLE INTEREST

In this kind of principle the person who wants to get insurance should have a willingly interest in
the policy of the insurance. If there is any forceful interest taken by the insured the policy will
become null and void. The insurable interest refers to the type of interest where the insured gets
some benefit from the insurance company rather than from the loss. For example, a man who
insures his scooter against accident has insurable interest in it because he uses it for official and
non-official visits and is thus benefited from its existence.

4.5.3. INDEMNITY

Indemnity refers to compensation given from the loss or damage suffered to the insured for
which he has taken insurance policy. But before seeking indemnity the suffered person has to
prove that he has suffered actual damage for claiming the insured money arising out from that
damage.

4.5.4. CONTRIBUTION

Principle of Contribution is a corollary of the principle of indemnity. It applies to all the
contracts of Indemnity. According to this kind of insurance if a person has taken two insurance
policy on

the same subject matter of the policy he can claim the compensation in the terms of contribution
by both the companies of the insurance.

For Ex. If A person has taken insurance for his business from X Company for Rupees 5000 and
from Y Company of Rupees 10000 the insured then will get the compensation in the manner of
the contribution by both the companies.

4.5.5. SUBROGATION

13 LIC v. G.M. CHannabsemma, (AIR 1991 SC 392)

The principle for the subrogation refers to the when the insured person has suffered the loss that
arisen from the third party act. This principle gives an advantage to the insurer to seek the loss
that has arisen from the third party negligence.

For Ex. If A has suffered the loss because of negligence of X that has cause destruction to the
house, then the insurer can claim for the recovery of the money as paid in the terms of the claim
to the insured and also the court fees he has suffered.

4.5.6. LOSS MINIMIZATION

According to this principle the insured should try his level best to minimize the property from
causing any loss to the insured property, in case of uncertain event such as fire, blast etc. The
insured must not neglect and behave irresponsibly during such events just because the property is
insured. Hence it is a responsibility of the insured to protect his insured property and avoid
further losses.

4.5.7. CAUSE PROXIMA

Cause Proxima which is also refers as Nearest Cause. Proximate cause literally means the
‘nearest cause’ or ‘direct cause’. This principle is applicable when the loss is the result of two or
more causes. The proximate cause means; the most dominant and most effective cause of loss is
considered. This principle is applicable when there are series of causes of damage or loss.

The principle states that to find out whether the insurer is liable for the loss or not, the proximate
(closest) and not the remote must be looked into.