Corp Comm Legal
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MODULE - 4
BASICS OF INSURANCE
.1. MEANING OF INSURANCE 4.1.2. Pure or Static risk
The term Insurance is used as a social device to The second category of risk involves Pure or Static
reduce the risk of life and property. The meaning of risk. It is a situation in which the outcome of the
Risk: Risk is a part of human life to try hard or to possibility is only the occurrence of the loss. They are
achieve a goal from taking that risk. The risk, can be never beneficial.
insured against sea, death and accidents. Insurance is
a means from the protection of financial loss of a For Example: Premature death, Medical Expenses,
person. Flood, Damage to property due to fire etc.
4.1.1. BASIC CATEGORY OF RISK Insurance is a contract by which the one party in
consideration of a price paid to him adequate to the
With regards to Insurance risk involves two types of risk becomes security to the other that he shall not
categories: suffer loss, damage, or prejudice by the happening of
the perils specified to certain things which may be
▪ Dynamic risk exposed to them.i
▪ Pure or Static risk
4.2. INSURANCE IN INDIA
4.1.1. Dynamic Risk 4.2.1. WHAT IS INSURANCE LAW?
Dynamic risk refers to the situation where either Insurance law is a contract between two parties
there is a possibility of profit OR the loss. In the daily whereby one party known as the “insurer”
business level, the conduct of its affairs depends on undertakes in exchange for a fixed sum called
the situation either to earn profit or the loss. “premium” the other party for a happening of a
For Example: Risks in betting on a horse race etc.
Dynamic risk are generally uninsurable in nature. ▪ An Insurer is a company selling the insurance.
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▪ "Insurer" means- as well as in the Economics of Arya Chanakya. When
(a) An Indian Insurance Company, or the British ruled the world, most of the trades and
(b) A statutory body established by an Act of travel was done by the sea. The transactions done by
Parliament to carry on insurance business, (c) the sea with the ships carried high risk of damage. The
An insurance co-operative society, or British businessmen thought of forming an
(d) A foreign company engaged in re- organization to reimburse the person who suffered
insurance business through a branch loss. From this practice the concept of insurance
established in India. born.
▪ An Insured or policyholderii is the person or entity Insurance law in India had its origins in the United
buying the insurance. The insured, receives a Kingdom with the establishment of a British firm, the
contract, called the insurance policy which Oriental Life Insurance Company in 1818 in Calcutta,
contains the situations and circumstances where followed by the Bombay Life Assurance Company in
will that policy work and where the suffered 1823, the Madras Equitable Life Insurance Society in
person will get compensation. 1829 and the Oriental Life Assurance Company in
1874, Indians were charged an extra premium of up
The need for an insurance policy arises when there is to 20% as compared to the British.
a risk for a happening of a certain event. That is totally
unpredictable in a nature. It is used for the purpose of The first act that establishes in India was in 1912 that
economic growth for the lower income and middle covers the provisions of Life Insurance of India
income families. however the scope of insurance was left out to the
scope of 1912 act. The first general Insurance
In the case of Liberty Insurance Company Limited v. Company was established by an Indian “Indian
Johniii where indemnity relates to payment of money Mercantile Insurance Company Limited” in Bombay.
to the insured, and the court held that the insurer was
legally bound to pay the money or provide the With the growth of fire, accident, and marine
equivalent pecuniary compensation to the insured. Insurance and other kind of Insurance also took a
place in the scenario of the Insurance with the scope
4.2.2. FORMATION OF INSURANCE IN INDIA of the Act 1912. The first Indian Insurance
Companies Act was passed in 1912. The next was
Insurance is quite an ancient thing. The concept of
insurance can be found in the Babylonian Civilization,
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passed in 1938. But the framing of act and the significant role in the development of the
regulations about the act was passed only in 1998. insurance market in India. The Insurance act
1938 was the first legislation governing the life
The Parliament passed the IRDA Act in 1999, and the insurance and non-life insurance to provide
Insurance and Development Authority was strict control over insurance business.
established. This institution now exercises control
over all the insurance business in the country. At that time there were 154 Indian life insurance
companies. In addition there were 16 non-
The need for the insurance business grew at a Indian companies and 75 provident societies
faster pace with the development of industry in issuing life insurance policies.
India after Independence despite the growth of
the business the need for the insurance ▪ Nationalization of General Insurance
Sixteen years later in 1972, non-life insurance
▪ Nationalization of insurance in India was finally nationalized. The general insurance
business act 1972 provides that the central
Since 1956 with the nationalization of Insurance government shall form a government company,
industry in India, the LIC hold the monopoly in in accordance with the provision of the
India’s Life Insurance sector. GIC wit four company’s act 1956, to be known as general
subsidiaries, enjoyed the monopoly for General Insurance Corporation of India.
Insurance. Both the LIC&GIC, have played
4.3. TYPES OF INSURANCE IN INDIA
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Section 64 C of Part II-A of the Indian Insurance Act 220.127.116.11. Definition of Life Insurance
1938 states that there shall be two Councils of the
Insurance Association of India, namelyiv: “Life Insurance is the contract to pay a certain sum of
money on the death of a person consideration of the
▪ The Life Insurance Council consisting of all the due payment of certain amenity for his life calculated
members and associate members of the according to the probable duration of lifevi”.
Association, who carry on life insurance business
in India, and, In light of the above definitions the essential features
of life insurance can be summed up as under:
▪ The General Insurance Council consisting of all
the members and associate members of the ▪ It is a contract relating to human life
Association who carry on general insurance ▪ There need not be an express provision that the
business in India.
payment is due on the death of the person.
4.3.1. LIFE INSURANCE ▪ The contract provides for payment of lump sum
The need for life insurance came with the need of the money.
fact that the life of the human beings depends upon ▪ The amount is paid at the expiration of certain
uncertainties and the person’s life is itself is
uncertain. It is well said that “life is full of risk. For period or on death of the person.
property, there are fire risk, for shipment of goods,
there are perils of sea, for human life, there is a risk of 18.104.22.168 Types of Life Insurance
death or disability and so on and so forthv”.
▪ Term insurance
Life Insurance is the privilege given to the human
being in terms of scheme to provide an assurance that A term insurance provides a fixed amount of price of
if any event happens which enlighten for the risk in money on death during the course of the contract.
terms of person’s life would get financial assurance to This type of insurance provides for life insurance
bear the loss for his family. 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.
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▪ Whole life insurance insurance. Every business enterprise is associated to
a large number of risks when they start a business i.e.
Whole life insurance policy provides for a sum of premises of the business, and plant and machinery of
fixed amount of money on death. The whole life the business or the raw materials.
insurance policies provide Life Insurance protection
over one's lifetime. Under these policies, the payment Non-Life insurance is a different concept of insurance
of the assured sum is a certainty in contrast to the from the general insurance policies. A life insurance
term insurance contracts. policy is basically a policy for a purpose of long run.
While general insurance policy is renewed every one
▪ Endowment Assurance year.
Endowment Assurance policy provides a fixed Section 2(6B) of thee Insurance Act 1938, defines
amount of money either on death during the period of General insurance business. According to the general
contract or at the expiry of contract if life assured is insurance business means fire, marine, or
alive. miscellaneous insurance whether carried separately
or in combination.
▪ Universal Life Insurance
The insurance companies collects the premium from
The product category is a hybrid of ULIP and a group of business firms for the protection to their
Traditional products. Like a ULIP product each property from the risk of damage caused by any
contract has underlying funds and like a traditional uncertainties during the course of time.
product returns (bonus) are agreed as a part of the
contract. Under this type of policy (ULI), the Types of General Insurance:
policyholder pays an initial premium, which should
not be less than a minimum for the given face value ▪ Motor vehicles Insurance
and the attained age of the Life to be insured. ▪ Fire Insurance
▪ Health Insurance
4.3.2. GENERAL INSURANCE ▪ Marine Insurance
The general insurance industry in India become 22.214.171.124. Motor Vehicles Insurance
nationalized as a general insurance corporation by
the Central Government in 1972. Non-Life – Under the provision of the Motor Vehicles Act 1988,
Insurance refers to the property and liability it has been stated that insurance is mandatory for
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every vehicles used for any purpose should be under customarily included among the risks insured against
the policy of motor vehicles insurance law. It is also in fire insurance policiesviii”.
known as third party Insurance of India or third party
liability. In this type of insurance the owner of the 126.96.36.199. Health Insurance
vehicle is liable to claim money from the third party if
any damage is cause to him in a public place by arising Health insurance covers the aspects the classes of
out of use of the vehicle. insurance related to medical expenses. It is a very
important kind of insurance for every individual. To
The Government. National Insurance Co. Ltd. v. Fakir cover the risk related to health issues.
Chandvii, “third party” should include everyone (other
than the contracting parties to the insurance policy), “Health insurance business” means the effecting of
be it a person traveling in another vehicle, one insurance contracts which provide for sickness
walking on the road or a passenger in the vehicle itself benefits or medical, surgical or hospital expense
which is the subject matter of insurance policy. benefits, travel health insurance and personal
188.8.131.52. Fire Insurance
Need of Health Insurance
A fire insurance is a type of policy in which the insurer
indemnify the person who suffered loss due to the ▪ Health insurance helps in solving high
destruction caused by the occurrence of fire and has unexpected costs arising at the time of
caused destruction to the property and goods. This emergency
kind of insurance is important for the enterprises
which have high risk of occurrence of fire in the ▪ By taking health insurance the person can make
enterprise. the treatment affordable.
The fire insurance business is defined as follows: “Fire ▪ It helps in taking tax benefit too.
insurance business means the business of 184.108.40.206. Marine insurance
effecting, otherwise than independently to some Marine insurance is important for the risk at the
Maritime perils. “Maritime perils” means the perils
other class of business, contracts of insurance against consequent on, or incidental to, the navigation of the
sea, that is to say, perils of the sea, fire, war perils,
loss by or incidental to fire or other occurrence pirates, rovers, thieves, and any other perils.x
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Marine Insurance business means the business of 5 years and the policy should be in force and secondly
effecting contracts of Insurance upon vessels of any the policy holder should be alive also. In this kind of
descriptions, including cargos, freights and other insurance the insurer has to send a premium to the
interests which may be legally insured in or in relation policy holder for how much amount is to be paid
to such vessels, cargos and freights, goods, wares, under this policy. He also discharge voucher under
merchandise and property of whatever description this kind of insurance.
insured for any transit by land or water or both,
whatever or not including warehouse risk or similar After the discharge of the policy by the insurer the
risk in addition or as incidental to such transit and policy holder has to duly sign the discharge document
include any other risk customarily included among for the benefit of the survival claim.
the risk insured against in Marine Insurance policies.
4.4.2. MATURITY BENEFIT CLAIM
4.4. MEANING AND TYPES OF CLAIMS
If the life insured survives to the full term, then basic
The meaning of Insurance claim is that when the sum assured is payable. This payment by the insurer
person who has suffered the loss, asks for the claim of to the insured on the date of maturity is called
insurance after the happening of the even that has maturity payment. The amount payable at the time of
caused loss to the claimant. The timely settlement of the maturity includes a sum assured and
the valid claim is very important for the insurance bonus/incentives. The insurer sends in advance the
company. intimation to the insured with a blank discharge form
for filling various details in it. It is to be returned to the
There are three types of claims under life insurance office along with-
▪ Original Policy document
▪ Survival Benefit Claim ▪ Age proof if age is not already submitted
▪ Maturity Benefit Claim ▪ Assignment /reassignment, if any.xi
▪ Death Benefit Claim
4.4.3. DEATH BENEFIT CLAIMS
4.4.1. SURVIVAL BENEFIT CLAIM
In this kind of insurance occurs when the death arises
Survival benefit refers to the payment of money after of the policy holder. This kind of insurance is very
the fixed period of time duration for example say 4 to important for the members of the policy holder. After
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the death arises the money will be payable to the ▪ Reimbursement of medical expenses
nominee mentioned in the document of the policy of
the policy holder. 220.127.116.11. Claims pertaining to cash less
In case of a death claim the following necessities has This kind of insurance refers to treatment of the
to be there for the claim of the insured money: insured person without cash. In this type of insurance
the person first goes to the hospital which are
▪ Proof of death, covered under the terms of the insurance company
▪ Proof of title and after that the insurance company after checking
▪ Proof of age are required. the scheme authorizes the hospital to do the
treatment under cashless scheme.
After completing the above formalities the insurance
company issues a discharge form for completion 18.104.22.168. Reimbursement of medical expenses
which is to be signed by the person entitled to receive
the policy money. In the cases where the customer does not use the
cashless health insurance, he raises the claim for
4.4.4. OTHER KINDS OF CLAIMS UNDER GENERAL reimbursement of medical expenses incurred.
22.214.171.124. Vehicle Accident Claims 4.5. PRINCIPLES OF INSURANCE LAW
In this type of insurance after the accident of the There are seven important Principles of Insurance
insured vehicle the insurer sends a person for the Law.
inspection of the damage caused to the vehicle and 4.5.1. UTMOST GOOD FAITH
according to that the insurer reports the same to the
insurance company. According to the terms of the The Principle of Utmost Good Faith which is also
policy of the insurance the policy holder will get the known as “UBERRIMAE FIDER” is the first basic
amount arising out of the damage. principle of insurance law. According to this principle,
the insurance policy must be sign by both the parties
126.96.36.199. Health insurance claim who are involved in the contract of the policy (insurer
as well as insured).
The health insurance claim are of two types:
The signature must be signed by both the parties in
▪ Claims pertaining to cash less the utmost faith. The person wants to make insurance
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is supposed to be under an obligation to disclose all 4.5.3. INDEMNITY
the material facts about the policy and the insurer
should also disclose all the facts of the insurance Indemnity refers to compensation given from the loss
company. Any misrepresentation by any of the party or damage suffered to the insured for which he has
of the policy will make the insurance policy void taken insurance policy. But before seeking indemnity
under the provisions of the Contract Act. the suffered person has to prove that he has suffered
actual damage for claiming the insured money arising
In a landmark decision the SC has held that the onus out from that damage.
of proving that the policy holder has failed to disclose
information on material facts lies on the corporation. 4.5.4. CONTRIBUTION
In this case the assured who suffered from 19
tuberculosis and died a few months after the taking of Principle of Contribution is a corollary of the principle
the policy, the court observed that it is well settled of indemnity. It applies to all the contracts of
that a contract of insurance is contract Uberrimae Indemnity. According to this kind of insurance if a
fides, but the burden of proving that the insured had person has taken two insurance policy on
made false representation or suppressed the material
facts is undoubtedly on the corporationxii the same subject matter of the policy he can claim the
compensation in the terms of contribution by both
4.5.2. INSURABLE INTEREST the companies of the insurance.
In this kind of principle the person who wants to get For Ex. If A person has taken insurance for his
insurance should have a willingly interest in the policy business from X Company for Rupees 5000 and from
of the insurance. If there is any forceful interest taken Y Company of Rupees 10000 the insured then will get
by the insured the policy will become null and void. the compensation in the manner of the contribution
The insurable interest refers to the type of interest by both the companies.
where the insured gets some benefit from the
insurance company rather than from the loss. For 4.5.5. SUBROGATION
example, a man who insures his scooter against
accident has insurable interest in it because he uses it The principle for the subrogation refers to the when
for official and non-official visits and is thus benefited the insured person has suffered the loss that arisen
from its existence. 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.
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For Ex. If A has suffered the loss because of 4.5.7. CAUSE PROXIMA
negligence of X that has cause destruction to the
house, then the insurer can claim for the recovery of Cause Proxima which is also refers as Nearest Cause.
the money as paid in the terms of the claim to the Proximate cause literally means the ‘nearest cause’ or
insured and also the court fees he has suffered. ‘direct cause’. This principle is applicable when the
loss is the result of two or more causes. The
4.5.6. LOSS MINIMIZATION proximate cause means; the most dominant and most
effective cause of loss is considered. This principle is
According to this principle the insured should try his applicable when there are series of causes of damage
level best to minimize the property from causing any or loss.
loss to the insured property, in case of uncertain
event such as fire, blast etc. The insured must not The principle states that to find out whether the
neglect and behave irresponsibly during such events insurer is liable for the loss or not, the proximate
just because the property is insured. Hence it is a (closest) and not the remote must be looked into.
responsibility of the insured to protect his insured
property and avoid further losses.
i Lucena Craufurd (1806)2 BOS,&PNR. vi Dalby v.India & London life Assurance Co.(1854)
15CB.365:139 AII ER465
ii "policy-holder" includes a person to whom, the whole of the vii AIR 1995 J&K 91.
interest of the policy-holder in the policy is assigned once and viii Section 2(6A) Insurance Act 1938.
for all, but does not include an assignee thereof whose interest ix Section 1(f) Insurance Regulatory And Development
in the policy is defeasible or is for the time being subject to any Authority (Health Insurance) Regulatons,2012.
condition. x Indian Marine Insurance Act, 1963, Section 2(e).
iii (1966)1 NWLR Pt.423. 73
xii LIC v. G.M. CHannabsemma, (AIR 1991 SC 392)
iv Section 64C, Insurance Act, 1938.
v G.Gopalkrishna, “The social security character of life
insurance, “The ICFAI University Journal of insurance law,
Vol.VI, no, (2008), P.12.
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