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KLE LAW ACADEMY BELAGAVI
(Constituent Colleges: KLE Society’s Law College, Bengaluru, Gurusiddappa Kotambri Law College, Hubballi, S.A. Manvi Law College, Gadag, KLE Society’s B.V. Bellad Law College, Belagavi, KLE Law College, Chikodi, and KLE College of Law, Kalamboli, Navi Mumbai)
STUDY MATERIAL
for
INSURANCE LAW
Prepared as per the syllabus prescribed by Karnataka State Law University (KSLU), Hubballi
Compiled by
Srinivas Palkonda, Asst. Prof.
Reviewed by
Dr. B Jayasimha, Principal
B.V. Bellad Law College, Belagavi
This study material is intended to be used as supplementary material to the online classes and
recorded video lectures. It is prepared for the sole purpose of guiding the students in preparation
for their examinations. Utmost care has been taken to ensure the accuracy of the content.
However, it is stressed that this material is not meant to be used as a replacement for textbooks
or commentaries on the subject. This is a compilation and the authors take no credit for the
originality of the content. Acknowledgement, wherever due, has been provided.
COUR COURSE-III: OPTIONALTIONAL -II: INSURNCE LAW
Objectives: 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 persons who made assurance, against loss of their goods, merchandise ships and 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. The operational framework of insurance idea is provided by the general principles of contract. The insurance policy, being a contract, is subject to all the judicial interpretative techniques of rules of interpretation as propounded by the judiciary. Besides, the insurance idea has a compensatory justice component. This course is designed to acquaint the students with the conceptual and operational parameters, of insurance law.
Course contents: UNIT – I Introduction : Nature- Definition- History of Insurance- History and development of Insurance in India- Insurance Act, 1938- (main sections) Insurance Regulatory Authority Act, 1999: Its role and functions.
UNIT – II
Contract of Insurance : Classification of contract of Insurance Nature of various Insurance Contracts- Parties there to- Principles of good faith – non disclosure – Misrepresentation in Insurance Contract- Insurable Interest- Premium: Definition- method of payment, days of grace, forfeiture, return of premium, Mortality; The risk – Meaning and scope of risk, Causa Proxima, Assignment of the subject matter.
UNIT – III Life Insurance : Nature and scope of Life Insurance- Kinds of Life Insurance. The policy and formation of a life insurance contract Event insured against Life insurance contract- Circumstance affecting the risk- Amount recoverable under the Life Policy- Persons entitles to payment- Settlement of claim and payment of money- Life Insurance Act, 1956Insurance against third party rights- General Insurance Act, 1972- The Motor Vehicles Act, 1988 – Sec. (140-176), in India. Nature and scope- Absolute or no-fault liabilities, Third
CONCEPT, NATURE AND SCOPE OF INSURANCE
Insurance is of primary importance both in the national economy and international trade. Insurance premium cash-flows generate funds for investment in the economy. The development of the insurance sector depends on the general level of economic development and prospects for the immediate future. Generally, there is a positive correlation between the economic development of a country and the amount which people spend on insurance; contractual, financial and legal aspects of insurance. Insurance is a contractual relation between insurer and the assured through which the former undertakes to indemnify the loss caused to the latter due to an uncertain risk involved or to pay a certain sum of money in the event of an incident happening or not happening, against a consideration called as premium. Everything in this universe is subject to accident, destruction and will perish. A businessman used this idea of risk as the substance of his business. He undertakes the burden of risk against a consideration by a probability study and affixation of an adequate consideration. He therefore earns profit on the trade of risk whereas the insured is entitled to receive the indemnification or a fixed sum on the happening of the uncertain event causing loss. Hence, the contract of insurance then is described as a mechanism of risk distribution and sharing.
SOME IMPORTANT DEFINITIONS
The aim of insurance is to protect the owner from a variety of risks which he anticipates. Fundamental function of Insurance is to ‘Shift the loss suffered by a sole individual to a willing and capable professional risk-bearers in consideration of a comparatively small contribution called premium’
Economist say ‘It is a process whereby the risk of financial loss arising from death or disability of a person or damage, deterioration, destruction or loss of property owing to perils of which they are exposed, is assumed by another’
According to 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’
In the words of Riegel & Miller ‘It serves social purpose; it is a social device whereby uncertain risks of individuals may be combined in a group and thus made more certain; small periodic contribution by the individuals providing a fund out of which those who suffer losses may be reimbursed’
Hardy Ivamy writes in his work - “ General Principles of insurance Law ” that, ‘ A contract of insurance is a contract whereby one person called the ‘insurer’, undertakes in return for the agreed consideration called the ‘premium’ to pay to another person, called the ‘insured’ a sum of money or its equivalent on the happening of a specified event’.
In Prudential Insurance Company v. Inland Revenue Commissioner , Channel J. said ‘ There must be either some uncertainty whether the event will ever happen or not, or if the event is one which must happen at some time or another, there must be uncertainty as to the time at which it will happen’.
Generally, an insurance agreement to be a valid contract must be i. A contract between an ‘insurer’ and the ‘insured’; ii. The contract is based on the loss due to happening or not happening of a future incident; iii. A consideration in the form of payment of an amount by the insured and iv. The insurer promises to make good the loss in so far money can do it, in case the loss occurs on the happening of the contingency.
Thus, one can observe that in a contract of insurance, one can insure ship or house but cannot ensure that the ship shall not be lost or the house shall not be burnt, but what one can insure is that a sum of money shall be paid on the happening of a certain event. Thus, the subject matter of insurance is the compensation in the form of money to be paid to the assured on happening of a risk.
General insurance in India began during the Industrial Revolution in the West and the growth of sea-faring commerce during the 17th century. It arrived as a legacy of British occupation, with its roots in the 1850 establishment of the Triton Insurance Company in Calcutta. In 1907 the Indian Mercantile Insurance was established, the first company to underwrite all classes of general insurance. In 1957 the General Insurance Council (a wing of the Insurance Association of India) was formed, framing a code of conduct for fairness and sound business practice.
Eleven years later, the Insurance Act was amended to regulate investments and set minimum solvency margins and the Tariff Advisory Committee was established. In 1972, with the passage of the General Insurance Business (Nationalization) Act, the insurance industry was nationalized on 1 January 1973. One hundred seven insurers were amalgamated and grouped into four companies: National Insurance Company, New India Assurance Company, Oriental Insurance Company and United India Insurance Company. The General Insurance Corporation of India was incorporated in 1971, effective from 1 January 1973.
The re-opening of the insurance sector began during the early 1990s. In 1993, the government set up a committee chaired by former Reserve Bank of India governor R. N. Malhotra to propose recommendations for insurance reform complementing those initiated in the financial sector. The committee submitted its report in 1994, recommending that the private sector be permitted to enter the insurance industry. Foreign companies should enter by floating Indian companies, preferably as joint ventures with Indian partners.
Following the recommendations of the Malhotra Committee, in 1999 the Insurance Regulatory and Development Authority (IRDA) was constituted to regulate and develop the insurance industry and was incorporated in April 2000. Objectives of the IRDA include promoting competition, to enhance customer satisfaction with increased consumer choice and lower premiums while ensuring the financial security of the insurance market.
The IRDA opened up the market in August 2000 with an invitation for registration applications; foreign companies were allowed ownership up to 26 percent. The authority, with the power to frame regulations under Section 114A of the Insurance Act, 1938, has
framed regulations ranging from company registrations to the protection of interests of policy-holders, since 2000.
In December 2000, the subsidiaries of the General Insurance Corporation of India were restructured as independent companies and the GIC was converted into a national re- insurer. Parliament passed a bill de-linking the four subsidiaries from the GIC in July 2002. There are 28 general insurance companies, including the Export Credit Guarantee Corporation of India and the Agriculture Insurance Corporation of India, and 24 life- insurance companies operating in the country. With banking services, insurance services add about seven percent to India’s GDP.
In 2013 the IRDAI attempted to raise the foreign direct investment (FDI) limit in the insurance sector to 49 percent from its current 26 percent. The FDI limit in the insurance sector was raised to 100 percent according to the budget 2019.
History of insurance in India can be studies in the following 5 important stages
- Period of Mushroom growth (1900-1912) – during this period there was a mushroom growth of Indian companies and this was mainly due to the swadeshi movement which prompted the boycott of British goods, British institutions and everything British. The indiscriminate mushroom growth of insurance companies led to the appearance of some evil which had to be checked by passing Indian Life Assurance Act, 1912. For the first time publishing of returns of life insurance began from 1914.
- Period of struggle & steady growth (1913-1938) – the period between two world wars. The indigenous companies had to pass through tough time. Sudden growth of companies due to impetus given by swadeshi movement brough with it evil of accumulation of wealth and inexperience in business. This has led to economic slump, business had to struggle for its growth. Many small offices had to be wound up and few that survived had to face the competition of many flourishing foreign offices.
Government was compelled to protect the interest of Indian insurance business and hence in 1934 Sri SC Sen was appointed as special officer to investigate and report on reform of insurance law in India. In 1936 a committee under chairmanship of Sri NN Sircar was appointed to examine the report of special officer, which led to
Procedure for registration
An incorporated company must be registered under IRDA. Sec 3 of the IRDA Act provides for filing application for registration.
Important provisions of Insurance Act 1938
Prohibition of transaction of insurance business by certain persons, - 2C. (1) Save as hereinafter provided, no person shall, after the commencement of the Insurance (Amendment) Act, 1950 (47 of 1950), begin to carry on any class of insurance business in India and no insurer carrying on any class of insurance business in India shall after the expiry of one year from such commencement, continue to carry on any such business unless he is- (a) a public company, or (b) a society registered under the Co-operative Societies Act, 1912 (2 of 1912), or under any other law for the time being in force in any State relating to co-operative societies, or (c) a body corporate incorporated under the law of any country outside India not being of the nature of a private company: Provided that the Central Government may, by notification in the official Gazette, exempt from the operation of this section to such extent for such period and subject to such conditions as it may specify, any person or insurer for the purpose of carrying on the business of granting superannuation allowances and annuities of the nature specified in sub-clause (c) of clause (11) of Section 2 or for the purpose of carrying on any general insurance business: Provided further that in the case of an insurer carrying on any general insurance business no such notification shall be issued having effect for more than three years at any one time: Provided also that no insurer other than an Indian insurance company shall begin to carry on any class of insurance business in India under this Act on or after the commencement of the Insurance Regulatory and Development Authority of India Act, 1999. (2) Every notification issued under subsection (1) shall be laid before Parliament as soon as may be after it is issued. (3) Notwithstanding anything contained in sub-section (1), an insurance co-operative society may carry on any class of insurance business in India under this Act on or after the commencement of the Insurance (Amendment) Act, 2002.
Registration
- (1) No person shall, after commencement of this Act, being to carry on any class of insurance business in India and no insurer carrying on any class of insurance business in India shall, after the expiry of three months from the commencement of this Act, continue to carry on any such business, unless he has obtained from the Authority a certificate of registration for the particular class of insurance business: Provided that in case of an insurer who was carrying on any class of insurance business in India at the commencement of this Act, failure to obtain a certificate of registration in accordance with the requirements of this sub-clause shall not operate to invalidate any contract of insurance entered into by him if before such date as may be fixed in this behalf by the Central Government by notification in the official Gazette, he has obtained that certificate: Provided further that a person or insurer, as the case may be, carrying on any class of insurance business in India, on or before the commencement of the Insurance Regulatory and Development Authority of India Act, 1999, for which no registration certificate was necessary prior to such commencement, may continue to do so for a period of three months from such commencement or, if he had made an application for such registration within the said period of three months, till the disposal of such application: Provided also that any certificate of registration, obtained immediately before the commencement of the Insurance Regulatory and Development Authority of India Act, 1999, shall be deemed to have been obtained from the Authority in accordance with the provisions of this Act (2) Every application for registration shall be made in such manner as may be determined by the regulations made by the Authority and shall be accompanied by- (a) a certified copy of the memorandum and articles of association, where the applicant is a company and incorporated under the Indian Companies Act, 1913 (7 of 1913), or under the Indian Companies Act, 1882 (6 of 1882), or under the Indian Companies Act, 1866 (10 of 1866); or under any Act repealed thereby, or, in the case of any other insurer specified in sub- clause ( a ) (ii) or sub-clause ( b ) of clause ( 9 ) of section 2, a certified copy of the deed of partnership or of the deed of constitution of the company, as the case may be, or, in the case of an insurer having his principal place of business or domicile outside India, the document specified in Clause (a) of Section 63; (b) the name, address and the occupation, if any, of the directors where insurer is a company incorporated under the Indian Companies Act, 1913 (7 of 1913), or under the Indian
(2A) If, on receipt of an application for registration and after making such inquiry as he deems fit, the Controller is satisfied that— ( a ) the financial condition and the general character of management of the applicant are sound; ( b ) the volume of business likely to be available to, and the capital structure and earning prospects of, the applicant will be adequate; ( c ) the interest of the general public will be served if the certificate of registration is granted to the applicant in respect of the class or classes of insurance business specified in the application; and ( d ) the applicant has complied with the provisions of Sections 2-C, 5, 31A and 32 and has fulfilled all the requirements of this section applicable to him, the Authority may register the applicant as an insurer and grant him a certificate of registration. (2AA) The Authority shall give preference to register the applicant and grant him a certificate of registration if such applicant agrees, in the form and manner as may be specified by the regulations made by the Authority, to carry on the life insurance business or general insurance business for providing health cover to individuals or group of individuals. (2B) Where the Authority refuses registration; he shall record the reasons for such decision and shall furnish a copy thereof to the applicant. (2C) Any person aggrieved by the decision of the Authority refusing registration may, within thirty days from the date on which a copy of the decision is received by him, appeal to the Central Government. (2D) The decision of the Central Government on such appeal shall be final and shall not be questioned before any Court. (3) Notwithstanding anything contained in sub-section (2A), in the case of any insurer having his principal place of business or domicile outside India, the Authority, shall withhold registration or shall cancel a registration already made, if he is satisfied that in the country in which such insurer has his principal place of business or domicile Indian nationals are debarred by the law or practice of the country relating to, or applied to insurance from carrying on the business of insurance, or that any requirement imposed on such insurer under the provisions of section 62 is not satisfied. (4) The Authority shall cancel the registration of an insurer either wholly or in so far as it relates to a particular class of insurance business, as the case may be, - ( a ) if the insurer fails to comply with the provisions of section 7 or section 98 as to deposits, or
(aa) if the insurer fails, at any time, to comply the provisions of Sec. 64VA as to the excess of the value of his assets over the amount of his liabilities; or ( b ) if the insurer is in liquidation or is adjudged an insolvent, or ( c ) if the business or a class of the business of the insurer has been transferred to any person or has been transferred to or amalgamated with the business of any other insurer, or ( d ) if the whole of the deposit made in respect of insurance business has been returned to the insurer under Sec. 9, or ( e ) if, in the case of an insurer specified in sub-clause ( c )of clause ( 9 ) of section 2, the standing contract referred to in that sub-clause is cancelled or is suspended and continues to be suspended for a period of six months, or (ee) if the Central Government so directs under sub- section (4) of Sec. 33] and the Authority may cancel the registration of an insurer- ( f ) if the insurer makes default in complying with, or acts in contravention of any requirement of this Act or of any rule or any regulation or order made or, any direction issued there under, or ( g ) if the Authority has reason to believe that any claim upon the insurer arising in India under any policy of insurance remains unpaid for three months after final judgment in regular course of law, or ( h ) if the insurer carries on any business other than insurance business or any prescribed business, or ( i ) if the insurer makes a default in complying with any direction issued or order made, as the case may be, by the Authority under the Insurance Regulatory and Development Authority of India Act, 1999, or ( j ) if the insurer makes a default in complying with, or acts in contravention of, any requirement of the Companies Act, 1956 (1 of 1956), or the Life Insurance Corporation Act, 1956 (31 of 1956), or the General Insurance Business (Nationalization) Act, 1972 (57 of 1972), or the Foreign Exchange Regulation Act, 1973 (46 of 1973). (5) When the Authority withholds or cancels any registration under sub-section (3) or clause (a), clause (aa), clause ( e ), clause (ee), clause ( f ), clause ( g ) or clause ( h ) of sub-section (4), he shall give notice in writing to the insurer of his decision, and the decision shall take affect on such date as he may specify in that behalf in the notice, such date not being less than one month nor more than two months from the date of the receipt of the notice in the ordinary course of transmission.
(7) The Authority may, on payment of the prescribed fee, not exceeding five rupees, issue a duplicate certificate of registration to replace a certificate lost, destroyed or mutilated, or in any other case where he is of opinion that the issue of a duplicate certificate is necessary.
Renewal of registration 3A. (1) An insurer who has been granted a certificate of registration under section 3 shall have the registration renewed annually for each year after that ending on the 31st day of March, after the commencement of the Insurance Regulatory and Development Authority of India Act, 1999. (2) An application for the renewal of a registration for any year shall be made by the insurer to the Authority before the 31st day of December of the preceding year, and shall be accompanied as provided in sub-section (3) by evidence of payment of the fee as determined by the regulations made by the Authority which may vary according to the total gross premium written direct in India, during the year preceding the year in which the application is required to be made under this section, by the insurer in the class of insurance business to which the registration relates but shall not— ( i ) exceed one-fourth of one per cent. of such premium income or rupees five crores, whichever is less; (ii) be less, in any case, than five hundred rupees for each class of insurance business: Provided that in the case of an insurer carrying on solely re-insurance business, the provisions of this sub-section shall apply with the modification that instead of the total gross premium written direct in India, the total premiums in respect of facultative re-insurances accepted by him in India shall be-taken into account. (3)The fee as determined by the regulations made by the Authority for the renewal of a registration for any year shall, be paid into the Reserve Bank of India, or where there is no office of that Bank, into the Imperial Bank of India acting as the agent of that Bank, or into any Government treasury, and the receipt shall be sent along with the application for renewal of the registration. (4) If an insurer fails to apply for renewal of registration before the date specified in sub- section (2) the Authority may, so long as an application to the Court under sub-section (5-D) of section 3 has not been made, accept an application for renewal of the registration on receipt from the insurer of the fee payable with the application and such penalty, not exceeding the fee as determined by the regulations made by the Authority, and payable by him, as the Authority may require:
Provided that an appeal shall lie to the Central Government from an order passed by the Authority imposing a penalty on the insurer (5) The Authority shall, on fulfilment by the insurer of the requirements of this section, renew the registration and grant him a certificate of renewal of registration.
Certification of soundness of terms of life insurance business
(3B) If, when considering an application for registration under section 3 or at any other time, it appears to the Authority that the assured rates, advantages, terms and conditions offered or to be offered in connection with life insurance business are in any respect not workable or sound, he may require that a statement thereof shall be submitted to an actuary appointed by the insurer for the purpose and approved by the Authority, and may by order in writing further require the insurer to make within such time as may be specified in the order such modifications in the said rates, advantages, terms, or conditions, as the case may be, as the said actuary may report to be necessary to enable him to certify that the said rates, advantages, terms and conditions are workable and sound.
INSURANCE REGULATORY AND DEVELOPMENT AUTHORITY (IRDA)
After 1991 due to liberalization in the economic policy, many private players started their business in India which has brought with it their own evil of unhealthy competition. Hence a Malhotra committee was formed to effectively regulate insurance companies. Following the recommendations of the Malhotra Committee, in 1999 the Insurance Regulatory and Development Authority (IRDA) was constituted to regulate and develop the insurance industry and was incorporated in April 2000. Objectives of the IRDA include promoting competition, to enhance customer satisfaction with increased consumer choice and lower premiums while ensuring the financial security of the insurance market.
Section 4 of the IRDAI Act 1999 specifies the authority's composition. It is a ten- member body consisting of a chairman, five full-time and four part-time members appointed by the government of India. At present (1 Sept, 2018), the authority is chaired by Dr. Subhash C. Khuntia and its full-time members are Mrs T.L. Alamelu, K. Ganesh, Pournima Gupte, Praveen Kutumbe and Sujay Banarji.
COUR COURSE-III: OPTIONALTIONAL -II: INSURNCE LAW
Objectives: 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 persons who made assurance, against loss of their goods, merchandise ships and 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. The operational framework of insurance idea is provided by the general principles of contract. The insurance policy, being a contract, is subject to all the judicial interpretative techniques of rules of interpretation as propounded by the judiciary. Besides, the insurance idea has a compensatory justice component. This course is designed to acquaint the students with the conceptual and operational parameters, of insurance law.
Course contents: UNIT – I Introduction : Nature- Definition- History of Insurance- History and development of Insurance in India- Insurance Act, 1938- (main sections) Insurance Regulatory Authority Act, 1999: Its role and functions.
UNIT – II
Contract of Insurance : Classification of contract of Insurance Nature of various Insurance Contracts- Parties there to- Principles of good faith – non disclosure – Misrepresentation in Insurance Contract- Insurable Interest- Premium: Definition- method of payment, days of grace, forfeiture, return of premium, Mortality; The risk – Meaning and scope of risk, Causa Proxima, Assignment of the subject matter.
UNIT – III Life Insurance : Nature and scope of Life Insurance- Kinds of Life Insurance. The policy and formation of a life insurance contract Event insured against Life insurance contract- Circumstance affecting the risk- Amount recoverable under the Life Policy- Persons entitles to payment- Settlement of claim and payment of money- Life Insurance Act, 1956Insurance against third party rights- General Insurance Act, 1972- The Motor Vehicles Act, 1988 – Sec. (140-176), in India. Nature and scope- Absolute or no-fault liabilities, Third
party or compulsory insurance of motors vehicles- Claims Tribunal- Public Liability Insurance –Legal aspects of Motor Insurance –Claims – Own Damages Claims – Third Party Liability Claims.
UNIT – IV
Fire Insurance: Nature and scope of Fire Insurance –Basic Principles – Conditions & Warranties – Right & Duties of Parties – Claims – Some Legal Aspects. Introduction to Agriculture Insurance – History of Crop Insurance in India – Crop Insurance Underwriting, Claims, Problems associated with Crop Insurance – Cattle Insurance in India.
UNIT – V
Marine Insurance: Nature and Scope- Classification of Marine policies- Insurable interest- Insurable values- Marine insurance and policy- Conditions and express warranties Voyage deviation- Perils of sea- Loss- Kinds of Loss- The Marine Insurance Act, 1963 (Ss 1 to 91).
Prescribed Books: K. S. N. Murthy and K. V. S. Sharma - Modern Law of Insurance M. H. Srinivasan - Principles of Insurance Law.
Reference Books: E. R.Hardy Ivamy - General Principles of Insurance Law, relevant Chapters. Insurance Act, 1938. The Marine Insurance Act, 1963. General Insurance (Business) (Nationalization) Act, 1972. The Life Insurance Corporation Act, 1956. Motor Vehicle Act, 1988.
