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Law thesis

Insurance is a business of risk

but not a risky business

Submitted to
Adv. Nadirshaw K. Dhondy

By:
Lucky Parashar
08bs0001551
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CERTIFICATE

I, Nadirshaw K. Dhondy, Advocate Supreme Court, have

examined the thesis of Ms. Lucky Parashar who is enrolled
at ICFAI Business School, Mumbai in the MBA course for
the academic year 2008-2010 at unique enrollment
number 08BS0001551

She has completed the thesis entitled “Insurance is a

business of risk but, not a risky business” in part
completion of the final examinations.

She has been rated to receive ______ marks out of fourty

(40).

Dated 14th day of December

Signed Signed
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Lucky Parashar Nadirshaw K.

Dhondy

ACKNOWLEDGEMENTS

This project is not a result of an individual effort but is a product of collective wisdom and
experience of all those who have shared their views, far beyond those found within the
covers of the book. Though words are seldom sufficient to express gratitude, it
somehow gives me an opportunity to acknowledge those who have helped me with this
thesis titled “Insurance is a business of risk but, not a risky business”, thus at the onset I
would like to thank all those helping hands.

With a deep sense of gratitude my thanks to the campus head and the senior advisor,
Dr. Y. K. Bhushan. It is my great privilege and a unique experience to study in IBS
Mumbai led by him.

Madam Sunanda Ishawaran, the Dean of IBS Mumbai.

I owe a deep sense of gratitude to Mr. Nadirshaw K. Dhondy – Supreme Court

Advocate, my teacher and guide who provided me with an overwhelming opportunity to
work in an area where I could gain more knowledge.

I also take this opportunity to thank Advocate Rahul Diwaker, a friend and guide for his
guidance and support.

I can never measure the contribution of my family, whose blessings, love, perpetual
support and encouragement has made me what I am. Lastly I am grateful to almighty for
giving me an opportunity to showcase my practical effort in the work led by many.
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PROLOGUE

Generally speaking, the business of insurance is a business of risk. People buy

insurance so as to protect themselves from the costs of a catastrophically expensive
possibility. By a simple interpretation, insurance is a measure of risk management in our
day-to-day life against the possibilities of risks and uncertainties. Risk and uncertainty
are incidental to life. Man may meet an untimely death. He may suffer from accident,
destruction of property, fire, sea perils, floods, earthquakes and other natural calamities.
Whenever there is uncertainty, and there is risk as well as insecurity. It is to provide
against risk and insecurity that insurance came into being. Insurance does not avert or
eliminate loss arising from uncertain events.
Insurance principle operates on the Law of Large Numbers and the Law of Averages
(Lex Numerorum Multorum Et Principiae Medianae Propabilitatis)
An insurance company mitigates, eliminates and reduces risk by two methods:
A. Internal Hedging through
a. Appropriate portfolio construction and timely revision.
b. Averaging portfolio volumes and mix by establishing statistical
independence of risks, convergence, co-relationships, portfolio
synchronization between insurance and investments.
B. External hedging through
a. coinsurance
b. homogenization/ Mutualisation
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c. Reinsurance
Insurance is thus a co-operative device to spread the loss caused by a risk (which is
covered by insurance) over a large number of persons who are also exposed to the
same risk and insure themselves against that risk.
Risk can be defined as “calculated uncertainty”. Any risk that can be quantified can
potentially be insured. Specific kinds of risk that may give rise to claims are known as
"perils". An insurance policy will set out in detail which perils are covered by the policy
and which are not. An insurer is a company which accepts your risk after charging a
premium. The insurance rate is a factor used to determine the amount, called the
premium, to be charged for a certain amount of insurance coverage.

The essence of the insurance business is the risk by undertaking to indemnify the
insured against loss or damage. They agree to pay the damages out of any accident by
taking a chance that no accident might happen. Motivation of the insurance business is
that the premium would turn to be the profit of the business incase no damage occurs.
Such business of the insurance company can be carried on only with the premium paid
by the insured person on the insurance policy. The only profit, if at all the insurance
company makes, of the insurance of the insurance business is the premium paid when
no loss or damage occurs. But to ask the insurance company to bear the entire loss or
damage of somebody else without the company receiving a rupee towards premium is
contrary to principles of equity.1

1
National Insurance Co. V. Seema Malhotra (2001) 3 SCC 151
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CASE LAW INDEX

1. General Assurance Society Ltd. v. Chandumull Jain AIR 1966 SC 1644.

2. Life Insurance Corporation of India v. Smt. G.M.Channabasamma (1991) 1 SCC
357.
3. Life Insurance Corporation of India v. Parvathavardhini Ammal AIR 1965 Mad
357.
4. United India Insurance co. Ltd v. M.K.J Corpn. (1996) 6 SCC 428.
5. Hanil Era Textiles Ltd. v. Oriental Insurance Co. Ltd. (2001) 1 SCC 269.
6. United India Insurance Co ltd. v. M.K.J. Corporation (1996) 6 SCC 428.
7. Behn v. Burness, (1863) 3 B&S 751.
8. Pawson v. Watson, (1778) 98 ER 1361.
9. Wheelton v. Haristy, (1857) 8 E and B 232.
10. Life Insurance Corporation v Smt. B. Kusuma T. Rao; (1991) 70 Comp Cas 86.
11. New Castle Fire Insurance Company v. Mac Morram and Co., (1815) 3 ER 1057.
12. Balkrishna v. New Indian Assurance Company, AIR 1959 Pat 102.
13. Barnard v. Faber, (1983) 1 Q.B. 340.
14. Svenska Handelsbanken vs. M/s. Indian Charge Chrome and others, 1993 SC.
15. Glen v. Lewis (1853) 8 Exch. 607.
16. Skandia Insurance Company Ltd. v. Kokilaben Chandravadan, (1987) 2 SCC
654.
17. Modern Insulators Ltd. v. Oriental Insurance Company Ltd. (2000) 2 SCC 1014.
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18. National Insurance Company Ltd. v. Sujir Ganesh Nayak and Company, AIR
1997 SC 2049.
19. Vania Silk Mills (P) Ltd. v. CIT (1991) 4 SCC 22.
20. Castellan v. Preston (1881) All ER 494.
21. Union of India v Sri Sarada Mills Ltd., 1972 (2) SCC 877.
22. Vasudeva Mudaliar v Caledonian Insurance Co. & Anr. AIR 1965 Madras 159.
23. Oberai Forwarding Agency v New India Assurance Co. Ltd. & Anr. 2002 (2) SCC
407.
24. Stanley V. Western Insurance Company (1868) L.R. 371.
25. New India Assurance Company Ltd. v. B. N. Sainani (1997) 6 SCC 383.
26. Seagrave v Union Insurance Co. Ltd., (1886) LR 1 CP 305.
27. Anctil v. Manufacturer's Life Insurance Company, (1899) AC 604 (PC).
28. Tomlison (Haullers) Ltd. V Hoplurane, 1966 (1) AC. 418.
29. Griffith v. Fleming, (1909) 1 K.B. 805.
30. Life Insurance Corporation of India v. Raja Vasireddi Komalavalli Kamba and
Others, 1984, SC.
31. New India Assurance Company. Limited. v. Ram Dayal & Others, (1990) 2 SCC
680.
32. National Insurance Company. Limited. v. Jikubhai Nathuji Dabhi (Smt) and
Others., 1997(1) SCC 66.
33. National Insurance Company Limited. v. Mrs. Chinto Devi & Others, 2000, SC. A.
34. National Insurance Co. V. Seema Malhotra (2001) 3 SCC 151
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PRIME TIME MATTER

Life is full of uncertainties and insurance is based on uncertainties and if there are no
uncertainties about the occurrence of a disaster, the concept of insurance will cease to
exist. For insurance, if one is able to predict the forthcoming dangers, then one will take
a proper safeguard action and then face the crisis in a very normal manner, but then
this is a utopian concept; because death, disaster and dangers cannot be predicted. All
individuals have assets; both tangible; the house, car, factory or intangible like the voice
of a singer, leg of a footballer, the hand of an author and many others. Now all such
assets are insured because they run the risk of becoming non-functional through a
disaster or an accident. Such possible and unforeseen occurrences are known as
“Perils”. And the damage caused by such perils is called risk that the assets are
exposed to. Risk is a contingency and the insurance is done against such possible
contingencies.

Uncertainty, risk and insecurity are incidental to any form of business. This makes
insurance indispensable for a business organization. Insurance may be defined as a
contract in writing under which one party agrees to indemnify the other party against a
loss or damage suffered by it on account of an uncertain future, in return for a
consideration called 'premium'. The person/business that gets its life/property insured is
called 'Insured/Assured'. The agency which helps in entering into an insurance
arrangement is called 'Insurer' or 'Insurance company'. The agreement or contract
9 |Page

which is put in writing, is called a 'policy'. An insurance policy provides the following
benefits to a business concern :-

 Protection: it provides protection against risk of loss and a sense of security to

the businessmen.
 Diffusion of risks: as the burden of loss is spread over a large number of
people.
 Credit standing: of the firm is enhanced as the businessman can easily transfer
some of his risks to an insurance company.
 Continuity and certainty of business: if all the risks were to be borne by the
businessmen themselves, the business operations would have been uncertain
and halting in character.
 Better utilization of the capital of the firms: as the Insurance companies take
over the risk, it enables the business firm to invest and optimally utilize its capital.

Thus, the aim of insurance is to compensate the owner against the losses arising from a
variety of risks which he anticipates to his life, property and business. It is a means of
pooling of risks, under which a group of people who are subject to an insurable risk
contribute regularly to a fund. The fund so created is utilized to compensate those
members of the group who actually suffer a loss due to some unexpected calamity.
Thus the loss of a few is shared by all the members on an equitable basis.

INSURANCE IS A BUSINESS OF MANAGING RISKS

The concept of insurance is quite simple. People who are in a similar trade and are
exposed to the same risks, congregate and come to an agreement that if any individual
member suffers a loss, then the loss will be shared by others and minimized in order to
enable the individual member recover from the loss and cover his ground. Similarly the
different kinds of risks can be identified and separate groups can be formed to counter
such risks and reduce the impact to a manageable level in which the share could be
collected from the members either after the loss or in advance, at the time of admission
to the group. This is an exemplary sign of humanity and insurance therefore serves
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mankind to a great extent, a point most of the individuals tend to overlook, since
monetary aspect is involved.

Satisfaction of economic needs requires generation of income from some source. If the
property which is the source of such income is lost fully or partially, permanently or
temporarily, the income too would stop. The purpose of insurance is a safeguard against
such misfortunes by making good the losses of the unfortunate few, through the help of
the fortunate many, who were exposed to the same risk, but saved from the misfortune.
Thus the essence of insurance is to share losses and substitute certainty by
uncertainity.

HOW DOES INSURANCE REDUCE RISK?

Health insurance seems like a simple exchange. You pay an insurance company a
premium and insurance pays your bills. You get rid of risk and the insurance company
takes your risk. However, there is more to it that this. What does the insurance company
do with your risk? Do they keep it? Do they also get rid of it somehow? When you
understand what the insurance company does with your risk, then you can better
evaluate your options and perhaps get a better deal on insurance.

One measure of risk is the potential for ups and downs. Having a stock that pays $100
in dividends each year and seldom changes in price is not very risky. Having a stock
that goes up or down wildly from one period to another is risky. The same is true for
health care costs. Paying $100 each year for eyeglasses is not risky. Having a chance
of winding up in the hospital and having to pay $100,000 is risky.

"Risk Pooling" happens when many people get together and share their losses by
averaging them together. Risk pooling works because of the "law of large numbers." As
you average together more and more numbers in a certain range, the average becomes
more and more stable. Unusually high or low numbers tend to cancel each other out.
For example, if you roll dice once, the result can be anywhere from 2 to 12. If you roll
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dice more and more, the average will get closer and closer to 7. By the time you roll the
dice 1,000 times, the average will be very stable around 7.

Insurance companies use risk pooling to get rid of the risk they take from you. They
charge you a premium based on average cost plus their administrative cost. When they
pool many people, the average cost is very stable and they have little risk themselves.
Risking pooling is also used in finance. When people buy a bunch of different stocks in a
diversified portfolio, their average return from the portfolio is more stable and less risky
than the return from a single stock.

In order for risk pooling to work, the individual risks that are pooled must be
independent. "Independent" risks go up and down at different times, not together. When
risks go up and down at different times, they tend to cancel each other out. If they go up
and down together, the do not cancel out. For example, it is less risky to provide
accident insurance for 100 people traveling on 100 different boats than for 100 people
traveling on the same boat. Health care risks for individuals are generally independent,
although contagious diseases or widespread disasters can change that. This is one
reason why many life and property insurance policies exclude losses from catastrophic
events such as war.

INSURANCE REGULATION IN INDIA

Insurance law regulations in India manage all the matters related to various insurance
companies in the country. The concept of insurance in India dates back to the ancient
period. The idea of getting anything insured gained its momentum from the overseas
traders who used to practice marine insurance in somewhat crude form. Social
insurance was the first of its kind which took shape in India. Since its introduction, the
history of insurance in India has undergone many phases. Earlier, the insurance
companies in India were privatized.

ENTRY OF PRIVATE COMPANIES: A LAND MARK DECISION

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In the later years, insurance companies were nationalized with the help of insurance
laws. In the most recent move in this regard, the Insurance law regulations in India
permitted the entry of private companies and foreign investment in the sector. This
remarkable decision gave the industry a breath of fresh air. Much of the development
and growth of the insurance sector in India owes to the decision of the government to
nationalize the insurance business in India and to allow private and foreign insurance
companies to establish their business in the country.

REGULATORY AUTHORITIES

There are 4 regulatory authorities which oversee different functioning of the insurance
companies in India and provide guidelines to them. These include:

• Insurance Regulatory and Development Authority (IRDA)

• Tariff Advisory Committee
• Ombudsmen
• Insurance Association of India

Insurance Regulatory and Development Authority (IRDA)

Insurance Regulatory and Development Authority (IRDA) is a very powerful body which
oversees important aspects of the functioning of the insurance companies in India. It
was set up by the government to safeguard the interest of the insurance policy holders
of the country. Some of the important powers, duties and functions of Insurance
Regulatory and Development Authority (IRDA) include:

• To regulate, ensure and promote the orderly growth of the insurance business
• To prescribe regulations on the investment of funds by insurance companies
• To regulate the maintenance of the margin of solvency
• To adjudicate the disputes between insurers and intermediaries
• To supervise the functioning of the Tariff Advisory Committee
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Tariff Advisory Committee

The prime duty of Tariff Advisory Committee is to regulate and control the rates,
benefits, terms and conditions offered by the insurance companies working in India.

Insurance Association of India

All the insurance companies functional in India are members of the Insurance
Association of India. It has 2 councils under its patronage. These are known as:

• Life Insurance Council

• General Insurance Council

Ombudsmen

Ombudsmen play important role in regulating and ensuring smooth functions of the
insurance companies. They are appointed to address all complaints relating to
settlements of claims. Anyone having a grievance against an insurance company can
approach Ombudsmen for redressal.

TYPES OF INSURANCE

Insurance is mainly protection against future loss. It can be better described as promise
of reimbursement in any case of loss. Insurances are paid to people or companies by
the insurance company against any kind of hazards or calamities. There are some major
types of insurances that include- Health Insurance, Life Insurance, Disability Insurances,
Casualty Insurances, Property Insurance, Liability Insurance and Credit Insurance.
These days a new concept of terrorism insurance has come up. Terrorism insurance is
insurance purchased by property owners to cover their potential losses and liabilities
that might occur due to terrorist activities.
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PRINCIPALS OF INSURANCE LAW

Where there is a positive enactment of the Indian legislature, the language of the statute
is applied t o the facts of the case. However, the common law of England is often relied
upon in consideration of justice, equity and good conscience.

1. Good Faith

A contract of insurance is a contract uberrimea fidei i.e. a contract of utmost good faith.
This is a fundamental principle of insurance law. Both the parties to the contract are
required to observe utmost good faith and should disclose every material fact known to
them. There is no difference between a contract of insurance and any other contract
2
except that in a contract of insurance there is a requirement of utmost good faith. The
burden of proof to show non-disclosure or 3misrepresentation is on the insurance
company and the onus is a heavy one4. The duty of good faith is of a continuing nature
5
in as much no material alteration can be made to the terms of the contract without the
mutual consent of the parties. Just as the assured has a duty to disclose all 6 the material
7
facts, the insurer is also under an obligation to do the same. The insurer cannot
subsequently demand additional premium nor can he escape liability by contending that
the situation does not warrant the insurance cover.8
The Insurance Act lays down that an insurance policy cannot be called in question two
years after it has been in force for two years. This was done to obviate the hardships of
the insured when the insurance company tried to avoid a policy, which has been in force
for a long time, on the ground of misrepresentation. However, this provision is not
applicable when the statement was made fraudulently. The Marine Insurance Act, 1963

2
General Assurance Society Ltd. v. Chandumull Jain AIR 1966 SC 1644.
3
Life Insurance Corporation of India v. Smt. G.M.Channabasamma (1991) 1 SCC 357.
4
Life Insurance Corporation of India v. Parvathavardhini Ammal AIR 1965 Mad 357.
5
United India Insurance co. Ltd v. M.K.J Corpn. (1996) 6 SCC 428.
6
Section 21(a) of the Indian Marine Insurance Act, 1906.
7
Hanil Era Textiles Ltd. v. Oriental Insurance Co. Ltd. (2001) 1 SCC 269.
8
United India Insurance Co ltd. v. M.K.J. Corporation (1996) 6 SCC 428.
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(“Marine Insurance Act”) lays down that the insured must disclose all the material facts
before t he contract is concluded. The disclosures by the assured or by his agent should
be true. The insured is deemed to know every circumstance, which in the ordinary
course of business, ought to be known by him. The insurer may avoid the contract if the
assured fails to make such disclosure or if the representation made is untrue. However,
circumstances which diminish the risk, or which are presumed to be known by the
insurer or information which is waived by the insurer or any circumstance which is
superfluous to disclose by reason of any express or implied warranty need not be
disclosed, in absence of any enquiry.

In India the post contractual duty of good faith is very strict. The situation, though, has
changed in9 England through a recent decision of the House of Lords.

The decision in the Star Sea Case lays down that the duty of good faith in insurance
contracts continues after the inception of the policy, but the duty is far less strict than it
was prior to the commencement of the contract. This is because it would enable the
insurers to avoid the whole policy ab initio for a post-contractual breach, which had no
effect when the policy was drawn initially. However, this position has yet to be accepted
by the Indian courts.

2. Misrepresentation

Representations are statements, made by one part y to the other, either prior to or while
entering into an insurance contract, of some matter or circumstances relating t o it and
which is not an10 integral part of the contract. These statements are said to have fulfilled
their obligations when the11 final acceptance on the policy is conveyed.
A mere recital of representations made at the time of entering into the contact will not
make then12 warranties. However, if representations are made an integral part of the
contract they become warranties, and, in case of their being untrue, the policy can be
9
[2001] 4 Lloyd's Rep IR 247.
10
Behn v. Burness, (1863) 3 B&S 751
11
Pawson v. Watson, (1778) 98 ER 1361.
12
Wheelton v. Haristy, (1857) 8 E and B 232.
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avoided, even if the loss does not arise from the fact concealed or misrepresented. A
policy of life insurance cannot be called in question on the ground of misrepresentation
after a period of two years from the commencement of the policy.
In dealing with representations as circumstances invalidating a contract, consideration
should be paid as to whether such representations are willful or innocent and whether
they are preliminary or for part of the contract. The Insurance Act lays down three
conditions to establish that the misrepresentation was willful; (a) the statement must be
on a material matter or must suppress facts which it was material to disclose; (b) the
suppression must be fraudulently made by the policy holder; and (c) the policy- holder
must have known at the time of making the statement that it was false or that it
suppressed facts which it was material to disclose. The burden of proof of establishing13
that the insured had in fact suppressed material facts in obtaining insurance is on the
insurer and14 all the aforesaid conditions are required to be proved cumulatively.
In determining whether there has been suppression of a material fact it is necessary to
examine whether the suppression relates to a fact which is in the exclusive knowledge
of the person intending to take the policy and also that it could not be ascertained by
reasonable enquiry by a prudent15 person.

3. Warranties

A warranty may be distinguished from a representation in as much a representation may

be equitably and substantially answered but a warrant y must be strictly complied with. A
breach of warranty will avoid the policy, although it may not relate to a matter material to
the risk insured.
Warranties may be express or implied, if it is condition implied by law. However, implied
warranties are mostly confined t o marine insurance. The Marine Insurance Act defines
a warranty as a promise whereby the assured under takes that some particular thing
shall or shall not be done, or that some condition shall be fulfilled, or affirms or negatives
13
Life Insurance Corporation v. Smt. G.M. Channabasemma, AIR 1991 SC 392
14
Life Insurance Corporation v Smt. B. Kusuma T. Rao; (1991) 70 Comp Cas 86.
15
Life Insurance Corporation v. Smt. G.M. Channabasemma, AIR 1991 SC 392.
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the existence of a particular state of facts.16 The statements must be true in fact without
any qualification of judgement, opinion or belief. The warranty should be in the policy or
must be incorporated by reference. If any of the statements or representations made by
the assured in the proposal have been made the “basis” of the contract and they are
found to be untrue, the contract of insurance would be void and unenforceable in law,17
irrespective of the question whether the statement, concerned is of a material nature or
not.
However, non-compliance of a warranty is excused when, by reason of a change of
circumstances, the warranty ceases to be applicable to the circumstances of the
contract, or when compliance with18 the warranty is rendered unlawful by any
subsequent law or when such a warranty has not been19 mentioned in the policy.

4. Conditions

Conditions are terms which prescribe the limitations under which an insurance policy is
granted and which specify the duties of the assured. They can be either conditions
precedent or subsequent.20 Conditions precedent are those, which are essential for the
creation of a valid contract, the non- satisfaction of which makes the contract void ab
initio.21 Conditions subsequent relate to the continuance of a valid contract, the non-
fulfillment of which leads to the avoidance of the contract22 from the date of the breach.
They can be further classified into express conditions and implied conditions. Implied
conditions are those, which are implied by law to apply t o every contract of insurance
irrespective of any specific inclusion or reference to them such as insurable interest,
good faith etc. A condition, which seeks to reduce or curtail the period of limitation and
prescribes a shorter period than that prescribed by law23 is void. However, the insured is
absolved once it is shown that he has done everything in his power to 24 keep, honour
16
New Castle Fire Insurance Company v. Mac Morram and Co., (1815) 3 ER 1057.
17
Balkrishna v. New Indian Assurance Company, AIR 1959 Pat 102.
18
Section 36 of The Marine Insurance Act, 1963.
19
United India Insurance Company Ltd. v. M.K.J. Corporation, (1996) 6 SCC 428.
20
Barnard v. Faber, (1983) 1 Q.B. 340.
21
Svenska Handelsbanken vs. M/s. Indian Charge Chrome and others, 1993 SC.
22
Glen v. Lewis (1853) 8 Exch. 607.
23
Section 28 of the Indian Contract Act, 1872.
24
Skandia Insurance Company Ltd. v. Kokilaben Chandravadan, (1987) 2 SCC 654.
18 | P a g e

and fulfill the promise and he himself is not guilty of a deliberate breach. An insurer
cannot take recourse to a condition, which has not been mentioned in the policy to
reduce his liability25. However, an insurance policy may not curtail the right but may
merely provide for forfeiture26 or waiver of any such right and such a right would be
enforceable against either party.

5. Indemnity and Subrogation

Most kinds of insurance policies other than life and personal accident insurance are
contracts of indemnity whereby the insurer undertakes to indemnify the insured for the
actual loss suffered by him as a result of the occurring of the event insured against.
Even within the maximum limit, the27 insured cannot recover more than what he
establishes to be his actual loss. A contract of marine insurance is an agreement
whereby the insurer undertakes to indemnify the insured to the extent agreed upon.
Although the insured is to be placed in the same position as if the loss has not occurred,
the amount of indemnity may be limited by certain conditions:
1. Injury or loss sustained by the insured has to be proved.
2. The indemnity is limited to the amount specified in the policy
3. The insured is indemnified only for the proximate causes.
4. The market value of the property determines the amount of indemnity.

Legal & Tax Counseling Worldwide

Indemnity is a fundamental principle of insurance law, and the principle of Subrogation is

a corollary of this principle in as much the insured is precluded from obtaining more than
the loss he has sustained. The most common form of subrogation is when an insurance
company pays a claim caused by the negligence of another. The doctrine of
subrogation confers two specific rights on the insurer. Firstly, the insurer is entitled to
all the remedies which the insured has against the third party incidental to the subject

25
Modern Insulators Ltd. v. Oriental Insurance Company Ltd. (2000) 2 SCC 1014.
26
National Insurance Company Ltd. v. Sujir Ganesh Nayak and Company, AIR 1997 SC 2049.
27
Vania Silk Mills (P) Ltd. v. CIT (1991) 4 SCC 22.
19 | P a g e

matter of the loss, such that the insurer can take advantage of any means available to
extinguish or diminish, the loss for which the insurer has indemnified the insured.
Secondly, the insurer is entitled to the benefits received by the assured from the third
party with a view to compensate himself for the loss.28 The fact that an insurer is
subrogated to the rights and remedies of the insured does not ipso jure29 enable him to
sue third parties in his own name. It will only entitle the insurer to sue in the name of
insured30, it being an obligation of the insured to lend his name and assistance to such
an action. An insurance policy may contain a special clause whereby the insured
assigns all his rights, against third parties, in favour of the insurer. In case of
subrogation, which vests by operation of law rather than as the product of express
agreement, the insured would be entitled to only to the extent of his 31 loss. The excess
amount, if any, would be returned to the insured.

6. Proximate Cause

The doctrine of proximate cause is expressed in the maxim 'Causa Proxima non remota
spectator', which means that the proximate and not the remote cause shall be taken as
the cause of loss. The insurer is thus has to make good the loss of the insured that
clearly and proximately results, whether32 directly or indirectly, from the event insured
against in the policy. The burden of proof that the loss occurred on account of the
proximate cause lies on the insured.
As per the Marine Insurance Act, unless the insurance policy states otherwise, the
insurer is liable for any loss proximately caused by a peril insured against, but he is not
liable for any loss which is not proximately caused by a peril insured against. An insurer
would therefore be exempted from liability when the cause of loss falls within the
exceptions of the policy. The Marine Insurance Act further states that the insurer is not
liable for any willful misconduct of the insured i.e. the assured cannot recover for a loss

28
Castellan v. Preston (1881) All ER 494.
29
Union of India v Sri Sarada Mills Ltd., 1972 (2) SCC 877.
30
Vasudeva Mudaliar v Caledonian Insurance Co. & Anr. AIR 1965 Madras 159.
31
Oberai Forwarding Agency v New India Assurance Co. Ltd. & Anr. 2002 (2) SCC 407.
32
Stanley V. Western Insurance company (1868) L.R. 371.
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where his own deliberate act is the proximate cause of it. Further, in the event of loss
caused by the delay of the ship, the insurer cannot be held liable, irrespective of the
proximity of33 the cause.

7. Insurance and Consumer Protection

The Consumer Protection Act, 1986 (“Consumer Protection Act”) is one of the most
important socio-economic legislation for the protection of consumers in India. The
provisions of this Act are compensatory in nature, unlike other laws, which are either
punitive or preventive. Insurance services fall within the purview of the Consumer
Protection Act, in as much, any deficiency in service of the insurance company would
enable the aggrieved to make a complaint. Disputes between policyholders and insurers
generally pertain to repudiation of the insurance claim or the matters connected with
admission of the claim or computation of the amount of claim. In the case of assignment
of all rights by the insured to the insurer, the consumer forum and he courts generally
refuse to accept the locus standi of the insured.
The courts have held that insurance companies do not fall under the definition of
“consumer” under the Consumer Protection Act, as no service is rendered to them
directly. Neither the subrogation nor the transfer of the right of action would confer t he
legal status of a 'consumer' on the insurer,34nor can the insurer be regarded as any
beneficiary of any service. Therefore, the remedy available to the insurer is to file a suit
in a civil court for recovery of the loss.

8. Insurable Interest

33
Section 55 (2)(b) of the Marine Insurance Act, 1963.
34
New India Assurance Company Ltd. v. B. N. Sainani (1997) 6 SCC 383.
21 | P a g e

To constitute insurable interest, it must be an interest such that the risk would by its
proximate35 effect cause damage to the assured, that is to say, cause him to lose a
benefit or incur a liability. The validity of an insurance contract, in India, is dependent on
the existence of an insurable interest in the subject matter. The person seeking an
insurance policy must establish some kind of interest in the life or property to be insured,
in the absence of which, the insurance policy would amount to a wager 36 and
consequently void in nature. The test for determining if there is an insurable interest is
whether the insured will in case of damage37 to the life or property being insured, suffer
pecuniary loss. A person having a limited interest can38 also insure such interest.
Insurable interest varies depending on the nature of the insurance. The controversy as
to the existence of an insurable interest between spouses was settled by the court,
which held that such39 an interest could exist as neither was likely to indulge in any
'mischievous game'. The same analogy may be extended to parents and children.
Further, the courts have also held that such an insurable interest would exist for a
creditor (in a debtor) and for an employee (in an employer) to the extent of the debt
incurred and the remuneration due, respectively.
The existence of insurable interest at the time of happening of the event is another
important consideration. In case of life and personal accident insurance it is sufficient if
the insurable interest is present at the time of taking the policy. However, in the case of
fire and motor accident insurance the insurable interest has to be present both at the
time of taking the policy and at the time of the accident. The case is completely different
with marine insurance wherein there need not be any insurable interest at the time of
taking the policy.

9. Commencement of policy

35
Seagrave v Union Insurance Co. Ltd., (1886) LR 1 CP 305.
36
Anctil v. Manufacturer's Life Insurance Company, (1899) AC 604 (PC).
37
New India Insurance Company Ltd. v. G.N. Sainani, (1997) 6 SCC 383.
38
Tomlison (Haullers) Ltd. V Hoplurane, 1966 (1) AC. 418.
39
Griffith v. Fleming, (1909) 1 K.B. 805.
22 | P a g e

The general rule on the formation of a contract, as per the Indian Contract Act, is that
the party to whom the offer has been made should accept it unconditionally and
communicate his acceptance to the person making the offer. Whether the final
acceptance is to be made by the insured or insurer really depends on the negotiations of
the policy.
Acceptance should be signified by some act as agreed upon by the parties or from
which the law raises a presumption of acceptance. The mere receipt or retention of
premium until after the death40 of the applicant or the mere preparation of the policy
document is not acceptance. Nonetheless,41 acceptance may be presumed upon the
retention of the premium. However, mere delay in giving an answer cannot be construed
as acceptance. Also, silence does not denote consent and no binding contract arises
until the person to whom an offer is made says or does something to signify his 42
acceptance. When the policy is of a particular date, it would cover the liability of the
insurer from the previous43 midnight preceding the same date. However, where there is
a special contract to the contrary in44 the policy, the terms of the contract would prevail.
Hence where the time of the issue of the insurance policy is mentioned, then the liability
would be covered only from the time when it was45 issued.

40
Life Insurance Corporation of India v. Raja Vasireddi Komalavalli Kamba and Others, 1984,
SC.
41
Corpus Juris Secundum, Vol. XLIV, page 986.
42
Life Insurance Corporation of India v. Raja Vasireddi Komalavalli Kamba and Others, 1984,
SC.
43
New India Assurance Company. Limited. v. Ram Dayal & Others, (1990) 2 SCC 680.
44
National Insurance Company. Limited. v. Jikubhai Nathuji Dabhi (Smt) and Others., 1997(1)
SCC 66
45
National Insurance Company Limited. v. Mrs. Chinto Devi & Others, 2000, SC. A.
23 | P a g e

BIBLIOGRAPHY

 Insurance : Fundamentals, Environment and Procedures

 By B.S. Bodla, M.C. Garg, K.P. Singh
 Bharats Manual of Insurance Laws
 By Ravi Puliani, Mahesh Puliani
 Insurance Law Manual
 Taxman
 Law of Insurance
 By Dr. M.N. Mishra
 Handbook of Insurance Claims
 By S.P. Gupta, V.H.P. Pinto
 Fundamentals of Risk and Insurance
 By Vaughan & Vaughan

 Various websites referred:

 www.manupatra.com
 www.scconline.com
 www.legalserviceindia.com
 www.indlaw.com
 www.supremecourtcaselaw.com
 www.supremecourtofindia.com
 www.wikipedia.com
 www.google.com
24 | P a g e

CROSS REFERENCE INDEX

A
Ab initio 15, 17
Accident insurance 11, 18, 21
B
Burden of proof 14, 16,19
C
Calculated uncertainty 4
Casualty Insurances 13
Causa Proxima non remota spectator 19
Commencement of policy 21
Compensate 9, 19
Conditions precedent 17
Conditions subsequent 17
Consumer Protection Act, 1986 20
Contingency 8
Continuity and certainty of business 9
Contract in writing 8
Credit Insurance 13
Credit standing 8
D
Deliberate breach 17
Diffusion of risks 8
Disability Insurances 13
Doctrine of proximate cause 19
25 | P a g e

E
Economic needs 9
External hedging 4
Enterprise Risk Management 29
F
Forfeiture 18
G
Good Faith 14, 15, 17
H
Health insurance 10
Humanity 9
I
Indemnity and Subrogation 18
Independent risks 11
Indian Contract Act, 21
Insurable Interest 17, 20, 21
Insurable risk 9
Insurance Association of India 12
Insurance Regulatory and Development Authority (IRDA) 12
Insured/Assured 4, 5, 11, 15, 18, 21
Internal Hedging 4
Ipso jure 19
J
Justice, equity and good conscience 5, 14
L
Legal & Tax Counseling Worldwide 18
Lex Numerorum Multorum Et Principiae Medianae Propabilitatis 4
Liability Insurance 13
Life Insurance 6, 7, 13, 16
Locus standi 20
M
26 | P a g e

Marine insurance 11, 14, 15, 16, 17, 18, 19, 20, 21
Mischievous game 21
Misrepresentation 14, 15, 16
Monetary 9
N
Nationalization 11, 12
O
Ombudsmen 12, 13
P
Pecuniary loss 21
Perils 4, 5, 8
Policy 5, 8, 12, 15, 16, 17, 18, 19, 21, 22, 28
Pooling of risks 9
Portfolio construction 4
Post contractual duty of good faith 15
Premium 5, 8, 10, 14, 18, 22, 28
Principle of Subrogation 18
Principles of equity 5
Privatization 11
Property Insurance 11, 13
Protection 8, 13, 20
Proximate Cause 18, 19, 20
Punitive or preventive 20
R
Regulatory authorities 12
Reinsurance 4, 28, 29
Repudiation 20
Risk Pooling 10, 11
S
Safeguard 8, 9, 12
Share losses 10
27 | P a g e

Social insurance 11
Substitute certainty 10
Superfluous 15
T
Tariff Advisory Committee 12
Terrorism insurance 13
U
Uberrimea fidei 14
Uncertainties 4, 8
Unenforceable in law 17
W
Warranties 15, 16
28 | P a g e

EPILOGUE

In today’s time of globalization, insurance companies face a dynamic environment which

is here to stay. Dramatic changes are taking place owing to the internationalization of
activities, the appearance of new risks, new types of covers to match with new risk
situations and unconventional and innovative ideas on customer service. Low growth
rates in developed markets, changing customer needs and the uncertain economic
conditions in the developing world are exerting pressure on insurer’s resources and
testing their ability to survive. In addition, the existing insurers are facing difficulties from
non-traditional competitors that are entering the retail market with new approaches and
through new channels.

So how do the insurance companies sustain the tough competition and the cold
slowdown waves in the market? There are a few new emerging trends in the market that
help the risk guard to guard itself like:

1. REINSURANCE:

The concept of Reinsurance, though known, is still a less popular one in Insurance
Industry and even general policy-holders are not very familiar with this term. An
insurance company uses this tool to transfer a portion to one or more insurance
companies. In a general language, Reinsurance is a process in which an insurer
transfers certain percentage of its business risk to another company, which will then
reimburse the loss that insurer, may face in his business. It makes the risk management
process of insurance companies more effective and economical.

Reinsurance is a transaction in which one insurer agrees for a premium, to indemnify

another insurer against all or part of loss that insurer may sustain under its policy or
29 | P a g e

policies of insurance. The company purchasing the reinsurance is known as the Ceding
Insurer (or Primary Insurer) and the company selling reinsurance is known as the
Assuming Insurer (or simply Reinsurer). The transaction is also described as "The
Insurance of Insurance Companies". It is a risk management tool that spreads the risk
so that no single entity has to bear the burden of paying back beyond the limit.
Reinsurance companies indemnify a certain percentage of the losses which the primary
insurer is unable to pay or the amount of loss is beyond the capacity of the primary
insurer.

2. Enterprise Risk Management (ERM)

Enterprise Risk Management refers to restructuring the risk philosophy of a company.

Enterprise Risk Management is a large change management initiative that needs to be
handled carefully and in a structured way. Global economic and industrial developments
have changed the risk profiles of insurance companies. They have realized the
importance of risk sensitive system in managing scarce capital. To deploy scarce capital
effectively and to maximize economic value, they need to move towards risk-based
capital wherein the companies’ capital requirements are based on the risk they face.
Regulatory changes have also compelled insurance companies to move towards risk-
adjusted returns.

THE BRIGHT FUTURE OF INDIAN INSURANCE INDUSTRY:

Indian markets hold tremendous potential to attract foreign insurers. This is putting up
pressure on India to open up its markets. Another important aspect is that India
accounts for an insignificant share in the world market. This in a sense means a
tremendous market potential which possibly can be tapped mainly by mounting a
programme of radical reforms. Thus, there is great room for expansion in this business
of risk management.

And hence we can conclude by saying that Insurance is a business of risk management
but, it is not a risky business as the principles of justice, equity and good conscience not
only offer a cover to the insured but also to the one who covers i.e. the insurer.