The Insurance Act, 1938

Act was passed to control the working and activities of the companies carrying on business of life, fire, marine and accident insurance. Apart from the above Act, the Indian insurance business is governed by the following special Acts.
1. 2. 3.

The Life Insurance Corporation Act, 1956 The Marine Insurance Act, 1963 and The General Insurance Business (Nationalization) Act 1972

Why insurance?
To provide against the risk and insecurity But, it does not avert or eliminate loss arising from uncertain events It only spreads the loss over a large number of people Contract of Insurance A contract of insurance is a contract by which a person, in consideration of a sum of money, undertakes to make good the loss of another against a specified risk e.g. fire or to compensate him or his estate on happening of a specified event, e.g. accident or death.

Essential elements
1. 2.

3. 4. 5.

Insurer and insured Premium : The consideration for which the insurer undertakes to indemnify the insured against the risk may be single or periodical Policy Subject matter of insurance Perils insured against.

Kinds of insurance 1. Life insurance 2. Fire insurance 3. Marine insurance 4. Personal accident insurance

Nature of the contract of insurance

The contract of insurance is called an aleatory contract At first sight, this would seem to be a wagering agreement, because insurer betting with the insured that his house will not be burnt But, modern view is that insurance contracts are not speculative or wagering In actual practice, it is a valid contract, because the insured is only indemnified for his loss and he dose not gain by the happening of the event insured against. Plus he must have an insurable interest in the subject matter

Contract of insurance is a species of the general contract Comes into existence by the process of offer by insured to insurer Insurer should communicate its acceptance Object of insurance must be lawful and consent must be free and genuine Contract must be supported by consideration

Differences between insurance and wager Insurance

Contract of indemnity Object is to make good the loss

Wager
No question of indemnity Object is to earn speculative gains

Has pecuniary or insurable interest No pecuniary or insurable interest Utmost good faith to be observed Legally enforceable Scientific calculation of risk and premium Cause varying degrees of loss or damage Good faith need not be observed Void ab initio Mere gamble

Either won or lost

Fundamental principles of insurance contracts

1. 2. 3. 4. 5. 6. 7. 8. 9.

Utmost good faith Insurable interest Indemnity Causa Proxima Mitigation of loss Risk must attach Doctrine of subrogation Doctrine of contribution Period of insurance

Utmost good faith (uberrimae fidei )

Utmost good faith must be observed by either party otherwise Whole truth must be told about the subject matter Fraud, concealment or misrepresentation of the material facts is fatal to the contract Material facts: needed to judge (a) whether he should accept the risk and (b) what premium he should charge Proposer should disclose at the time of making the proposal and must continue to do so till the negotiations are completed but need not after the contract Principle of caveat emptor is not applicable Exceptions:

Insurable interest

Insured must be in a legally recognized relationship to what is insured so that he will suffer a direct financial loss on the happening of the event insured ( or benefit from the existence of the subject matter) It is the legal right of the person to insure It is not the owner alone, but every person who would suffer direct financial loss from the destruction Existence of insurable interest for different types of insurance Life insurance : at the time of insurance Fire insurance : both at the of insurance and loss Marine insurance : at the time of loss

Causa proxima

Insurer is liable only for those losses which have been proximately caused by the peril insured against Maxim is : Causa Proxima Non remota Spectatur ( the proximate or immediate and not the remote cause is to be looked to) The question, which is the causa proxima of a loss arises only when there is a succession of causes When a loss has been brought about by two or more causes, one has to look to the nearest cause, although the loss would no doubt not have happened without the remote or other causes Commonsense is to be used Loss if brought about by a cause attributable to the misconduct of the insured - insurer is not liable Cases: read out

Risk must attach

The insurer receives the premium for running a certain risk If risk is not run, the consideration for which the premium was given fails Then, insurer must return the premium The premium is also to be returned even where the risk is not run or could not be run due to the fault, will or pleasure of the insured

Mitigation of loss

The insured must take all necessary steps for the purpose of averting or minimizing loss He must act as an uninsured prudent person If insured dose not do so, the insurer can avoid the payment of loss attributable to his negligence He is not bound to do so at the risk of his life

Doctrine of contribution
No person is prevented from effecting two or more insurances in respect of the same subject matter But, in case of there is a loss or damage the insured will have no right to recover more than the full amount of his actual loss To apply principle between two or more companies :
1. 2. 3. 4. 5.

There are different policies which relate to the same subject matter The event insured must be the same The insured must be the same All the policies are in force at the time of loss One of the insurer has paid to the insured more than his share of loss

In case of loss, any one insurer may pay and he is entitled to contribution from coinsurers In proportion to the amount which each has undertaken to pay in case of loss

A insures his house against fir for Rs. 10000/ with insurer X and For Rs.20000 with insurer Y A loss of Rs.12000 X is liable for Rs.4000/ and Y for Rs.8000/ Formula: Sum insured with an individual insurer X 100 Total sum insured

Doctrine of subrogation

Applies only to fire and marine insurances The insurer, on making good the loss, is entitled to be put into the place of insured So, whenever an insured has received full indemnity in respect of his loss, all rights and remedies which he has against the third persons must be held and exercised for the benefit of the insurer.

 1. 2. 3.

Limitations: The insurer is subrogated to only the rights and remedies available to the insured in respect of the thing The insurers right of subrogation arises only when he pays the loss for which he is liable under policy The insurer is not entitled to the benefit of what is recovered until the insured has recovered a full indemnity

Period of insurance : period or time for which the insurance contract has been entered into Life insurance Fire insurance Marine insurance Premium The consideration paid by the insured to the insurer for the risk undertaken by the latter Determined by taking into : average of losses, total premium he receives, overhead and other expenses and profit

Illustration
Suppose there are 10,000 houses in a locality Owners of 8000 of them decide to get their houses insured Experience shows ( and sometime on the basis of probability models) : every year average 2 houses catch fire Each house is valued at Rs. 2,00,000 So average loss Rs. 4,00,000 Assume premium of Rs.100/ per house So, total premium Rs.8,00,000 Now, Rs. 8,00,000 Rs. 4,00,000 = Rs. 4,00,000 Deduct overhead expenses and left with profit In case of fire and marine on similar considerations but in life : mortality rate

Return of premium
1. 2. 3. 4.

Where the consideration for the premium has totally failed Where the policy is void ab initio Where the assured has no insurable interest Where the assured bona fide over-insures

Re-insurance Insuring the same risk either wholly or partially with other insurers to safeguard his own interest The re-insurer is not liable to the insured The policy of re-insurance is co-extensive with the original policy All principles are applicable between original insurer and reinsurer

Double insurance Where the insured insures the same risk with two or more independent insurers Over-insurance Where the insured insures the same risk with two or more independent insurers and the total sum insured exceeds the value of the subject matter If no express contract, both are valid

Rules applicable
1. 2. 3. 4.

Recovery of actual loss Excess amount recovered to be held in trust Liability of insurers contribution No limit on life insurances

Life insurance The contracts are governed by: 1.The insurance Act, 1938 2.The Life Insurance Corporation Act, 1956 Contract of life insurance: A contract by which the insurer, in consideration of the payment