LaxmiNarasimhaa Krishnaa. A, 36, Puttanna Road, Basavanagudi, Bangalore-4 LaxmiNarasimhaa Krishnaa.

A, 36, Puttanna Road, Basavanagudi, Bangalore-4

Ph: 98455 35438 E-mail: krishnaa0205@yahoo.com, Ph: 98455 35438 E-mail: krishnaa0205@yahoo.com,

Note: All the subject matter has been collected from the internet or Seeking profit opportunities by reporting false occurrences violates
other freely available sources, believed to be under the creative the terms and conditions of an insurance contract. This breaks trust,
commons license and may be distributed freely for the purpose of results in breaching of a contract and invites legal penalties.
study but not for sale, any copyrighted material if found in these n insurer must always investigate any doubtable insurance claims. It
notes may please be brought to my attention and the same will is also a duty of the insurer to accept and approve all genuine
be forthwith removed. insurance claims made, as early as possible without any further
Additionally, I hold no responsibility for the correctness or otherwise delays and annoying hindrances.
of the matter provided below and your results in the examinations
are eventually a product of your efforts only and I take no
responsibility for the same. However, any thanksgiving, & Seven Principles of Insurance With Examples
suggestions are welcome for further improvement of the legal
education system in India
The seven principles of insurance are :-
First Semester Five Year BA, LL.B. Examination Answered Papers 1. Principle of Uberrimae fidei (Utmost Good Faith),
Max. Marks: 100 2. Principle of Insurable Interest,
Instructions: 3. Principle of Indemnity,
1. Please read the instructions in your Exam Question paper and 4. Principle of Contribution,
in your answer sheet without fail. 5. Principle of Subrogation,
2. Start all answers in a different new page 6. Principle of Loss Minimization, and
7. Principle of Causa Proxima (Nearest Cause).
INSURANCE LAW

Principles of Insurance - 7 Basic General Insurance Principles

causa proxima.
Understanding Principles of Insurance

The main objective of every insurance contract is to give financial

security and protection to the insured from any future uncertainties.
Insured must never ever try to misuse this safe financial cover.

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1. Principle of Uberrimae fidei (Utmost Good Faith)

Principle of Uberrimae fidei (a Latin phrase), or in simple english

words, the Principle of Utmost Good Faith, is a very basic and first
primary principle of insurance. According to this principle, the
insurance contract must be signed by both parties (i.e insurer and
insured) in an absolute good faith or belief or trust.
The person getting insured must willingly disclose and surrender to
the insurer his complete true information regarding the subject matter
of insurance. The insurer's liability gets void (i.e legally revoked or
cancelled) if any facts, about the subject matter of insurance are
either omitted, hidden, falsified or presented in a wrong manner by
the insured.
The principle of Uberrimae fidei applies to all types of insurance
contracts.

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2. Principle of Insurable Interest 3. Principle of Indemnity

Indemnity means security, protection and compensation given

against damage, loss or injury.
According to the principle of indemnity, an insurance contract is
signed only for getting protection against unpredicted financial losses
arising due to future uncertainties. Insurance contract is not made for
making profit else its sole purpose is to give compensation in case of
The principle of insurable interest states that the person getting
any damage or loss.
insured must have insurable interest in the object of insurance. A
In an insurance contract, the amount of compensations paid is in
person has an insurable interest when the physical existence of the
proportion to the incurred losses. The amount of compensations is
insured object gives him some gain but its non-existence will give
limited to the amount assured or the actual losses, whichever is less.
him a loss. In simple words, the insured person must suffer some
The compensation must not be less or more than the actual damage.
financial loss by the damage of the insured object.
Compensation is not paid if the specified loss does not happen due
For example :- The owner of a taxicab has insurable interest in the
to a particular reason during a specific time period. Thus, insurance
taxicab because he is getting income from it. But, if he sells it, he will
is only for giving protection against losses and not for making profit.
not have an insurable interest left in that taxicab.
However, in case of life insurance, the principle of indemnity does
From above example, we can conclude that, ownership plays a very
not apply because the value of human life cannot be measured in
crucial role in evaluating insurable interest. Every person has an
terms of money.
insurable interest in his own life. A merchant has insurable interest in
his business of trading. Similarly, a creditor has insurable interest in
his debtor.

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4. Principle of Contribution

5. Principle of Subrogation

Principle of Contribution is a corollary of the principle of indemnity. It

applies to all contracts of indemnity, if the insured has taken out
more than one policy on the same subject matter. According to this
principle, the insured can claim the compensation only to the extent
of actual loss either from all insurers or from any one insurer. If one Subrogation means substituting one creditor for another.
insurer pays full compensation then that insurer can claim Principle of Subrogation is an extension and another corollary of the
proportionate claim from the other insurers. principle of indemnity. It also applies to all contracts of indemnity.
For example :- Mr. John insures his property worth $ 100,000 with According to the principle of subrogation, when the insured is
two insurers "AIG Ltd." for $ 90,000 and "MetLife Ltd." for $ 60,000. compensated for the losses due to damage to his insured property,
John's actual property destroyed is worth $ 60,000, then Mr. John then the ownership right of such property shifts to the insurer.
can claim the full loss of $ 60,000 either from AIG Ltd. or MetLife This principle is applicable only when the damaged property has any
Ltd., or he can claim $ 36,000 from AIG Ltd. and $ 24,000 from value after the event causing the damage. The insurer can benefit
Metlife Ltd. out of subrogation rights only to the extent of the amount he has paid
So, if the insured claims full amount of compensation from one to the insured as compensation.
insurer then he cannot claim the same compensation from other For example :- Mr. John insures his house for $ 1 million. The house
insurer and make a profit. Secondly, if one insurance company pays is totally destroyed by the negligence of his neighbour Mr.Tom. The
the full compensation then it can recover the proportionate insurance company shall settle the claim of Mr. John for $ 1 million.
contribution from the other insurance company. At the same time, it can file a law suit against Mr.Tom for $ 1.2
million, the market value of the house. If insurance company wins the
case and collects $ 1.2 million from Mr. Tom, then the insurance
company will retain $ 1 million (which it has already paid to Mr. John)
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plus other expenses such as court fees. The balance amount, if any
will be given to Mr. John, the insured.

6. Principle of Loss Minimization

7. Principle of Causa Proxima (Nearest Cause)

According to the Principle of Loss Minimization, insured must always

try his level best to minimize the loss of his insured property, in case
of uncertain events like a fire outbreak or blast, etc. The insured
must take all possible measures and necessary steps to control and
reduce the losses in such a scenario. The insured must not neglect
and behave irresponsibly during such events just because the
property is insured. Hence it is a responsibility of the insured to
protect his insured property and avoid further losses.
For example :- Assume, Mr. John's house is set on fire due to an
electric short-circuit. In this tragic scenario, Mr. John must try his
level best to stop fire by all possible means, like first calling nearest
fire department office, asking neighbours for emergency fire Principle of Causa Proxima (a Latin phrase), or in simple english
extinguishers, etc. He must not remain inactive and watch his house words, the Principle of Proximate (i.e Nearest) Cause, means when
burning hoping, "Why should I worry? I've insured my house." a loss is caused by more than one causes, the proximate or the

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nearest or the closest cause should be taken into consideration to

decide the liability of the insurer.
The principle states that to find out whether the insurer is liable for
the loss or not, the proximate (closest) and not the remote (farest)
must be looked into.
For example :- A cargo ship's base was punctured due to rats and
so sea water entered and cargo was damaged. Here there are two
causes for the damage of the cargo ship - (i) The cargo ship getting
punctured beacuse of rats, and (ii) The sea water entering ship
through puncture. The risk of sea water is insured but the first cause
is not. The nearest cause of damage is sea water which is insured
and therefore the insurer must pay the compensation.
However, in case of life insurance, the principle of Causa
Proxima does not apply. Whatever may be the reason of death
(whether a natural death or an unnatural death) the insurer is liable
to pay the amount of insurance.

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How is life insurance different from other insurances? Explain. Available for private cars, motorcycles, commercial vehicles and fleet
Private individuals and businesses need different types of 'general insurance. Motor is one of the compulsory insurance classes and
insurance', so we can split general insurance into two areas. One: anyone using a motor vehicle on the public highway must have it.
personal insurances (or 'personal lines') where the policyholder is a
Liability insurance
private individual. And two: commercial insurances (or 'commercial
lines') where the policyholder is a firm or some other kind of We all have a legal duty to behave reasonably to others. If we injure
organisation. Within general insurance there are a number of someone or damage their property through negligence, we are
different categories. legally obliged to pay compensation. Liability insurance is there to
Property insure individuals and businesses against this risk.

Marine and aviation insurance

Property insurance includes a range of covers, which may be
needed by businesses to protect their physical property, such as Marine policies cover the property or 'interest' insured against perils
buildings, machinery and stock. Private individuals need property of the sea such as bad weather, stranding, collision, fire and seizure,
insurance too, but this is typically provided in a home insurance while aviation insurance covers damage on the ground or in the air,
policy. and liabilities for cargo and passengers.
Pecuniary Life assurance

'Pecuniary' means relating to money and pecuniary insurance covers A life assurance (or insurance) policy pays a specified sum if the
businesses against purely financial losses (e.g. from fraud, legal person assured (or insured) dies, or if they survive a given term of
expenses or business interruption) rather than physical damage to years.
property.
Life insurance is protection against financial loss resulting from
Motor insurance
death. It is an insurance company's promise to pay your beneficiary
a specific amount of money when you die in exchange for timely
payment of premiums.

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Health and protection insurance What is Assignment?

Personal accident and sickness cover pays out in the event of death,
Assignment of a life insurance policy means transfer of rights from
permanent disablement or loss of eyes or limbs due to accident or if
the insured is unable to work due to accident (or sickness). Private one person to another. You can transfer the rights on your insurance
Medical insurance (PMI) pays for inpatient and outpatient treatment
outside the NHS. Creditor insurance covers credit repayments (e.g. policy to another person / entity for various reasons. This process is
on mortgage and credit card loans) in the event of unemployment, referred to as ‘Assignment’.
accident or sickness.

Other Types of Insurance include The person who assigns the insurance policy is called
Dental Insurance
Travel Insurance the Assignor(policyholder) and the one to whom the policy has been
Pet insurance
Home Owners Fire Insurance assigned, i.e. the person to whom the policy rights have been
Unemployment insurance
Business insurance transferred is called the Assignee.
Explain the rules governing the assignment of life insurance
policy.
Once the rights have been transferred from the Assignor to the
nsurance is a contract between the insurance company (insurer) and
you(policyholder). It is a contract with full of jargon. As much as Assignee, the rights of the policyholder stands cancelled and the
possible, we must try to understand all the insurance terms
mentioned in the policy bond (certificate). One such insurance jargon assignee becomes the owner of the insurance policy.
which is mostly used is Assignment.

Assigning one’s life insurance policy to a bank is fairly common. In

this case, the bank becomes the policy owner whereas the original

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policyholder continues to be the life assured on whose death the • Conditional Assignment – Under this type of assignment,

bank or the policy owner is entitled to receive the insurance money. the transfer of rights will happen from the Assignor to the

Assignee subject to certain conditions. If the conditions are

Types of Assignment
fulfilled then only the Policy will get transferred from the
The assignment of an insurance policy can be made in two ways;
Assignor to the Assignee.

• Absolute Assignment – Under this process, the complete • Example: Mr. Mallya owns a term insurance policy of

transfer of rights from the Assignor to the Assignee will Rs 50 Lakh. He wants to apply for a home loan of Rs

happen. There are no conditions applicable. 50 Lakh. His banker has asked him to assign the term

• Example: Mr. PK Khan owns a life insurance policy of policy in their name to get the loan. Mallya can

Rs 1 Crore. He would like to gift this policy to his wife. conditionally assign the policy to the home loan

He wants to make ‘absolute assignment’ of this policy provider to acquire a home loan. If Mallya meets an

in his wife’s name, so that the death benefit (or) untimely death (during the loan tenure), the banker can

maturity proceeds can be directly paid to her. Once the receive the death benefit under this policy and get their

absolute assignment is made, Mrs. Khan will be the money back from the insurance company.

owner of the policy and she may again transfer this • If Mallya repays the entire home loan amount, he can

policy to someone else. get back his term insurance policy. The policy would be

reassigned to Mallya on the repayment of the loan.

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The Assignment must be in writing and a notice to that effect must

be given to the insurer. Assignment of a life insurance policy may be

made by making an endorsement to that effect in the policy

document (or) by executing a separate ‘Assignment Deed’. In case

of assignment deed, stamp duty has to be paid. An Assignment

should be signed by the assignor and attested by at least one

witness.

Nomination Vs Assignment

Nomination is a right given to the policyholder to appoint a person(s)

• to receive the death benefit (death claim). The person in whose favor
• In case if the death benefit received by the banker is more than the nomination is effected is termed as ‘nominee’. The nominee
the outstanding loan amount, the insurer will pay the bank the comes into picture only after the death of the life assured (policy
outstanding dues and pay the balance to the nominee directly. holder). The nominee will not have the absolute right over the
The balance amount (if any) will be paid to Mallya’s beneficiaries money (claim proceeds). The other legal heirs of the policy holder
(legal heirs / nominee). can also recover money from the nominee.

How to assign a life insurance policy?

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(However, as per Insurance Laws (Amendment) Act, 2015 – If an • If you assign the policy for other purpose other than taking a

immediate family member such as spouse / parent / child is made as loan, the nomination stands cancelled.

the nominee, then the death benefit will be paid to that person and • If the policy is assigned, then the assignee will receive the

other legal heirs will not have a claim on the money) policy benefit. Death benefit will be paid to the Nominee, in

case the policy is not assigned.

Under nomination, the rights of the policyholder are not transferred.
• The policy would be reassigned to you on the repayment of
But, assignment is transfer of rights, interest and title of the policy to
the loan(under conditional assignment).
some other person (or) entity. To make assignment, consent of the
• Types of insurance policies used for assignment purpose to
insurer is also required.
get business loans, generally include an endowment plan,

money back policy or a ULIP. Home loan providers generally

ask for the assignment of Term insurance plans on their

names. (The term plan tenure should be more than the home

Important Points loan tenure)

• An assignment of a life insurance policy once validly

• Assignment of policies can be done even when a loan is not
executed, cannot be cancelled or rendered in effectual by the
required or for some special purposes.
assignor. The only way to cancel such assignment would be

to get it re-assigned by the assignee in favor of the assignor.

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• You can also raise a loan against your policy from your the existing life insurance policies cannot be assigned under

insurance company itself. In this case, your policy would have MWP Act)

to be assigned to insurance company. • Partial assignment or transfer of a policy can also be made.

• An insurer may accept the assignment or decline. (The insurer But banks will accept any of your life insurance policies as

shall, before refusing to act upon the endorsement, record in long as the sum assured is equal to or greater than the loan

writing the reasons for such refusal and communicate the amount.

same to the policy-holder not later than thirty days from the
What is Fire Insurance? Explain its nature.
date of the policy-holder giving notice of such transfer or Fire Insurance
Fire is hazardous to human life as well as property. Loss of
assignment) life by fire is covered under Life insurance and loss of property by fire
is covered under fire insurance. Fire causes enormous damage by
• In case of death of the absolute Assignee (to whom the policy physically reducing the materials to ashes. A fire insurance policy
provides protection strictly against fire. There could be enormous
rights have been transferred under absolute assignment), the reasons for fire. In practice certain other related perils are also
covered by the fire insurance policy. The General Insurance Act
rights under the policy will be transferred to the legal heirs of (Tariff) recommends the form of the contract in which a fire insurance
is to be written. The policy form contains a preamble and operative
the assignee. clause, general exclusions and general conditions. Fire Insurance
comes under tariff class of business. All India Fire Tariff is the
• You can also assign a life insurance policy under Married revised fire insurance tariff, which came into force on May1, 2001.
Now a single policy was introduced to cover all property risks called
Women’s Property Act. (At the time of making the application standard fire and special peril policy in the place of three standard
policies i.e. A, B&C.
(buying a policy), a separate MWPA form has to be filled by A contract of fire insurance can be defined as a contract under
which one party ( the insurer) agrees for consideration (premium) to
the proposer for it to be covered under MWP Act. Do note that indemnify the other party (The insured) for the financial loss which
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the latter may suffer due to damage to the property insured by fire 5. Bush fire: This covers damage caused by burning of bush and
during a specified period of time and up to an agreed amount. The jungles but excluding destruction or damage caused by forest fire.
document containing the terms and conditions of the contract is 6. Riot, strike, malicious, and terrorism damages: Any loss or
known as ‘Fire Insurance Policy’. A fire policy contains the name of physical damage to the property insured directly caused by such
the parties, description of the insured property, the sum for which the activity or by the action of any lawful authorities in suppressing such
property is insured, amount of premium payable and the period disturbance is covered.
insured against. The premium may be paid either in single
installment or by way of installments. The insurer is liable to make 7. Aircraft damage: Loss, destruction or damage caused by Aircraft,
good the loss only when loss is caused by actual fire. The phrase other aerial or space devices and articles dropped there from
‘loss or damage by fire’ also includes the loss or damage caused by excluding those caused by pressure waves.
efforts to extinguish fire. 8. Overflowing of water tanks and pipes etc.: Loss or damage to
property by water or otherwise on account of bursting or accidental
Scope of cover overflowing of water tanks, apparatus and pipes is covered.
Standard Fire and special perils policy usually cover loss due to the
following perils: 9. Add-on Covers: The insurer can issue the standard fire policy
with added benefits at the option of the policyholders by charging
1. Fire: Destruction or damage to the property insured by its own additional premium. These added benefits are as follows:
fermentation, natural heating or spontaneous combustion or drying 1. Architects, Surveyors and Consulting engineer’s fees ( in
process can not be treated as damage due to fire. excess of 3% claim amount)
2. Lightning: It may result in fire damage or other type of damage, 2. Debris removal ( in excess of 1% of claim amount)
such as cracks in a building due to a lightning strike. 3. Deterioration of stocks in cold storage due to power failure
4. Forest fire
3. Explosion: An explosion is caused inside a vessel when the 5. Spontaneous combustion
pressure within the vessel exceeds the atmospheric pressure acting 6. Earthquake as per minimum rates and excess applicable as
externally on its surface. This policy, however, does not cover specified in the tariff.
destruction or damage caused to the boilers or other vessels where 7. Omission to insure additions, alterations or extensions.
heat is generated.
4. Storm, cyclone, typhoon, hurricane, tornado, landslide: These The following types of losses, however, are not covered by a fire
are all various types of violent natural disturbances accompanied by policy:
thunder or strong winds or heavy rain fall. Loss or damage directly · Loss by theft during and after the occurrence of fire.
caused by these disturbances are covered excluding those resulting · Loss caused by burning of property by order of any public
from earthquake, volcanic eruption etc. authority.
· Loss caused by underground fire.

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· Loss or damage to property occasioned by its own fermentation (iii) Average Policy. Under a fire insurance policy containing
or spontaneous combustion. the ‘average clause’ the insured is liable for such
· Loss happening by fire which is caused by earthquake, invasion, proportion of the loss as the value of the uncovered
act of foreign enemy, warlike operations, civil wars, riot etc. property bears to the whole property. e.g. if a person gets
In all the above cases the insurer is not liable, unless specifically his house insured for Rs. 4,00,000 though its actual value
provided for in the fire insurance policy. The insurer can issue the is Rs. 6,00,000 , if a part of the house is damaged in fire
standard fire policy as per the New Fire Tariff along with added and the insured suffers a loss of Rs. 3,00,000 , the amount
benefits at the option of the policyholders by charging additional of compensation to be paid by the insurer comes out to
premium. Rs. 2,00,000 calculated as follows:

Types of Fire Policies Amount of claim= (Insured amount X Actual

The important fire insurance policies are discussed below: loss) /Actual value of property
(i) Valued Policy. They are the exception in fire insurance. (4,00,000 X
Under valued policy, the value declared in the policy is the 3,00,000)/6,00,000
amount the insurer will have to pay to the insured in the =2,00,000
event of a total loss irrespective of the actual value of loss. (iv) Floating policy. A floating policy is used for covering
The policy violates the principle of indemnity. The insurer fluctuating stocks of goods held in different lots for one
has to pay a specified amount quite independent of the premium. With every transaction of sale or purchase, the
market or actual value of the property at the time of loss. quantities of goods kept at different places fluctuate. It is
So such a policy is very rarely issued. It may be issued difficult for the owner to take a policy for a specific amount.
only on artistic work, antiques and similar rare articles The best way is to take out a floating policy for all the
whose value cannot be determined easily. stocks of goods.
(v) Reinstatement Policy. In such a policy, the insurer has
(ii) Specific Policy. Under this policy, the insurer undertakes
the right to reinstate or replenish the property destroyed
to make good the loss to the insured upto the amount
instead of paying compensation to the insured in cash. It
specified in the policy. Supposing, a building worth
may be granted on building, machinery, furniture, fixture
Rs.2,00,000 is insured against fire for Rs. 1,00,000. If the
and fittings only.
damage to the property is Rs.75,000 the insurer will get
(vi) Consequential loss Policy. Sometimes the insured has to
the full compensation. Even if the loss is Rs.1,00,000 the
suffer a greater financial loss on account of dislocation of
insurer will get the full amount. But if the loss is more than
business caused by fire .e.g. close down business after
Rs. 1, 00,000 the insured will get Rs. 1,00,000 only.
fire for repair, to meet fixed expenses such as rent,
Hence, the value of property is not relevant in determining
salaries, taxes and other expenses as usual. Such
the amount of indemnity in case of a specific policy.
considerable loss to the insured is not covered by the
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ordinary fire policy. In order to cover such loss by fire, the The general principles of marine insurance are the same as
‘Consequential Loss Policy’ has been introduced. The loss with other types of insurance in that there are two parties: the
so suffered is separately calculated from the loss actually
suffered. assured and assurer (or carrier). The assured or insured agrees to
(vii) Comprehensive policy. This policy covers the risks of pay a premium and the insurer agrees that, if certain losses or
the fire arising out of any cause that is civil commotion, damage occurs to certain interests of the insured, the insurer will
lightening, riots, thefts, labor disturbances and strikes etc. indemnify the insured. The similarities pretty much end here. The
It is also known as ‘all insurance policy’.
complex circumstances involved in sea voyages require very specific
(viii) A Blanket policy. This policy is issued to cover all the
fixed and current assets of an enterprise by one insurance. arrangements for the provision of marine insurance. The fixing of
(ix) Declaration policy. In this policy, trader takes out a policy rates and special conditions, for example, requires a vast knowledge
for the maximum value of stock which may be expected to of the nature of vessels and cargos and of the conditions of
hold during the year. At a fixed date each month, the navigation.
insured has to make a declaration regarding the actual
value of stock at risk on that date. On the basis of such The marine policy may cover the risks of a single voyage, or
declaration, the average amount of stock at risk in the year may insure for a certain period of time. Cargo is almost always
is calculated and this amount becomes the sum assured.
insured by voyage. Vessels are usually insured for certain duration of
(x) Sprinklers leakage policy. It covers the loss arising out of
water leakage from sprinklers which are setup to time, usually year by the year. Cargo policies may be on a single lot
extinguish fire. or may be open to cover cargo as shipped by the insured. Hull
insurance, or vessel insurance, may cover a ship or a whole fleet.
Marine Insurance
Typical of marine insurance is the principle that no contract of
Marine insurance covers the loss or damage of ships, cargo, marine insurance is valid unless the insured has an insurable interest
terminals, and any transport or cargo by which property is in the subject matter at the time of loss. The term insurable interest
transferred, acquired, or held between the points of origin and final has been variously defined. According to the English Marine
destination. Cargo insurance discussed here is a sub-branch of Insurance Act of 1906, "every person has an insurable interest who
marine insurance, though Marine also includes Onshore and is interested in a marine adventure.... a person is interested in a
Offshore exposed property (container terminals, ports, oil platforms, marine adventure where he stands in any legal or equitable relation
pipelines); Hull; Marine Casualty; and Marine Liability. to the adventure or to any insurable property at risk therein, in
consequence of which he may benefit by the safety or due arrival of
insurable property, or may be prejudiced by its loss, or damage
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thereto, or by the detention thereof, or may incur liability in respect cargo would have generated would also be lost. Based on this we
thereof". can classify the marine insurance into four categories:

The nature and scope of marine insurance is determined by 1. Hull Insurance: Hull refers to the ocean going vessels (ships
reference to s. 6 of the Marine Insurance Act and by the definitions of trawlers etc.) as well as its machinery. The hull insurance also
“marine adventure” and “maritime perils”. A contract of marine covers the construction risk when the vessel is under
construction. A vessel is exposed to many dangers or risks at
insurance is a contract whereby the insurer undertakes to indemnify
the insured, in the manner and to the extent agreed in the contract, sea during the voyage. An insurance effected to indemnify the
against losses that are incidental to a marine adventure or an insured for such losses is known as Hull insurance.
adventure analogous to a marine adventure, including losses arising 2. Cargo Insurance: Cargo refers to the goods and
from a land or air peril incidental to such an adventure if they are commodities carried in the ship from one place to another.
provided for in the contract or by usage of the trade; or losses that The cargo transported by sea is also subject to manifold risks
are incidental to the building, repair or launch of a ship. at the port and during the voyage. Cargo insurance covers the
"Marine adventure" means any situation where insurable shipper of the goods if the goods are damaged or lost. The
property is exposed to maritime perils, and includes any situation cargo policy covers the risks associated with the
where the earning or acquisition of any freight, commission, profit or transshipment of goods. The policy can be written to cover a
single shipment. If regular shipments are made, an open
other pecuniary benefit, or the security for any advance, loan or
cargo policy can be used that insures the goods automatically
disbursement, is endangered by the exposure of insurable property
when a shipment is made.
to maritime perils, and any liability to a third party may be incurred by
the owner of, or other person interested in or responsible for, 3. Freight Insurance: Freight refers to the fee received for the
insurable property, by reason of maritime perils. "Maritime perils" carriage of goods in the ship. Usually the ship owner and the
means the perils consequent on or incidental to navigation, including freight receiver are the same person. Freight can be received
perils of the seas, fire, war perils, acts of pirates or thieves, captures, in two ways- in advance or after the goods reach the
seizures, restraints, detainments of princes and peoples, jettisons, destination. In the former case, freight is secure. In the latter
barratry and all other perils of a like kind and, in respect of a marine the marine laws say that the freight is payable only when the
policy, any peril designated by the policy. goods reach the destination port safely. Hence if the ship is
destroyed on the way the ship owner will loose the freight
Subject Matter of Marine Insurance along with the ship. That is why, the ship owners purchase
freight insurance policy along with the hull policy.
The insured may be the owner of the ship, owner of the cargo
or the person interested in freight. In case the ship carrying the cargo 4. Liability Insurance: It is usually written as a separate
sinks, the ship will be lost along with the cargo. The income that the contract that provides comprehensive liability insurance for
property damage or bodily injury to third parties. It is also
known as protection and indemnity insurance which protects
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the ship owner for damage caused by the ship to docks, (iv) Valued Policies: It is one under which the value of subject
cargo, illness or injury to the passengers or crew, and fines matter insured is specified on the face of the policy itself. This
and penalties. kind of policy specifies the settled value of the subject matter
that is being provided cover for. The value which is agreed
upon is called the insured value. It forms the measure of
Types of Marine Policy indemnity in the event of loss. Insured value is not necessarily
the actual value. It includes (a) invoice price of goods (b)
There are different types of marine policies known by different
freight, insurance and other charges (c) ten to fifteen percent
names according to the manner of their execution or the risk they
margin to cover expected profits.
cover. They are:
(v) Unvalued policy: It is the policy under which the value of
(i) Voyage Policy: Under the policy, the subject matter is
subject matter insured is not fixed at the time of effecting
insured against risk in respect of a particular voyage from a
insurance but has to be ascertained wherever the subject
port of departure to the port of destination, e.g. Mumbai to
matter is lost or damaged.
New York. The risk starts from the departure of ship from the
port and it ends on its arrival at the port of destination. This (vi) Open policy: An open policy is issued for a period of 12
policy covers the subject matter irrespective of the time factor. months and all consignments cleared during the period are
This policy is not suitable for hull insurance as a ship usually covered by the insurer. This form of insurance Policy is
does not operate over a particular route only. The policy is suitable for big companies that have regular shipments. It
used mostly in case of cargo insurance. saves them the tedious and expensive process of acquiring
an insurance policy for each shipment. The rates are fixed in
(ii) Time Policy: It is one under which the insurance is
advance, without taking the total value of the cargo being
affected for a specified period of time, usually not exceeded
shipped into consideration. The assured has to declare the
twelve months. Time policies are generally used in connection
nature of each shipment, and the cover is provided to all the
with the insurance of ship. Thus if the voyage is not completed
shipments. The assured also deposits a premium for the
with in the specified period, the risk shall be covered until the
estimated value of the consignment during the policy period.
voyage is completed or till the arrival of the ship at the port of
call. (vii) Floating Policy: A merchant who is a regular shipper of
goods can take out a ‘floating policy’ to avoid botheration and
(iii) Mixed Policies: It is one under which insurance contract is
waste of time involved in taking a new policy for every
entered into for a certain time period and for a certain voyage
shipment. This policy stands for the contract of insurance in
or voyages, e.g., Kolkata to New York, for a period of one
general terms. It does not include the name of the ship and
year. Mixed Policies are generally issued to ships operating
other details. The other details are required to be furnished
on particular routes. It is a mixture of voyage and time
through subsequent declarations. Thus, the insured takes a
policies.
policy for a huge amount and he informs the underwriter as
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and when he makes shipment of goods. The underwriter goes Firstly, policies are constructed in general, ordinary and popular
on recording the entries in the policy. When the sum assured sense, and, later on, specific clauses are added to them according to
is exhausted, the policy is said to be “fully declared” or “run terms and conditions of the contract. Some of the important clauses
off”. in a marine policy are described below:
(viii) Block Policy: This policy covers other risks also in addition 1. Valuation Clause. This clause states the value of the
to marine risks. When goods are to be transported by ship to subject matter insured as agreed upon between both the
the place of destination, a single policy known as block policy parties.
may be taken to cover all risks. E.g. when the goods are 2. Sue and Labour clause. This clause authorizes the
dispatched by rail or road transport for shipment, a single insured to take all possible steps to avert or minimize the loss
policy may cover all the risks from the point of origin to the or to protect the subject matter insured in case of danger. The
point of destination. insurer is liable to pay the expenses, if any, incurred by the
Assignment of Marine Policy insured for this purpose.
A marine insurance policy may be transferred by assignment 3. Waiver Clause. This clause is an extension of the above
unless the terms of the policy expressly prohibit the same. The policy clause. The clause states that any act of the insured or the
may be assigned either before or after loss. The assignment may be insurer to protect, recover or preserve the subject matter of
made either by endorsement on the policy itself or on a separate insurance shall not be taken to mean that the insured wants to
document. The insured need not give a notice or information to the forgo the compensation, nor will it mean that the insurer
insurer or underwriter about assignment. In case of death of the accepts the act as abandonment of the policy.
insured, a marine policy is automatically assigned to his heirs. At the 4. Touch and Stay Clause. This clause requires the ship to
time of assignment, the assignor must possess an insurable interest touch and stay at such ports and in such order as specified in
in the subject matter insured. An insured who has parted with or lost the policy. Any departure from the route mentioned in the
interest in the subject matter insured cannot make a valid policy or the ordinary trade route followed will be considered
assignment. After the occurrence of the loss, the policy can be as deviation unless such departure is essential to save the
assigned freely to any person. The assignor merely transfers his own ship or the lives on board in an emergency.
right to claim to the assignee.
5. Warehouse to warehouse clause. This clause is inserted
Clauses in a Marine Policy to cover the risks to goods from the time they are dispatched
A policy of marine insurance may contain several clauses. from the consignor’s warehouse until their delivery at the
Some of the clauses are common to all marine policies while others consignee’s warehouse at the port of destination.
are included to meet special requirements of the insured. Hull, cargo 6. In charge Clause. This clause covers the loss or damage
and freight policies have different standard clauses. There are caused to the ship or machinery by the negligence of the
standard clauses which are invariably used in marine insurance.
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master of the ship as well as by explosives or latent defect in 13. Jettison Clause. Jettison means throwing overboard a part
the machinery or the hull. of the ship’s cargo so as to reduce her weight or to save other
7. F.P.A. and F.A.A. Clause. The F.P.A. (Free of Particular goods. This clause covers the loss arising out of such
Average) clause relieves the insurer from particular average throwing of goods. The owner of jettisoned goods is
liability. The F.A.A. ( free of all average) clause relieves the compensated by all interested parties.
insurer from liability arising from both particular average and 14. At and From Clause. This clause covers the subject matter
general average. while it is lying at the port of departure and until it reaches the
port of destination. It is used in voyage policies. If the policy
8. Lost or Not Lost Clause. Under this clause, the insurer is
liable even if the ship insured is found not to be lost prior to consists of the word ‘from’ only instead of ‘at and from’, the
risk is covered only from the time of departure of the ship.
the contact of insurance, provided the insurer had no
knowledge of such loss and does not commit any fraud. This Warranties
clause covers the risks between the issue of the policy and Warranty means a promissory warranty by which the insured
the shipment of the goods. undertakes that some particular thing will or will not be done or that
9. Running down Clause. This clause covers the risk arising some condition will be fulfilled; or affirms or negates the existence of
out of collision between two ships. The insurer is liable to pay particular facts. A warranty may be an implied warranty and express
compensation to the owner of the damaged ship. This clause warranty.
is used in hull insurance. Express Warranties: An express warranty may be in any form of
10. Free of Capture and Seizure Clause. This clause relieves words from which the intention to warrant may be inferred. (2) An
the insurer from the liability of making compensation for the express warranty must be included in, or written on, the marine
capture and seizure of the vessel by enemy countries. The policy or be contained in a document incorporated by reference into
insured can insure such abnormal risks by taking an extra the policy. It does not exclude an implied warranty, unless they are
‘war risks’ policy. inconsistent.
11. Continuation Clause. This clause authorizes the vessel to An express warranty may be in any form of words from which the
continue and complete her voyage even if the time of the intention to warrant may be inferred. Unfortunately, it has proven
policy has expired. This clause is used in a time policy. The difficult for insurers to find the exact words that will lead to the
insured has to give prior notice for this and deposit a monthly required inference. Words such as “warranted that” have been held
prorate premium. to not necessarily delineate a warranty. Similarly, the words
“warranted free from any claim...” were held not to delineate a
12. Barratry Clause. This clause covers losses sustained by
warranty. Examples of express warranties are as follows:
the ship owner or the cargo owner due to willful conduct of the
master or crew of the ship. The number and type of express warranties are limited only
by the imagination and ingenuity of underwriters. Almost anything
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can be made to be an express warranty provided the proper words · Legality: The warranty of legality is one which is often
are used. Notwithstanding this total freedom to make almost expressly included in policies as well as implied. The journey
anything a warranty most policies contain relatively few. The more undertaken by the ship must be for legal purposes. Carrying
common express warranties are: prohibited or smuggled goods is illegal and therefore, the
insurer shall not be liable for the loss.
· Navigation and trading warranties that limit the
geographical areas in which a vessel may operate; · Neutrality: Where in any marine policy insurable property is
expressly warranted to be neutral, there is an implied
· Laid up and out of commission warranties that require a
condition in the policy (a) that the property will have a neutral
vessel to be laid up for a defined period or generally;
character at the commencement of the risk and that, in so far
· Identity of the master warranties that require a named as the insured has control, that character will be preserved
person to command the vessel; during the risk; and (b) where the property is a ship, that, in so
· Towing warranties that prohibit the insured vessel from far as the insured has control, the papers necessary to
being towed except where customary or when the vessel is in establish the neutrality of the ship will be carried on the ship
need of assistance; and will not be falsified or suppressed and no simulated
papers will be used.
· Private pleasure use warranties that prohibit any
commercial use of a yacht; and · Seaworthiness: There is an implied warranty in every
voyage policy that, at the commencement of the voyage, the
· Warranties regarding surveys and inspections that require ship will be seaworthy for the purpose of the particular marine
inspections to be conducted or recommendations by adventure insured.
surveyors to be complied with.
Types of Marine Losses
Implied Warranty: these are the warranties which are not expressly
mentioned in the contract but the law takes it for granted that such A loss arising in a marine adventure due to perils of the sea is a
warranty exists. An express warranty does not exclude implied marine loss. Marine loss may be classified into two categories:
warranty unless it is inconsistent therewith. Implied warranties do not · Total loss: A total loss implies that the subject matter
appear in the policy documents at all, but are understood without insured is fully destroyed and is totally lost to its owner. It can
being put into words, and as such, are automatically applicable. be Actual total loss or Constructive total loss. In actual total
These are included in the policy by law, general practice, long loss subject matter is completely destroyed or so damaged
established custom or usage. There are three warranties implied by that it ceases to be a thing of the kind insured. e.g. sinking of
the Act. They are the warranty of legality, neutrality and ship, complete destruction of cargo by fire, etc. In case of
seaworthiness. constructive total loss the ship or cargo insured is not
completely destroyed but is so badly damaged that the cost of
repair or recovery would be greater than the value of the
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property saved. e.g. a ship dashed against the rock and is

cottage. As a result of a conflict with the farmer owning all the
stranded in a badly damaged position. If the expenses of
bringing it back and repairing it would be more than the actual surrounding land, Mr Leppard could not sell the cottage as no one
value of the damaged ship, it is abandoned. could access the cottage. He had to drop the price of the cottage
· Partial loss: A partial loss occurs when the subject matter excluding land from £8694 to £3000. A loss occurred just then, and
is partially destroyed or damaged. Partial loss can be general
average or particular average. General average refers to the the indemnity amount paid to Leppard was £3000 which was the
sacrifice made during extreme circumstances for the safety of value just before the fire, not the £8694 cost of rebuilding.
the ship and the cargo. This loss has to be borne by all the
parties who have an interest in the marine adventure. e.g. A
loss caused by throwing overboard of goods is a general In the case of a total loss of property, its financial value at the time
average and must be shared by various parties. Particular and place of loss must be paid. Deductions are made for wear and
average may be defined as a loss arising from damage
accidentally caused by the perils insured against. Such a loss tear and betterment. The indemnity principle may be adjusted in
is borne by the underwriter who insured the object damaged. three ways:
e.g. If a ship is damaged due to bad weather the loss incurred
is a particular average loss.
1) Valued policies for subject matters which do not have a
measurable value
Discuss the doctrines "Subrogation" and "Contribution", & Indemnity
Insurance Principles: Indemnity, Subrogation and Contribution
2) Allowing more than indemnity, for example in cases of new-for-
Indemnity means that the insured must be placed in the same old where no deduction for depreciation is made, or in cases of
financial position as he was just before he suffered a loss. The property insurance covering architects’ and surveyors’ fees after fire
principles of subrogation and contribution are ancillary to indemnity. damage to ensure that rebuilding complies with local legislation

The principle of indemnity means that the insured must be placed in 3) Allowing less than indemnity, for example in cases of
the same financial position as he was just before the loss occurred. underinsurance where the insured is deemed to be his own insurer
This principle is illustrated by the case of Leppard vs Excess for the proportion of the underinsured loss, or excess which is the
Insurance Company Ltd (1979), where the subject matter was a first part of a claim paid by the insured.
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Subrogation is the insurance principle which allows insurers to Another principle linked with indemnity is Contribution, which
stand in the place of the insured and avail themselves of all rights involves the scenario where there are two or more insurance policies
and remedies of the insured. This principle enforces indemnity. The and the insurers must share the cost of indemnity payment. For
leading case here is that of Castellain vs Preston (1883) where contribution to apply, the policies must be contracts of indemnity, and
Preston recovered fire damage loss from his insurers and also the the party holding insurable interest in the property must be the same,
full purchase price after completion of the sale, making a profit out of the perils causing the damage must be common, and the subject
this situation. Castellain, the insurers, were given the right to stand in matter must also be the same. The case here is known as the King
the place of Preston and recover the amount paid in the claim to and Queen Granaries case where there were two indemnity policies,
Preston. one by the owner and the other by the bailee (different insurable
interest), covering grain (common subject matter) which was then
The basic concepts are that the insured cannot make a profit out of a
damaged by fire (common cause), were in force but contribution did
loss by recovering twice, the insurer can recover the amount paid in
not apply due to the lack of common interest in the grain.
claim to the insured from the third-party responsible for the loss, and
that subrogation only applies to contracts of indemnity not to benefit
policies (such as life assurance). Decide the following case.
Shobha has insured her jewels against loss by fire. During summer
Subrogation rights start operating even before the insurer she kept the jewels in a newspaper and placed them for safety in the
fire-place to prevent burglars from noticing them.
indemnifies the insured. These may derive from tort (eg: damage on Later without removing jewels, as she forgot about them, she set the
property by third-parties), contract (eg: contract to receive fire and they were burnt and damaged. Is insurer liable for the loss?

compensation for damage by a contractor), statute (eg: right to sue Discuss the history and development of Life Insurance in India.
police authority for riot damages) or salvage (eg: insurer paid for In India, insurance has a deep-rooted history. It finds mention in the
writings of Manu ( Manusmrithi ), Yagnavalkya (Dharmasastra ) and
stolen jewellery, then the jewellery is recovered and must be passed Kautilya ( Arthasastra ). The writings talk in terms of pooling of
to the insured). resources that could be re-distributed in times of calamities such as
fire, floods, epidemics and famine. This was probably a pre-cursor to
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modern day insurance. Ancient Indian history has preserved the allegations of unfair trade practices. The Government of India,
earliest traces of insurance in the form of marine trade loans and therefore, decided to nationalize insurance business.
carriers’ contracts. Insurance in India has evolved over time heavily
drawing from other countries, England in particular. An Ordinance was issued on 19th January, 1956 nationalising the
Life Insurance sector and Life Insurance Corporation came into
1818 saw the advent of life insurance business in India with the existence in the same year. The LIC absorbed 154 Indian, 16 non-
establishment of the Oriental Life Insurance Company in Calcutta. Indian insurers as also 75 provident societies—245 Indian and
This Company however failed in 1834. In 1829, the Madras foreign insurers in all. The LIC had monopoly till the late 90s when
Equitable had begun transacting life insurance business in the the Insurance sector was reopened to the private sector.
Madras Presidency. 1870 saw the enactment of the British Insurance
Act and in the last three decades of the nineteenth century, the The history of general insurance dates back to the Industrial
Bombay Mutual (1871), Oriental (1874) and Empire of India (1897) Revolution in the west and the consequent growth of sea-faring trade
were started in the Bombay Residency. This era, however, was and commerce in the 17th century. It came to India as a legacy of
dominated by foreign insurance offices which did good business in British occupation. General Insurance in India has its roots in the
India, namely Albert Life Assurance, Royal Insurance, Liverpool and establishment of Triton Insurance Company Ltd., in the year 1850 in
London Globe Insurance and the Indian offices were up for hard Calcutta by the British. In 1907, the Indian Mercantile Insurance Ltd,
competition from the foreign companies. was set up. This was the first company to transact all classes of
general insurance business.
In 1914, the Government of India started publishing returns of 1957 saw the formation of the General Insurance Council, a wing of
Insurance Companies in India. The Indian Life Assurance the Insurance Associaton of India. The General Insurance Council
Companies Act, 1912 was the first statutory measure to regulate life framed a code of conduct for ensuring fair conduct and sound
business. In 1928, the Indian Insurance Companies Act was enacted business practices.
to enable the Government to collect statistical information about both
life and non-life business transacted in India by Indian and foreign In 1968, the Insurance Act was amended to regulate investments
insurers including provident insurance societies. In 1938, with a view and set minimum solvency margins. The Tariff Advisory Committee
to protecting the interest of the Insurance public, the earlier was also set up then.
legislation was consolidated and amended by the Insurance Act,
1938 with comprehensive provisions for effective control over the In 1972 with the passing of the General Insurance Business
activities of insurers. (Nationalisation) Act, general insurance business was nationalized
with effect from 1st January, 1973. 107 insurers were amalgamated
The Insurance Amendment Act of 1950 abolished Principal and grouped into four companies, namely National Insurance
Agencies. However, there were a large number of insurance Company Ltd., the New India Assurance Company Ltd., the Oriental
companies and the level of competition was high. There were also Insurance Company Ltd and the United India Insurance Company
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Ltd. The General Insurance Corporation of India was incorporated as

a company in 1971 and it commence business on January 1sst In December, 2000, the subsidiaries of the General Insurance
1973. Corporation of India were restructured as independent companies
and at the same time GIC was converted into a national re-insurer.
This millennium has seen insurance come a full circle in a journey Parliament passed a bill de-linking the four subsidiaries from GIC in
extending to nearly 200 years. The process of re-opening of the July, 2002.
sector had begun in the early 1990s and the last decade and more
has seen it been opened up substantially. In 1993, the Government Today there are 28 general insurance companies including the
set up a committee under the chairmanship of RN Malhotra, former ECGC and Agriculture Insurance Corporation of India and 24 life
Governor of RBI, to propose recommendations for reforms in the insurance companies operating in the country.
insurance sector.The objective was to complement the reforms
initiated in the financial sector. The committee submitted its report in The insurance sector is a colossal one and is growing at a
1994 wherein , among other things, it recommended that the private speedy rate of 15-20%. Together with banking services, insurance
sector be permitted to enter the insurance industry. They stated that services add about 7% to the country’s GDP. A well-developed and
foreign companies be allowed to enter by floating Indian companies, evolved insurance sector is a boon for economic development as it
preferably a joint venture with Indian partners. provides long- term funds for infrastructure development at the same
time strengthening the risk taking ability of the country.
Following the recommendations of the Malhotra Committee
report, in 1999, the Insurance Regulatory and Development Authority Indians have been a prudent lot for millenia and risk mitigation has
(IRDA) was constituted as an autonomous body to regulate and taxed the Indian mind from ancient times. The works of Manu
develop the insurance industry. The IRDA was incorporated as a
statutory body in April, 2000. The key objectives of the IRDA include ( Manusmrithi ), Yagnavalkya (Dharmasastra ) and Kautilya
promotion of competition so as to enhance customer satisfaction ( Arthasastra ) talk about the pooling of resources that could be re-
through increased consumer choice and lower premiums, while distributed in times of calamities such as fire, floods, epidemics and
ensuring the financial security of the insurance market. famine. This is a pre-cursor to modern day insurance which is based
on the law of large numbers and pooling of risk.
The IRDA opened up the market in August 2000 with the
invitation for application for registrations. Foreign companies were Life insurance in modern India evolved by drawing heavily from
allowed ownership of up to 26%. The Authority has the power to developments in other countries,especially England.
frame regulations under Section 114A of the Insurance Act, 1938 In 1818 the Oriental Life Insurance Company was established by
and has from 2000 onwards framed various regulations ranging from Europeans in Calcutta. However,the company was short-lived and by
registration of companies for carrying on insurance business to
protection of policyholders’ interests.
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1834 the company had failed.Then in 1829, the Madras Equitable Assurance, Royal Insurance, Liverpool and London Globe Insurance
begun transacting life insurance business in the Madras Presidency. and the Indian companies were up for hard competition from the
The life insurance companies established during this foreign companies.
period exclusively catered to the needs of the European community Prior to 1912 India had no legislation to regulate insurance business.
and Native Indian lives were not insured by these companies. Later The Indian Life Assurance Companies Act, 1912 was the first
due to the efforts of eminent people like Babu Muttylal Seal, foreign statutory measure to regulate the life insurance business.The Life
life insurance companies started insuring Indian lives. But Indian Insurance Companies Act, 1912 made it necessary that the premium
lives were still treated as sub-standard lives and heavy extra rate tables and periodical valuations of companies should be certified
premiums were charged on them. by an actuary. But the Act discriminated between foreign and Indian
The British Insurance Act was enacted in 1870 and in the last three companies on many accounts, putting the Indian companies at a
decades of the nineteenth century insurance concerns like the disadvantage.In 1914, the Government of India started publishing
Bombay Mutual (1871), Oriental (1874) and Empire of India (1897) returns of Insurance Companies in India.
were started in the Bombay Presidency.The Bombay Mutual Life In 1928, the Indian Insurance Companies Act was enacted to enable
Assurance Society,which was an Indian owned concern, was the first the Government to collect statistical information about both life and
to cover Indian lives at normal rates. Also cross India, many Indian non-life business transacted in India by Indian and foreign insurers
insurance concerns were founded with highly patriotic motives to including provident insurance societies.
carry the message of insurance and social security through The first two decades of the twentieth century saw lot of growth in
insurance to various sectors of society. Bharat Insurance Company insurance business. From 44 companies with total business-in-force
(1896) was one such example. of Rs.22.44 crore, it rose to 176 companies with total business-in-
The Swadeshi movement of 1905-1907 gave rise to more force as Rs.298 crore in 1938. During the mushrooming of insurance
Indian insurance companies. The United India in Madras, National companies many financially unsound concerns were also floated
Indian and National Insurance in Calcutta and the Co-operative which failed miserably.In 1938, with a view to protecting the interests
Assurance at Lahore were established in 1906. In 1907, Hindustan of the insured public, the earlier legislation was consolidated and
Co-operative Insurance Company took its birth in one of the rooms of amended by the Insurance Act, 1938 with comprehensive provisions
the Jorasanko, house of the great poet Rabindranath Tagore, in for effective control over the activities of insurers.
Calcutta.This era, however, was dominated by foreign insurance However,the demand for nationalization of the life insurance industry
offices which did good business in India, namely Albert Life was made repeatedly and gathered momentum in 1944 when a bill

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to amend the Life Insurance Act 1938 was introduced in the insurance industry. They stated that foreign companies be allowed to
Legislative Assembly. enter by floating Indian companies, preferably a joint venture with
The Insurance Amendment Act of 1950 abolished Principal Indian partners.
Agencies. However, there were still a large number of insurance Following the recommendations of the Malhotra Committee report, in
companies and the level of competition was high. There were also 1999, the Insurance Regulatory and Development Authority
allegations of unfair trade practices. The Government of India, (IRDA) was constituted as an autonomous body to regulate and
therefore, decided to nationalize insurance business.Nationalization develop the insurance industry. The IRDA was incorporated as a
was accomplished in two stages; initially the management of the statutory body in April, 2000. The key objectives of the IRDA include
companies was taken over by means of an ordinance issued promotion of competition so as to enhance customer satisfaction
on 19th January, 1956 , and later, the ownership too by means of a through increased consumer choice and lower premiums, while
comprehensive bill-The Indian Parliament passed the Life Insurance ensuring the financial security of the insurance market.The IRDA has
Corporation Act on the 19th of June 1956, and the Life Insurance the power to make regulations under section 114A of the
Corporation of India was created on 1st September, 1956, with the Insurance Act 1938. Since 2000 it has introduced various regulations
objective of spreading life insurance much more widely and in ranging from the registration of companies for carrying on insurance
particular to the rural areas with a view to reach all insurable persons business to the protection of policyholders’ interests.
in the country, providing them adequate financial cover at a A per the the recommendations of the Malhotra Committee,the IRDA
reasonable cost.The LIC absorbed 154 Indian, 16 non-Indian opened up the life insurance market in India in August 2000 to
insurers as also 75 provident societies—245 Indian and foreign private companies with the invitation for application for
insurers in all.The LIC had monopoly of the life insurance business in registrations. Foreign companies were allowed to participate in the
India till the late 1990s when the Insurance sector was reopened to Indian insurance market through joint ventures (JVs) with Indian
the private sector. companies. Under current regulations the foreign partner cannot hold
In 1993, the Government of India set up a committee under the more than a 26% stake in the joint venture.Today there are 23 life
chairmanship of RN Malhotra, former Governor of RBI, to propose insurance companies operating in the country.
recommendations for reforms in the insurance sector.The objective However LIC continues to be the dominant life insurer in India even
was to complement the reforms initiated in the financial sector. The after liberalization with an 80+ share of the market.
committee submitted its report in 1994 wherein , among other things,
it recommended that the private sector be permitted to enter the

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(IRDA/R1), the Authority may ask for an additional application in the

Explain the procedures for the registration of prescribed form (IRDA/ R2) which should be accompanied with the
Insurance companies. following documents.
PROCEDURE OF GRANTING OF LICENSE TO COMPANIES TO Every Insurance shall deposit in cash or in approved securities or
START INSURANCE BUSINESS No person can carry on Insurance partially in cash or partially in approved securities as per details
business unless & until he has obtained a certificate from the given below: -
Authority for a particular class of Insurance business. For e.g. A (i) In case of Life Insurance business, a sum
person can start life Insurance, marine Insurance, fire Insurance, equivalent to 1% of his total gross premium
health Insurance etc. But a life Insurance business cannot be written in India in any financial year
combined with other type of Insurance business. Those who are
commencing after the 31st day of March
already in Insurance Business like General Insurance Corp., National
Insurance, New India Assurance, Oriental Insurance & United India 2000 not exceeding rupees ten crores (Rs.10
Insurance have to obtain a fresh certificate within 3 months from the crores).
date of commencement of this Act or before such date as fixed by (ii) In the case of General Insurance business a
the Govt. sum equivalent to 3% of his total gross
Even those insurers for whom the registration was not necessary premium written in India in any financial year
before the commencement of this Act will require the registration commencing after 31/3/ 2000 not exceeding
certificate.
rupees ten crores (Rs.10 crores).
To get the registration certificate the following procedure is to be
followed: Every application in the prescribed form (IRDA/R1) for (iii) In case of reinsurance business, a sum of
registration shall be made with the following enclosures:— rupees twenty crores (Rs.20 crores).
1. A certified copy of Memorandum and Articles of association if the (iv) If the business is to be done in marine Insurance
applicant is a company. only & relates exclusively to country craft or
2. The name, address & the occupation of the directors of the its cargo or both the amount to be deposited
company. Rs.1,00,000/- (Rs.1 lakh) only.
3. A statement of the class of insurance business proposed to be
(v) A certificate from the Reserve Bank of India
carried on.
4. A statement indicating the sources that will contribute the share showing the amount deposited.
capital. On receiving the above documents IRDA will verify the
contents and may ask for additional information if any. The Authority 2. A declaration verified by an affidavit from the
may ask the Principal Officer to appear to their office for any “Principal Officer” that the equity capital of the
information or clarification. If the Authority is satisfied with the company has been complied with.
information and documents provide with the application form The paid up equity excluding preliminary expenses
and registration charges should be Rs.100 crores
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for life or General Insurance business and Rs.200 c) The interest of the general public will be served if
crores for the Reinsurance business. the certificate of registration is granted to the
If any insurer is carrying on business of insurance applicant then the certificate of registration is
already then within 6 months from the granted.
commencement of the Act the paid up capital Refusal of Registration
should be as per prescribed limits in the Act. * If the Authority refuses the registration the reason of
3. A certified copy of the published prospects and of such decision will be intimated to the applicant.
the standard policy forms of the insurer. * The Applicant whose application has been rejected
4. Statement of assured rate, advantages, terms & can file an appeal before the Central Govt. within 30
conditions to be offered in connection with days from the date on which a copy of the decision
Insurance policies. is received.
5. In the case of the business the certificate from the * The decision of the Govt. shall be final and shall not
actuary that such rates are workable & sound. be questioned before any court.
6. In the case of marine accident & miscellaneous Cancellation of Registration
Insurance business other than workmen’s The Authority has the right to cancel the certificate
compensation & motor car Insurance the available of registration either wholly or in so far as it relates
forms, prospects and statements to be submitted. to a particular class of Insurance business if the any
7. The receipt of deposit of Rs. 50,000/- for each class of the conditions specified for registration is not
of business. complied with.
8. If there is any foreign partner, a certified copy of Renewal of Registration
Memorandum of understanding between Indian Every year the registration is to be renewed and the
promoter and Foreign promoter including details of application is to be made to the Authority before
support comfort letters exchanged between the 31st Dec. of the preceding years with the prescribed
parties. fees i.e.,
9. Any other document as desired by the Authority (i) 1/4th of 1% of premium received or Rs. 5 crores
after scrutiny the application. whichever is less.
2A) If on the receipt of an application for registration and (ii) It should not be less than Rs. 50,000 in each
the authority is satisfied that
class of business.
a) The financial condition & the general character of
management of the applicant are sound. (iii) For reinsurer companies 1/4th of 1% will be
b) The volume of business likely to be available to & considered of total premium in respect of
the capital structure & earning prospects of the facultative reinsurance accepted in India.
applicant will be adequate. (iv) Fees to be paid in Reserve Bank of India.
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Discuss the powers and functions of Insurance Regulatory investments of funds by insurance companies, regulating
and Development Authority. maintenance of the margin of solvency,
The main regulations that regulate the insurance business are the adjudication of disputes between insurers and inter mediaries,
Insurance Act, 1938, the Life Insurance Corporation Act, 1956, the supervising the funct ioning of the
General Insurance Business (Nationalisation) Act, 1982, the Marine Tariff Advisory Committee, specifying t he percentage of premium
Insurance Act, 1963 and the Motor Vehicles Act, 1988. The Indian income of the insurer t o finance
Contract Act, 1872, governs most of the aspects of the insurance schemes for promoting and regulating professional organizations
contract. Additionally, the Foreign Exchange Management Act, 2000, and specifying the per centage of
Income Tax Act, 1961, Indian Stamp Act and the Hindu and Indian life insurance business and general insurance business to be
Succession Act govern some aspects involved in insurance. undertaken by the insurer in the rural
1. Insurance Regulatory and Development Authority or social sector.
The IRD Act has established the Insurance Regulatory and The Tariff Advisory Committee (“Advisory Committee”) is a body
Development Authority (“IRDA” or “Authority”) as a statutory corporat e, which controls and
regulator to regulate and pr omote the insurance industry in India regulates the rates, advant ages, terms and conditions off ered by
and t o protect the interes ts of holders of insurance policies. The insurers in the general insurance
IRD Act also carried out a series of amendments to the Act of business. The Advisory Committee has the authority to require any
1938 and conferred the powers of the Controller of Insurance on t he insurer to supply such
IRDA. information or stat ements necessary for discharge of its functions.
The members of the IRDA are appointed by the Central Government Any insurer f ailing to comply with
from amongst persons of ability, such provisions shall be deemed to have contravened the provisions
integrity and s tanding who have knowledge or experience in life of the Insurance Act. Every
insurance, general insurance, insurer is required to make an annual payment of fees to the
actuarial science, finance, economics, law, accountancy, Advisory Committ ee of an amount not
administration etc. The Authority consis ts exceeding in case of reinsurance business in India, one percent of
of a chairperson, not more than five whole-time members and not the total pr emiums in respect of
more than four part-time facultative insurance accepted by him in India; and in case of any
members. other insurance business, one percent of the total gross premium
The Authority has been entrus ted with the dut y to regulate, promote written direct by him in India.
and ensur e the orderly growth All insurers and provident societies incorporat ed or domiciled in
of the insurance and re-insurance business in India. In furt herance India are members of the Insurance
of this responsibilit y, it has been Association of India (“Insurance Association”) and all insurers and
conferred with numerous powers and functions which include prov ident societies incorporated
prescribing regulations on the
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or domiciled elsewhere than in India are associate members of t he same subject matter. The Ombudsmen are also empowered to
Insurance Association. There are receive and consider any partial or
two councils of the Insurance Association, namely the Life Insurance total repudiation of claims by an insurer, any dispute in regard to the
Council and the General premium paid in t erms of the
Insurance Council. The Life Insurance Council, through its Executive policy, any dispute on the legal construction of the policies in as
Committee, conducts much such a dispute relat es to
examinations for individuals wising to qualif y themselves as claims, delay in settlement of claims and the non-issue of any
insurance agents. It also fixes the limits insurance document to customers
for actual expenses by which the insurer carr ying on life insurance after receipt of premium.
business or any group of insurers The Ombudsmen act as a counsellor and mediator and make
can exceed from the prescribed limits under the Insurance Act. recommendations to both par ties in
Likewise, the General Insurance the event that the complaint is settled by agreement between both
Council, through its Executive Committee, may fix the limits by which the parties. However, if the
the actual expenses of complaint is not settled by agreement, the Ombudsman may pass an
management incurred by an insurer carrying on general insurance award of compensation within
business may exceed t he limits three months of the complaint, which shall not be in excess of w hich
as prescribed in the Insurance Act. is necessary to cover the loss
The Ombudsmen are appointed in accordance with the Redressal of suffered by the complainant as a direct consequence of the insured
Public Grievances Rules, 1998, peril, or for an amount not
to resolve all complaints relating t o settlement of claims on the par t exceeding rupees two million (including ex gratia and other
of insurance companies in a expenses), whichever is lower.
cost-effective, ef ficient and effective manner. Any person who has a Ombudsman within his jurisdiction, in the manner specified.
grievance against an insurer However, prior to making a complaint,
may make a complaint to an Ombudsman within his jurisdiction, in such person should have made a representation to t he insurer and
the manner specified. However, either the insurer has rejected
prior to making a complaint, such person should have made a the complaint or has not replied to it. Further, the complaint should
representation to the insurer and be made not later than a year
either the insurer has rejected the complaint or has not r eplied to it. from the date of rejection of the complaint by the insurer and should
Further, the complaint should be not be any other proceedings
made not later than a year from the date of r ejection of the pending in any other court, Consumer Forum or arbitrator pending on
complaint by the insurer and should not t he same subject matter. The
be any other proceedings pending in any other court, Consumer Ombudsmen are also empowered to receive and consider any par
Forum or arbitr ator pending on the tial or total repudiation of claims
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by an insurer, any dispute in regard to the premium paid in terms of subsidiary companies or its nominees) in the applicant company
the policy, any dispute on the cannot not exceed twent y six per
legal construction of the policies in as much such a dispute relat es cent of the paid up capital of the insurance company. However, the
to claims, delay in settlement of Insurance Act and the regulations
claims and the non-issue of any insurance document to customers af there under provide for the manner of computation of such twent y-
ter receipt of premium. six per cent.
The Ombudsmen act as a counsellor and mediator and make (c) The applicant can carry on any one of life insurance business,
recommendations to both par ties in general insurance business or reinsurance
the event that the complaint is settled by agreement between both business. Separate companies would be needed if the intent were t o
the parties. However, if the complaint is not settled by agreement, conduct more than
the Ombudsman may pass an award of compensation within one business.
three months of the complaint, which shall not be in excess of w hich (d) The name of the applicant needs to contain the words “insurance
is necessary to cover the loss company” or “assurance
suffered by the complainant as a direct consequence of the insured company”.
peril, or for an amount not The applicant would need to meet with the following capital structure
exceeding rupees two million (including ex gratia and other requirements:
expenses), w hichever is lower. (a) A minimum paid up equity capital of rupees one billion in case of
Every insurer seeking to carr y out the business of insurance in an applicant w hich seeks to
India is required to obtain a cer tificate of registration from the carry on the business of life insurance or general insurance.
IRDA prior to commencement of business. The pre-conditions for (b) A minimum paid-up equity capital of rupees t wo billion, in case of
applying for such registration have been set out under t he Act of a person carrying on exclusively
1938, the IRD Act and the various regulations prescribed by t he the business of reinsurance.
Authority. In determining the aforesaid capital r equirement, the deposits to be
The following are some of the import ant general registration requir made and any preliminary
ements that an applicant would expenses incurred in the formation and regis tration of the company
need to fulfil: would be included.
(a) The applicant would need to be a company registered under the A “promoter” of the company is not permitted to hold, at any time,
provisions of the Indian more than t wenty-six per cent of
Companies Act, 1956. Consequently, any person intending to carry the paid-up capital in any Indian insurance company. However, an
on insurance business in India interim measure has been
would need to set up a separate entit y in India. permitted percentages higher than twent y six percent are permitt ed
(b) The aggregate equity participation of a for eign company (either if the promoters divest, in a
by itself or through its
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phased manner, over a period of ten years from the date of supply of the application for registr ation to the applicant. An
commencement of business, the shar e applicant, whose requisition has been
capital held by them in excess of twent y six per cent. accepted, may make an application along with the relevant
An applicant desiring to carry on insurance business in India is requir documents ev idencing deposit, capital
ed to make a requisition for a and other requirements in the prescribed form for grant of a certif
registration application t o the IRDA in a prescribed format along with icate of registration. If, w hen
all the relevant documents. considering an application, it appears to the Authorit y that the
The applicant is required to make a separate requisit ion for assured rates, advantages, terms
registration for each class of business and conditions offered or t o be offered in connection wit h life
5 6 i.e. life insurance business consisting of linked business, non- insurance business are in any respect
linked business or both, or general not workable or sound, he may require that a statement thereof to be
7 insurance business including health insurance business. submitted to an actuary
The IRDA may accept the requisition on being satisfied of the appointed by the insurer and the Authorit y shall order the insurer to
bonafides of the applicant, the make such modifications as
completeness of the application and that the applicant will carr y on reported by the actuar y.
all the functions in respect of the After consideration of the matters inter alia capital structure, record
insurance business including management of investments etc. In the of performance of each
event that the aforesaid promoters and directors and planned infrastructure of the company,
requirements are not met with, the Authorit y may after giving the the Authority may gr ant the
applicant a reasonable certificate of r egistration. The Authorit y would, however, give
opportunit y of being heard, reject the requisition. Thereafter, the preference in grant of cert ificate of
applicant may apply to the registration to those applicants w ho propose to carry on the
Authority within t hirt y days of such rejection for re-considerat ion of business of pr oviding health covers to
its decision. Additionally, an individuals or groups of individuals. An applicant grant ed a
applicant whose requisition for regis tration has been rejected, may certificate of r egistration may commence
approach the Authority with a the insurance business within twelve months fr om the date of
fresh request for regis tration application aft er a period of two years registration.
from the date of reject ion, with In the event that the Authorit y rejects the application for registr ation,
a new set of promoters and for a class of insurance business dif the applicant aggrieved by the
ferent than the one originally applied decision of the Authority may wit hin a period of thirt y days from the
for. date of communication of such
In the event that the Authorit y accepts the requisition for registr ation rejection, appeal to the Central Government f or reconsideration of
application, it shall direct the decision and the decision of
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the Central Government in this regard would be final. of insurance business, in addition to any penalt y that may be
An insurer who has been granted a cer tificate of registration should imposed or any action that may be
renew the registrat ion before taken, for such period as may be specified by the Authorit y, in the
st the 31 day of December each year, and such application should following cases:
be accompanied by evidence of fees conducts its business in a manner prejudicial to the interes ts of
that should be the higher of- the policy-holders;
fift y thousand rupees for each class of insurance business, and fails to furnish any information as r equired by the Authorit y
one fifth of one per cent of tot al gross premium writ ten direct by relating to its insurance business;
an insurer in India during the does not submit periodical returns as required under the Act or by
financial year preceding the year in which the applicat ion for renewal the Authorit y;
of certif icate is required to be does not co-operate in any inquiry conducted by the Author ity;
made, or the application for renewal of certificate is required t o be indulges in manipulating the insurance business;
made, or rupees fift y million whichever is less; (and in case of an fails to make investment in the infrastr ucture or social sector as
insurer carrying on solel y re-insurance business, instead of the specified under the Insurance
total gross premium written direct in India, the total premium in Act.
respect of f acultative re-insurance The Authority, in case of repeated defaults of the grounds for
accepted by him in India shall be taken into account). suspension of a certificate of
This fee may vary according to the total gross premium writ ten direct registration, may impose a penalt y in the form of cancellation of the
in India, during the year cer tificate. The Authorit y is
preceding the year in which the application is r equired to be made compulsorily required to cancel the r egistration of an insurer either w
by the insurer in the class of holly or in so far as it relates to
insurance business to which the regis tration relates but shall not a particular class of insurance business, as the case may be
exceed one-four th of one percent if the insurer fails to comply with t he provisions relating t o
of such premium income or rupees fift y million, whichever is less, or deposits; or
be less, in any case than fif ty if the insurer fails, at any time, to comply wit h the provisions
thousand rupees for each class of insurance business. However, in relating t o the excess of the value of
the case of an insurer carrying on his assets over the amount of his liabilities; or
solely re-insurance business, the total pr emiums in respect of if the insurer is in liquidation or is adjudged an insolvent; or
facultative re-insurance accept ed by if the business or a class of the business of the insurer has been
him in India shall be taken into account. transferr ed to any person or has
The registration of an Indian insurance company or insurer may be been transferred to or amalgamated with the business of any other
suspended for a class or classes insurer; or

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if the whole of the deposit made in respect of the insurance by him before the cancellation takes ef fect shall continue as if the
business has been r eturned to the cancellation had not taken place.
insurer; The Authority may, aft er the expiry of six months from the dat e on
if, in the case of an insurer, the standing contract is cancelled or which the cancellation order takes
is suspended and continues to be effect, apply to t he Court for an order to wind up t he insurance
suspended for a period of six months, or company, or to wind up the affairs of
if the Central Government of India so directs . the company in respect of a class of insurance business, unless the
In addition to the above, the Authorit y has the discretion to cancel registration of the insurance
the r egistration of an insurer company has been revived or an application for winding up has
if the insurer makes default in complying with, or acts in alread y been presented to the Cour t.
contravent ion of , any requirement of the The Authority has a discret ion, where the registr ation of an insurer
Insurance Act or of any rule or any regulation or order made or, any has been cancelled, to rev ive the
direction issued thereunder, or if the Authority has r eason to registration, if the insurer wit hin six months from the date on which t
believe that nay claim upon the insurer arising in India under any he cancellation took effect:
policy of insurance remains unpaid for three months af ter final makes the deposits, or
judgment in regular course of law, or complies with the provisions as to t he excess of the value of his
if the insurer carries on any business other than insurance assets over the amount of his
business or any pr escribed business, liabilities, or
or has his standing contract rest ored, or
if the insurer makes a default in complying with any direct ion has the application accepted, or
issued or order made, as the case satisfies the Authorit y that no claim upon him remains unpaid, or
may be, by the Authority under the IRDA Act, 1999. has complied with any requirements of the Insurance Act or the
If the insurer makes a default in complying with, or acts in IRDA Act, or any rule or
contravent ion of, any requirement of the regulation, or any order made thereunder or any direct ion issued
Companies Act, or the LIC Act, or the GIC Act or the Foreign under these Acts, or
Exchange Management Act, 2000. that he has ceased to carry on any business other than insur
The order of cancellation shall take ef fect on the date on which ance business or any prescribed
notice of t he order of cancellation is business.
served on the insurer. Thereafter, the insurer would be prohibited
from entering into any new Explain briefly the provisions of Insurance Act 1938.
contracts of insurance, but all rights and liabilities in respect of Section 64VB in The Insurance Act, 1938
contracts of insurance ent ered into

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64VB. No risk to be assumed unless premium is received in (4) Where an insurance agent collects a premium on a policy of
advance.— insurance on behalf of an insurer, he shall deposit with, or despatch
(1) No insurer shall assume any risk in India in respect of any by post to, the insurer, the premium so collected in full without
insurance business on which premium is not ordinarily payable deduction of his commission within twenty-four hours of the
outside India unless and until the premium payable is received by collection excluding bank and postal holidays.
him or is guaranteed to be paid by such person in such manner and (5) The Central Government may, by rules, relax the requirements of
within such time as may be prescribed or unless and until deposit of sub-section (1) in respect of particular categories in insurance
such amount as may be prescribed, is made in advance in the policies.] 1[(6) The Authority may, from time to time, specify, by the
prescribed manner. regulations made by it, the manner of receipt of premium by the
(2) For the purposes of this section, in the case of risks for which insurer.]
premium can be ascertained in advance, the risk may be assumed
not earlier than the date on which the premium has been paid in Discuss the importance of insurable interest in the contract
of insurance.
cash or by cheque to the insurer. Explanation.—Where the premium
Need of Insurable Interest in insurance contract
is tendered by postal money order or cheque sent by post, the risk
may be assumed on the date on which the money order is booked or For the contract of insurance to be valid it is not only necessary that
the parties to the contract are competent to contract, it is made with
the cheque is posted, as the case may be. free consent and the consideration is lawful, beside all this it is also
(3) Any refund of premium which may become due to an insured on necessary that the insured has insurable interest on the subject
matter of the insurance. if there will be no insurable interest then
account of the cancellation of a policy or alteration in its terms and contract will amount to wager.Insurable interest in broad term means
conditions or otherwise shall be paid by the insurer directly to the that the party to the insurance contract who is insured or policyholder
must have a particular relationship with subject matter of the
insured by a crossed or order cheque or by postal money order and
insurance, whether that be a life or property. The concept of
a proper receipt shall be obtained by the insurer from the insured, insurable interest is of particular importance in marine and life
and such refund shall in no case be credited to the account of the insurance.
agent. The definition of insurable interest has been continuously expanding.
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the most commonly quoted definition of insurable interest is that of shareholder has no insurable interest in the assets of the company.
Lawrence J, in Lucena v Craufurd, in which it was said that “A man is While the sole shareholder in one man company will suffer a certain
interested in a thing to whom advantage may arise or prejudice may detriment in the event of loss of company’s property, he has no
happen, from the circumstances which may attend it…to be insurable interest in it even if he is in possession of it, as his
interested in the preservation of a thing, is to be so circumstanced possession is not coupled with any legal right to enjoy the use of
with respect to it as to have benefit from its existence, prejudice from property, and in his capacity as a creditor he is merely unsecured
its destruction” creditor of the company.

Broadly it could be said that a person has an insurable interest in Mere probability of detriment is not enough, and one cannot insure a
something when loss or damage to it will cause that person to suffer thing merely because there is a chance that some collateral benefit
a financial loss or some other kind of losses. or example, if the car may arise should it not be lost. A shareholder can however insure his
you own meets with an accident, you have to incur costs to repair the own share, in which he has a insurable interest, against loss suffered
car before you can ply it again or you have to sell it in scrap and be owing to the failure of an adventure in which the company is
content with getting too small a sum in return to replace your car. engaged, and in Wilson v Jonesthe adventure of laying down a
Here, you suffer a financial loss and, hence, have a strong reason to submarine cable was insured by shareholder in that way.
insure your car. If the accident happens with a car not owned by you,
you do not suffer any financial loss. You do not have a reason to Thus a personal accident policy may be effected by the assured
insure such a car. If a 'reason' exists, you are said to have an against the loss which he may suffer by reason of an accident to a
insurable interest in the subject of insurance. third party. To render such an insurance valid assured must have an
insurable interest in such person’s safety, and this interest must be
The governing principle is that the interest must be an enforceable of pecuniary nature. A son, therefore, whose father is a pauper and
one. The mere hope of acquiring is not enough. it has been said that dependent on him, has not a sufficient insurable interest to support
party has interest in an event if he will gain advantage if it happens an insurance upon his father against personal accident.
and suffer a loss if it does not happen. But the advantage or loss
must depend upon some right, whether contractual or proprietary, Wager and insurance
legal or equitable, which is enforceable in court of law. Although the
insurable interest has to be enforceable by law, the enforceability is In a contract of wager all the parties does not have any interest in
not the sole criterion, howsoever strong it might be. happening of the event other than the sum or stake him will win or
lose. This is what marks the difference between a wagering
A husband who is living with his wife has an insurable interest in her agreement and a contract of insurance because every contract of
property, for he is by law entitled to share her enjoyment in it, and insurance requires for its validity the insurable interest. Insurance
she, no doubt, has a similar insurable interest in his property as their affected without insurable interest is no more than a wagering
rights and duties are largely reciprocal. On the same principle a agreement and therefore void. "Insurable interest" means the risk of
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lose to which the assured is likely to be exposed by the happening of validity of the policy, whether by express statutory law as in the
the event assured against. In a wager on the other hand neither Marine Insurance Act 1906 or as by section 30 of the Indian Contract
party is running any risk of loss except that which is created by the Act which merely declares that all contracts by way of wager is void.
agreement between two or more than two parties. This is the interest required by statue or the statutory shareholder. If
this agent is absent, the insurance is illegal or void and no
We all also know that wagering is illegal in India and against to the agreement between the parties dispensing with this requirement can
norms of society or in short wagering is against public policy and be effective. In an action upon such a contract if the insurer does not
distinction between a insurance and a wager is this a insurance is raise the plea of want of interest nevertheless the court of its own
properly speaking a contract to indemnify the insured in respect of motion may refuse to enforce the contract.
some interest which he has against perils which he contemplates it
will be liable to. Let's take a case law in detail that will clear the picture of the
difference between these two kinds of insurable interest in the case
In case of Alamani v. Positive Govt Security Life Insurance of Macaura v Northern Assurance Company one macaura insured
Co the plaintiffs husband took a policy of insurance on the life of timber in his estate against fire. He sold timber to a company of
Mehbub Bi, the wife of a clerk working under him and about a week which he was the sole substantial shareholder. Thereafter most of
later got the policy assigned in the favour of the plaintiff, Mehbub Bi the timber was destroyed by fire and he demanded that he should be
died a month later and the plaintiff as assignee claimed the sum indemnified. The insurer succeeded in refusing to comply with the
assured and in this case court find that there was no insurable demand. The insured had no statutory interest in the assets of the
interest present in this case and hence this insurance contract held company though too he would suffer loss on the company losing its
to be contract of wager and held to be void. property, nor he had any contractual interest under the policy
because he could not prove interest at the time of the loss. Though
Types of insurable interest the insured had no statutory interest the policy was held to be not a
wagering contract because even being the sole shareholder he had
There are basically two types of insurable interest (1) Contractual (2) a interest or better call insurable interest in the property.
Statutory. Insurable interest is of two types – Contractual and
Statutory. Where an insurance contract requires the existence of an Time or duration of insurable interest
insurable interest for effecting the policy, such interest is known as
Contractual insurable interest while an insurable interest mandated The time when the insurable interest must be present varies with the
by a particular statute dealing on insurance is known as Contractual nature of the insurance contracts. The question is whether insurable
insurable interest. It is noteworthy that neither the British Life interest should exist at the time when the contract is formed or
Assurance Act, 1774 nor the Insurance Act, 1938 of India defines the should it also continue to exist until it is discharged but as we have
term insurable interest. As we have seen in some cases that interest seen in life insurance the presence of insurable interest is necessary
in the subject matter of insurance is required by law itself for the at the commencement of the policy although it is not necessary
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afterwards, not even at the time of occurrence of risk. So it should be not required to show at any point that he had some particular interest
there in life policies at the time of taking the policy it need not exist at in the continuation of his life. In Wainwright v Bland an executor,
the time when the lose take place or even when the claim is made suing on a policy effected by his testator on two years of his life, was
under the policy. Life insurance contracts are not strictly speaking not required to show any significant reason for making an insurance
contracts of indemnity. for such a limited time period. As regard spouses are concerned, it is
generally believed and accepted that a wife has an insurable interest
In fire insurance it's required both at the commencement of the policy in the life of her husband and vice versa. Lord Kenyon CJ declared
and at the time when the risk occurs. In a sense, therefore it may be that “…it must be presumed that every wife had interest in the life of
said that insurable interest is doubly insisted upon in fire insurance. her husband…”and it is not necessary for her to prove that she had
The insurance interest is necessary at both the times because it is an insurable interest only because a large sum of money would go
treated as a personal contract and also a contract of indemnity. And from her husband’s estate to another, upon his death.
even the onus that the fire was intentional is on the insure not on
insured. In a marine insurance contract the presence of insurable As far as children are concerned, in England, the rule, which was
interest is necessary only at the time of the loss. It is immaterial recognised in the case of Halford v Khymer, is that a parent has no
whether he has or does not have any insurable interest at the time insurable interest in the life of his child as mere love and affection is
when the marine insurance policy was taken. not sufficient to constitute insurable interest. Similarly a child does
not have an insurable interest in the life of his parent provided he is
Insurable Interest in life not dependent on the latter. Therefore, under English law, insurable
interest is limited to statutory insurable interest.
In order to effect a life insurance contract, it is necessary that the
person, who is privy to the contract, should have an insurable The Insurance Act, 1938 of India does not contain any provision
interest in the life of the person, for whom the policy is being taken. which explains the concept of insurable interest. In the absence of
Although it is difficult to lay down in a precise manner as to what any statutory explanation, courts take recourse to the English and
would constitute insurable interest in a life insurance contract, yet it American decisions which are in conformity with the prevailing
is a well settled principle of law that there has to be an insurable currents of social, economic and religious thought in the society.
interest attached to a life insurance contract. It is opposed to public Thus in India too, apart from husband, wife or any other close
policy to allow a person, who has no interest in the life of another relative, any person, who has a legal right to derive maintainance
person, to take an insurance policy in the name of the latter. In from a person, can take a life insurance policy on the life of the latter
England, insurable interest is mandated by the Life Assurance Act, without any proof of insurable interest.
1774 while in America and in India; it is required as a matter of public
policy. Another set of relations which acquire insurable interest for effecting
a life insurance, are relations which originate from contractual
Every man is presumed to have an interest in his own life and he is transactions. Therefore a creditor has an insurable interest in the life
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of the debtor to the extent of his interest and where the debt has whom goods are entrusted for safe keeping as an insurance ''on
been guaranteed by a surety, then on the life of the surety too. In goods', it would not cover the interests of others in the property. It
Powell v Dewy it was held that a partner of a firm has no insurable will cover his personal insurable interest in the goods including his
interest in the life of the other partner, except when the latter is lien and his liability to the owner of the goods arising from his
indebted to him personally and only to the extent of such responsibility for their safety as a person entrusted with the goods.
indebtedness.
A person without any interest at all can insure as trustee for the
Insurable interest in Goods person having interest, provided interest in such insurance is not
required by statute He will then have to hold the claim amounts
Insurable interest is not confined to legal ownership only. The legal received as trustee for the interested person. This is under the
liability of common carriers to make good the loss or damage to the principle that a party to a contract can constitute himself a trustee for
goods in transit to the bailor of goods is also an insurable interest A a third party of rights under a contract and thus confer rights on the
person with a limited interest in a property may insure recover his third party.
interest only or so as to cover the interest of others as well who are
interested in 'the property. For instance, a carrier or bailee may Marine insurance contract and insurable interest
insure to cover his own loss or personal liability to the owner of the
goods or up to the full value of the goods entrusted to him which Insurable interest is a special requirement of the marine insurance
includes the owner’s interest as well. What interest the assured in- contract and any valid contract of marine insurance can be entered
tended to coyer under the policy must be determined by construction onto by person only if he has insurable interest in the marine
of the policy itself. Thus, where the subject-matter of the insurance is adventure. A marine insurance contract is one in which the insurer
described as 'Goods his own, in trust or on commission' the intention promises to indemnify the insured against any loss to the insured
is to insure beyond his own personal interest and he will be entitled subject matter, be it a ship or the cargo, arising out of the perils of
to recover the full value of the goods in case of loss. the sea, subject to the conditions and the extent of the policy. Every
person who has an interest in a marine adventure has an insurable
Where it is described as 'goods held in trust for which they are interest and a person is said to be interested in a marine adventure if
responsible' by the assured wholesalers who purchased and resold he stands in such a relationship with the thing insured that upon its
parcels of tea, etc., lying in bonded warehouses and had sold and destruction, he may incur liability or suffer a loss, on it.
received the value of some chests of tea before a fire broke out and
damaged them, it was held that the words goods for which they were It is important for insurable interest that (1) there should be a
responsible showed that they did not~ intend to cover the proprietary physical object which is exposed to the marine perils and (2) the
interest of other persons in the goods insured. assured must have some legally recognized relationship with that
object in consequences of which he benefits by its preservation and
Where it is described by the commercial trustee, i.e., a bailee to is prejudiced by its loss or damage. Insurable interest, in a marine
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policy, must exist at the time of the loss though it is not necessary ware housemen had goods of third persons deposited in their ware-
that it should be in existence at the time of effecting the policy. The house in the way of their trade as warehousemen. They had taken
policy will be considered valid if the insured insures the subject floating policies against fire with the defendants 'on goods the
matter without being interested in it, at the time of effecting the policy property of the assured or held by them in trust or on commission'.
and if he acquires an interest in it after it has been lost, he can Some goods were destroyed by fire and they claimed their full value
recover under the policy. and not limited to their lien on the goods to the extent of their
charges for warehousing, landing and cartage. The insurers
A marine policy, just like a fire policy, is a personal contract and contended that plaintiffs had no insurable interest in the goods. It
hence, the insurable interest of the insured in the subject matter was held that the words in trust' meant goods of customers which the
continues till the time he is in actual possession of it. If he has assured held and not merely goods of which they might be trustees
transferred the title in the subject matter to another person, through in the strict legal" sense, that the insured must make good the value
an agreement to that effect, he ceases to have any interest in it and of the whole of the goods destroyed which the plaintiffs must apply to
the policy will also come to an end. So long as the seller of a ship or cover there own interest and for the balance they will be trustees for
of the goods retains any interest in the property, he can insure it to the owners of the goods.
the extent of his interest.46 In Reed v Cole it was held that where the
owner of a ship has sold her under a contract which requires him to In case of North British and Merchantile Insurance Co. v Moffat,
pay the buyer a certain sum of money should a loss happen within a the assured were wholesale tea merchants who purchased and
particular period of time, the owner has an insurable interest to the resold parcels of tea lying in bonded warehouses where they had
extent of such a sum. been deposited by the importer. They took out two insurances to
cover 'merchandise (jute; petroleurn and its products excepted), the
Illustrative Cases assured own, in trust or on cornrnission For which they are
In case of Graffith v Flemming, Griffith and his wife each signed a responsible…..’ at certain wharves described in the policies. fire
proposal form for a joint life policy on their lives for £500 and both occurred at one of these warehouses and certain chests of tea were
contributed towards the premium. After the policy was taken, the wife damaged. The assured claimed to be paid the full Value of the
committed suicide and the husband claimed the sum assured. The chests of tea destroyed. It was found that some of the teas had been
insurer alIeged that at the time of taking the policy the husband had resold by the assured before the fire occurred and that the purchase
no insurable interest in his wife's life as required by the Life money had been paid. Consequently, the assured had no longer any
Assurance Act, 1774. Decreeing the claim vaughan Williams L.J. responsibility to the purchasers in respect of that part of the tea
held that 4the husband has an interest in his wife's life which ought destroyed and they were not covered by the policy.
to be presumed and that “it is unnecessary to go into the evidence to
show any pecuniary interest of the husband…” In case of Tomlinson v Hepburn, plaintiffs who were road hauliers
and carriers, insured tobacco and cigarette consignments which they
In case of Monarch v Water Fire and Life, plaintiffs, merchants and had contracted to carry to the~"customer's depot by a Lloyd's 'Goods
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in Transit* Policy, with the defendant who was an underwriter. This to claim the fire insurance claim or one can kill any third person
they did as they were required by their contract with the tobacco insured by him.
owners to 'insure and keep insured with a full comprehensive cover
against loss of goods in transit or otherwise. The policy insured the The concept is also important to measure the amount of the
goods in transit..;., including loading and unloading' against all risks' insured's loss in property insured. Most of the property insurance is
of loss or damage however arising'. Before the goods could be contracts of indemnity and the measure of recovery is the insurable
unloaded at the owner's depot, the lorries and the tobacco were interest of the insured. In the event of loss, payment cannot exceed
stolen without plaintiffs fault. Plaintiffs claimed the value of the goods the amount of one's insurable interest as the principle of indemnity
under the policy. The insurer resisted on the ground that the policy shall apply. Thus it can be finally concluded from whole discussion
did not cover the owner's interest but only the carriers interest in that the insurable interest is very important ingredient of the
respect of their negligence. In appeal the House of Lords said that insurance and it could be said that without insurable interest in
(1) this was a policy on goods and not merely in respect of the subject matter of the insurance there can be no insurance.
carriers negligence, and (2) the earners had an insurable interest in
the goods the value of which was recoverable under the policy, but Insurable Interest Alternate Answer:
that (3) the carrier must account to the owners for their share of the Everyday newspaper, television and other means of communication
loss after deducting what was due to them as carriers.
brings reports of death of number of peoples, naturally or by accident
Conclusion or otherwise. One does not shed a tear at this unless ones near
To prevent gambling insurable interest is necessary. If insurable relative or breadwinner or benefactor or friend are among the dead,
interest is not required, the contract would be gambling contract and
would be against public interest. For example you can insure the because one has no interest in their continued existence or death. In
property of another and hope for an early loss. One can similarly other words he has no risk of loss in the death of the person or any
insure the life of another person and hope for an early death. These motive to support that person's life.
contracts would be gambling contracts and would be against public
If so why should he have a right to insure that life and get a chance
interest and public policy and so need to be checked and stopped.
to recover on the termination of that life a disproportionately bigger
If insurable interest is not required, a dishonest person could sum than what he gives? On the other hand it may even tempt him to
purchase a property's insurance belonging to someone else and
bring about the destruction of that life and thereby make an unlawful
then deliberately cause a loss to receive the proceeds; but if the
insured stands to lose financially nothing is gained by causing the gain. It is against public policy to allow such things to happen and
loss. Thus moral hazard is reduced. In life insurance, insurable with this motive there is something in insurance contract called as
interest requirement reduces the incentive to murder the insured for insurance interest But there is however no danger to public welfare if
the purpose of collecting policy claim or anyone can set fire his home
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a person is allowed to insure the life of a person whose preservation Insurable interest is also defined as a legal right to insure asset
is to his advantage and whose death puts him to risk of genuine loss. or person. These are the following few principle of insurable
Insurable interest is thus a financial or other lawful interest in the interest.
preservation of the life to be insured .also we know that nobody can • In theory, therefore, noting more is payable than the amount
burn his car or home to claim the insurance money for insurance of actual loss.
company. • It follows that unless the assured has a pecuniary interest in
The aim of insurance is to shift risk from one person (the insured) to the thing insured, no question of loss or indemnity shall arise.
another (the insurers). As we all know that insurance contracts are • A person cannot therefore insure a thing, the loss of which
subject to the general law of contract, but special rules also apply to cannot cause him any financial loss.
them which do not apply to most other contracts for instance both • A policy of insurance, therefore, is void if the insured has no
parties are under the duty of disclosure in relation to some policies such pecuniary interest in the subject matter of the insurance.
(utmost good faith, insurable interest etc). • Any person, who would suffer from destruction or loss of a
In insurance contract as a matter of public policy, certain insurable thing, has insurable interest in that thing.
requirements must be met, to make it valid. Insurable interest is one The Insurable Interest must:-
of the basic requirements of the insurance without it the insurance • Be definite
contract is a mere wagering agreement. • Be capable of valuation
In India it is strange that the insurance Act 1938 does not contain a • Be legally valid and subsisting
definition of insurable interest the only section, namely section 68 • Involve the loss of legal right
which makes a passing reference to the words 'insurable interest'Â • Involve a legal liability
stands repeated by section 48 of The Insurance Amendment Act Hypothesis
1950. Briefly stated there is no legislative guidance in Indian law on Insurable interest is the one of the necessary condition important to
the subject but still marine insurance defines under section 7 of the create a legally binding valid insurance contract and without
marine insurance act 1963 defines insurable interest . insurable interest the insurance contract will be void and will be seen
as a contract of wager which is void as under Section 30 of Indian
Contract Act 1872 .

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Research Question if it is recognized by court of law or equity as such interest. The

Can there be any valid insurance agreement without insurable following points may be gathered from this case .
interest? • The interest should not be a mere sentimental right or interest,
Research Methodology for example love and affection alone cannot constitute insurable
This project is basically non empirical or doctrinal research based. interest.
Sources are mainly books, magazine, journals and web based. • It should be a right in property or a right arising out of a
Meaning and definition of insurable interest contract in relation to the property.
Rodda says: insurable interest may be defined as an interest of such • The interest must be pecuniary that is, capable of estimation
a nature that the occurrence of the event insured against would in terms of money. In other words, the peril must be such that its
cause financial loss to the insured. happening may bring upon the insured an actual or deemed
It is also defined as: pecuniary loss. Mere disadvantage or inconvenience or mental
When the assured is so situated that the happening of the event on distress cannot be regarded as an insurable interest but this rule not
which the insurance money is to be payable would as an strictly followed in life insurance cases.
approximate result involve in the loss or diminution of any right • The interest must be lawful, that is, it should not be illegal,
recognized by law or in any liability there is an insurable interest to unlawful, and immoral or opposed to public policy and does not harm
the extent of the possible loss or liability. any others legal justified claim.
The existence of insurable interest is an essential ingredient of any • Insurable interest means an interest which can be or is
insurance contract; it is an important and fundamental principle of protected by a contract of insurance.
insurance. It can be defined as "the legal right to insure arising out of In the case of Brahma Dutt v. LICÂ one Mukhtar Singh a petty
a financial relationship recognized under law", between the insured school teacher on salary of Rs 20 took a policy for Rs 35,000 on his
and the subject matter of insurance life making false statements in the proposal and nominated a
We find that meaning of the term insurable interest is liberally stranger Brahma Dutt for the policy. The nominee paid the first two
interpreted. It is not always the legal interest or a full interest that's quarterly premiums by which time the life insured died. The nominee
required by the courts but it should be such that it would be sufficient intimated the insured's death and claimed the sum assured. It was
found on evidence that Brahma Dutt had taken the policy without any

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insurable interest in the life of the deceased for his own benefit and Creation of insurable interest
that therefore it was void being a wagering agreement. There are number of ways in which insurable interest will arise
Supreme court in case of Suraj Mal Ram Niwas Oil Mills (Private) or can be created. Few main ways are -;
Limited v United India Insurance Company Limited and another 1. By Contract -In some contracts a person will agree to be
held that the objection of the insurer about the non-disclosure of liable for something, which he or she would not ordinarily be
dispatch of each and every consignment, as pointed by the second liable for. A landlord is normally liable for the maintenance of
surveyor, learned counsel submitted that the said condition has to be property he owns rather than the tenants. A lease may,
understood in the context of the fundamental condition that the however, make the tenant responsible for the maintenance,
insurance cover was intended to secure only the "insurable interest" repair etc. of the building. Such a contract places the tenant in
of the appellant in the dispatches. It was urged that the appellant had legally recognized relationship to the building. This gives him
declared only those consignments in which they had an "insurable an insurable interest, which would not be present if the
interest" as in relation to dispatches which had not been declared, contract had not been entered into so these kinds of special
the consignees had desired that their consignments should be contractual relationships give arise to the insurable interest on
dispatched without an insurance cover. something on which otherwise one does not have any kind of
In all such cases, the purchasers took the risk of loss to their goods, insurable interest.
and hence the appellant had no "insurable interest" in them, unlike in 2. By Common Law - Where the essential elements of
the consignment in question for which due declaration was made. insurable interest are automatically present, the same can be
Reference was made to the decisions of this Court in New India described as having arisen at common law. The most straight
Assurance Co. Ltd v. G.N. Sainani, and New India Assurance forward example is ownership. One can own a house, and
Company Limited v. Hira Lal Ramesh Chand & Ors , wherein it was there is therefore entitlement to insure it equally the common
held that "insurable interest" over a property is "such interest as shall law duty of care which one owes to the other, may give rise to
make the loss of the property to cause pecuniary damage to the a liability which again is insurable. Like the use or driving of a
assured and under this case it will make a damage to the interest of motor vehicle in a public place is sufficient insurable interest
the insured. for the purpose of effecting insurance in the favour of the third
party .

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3. By Statute - Some time an act of parliament will create an In case of Alamani v. Positive Govt Security Life Insurance Co the
insurable interest either by granting some benefit or imposing plaintiffs husband took a policy of insurance on the life of Mehbub Bi,
a duty. While the statute may create insurable interest where the wife of a clerk working under him and about a week later got the
none would otherwise exist. There can be some statutes policy assigned in the favour of the plaintiff, Mehbub Bi died a
which can restrict liability and thereby also restrict insurable month later and the plaintiff as assignee claimed the sum assured
interest. and in this case court find that there was no insurable interest
Wager and insurance present in this case and hence this insurance contract held to be
In a contract of wager all the parties does not have any interest in contract of wager and held to be void.
happening of the event other than the sum or stake him will win or Types of insurable interest
lose. This is what marks the difference between a wagering There are basically two types of insurable interest (1) Contractual (2)
agreement and a contract of insurance because every contract of Statutory
insurance requires for its validity the insurable interest. As we have seen in some cases that interest in the subject matter of
Insurance affected without insurable interest is no more than a insurance is required by law itself for the validity of the policy,
wagering agreement and therefore void . "Insurable interest" means whether by express statutory law as in the Marine Insurance Act
the risk of lose to which the assured is likely to be exposed by the 1906 or as by section 30 of the Indian Contract Act which merely
happening of the event assured against. In a wager on the other declares that all contracts by way of wager is void. This is the
hand neither party is running any risk of loss except that which is interest required by statue or the statutory shareholder. If this agent
created by the agreement between two or more than two parties. is absent, the insurance is illegal or void and no agreement between
We all also know that wagering is illegal in India and against to the the parties dispensing with this requirement can be effective . In an
norms of society or in short wagering is against public policy and action upon such a contract if the insurer does not raise the plea of
distinction between a insurance and a wager is this a insurance is want of interest nevertheless  the court of its own motion may
properly speaking a contract to indemnify the insured in respect of refuse to enforce the contract.
some interest which he has against perils which he contemplates it Courts however, lean in favour of the existence of a valid interest as
will be liable to. far as possible, so as to render the contract enforceable . It has also
been held in some cases that there is nothing illegal about the

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insurer paying on policy without interest as the objection or want of at the commencement of the policy although it is not necessary
insurable interest is purely technical and has no real merit as afterwards, not even at the time of occurrence of risk.
between the insurer and the insured. So it should be there in life policies at the time of taking the policy it
Let's take a case law in detail that will clear the picture of the need not exist at the time when the lose take place or even when the
difference between these two kinds of insurable interest in the case claim is made under the policy. Life insurance contracts are not
of Macaura v. Northern Assurance Company one macaura insured strictly speaking contracts of indemnity.
timber in his estate against fire. He sold timber to a company of In fire insurance it's required both at the commencement of the policy
which he was the sole substantial shareholder. Thereafter most of and at the time when the risk occurs. In a sense, therefore it may be
the timber was destroyed by fire and he demanded that he should be said that insurable interest is doubly insisted upon in fire insurance.
indemnified. The insurance interest is necessary at both the times because it is
The insurer succeeded in refusing to comply with the demand. The treated as a personal contract and also a contract of indemnity. And
insured had no statutory interest in the assets of the company even the onus that the fire was intentional is on the insure not on
though too he would suffer loss on the company losing its property, insured.
nor he had any contractual interest under the policy because he In a marine insurance contract the presence of insurable interest is
could not prove interest at the time of the loss. Though the insured necessary only at the time of the loss. It is immaterial whether he has
had no statutory interest the policy was held to be not a wagering or does not have any insurable interest at the time when the marine
contract because even being the sole shareholder he had a interest insurance policy was taken.
or better call insurable interest in the property. Insurable interest in life insurance contract
Time or duration of insurable interest As we all know life insurance contract is not a contract of indemnity
The time when the insurable interest must be present varies with the and a person affecting a policy must have an insurable interest in the
nature of the insurance contracts. The question is whether insurable life to be assured .In the life insurance policy persons having
interest should exist at the time when the contract is formed or relationship by marriage (example, husband and wife), blood
should it also continue to exist until it is discharged but as we have (example, father and son) or adoption (example, adopted son and
seen in life insurance the presence of insurable interest is necessary his mother), have been recognized as having insurable interest.

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Few example of relationship which have insurable interest in on his own life to gain a pyrrhic victory. And if somebody commits
the life of other suicide to get the benefit of claim for his beneficiary or relatives his
1. Child has the insurable interest in life of parents and vice claim will not be entertained.
versa even the illegitimate child. Marine insurance contract and insurable interest
2. Wife have a insurable interest in the life of husband and vice Insurable interest is a special requirement of the marine insurance
versa contract and any valid contract of marine insurance can be entered
3. Debtor have a insurable interest of the life of creditor and vice onto by person only if he has insurable interest in the marine
versa adventure.
4. Master have a insurable interest in the life of servant and vice And what is important for insurable interest is that (1) there should be
versa a physical object which is exposed to the marine perils and (2) the
5. A company have a insurable interest in the life of manager or assured must have some legally recognized relationship with that
director or partners or other employees and vice versa object in consequences of which he benefits by its preservation and
6. Husband or wife have a insurable interest in the life of father- is prejudiced by its loss or damage.
in- law or mother in law and vice versa Few instances which shows insurable interest of following
7. Insurable interest in the life of grandparents and vice versa person in marine insurance policy
8. Insurable interest of one person on his own life • The insurer under a contract of marine insurance has a
Insurable interest in India need not be confined to a pecuniary insurable interest in his risk which he mar reinsure .
interest. Sentimental interest or an interest based on close family • The lender of money on bottomry or respondentia has a
relationship may constitute a sufficient insurable interest. The insurable interest in respect of loan .
closeness of relationship operates as a protection to the life of the • The masters of the crew of a ship have insurable interest in
insured and does not place him in the danger of being murdered . their wages.
But when a person seeks insurance on his own life, the question of So these example made the clear picture of insurable interest in
insurable interest is immaterial. marine insurance contract.
There can also be no element of wagering, for whatever gain May Fire insurance and insurable interest
accrue, will be by his death and that is no gain. No man will gamble

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In case of fire insurance those have insurable interest in fire You can similarly insure the life of another person and hope for an
insurance that will have damage or loss if the insured property will early death. These contracts would be gambling contracts and would
have damage or loss due to fire. be against public interest and public policy and so need to be
Few example of peoples those can have insurable interest in checked and stopped.
any insured property by fire. To reduce moral hazard: insurable interest reduces moral hazard. If
1. Owner of the property , joint owner, sole owner, or a farm insurable interest is not required, a dishonest person could purchase
owning the property a property's insurance belonging to someone else and then
2. Lessor and lessee both have insurable interest on any deliberately cause a loss to receive the proceeds; but if the insured
property stands to lose financially nothing is gained by causing the loss.
3. The vendor or the purchaser both have the right Thus moral hazard is reduced. In life insurance, insurable interest
4. The mortgagor and mortgagee requirement reduces the incentive to murder the insured for the
5. Trustees are legal owners and beneficiaries the beneficial purpose of collecting policy claim or anyone can set fire his home to
owner of the trust property and each can insure it. claim the fire insurance claim or one can kill any third person insured
6. Bailees such as carriers, pawnbrokers or warehouse men are by him.
responsible for the safety of the property entrusted in them To measure the amount of the insured's loss in property insured
and so can insure it. Finally in property insurance insurable interest measures the amount
Conclusion of the insured's loss. Most of the property insurance is contracts of
To be legally enforceable, all insurance contracts must be supported indemnity and the measure of recovery is the insurable interest of
by an insurable interest. Insurance contracts must be supported by the insured. In the event of loss, payment cannot exceed the amount
an insurable interest for the following reasons. Purpose of Insurable of one's insurable interest as the principle of indemnity shall apply.
Interest. The object of insurance in such a case is to indemnity the assured to
To prevent gambling: insurable interest is necessary to prevent the extent of the commercial value of the thing lost It follows that
gambling. If insurable interest is not required, the contract would be unless the assured has a pecuniary interest in the thing insured, no
gambling contract and would be against public interest. For example question of loss or indemnity shall arise. A person cannot therefore,
you can insure the property of another and hope for an early loss. insure a thing, the loss of which cannot cause him any financial loss.

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A policy of insurance therefore is void if the insured has no such insurance claim. This means that each party to the contract
must provide some value to the relationship.
pecuniary interest in the subject matter of insurance. Any person • Legal Capacity
who would suffer from the destruction of loss of a thing has insurable You need to be legally competent to enter into an agreement
interest in that thing. with your insurer. If you are a minor or are mentally ill, for
example, then you may not be qualified to make contracts.
So after going through the project we find that there can be not valid
Similarly, insurers are considered to be competent if they are
insurance contract without insurable interest and hence the licensed under the prevailing regulations that govern them.
hypothesis is proved and we can say that insurable interest is • Legal Purpose: If the purpose of your contract is to encourage
illegal activities, it is invalid.
essential for making any insurance agreement a legally binding
insurance contract. Find the Value in Indemnity contracts
Most insurance contracts are indemnity contracts. Indemnity
contracts apply to insurances where the loss suffered can be
What is premium? Under what circumstances it can measured in terms of money.
be recovered back?
Essentials of a Valid Insurance Contract • Principle of Indemnity
This states that insurers pay no more than the actual loss
• Offer and Acceptance suffered. The purpose of an insurance contract is to leave you
When applying for insurance, the first thing you do is get the in the same financial position you were in immediately prior to
proposal form of a particular insurance company. After filling the incident leading to an insurance claim. When your old
in the requested details, you send the form to the company Chevy Cavalier is stolen, you can't expect your insurer to
(sometimes with a premium check). This is your offer. If the replace it with a brand new Mercedes-Benz. In other words,
insurance company accepts your offer and agrees to insure you will be remunerated according to the total sum you
you, this is called an acceptance. In some cases, your insurer have assured for the car. (To read more on indemnity
may agree to accept your offer after making some changes to contracts, see Shopping For Car Insurance and How does the
your proposed terms (for example, charging you a double 80% rule for home insurance work?)
premium for your chain-smoking habit).
• Consideration Additional Factors
This is the premium or the future premiums that you have pay There are some additional factors of your insurance contract that
to your insurance company. For insurers, consideration also also need to be considered, including under-insurance and excess
refers to the money paid out to you should you file an clauses that create situations in which the full value of an insured
asset is not remunerated.
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• Under-Insurance may cause financial loss or create a legal liability to you. This is
Often, in order to save on premiums, you may insure your called insurable interest.
house at $80,000 when the total value of the house actually
comes to $100,000. At the time of partial loss, your insurer will Suppose you are living in your uncle's house, and you apply for
pay only a proportion of $80,000 while you have to dig into homeowners' insurance because you believe that you may inherit
your savings to cover the remaining portion of the loss. This is the house later. Insurers will decline your offer because you are not
called under-insurance, and you should try to avoid it as much the owner of the house and, therefore, you do not stand to suffer
as possible. financially in the event of a loss.
• Excess
To avoid trivial claims, the insurers have introduced provisions This example demonstrates that when it comes to insurance, it is not
like excess. For example, you have auto insurance with the the house, car or machinery that is insured. Rather, it is the
applicable excess of $5,000. Unfortunately, your car had an monetary interest in that house, car or machinery to which your
accident with the loss amounting to $7,000. Your insurer will policy applies.
pay you the $7,000 because the loss has exceeded the
specified limit of $5,000. But, if the loss comes to $3,000 then It is also the principle of insurable interest that allows married
the insurance company will not pay a single penny and you couples to take out insurance policies on the lives of their spouses -
have to bear the loss expenses yourself. In short, the insurers they may suffer financially if the spouse dies. Insurable interest also
will not entertain claims unless and until your losses exceed a exists in some business arrangements, as seen between
minimum amount set by the insurer. a creditor and debtor, between business partners or between
employers and employees.
Not all insurance contracts are indemnity contracts. Life
insurance contracts and most personal accident insurance contracts Principle of Subrogation
are non-indemnity contracts. You may purchase a life insurance Subrogation allows an insurer to sue a third party that has caused a
policy of $1 million, but that does not imply that your life's value is loss to the insured and pursue all methods of getting back some of
equal to this dollar amount. Because you can't calculate your the money that it has paid to the insured as a result of the loss.
life's net worth and fix a price on it, an indemnity contract does not
apply. (For more information on non-indemnity contracts, For example, if you are injured in a road accident that is caused by
read Buying Life Insurance: Term Versus Permanent, Long-Term the reckless driving of another party, you will be compensated by
Care Insurance: Who Needs It? and Shifting Life Insurance your insurer. However, your insurance company may also sue the
Ownership.) reckless driver in an attempt to recover that money.

Insurable Interest Doctrine of Utmost Good Faith

It is your legal right to insure any type of property or any event that All insurance contracts are based on the concept of "uberrima fidei",
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or the doctrine of utmost good faith. This doctrine emphasizes the A spouse is not divested of the insurable interest held in his wife or
presence of mutual faith between the insured and the insurer. In her husband upon divorce. Thus, a spouse is not precluded from
simple terms, while applying for life insurance, it becomes your duty collecting the proceeds of a life insurance policy that had been
to disclose your past illnesses to the insurer. Likewise, the insurer purchased on the life of the other marital partner during the marriage
cannot hide information about the insurance coverage that is being so long as the terms of either the divorce decree or the policy do not
sold. provide otherwise.

Doctrine of Adhesion Facts:

The doctrine of adhesion states that you must accept the entire
A New York State resident stated that s/he was in the process of a
insurance contract and all of its terms and conditions without
divorce. The resident stated that s/he is the named beneficiary on life
bargaining. Because the insured has no opportunity to change the
insurance policies that s/he had purchased on the spouse’s life. The
terms, any ambiguities in the contract will be interpreted in favor of
resident also stated that s/he intends to divide the cash values of
the insured.
those policies as part of the divorce settlement. The resident inquired
whether s/he could continue to maintain those policies after the
Conclusion
divorce.
When purchasing insurance, most of us rely on our insurance
advisor for everything - from choosing a policy for us to filling in the Analysis:
insurance application forms. Most people try to stay away from the
boring legal terms of insurance contracts, but it is always handy to be N.Y. Ins. Law § 3205 (c) (1) (McKinney 2000), which applies to life
familiar with these words and phrases and to become familiar with insurance and accident and health insurance, states:
the terms of the policy you are paying for.
No contract of insurance upon the person, except a policy of group
Anand takes out a policy on the life of his wife and life insurance, group or blanket accident and health insurance, or
subsequently divorces her. Does policy continue to be valid? family insurance, as defined in this chapter, shall be made or
RE: Divorce and Insurable Interest effectuated unless at or before the making of such contract the
person insured, being of lawful age or competent to contract therefor,
Question Presented: applies for or consents in writing to the making of the contract,
except in the following cases:
Is a spouse divested of the insurable interest in his wife or her
husband upon divorce so as to preclude the spouse from collecting (1) A wife or husband may effectuate insurance upon the person of
the proceeds of a life insurance policy that had been purchased on the other.
the life of the other marital partner during the marriage?
Thus, while married, a spouse has an insurable interest in the life of
Conclusion: his or her marital partner and may purchase insurance on the life of
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such person. Pursuant to case law, a beneficiary’s right to collect the

proceeds of a life insurance policy are not affected by the fact that Yes, Liable to pay. On my finding, it must be held that the plaintiff is
the beneficiary and insured divorced after the policy was issued, so not guilty of giving false answer to anyone of the questions in the
long as the terms and conditions of the policy do not preclude such
result.See Salvin v. Salvin, 165 A.D. 362, 151 N.Y.S. 60 (1st Dep’t proposal that the plaintiff was required to answer. In particular, he did
1914). A policyholder must read his or her policy to determine
whether it contains any provisions that preclude the collection of not give false answer to Q. 7(a). I find that the plaintiff never suffered
proceeds upon the termination of the marriage. Further, the court any loss by fire, burglary, house-breaking or larceny,
handling the divorce may modify the general rule and specifically
provide for ownership of the policies.
18. The next point to be considered is whether the plaintiff was under
The resident stated that s/he intends to "divide" the cash values of
the life insurance policies and inquired whether s/he may keep the an obligation to disclose the burglary of 1949 and failure to disclose
policies in-force. Depending upon the specific terms and conditions
the burglary amounts to suppression of a material fact, so as to avoid
of the policies, the policies’ present cash value amounts, and other
factors, the policyholder may be able to obtain a partial withdrawal the policy. A contract of insurance is contract uberrima fides and
of, or borrow against, the cash values. A policyholder should discuss
this matter with his or her insurance agent and/or insurance carrier to there must be utmost good faith on the part of the assured. This
determine whether either of these options is available.
imposes a duty and an obligation on the assured to make a full
C P' insured against fire and burglary in respect of his disclosure of all material facts which would affect the mind of the
furniture’s and house hold goods etc. In his house on the first
floor of a building. There was a burglary and he claimed insurer whether to accept the risk or not and on what terms. The duty
compensation for the loss of the things insured. The insurer
refused the claim the ground that° P' did not disclose the fact is to disclose material facts only. A fact which is the subject-matter of
that there was a burglary in the ground floor of the same a question in the proposal which the assured is required to answer
building three years back. Is insurer liable?
must be considered to be a material fact, so that a false answer will
Citation: Rohini Nandan Goswami vs Ocean Accident And
vitiate the policy in terms of the contract itself. But a fact may be a
Guarantee ... on 28 April, 1960
material fact, even though it is not the subject-matter of a question in
Equivalent citations: AIR 1960 Cal 696 the proposal, if the knowledge of that fact will affect the mind of an

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The test to determine materiality is whether the fact has any bearing
ordinary insurer to accept the risk. If it is so, it as a material fact and on the risk undertaken by the insurer. If the fact has any bearing on
non-disclosure or concealment of such a material fact will avoid the the risk, it is a material fact; if not it is immaterial. The short question
I am called upon to answer in the instant case therefore is whether
policy, even though there is no fraud and the concealment is the fact of burglary having been committed five years back in the
ground floor of the same premises has any bearing on the risk
innocent. The law is clear that a defence of concealment is availably undertaken by the insurer by insuring goods in the first floor of the
to the insurer and, if established, will avoid the policy. In order to same premises in 1954.
It is also absurd to contend that the occupier of the first floor is to be
establish its defence of concealment, the insurer must prove: stigmatised as a careless person when a burglary is committed in the
ground floor of the building with which the occupier of the first floor
has no concern. The reasons given by the learned standing counsel
(1) that the facts alleged to have been concealed by the assured appear to be far fetched and fantastic. I fail to understand how the
were true; fact of burglary having been committed in the ground floor of the
premises some five years back, has any bearing on the risk of
insurance of goods in the first floor of the same premises five years
(2) that they were material facts, and (3) that they were within the after. Nor, do I consider that this fact has any bearing on what is
called "the moral hazard" in insurance. All cases of moral hazard
special knowledge of the assured.
have reference to the person and not the place in which burglary
takes place. Not a single case has been cited in which it has been
Burden of proving these three facts is on the defendant who sets up held that a previous burglary in a part of the premises has a bearing
on the risk undertaken by the insurer in effecting a burglary
this defence. In the instant case, it has been proved indeed admitted insurance of goods situate in other part of the same building.
by the plaintiff himself, that in 1949 a burglary was committed in the
What facts must be disclosed as material facts have been indicated
ground floor of the same premises. It has been further proved that
in the Law of Fire Insurance by A. W. Baker Weltord and W. W.
the plaintiff had knowledge of this burglary having been committed in
Otter-Barry, 4th Edition at page 137 which reads as follows:
1949 when he submitted his proposal for insurance in June 1954.
The only question to be considered is whether this fact was a
"The facts which must be disclosed as material may be classified as
material fact which it was the plaintiff's duty to disclose.
follows:
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(i) Facts which show that in the case of the particular subject-matter the case of an insurance on profits, the fact that he is trading at a
of insurance the risk of fire is greater than would ordinarily be loss. In certain circumstances, the nationality of the assured may be
expected considering its nature. It is necessary for the assured to material, or even his name.
disclose every thing in the nature, condition, or user, of the subject-
(iii) Facts which show that, in the circumstances, the liability of the
matter or its surroundings, which points to a more than ordinary risk.
insurers may be greater than would naturally be expected under an
In particular, the following facts have been held to be material: that a insurance of the property in question. Thus, it is material, in a
fire had broken out in an adjacent building, although it had been retrospective insurance, that the subject-matter is already destroyed;
extinguished a few hours before the assured sent the instructions to or, under a special insurance, binding the insurers to reinstate the
his agent to effect the insurance; that threats have been made to machinery insured, that the machinery is second-hand, seeing that
destroy the property, or that the assured has reason to suspect that that the cost of reinstatement will be proportionately greater. In the
an attempt to do so will be made. case of goods entrusted to a carrier, it may be a material fact that the
assured has entered into a special contract, by which the carrier is
(ii) Facts which bear upon what is called the moral hazard and
relieved from his common law liability.
suggest that in the case of the particular assured the possibility of
fire may be greater than usual. Thus, it has been held to be material (iv) Facts which are shown to be material by being made the subject
that the assured has had previous fire losses, or has made previous of a question", I do not consider that the instant case comes under
claims, or that other insurers have previouly refused to renew fire any one of the above four headings.
policies effected by the assured, or to accept proposals for fire or
Question 7 as also Q. 8 are purely personal questions relating to the
other insurance from him. In accordance with the same principle the
assured or known as "moral hazard". These questions are entirely
assured must disclose the fact of an excessive overvaluation, or in
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personal to the assured and have no reference to the place where burglary of 1949 has any bearing on the risk to be undertaken on the
the insured property would lie. It is to be noted that in both the policy in suit and the contentions made on behalf of the defence
questions the emphasis is on the word 'you'. Have you sustained a have no substance whatsoever.
loss etc.? Have you had a proposal terminated by a company? A
23. On the evidence I must hold that the plaintiff has proved his
perusal of these questions which an assured is required to answer
case. I accept the plaintiff's evidence as to the value of the property
lends to suggest that the happening of a burglary in the neighbouring
and quantum of loss suffered.
premises or another portion of the same premises is not considered
to have anything to do with the risk to be undertaken by the insurer 24. There will be a decree for Rs. 16,889/-.
and as such is not at all material for the purpose of insurance. I am
far from suggesting that in order to validate a policy all that is The plaintiff will be entitled to both interim interest and interest on the

necessary is to give correct answers to the questions fully and decretal amount at the rate of 6 per cent per annum. The plaintiff is

frankly. There may be other facts not covered by the queries in the further en titled to the costs of the suit. Certified for two counsel.

policy which affects the risk and which, it is the duty of the assured to
disclose. But the nature of questions, an assured is required to Discuss the circumstances affecting the risk in life insurance.
answer undoubtedly gives an indication as to what facts in the Circumstances affecting the Risk in Life Insurance

opinion of the insurers are material affecting the insurance risk. If the Risk in life insurance is the risk of death at an early date due to
disease or distinguished from accident
insurers rely on other facts as having a bearing on the risk under the
In. Thomson vs. Weems 1884 9 AC 671,681
policy, such other facts must be strictly proved to have such a
Lord Blackburn observed
bearing by dependable evidence or otherwise to the satisfaction of
the Court. In the instant case, I am not satisfied that the previous
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“Those whose business is to insure lives calculate on the average The section generally provides that the correctness of a
rate of mortality and charge a premium which on that average will representation shall not be questioned by an insurer after two years
prevent their being loses. but the proviso specifically makes an exception with reference to the
a. Age of the proponent. representation of the age in a proposal form.
b. His family history. According to this the insurer is entitled to call for proof of the age
c. Personal health from the assured at any time if the same had not been proved and
d. Moral history including habits of life past and present. admitted as true by an endorsement on the policy notwithstanding
e. Geographical position & occupation the fact that the requisition of the proof has been made by insurer
Age of the Proponent after two years.
Age is an important material fact in life insurance as the When once a date is given as date of birth and on subsequesnt
rate of premium depends on theage of the assured. verification after the issue of the policy the date is found to be wrong
it may result in either
Case law:-Alliance and strutgarter Vs. Hemantha Kumar AIR 1938 Overstatement of Age :---------- Overage
Cal 641 Understatement of Age:---------Underage
Once it is written In either case the original representation becomes a
Then it is admitted misrepresentation, but effect on the validity of the policy is different.
In case of M.K. Shah V. Yorkshire Insurance Co. AIR 1938 Bom 161 If it is overstatement:- it is considered to be an innocent
Once the age is admitted by the insurer then correctness of the age misrepresentation as it will be against the interest of the maker and
cannot be questioned unless the insurer can prove that his so in such cases the validity of the policy is not affected. In such
admission was procured by the fraud of the assured. cases if the insurer accepts the proof of age, he can be compelled to
{Section 45 of the Insurance Act 1938 says After 2 years company refund the excess payment towards the premium and to adjust the
have no right to reopen the things.} rate for future payment according to the proved age.
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But when it turns out to be an understatement of age, if is proved In Asia Assurance Company V/s Kartiya Devi 1936 Cal
gross understatement or is proved to have been made willfully, it 437 The total numbers of bothers and sisters had to be filled in one
amounts to fraud and the policy become voidable. column and the actual number alive in another column. The assured
1. The sum assured may be reduced to such amount filled the first column but left the other b lank. It was helf that answer
2. The assured may be required if he wants to continue the policy for amounted to suppression of truth and hence amounted to
the entire insured amount to pay the difference of premium with misrepresentation and the policy was void.
interest. Personal Health and Moral History
Hemmin’s v/s Scetore (1905) ch 365 The habits of life, past and present and which tend to
Misstated age as 41 years through in fact she was at that time forty- shorten the life must be disclosed ,e.g. the use of opium, tobacco or
four years, of age. This fact was brought to notice of the insurers in alcohol.
1997 and inspite of that the insurers accepted the premiums for two The present state of health is important.
subsequent year later they demanded form the assignee a highter The past illness also become important
rate of premium ande also the difference of premiums accumulate to Regulat habits regarding food, sleep etc. tend to increase the
date at the revised rate premium and the insurers refused to receive longevity.
the same. Geographical Position
If after becoming acquainted with a breach of warranty the The place where the applicant lives is important as climate and
office continue to treat the policy as valid it will be held to have environment have an appreciable effect on one’s health. Unhealthy
waived the breach. surrounding have a tendency to shorten the life. Further, the
Family History particular, place may be subject to earthquake, volcanoes and
The risk in life policies the assured and heredity throws floods.
sufficient light and play an important role in the determination or the Huguenin v/s Rayley Where the assured gave his residential
probable longevity of a person. address but actually he was not there at that time. It was held that
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the omission of this fact was fatal to the policy and the insurance 22 years 7 months and another person of 23 years 5 months will be
company was not liable. treated the age of 23 years.
Occupation
The age proof is very essential for calculating premium rate. So,
If it is a dangerous occupation like a soldier, sailor, airman or
unless age is proved payment of claim is not made if the age was not
workman in an ammunition factory the insurers charge a higher rate
admitted at the time of proposal. Now it has been the common
of premium practice that the age should be admitted at the time of proposal to
14 Factors Affecting Risk in life Insurance avoid dispute.

In life insurance, the factors which may affect the risk are usually On the basis of age, in future, if a misstatement is discovered after
those factors which are affecting the mortality; they are also called the policy has become a claim; the amount of the claim is adjusted in
factors affecting longevity of a person. The mortality is not the only accordance with the rectification of age.
risk but the capacity and willingness of a person also influence the
Age proof is essential at the proposal if the policy is term insurance,
insurance decision. These factors are discussed in following
non-medical policies and immediate annuity or the insurance is taken
paragraphs:
at advance age or for a child because they are maximum and
1. Age : minimum limits of age.

The age of the life to be assured is the most important factor to affect Minimum and Maximum limit of age:
mortality. Except for a few years of the childhood, the premium is
The maximum age limit is fixed to avoid adverse selection. At
determined at every year of the completion of age. The corporation
advance age, the need for insurance is a doubtful proposition, i.e.,
asks for the age nearer to birthdays.
the chances of moral hazard are higher.
The person below six months and the person above six months older
of the age will be treated of the same age. For instance, a person of
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The third reason for fixing maximum limit is the medical examination 3. Physical Condition :
will disapprove most of the proposal at that stage. Mortality is
certainly increased at that age. The minimum age limit is meant to The physical condition of the age life proposed has a direct bearing

avoid risk of infant mortality. on the mortality of the life. Insurers are, therefore, very particular
about the conditions of an applicants' sight, hearing, heart, arteries,
2. Build : lungs, tonsils, teeth, kidneys, nervous system, etc. The experts in the
field can assess the longevity or mortality of a person due to
Build refers to physique of the proposed life and includes height, impairment of certain organs.
weight, the distribution of weight and chest expansion. There are
standards of weight according to maximum weight reveal the The questions are also designed to elicit information on the physical
indication of certain hidden diseases. status of the applicant in the proposal form. The information is
confirmed and supplemented by a medical examination. The primary
Therefore this sign is not favourable. The relationship between purpose of the medical examination is to detect any malfunctioning
height, weight, girth and expansion of chest are the basic of the vital organs of the body.
determinants of mortality expectations.
4. Personal History :
Overweight is dangerous in advanced age and underweight is
similarly not desirable at younger age, say, below 35 years. The The personal history of the life proposed would reveal the possibility
corporation, for example, has fixed the minimum weight, and of death to him. The history may be connected with the (i) health
maximum weight at a specified height. record, (ii) past habit, (iii) previous occupation, (iv) insurance history.

If the assured life is not within the standard the proposal may not be (i) Health Record:
accepted at the time of proposal and it may be postponed or may be
accepted at extra-premium or may be rejected at all. The past health record is the most important factor under personal
history because it affects the longevity or mortality of a person to a

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greater extent. It includes any operations of the life proposed. The An intimate association within a person suffering from a contagious
medical examination may reveal these facts. disease may influence the health of the life proposed. The past
hazardous occupations generally affects, health slowly occupational
This information is also given by the applicant. Particular emphasis is diseases are contacted. Inorganic dust may create silicosis.
placed on the recent injuries and illness. It is customary to consult
attending physicians. (iv) Insurance History:

It has been the practice not to accept the proposal form of the The previous amount of insurance may disclose the degree of risk of
applicants who are suffering from illness. If the applicant has the applicant. If he was refused insurance, it might be a suspicious
suffered from certain serious disease or operation during the past 5 factor of his insurability. If it was found that the applicant was already
years, he may be under the possibility of getting it again. insured for adequate amount this request for more insurance is
regarded with suspicions.
(ii) Past Habits:
5. Family History :
The insurers want to know the past habit the life proposed, for drugs
or alcohol because the cure may be only temporary. The past history Like the personal history, family history also requires information of
is usually expected to be repeated. Therefore, past history is very habit, health, occupation and insurance of other family members,
cautiously examined. particularly of the parents, brother and sisters. The children's history
of health is also required.
(iii) History of Occupation:
The certain diseases, like tuberculosis and insanity, etc., and
If the proponent was employed in hazardous or unhealthy longevity of the parents will be relevant factors for determining the
occupation, there is a possibility that he may still retain ill-effects degree of risk of the proponents. The favorable family history,
there from or may revert to such occupation. however, is not considered for offsetting the adverse effect of the
personal history.
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The family history is considered significant to know the transmission Sixthly, excessive mental and nervous strain may cause financial
of certain, characteristics by heredity. Hearts, lungs, build, etc., worries, and lastly, the lesser income may affect the health of the
follow family. worker.

6. Occupation : 7. Residence :

Occupation is an important factor to affect the risk. It affects the The residence also affects the risk. The risk will be lesser in a good
occupation in various ways. Firstly, the nature of work may be climate area and more in a bad climate although the difference is
hazardous because he may suffer an accident at any time while at narrowed down because of better medical and sanitary facilities!
work. Information about the previous residence is equally important.

Secondly, the morale of the workers may go down. They may be The geographical location, atmosphere, political stability, climate,
tempted to indulge in intoxicating or liquor or other forms of immoral construction of house, travel, etc., are important factor which may
living. affect the risk.

Thirdly, the chemical effect may be poisonous. For instance, the 8. Present Habits :
workers may contact poison while engaged in match or chemical
factories. The general mode of living of the proposer affects the risk.
Drunkards and non-temperate persons cause increase in mortality.
Fourthly, the dusty or unventilated house, unhealthy or insanitary Similarly, temperate habits tend to increase longevity of a person.
environments may deteriorate the health of the workers.
Excessive and careless smoking tends to shorten the life due to
Fifthly, in certain occupation, the occupational diseases are common. development of nicotine poisoning. The past habits are also
considered important. The intoxication affects the health of a person

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and consequently his mortality. The general mode of living is also disease, proposal is on other's life and the proponent is engaged in
considered in habits. hazardous occupation.

9. Morals : 10. Race and Nationality :

It has been observed that the departure from the commonly The mortality rate differs from race to race and nation to nation. In
accepted standards of ethical and moral conduct involve extra India, persons of high, race or caste are expected to live longer than
mortality. Infidelity and departure from the code of sex behaviour are the scheduled castes or tribes. Similarly, countries near to equator
seriously regarded because these may affect the health. Unethical have more mortality. The climate and way of life of a country affect
conduct is considered to be another form of moral hazard. Insurance the health conditions of the people.
is not generally given to bankrupt and reputed dishonest persons.
11. Sex :
Consideration, of morals is essential to determine the moral hazard.
There are two types of hazards Moral and Physical hazards we have Mortality among female sex is, generally, higher than that of male

discussed factors affecting physical hazards in the other sections. sex because the physical hazard of maternity is present in the former

Moral hazard will be discussed only under this heading. case. Moreover, the ladies are physically more handicapped. The
lesser education, conservatism and non-employment of the ladies
The moral hazard occurs due to intention of the insured whereas the also affect the mortality.
physical hazard is beyond his approach. The former is present where
the policy is taken not with a view to protect one-self against losses The absences of proper examination of the ladies also count more

but to obtain gain through crooked means. hazard. The chances of moral hazard are also present in the female
insurance. So, unless woman has good financial reasons for
The moral hazard is judged by the reputation and fairness in insurance, her proposal is not generally conceded.
dealings. The moral hazard is expected to present where insurance
is taken at advanced age, where person is suffering from serious 12. Economic Status

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It is essential to examine that the family and business circumstances Certain plans involve more responsibility to the insurer at death and
of the proponents are such as to justify the amount of insurance so these plans are restricted to only first class lives, Similarly, some
applied for. This investigation also reveals whether the income of the plans have lesser risk and. therefore, can be issued without any
applicants bears a reasonable relationship to the amount of extra investigations. For example, the multi-purpose policy is issued
insurance which he proposes to carry. only to first class lives and the pure endowment policy can be issued
to any one irrespective of health.
The higher economic status generally provides a better field for
insurance due to various reasons. Educational, financial and
Explain about third party or compulsory insurance of Motor
professional consciousness makes the proponent insurance minded. Vehicles.
The chance of death is also lower in higher strata of the society. In India, under the provisions of the Motor Vehicles Act, 1988, it is
mandatory that every vehicle should have a valid Insurance to drive
on the road. Any vehicle used for social, domestic and pleasure
13. Defence Services : purpose and for the insurer's business motor purpose should be
insured.
Though there has been much improvement in defence technology,
Insurance is a contract whereby one party, the insurer, undertakes in
Jet flying or gliding, etc., is still considered hazardous one.
return for a consideration, the premium , to pay the other, the insured
Sometimes, certain restrictive clauses are imposed for insuring or assured, a sum of money in the event of the happening of a , or
persons engaged in such services. one of various ,specified uncertain events.

Insurance developed from the fourteenth century as a means of

In some other works, extra premiums are required. In commercial spreading huge risks attendant on early maritime enterprises; life
flying, no occupational extra is required. The war clause is added to and fire insurance developed later. The main classes of insurance
are life and other personal insurance, marine insurance, accident or
avoid the occupation risk in defence, say, navy, air force and military.
property insurance and liability insurance when the sum becomes
payable when legal liability is incurred as for personal injuries or
14. Plan of Insurance : professional negligence to another.

Motor third-party insurance or third-party liability cover, which is

sometimes also referred to as the 'act only' cover, is a statutory
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requirement under the Motor Vehicles Act. It is referred to as a 'third-

party' cover since the beneficiary of the policy is someone other than
the two parties involved in the contract i.e. the insured and the
Salient Features of Third Party Insurance
insurance company. The policy does not provide any benefit to the
Ø Third party insurance is compulsory for all motor vehicles. In G.
insured; however it covers the insured's legal liability for
Govindan v. New India Assurance Co. Ltd.[2],Third party risks
death/disability of third party loss or damage to third party property.
insurance is mandatory under the statute .This provision cannot be
overridden by any clause in the insurance policy.
This paper is an endeavour to explain the relevance of third party
insurance? What is third party insurance? Who is a third party? Why
Ø Third party insurance does not cover injuries to the insured himself
third party insurance is compulsory for all vehicles under the Motor
but to the rest of the world who is injured by the insured.
Vehicles Act, 1988? What are the salient features of third party
insurance? These aspects of the third party insurance have been
Ø Beneficiary of third party insurance is the injured third party, the
explained with the help of various case laws.
insured or the policy holder is only nominally the beneficiary of the
What is Third Party Insurance? policy. In practice the money is always paid direct by the insurance
There are two quite different kinds of insurance involved in the company to the third party (or his solicitor) and does not even pass
damages system. One is Third Party liability insurance, which is just through the hands of the insured person.
called liability insurance by insurance companies and the other one
is first party insurance. Ø In third party policies the premiums do not vary with the value of
what is being insured because what is insured is the ‘legal liability’
A third party insurance policy is a policy under which the insurance and it is not possible to know in advance what that liability will be.
company agrees to indemnify the insured person, if he is sued or
held legally liable for injuries or damage done to a third party. The Ø Third party insurance is almost entirely fault-based.(means you
insured is one party, the insurance company is the second party, and have to prove the fault of the insured first and also that injury
the person you (the insured) injure who claims damages against you occurred from the fault of the insured to claim damages from him)
is the third party.
Ø Third party insurance involves lawyers aid
Section 145(g) "third party" includes the Government. National
Insurance Co. Ltd. v. Fakir Chand[1], “third party” should include Ø The third party insurance is unpopular with insurance companies
everyone (other than the contracting parties to the insurance policy), as compared to first party insurance, because they never know the
be it a person traveling in another vehicle, one walking on the road or maximum amounts they will have to pay under third party policies.
a passenger in the vehicle itself which is the subject matter of
insurance policy.

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deceased and in such a situation the claimants were unable to

Motor Vehicles Acts,1939 and 1988
recover damages. It is under such circumstances that various
Motor Vehicles Act,1939 (4 of 1939) consolidates and amends the
legislations were enacted. To meet the situation it is for the first time
law relating to motor vehicles. This has been amended several times
‘the Third Parties’ Rights Against Insurance Act,1930’ was enacted in
to keep it up to date.The need was, however felt that this Act should,
England. The provision of this Act found place in S.97 of the 1939
now interalia take into account also changes in the road transport
Act which gave to the third party a right to sue insurer directly.
technology, pattern of passenger and freight movements,
Subsequently, ‘the road traffic Act,1930’ was enacted which provided
development of the road network in the country and particularly the
for compulsory insurance for Motor Vehicles. The provisions of this
improved techniques in the motor vehicles management.
Act were engrafted in S.95 of the 1939 Act and S.146 of the 1988
Act. It is relevant that under S.38 of the English Act of 1930, certain
The Motor Vehicles Act,1988 which came into force on 1st July,1988
conditions of insurance policy were made ineffective so far as third
and which is divided into XIV Chapters, 217 Sections and two
parties were concerned .The object behind the provision was that the
schedules, makes it compulsory for every motor vehicle to be
third party should not suffer on account of failure of the insured to
insured. Chapters X,XI and XII of the 1988 Act deals with
comply with those terms of the insurance policy.
compensation provisions. Sections 140 to 144 (Ch.X) deal with
liability with out fault in certain cases. Chapter XI (Ss. 145 to 164)
Subsequently in 1934, the second Road Traffic Act was enacted.
deal with insurance of motor vehicles against third party risks.
The object of this legislation was to satisfy the liability of the insured.
Under this enactment three actions were provided .The first was to
satisfy the award passed against the insured. The second was that,
Historical Background of third Party Insurance in case the insurer did not discharge its liability the claimant had the
Chapter VIII of the 1939 Act and Chapter XI of the 1988 Act have right to execute decree against the insurer. However, in certain
been enacted on the pattern of several English statutes which is events, namely, what was provided in section Ss.96(2)(a) which
evident from the report of ‘Motor Vehicles Insurance corresponds to section 149 (2)(a) of the 1988 Act, the insurer could
Committee,1936-1937’In order to find out the real intention for defend his liability.
enacting Ss.96 of the 1939 Act which corresponds to Ss.149 of the
1988 Act, it is relevant to trace the historical development of the law The third action provided for was contained in S.10(3) of the Road
for compulsory third –party insurance in England. Prior to 1930, there Traffic Act. Under this provision, the insurer could defend his liability
was no law of compulsory insurance in respect of third party rights in to satisfy decree on the ground that insurance policy was obtained
England. As and when an accident took place an injured used to due to misrepresentation or fraud. This provision also found place in
bring action against the motorist for recovery of damages. S.149 (2)(b) of the 1988 Act. While enacting the 1939 Act and the
1988 Act, all the three actions were engrafted in S.96 of the 1939 Act
But in many cases it was found that the owner of the offending and Section 149 of the 1988 Act. However neither the 1939 Act, nor
vehicle had no means to pay to the injured or the dependant of the the 1988 Act conferred greater rights on the insurer than what had
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been conferred in English Law. Thus, in common law, an insurer was Workmen Compensation Act. Under Section 149 the insurer have
not permitted to contest a claim of a claimant on merits, i.e. offending been statutorily liable to satisfy the judgment and award against the
vehicle was not negligent or there was contributory negligence. The person insured in respect of third party risk.
insurer could contest the claim only on statutory defences specified
for in the statute. Thus while enacting Chapter VIII of the 1939 Act or
Chapter XI of the 1988 Act, the intention of the legislature was to
Insurance Companies have been allowed no other defence
protect third party rights and not the insurers even though they may
be nationalized companies.” except the following:
(1) Use of vehicle for hire and reward not permit to ply such vehicle.
Prohibition on use of motor vehicles without statutory insurance (2) For organizing racing and speed testing;
policy, object of is to enable the third party suffering injuries from use (3) Use of transport vehicle not allowed by permit.
of the motor vehicle to get damages irrespective of the financial (4) Driver not holding valid driving license or have been disqualified
capacity or solvency of the driver or the owner. for holding such license.
(5) Policy taken is void as the same is obtained by non-disclosure of
material fact.
Relevant Provisions of Motor Vehicles Act,1988
Section152. Settlement between insurers and insured persons.
Chapter 11 (Section 145 to 164) provides for compulsory third party
(1) No settlement made by an insurer in respect of any claim which
insurance, which is required to be taken by every vehicle owner. It
might be made by a third party in respect of any liability of the nature
has been specified in Section 146(1) that no person shall use or
referred to in clause (b) of sub-section (1) of section 147 shall be
allow using a motor vehicle in public place unless there is in force a
valid unless such third party is a party to the settlement.
policy of insurance complying with the requirement of this chapter.[3]
Contravention of the provisions of section 146 is an offence and is
(2) Where a person who is insured under a policy issued for the
punishable with imprisonment which may extend to three months or
purposes of this Chapter has become insolvent, or where, if such
with fine which may extend to one thousand rupees or with both
insured person is a company, a winding up order has been made or
(section 196).Section 147 provides for the requirement of policy and
a resolution for a voluntary winding up has been passed with respect
limit of liability. Every vehicle owner is required to take a policy
to the company, no agreement made between the insurer and the
covering against any liability which may be incurred by him in respect
insured person after the liability has been incurred to a third party
of death or bodily injury including owner of goods or his authorized
and after the commencement of the insolvency or winding up, as the
representative carried in the vehicle or damage to the property of
case may be, nor any waiver, assignment or other disposition made
third party and also death or bodily injury to any passenger of a
by or payment made to the insured person after the commencement
public service vehicle. According to this section the policy not require
aforesaid shall be effective to defeat the rights transferred to the third
covering the liability of death or injuries arising to the employees in
party under this Chapter, but those rights shall be the same as if no
the course of employment except to the extent of liability under
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such agreement, waiver, assignment or disposition or payment has first time by the Supreme Court that the breach of condition should
been made. be with the knowledge of the owner. If owner's knowledge with
reference to fake driving licence held by driver is not proved by the
Insurance Company, such defence, which was otherwise available,
can not absolve insurer from the liability. Recently in a dynamic
Legal defence available to the Insurance Companies towards
judgment in case of Swaran Singh [5], the Supreme Court has
third party: almost taken away the said right by holding;
The Insurance Company cannot avoid the liability except on the (i) Proving breach of condition or not holding driving licence or
grounds and not any other ground, which have been provided in holding fake licence or carrying gratuitous passenger would not
Section 149(2). In recent time, Supreme Court while dealing with the absolve the Insurance Company until it is proved that the said
provisions of Motor Vehicle Act has held that even if the defence has breach was with the knowledge of owner.
been pleaded and proved by the Insurance Company, they are not (ii) Learner's licence is a licence and will not absolve Insurance
absolve from liability to make payment to the third party but can Company from liability.
receive such amount from the owner insured. The courts one after (iii) The breach of the conditions of the policy even within the scope
one have held that the burden of proving availability of defence is on of Section 149(2) should be material one which must have been
Insurance Company and Insurance Company has not only to lead effect cause of accident and thereby absolving requirement of driving
evidence as to breach of condition of policy or violation of provisions licence to those accidents with standing vehicle, fire or murder during
of Section 149(2) but has to prove also that such act happens with the course of use of vehicle.
the connivance or knowledge of the owner. If knowledge or
connivance has not been proved, the Insurance Company shall This judgment has created a landmark history and is a message to
remain liable even if defence is available. the Government to remove such defence from the legislation as the
victim has to be given compensation.
Nature and Extent of Insurer’s Liability (section 147)
Driving License: According to the provisions of this section the policy of insurance
Earlier not holding a valid driving license was a good defence to the must be issued by an authorized insurer.It must be as per
Insurance Company to avoid liability. It was been held by the requirements as specified in subsection (2).It must insure against
Supreme Court that the Insurance Company is not liable for claim if liability in respect of death or bodily injury or damage to property of a
driver is not holding effective & valid driving licence. It has also been third party. “Third party” includes owner of the goods or his
held that the learner's licence absolves the insurance Company from authorized representative carried in the vehicle and any passenger
liability, but later Supreme Court in order to give purposeful meaning of a public service vehicle.
to the Act have made this defence very difficult.
The policy of insurance must cover:
In Sohan Lal Passi's v. P. Sesh Reddy[4] it has been held for the 1.Liability under the Workmen’s compensation Act,1923 in respect of
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death or bodily injury to any such employee

(a) engaged in driving the vehicle, or The policy under the Act covers only third party risks.[7] Insurer is
(b) the conductor or ticket examiner if it is a public service vehicle ,or not liable for any harm suffered by a passenger traveling in a private
car neither for hire nor for reward. Similar is the position of a pillion
2. any contractual liability. rider on a scooter.
Section 147 has to be given wider, effective and practical meaning
so that it may benefit various categories of persons entitling them to
claim compensation from the insurer or the insured or both. Insurer's
K. Gopal Krishnan v. Sankara Narayanan[8]
liability commences as soon as the contract of insurance comes into
In this case Madras High Court observed that a scooter-owner is not
force. The liability remains in existence during the operation of the
bound to take out a third party risk policy to cover the claim of the
policy. If the existing policy is renewed the risk is covered from the
pillion rider that is carried gratuitously. If he is injured , the insurance
moment the renewal of the policy comes into force. If the accident
company would not be liable unless policy covering such risk is
occurs before the renewal comes into existence, the insurer cannot
obtained by the scooter-owner. A private carrier registered as such
be made liable. It is the primary duty of the vehicle owner to prove
with R.T.O. and also in insurance policy , cannot be used for carrying
that his vehicle was insured with a particular company. If he fails to
any passenger or goods for hire or reward. However if it is so used
comply with it he will have to pay the entire amount of compensation
and the employees of a party hiring the private vehicle belonging to
in the case. In case where there is a dispute in respect of the vehicle
the insured are injured in an accident the insurance company will not
having been insured by an assurance company, the tribunal must
be liable.
give its finding in the matter, it is its duty to do so. After a certificate
of insurance is issued it does not lie in the mouth of the insurer to
deny his liability. If the insurer has been a victim of fraud he can
recover the amount from the insured by a separate action against Insurer’s liability to Vehicle-owner
him. A contract of insurance is a personal contract between the insurer
and the insured. It is for the purpose of indemnifying the insured for
damage caused due to accident by the vehicle , to a third party. To
make the insurer liable the policy of insurance must be in the name
Oriental Insurance Co. v. Inderjit Kaur [6]
of the owner of the vehicle.[9]Owner of the vehicle as defined in
If the insurer has issued a policy to cover the bus without receiving
Section 2(30) is a person in whose name the motor vehicle stands
the premium therefore, he has to indemnify third parties in respect of
registered.
the liability covered by the policy. He cannot avoid the liability
arguing that he was entitled to avoid or cancel the contract.
A person in possession of a vehicle under a hire-purchase
agreement or an agreement of lease or hypothecation is also
Liability for injury to certain persons or class of persons (other than
covered by the definition, no matter he has exercised his option to
gratuitous passengers and pillion riders)
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purchase the vehicle or not.

Section 157(1) makes it clear that when the owner of a vehicle

Liability in respect of damage to property [S.147(2)]
transfers the ownership of the vehicle , the policy of insurance and
For damage to property of a third party under 1939 Act the limit of
the certificate of insurance shall be deemed to have been transferred
liability is Rs 6000 in all, irrespective of the class of the vehicle.
in favour of the purchaser of the vehicle with effect from the date of
Under 1988 Act the position as laid down by section 147 (2) in
its transfer.This deemed transfer shall include transfer of rights and
regard to liability is as under:
liabilities of the said certificate of insurance and policy of insurance.
(i) For death or personal injury to a third party, the liability of the
insurer is the amount of liability incurred, i.e. for the whole amount of
According to subsection (2) the transferee has to apply within 14
liability.
days from the date of transfer to the insurer for effecting necessary
(ii) For damage to property of a third party the liability of the insurer is
changes in the certificate and in the policy of insurance.
limited to Rs. 6000 as was under the 1939 Act.
If the certificate of insurance and the policy are not transferred , the
insurer could not be made liable even though the vehicle is
transferred. It is to be remembered that “an insurance policy is a Liability of Insurer beyond the limits mentioned in the Act
personal contract between the parties for indemnifying the insured in Section 147 lays down the limits of liability of the insurer. However
case of an accident covered under the policy. If the vehicle is there is no bar for the insurer undertaking a higher liability i.e. liability
transferred by an insured to another person, the insurance policy for a greater amount than that mentioned in the Act. Thus the
lapses upon the transfer. In such a case the benefit of the policy is insured and the insurer can contract and can provide for a higher
not available to the transferee, without an express agreement with liability.
the insurance company. When the insurance policy lapses it would
not be available to cover the liability of the purchaser of the vehicle. Conclusion
Thus I have studied and analysed the third party liability insurance
under the motor Vehicles Act, 1988.Third party insurance protects
the interest of a third party who becomes the victim of accident or
S.Sudhakaran v. A.K.Francis,[10]
injury caused by the fault of the insured. So any liability arising on
There was an agreement for sale of a vehicle. The owner did not
the insured by the third party is mitigated by the insurance company.
comply with the statutory provisions regarding transfer of a
Third party insurance is compulsory under the motor vehicles
vehicle.He, however ,allowed the vehicle to be used by the
Act,1988. As the third party insurance is mandatory so it cannot be
transferee .The owner had retained the insurance policy with him.
overridden be any clause in the insurance policy.
Held— The insurance company was not liable to indemnify the
It is the duty of insurers to satisfy the judgments and awards against
owner.
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persons insured in respect of third party risks. The insurance

company is a ‘State’ within the meaning of article 12 of the damages unless he has an insurable interest in the property at the
Constitution. For this reason it cannot deny , discriminate or refuse
third party insurance cover to State run vehicles because their time when the loss occurs. A stranger cannot sue on a fire policy.
actions are guided by Article 14 of the Constitution.[11]
2. It is obvious that the contract of insurance may be assigned in
The compulsory nature of third party insurance is justifiable as it
one of two ways. In the first place, the policy may be assigned
makes the process more easy for the injured person to recover
money from the insured. The defendant or wrongdoer cannot be without the assignment of the property insured; or, secondly,
exempted on the ground that he has become insolvent. If he owns a
vehicle he bound to pay to the injured directly or through his the policy may be assigned together with the assignment of
insurance company. the property insured. The distinction is important, and must be

1. 'A'has insured his house against fire. Afterwards he only kept in mind.

3. Where the assignment is of the policy only, there is no

assigned the fire policy to'B' without transferring any 'Interest in
difficulty in reconciling this with the nature of a personal
the house. If that house ls damaged by fire after this
contract. All that is assigned in this case is the right to receive
assignment of policy, can'B' recover the amount under the the insurance money, in case the interest of the person
originally insured suffers loss from the perils insured against.
policy?
The assignment is like the assignment of any other chose in
Assignment: According to English law a policy of fire insurance can
action. The assignee is merely the person designated to
be assigned only with the consent of the insurer. In India such receive the insurance, and he acquires only the rights of the
assignor, and is subject to all the defences which the insurers
consent is not necessary and the policy can be assigned as a chose-
have or may have against the person originally insured. No
in-action under the Transfer of Property Act. The insurer is bound
element of the personal contract is violated, for it is of no
when notice is given to him. But the assignee cannot be recovering consequence to the insurers who receives the insurance

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money, so long as they are free from the claims of the person was not his loss; not the purchaser, because he has no
originally insured.[3] contract with the company. And although in popular language
the goods are said to be insured against loss by fire, yet, in
4. But where the property insured is sold, and the policy is
assigned, an entirely different question is raised. In this case, legal effect, the original assured obtains a guaranty by the

the person originally insured has parted with his entire interest contract that he shall sustain no damage by their destruction

in the subject-matter of the contract. He can suffer no loss, for by fire. But in case of such sale or alienation of the insured

he had no interest in the property at the time of the loss. The property, the original assured having no longer any interest in

insurers cannot indemnify him, for he has no interest which the policy, except to claim a return of premium, if he will

can be the subject of indemnity. That interest is in the assign his policy or his contract of insurance to such

assignee, a stranger to the contract, who is neither a party nor purchaser, and the company assent to it, here is a new and

a privy to the original contract, and it is he who suffers the original contract embracing all the elements of a contract of

loss.[4] If, then, the contract can be assigned, seemingly the insurance between the assignee and the insurers. The

whole conception of a personal contract will be done away property having become the purchaser’s, is at his risk, and if

with. burnt it is his loss, and he has a good original contract upon a
valid consideration to guarantee him against such loss……
5. This objection was clearly seen by Chief Justice Shaw in
Upon each assignment perfected, there is an entire change in
Fogg v.Middlesex Mutual Fire Insurance Co.[5] “After such
the contract, in the party contracted with, in the insurable
sale” (says Judge Shaw, referring to the sale of the property
interest in the property at risk, and it becomes an insurance
insured), “if nothing more is done,—no surrender or exchange
on the property of the assignee, and ceases to be a contract
of the policy,—and the goods should be burnt, nobody could
of insurance of the property of the assignor.”
recover on the policy; not the original assured, for he has
sustained no loss; the property was not his, and the loss of it

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When a ship is sunk or is completely destroyed by fire, it will be a

Explain the different kinds of losses in Marine Insurance.
case of actual total loss. There may be a case when the goods are
2 Types of Marine Losses: Total Loss and Partial Loss
so damaged that they do not look like goods which were insured e.g.
Marine losses may be divided into the following categories: if crockery is reduced to pieces, it is a case of actual total loss.

In another case if the insured is not able to get the things back i.e., if
the ship is missing and there is no trace of it, it is also a case of
actual total loss. In case of actual total loss the insured is entitled to
recover full amount of loss. When the insured has been
compensated the title of goods passes on to the insurer. If some
amount is received from the sale of damaged goods, the amount will
go to the insurer and not to the insured.

A. Total Loss: 2. Constructive Total Loss:

Total loss is divided into two categories: This occurs when the ship is abandoned for certain reasons. It is not
commercially viable to retrieve the ship or cargo. The ship or the
1. Actual Total Loss: cargo is not wholly destroyed but it is not practicable to get it
Actual total loss occurs under these following situations: repaired and restore it to its original position. When a ship is badly
(a) The subject-matter is completely destroyed. damaged, and the cost of repairs is expected to be more than the
value of the ship, it will be advisable to abandon the ship.
(b) The goods are so damaged that they cease to be a thing of the
kind which were insured. In the same way if the cargo is safe in the abandoned ship but the
cost of bringing the cargo to the coast is more than the cost of cargo,
(c) The insured is deprived of the subject-matter. then it will be proper to leave the cargo. In the case of constructive
total loss, the insured gives a notice of abandonment and surrenders

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its interest in the subject-matter to the insurer. The insured can claim (a) There must be an extra-ordinary situation.
damage for total loss.
(b) The peril must be real and not imaginary.
B. Partial Loss:
When the subject-matter is partially damaged, it will be a case (c) The loss must be voluntary and deliberate.
of partial loss. It is of two types:
(d) The sacrifice must be made prudently.
1. Particular Average Loss:
A particular average loss has been defined as, “a partial loss of
(e) The purpose should be to save the whole adventure.
subject-matter insured, caused by a peril insured against, and which
is not general average loss.” A particular average loss is not caused (f) The act should be successful at least partially.
voluntarily. The insured subject-matter should be damaged and this
damage should be caused by marine peril which is insured. Marine losses can be divided into two parts; total loss and partial
loss.
What is"Deviation"? Under what circumstances it is excused?
2. General Average Loss:
A general average loss is caused voluntarily to avoid an impending "DEVIATION" IN MARINE INSURANCE
danger. “A general average loss is one which is caused by an extra-
DEVIATION:- According to Indian marine insurance act 1963 section
ordinary sacrifice or expenditure voluntarily and reasonably made or 48(1), when a ship, without lawful excuse, deviates from the voyage
incurred under fortuitous circumstances, for the sole purpose of contemplated by the policy, the insured is discharged from the
preserving the common interest from an impending peril.” liability as from the time of deviation and is immaterial that the ship
may have regained her route before any loss occurs.
As per section 49(2) there is a deviation from the voyage
If a ship is sinking because of overload, some of the cargo may be
contemplated by the policy
thrown out of the ship with a purpose to save the ship and the crew. 1) where the course of the voyage is specifically designated by the
It will be a case of general average loss. policy and that course is departed from.
2) where the course of the voyage is not specifically designated by
the policy, but the usual and customary course is departed from.
Some conditions are to be satisfied before deciding about a
Section 48(3) says the intention to deviate is immaterial, there
general average loss: must be a deviation in fact to discharge the insurer from his liability
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under the contract. (i) Cover note

So, the effect of deviation is that any loss arising during or after (ii) Certificate of Insurance (5 marks)
the deviation will be borne by the ship owner. (b) Enumerate the risks faced by insurance companies as financial
Section 49(1) says where several ports of discharge are specified by intermediaries.
the policy, the ship may proceed to all or any one of them, but, in the (5 marks)
absence of any usage or sufficient cause to the contrary she must (c) Mr. Saurabh Jain owns a restaurant, which he had bought three
proceed to them in the order designated by the policy. If she does years ago for
not there is a deviation. Rs. 20 lakhs. He had bought fire insurance worth Rs. 16 lakhs (which
Section 49(2) says, where the policy is to "ports of discharge" within is the
a given area which are not named the ship must, in the absence of written down value of his insured property). His restaurant caught fire
any usage or sufficient cause to the contrary, proceed to them in and the
their geographical order. If she does not there is a deviation. amount of loss suffered was worth Rs. 15 lakhs. What is the amount
Although section 51 says that deviation will be excused in the of
following circumstances:- compensation to be paid by the insurance company ? (10 marks)
1) Where authorized by any special term in the policy. Answer to Question No. 1(a)(i)
2) Where caused by circumstances beyond the control of the Master Cover note
and his employer; or Cover note is the document which is issued immediately after the
3) Where reasonably necessary in order to comply with an express insurance premium
or implied warranty;or is received to prove that insurance cover is existed. Cover note is
4) Where reasonably necessary for the safety of the ship or subject valid for 60 days from
matter insured; or the date of issue. Cover note is mostly used in motor insurance and
5) For the purpose of saving human life or aiding a ship in distress transit insurance,
6) Where reasonably necessary for the purpose of obtaining medical particularly for import covers by sea. The cover note in marine
or surgical aid for any person on board the ship; or insurance would be valid
7) Where caused by the barratrous conduct of the Master or crew, if for duration of transit.
barratry be one of the perils insured against. Answer to Question No. 1(a)(ii)
When the cause excusing the deviation ceases to operate the Certificate of Insurance
ship must resume her course, and prosecute her voyage with These are usually given in marine transit insurance under open
reasonable despatch. policies and also for
motor insurance. In motor insurance they are mandatory as it
confirms that there is
Professional Practice of Insurance Laws insurance cover extant for the vehicle plying on public roads. They
(a) Briefly explain the following: are less detailed
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than an Insurance policy and not stamped, but essentially give the The Insurance Ombudsman scheme was created by Government of
same information India for individual
regarding insurance policyholders to have their complaints settled out of the courts
Answer to Question No. 1(b) system in a cost-effective,
Risk faced by Insurance Companies as Financial Intermediaries efficient and impartial way. There are 12 Insurance Ombudsman in
There are number of risk faced by an Insurance company as different locations
financial intermediaries. and the policy holders can approach the one having jurisdiction over
Few of them are as given below the location of the
(a) Risk of Mismatch in return and committed payment insurance company office that he has a complaint against.
(b) Regulatory Risk Persons eligible to be appointed as Insurance Ombudsmen
(c) Risk of Fluctuation in Interest rates Only the following persons shall be eligible to be appointed as
(d) Risk of Investment handling Insurance Ombudsmen:
(e) Insurance complaint handling (a) Persons who served in the capacity of Chairman or Managing
(f) Reputation risk due to Mis-selling of insurance policies Director in Public Sector Insurance Companies
Answer to Question No. 1(c) (b) Persons who have served the Indian Administrative Service or
Written down value of Machinery Rs. 16 Lakhs the Indian
Insurance value Rs. 16 Lakhs Revenue Service
Loss incurred Rs. 15 Lakhs (c) Persons who are retired Judges of the Supreme Court or the High
Since the actual amount of loss is less than the insured value so Courts
insured value will An Ombudsman shall be appointed by the Governing body from a
be paid by insurance company. In this question, the original value of panel prepared by
restaurant will not a Committee comprising of:
be considered. (a) Chairman, IRDA
Question No. 2 (b) Two representatives of Insurance council including one each from
(a) Write short notes on the following: Life Insurance
(i) Insurance ombudsman scheme business and from General Insurance respectively
(ii) How does society benefit from the insurance ? (5 marks each) (c) One representative of Central Government
(b) Distinguish between: An Ombudsman shall serve for a term of three years and shall be
(i) Life Insurance and General Insurance eligible for
(ii) Endowment Scheme and Pure Insurance Scheme (5 marks each) reappointment. However, an Ombudsman shall not hold office after
Answer to Question No. 2(a)(i) he or she attains the
Insurance Ombudsman Scheme age of 65.
Powers of Ombudsmen
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An Ombudsmen is empower to entertain the following disputes: Because insured are restored either in part or in whole after a loss
(a) A complaint as specified under Rule 13 occurs, they are less likely to apply for public assistance welfare
(b) Partial or total repudiation of claims by an insurer benefits, or to seek financial
(c) Dispute with regard to the premium paid or payable in terms of assistance from relatives and friends. So other members of the
the policy society need
(d) Dispute on the legal construction of policies with regard to claims not help the unlucky member even after suffering from loss. If the
(e) Delay in settlement of claims individual has
(f) Non-issuance of any insurance document to customers after not insured the risk, the relatives and friends should support him
receipt of premium financially,
Answer to Question No. 2(a)(ii) when he becomes unlucky victim from the risks.
Benefits of Insurance to Society 3. Source of Investment Funds.
People live in society. Society is full of risks and uncertainty Insurance is a business of collection of fund and payment to insureds
Insurance is a social suffered
device providing financial compensation to those who suffer from from unexpected incidents. Hence, insurance industry accumulates
misfortune. Such funds as
payment being made form accumulated contribution of all parties premium from society and become an important source of funds for
participating in the capital
scheme. Insurance provides stability, in the society by necessary investment. Insurance companies collect premiums in advance of the
arrangement of security loss and
against loss form unexpected risks. Society becomes more peaceful funds not needed to pay immediate losses can be loaned to
and safe by business firms.
insurance, which provides different benefits and financial security Generally, insurance companies invest such funds typically in
against losses form shipping centers,
risks. The major benefits of insurance to society are given below. hospitals, factories, housing development etc. In this way, insurance
1. Indemnification for Loss: industry
All remembers of society are facing different risks. If risks are creates capital fund and promotes economic development of a
insured, all losses country.
occurred form unexpected risks are indemnified Indemnification 4. Less worry and Fear
permits Another benefit of insurance to society is that it decreases the worry
individuals and families to be restored to their former financial after to and fear of
loss members of society regarding the risk of accident and premature
occur. As a result, they can maintain their financial security. death. If family
2. Fewer Burdens to Society
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heads have adequate amounts of life insurance, they are less likely into the following 3 sub-categories:
to worry a. Fire insurance business
about the financial security of their dependents in the event of b. Marine insurance business
premature death, c. Miscellaneous insurance business
Similarly, businessmen who are insured enjoy greater peace of mind T.P.-1/2013 5 S.A.-PP-IL&P
because Life insurance business covers the risk of contingencies dependent
they know are covered if a loss occurs. on human life.
5. Prevention of loss For example payment of an amount (called “sum assured”) on the
when losses occur from risks, the insurer has to indemnify them death of the life
financially assured. Further, annuity contracts (which provide for periodic
Since loss of insured is transferred from insurer in the insurance payments to life assured
policy, the as long as the policyholder is alive) or the provisions of accident
insurance company should bear the risks. it means occurrence of benefits also form part
loss from the of life insurance business.
risks is the loss of the insurer, not of the insured. Hence, the All businesses other than Life are classified as General insurance
prevention as well business. Fire
as now becomes the interest of the owner of the property as well as insurance, as the name suggests covers the risks associated with
the insurance loss due to a fire
company. That is why; insurance companies are actively involved in accident to properties. Marine insurance means the business of
numerous effecting insurance
programs about loss-prevention. They employ wide specialists in fire contracts upon vessels of any description, including cargoes, freights
prevention, and other interests
occupational safety engineers and specialists in fire prevention, which may be insured for transit by land or water or both and
occupational includes warehouse risks
safety and health, and products liability. or similar risks incidental to such transit. Miscellaneous insurance
Answer to Question No. 2(b)(i) include all insurance
Life Insurance and General Insurance businesses other than Fire and Marine insurance business (and Life
The following are the various types of insurance businesses insurance business).
recognised under the It includes Motor, Liability, Health and Burglary insurances.
Insurance Act, 1938: Generally, indemnity based health insurance policies (which
(a) Life insurance business reimburse hospitalisation
(b) General insurance business (also called “Non-Life” business). expenses) were classified under the General insurance business.
This is sub divided Under the Insurance
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Bill, Health insurance business has been categorised as a separate On 15-6-2013, there was fire in their godown and loss was assessed
line of business for
than the General insurance business. Standalone health insurance Rs. 1,50,00,000. Value of stock at the time of fire was Rs. 7.5 crores.
companies have Apportion
been licensed by IRDA to sell only health insurance policies, given the loss over the three policies
the huge potential for (10 marks)
this business. S.A.-PP-IL&P 6 T.P.-1/2013
Answer to Question No. 2(b)(ii) Answer to Question No. 3(a)(i)
Endowment Scheme and Pure Insurance Scheme Directors’ and Officers’ Insurance
Endowment Insurance – An endowment insurance offers death The D&O policy provides cover for the personal liability of Directors
cover if the life and Officers
insured dies during the term of the policy and also offers a Survival arising due to wrongful acts in their managerial capacity. Defence
benefit if the life costs are also covered
insured survives until the maturity of the policy. and are payable in advance of final judgment. This policy provides
Pure protection plan is a simple risk cover insurance product where protection for claims
the sum assured brought against directors, officers and employees for actual or
becomes payable upon the happening of the risk event during the alleged breach of duty,
term of the policy. It neglect, misstatements or errors in their managerial capacity.
is also called term insurance. It has the lowest possible premium Answer to Question No. 3(a)(ii)
among all the other Engineering Insurance
insurance plans available. Premiums of this policy are fixed and it The rapid industrialization has led to increasing use of machines in
does not increase industries. Though
during the term period of the policy. use of machinery results in increased production capacities, in the
Question No. 3 event of accident
(a) Write short notes on any two of the following: and breakdowns, they can be potential sources of financial loss and
(i) Directors’ and Officers’ Insurance could even result in
(ii) Engineering Insurance the closure of business.
(b) M/s. Brown & Co. insured their stock against fire risk by taking In spite of proper care and maintenance of machinery, mishap may
following policies: yet occur.
Sum insured Rs. Sometimes the extent of damage may be quite high and may also
Standard Fire Policy with A 2,00,00,000 lead to fatal or nonfatal
Standard Fire Policy with B 2,50,00,000 injuries to human beings nearby. The remedy for such losses is
Fire Declaration Policy with C 3,50,00,000 offered by various
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companies in form of engineering insurance. Risk Management

The various engineering policies offered by insurance companies are ‘Risk, in insurance terms, is the possibility of a loss or other adverse
divided under event that has
the following three major heads: the potential to interfere with an organization’s ability to fulfill its
1. Project Insurance mandate, and for which
2. Operational Machineries Insurance an insurance claim may be submitted’.
3. Business Interruption Insurance Risk management ensures that an organization identifies and
Answer to Question No. 3(b) understands the risks
In this case, there is a fire declaration policy, so first standard fire to which it is exposed. Risk management also guarantees that the
policy with A and organization creates
standard fire policy with B will used and implements an effective plan to prevent losses or reduce the
Share of loss : Insured value/Value of Property * Loss impact if a loss occurs.
Share of Loss of A : Rs. (2,00,00,000/7,50,00,000)* 1,50,00,000 Techniques of Risk management : There are five major methods
= Rs. 40,00,000 of handling and
Share of Loss of B : Rs. (2,50,00,000/7,50,00,000)* 1,50,00,000 controlling risk.
= Rs. 50,00,000 (a) Risk avoidance;
Total Loss apportioned to A and B = Rs. 90,00,000 (b) Risk retention;
Actual Loss Incurred = Rs. 1,50,00,000 (c) Risk transfer;
Excess of Loss = Rs. 60,00,000 (d) Loss control; and
Since in this case, standard life policy could not indemnify the full (e) Insurance.
loss so insurance Risk Avoidance
claim will be apportioned to declaration life policy. Risk avoidance is one method of handling risk. For example, you can
C’s Share in loss = Rs.(3,50,00,000/7,50,00,000)* 1,50,00,000 avoid the risk
= Rs. 70,00,000 of being pick pocketed in Metropolitan cities by staying out of them;
Since the excess of loss is Rs. 60,00,000 so C will have to contribute you can avoid the
Rs. 60,00,000 risk of divorce by not marrying; a career employee who is frequently
only transferred can
T.P.-1/2013 7 S.A.-PP-IL&P avoid the risk of selling a house in a depressed real estate market by
Question No. 4 renting instead of
Define Risk Management and explain briefly the different techniques owning; and a business firm can avoid the risk of being sued for a
of the same. defective product by
(20 marks) not producing the product.
Answer to Question No. 4 Risk Retention
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Risk retention is a second method of handling risk. An individual or a against risk. An insured is the party who will seek to obtain an
business firm insurance policy while the
may retain all or part of a given risk. Risk retention can be either insurer is the party that shares the risk for a paid price called an
active or passive. insurance premium. The
Active Risk Retention insured can easily obtain an insurance policy for a number of risks.
Active risk retention means that an individual is consciously aware of The most common
the risk and types of insurance policy taken out is a vehicle/auto insurance policy
deliberately plans to retain all or part of it. as this is mandated
Passive Risk Retention by law in many countries. Other policies include home owner’s
Risk can also be retained passively. Certain risks may be insurance, renter’s
unknowingly retained insurance, medical insurance, life insurance, liability insurance, etc.
because of ignorance, indifference, or laziness. This is often Question No. 5
dangerous if a risk that is (a) Explain the principles of Contribution and subrogation.
retained has the potential for destroying a person financially. (b) Explain the principle of insurable interest. (10 marks each)
Risk Transfer Answer to Question No. 5(a)
Risk transfer is another technique for handling risk. Risks can be Principle of Subrogation : Subrogation means the restitution of the
transferred by rights of an
several methods, among which are the following: assured in favour of the insurer against the third party for any
(a) Transfer of risk by contracts; damages caused by the
(b) Hedging price risks; and (c) Conversion to Public Limited third party, after the insurer has indemnified the assured for the loss.
Company. In accordance with this principle the insurance company acquires the
Loss Control right of the
Loss control is another important method for handling risk. Loss insured to sue the third party to compensate for the loss inflicted,
control consists of when it indemnifies
certain activities undertaken to reduce both the frequency and the insured for the losses suffered by him. This means that, if
severity of losses. Thus, another vehicle hits your
loss control has two major objectives: vehicle, and the insurer pays you the claim, then the insurer, not you,
(a) Loss prevention. can sue the owner
(b) Loss reduction. of that vehicle to claim damages.
Insurance Right of subrogation of the insurer
Insurance is a more commonly known concept that describes the act Where the insurer pays for a total loss, either of the whole, or in the
of guarding case of goods

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of any apportion able part, of the subject-matter insured, he The Insurance Act 1938 doesn’t define the insurable interest but it
thereupon becomes entitled has been defined
to take over the interest of the assured in whatever may remain of as follows by Mac-Gillivray “Where the assured is so situated that the
the subject-matter so happening of the
paid for, and he is thereby subrogated to all the rights and remedies event on which the Insurance money is to become payable would as
of the assured in a proximity cause,
and in respect of that subject matter as from the time of the casualty involve the assured in the loss or diminution of any right recognised
causing the loss. by law or in any
Principle of Contribution : As per the doctrine of contribution the legal liability there is an insurable interest in the happening of that
indemnity provided event to the extent of
for the loss occurring on the asset, which is insured with several the possible loss or liability.” The object of Insurance should be
insurers has to be lawful for this purpose;
proportionately shared among them according to the rateable the person proposing for Insurance must have interest in the
proportion of the loss. continued life of the insured
Contribution is the right of an insurer to call upon others similarly, but & would suffer pecuniary loss if the insured dies. If there is no
not necessarily insurable interest, the
equally, liable to the same insured to share the cost of an indemnity contract becomes wagering (gambling) contract. All wagering
payment. contracts are illegal &
T.P.-1/2013 9 S.A.-PP-IL&P therefore null & void.
Right of Contribution Insurable interest in Own Life Policy
Where the assured is over-insured by double insurance, each insurer So long as the Insurance is on one’s own life, the “Insurance
is bound, as Interest” presents no
between himself and the other insurers, to contribute rateably to the difficulty. A person has insurable interest in his own life to an
loss in proportion to unlimited extent. The
the amount for which he is liable under his contract. absence of a limit in this case is reasonable. When a person insures
If any insurer pays more than his proportion of the loss, he is entitled his life he obtains
to maintain a protection against loss to his estate; for in the event of his untimely
suit for contribution against the other insurers, and is entitled to the death the estate
like remedies as a would not benefit by the future accumulation he hopes to make
surety who has paid more than this proportion of the debt during the normal span
Answer to Question No. 5(b) of life. It is not easy to compute with any degree of certainty what the
The principle of insurable interest. future earnings of
Insurable Interest
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a person would be. Hence no limit may be fixed in respect of life the attention of people here.
Insurance he may A Hindu is under a legal obligation to maintain his parents. Even as
effect. Where, however, insurer rejects a proposal for an amount of per traditional
assurance, which is law Section 20 of the Hindu Adoption and Maintenance Act has
disproportionate to the means of the proposer, it is not normally for given statutory form to
lack of Insurable the legal obligation. The parents have, therefore, a right to
interest but on considerations of “moral hazard”. Indeed it may also maintenance subject to their
be presumed in a being aged or infirm. An order for maintenance of parents may also
case where a person proposes for a policy for a large amount, which be passed under
he may not be able Section 125 of the Code of Criminal Procedure, 1973. It may be
to maintain having regard to his income, that it will be financed by stated, therefore, that a
some other person parent has pecuniary interest in the life of the child, and an
and that there is no insurable interest assurance effected on that
Insurance on the Life of Spouse basis cannot be hit by Section 30 of the Contract Act as a wagering
As a wife is normally supported by her husband, she can validly contract. However,
effect an insurance it may be noted that the pecuniary interest is not a present interest
on her life for adequate amount. The service and help rendered by unless the parent is
the wife used to be unable to maintain himself or herself at the time when the Insurance
thought of as the basis of insurable interest which supports any is effected. It may
policy which a man therefore, be argued that a parent cannot have insurable interest in
takes on the life of his wife. In Griffiths v. Elemming the Court of the life of the child
Appeal in England until the right to maintenance arises; but when a person is not able to
stated that it was difficult to uphold such interest on the basis of maintain oneself
pecuniary interest but how can he be expected to have the means to insure the life of his
thought that such interest could be presumed on broader grounds. children?
Parent and Child As a matter of fact in India, even today a child is a potential
Following the practice in U.K. in India also a parent is not considered breadwinner for the
to have insurable parents in their old age. The present affluent circumstances of a
S.A.-PP-IL&P 10 T.P.-1/2013 parent do not alter that
interest in the life of the child. The same is the case with a child in situation. Under the traditional law a right to maintenance could be
respect of his claimed only against
parent’s life. Whether this position requires to be reviewed now the sons; the statute has now extended the obligation to the
appears to be engaging daughters as well. Having
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regard to the social and economic set up of the people in the country debtor once the loan is repaid. The better arrangement would be for
a review of the the debtor to
question seems to be appropriate. take out a policy for the required amount and mortgage the policy to
On the life of other relations the creditor.
In the case of other relations, insurable interest cannot be presumed The creditor then cannot take benefits under the policy in excess of
from the mere his dues.
existence of their relationship. Moral obligations or duties are not (c) Partner : A partner has insurable interest in the life of his co-
sufficient to sustain an partner to the
insurable interest. extent of the capital to be brought in by the latter.
In every other case, the insurable interest must be a pecuniary T.P.-1/2013 11 S.A.-PP-IL&P
interest and must be (d) Surety and principal debtor-Co-surety : A surety has insurable
founded on a right or obligation capable of being enforced by Courts interest in the life
of law. The following of his co-surety to the extent of the proportion of his debt and also in
are illustrations of such cases of insurable interest: the life of
(a) Employer – Employee : An employer has insurable interest in the his principal debtor.
life of his Effect on Contract when Insurable interest is not present : Where,
employee, and the employee in the life of the employer; An employer therefore, the
can create proposal is on the life of another, unless the proposer has insurable
insurable interest in the lives of his employees by undertaking to interest in the life to
provide monetary be assured, the contract shall be void. Lack of insurable interest is a
benefit to the family or estate of the employees in the event of death. defence, which the
Group insurer may plead in resisting a claim. There may be also cases
Insurances effected by companies on the lives of their employees where Insurance on
are on the one’s own life is surreptitiously financed and held by another for his
basis of such insurable interest. benefit, which if
(b) Creditor – debtor : A creditor has insurable interest in the life of detected by the insurer, may be declared void. As a life Insurance
his debtor upto contract is not one of
the amount of the debt; This is not a satisfactory basis; for in the indemnity, the existence of insurable interest and the amount thereof
event of death will have to be
of the debtor after the debt has been repaid, the creditor would still considered at the time of effecting the contract since lack of such
be entitled to interest would render
the policy moneys and thus can be in a position to gain by the death the contract void. If insurable interest existed at the inception of the
of the policy, the contract
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would be enforceable though such interest might cease later. Answer to Question No. 6(b)
Question No. 6 Assignment the policy and Assignment of the proceeds of the
Distinguish briefly between any four of the following: policy
(a) Peril and Hazard An assignment of an insurance policy by an insured is the transfer of
(b) Assignment of the policy and Assignment of the proceeds of the the rights to
policy receive the benefits under a contract accruing to the party in that
(c) Agent and Broker party. In life insurance,
(d) Actual cash value of the assets and Fair market value of the assignment is the transfer of rights to receive benefits stated in the
assets life insurance policy.
(e) Implied conditions and Express conditions. (5 marks each) The concept and procedure for assignment is dealt with section 38 of
Answer to Question No. 6(a) the Insurance Act,
Peril and Hazard 1938. The Section treats the assignment and transfer at par.
Peril is defined as the cause of loss. Thus, if a house burns because S.A.-PP-IL&P 12 T.P.-1/2013
of a fire, the An Assignment of the proceeds of the policy means that the insured
peril, or cause of, loss, is the fire. If a car is totally destroyed in an assigns the
accident with another rights of receiving the proceeds from the insurance policy to a third
motorist, accident (collision) is the peril, or cause of loss. Some party. Mere transfer
common perils that of the rights of receiving the benefits of the policy, which the insured
result in the loss or destruction of property include fire, cyclone, is entitled to, does
storm, landslide, lightning, not require the approval of insurer. This is because it does not
earthquakes, theft, and burglary. amount to the assignment
Factors, which may influence the outcome, are referred to as of the policy or its subject matter. The assignee thus only stands in
hazards. These hazards the place of insured
are not themselves the cause of the loss, but they can increase or for receiving the benefits of the policy. Where due to breach of a
decrease the effect condition the insurer
should a peril operate. The consideration of hazard is important declines to pay, the assignee cannot recover anything from the
when an insurance insurer.
company is deciding whether or not it should insure some risk and Answer to Question No. 6(c)
what premium to Agent and Broker
charge. So a hazard is a condition that creates or increases the The basic difference between an Insurance Broker and an Insurance
chance of loss. There Agent is that
are three major types of hazards: Hazard can be physical or moral or while an Insurance Broker represents the client, while an Insurance
Morale. Agent represents
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the insurance company. As a corollary to the above, an Insurance Implied conditions can be expressed in policy explicitly, or can be
Broker is licensed to modified or
recommend the products of any insurance company, whereas excluded by express conditions.
Insurance Agent at any T.P.-1/2013 13 S.A.-PP-IL&P
point in time can sell the insurance products of only one insurance Express conditions are clearly stated in the insurance policy. There
company with which are two types of
he is attached. express conditions.
Answer to Question No. 6(d) General express conditions which are applicable to all policies of that
Actual cash value of the assets and Fair market value of the class and are
assets therefore printed on the policy document
The actual amount of payment to be made to the insured for the loss Specific conditions are the conditions which are applicable only to a
is based on the specific policy.
Actual cash value (ACV) of the property, which is insured. Usually Generally specific conditions are handwritten or rubber stamped on
ACV is determined the policy.
using the three methods Question No. 1
1. Replacement cost less depreciation (a) Define the scope and aim of Electronic Equipment Insurance.
2. Fair Market value (b) Define underwriting. Discuss its objectives and the activities
3. Broad evidence Rule’ involve in it.
Fair Market value is the price which would normally be determined in (10 marks each)
a free market Answer to Question No. 1(a)
during a transaction entered into by a willing buyer and willing seller. This is an omni bus cover against all risks for electronic equipment.
Answer to Question No. 6(e) In addition to
Implied conditions and Express conditions break down cover, it provides protection against fire and allied perils,
Conditions are stipulations in the policy, which help in regulating the burglary, terrorism
contract. These etc.
may be implied or express conditions It is a requirement of this insurance that the sum insured shall be
Implied conditions : In the absence of express conditions, the equal to the cost
insurance contract is of replacement of the insured by new property of the same kind and
subject to implied conditions, which relate to same capacity
1. Good faith which shall mean its replacement cost including freight, dues and
2. Insurable interest customs duty, if any,
3. Subject matter of insurance and erection cost.
4. Identification of the subject matter. The policy covers the following:
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(a) Material damage. of a risk is decided. It is only after the risk has been weighed and all
(b) Damage to external Data Media possible alternatives
Answer to Question No. 1(b) evaluated that the final underwriting is done. When a proposal for
Underwriting can be defined as “assumption of liability”. Underwriting insurance is received,
involves the the underwriter has four possible courses of action:
selection of policyholders after thoroughly evaluating all hazards, I. Accept the risk at standard rates
establishing prices II. Charge extra premium depending on the risk factor
and then determining the terms and conditions of the insurance III. Impose special conditions
policy. The term IV. Reject the risk.
‘Underwriting’, refers to the formal acceptance of a risk by the The activities involved in underwriting process includes-
insurance company for a 1. Assimilating information about the applicant
price, which is termed as ‘Premium’. 2. Evaluating and making a decision
Objectives of Underwriting 3. Executing the decision
The objectives of underwriting are three-fold: Producing a large Question No. 2
volume of premium (a) Compare and contrast the features of term life insurance and
income that is sufficient to maintain and enlarge the insurance universal Life
company’s operations insurance.
and to achieve a better spread of the risk portfolio; Earning a (b) Distinguish between Pure risks and speculative risk. (10 marks
reasonable amount of profit each)
on insurance operations; Maintaining a profitable book of business Answer to Question No. 2(a)
(by ensuring Life Insurance
underwriting profits) – that contains all the policies that the insurer Under a whole life insurance policy, the purchaser agrees to pay
has in force; More premiums to a life
spread – across the profile and geography. insurance company in exchange for a guarantee of a specified
Activities involved in Underwriting Process benefit payable to their
The underwriting process follows a series of stages, at the end of spouse or other beneficiaries upon their death. Earnings on a whole
which the status life insurance policy
TEST PAPER 2/2013 are set by the life insurance company based on the overall return on
Time allowed : 3 hours Max. Marks : 100 its investments.
NOTE : Answer Any 5 Questions. Universal Life Insurance
14 Universal life insurance was created to provide more flexibility than
T.P.-2/2013 15 S.A.-PP-IL&P whole life

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insurance by allowing the policy owner to shift money between the Life Insurance vs. Universal Life Insurance
insurance and savings The flexibility provided by universal life insurance policies is
components of the policy. Premiums, which are variable, are broken attractive. Also, higher
down by the insurance interest rates mean money doesn’t have to work as hard to generate
company into insurance and savings, allowing the policy owner to the same return.
make adjustments As a result, universal life insurance premiums are typically lower
based on their individual circumstances. For example, if the savings during periods of high
portion is earning a interest rates than whole life insurance premiums for the same
low return, it can be used instead of external funds to pay the amount of coverage.
premiums. Unlike whole And, while the interest paid on universal life insurance is often
life insurance, universal life allows the cash value of investments to adjusted monthly, interest
grow at a variable on a whole life insurance policy is adjusted annually. This means that
rate that is adjusted monthly. during periods of
Universal life offers the following advantages: rising interest rates, universal life insurance policy holders see their
1. Lower-cost life insurance (compared to whole life insurance) cash values increase
2. No-Lapse Protection much more rapidly than those in whole life insurance policies
3. A tax-advantaged savings element that provides a cash value with Answer to Question No. 2(b)
a guaranteed With regards insurability, there are basically two categories of risks;
minimum interest rate 1. Speculative or dynamic risk; and
4. Flexibility to adjust your premium payment and death benefit as 2. Pure or static risk
your needs Speculative or Dynamic Risk
change Speculative (dynamic) risk is a situation in which either profit OR loss
5. Favorable loan features. is possible.
S.A.-PP-IL&P 16 T.P.-2/2013 Examples of speculative risks are betting on a horse race, investing
Universal Life insurance is flexible-premium, adjustable-benefit, in stocks/bonds
permanent life and real estate. The outcome of such speculative risk is either
insurance that can accumulate values beyond the guaranteed cash beneficial (profitable) or
value. In addition to loss. Speculative risk is uninsurable.
its cash values which can be used for children’s educations, to Pure or Static Risk
supplement retirement The second category of risk is known as pure or static risk. Pure
income and for incidental expenses, universal life insurance is (static) risk is a
flexible enough to change situation in which there are only the possibilities of loss or no loss, as
as your needs change. oppose to loss or
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profit with speculative risk. The only outcome of pure risks are one party agrees to pay for potential losses or damages caused by
adverse (in a loss) or the other party. A
neutral (with no loss), never beneficial. Examples of pure risks typical example is an insurance contract, whereby one party (the
include premature death, insurer) agrees to
occupational disability, catastrophic medical expenses, and damage compensate the other (the insured) for any damages or losses, in
to property due to return for premiums
fire, lightning, or flood. paid by the insured to the insurer.
It is important to distinguish between pure and speculative risks for Answer to Question No. 3(b)
three reasons. Cost of Insurance to the society
First, through the use of commercial, personal, and liability insurance Though insurance provides vast benefits to individuals and society, it
policies, insurance carries some
companies in the private sector generally insure only pure risks. social costs that must be realized. Heavy expenditure is incurred in
Speculative risks are running of insurance
not considered insurable, with some exceptions. companies, which are increasing over time. This results in scarce
Second, the law of large numbers can be applied more easily to pure economic resources
risks than to being diverted for the development of insurance industry.
speculative risks. . Besides, insurance sometimes has the effect of encouraging
Finally, society as a whole may benefit from a speculative risk even unscrupulous individuals
though a loss to resort to fraud, which is a heavy cost to the companies and the
occurs, but it is harmed if a pure risk is present and a loss occurs. nation. Also, it has
Question No. 3 now become increasingly common to make highly inflated claims
(a) What do you mean by Indemnification? particularly in motor
(b) “Insurance entails certain costs to Society”. Explain. (10 marks insurance and health insurance to cover ‘deductibles’. This results in
each) heavy underwriting
T.P.-2/2013 17 S.A.-PP-IL&P losses to insurance companies who are forced to raise premiums. In
Answer to Question No. 3(a) our own country,
The term “indemnification’ means compensation for damages or most of the nationalized insurance companies all along have been
loss. Indemnity in incurring heavy
the legal sense may also refer to an exemption from liability for underwriting losses. The huge increase in motor insurance and
damages. The concept health insurance premiums
of indemnity is based on a contractual agreement made between two is a direct result of this factor. The costs of insurance thus also
parties, in which include:
1. Fraudulent claims
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2. Inflated claims Personal accident policy pays compensation to the insured in the
Question No. 4 event of happening
(a) Can a person recover anything under a Personal Accident policy, of one or more of the following listed below which may be selected
if he dies a by insured at the time
natural death ? of taking policy :
(b) What are the major exclusions in a medical insurance policy ? On death
(10 marks each) On permanent total and partial disability and
Answer to Question No. 4(a) On temporary total disability
Personal Accident Insurance In case of accidental death during the policy period, normally, the
Personal accident insurance provides protection to the insured policy, in addition
person financially, if covers funeral expenses of the insured person. (some companies
he is injured. This policy provides monetary compensation in case of even provide removal
death or disablement of mortal remains). Permanent total disablement occurs when an
resulting from accidental injury arising out of EXTERENAL, VIOLENT individual is unable to
AND VISIBLE perform his regular duties for the remaining part of his life. (loss of
MEANS. Medical expenses incurred for treatment of injuries from both eyes, upper
such accident are limbs, lower limbs etc. are treated as total disability.
also reimbursed to a certain extent on payment of additional Thus on the basis of above discussion and after referring the scope
premium. The policy also of policy, we
pays a pre-determined sum if death occurs as a result of an may say that in normal circumstances a person cannot recover
accident. All of us are anything under a Personal
exposed to the risk of accident, which is a threat to our financial Accident policy, if he dies a natural death.
security, and therefore Answer to Question No. 4(b)
it is prudent to have adequate personal accident cover to manage Generally a medical insurance policy does not cover the following
this contingency. For unless otherwise
handling accident risks, personal accident policy, janata personal provide.
accident policy and (a) Any sickness or illness for first 30 days during the policy
gramin personal accident policies are available in India. Other (b) Any medical expenses relating to pregnancy Diseases caused by
personal accident policies war, invasion
are offered to particular groups like students, NRI’s, women etc. or due to nuclear weapons etc.
S.A.-PP-IL&P 18 T.P.-2/2013 (c) Any expenses incurred for spectacles, cosmetic treatment etc.
Scope of cover (d) Medical expenses incurred for purchasing tonics, vitamins unless
incurred as
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part of the treatment. he benefits from its safety, well being or freedom from liability and
Question No. 5 would be prejudiced
(a) What is an “insurable Interest” ? What are the policy by its loss, damage or existence of liability.
requirements for an insurance The relationship between the insured and the subject matter of
interest ? insurance must be
(b) Define Maritime Perils and discuss about Insured perils or recognized at law.
Uninsured perils in For example, the subject matter of insurance under a fire policy can
detail. (10 marks each) be a building,
Answer to Question No. 5(a) stocks, machinery, under a liability policy it can be a person’s legal
Definition liability for injury or
The legal right to insure arising out of a financial relationship damage, a ship in a marine policy etc. Any damage to the property
recognized under the must result in
law, between the insured and the subject matter of insurance. financial loss to the policyholder. Only then insurable interest is said
The existence of insurable interest is an essential ingredient of any to exist. There are
insurance contract. a number of ways in which insurable interest will arise or be limited:
It is an important and fundamental principle of insurance. Insurable (a) By Common Law : under common law insurable interest is
interest simply means automatically created
“right to insure”. The policyholder must have a pecuniary or monetary by ‘ownership’ rights. Similarly, the common law of ‘duty of care’ that
interest in the one owes
property, which he has insured. The subject matter of insurance can to the other may give rise to a liability which is also insurable. For
be any type of E.g. the
T.P.-2/2013 19 S.A.-PP-IL&P owner of a tractor who depends on it for his agricultural operation
property or any event that may result in a loss of a legal right or stands to lose
creation of a legal financially if the tractor meets with an accident, as his business will
liability. come to a
Therefore the essentials of insurable interest include: standstill. Thus the owner has an insurable interest in the asset, i.e.,
There must be some property, right, interest, liability or potential his tractor.
liability capable of Hence the tractor forms the subject matter when insurance is
being insured. purchased on it.
It is this property, right etc, which must be the subject matter of (b) By Contract : sometimes insurable interest is also created by
insurance. contractual
The insured must stand in a relationship with the subject matter of obligations. For example, a lease agreement between a landlord and
insurance whereby a tenant
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may make a tenant responsible for the maintenance or repair of the whether committed by marauders from outside the ship or by
building. mariners or
This contract places the tenant in a legally recognized relationship to passengers within it.
the building 2. Barratry – it is an act willfully committed by the master and the
which gives him insurable interest. crew against the
(c) By Statute : sometimes an act of parliament may create insurable owner or charterer of the ship. Barratry includes fraudulent sale of
interest cargo or
either by granting a benefit or by imposing a duty. deviation of ship, the crew’s refusal to discharge the cargo, etc.
Answer to Question No. 5(b) 3. Jettison – this is throwing of cargo overboard due to either a
As per Section 2(e) of The Marine Insurance Act, 1963 , maritime deliberate act or at
perils” means the the wake of grave danger.
perils consequent on, or incidental to, the navigation of the sea, that 4. Taking at Sea – is a situation when the vessel is captured by the
is to say, perils of enemy or
the seas, fire, war perils, pirates, rovers, thieves, captures, seizures, others.
restraints and 5. Foundering at Sea – if a ship has been reported lost and after a
detainments of princes and peoples, jettisons, barratry and any other stipulated time,
perils which are there is no news of its whereabouts then it is presumed to be lost
either of the like kind or may be designated by the policy; due to perils
Maritime Perils (Insured and Uninsured) of the Stranding – arises when the ship deviates from its course due
Maritime perils can be defined as the fortuitous (it represents an to an
element of chance accident and is stranded in shallow waters and suffers damages.
or ill luck) accidents or casualties of the sea caused without the 6. Collision – is caused when the ship collides with another ship or
willful intervention of with other
human agency. There are different forms of perils at sea, of which objects, causing damage.
only a few are covered 7. All other Perils – This includes all perils similar in nature to the
S.A.-PP-IL&P 20 T.P.-2/2013 ones mentioned
by insurance while others are not. In this part we will be enumerating in the policy.
both the insured Perils not explicitly dealt with – there are two other losses the insurer
and uninsured perils of the sea. is bound to
Marine insurance coverage provide cover for. They are:
Fire – is a common peril at sea. (A) Insurer’s Liability in respect of General Average Loss (Section
1. Pirates and Thieves – according to Carver: “ Piracy is forcible 66) – General
robbery at sea,
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average loss is expenditure or loss incurred consciously while by insurance. But goods damaged by the violent action of the waves
countering a peril are covered,
for saving the ship and /or consignment. This is borne as this is treated as a peril at sea.
proportionately by all Inherent Vice – This refers to the inherent properties of the cargo
having insurable interests in the marine adventure. being transported.
(B) Insurer’s liability in respect of salvage charges – These are Thus, the insurer cannot be made liable for perishable commodity,
charges awarded to which has an
a salveger for retrieving property from the sea. This is not part of a inherent process of decomposition. This would apply to fruits,
marine vegetables, meat,
contract. This amount is contributed by all holding insurable interest etc.
in the marine Loss by Rats and Vermin – This loss is not considered as a peril of
adventure. The insurer is liable to cover the salvage charges the sea. (e.g.
incurred by the Hamilton v Pandrof- a rat gnawed a hole in a pipe, causing damage
assured. This is treated as part of general average loss. to the cargo of
Uninsured Perils rice by seawater, there was no negligence. The insurer was not held
All losses and damages caused due to reasons not considered as responsible).
perils of the sea Loss by Delay – This means that the insurer of the vessel and the
are not provided insurance cover. cargo cannot
Wear and Tear – This is the regular deterioration that inflicts the claim for loss caused due to delay, even if the delay is caused by a
vessel due to the peril of the sea,
corrosive action of the sea, action of winds and other maintenance which is covered by insurance. (Normally, coverage till completion of
problems caused transit/ reaching
to the body of the ship due to sailing. This includes perishable destination and not defined in terms of date/days – except in case of
commodity that is annual
transported. declaration policies).
T.P.-2/2013 21 S.A.-PP-IL&P Question No. 6
Leakage – If a leak develops in a vessel then insurance does not Write short note on any four of the following
provide cover for (i) Endowment insurance
the loss caused, unless the leak is caused by an accident. Ordinary (ii) ‘Property accident aspect’ of the Motor Insurance Policy
leakage of (iii) Coinsurance
liquid cargo is also not covered. (iv) Advance Loss of Profit Insurance.
Breakage of goods – Goods damaged due to movement of the ship (v) Fidelity Guarantee Insurance. (5 marks each)
are not covered Answer to Question No. 6(i)
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Endowment Insurance ‘Property accident aspect’ of the Motor Insurance Policy

An endowment insurance offers death cover if the life insured dies Property accident aspect of motor insurance help pay for other
during the term of drivers’ and property
the policy and also offers a Survival benefit if the life insured survives owners’ expenses after the insured found at fault in an accident. This
until the maturity includes repairing
of the policy. damaged cars or fixing any other property involved. It can also help
Some of the key features of an Endowment insurance plan are - mitigate out-ofpocket
• If the life insured survives the entire term of the plan, then a legal fees associated with damaged property.
specified amount is Answer to Question No. 6(iii)
paid to him/her on maturity of the plan. Coinsurance
• If the life insured dies before the maturity of the plan, then the Co-insurance is a term that describes a splitting or spreading of risk
death cover among multiple
benefit is paid to the nominee/beneficiary. parties. Coinsurance has different meaning for different types of
• Savings element : After deducting the death cover charges & policies. For property
administration related policies the insured bears a portion of the risk only when it is
charges from the premium, the remaining amount is invested by the underinsured. The
insurance main reason behind this is to ensure that the principal insured
company. The returns earned are later paid back to the life insured in willingly protects the
the form of property insured.
bonuses. Answer to Question No. 6(iv)
S.A.-PP-IL&P 22 T.P.-2/2013 Advance Loss of Profit Insurance
• Goal-based investment : Helps in accumulating money for specific This insurance policy is also known as business interruption
plans like a insurance. this policy
child’s higher education or marriage, etc. covers monetary loss due to delayed commissioning of the project as
• Some insurance companies also allow partial withdrawal or loans a result of loss
against these during construction/erection which is covered under a project
policies. insurance policy. The cost
• There are different variants under this plan – covered under this policy includes
– Higher death cover than the maturity benefit (a) Loss of gross profit
– Maturity benefit is double the death cover, known as a double (b) Loss of gross earning
endowment (c) Increased cost of working
insurance plan. (d) Loss of rent
Answer to Question No. 6(ii) (e) Special expenses etc
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Answer to Question No. 6(v) turned out to be very tragic for some people. Two pilots of naval
Fidelity Insurance aircraft and a
Fidelity insurance protects organizations from loss of money, civilian were killed after an aircraft crashed on a nearby residential
securities, or inventory building. Seven
resulting from crime. Common Fidelity claims allege employee others were also injured in the mishap.”
dishonesty, (a) What are the risks involved in the above event ? (10 marks)
embezzlement, forgery, robbery, safe burglary, computer fraud, wire (b) Identify and discuss, how such risks can be managed insurance
transfer fraud, and who should
counterfeiting, and other criminal acts. be taking insurance (10 marks)
T.P.-2/2013 23 S.A.-PP-IL&P Answer to Question No. 1(a)
These schemes involve every possible angle, taking advantage of There are many risks involved in the above event namely
any potential (a) Property Risk
weakness in your company’s financial controls. From fictitious (b) Public Liability Risk
employees, dummy (c) Reputation Risk
accounts payable, non-existent suppliers to outright theft of money, (d) Risk for loss of Profit
securities and property. (e) Personal Risk
Fraud and embezzlement in the workplace is on the rise, occurring in Answer to Question No. 1(b)
even the best work Property Risk can be managed by taking insurance cover for the
environments. aircraft. This
Liabilities covered by crime insurance usually fall into two categories, insurance cover should be taken by the airline.
although many Public Liability Risk can be managed by taking the public liability
polices combine both types of coverage: insurance. This
— Money and security coverage pays for money and securities risk should be taken so as to compensate the effected party under
taken by burglary, absolute liability
robbery, theft, disappearance and destruction. principle. This insurance cover should be taken by the airline.
— Employee dishonesty coverage pays for losses caused by most Reputation Risk : Reputation risk can be retained by the company
dishonest acts and the company
of your employees, such as embezzlement and theft. should take all necessary steps to avoid any wrong happening.
Question No. 1 Alternatively insurance
Hyderabad Air Show tragic: cover can also be taken by the insurance company for handling
“In March, 2010, an Air show was undertaken at Begumpet in reputation risk
Hyderabad which Risk for Loss of Profit : any event due to which business operations
are suspended,
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results in loss of profit and additional expenses in form of standing peril is the prime cause; it is what will give rise to the loss. Often it is
expenses. Loss of beyond the control
profit policy may be taken by the airline so as to manage this risk. of anyone who may be involved. In this way we can say that storm,
TEST PAPER 3/2013 fire, theft, motor
Time allowed : 3 hours Max. Marks : 100 accident and explosion are all perils.
NOTE : Answer Any 5 Questions. Peril is defined as the cause of loss. Thus, if a house burns because
24 of a fire, the
T.P.-3/2013 25 S.A.-PP-IL&P peril, or cause of, loss, is the fire. If a car is totally destroyed in an
Personal Risk : It refers to the risk borne by the travelers in the accident with another
aircraft. This risk motorist, accident (collision) is the peril, or cause of loss. Some
can be managed by the traveler by taking travelling insurance. common perils that
Question No. 2 result in the loss or destruction of property include fire, cyclone,
(a) Distinguish between Peril and Hazard. (10 marks) storm, landslide, lightning,
(b) Explain with example each of the following categories of Hazard: earthquakes, theft, and burglary.
(i) Physical Hazard Factors, which may influence the outcome, are referred to as
(ii) Moral Hazard hazards. These hazards
(iii) Morale Hazard. (10 marks) are not themselves the cause of the loss, but they can increase or
Answer to Question No. 2(a) decrease the effect
Peril and Hazard should a peril operate. The consideration of hazard is important
Peril is used to mean both the event which will give rise to some when an insurance
loss, and the company is deciding whether or not it should insure some risk and
factors which may influence the outcome of a loss. When we think what premium to
about cause, we charge. So a hazard is a condition that creates or increases the
must be clear that there are at least two aspects to it. We can see chance of loss. There
this if we think back are three major types of hazards: Hazard can be physical or moral or
to the two houses on the river bank and the risk of flood. The risk of Morale.
flood does not really Answer to Question No. 2(b)(i)
make sense, what we mean is the risk of flood damage. Flood is the Physical hazard
cause of the loss Physical hazard relates to the physical characteristics of the risk,
and the fact that one of the houses was right on the bank of the river such as the
influences the nature of construction of a building, security protection at a shop or
outcome. Flood is the peril and the proximity of the house to the river factory, or the
is the hazard. The
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proximity of houses to a riverbank. Therefore a physical hazard is a since the company can pay claims only by collecting premiums from
physical condition other policy owners.
that increases the chances of loss. Thus, if a person owns an older Because of moral hazard, premiums are higher for all insured,
building with defective including the honest.
wiring, the defective wiring is a physical hazard that increases the Although an individual may believe that it is morally wrong to steal
chance of a fire. from a neighbour, he
Another example of physical hazard is a slippery road after the rains. or she often has little hesitation about stealing from an insurer and
If a motorist loses other policy owners
control of his car on a slippery road and collides with another by either causing a loss or by inflating the size of a claim after a loss
motorist, the slippery road occurs.
is a physical hazard while collision is the peril, or cause of loss. Answer to Question No. 2(b)(iii)
S.A.-PP-ILA&P 26 T.P.-3/2013 Morale Hazard
Answer to Question No. 2(b)(ii) This usually refers to the attitude of the insured person. Morale
Moral Hazard hazard is defined as
Moral hazard concerns the human aspects which may influence the carelessness or indifference to a loss because of the existence of
outcome. Moral insurance. The very
hazard is dishonesty or character defects in an individual that presence of insurance causes some insurers to be careless about
increase the chance of protecting their property,
loss. For example, a business firm may be overstocked with and the chance of loss is thereby increased. For example, many
inventories because of a motorists know their
severe business recession. If the inventory is insured, the owner of cars are insured and, consequently, they are not too concerned
the firm may about the possibility of
deliberately burn the warehouse to collect money from the insurer. In loss through theft. Their lack of concern will often lead them to leave
effect, the unsold their cars unlocked.
inventory has been sold to the insurer by the deliberate loss. A large The chance of a loss by theft is thereby increased because of the
number of fires are existence of insurance.
due to arson, which is a clear example of moral hazard. Moral Morale hazard should not be confused with moral hazard. Morale
hazard is present in all hazard refers to an
forms of insurance, and it is difficult to control. Dishonest insured Insured who is simply careless about protecting his property because
persons often rationalise the property is
their actions on the grounds that “the insurer has plenty of money”. insured against loss. Moral hazard is more serious since it involves
This is incorrect unethical or immoral

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behaviour by insurers who seek their own financial gain at the — Motor Vehicles Act in 1939 was passed to mainly safeguard the
expense of insurers and interests of
other policy owners. Insurers attempt to control both moral and pedestrians. The current act is MV Act 1988. According to the Act, a
morale hazards by careful vehicle
underwriting and by various policy provisions, such as compulsory cannot be used in a public place without insuring the third party
excess, waiting liability.
periods, exclusions, and exceptions. When used in conjunction with — No insurer can deny TP cover to any owner of a motor vehicle
peril and hazard we (Section 146 of
find that risk means the likelihood that the hazard will indeed cause MV Act 1988).
the peril to operate — According to Section 24 of Motor Vehicles Act “no person shall
and cause the loss. For example, if the hazard is old electrical wiring use or allow any
prone to shorting other person to use, a motor vehicle in a public place, unless the
and causing sparks, and the peril is fire, then the risk, is the vehicle is
likelihood that the wiring will covered by a policy of insurance.”
indeed be a cause of fire. — The policy comes into effect from the issuance of certificate of
Question No. 3 insurance to the
(a) What are the legal aspects of third party motor insurance? Are proposer or the insured.
there any Compulsory insurance in respect of motor vehicles comprises the
exemptions to the concept of compulsory third party insurance? following liabilities:
Discuss. — Liability arising out of bodily injury or death of the third party or
(10 marks) arising out of the
(b) Explain the features of the Term Assurance Policy. Comment on damage to his property.
the relevance — Compulsory insurance of passengers carried on hired vehicles.
of such policy to a self-employed person, who has limited income — Compulsory insurance of passengers carried by reason of a
with no material contract of
savings and who is the sole breadwinner of the family. (10 marks) employment.
T.P.-3/2013 27 S.A.-PP-IL&P — Compulsory insurance of an employee under workmen’s
Answer to Question No. 3(a) compensation act
Motor insurance being a contract like any other contract has to fulfil considering the factors such as:
the requirements — Who was driving the vehicle?
of a valid contract as laid down in the Indian Contract Act 1872. In — Whether working as conductor or ticket examiner/coolies
addition it has certain — Nature of goods carried in the goods carriage
special features common to other insurance contracts. Exceptions
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Both the central and state/local body government owned vehicles Term Insurance policy furnishes protection for a limited number of
(public transport years. It terminates
corporations also) do not fall under compulsory insurance. However with no maturity value. The face amount of the policy is payable only
for the exemption to if the insured’s
be effective, the concerned government authority must pass an order death occurs during the stipulated term. Nothing is paid in case of
for such exemption survival. Generally it
only with a fund established by the concerned government is issued for a short period but customarily provides protection for at
debt/corporate to meet the least a set number
liabilities arising out of the use of the vehicles. Limitations of liability of years, such as 10 or 20 years, or to a stipulated age, such as 65
(Liability to TP or 70 years. It is
injury / death is unlimited. This is a major change brought in by MV more comparable to property and liability insurance contracts than to
Act 1988 and that is any other life
why IRDA has brought in pool arrangement to manage TP portfolio). insurance contract. Initial premium rates are low compared to other
Liability coverage is life products because
limited to any one accident. The limitations are: the period of protection is limited.
— Liability coverage of goods vehicle under workmen’s There are many features of term assurance policies, few of them are
compensation is as per discussed
WC Act. below:
— Only upto Rs. 1,00,000 and passengers are limited to less than 1. Renewability – continuation of the policy for another term without
six. This limit is reference to
over and above the coverage available to the driver. insured’s insurability; premiums increase at each interval.
S.A.-PP-ILA&P 28 T.P.-3/2013 2. Convertibility – is an option to change over to a cash value policy
— Liability coverage limit is upto Rs.15, 000 in case of a hired [whole life or
passenger vehicle. endowment] without reference to insured’s insurability; conversion
The passengers here also include passengers under contract of allowed on
employment. attained age method or on original age method.
— Liability coverage of any vehicle other than the mentioned above 3. Re-entry – is the facility to pay lower premium than otherwise if
is limited to insured can
the rupee value of actual liability. demonstrate that they meet certain continuing insurability conditions.
— Liability coverage in case of any damage to the property of third Re-entry term premiums are based on select / mortality split.
party is upto Relevance of such policy to a self-employed person, who has
Rs. 6,000. limited income with
Answer to Question No. 3(b)
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no material savings and who is the sole breadwinner of the and family history, habits, employment, insurance already in force,
family and other applications
This policy is very useful for a person who is self employed and has for insurance that either are pending or have been postponed or
limited income refused etc. A failure to
with no material saving. This policy provides security cover at a very do so leads the insurer being estopped [i.e., prevented] from denying
low premium. the correctness or
Such person may take benefit of this policy and can secure his truth of information in the application. Insurers place great reliance
dependants. Though the on this information to
insured does not get anything at the time of survival but it gives issue the requested policy. This principle of insurance stems from
economic security to the doctrine of
the dependants. “Uberrimae Fides” which is essential for a valid insurance contract. It
Question No. 4 implies that in a
(a) What is the relevance of “utmost good faith” to life insurance contract of insurance, the concerned contracting parties must rely on
contracts? Are each other’s honesty.
there any exemptions to this concept ? (10 marks) Insurance contracts are different from other contracts. Normally the
(b) What are the special features of a term insurance life policy? doctrine of “Caveat
Explain. Emptor” governs the formation of commercial contracts which means
(10 marks) ‘let the buyer
Answer to Question No. 4(a) beware’. The buyer is responsible for examining the good or service
Utmost good faith is the most important principle of Insurance and its features and
contract. In insurance functions. It is not binding upon the parties to disclose the
contracts, the rule of caveat emptor [let the buyer beware] does not information, which is not
generally apply. asked for.
T.P.-3/2013 29 S.A.-PP-IL&P However in case of insurance, the products sold are intangible. Here
This doctrine is supported by Representation through an application the required
Concealment facts relate to the proposer, those that are very personal and known
Warranty. An application for life and health insurance is the only to him. The law
applicant’s proposal to the imposes a greater duty on the parties to an insurance contract than
insurer for protection and is the beginning of the policy contract. The those involved in
proposed insured is commercial contracts. They need to have utmost good faith in each
required to give accurate answers to questions in the application other, which implies
relating to his personal full and correct disclosure of all material facts by both parties to the
contract of insurance.
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The term “material fact” refers to every fact or information, which has of the conditions for which the insurance policy was purchased, the
a bearing on other party would
the decisions with respect to the determination of the severity of risk perform his duties as promised by him. Non-compliance by either
involved and the party or any nondisclosure
amount of premium. The disclosure of material facts determines the of the relevant facts renders the contract null and void.
terms of coverage Answer to Question No. 4(b)
of the policy. Special features of a term insurance life policy : A term insurance
Any concealment of material facts may lead to negative plan provides a
repercussions on the pure risk cover where the sum assured becomes payable upon
functioning of the insurance company’s normal business. For death of the life assured
instance life insurance during the term of the policy. Since there is only a risk cover, the
companies normally segregate the quality of lives depending upon premiums are usually
the state of health of S.A.-PP-ILA&P 30 T.P.-3/2013
the people. Healthy people are accorded a higher status in the table low and affordable and the policy assures a financial security to the
and different (lower) family members
rates of premium are applicable to them since their risk of ill health is upon death of the life assured. The term of the policy is fixed and
lower. If a person where the life assured
suppresses facts about his ill health and manages to buy a policy at survives the full term, no amount is payable. Some variants of pure
rates applicable to protection plans
the low risk group then other policyholders in the same group have to also assure a return of some or whole of the premiums paid if the life
share his risk. This assured survives
results in adverse selection. the term of the policy. The benefit arising to the insurance company
Hence as per the principle of utmost good faith it is binding on the in such case is the
part of parties, the income out of the premiums invested during the term.
insured and the insurer, to expressly disclose all the relevant Question No. 5
material facts pertaining to (a) A Shipping Company owns an ocean-going steamer valued at
the contract. This doctrine is incorporated in insurance law and both Rs. 32 crores.
the parties are The steamer has been insured with three different insurance
expected to adhere to a high degree of honesty. Based on such faith, companies X, Y
the insurer and the and Z. The amount underwritten by X is Rs. 6 crores, by Y is Rs. 10
insured execute the contract of insurance. Thus each party believes crores and
that on fulfillment by Z is Rs. 16 crores. The steamer met with an accident and the loss
is valued
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at 4 crores. Calculate the liability of each individual insurer. (10 (b) Distinction between Insurance and Speculation
marks) (c) Exceptions to the principle of indemnity
(b) Explain 4 risk handling techniques. (10 marks) (d) Exceptions under a personal accident policy
Answer to Question No. 5(a) (e) Functions of capital in an insurance company. (5 marks each)
The cost of steamer = Rs. 32 crores Answer to Question No. 6(a)
The insurance value of steamer Characteristics of Risks
A = Rs. 6 crores, Risk is the potential of loss (an undesirable outcome, however not
B = Rs. 10 crores necessarily so)
C = Rs. 16 crores resulting from a given action, activity and/or inaction. The notion
Thus the total sum insured amounts to Rs. 32 crores. implies that a choice
Hence the liability of each individual insurer = (Amount underwritten having an influence on the outcome sometimes exists (or existed).
by the insurer * Potential losses
amount of loss)/total sum insured themselves may also be called “risks”. Any human endeavor carries
So, the liability of insurer A = Rs. (4* 6)/32 = Rs. 75 lakhs. some risk, but
The liability of insurer B = Rs. (4*10) / 32 = Rs. 1.25 crore. some are much riskier than others. Risk can be defined in many
The liability of insurer C = Rs. (4*16) / 32 = Rs. 2 crores. different ways.
Answer to Question No. 5(b) - The probability of something happening multiplied by the resulting
Once risk and identified and analyzed, it is important to plan and cost or benefit
adopt a suitable if it does.
strategy for controlling the risk. Risk planning and controlling is the - The probability or threat of quantifiable damage, injury, liability,
stage which comes loss, or any
after the risk analysis process is over. Some of the major methods of other negative occurrence that is caused by external or internal
handling and vulnerabilities,
controlling risk are: and that may be avoided through preemptive action.
(a) Risk avoidance; Risk is part of every human endeavor. From the moment we get up
(b) Risk retention; in the morning,
(c) Risk transfer; drive or take public transportation to get to school or to work until we
(d) Loss control; and get back into our
(e) Insurance. beds (and perhaps even afterwards), we are exposed to risks of
T.P.-3/2013 31 S.A.-PP-IL&P different degrees.
Question No. 6 Answer to Question No. 6(b)
Write short notes on the following: Distinction between Insurance and Speculation
(a) Characteristics of risk
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Insurance and speculation both are different. Insured takes an agreed upon amount in full is paid to the beneficiary in case of loss
insurance policy so of life.
as to transfer the risk posed by him to the insurer while speculation is
a situation in
which either profit OR loss is possible. Examples of speculative
transactions are betting
on a horse race, investing in stocks/bonds and real estate.
Speculative transactions are
uninsurable.
Answer to Question No. 6(c)
Exceptions to the Principle of indemnity
In non-life insurance this covers Personal Accident Insurance and
certain types of
Health Insurance such as ‘Critical Illness’, ‘Hospital Cash’, etc.,
where the agreed amount
is paid as claims without having to establish the actual spending by
the policyholder).
The life of a person is different from a material or property. The
principle of valuing
material property like replacement cost less depreciation and
discounted cash flows
cannot be applied to determine the monetary value of the life of a
person.
The value of life is broadly determined by certain qualitative factors
and is subject
to one’s opinion. The most important factor here is the earning
capacity of the person
S.A.-PP-ILA&P 32 T.P.-3/2013
and the insurable value is the value of the policy taken up by the
person. A life insurance
policy is not subject to the principle of indemnity but is a valued
policy wherein the

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Answer to Question No. 6(d) In case of accidental death during the policy period, normally, the
Exceptions under a personal accident policy policy, in addition
Personal Accident Insurance covers funeral expenses of the insured person. (some companies
Personal accident insurance provides protection to the insured even provide removal
person financially, if of mortal remains). Permanent total disablement occurs when an
he is injured. This policy provides monetary compensation in case of individual is unable to
death or disablement perform his regular duties for the remaining part of his life. (loss of
resulting from accidental injury arising out of External, Violent and both eyes, upper
Visible means. Medical limbs, lower limbs etc. are treated as total disability.
expenses incurred for treatment of injuries from such accident are Answer to Question No. 6(e)
also reimbursed to a Capital plays a very importance function in an insurance company.
certain extent on payment of additional premium. The policy also Insurance companies invest the capital in the insurance business
pays a pre-determined which helps the insurance company
sum if death occurs as a result of an accident. All of us are exposed to sustain initially. Initially most of the premium income is spent and
to the risk of the capital with the insurance provides subsistence to workers.
accident, which is a threat to our financial security, and therefore it is Adequate capital is very important for proper
prudent to have functioning of an Insurance company
adequate personal accident cover to manage this contingency. For
handling accident
risks, personal accident policy, janata personal accident policy and
gramin personal
accident policies are available in India. Other personal accident
policies are offered to particular groups like students, NRI’s, women
etc.
Scope of cover
Personal accident policy pays compensation to the insured in the
event of happening
of one or more of the following listed below which may be selected
by insured at the time
of taking policy:
(a) On death;
(b) On permanent total and partial disability; and
(c) On temporary total disability.
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