Ch 7 Insurance Law And Regulation 1

Insurance Law and Regulation PUTTU GURU PRASAD INC GUNTUR

General Insurance Policy and its elements 

The Insurance business has developed in proportion to the development of the economic growth in India. General Insurance is one of the fastest growing business in India. Many Insurance companies have come to Indian market to make profits.

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They are short term contracts. They can be renewed. Every renewal is a new contract.

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The mode of payment and time period calculations are different in comparison to life insurance. But other principles of insurance are applicable to general insurance contracts also.

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Insurance Act, 1938 and the General Insurance Business (Nationalization) Act, 1972 are applicable.

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General Insurance

Insurance Law in India

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Insurance law is based on the English Law

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Indian Life Assurance Companies Act, 1912 was passed based on the English Act of 1909 ( Life Insurance) Now under the Life Insurance Act, 1956

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The General Insurance Business is governed by 1938.

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The other special insurances are governed by special enactments like

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Marine Insurance Act, 1963,

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Motor Vehicles Insurance Act, 1988,

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Public Liability Insurance Act, 1991 after the Bhopal gas Tragedy and Olium Gas leakage in Delhi.

Insurance Act,

Meaning of Insurance

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It is a contract in which one party known as the insured or assured, insure with another person, known as the insurer, assures or underwrites his property or life, or the life of another person in whom he has a pecuniary interest, or property in which he is interested, or against some risk or liability, by paying a sum of money as the premium. Under the contract, the insurer agrees to indemnify the insured against a loss which may accrue to the other on the happening of some event.

Features of Insurance Contract • • • • • •

Shifting or transferring risk of loss or damage Sharing of losses by members of the group One party undertakes to make good the loss of the other party. The risk is for a consideration of money called as Premium (No risk to be assumed unless premium is received in advance). The amount will be paid on happening of the specified act or event. E.g.. Death, Fire Accident, Motor Accident , Any peril in Sea. The general principles of contract, like offer, acceptance, communication of offer and acceptance, consideration, free consent, legal formalities etc.. are to be followed for a insurance contract to be valid.

Parties to the Insurance Contract • Insurer ( The person who undertakes the risk under the contract) • Insured ( The person to whom the undertaking is given) • The Insurer can be any of the following mentioned below:     

An individual, Unincorporated body of individuals, Body corporate ( Companies Act) including Indian Insurance Company, An Association of partnership firm Registered, Any other agency permitted under any other Law in India with exceptions as specified under the Act.

Policy

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The instrument in the contract of insurance is generally embodied and is called the Policy.

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It is the evidence of contract.

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Every policy will have terms. The terms states the duration of risk that is going to be covered by the Insurer.

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Other than life insurance all other kinds of insurances are policy to be taken from year to year.

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The insurance comes to an end after that particular year if it is not renewed.

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All insurance contracts are considered to be contracts which are aleatory, voluntary, executory and conditional contract between the two parties i.e. the Insurer and the Insured.

Insurance Contracts- Special characteristics 

Insurance Contracts are Standard Form Contracts.

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Terms of agreement to be in writing.

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Policy, which is a document of contract contains the terms and condition (stipulations) of contract, the risks covered and the valuation.

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It contains an indemnity clause, in which the insurer undertakes to indemnify the loss of the insured (The risks covered are specified in the policy). The pecuniary interest is compensated for happening of a particular specified event on the specified subject mater.

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Contract of insurance are contract of indemnity (Other than life insurance, as life cannot have a valuation). It specified the amount of premium to be paid by the insured.

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The contract of insurance are contract made under uberrimae fide (Contract with utmost good faith)

Insurable Interest

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Some proprietary or pecuniary ( Monetary) interest.

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A person is said to have insurable interest only when he or she is so situated with regards to the thing insured that he would have benefit from its existence and loss from its destruction.

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In all the insurance contracts, there must be an insurable interest. Absence of insurable interest makes the insurance contract a wagering contract.

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The insured must have an insurable interest in the object or the life of the insured. E.g. Industry owned by a person, Creditor having a insurable interest over the life of the debtor etc…

Legal Principles of Insurance •

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Insurable Interest- The contract of insurance is similar to a wagering contract as it is based on the uncertain events. Any contract which is a wagering contract, is unlawful. But the presence of insurable insurance in the insurance contract has made it a valid contract. Presence of property right, interest, life or potential liability is the essential feature of insurable interest. The important concept in insurable interest is that, there should be a recognized relation under law between the insured and subject matter of the contract. The insurable interest may be created either by operation of law or under the common law under the contract. Insurable interest in life insurance policy in certain set of relationships as established under the law. E.g. Once own life, Husband and wife, employer and employee etc…. cont….

Other Principles •

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Good Faith- The contract of insurance is based on utmost good faith. Therefore the duty of disclosure forms the bottom line of contract. The principle of utmost good faith has to be present between the insured and the insurer. Withholding of any relevant information or misstatement of any material facts may give the insurer a legal ground to declare the contract as void. Uberrimae fide (Contract with utmost good faith). It is an exception to the cardinal rule of the commercial contract i.e. the rule of ‘caveat emptor’ does not apply to Insurance contracts. The risk involved is an intangible asset in the hands of insured and the insurer. In insurance contract with the details of facts the insured proposes and the insurer by knowing the facts undertakes to take the risks knowing those facts and conditions.

Causa Proxima

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In contract of marine insurance and fire insurance, the main principle applicable will be the principle of causa proxima i.e. the proximate cause.

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The meaning is that, when a damage has resulted due to two or more causes, the law looks into the proximate or the nearest cause of the damage, although the damage might not have taken place without the remote cause.

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In any event of a loss, the law looks into the proximate cause and not the remote cause.

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Such cause should be a peril that can be covered under the contract, otherwise the insured cannot claim successfully.

Risk and Mitigation of loss

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In order to enforce any contracts relating to insurance, there must be a risk attached to it. The insured pays premium to the insurer for running a certain risk. If the insurer is not doing so, he will be bound to return the premium paid by the insured.

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The other important principle of insurance contract is the mitigation of loss by the insured. It imposes a duty on the insured to act as if is not insured. If any mishap happens, the insured must have all those measured to minimize the loss, as if he would have taken if he was not covered by a insurance. Law expects the insured to act as a reasonable man.

Principle of Subrogation

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The principle is corollary to the principle of indemnity. So it is applicable to contract of fire and marine insurance. It is a right of the insurers, so that they can enforce their own benefits relating to all the rights and remedies, similar to what the insured could have made. Whatever rights the insured have against the third party, will be given under law to the insurer. The concept of subrogation is substitution of one person in place of another, in relation to claims, rights, remedies and securities. It is equivalent to step into the shoes of another. This is a right of the insurer, which is made available, when the insurer satisfies the claims of insured, and later stands in the place of the insured.

Contribution and double insurance

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Any property can be insured with one or more insurers. Therefore when a property is insured with two or more insurers against the same risk. It will be called “double insurance”. When the property is under double insurance and if any loss occurs, the insured will get compensation only for the amount of actual loss. By calculating the actual loss each company will pay as per the principle of “ Contribution”. This principle is applied as the insurers share the burden of loss. But sometimes if only one insurer pays, then the other insurance will be obliged to contribute to the insurer who has made good the loss. This sharing of loss among the insurers to make good the loss is called the right to contribution in case of double insurance.

Re-insurance

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When the insurer insures the risk that he or she undertakes with another insurance, then there is re-insurance.

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Through reinsurance the insurer feels that he has taken heavy risks and thereby transfers a part of the risk to another insurer.

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Reinsurance is considered to insurance of insurance and done by the insurer to protect his interest. It is also a contract of indemnity

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Double insurance is a protection that insured takes.

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The general principles of insurance contract are applicable to reinsurance contracts also.

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Generally the re insurer will pay the money only when he is satisfied that the original insurer has paid for the loss.

Days of Grace

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The time allowed by the insurance company after the expiry of the stipulated period during which the assured can pay the premium in order to continue or renew the policy of insurance.

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Other than the life insurance contract , all kinds of insurance are one year contracts.

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Days of grace are given as an opportunity to renew the contract or not to continue it.

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If any loss occurs during the days of grace the insurer will not be liable.

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For a life insurance contract, if death occurs during the days of grace without the payment of the premium, the money due under the policy becomes payable.

Fire Insurance •

The main objective of fire insurance is to cover the risks that happen through fire. The risk to the asset is from fire or those which are incidental to fire. The loss is either by fire or incidental to fire or such other that or customarily included among the risks insured against in the fire policies.

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Loss or damage occasioned by fire means loss or damage either by ignition of articles consumed, or by ignition of that part of the premises, where the article is. The cause of fire is not material unless it is deliberate act of the insured or someone acting on behalf of the insured.

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A contract of Indemnity

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It covers both tangible movable and immovable property

Elements of Fire Insurance Subject to the principle of uberrimae fidei • Insurable Interest- Owner as well as the beneficiaries of the property poses Insurable interest. E.g.. Tenants, Carriers, innkeepers, Wharfingers, mortgagees charge holders, officials assignees, receivers, executors and trustees. Insurable interest need not be necessary at the time of insurance, but it has to exist at the time of the loss. • Right to subrogation • Right to contribution • Assignment- Fire insurance may be assigned by endorsement in the policy or by writing by giving a notice to the insurers. • The fire insurance policies have certain implied and express conditions and warranties. • Average Clause- In fire insurance there will be a clause, which provides that in case of loss, which is more than the insured amount, the insured have to bear the loss.

Coverage of Risk Any fire policy covers the property of a person such as buildings of residential or commercial nature, furniture or machinery or other property that are movable and tangible. The Risk Covered are: • Damage caused by explosion or implosion in industries through any apparatus etc… • The damage to a aircraft or any property dropped from it. • Missile testing operation is also included. • Damage caused by bush fire. The following losses are excluded from the coverage of fire insurance: • Forest fire. • Any damage or destruction caused by fire due to war or kindred by war not covered. • Any loss or destruction caused by pollution, nuclear peril etc.

Types of Fire Insurance

The different types of fire insurance policies are: • Valued policies, • Unvalued or open policies • Long-term, mid-term and short-term policies, • All risk policies and • Limited risk policies Other principles to be known under the fire insurance policy are: Assignment of the policy- Under the TP Act,1882, where the law provides for assignment of the policies either by a mere endorsement or by a separate deed of assignment. Loss assessment- Will be made by the insurer. All the claims to be made within the limitation period. In case of possibility the insurer can replace property at loss. Claim settlement- After assessing the damage the insurer will settle the claim. He can even reject the claim. The loss depends upon the kind of policy taken etc…

Marine Insurance •

The Marine Insurance Act was enacted in the year 1963 based on the English law. • In Marine insurance, the insurer undertakes to, indemnify to make good the marine losses and those losses incidental to marine adventure. The risk involved is incidental to navigation of sea and perils of sea including, war , pirates, rovers, captures, seizures, jettisons, barratry etc… as designed by the policy The term marine adventure includes: a) Any adventure where the insurable property is exposed to marine perils b) The earnings or acquisitions of any freight, passage money, advances loans, etc is endangered by the exposure of insurable property to maritime perils c) any liability to the third party which may be incurred by the owner of or other person interested in or responsible for, insurable property by reasons of maritime perils.

Essential elements and contents of the Marine insurance policy To be embodied in a marine policy otherwise the contract of marine insurance will be considered to be void. It may be executed and issued at the time of contract and later by initialing of the slip by insurer or underwriter. Other than the general elements like offer, acceptance, premium, good faith, insurable interest to be presented the time of loss, the name of the owner of the ship etc The policy should contain the following: • Name of the assured or other person who effects the insurance on his behalf • The subject matter and the risk insured against; • The voyage/ period of time or both • The sums insured • The names of the insurer/insurers

Types of policies and other features The different types of policies are: • Voyage Policy ( Voyage means the route of the sea where the vessel or the ship undertakes the journey). • Time Policy- made for a definite period of time and in case it covers both a voyage and the time period , it will be called a Voyage Time Policy. • Valued policy • Open or Unvalued Policy • Floating Policy The policy can be assigned to any person who has an Insurable interest in the subject matter unless prohibited by the contract. The other important clauses of the document will have warranties, loss assessment, claims settlement including the general average, right of subrogation, contribution etc..

MOTOR VEHICLE INSURANCE

 Governed under The Motor Vehicle Act, 1988  It is a contract of indemnity, in which the insurer promises to indemnify the loss which the insured will incur but also the driver who may actually be a third party to the insurance contract. E.g., A insurance to a car or a bus includes the insurance of the driver who is saved from the liability to pay the compensation to those people who have suffered the loss due to the accident by the vehicle insured.

Other Principles

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The enactment has developed based on the No Fault Theory- (It means that the claimant need not prove negligence on the part of the motorist, once an accident occurs, the liability is considered to be automatic).

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The enactment has not made insurance of the vehicle against the damage as compulsory but it has made the third party liability due to the accident of motor vehicle compulsory.

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As per this rule no motor vehicle, which is not having a third party insurance cover can ply the vehicle in public place. The liability will arise when there is death or permanent disablement.

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The Act provides for the mode of making claims, jurisdiction of the Tribunals established and the payment of compensation.

Public Liability Insurance

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The Act was enacted in 1991 after the Bhopal Gas Tragedy and the Olium Gas leakage in Delhi ( Shirram Fertilizers). (Industrial Risks and Non Industrial Risks like flights, cinema halls, educational institutions , warehouse etc...)

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The Act was enacted with a purpose of providing immediate relief to persons affected by accident occurring while handling any hazardous substance or products and for matters connected therewith or incidental thereto.

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The main purpose of the Act to give relief to the victims of the accidents and when there is death or disability.

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The Act defines the process, which constitutes the handling of hazardous products and to insure for the purpose of claims of compensation for the victims of such accidents.

Other principles

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Every owner is under a mandatory obligation to purchase insurance policies depending upon the requirement to meet the needs of the employees and the nature of the substances handled by them.

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The contract under the Act is between the owner and the insurer. The insurer will compensate the owner from liability of payment of compensation to the employees handling the hazardous substance.

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The district collector has been empowered under the Act to inspect the area, documents and verify the claim. He has the powers of the civil court.

Special Provisions •

A fund known as Environmental Relief Fund is established or deposited with a nationalized bank.

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The owner has to deposit in a Nationalized Bank every year an amount equal to the premium paid by them.

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The fund is developed to meet the needs of claims.

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The Act, makes it an offence if any owner fails to comply with the provisions of the Act, like failure to purchase insurance policy, provide information, comply with the directions of the Central Government.

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The Central Government has directive and supervisory powers.

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It can appoint a committee for the same, issue notification of the enforcement and commencement of the Act.

Miscellaneous Insurance Business Policies

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The insurance contracts which are not covered specifically under general, fire, and marine insurance come under this Insurance.

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Regulated under the Insurance Act, 1938

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The licensed insurers can undertake this business. They can design their own products and market them to their customers. They can be short term or short-range usually from year to year.

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The general principles of Insurance contract are applicable.

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The Medi-Claim, burglary/ house breaking, fidelity guarantees, cattle, agricultural related insurances are the expansion that have taken place in the Insurance coverage. Risks are growing these days.

Regulation of Insurance Business •

The Insurance Regulatory Act, 1999 is the enactment made for the purpose of regulating insurance business in India. The Act is considered to be a landmark legislation to regulate both private and government corporations engaged in the Insurance business.

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The globalization, liberalization and privatization forced the government to appoint a committee chaired by Sri R N Malhotra to make certain regulations for Insurance sector.

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After making the recommendations certain provisions of the LIC Act and GIC were amended to allow the private companies to enter the Indian market.

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The Insurance Regulatory Authority has been replaced by the Insurance Regulatory and Development Authority (IRDA) after the enactment of the IRDA Act, 1999

Purpose and objectives of the Act

Purpose: •

The Act defines the powers and functions of the IRDA

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It is acting as a tool to check the accounting system and reporting system of the Insurers.

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It can make regulations in the field of licensing of insurers, agents intermediatories, in relation to capital, investments and securities, etc..

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It also describes the powers, authorities, and related matters so as to completely regulates the insurance business.

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Objective- To establish authorities to protect the interests of the holders of the insurance policies

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To allow orderly growth and also to promote the insurance industry including those which are incidental to them.

Duties of the IRDA

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Regulate , promote and ensure orderly growth of the insurance business

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Maintain proper accounts and arrange proper audits of accounts as prescribed by the Central Government in consultation with the Controller and Auditor General of India.

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The authority to submit the audited balance sheets to the Central Govt, and lay it before both Houses of the Parliament.

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Duty to follow the directions of the Central Govt.

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To protect the interest of the policy holders in matters relating to assignment of policy, nomination of policy, settlement of insurance claims, surrender of the policy, and related matters of insurance contracts.

Powers and Functions of IRDA • • • • • • • • • •

Supervisory powers Appointment of staff and officers To delegate powers Constitute committee To hold property, acquire property both movable and immovable. To make code of conduct to agents, chief agents, principal agents etc.. Promoting and regulating professional organizations connected to Insurance and re-insurance business. Levy fees Call information from insurance undertakings, inspections, investigations etc.. Power to regulate the investments of funds

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Other Powers • • • • • •

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Regulate the margin of solvency Acts as an adjudicator in settlement of disputes between insurers and intermediatories of insurers. Supervises and checks the functioning of the Tariff Advisory Committee. It formulates and regulates rural and social insurance sectors insurers. To finalize service conditions in consultancy of Insurance Advisory Committee of the members and the staff of the Advisory Committee The Central Government is given the powers to direct the Authority and grant funds with the sanction of the Parliament i.e.. IRDA Fund which is used to meet the salaries, allowances, etc of the members and officers. The fund also gets credit from the Insurance premiums, application fee from insurers etc..