December2A- Gen Princiles of Insurance Law

8/13/2019 December2A- Gen Princiles of Insurance Law

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General Principles of

INSURANCE

Dr.Ashok R PatilAssociate Professor in LawChair on Consumer Law and PracticeNLSIU, Bangalore


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Nature of the Insurance Contract

a. Contract is Aleatory: contract ofspeculation; depending on uncertainevent or contingency as to bothprofit and loss

b. Contract of Utmost Good Faith(Uberrima fides)

c. Contract of Indemnityd. Not a Wager Contract


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Insurable Interest means

A relation between the insuredand the event insured against,such that the occurrence of the

event will cause substantialloss or injury of some kind to

the insured.


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Insurable Interest

1. The interest should not be a meresentimental right or interest, forexample, love & affection alone

cannot constitute insurableinterest.

2. It should be a right in property or

a right arising out of a contract inrelation to the property.


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Cont..

3. The interest must be pecuniary, that is,

capable of estimation in terms of money. --In other words, the peril must be suchthat its happening may bring upon theinsured an actual or deemed pecuniaryloss. Mere disadvantage or inconvenienceor mental distress cannot be regarded asan insurable interest.

4. The interest must be lawful, that is, itshould not be illegal, unlawful, immoral oropposed to public policy.


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When Insurable Interest mustExist?

i. Life Insurance: at the time ofbeginning/inception

ii. Fire Insurance: both at the time of

beginning and at the time of lossiii. Marine Insurance: at the time of loss


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i. Insurable Interest andLife Insurance

Insurable interest should exist at thetime of taking the policy. It need notexist at the time when the loss takesplace or even when the claim is madeunder the policy.

Life insurance contracts, as we have

noted, are not strictly speakingcontracts of indemnity.


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The following persons have beenrecognised as having insurableinterest and they may convenientlybe considered under three main

headings, namely:a) By relationship by marriage, blood or

adoption

b) By contractual relationship, andc) By statutory duty


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a) Blood Relationship

i) On ones own life: Every person is

presumed to have insurable interest in hisown life without any limitation. Everyperson is entitled to recover the suminsured whether it is for full life or for anytime short of it. If he dies, his nominee ordependents are entitled to receive theamounts.

ii) By Husband or Wife:iii) Parent and Child:

iv) Other relations


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ii) By Husband or Wife

Griffiths v Fleming (1909)

- It is now well settled in England and Americathat a wife has an insurable interest in thelife of the husband and vice versa.

- It forms an exception to the general rulethat interest necessary to support theinsurance of another persons life must be

capable of expression it terms of money orpecuniary interest.


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The husband and wife are dependenton each other, that is presumed asinsurable interest in the life of eachother.

Insurable interest should be existedat the time of entering in to thecontract. They will continue to be

operative even after the dissolution ofthe marriage.


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Example

A takes out a policy on the life of his wife B

and subsequently even if they are divorcedstill the policy continues to be valid.

On other hand, if A takes out a policy on

the life of B whom he proposes to marry orwho has been divorced by him, the policy isnot valid for want of insurable interest at

the commencement of the risk, that is, atthe time when the contract is made.


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ii) Parent and Child

If the person has any pecuniary interest in

the life of the child, whether natural oradopted, he can take out an insurancepolicy on the life of such child.

A child whether natural or adopted is

presumed to have an insurable interest inthe life of the parent because it depends onthe life of the parent for support whethernatural or adopted.

Even if such interest is proved, if a personeffects a life insurance on a boy whom heintends to adopt, the insurance is not valid.


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b) Contractual Relationship

Debtor and Creditor

Partner and Co-partner

Principal and Agent

Master and Servant


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Debtor and Creditor Relationship

A creditor has an insurable interest in the

life of the debtor [Godsall v Baldero (1807)] It is immaterial whether the debt is secured

or unsecured. The creditors interest has an insurable

interest in the life of the debtor because thechance of obtaining repayment materiallydepends upon the continuance of the life ofthe debtor.

The creditor has also an insurable interestin the life of the surety, as a surety is onlya favoured debtor.


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On the same principle the surety hasan insurable interest in the life of theprincipal debtor.

A policy on the life of the debtor willnot cease to be operative eventhough the debt has been satisfied or

the debt becomes time barred beforethe debtor dies.


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Similarly

Surety can insure the life of a co-surety

Mortgagee can insure life of his mortgagor

In these relationship it may be

noted that the person who is in theposition of a creditor only has aninsurable interest in the life of the

person in the position of the debtorand not vice-versa


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Utmost Good faith/ Uberrima fides

A contract of insurance is a contractbased upon the utmost good faith,and, if the utmost good faith be notobserved by either party, the contractmay be avoided by the other party.


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LIC v. G.M.CHannabsemma,AIR 1991 SC 392

In a landmark decision the SC has held that

the onus of proving that the policy holder hasfailed to disclose information on material factslies on the corporation.

In this case the assured who suffered from

tuberculosis and died a few months after thetaking of the policy, the court observed that itis well settled that a contract of insurance iscontract u b e r r i m a e f i d e s , but the burden of

proving that the insured had made falserepresentation or suppressed the material factsis undoubtedly on the corporation.


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Sec.45 of Insurance Act 1938

The insurance contract is a contract of utmost

good faith and therefore if the assured hasnot disclosed all the material facts, theinsurance company can avoid the contract.

It has become the practice of the insurers to

insert a clause in the policies and proposalforms as we have already noted, to declarethat all the answers stated in the proposal formshall form the basis and form part of the terms

of the contract in the policy.


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New India Insurance Company v.Raghava Reddy, AIR1961 AP 295

It was held that a policy cannot be avoided on the

ground of misrepresentation unless the followingare established by the insurer namely,

a. The statement was inaccurate or false.

b. Such statement was on a material matter or that

the statement suppressed facts which it wasmaterial to disclose.

c. The statement was fraudulently made

d. The policy holder knew at the time of making

the statement that it was false or that fact whichought to be disclosed has been suppressed.


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Cont..

By such a declaration, for any variation of

the state of things from therepresentations in the proposal form,whether in fact is material or not, and

however slight the variation may be theinsurer gets a right to avoid the policy.

Section 45 of the Insurance Act 1938,

modified this rule materially andmitigated the rigour of the rule of utmostgood faith.


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Cont

It lays down that no policy can be

challenged after two years from the dateof the policy on the ground that anystatement made in the proposal or in

any report of the medical officer or anydocument was inaccurate or

false unless it is material to disclose andit was fraudulently made and the policy

holder knows at the time that it wasfalse or he suppressed the fact materialto be disclosed,


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Cont..

provided that nothing in thatsection prevents the insurerfrom calling for proof of age of

the assured or to adjust therate of premium according to

the correct age provedsubsequently.


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Mithoolal v. Life InsuranceCorporation, AIR 1962 SC 814

LIC challenged a policy after two

years after its issue. It was inevidence that the assuredfraudulently suppressed facts. It washeld that the LIC was not liable


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LIC v. Janaki Ammal, AIR 1968Mad 324.

Following the SC observations of the

Mithoolal case referred to above held that ifa period of two years has expired from thedate on which the policy of life insurancewas effected,

that policy cannot be called in question byan insurer on the ground that a statementmade in the proposal for insurance or onany report of a medical officer or referee,or a friend of the insured, or in any otherdocument leading to the assure of thepolicy, was inaccurate or false.


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Present Position

If the policy is questioned after a period of

two years the insurer can repudiate thepolicy only if he knows that such astatement was on a material matter or theinsured suppressed facts which it was

material to disclose and that it was fraudulently made by the policy

holder and that the policy holder knew at

the time of making it that the statementwas false or that it suppressed facts whichit was material to disclose.


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Special Doctrines

Reinstatement

Subrogation

Contribution


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Special DoctrinesReinstatement

Reinstatement literally means

- replacement of what is lost or

- repairing the damaged property and

bringing it to its original value andutility.


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In Anderson v. Commercial Assurance Co,(1955) 55 DJQB 146 (CA)

Lord Esher MR explained: we have come to

the conclusion that the words reinstateand replace should thus be applied:- if the property is wholly destroyed, thecompany may, if they choose, instead of

paying the money replace the things byothers which are equivalent; or,- if the goods insured are damaged but notdestroyed, may exercise the option to

reinstate them, ie, to repair them and putthem in a condition in which they werebefore the fire.


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Right of Reinstatement

This right of the insurers to reinstate

the property instead of paying themoney may spring up;a. either from a contract in the formof a clause under the policy, orb. under a statute.

This type of clause is not inserted inall policies in all branches ofinsurances, eg, it is not and cannotbe included in life policies.


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Only in indemnity insurances, in

appropriate branches of insurance, likefire, burglary, steam boilers, or motorvehicle insurances, this clause called

the reinstatement clause, entitling theinsurers to exercise an option, on thehappening of the insured event, either

to reinstate or to pay the insuredmoney can be incorporated.


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Times Fire v Hawke, 1858

When once the option to reinstate is

expressly or by implication exercisedin favour or reinstatement, itamounts to a new contract and they

cannot go back and say that theywould pay money.

The selection of one alternative

amounts to an abandonment of theother.


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In Brown v Royal Assurance co Ltd, 1859

CJ Campebell observed:

On exercising the option the case standsas if the policy had been simply toreinstate the premises in case of fire;

because, where a contract provides foran election, the party making theelection is in the same position as if he

had originally contracted to do the actwhich he has elected to do


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In reinstatement, it is sufficient

that a substantially similar buildingis construed although the newbuilding is not identical in all

minute details with the destroyedone.

But if the new building is by far

less than the original building, theyhave to make good the loss.


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In Brown v Royal Insurance Co

It has been held that if the newbuilding is costlier than theoriginal building, on that count

they cannot go back from theirduty nor in the absence of aspecific agreement, require the

assured to contribute for thebalance.


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Smith v Colonial Mutual Fire, 1880

It was held that if a fire occursfor a second time during thereinstatement, they are their

own insurers and so cannotclaim credit for what they havealready spent.

They should replace a similarbuilding.


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SubrogationRandal v. Cockran (1748) 1 Ves Sen 98

The doctrine of subrogation is a

necessary incident to a contract ofindemnity and therefore is applicableto a contract of fire insurance and

one of marine insurance.


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It is given statutory recognition in sec.79

of the Marine Insurance Act 1906. Underthis doctrine, as applicable to fireinsurance, the insurer has a right ofstanding in the shoes of the insured and

avail himself of all the rights andremedies of the insured, whether alreadyenforced or not.

The principle of subrogation prevents an

insured who holds a policy of indemnityfrom recovering from the insurer the sumgreater than the economic loss he hassustained.


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Therefore, if a loss occurs under such

circumstances that insured has analternative right to recover damages,under common law, tort or statute and

if the loss is also covered by the policy

and so he can recover the entire lossfrom the insurer and if he so receives,the insurer is entitled to, or issubrogated to, the former alternativerights and remedies of the insured andthis is technically called subrogation.


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Limitation on the Doctrine

i. Does not apply to life and personal

accident policies;Before the doctrine is applied, there must be

indemnity. Since life and personal accident

policies are not governed by strict principleof indemnity the doctrine applies only tofire, marine and other non-life policies;

ii. Insurer must pay before he claimsubrogation;


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iii. Assured must have been able to bring action.

For Example. where two ships belonging to the same owner collided

by fault of one of them, the insurers of the ship not atfault have been held not to be entitled to make anyclaim on the owner of the ship at fault, though the

insurers of cargo owned by a third party can claimsubrogation [Simpson v. Thompson, 1877 (3) AC279].

Similarly, where the assured and the wrongdoer are

co-assureds the doctrine does not apply [Petrofira v.Magnaload, 1983 (2) Lloyds Rep 91].


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AIR 2001 SC 2630 "Savani Road Lines v.Sundaram Textiles Ltd."

COPRA S.2(1)(d) - CONSUMER

PROTECTION - "Consumer" - Insurancecompany compensating consignor forloss of goods during transit - Insurance

company taking letter of subrogation,filed consumer complaint for recoveryof amount against carrier of goods -

Letter of subrogation was in effect anassignment -


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Therefore, insurance company being

an assignee was not beneficiary ofservices hired by consumer fromcarrier - Insurance company not

consumer vis-a-vis the carrier -Consumer complaint by InsuranceCompany, not maintainable -

Insurance company can file civil suitfor recovery of amount.


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Contribution

Like subrogation, contribution is also

a corollary to the principle ofindemnity. Therefore contributiongenerally arises only in property

insurance. The rule is of ancientorigin and was recognized by thechancery courts.


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Contribution arises because of the

liberty of the assured to insure thesame property with more than oneinsurer which is called double

insurance. By mere double insuranceand, over insurance, the right ofcontribution springs up.


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Essential conditions of Contribution

i. All the insurance must relate to the same

subject-matter.ii. The policies concerned must all cover the

same interest of the same insured.

iii. The policies concerned must all cover thesame peril which caused the loss.

iv. The policies must have been in force and

all of them should be enforceable at thetime of loss.


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Example

If a house is insured with company X for

Rs.5,000 and with company Y forRs.10000 and the damage amounts toRs.1200,

company X will apparently be liable tocontribute Rs.400 and company YRs.800.


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Differences between the Doctrines

of Contribution and Subrogation

i. In contribution the purpose is to

distribute the loss while in subrogationthe loss is shifted from one person toanother

ii. Contribution is between insurers butsubrogation is against third party

iii. In contribution there must be morethan one insurer but in subrogationthere may be one insurer and onepolicy.


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Cont..

iv. In contribution the right of the

insurer is claimed but insubrogation the right of theinsured is claimed.

In modern fire policies we find thecontribution clause which enables

the insurer to claim contributionfrom other co-insurers.

Documents

December2A- Gen Princiles of Insurance Law