Law thesis

Insurance is a business of risk but not a risky business

Submitted to

Adv. Nadirshaw K. Dhondy

By: Shilpa Jain

CERTIFICATE

I, Nadirshaw K. Dhondy, Advocate Supreme Court, have examined the thesis of Ms. Shilpa Jain who is enrolled at Welingkar Institute of Management, Mumbai in the MBA course. She has completed the thesis entitled Insurance is a business of risk but, not a risky business in part completion of the final examinations. She has been rated to receive ______ marks out of forty (40). Dated________day of ______2013

Signed

Signed

Shilpa Jain

Nadirshaw K.Dhondy

ACKNOWLEDGEMENTS
This project is not a result of an individual effort but is a product of collective wisdom and experience of all those who have shared their views, far beyond those found within the covers of the book. Though words are seldom sufficient to express gratitude, it somehow gives me an opportunity to acknowledge those who have helped me with this thesis titled Insurance is a business of risk but, not a risky business, thus at the onset I would like to thank all those helping hands. With a deep sense of gratitude my thanks to the senior advisor, Dr.Y.A.Awte. It is my great privilege and a unique experience to study in Welingkar Institute of Management Mumbai led by him. Prof. V.H.Iyer , the Dean of Welingkar Institute of Management Mumbai. I owe a deep sense of gratitude to Mr. Nadirshaw K. Dhondy Supreme Court Advocate, my teacher and guide who provided me with an overwhelming opportunity to work in an area where I could gain more knowledge. I also take this opportunity to thank Advocate Dilip Bhave , a friend and guide for his guidance and support. I can never measure the contribution of my family, whose blessings, love, perpetual support and encouragement has made me what I am. Lastly I am grateful to almighty for giving me an opportunity to showcase my practical effort in the work led by many.

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

covered by the policy and which is not. An insurer is a company which accepts your risk after charging a premium. The insurance rate is a factor used to determine the amount, called the premium, to be charged for a certain amount of insurance coverage. The essence of the insurance business is the risk by undertaking to indemnify the insured against loss or damage. They agree to pay the damages out of any accident by taking a chance that no accident might happen. Motivation of the insurance business is that the premium would turn to be the profit of the business incase no damage occurs. Such business of the insurance company can be carried on only with the premium paid by the insured person on the insurance policy. The only profit, if at all the insurance company makes, of the insurance of the insurance business is the premium paid when no loss or damage occurs. But to ask the insurance company to bear the entire loss or damage of somebody else without the company receiving a rupee towards premium is contrary to principles of equity.1

National Insurance Co. V. Seema Malhotra (2001) 3 SCC 151

CASE LAW INDEX

1. General Assurance Society Ltd. v. Chandumull Jain AIR 1966 SC 1644. 2. Life Insurance Corporation of India v. Smt. G.M.Channabasamma (1991) 1 SCC357. 3. Life Insurance Corporation of India v. Parvathavardhini Ammal AIR 1965 Mad357. 4. United India Insurance co. Ltd v. M.K.J Corpn. (1996) 6 SCC 428. 5. Hanil Era Textiles Ltd. v. Oriental Insurance Co. Ltd. (2001) 1 SCC 269. 6. United India Insurance Co ltd. v. M.K.J. Corporation (1996) 6 SCC 428. 7. Behn v. Burness, (1863) 3 B&S 751. 8. Pawson v. Watson, (1778) 98 ER 1361. 9. Wheelton v. Haristy, (1857) 8 E and B 232. 10. Life Insurance Corporation v Smt. B. Kusuma T. Rao; (1991) 70 Comp Cas 86. 11. New Castle Fire Insurance Company v. Mac Morram and Co., (1815) 3 ER 1057. 12. Balkrishna v. New Indian Assurance Company, AIR 1959 Pat 102. 13. Barnard v. Faber, (1983) 1 Q.B. 340. 14. Svenska Handelsbanken vs. M/s. Indian Charge Chrome and others, 1993 SC. 15. Glen v. Lewis (1853) 8 Exch. 607. 16. Skandia Insurance Company Ltd. v. Kokilaben Chandravadan, (1987) 2 SCC654. 17. Modern Insulators Ltd. v. Oriental Insurance Company Ltd. (2000) 2 SCC 1014.

18. National Insurance Company Ltd. v. Sujir Ganesh Nayak and Company, AIR1997 SC 2049. 19. Vania Silk Mills (P) Ltd. v. CIT (1991) 4 SCC 22. 20. Castellan v. Preston (1881) All ER 494. 21. Union of India v Sri Sarada Mills Ltd., 1972 (2) SCC 877. 22. Vasudeva Mudaliar v Caledonian Insurance Co. & Anr. AIR 1965 Madras 159. 23. Oberai Forwarding Agency v New India Assurance Co. Ltd. & Anr. 2002 (2) SCC407. 24. Stanley V. Western Insurance Company (1868) L.R. 371. 25. New India Assurance Company Ltd. v. B. N. Sainani (1997) 6 SCC 383. 26. Seagrave v Union Insurance Co. Ltd., (1886) LR 1 CP 305. 27. Anctil v. Manufacturer's Life Insurance Company, (1899) AC 604 (PC). 28. Tomlison (Haullers) Ltd. V Hoplurane, 1966 (1) AC. 418. 29. Griffith v. Fleming, (1909) 1 K.B. 805. 30. Life Insurance Corporation of India v. Raja Vasireddi Komalavalli Kamba andOthers, 1984, SC. 31. New India Assurance Company. Limited. v. Ram Dayal & Others, (1990) 2 SCC680. 32. National Insurance Company. Limited. v. Jikubhai Nathuji Dabhi (Smt) andOthers., 1997(1) SCC 66. 33. National Insurance Company Limited. v. Mrs. Chinto Devi & Others, 2000, SC. A. 34. National Insurance Co. V. Seema Malhotra (2001) 3 SCC 151

PRIME TIME MATTER

Life is full of uncertainties and insurance is based on uncertainties and if there are no uncertainties about the occurrence of a disaster, the concept of insurance will cease to exist. For insurance, if one is able to predict the forthcoming dangers, then one will take a proper safeguard action and then face the crisis in a very normal manner, but then this is a utopian concept; because death, disaster and dangers cannot be predicted. All individuals have assets; both tangible; the house, car, factory or intangible like the voice of a singer, leg of a footballer, the hand of an author and many others. Now all such assets are insured because they run the risk of becoming non-functional through a disaster or an accident. Such possible and unforeseen occurrences are known as Perils. And the damage caused by such perils is called risk that the assets are exposed to. Risk is a contingency and the insurance is done against such possible contingencies. Uncertainty, risk and insecurity are incidental to any form of business. This makes insurance indispensable for a business organization. Insurance may be defined as a contract in writing under which one party agrees to indemnify the other party against a loss or damage suffered by it on account of an uncertain future, in return for a consideration called 'premium'. The person/business that gets its life/property insured is called 'Insured/Assured'. The agency which helps in entering into an insurance arrangement is called 'Insurer' or 'Insurance Company'. The agreement or contract which is put in writing is called a 'policy'. An insurance policy provides the following benefits to a business concern: Protection: it provides protection against risk of loss and a sense of security to the businessmen. Diffusion of risks: as the burden of loss is spread over a large number of people. Credit standing: of the firm is enhanced as the businessman can easily transfer some of his risks to an insurance company. Continuity and certainty of business: if all the risks were to be borne by the businessmen themselves, the business operations would have been uncertain and halting in character.

 Better utilization of the capital of the firms: as the Insurance Company's takeover the risk, it enables the business firm to invest and optimally utilize its capital. Thus, the aim of insurance is to compensate the owner against the losses arising from a variety of risks which he anticipates to his life, property and business. It is a means of pooling of risks, under which a group of people who are subject to an insurable risk contribute regularly to a fund. The fund so created is utilized to compensate those members of the group who actually suffer a loss due to some unexpected calamity. Thus the loss of a few is shared by all the members on an equitable basis.

INSURANCE IS A BUSINESS OF MANAGING RISKS

The concept of insurance is quite simple. People who are in a similar trade and are exposed to the same risks, congregate and come to an agreement that if any individual member suffers a loss, then the loss will be shared by others and minimized in order to enable the individual member recover from the loss and cover his ground. Similarly the different kinds of risks can be identified and separate groups can be formed to counter such risks and reduce the impact to a manageable level in which the share could be collected from the members either after the loss or in advance, at the time of admission to the group. This is an exemplary sign of humanity and insurance therefore serves mankind to a great extent, a point most of the individuals tend to overlook, since monetary aspect is involved. Satisfaction of economic needs requires generation of income from some source. If the property which is the source of such income is lost fully or partially, permanently or temporarily, the income too would stop. The purpose of insurance is a safeguard against such misfortunes by making good the losses of the unfortunate few, through the help of the fortunate many, who were exposed to the same risk, but saved from the misfortune. Thus the essence of insurance is to share losses and substitute certainty by uncertainty.

HOW DOES INSURANCE REDUCE RISK?

Health insurance seems like a simple exchange. You pay an insurance company a premium and insurance pays your bills. You get rid of risk and the insurance company takes your risk. However, there is more to it that this. What does the insurance company do with your risk? Do they keep it? Do they also get rid of it somehow? When you understand what the insurance company does with your risk, then you can better evaluate your options and perhaps get a better deal on insurance. One measure of risk is the potential for ups and downs. Having a stock that pays $100in dividends each year and seldom changes in price is not very risky. Having a stock that goes up or down wildly from one period to another is risky. The same is true for health care costs. Paying $100 each year for eyeglasses is not risky. Having a chance of winding up in the hospital and having to pay $100,000 is risky. "Risk Pooling" happens when many people get together and share their losses by averaging them together. Risk pooling works because of the "law of large numbers." As you average together more and more numbers in a certain range, the average becomes more and more stable. Unusually high or low numbers tend to cancel each other out. For example, if you roll dice once, the result can be anywhere from 2 to 12. If you roll dice more and more, the average will get closer and closer to 7. By the time you roll the dice 1,000 times, the average will be very stable around 7. Insurance companies use risk pooling to get rid of the risk they take from you. They charge you a premium based on average cost plus their administrative cost. When they pool many people, the average cost is very stable and they have little risk themselves. Risking pooling is also used in finance. When people buy a bunch of different stocks in a diversified portfolio, their average return from the portfolio is more stable and less risky than the return from a single stock. In order for risk pooling to work, the individual risks that are pooled must be independent. "Independent" risks go up and down at different times, not together. When risks go up and down at different times, they tend to cancel

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

INSURANCE REGULATION IN INDIA

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

ENTRY OF PRIVATE COMPANIES: A LAND MARK DECISION

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

REGULATORY AUTHORITIES
There are 4 regulatory authorities which oversee different functioning of the insurance companies in India and provide guidelines to them. These include: Insurance Regulatory and Development Authority (IRDA) Tariff Advisory Committee

 Ombudsmen Insurance Association of India

Insurance Regulatory and Development Authority (IRDA)

Insurance Regulatory and Development Authority (IRDA) is a very powerful body which oversees important aspects of the functioning of the insurance companies in India. It was set up by the government to safeguard the interest of the insurance policy holders of the country. Some of the important powers, duties and functions of Insurance Regulatory and Development Authority (IRDA) include: To regulate, ensure and promote the orderly growth of the insurance business To prescribe regulations on the investment of funds by insurance companies To regulate the maintenance of the margin of solvency To adjudicate the disputes between insurers and intermediaries To supervise the functioning of the Tariff Advisory Committee

Tariff Advisory Committee

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

Insurance Association of India

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

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

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

PRINCIPALS OF INSURANCE LAW

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

1. Good Faith
A contract of insurance is a contract uberrimea fidei i.e. a contract of utmost good faith. This is a fundamental principle of insurance law. Both the parties to the contract are required to observe utmost good faith and should disclose every material fact known to them. There is no difference between a contract of insurance and any other contract except that in a contract of insurance there2 is a requirement of utmost good faith. The burden of proof to show non-disclosure or 3misrepresentation is on the insurance company and the
2 3

General Assurance Society Ltd. v. Chandumull Jain AIR 1966 SC 1644. Life Insurance Corporation of India v. Smt. G.M.Channabasamma (1991) 1 SCC 357.

onus is a heavy one4. The duty of good faith is of a continuing nature in as much no material alteration can be made to the terms of the 5contract without the mutual consent of the parties. Just as the assured has a duty to disclose all6 the material facts, the insurer is also under an obligation to do the same. The insurer cannot7 subsequently demand additional premium nor can he escape liability by contending that the situation does not warrant the insurance cover.8 The Insurance Act lays down that an insurance policy cannot be called in question two years after it has been in force for two years. This was done to obviate the hardships of the insured when the insurance company tried to avoid a policy, which has been in force for a long time, on the ground of misrepresentation. However, this provision is not applicable when the statement was made fraudulently. The Marine Insurance Act, 1963 (Marine Insurance Act) lays down that the insured must disclose all the material facts before t he contract is concluded. The disclosures by the assured or by his agent should be true. The insured is deemed to know every circumstance, which in the ordinary course of business, ought to be known by him. The insurer may avoid the contract if the assured fails to make such disclosure or if the representation made is untrue. However, circumstances which diminish the risk, or which are presumed to be known by the insurer or information which is waived by the insurer or any circumstance which is superfluous to disclose by reason of any express or implied warranty need not be disclosed, in absence of any enquiry. In India the post contractual duty of good faith is very strict. The situation, though, has changed in9 England through a recent decision of the House of Lords. The decision in the Star Sea Case lays down that the duty of good faith in insurance contracts continues after the inception of the policy, but the duty is far less strict than it was prior to the commencement of the contract. This is
4 5

Life Insurance Corporation of India v. Parvathavardhini Ammal AIR 1965 Mad 357. United India Insurance co. Ltd v. M.K.J Corpn. (1996) 6 SCC 428. 6 Section 21(a) of the Indian Marine Insurance Act, 1906. 7 Hanil Era Textiles Ltd. v. Oriental Insurance Co. Ltd. (2001) 1 SCC 269. 8 United India Insurance Co ltd. v. M.K.J. Corporation (1996) 6 SCC 428. 9 [2001] 4 Lloyd's Rep IR 247.

because it would enable the insurers to avoid the whole policy ab initio for a post-contractual breach, which had no effect when the policy was drawn initially. However, this position has yet to be accepted by the Indian courts.

2. Misrepresentation
Representations are statements, made by one part y to the other, either prior to or while entering into an insurance contract, of some matter or circumstances relating t o it and which is not an10 integral part of the contract. These statements are said to have fulfilled their obligations when the11 final acceptance on the policy is conveyed. A mere recital of representations made at the time of entering into the contact wills not make then 12warranties. However, if representations are made an integral part of the contract they become warranties, and, in case of their being untrue, the policy can be avoided, even if the loss does not arise from the fact concealed or misrepresented. A policy of life insurance cannot be called in question on the ground of misrepresentation after a period of two years from the commencement of the policy. In dealing with representations as circumstances invalidating a contract, consideration should be paid as to whether such representations are willful or innocent and whether they are preliminary or for part of the contract. The Insurance Act lays down three conditions to establish that the misrepresentation was willful; (a) the statement must be on a material matter or must suppress facts which it was material to disclose; (b) the suppression must be fraudulently made by the policy holder; and (c) the policyholder must have known at the time of making the statement that it was false or that it suppressed facts which it was material to disclose. The burden of proof of establishing13 that the insured had in fact suppressed material facts in obtaining insurance is on the insurer and14 all the aforesaid conditions are required to be proved cumulatively. In determining whether there has been suppression of a material fact it is necessary to examine whether the suppression relates to a fact which is in the exclusive knowledge of the person

10 11

Behn v. Burness, (1863) 3 B&S 751 Pawson v. Watson, (1778) 98 ER 1361. 12 Wheelton v. Haristy, (1857) 8 E and B 232. 13 Life Insurance Corporation v. Smt. G.M. Channabasemma, AIR 1991 SC 392 14 Life Insurance Corporation v Smt. B. Kusuma T. Rao; (1991) 70 Comp Cas 86.

intending to take the policy and also that it could not be ascertained by reasonable enquiry by a prudent15 person.

3. Warranties
A warranty may be distinguished from a representation in as much a representation maybe equitably and substantially answered but a warrant y must be strictly complied with. A breach of warranty will avoid the policy, although it may not relate to a matter material to the risk insured. Warranties may be expressed or implied, if it is condition implied by law. However, implied warranties are mostly confined t o marine insurance. The Marine Insurance Act defines a warranty as a promise whereby the assured under takes that some particular thing shall or shall not be done, or that some condition shall be fulfilled, or affirms or negatives the existence of a particular state of facts.16The statements must be true in fact without any qualification of judgment, opinion or belief. The warranty should be in the policy or must be incorporated by reference. If any of the statements or representations made by the assured in the proposal have been made the basis of the contract and they are found to be untrue, the contract of insurance would be void and unenforceable in law,17irrespective of the question whether the statement, concerned is of a material nature or not. However, non-compliance of a warranty is excused when, by reason of a change of circumstances, the warranty ceases to be applicable to the circumstances of the contract, or when compliance with18 the warranty is rendered unlawful by any subsequent law or when such a warranty has not been19 mentioned in the policy.

4. Conditions
Conditions are terms which prescribe the limitations under which an insurance policy is granted and which specify the duties of the assured. They can be either conditions precedent or subsequent.20 Conditions precedents are those,
15 16

Life Insurance Corporation v. Smt. G.M. Channabasemma, AIR 1991 SC 392. New Castle Fire Insurance Company v. Mac Morram and Co., (1815) 3 ER 1057. 17 Balkrishna v. New Indian Assurance Company, AIR 1959 Pat 102. 18 Section 36 of The Marine Insurance Act, 1963 19 United India Insurance Company Ltd. v. M.K.J. Corporation, (1996) 6 SCC 428 20 Barnard v. Faber, (1983) 1 Q.B. 340.

which are essential for the creation of a valid contract, the non- satisfaction of which makes the contract void ab initio.21 Conditions subsequent relate to the continuance of a valid contract, the non-fulfillment of which leads to the avoidance of the contract22 from the date of the breach. They can be further classified into express conditions and implied conditions. Implied conditions are those, which are implied by law to apply t o every contract of insurance irrespective of any specific inclusion or reference to them such as insurable interest, good faith etc. A condition, which seeks to reduce or curtail the period of limitation and prescribes a shorter period than that prescribed by law23 is void. However, the insured is absolved once it is shown that he has done everything in his power to24 keep, honor and fulfill the promise and he himself is not guilty of a deliberate breach. An insurer cannot take recourse to a condition, which has not been mentioned in the policy to reduce his liability.25 However, an insurance policy may not curtail the right but may merely provide for forfeiture26 or waiver of any such right and such a right would be enforceable against either party.

5. Indemnity and Subrogation

Most kinds of insurance policies other than life and personal accident insurance are contracts of indemnity whereby the insurer undertakes to indemnify the insured for the actual loss suffered by him as a result of the occurring of the event insured against. Even within the maximum limit, the27 insured cannot recover more than what he establishes to be his actual loss. A contract of marine insurance is an agreement whereby the insurer undertakes to indemnify the insured to the extent agreed upon. Although the insured is to be placed in the same position as if the loss has not occurred, the amount of indemnity may be limited by certain conditions:

21 22

Svenska Handelsbanken vs. M/s. Indian Charge Chrome and others, 1993 SC. Glen v. Lewis (1853) 8 Exch. 607. 23 Section 28 of the Indian Contract Act, 1872. 24 Skandia Insurance Company Ltd. v. Kokilaben Chandravadan, (1987) 2 SCC 654. 25 Modern Insulators Ltd. v. Oriental Insurance Company Ltd. (2000) 2 SCC 1014. 26 National Insurance Company Ltd. v. Sujir Ganesh Nayak and Company, AIR 1997 SC 2049. 27 Vania Silk Mills (P) Ltd. v. CIT (1991) 4 SCC 22.

1. Injury or loss sustained by the insured has to be proved. 2. The indemnity is limited to the amount specified in the policy 3. The insured is indemnified only for the proximate causes. 4. The market value of the property determines the amount of indemnity.

Legal & Tax Counseling Worldwide

Indemnity is a fundamental principle of insurance law, and the principle of Subrogation is a corollary of this principle in as much the insured is precluded from obtaining more than the loss he has sustained. The most common form of subrogation is when an insurance company pays a claim caused by the negligence of another. The doctrine of subrogation confers two specific rights on the insurer. Firstly, the insurer is entitled to all the remedies which the insured has against the third party incidental to the subject matter of the loss, such that the insurer can take advantage of any means available to extinguish or diminish, the loss for which the insurer has indemnified the insured. Secondly, the insurer is entitled to the benefits received by the assured from the third party with a view to compensate him for the loss.28 The fact that an insurer is subrogated to the rights and remedies of the insured does not ipso jure29 enable him to sue third parties in his own name. It will only entitle the insurer to sue in the name of insured30, it being an obligation of the insured to lend his name and assistance to such an action. An insurance policy may contain a special clause whereby the insured assigns all his rights, against third parties, in favor of the insurer. In case of subrogation, which vests by operation of law rather than as the product of express agreement, the insured would be entitled to only to the extent of his31 loss. The excess amount, if any, would be returned to the insured.
28 29

Castellan v. Preston (1881) All ER 494 Union of India v Sri Sarada Mills Ltd., 1972 (2) SCC 877. 30 Vasudeva Mudaliar v Caledonian Insurance Co. & Anr. AIR 1965 Madras 159.
31

Oberai Forwarding Agency v New India Assurance Co. Ltd. & Anr. 2002 (2) SCC 407.

6. Proximate Cause
The doctrine of proximate cause is expressed in the maxim 'Causa Proxima non remota spectator', which means that the proximate and not the remote cause shall be taken as the cause of loss. The insurer is thus has to make good the loss of the insured that clearly and proximately results, whether 32directly or indirectly, from the event insured against in the policy. The burden of proof that the loss occurred on account of the proximate cause lies on the insured. As per the Marine Insurance Act, unless the insurance policy states otherwise, the insurer is liable for any loss proximately caused by a peril insured against, but he is not liable for any loss which is not proximately caused by a peril insured against. An insurer would therefore be exempted from liability when the cause of loss falls within the exceptions of the policy. The Marine Insurance Act further states that the insurer is not liable for any willful misconduct of the insured i.e. the assured cannot recover for a loss where his own deliberate act is the proximate cause of it. Further, in the event of loss caused by the delay of the ship, the insurer cannot be held liable, irrespective of the proximity of 33the cause.

7. Insurance and Consumer Protection

The Consumer Protection Act, 1986 (Consumer Protection Act) is one of the most important socio-economic legislation for the protection of consumers in India. The provisions of this Act are compensatory in nature, unlike other laws, which are either punitive or preventive. Insurance services fall within the purview of the Consumer Protection Act, in as much, any deficiency in service of the insurance company would enable the aggrieved to make a complaint. Disputes between policyholders and insurers generally pertain to repudiation of the insurance claim or the matters connected with admission of the claim or computation of the amount of claim. In the case of assignment of all rights by the insured to the insurer, the consumer forum and he courts generally refuse to accept the locus standi of the insured. The courts have held that insurance companies do not fall under the definition of consumer under the Consumer Protection Act, as no service is rendered to them directly. Neither the
32 33

Stanley V. Western Insurance company (1868) L.R. 371 Section 55 (2)(b) of the Marine Insurance Act, 1963

subrogation nor the transfer of the right of action would confer t he legal status of a 'consumer' on the insurer,34 nor can the insurer be regarded as any beneficiary of any service. Therefore, the remedy available to the insurer is to file a suit in a civil court for recovery of the loss.

8. Insurable Interest
To constitute insurable interest, it must be an interest such that the risk would by its proximate35effect cause damage to the assured, that is to say, cause him to lose a benefit or incur a liability. The validity of an insurance contract, in India, is dependent on the existence of an insurable interest in the subject matter. The person seeking an insurance policy must establish some kind of interest in the life or property to be insured, in the absence of which, the insurance policy would amount to a wager 36 and consequently void in nature. The test for determining if there is an insurable interest is whether the insured will in case of damage37 to the life or property being insured, suffer pecuniary loss. A person having a limited interest can38 also insure such interest. Insurable interest varies depending on the nature of the insurance. The controversy as to the existence of an insurable interest between spouses was settled by the court, which held that such39 An interest could exist as neither was likely to indulge in any 'mischievous game'. The same analogy may be extended to parents and children. Further, the courts have also held that such an insurable interest would exist for a creditor (in a debtor) and for an employee (in an employer) to the extent of the debt incurred and the remuneration due, respectively. The existence of insurable interest at the time of happening of the event is another important consideration. In case of life and personal accident insurance it is sufficient if the insurable interest is present at the time of taking the policy. However, in the case of fire and motor accident insurance the insurable interest has to be present both at the time of taking the policy and at the time of the accident.
34 35

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

The case is completely different with marine insurance wherein there need not be any insurable interest at the time of taking the policy.

9. Commencement of policy
The general rule on the formation of a contract, as per the Indian Contract Act, is that the party to whom the offer has been made should accept it unconditionally and communicate his acceptance to the person making the offer. Whether the final acceptance is to be made by the insured or insurer really depends on the negotiations of the policy. Acceptance should be signified by some act as agreed upon by the parties or from which the law raises a presumption of acceptance. The mere receipt or retention of premium until after the death40 of the applicant or the mere preparation of the policy document is not acceptance. Nonetheless,41 acceptance may be presumed upon the retention of the premium. However, mere delay in giving an answer cannot be construed as acceptance. Also, silence does not denote consent and no binding contract arises until the person to whom an offer is made says or does something to signify his42 acceptance. When the policy is of a particular date, it would cover the liability of the insurer from the previous43 midnight preceding the same date. However, where there is a special contract to the contrary in44 the policy, the terms of the contract would prevail. Hence where the time of the issue of the insurance policy is mentioned, then the liability would be covered only from the time when it was45 issued.

40 41

Life Insurance Corporation of India v. Raja Vasireddi Komalavalli Kamba and Others, 1984,SC. Corpus juris Secundum, Vol. XLIV, page 986 42 Life Insurance Corporation of India v. Raja Vasireddi Komalavalli Kamba and Others, 1984,SC. 43 New India Assurance Company. Limited. v. Ram Dayal & Others, (1990) 2 SCC 680. 44 National Insurance Company Limited. v.jikubhai Nathuji Dabhai (smt) and others,1984,SC. 45 National Insurance Company Limited. v. Mrs. Chinto Devi & Others, 2000, SC. A.

BIBLIOGRAPHY
Insurance : Fundamentals, Environment and Procedures By B.S. Bodla, M.C. Garg, K.P. Singh Bharats Manual of Insurance Laws By Ravi Puliani, Mahesh Puliani Insurance Law Manual Taxman Law of Insurance By Dr. M.N. Mishra Handbook of Insurance Claims By S.P. Gupta, V.H.P. Pinto Fundamentals of Risk and Insurance By Vaughan & Vaughan Various websites referred: www.manupatra.com www.scconline.com www.legalserviceindia.com www.indlaw.com www.supremecourtcaselaw.com www.supremecourtofindia.com www.wikipedia.com www.google.com

CROSS REFERENCE INDEX

A Ab initio Accident insurance B Burden of proof C Calculated uncertainty Casualty Insurances Causa Proxima non remota spectator Commencement of policy Compensate Conditions precedent Conditions subsequent Consumer Protection Act, 1986 Contingency Continuity and certainty of business Contract in writing 8Credit Insurance 13Credit standing 04 13 19 21 09, 19 17 17 20 08 09 08 14, 16,19 15, 17 11, 18, 21

D Deliberate breach Diffusion of risks Disability Insurances Doctrine of proximate cause 17 08 13 19

E Economic needs External hedging Enterprise Risk Management F Forfeiture G Good Faith H Health insurance Humanity I Indemnity and Subrogation Independent risks Indian Contract Act Insurable Interest Insurable risk Insurance Association of India Insurance Regulatory and Development Authority (IRDA) Insured/Assured Internal Hedging Ipso jure 18 11 21 17, 20, 21 09 12 12 04, 05, 11, 15, 18, 21 04 10 09 14, 15, 17 18 09 04 29

J Justice, equity and good conscience L Legal & Tax Counseling Worldwide Lex Numerorum Multorum Et Principiae Medianae Propabilitatis Liability Insurance Life Insurance Locus standi M Marine insurance Mischievous game Misrepresentation Monetary N Nationalization O Ombudsmen P Pecuniary loss Perils Policy Pooling of risks Portfolio construction 21 04, 05, 08 05, 08, 12, 15, 16, 17, 18, 19, 21, 22, 28 09 04 12, 13 11, 12 11, 14, 15, 16, 17, 18, 19, 20, 21 21 14, 15, 16 09 18 04 13 06, 07, 13, 16 20 05, 14

Post contractual duty of good faith Premium Principle of Subrogation Principles of equity Privatization Property Insurance Protection Proximate Cause Punitive or preventive R Regulatory authorities Reinsurance Repudiation Risk Pooling S Safeguard Share losses Social insurance Substitute certainty Superfluous T Tariff Advisory Committee Terrorism insurance

15 05, 08, 10, 14, 18, 22, 28 18 05 11 11, 13 08, 13, 20 18, 19, 20 20

12 04, 28, 29 20 10, 11

08, 09, 12 10 11 10 15

12 13

U Uberrimea fidei Uncertainties Unenforceable in law W Warranties 15, 16 14 04, 08 17

EPILOGUE
In todays time of globalization, insurance companies face a dynamic environment which is here to stay. Dramatic changes are taking place owing to the internationalization of activities, the appearance of new risks, new types of covers to match with new risk situations and unconventional and innovative ideas on customer service. Low growth rates in developed markets, changing customer needs and the uncertain economic conditions in the developing world are exerting pressure on insurers resources and testing their ability to survive. In addition, the existing insurers are facing difficulties from nontraditional competitors that are entering the retail market with new approaches and through new channels. So how do the insurance companies sustain the tough competition and the cold slowdown waves in the market? There are a few new emerging trends in the market that help the risk guard to guard itself like: 1. REINSURANCE: The concept of Reinsurance, though known, is still a less popular one in Insurance Industry and even general policy-holders are not very familiar with this term. An insurance company uses this tool to transfer a portion to one or more insurance companies. In a general language, Reinsurance is a process in which an insurer transfers certain percentage of its business risk to another company, which will then reimburse the loss that insurer, may face in his business. It makes the risk management process of insurance companies more effective and economical. Reinsurance is a transaction in which one insurer agrees for a premium, to indemnify another insurer against all or part of loss that insurer may sustain under its policy or policies of insurance. The company purchasing the reinsurance is known as the Ceding Insurer (or Primary Insurer) and the company selling reinsurance is known as the Assuming Insurer (or simply Reinsurer). The transaction is also described as "The Insurance of Insurance Companies". It is a risk management tool that spreads the risk so that no single entity has to bear the burden of paying back beyond the limit. Reinsurance companies indemnify a certain percentage of the losses which the

primary insurer is unable to pay or the amount of loss is beyond the capacity of the primary insurer. 2. Enterprise Risk Management (ERM) Enterprise Risk Management refers to restructuring the risk philosophy of a company. Enterprise Risk Management is a large change management initiative that needs to be handled carefully and in a structured way. Global economic and industrial development shave changed the risk profiles of insurance companies. They have realized the importance of risk sensitive system in managing scarce capital. To deploy scarce capital effectively and to maximize economic value, they need to move towards risk-based capital wherein the companies capital requirements are based on the risk they face. Regulatory changes have also compelled insurance companies to move towards risk-adjusted returns.

THE BRIGHT FUTURE OF INDIAN INSURANCE INDUSTRY:

Indian markets hold tremendous potential to attract foreign insurers. This is putting up pressure on India to open up its markets. Another important aspect is that India accounts for an insignificant share in the world market. This in a sense means a tremendous market potential which possibly can be tapped mainly by mounting a programme of radical reforms. Thus, there is great room for expansion in this business of risk management. And hence we can conclude by saying that Insurance is a business of risk management but, it is not a risky business as the principles of justice, equity and good conscience not only offer a cover to the insured but also to the one who covers i.e. the insurer.