IC33 English Chapter 3 Notes

Chapter 3: Legal Principles of Insurance

 

  • A contract is an agreement between parties, enforceable at law. The provisions of the Indian Contract Act, 1872 govern all contracts in India, including insurance contracts.
  • An insurance policy is a contract entered into between two parties, viz., the company, called the insurer, and the policy holder, called the insured and fulfills the requirements enshrined in the Indian Contract Act, 1872.

The elements of a valid contract are: 

Offer and AcceptanceThere must be an agreement based on a lawful offer
made by person to another and lawful acceptance of that
offer made by the latter.
ConsiderationConsideration means “something in return” (quid pro quo).
It can be cash, kind, an act or abstinence. It can be past,
present or future.
Capacity to ContractConsideration means “something in return” (quid pro quo).
It can be cash, kind, an act or abstinence. It can be past,
present or future.
Legality of PurposeThe object of the agreement must not be illegal or
unlawful.
Consensus ad idemBoth parties to the contract should have same
understanding of the transaction.
Free ConsentThere should be free consent without any coercion or
influence while entering into a contract.

 

Coercion involves pressure applied through criminal means.

  • Undue influence – When a person who is able to dominate the will of another, uses her position to obtain an undue advantage over the other.
  • Insurance Contracts – Special Principles
  • Life insurance is a contract under the Indian Contract Act, 1872. Apart from the essential elements of a contract, insurance contracts also abide by special principles mentioned herein.
  • Principle of Utmost good faith: “A positive duty voluntarily to disclose, accurately and fully, all facts material to the risk being proposed, whether requested or not.”
“Example: David made a proposal for a life insurance policy. At the time of applying for the policy, David was suffering from and under treatment for Diabetes. But David did not disclose this fact to the life insurance company. David was in his thirties, so the life insurance company issued the policy without asking David to undergo a medical test. Few years down the line, David’s health deteriorated and he had to be hospitalised. David could not recover and died in the next few days. A claim was raised on the life insurance company. Hence the insurance contract was declared null and void and the claim was rejected.”
  • Material fact has been defined as a fact that would affect the judgment of an insurance underwriter in deciding whether to accept the risk and if so, the rate of premium and the terms and conditions.
  • Examples of material information: Own medical history, family history of hereditary illnesses, habits like smoking and drinking, absence from work, age, hobbies, financial information like income details of proposer, pre-existing life insurance policies, occupation etc. If utmost good faith is not observed by either party, the contract may be avoided by the other.
  • Duty of disclosure: In the case of life insurance contracts, the duty to disclose is present throughout the entire period of negotiation until the proposal is accepted and a policy is issued.
  • If the policy is in a lapsed condition and the policy holder seeks to revive the policy contract, at the time of such revival, he has to disclose all facts that are material and relevant, as though it is a new policy.
  • Once the policy is accepted, there is no further need to disclose any material facts that may come up during the term of the policy.
  • Non-Disclosure may arise when the insured is silent in general about material facts because the insurer has not raised any specific enquiry. It may also arise through evasive answers to queries raised by the insurer.
  • Misrepresentation is of two kinds: Innocent Misrepresentation relates to inaccurate statements, which are made without any fraudulent intention. Fraudulent Misrepresentation refers to false statements that are made with deliberate intent to deceive the insurer or are made recklessly without due regard for truth.
  • Principle of Insurable Interest: Insurable Interests is the Basis of Contract.
  • The existence of ‘insurable interest’ is an essential ingredient of every insurance contract and is considered as the legal pre-requisite for insurance.
  • Subject matter of insurance relates to property being insured against, which has an intrinsic value of its own.
  • Subject matter of an insurance contract is the insured’s financial interest in that property. It is only when the insured has such an interest in the property that he has the legal right to insure. The insurance policy in the strictest sense covers not the property per se, but the insured’s financial interest in the property.
  • In gambling, one could win or lose; but in a fire one can have only one consequence – loss to the owner of the house.
  • Insurable Interest according to common law: Self, husband, wife, children and assets.
  • In life insurance, insurable interest should be present at the time of taking the policy.
  • In general insurance, insurable interest should be present both at the time of taking the policy and at the time of claim.
  • It also exists between the following people on the basis of contract: Employer – Employee, Credit – Debtor, partner & surety.
  • Proximate cause is defined as the active and efficient cause that sets in motion a chain of events which brings about a result, without the intervention of any force started and working actively from a new and independent source.
  • Applicability of proximate cause in life insurance contracts:
  • Since life insurance provides for payment of a death benefit, regardless of the cause of death, the principle of proximate cause would not apply. In cases of life insurance contracts with accident benefit rider, it becomes necessary to ascertain the cause – whether the death occurred as a result of an accident. The principle of proximate cause would become applicable in such instances.
  • Indemnity and Life Insurance: Life insurance works on the concept of “Sum assured” and not on the “Principle of indemnity”. It is applicable only to General Insurance contracts.