CHAPTER 1

UNDERSTANDING THE NUANCES OF MODERN•

INSURANCE
Human existence is hinged on the purpose of a struggle for perfection and excellence. Nature
has endowed man with the talent to perceive, attempt and create and maintain the necessities
for making his life more creative and comfortable and also satisfy his intellectual pursuit.
Man is engaged in an everlasting exercise of discovering and improving the existing facultes
that nature has vested in him. Unless he engages himself in this pursuit, he is not performing
the duty imposed upon .him by nature. In fact it is not an overstatement to say that nature's
best attempt at creation is the human, creating in him all the faculties necessary to discover,
innovate and also be prepared to face the intermittent difficulties involved in such attempts.
Difficulties have never stood as a stumbling block in human pursuit.

What makes this pursuit so special? Is it the difficulties and hurdles involved in this pursuit
that make it so very challenging? Is it the essential nature of creativity that nature has
endowed man with? Is it the realization of the challenges involved in this eternal pursuit of
man to achieve excellence? Or is it that element of human nature which makes challenges
give strength to human efforts? Or is it the preparedness of man to face .challenges and
difficulties while engaging in this pursuit of perfection?

All these attributes put together contribute to this wonderful and everlasting pursuit of man.
But most importantly it is the knowledge of the involved in this pursuit and also being
prepared for the risks involved and yet constantly endeavouring for excellence is what makes
human effort so very endearing.

The words above mentioned explain the fact that human effort is endowed with risk and risk
preparedness. In fact risk preparedness is one of the essential features of human effort. Risk
preparedness is not just preparing one self regularly for risk involved in human effort; it is
much more than that. When we say risk preparedness what we essentially are referring to is
making attempts at protecting oneself from the rigours of risk and making good the loss that
is likely to result from the risk involved in any venture.

This risk preparedness in any venture in legal terms is called as insurance. While risk is an
essential feature of any ownership and any venture of man, being prepared for the risk and
managing the risk effectively is also seen as a necessary feature of business of human
endeavour. Risk preparedness and risk management gives rise to the insurance business. The
goal of all this preparedness is to gain protection against any anticipated and perceived risks
involved in any venture.

1.1 What is insurance

Insurance is a co-operative device to spread the loss caused by a particular risk over a number
of persons who are exposed to it and who agree to insure themselves against the risk. Thus it
is essentially a method to spread the loss perceived in any venture.
The aim of all insurance is to protect the owner from a variety of risks which he anticipates.
He who seeks this protection is called the assured or insured and the other person who takes
the risk by undertaking to protect that other from loss is called the underwriter or insurer and
he does this for a small consideration called the premium. So a contract of insurance may be
defined as a contract whereby one person, called the 'insurer' undertakes, in return for the
agreed consideration, called the premium, to pay to another person, called the assured, a sum
of money or its equivalent on the happening of a specified event. The happening of the
specified event must involve some loss to the assured or at least should expose him to
adversity which is in the law of insurance commonly called the risk. Thus the nature of
insurance depends upon the nature of the risk sought to be protected.

1.2 History of Insurance

Almost 4,500 years ago, in the ancierit land of Babylonia, traders used to bear risk of the
caravan trade by giving loans that had to be later repaid with interest when the goods arrived
safely. In 2100 BC, the Code of Hammurabi granted legal status to the practice. That,
perhps, was how insurance made its beginning. Life insurance had its origins in ancient
Rome, where citizens formed burfal clubs that would meet the funeral expenses of its
members as well as help survivors by making some payments

As European civilization progressed, its social institutions and welfare practices also got
more and more refined. With the discovery of new lands, sea routes and the consequent
growth in trade, medieval guilds took it upon themselves to protect their member traders
from loss on account of fire, shipwrecks and the like.

Since most of the trade took place by sea, there was also the fear of pirates. So these guilds
even offered ransom for members held captive by pirates. Burial expenses and support in
times of sickness and poverty were other services offered. Essentially, all these. revolved
around the concept of insurance or risk coverage. That's how old these concepts are, really.

In 1347, in Genoa, European maritime nations entered into the earliest known insurance
contract and decided to accept marine insurance as a practice.

Insurance as we know it today owes its existence to 17th century England. In fact, it began
taking shape in 1688 at a rather interesting place called Coffee House in London, where
merchants, ship-owners and underwriters met to discuss and transact business. By the end of
the 18th century, Lloyd's had brewed enough business to become one of the first modern
insurance companies. In 1693, astronomer Edmond Halley constructed the first mortality
table to provide a link between the life insurance premium and the average life spans based
on statistical laws of mortality and compound interest. In 1756, Joseph Dodson reworked the
table, linking premium rate to age.

The century saw the entry of stock companies into the insurance business.

The first stock companies to get into the business of insurance were chartered in England in
1720. The year 1735 saw the birth of the first insurance company in the American colonies in
Charleston, SC. In 1759, the Presbyterian Synod of Philadelphia sponsored the first life
insurance corporation in America for the benefit of ministers and their dependents. However,
it was after 1840 that life insurance really took off in a big way. The trigger: reducing
opposition from religious groups.

The 19th century saw huge developments in the field of insurance, with newer products being
devised to meet the growing needs of urbanization and industrialization.

In 1835, the infamous New York fire drew people's attention to the need to provide for
sudden and large losses. Two years later, Massachusetts became the first state to require
companies by law to maintain such reserves. The great Chicago fire of 1871 further
emphasized how fires can cause huge losses in densely populated modern cities. The practice
of reinsurance, wherein the risks are spread among several companies, was devised
specifically for such situations

There were more offshoots of the process of industrialization. In 1897, the British
government passed the Workmen's Compensation Act, which made it mandatory for a
company to insure its employees against industrial accidents.

With the advent of the automobile, public liability insurance, which first made its appearance
in the 1880s, gained importance and acceptance.

In the 19th century, many societies were fol.1Iided to insure the life and health of their
members, while fraternal orders' provided low-cost, members-only insurance.

Even today, such fraternal orders continue to provide insurance coverage to members as do
most labour organizations. Many employers sponsor group insurance policies for their
employees; providing not just life insurance, but sickness and accident benefits and old-age
pensions. Employees contribute a certain percentage of the premium for these policies.

Insurance in India can be traced back to the Vedas. For instance, yogakshema, the name of
Life Insurance Corporation of India's corporate headquarters, is derived from the Rig Veda.
The term suggests that a form of "community insurance" was prevalent around 1000 BC and
practiced by the Aryans. Burial societies of the kind found in ancient Rome were formed in
the Buddhist period to help families build houses, protect widows and children.

Bombay Mutual Assurance Society, the first Indian life assurance society, was formed in
1870. Other companies like Oriental, Bharat and Empire of India were also set up in the
1870-90s. It was during the swadeshi movement in the early 20th century that insurance
witnessed a big boom in India with several more companies being set up. As these
companies grew, the government began to exercise control on them. The Insurance Act was
passed in 1912, followed by a detailed and amended Insurance Act of 1938 that looked into
investments, expenditure and management of these companies' funds. By the mid-l 950s,
there were, around 170 insurance companies and..80 provident fund societies in the country's
life insurance scene. However, ill the- absence of regulatory systems, scams and irregularities
were almost a way of life at rhost of these companies. As a result, the government
decided nationalize the life History of Insurance, the official website of the IRDA
assurance business in India. The Life Insurance Corporation of India was set up in 1956 to
take over around 250 life companies.

For years thereafter, insurance remained a monopoly of the public sector. It was only after
seven years of deliberation and debate - after the RN Malhotra Committee report of 1994
became the first serious document calling for the re- opening up of the insurance sector to
private players -- that the sector was finally opened up to private players in 2001.6

The Insurance Regulatory & Development Authority, an autonomous insurance regulator set
up in 2000, has extensive powers to oversee the insurance business and regulate in a manner
that will safeguard the interests of the insured.

1.3 Nature of the Insurance Contract

The contract of insurance is basically governed by the rules which form part of the general
law of contract. But equally there is no doubt that over the years it has attracted many
principles of its own to such an extent that it is perfectly proper to speak of a law of
insurance. Some of these principles owe their existence to the fact that the documents of the
standard insurance contract, principally the proposal form and the policy, has long been
drafted in a fairly uniform way. In addition the reason for many of the principles of insurance
can be found by looking at the history of insurance and of the insurance contract.

Insurance law has its peculiar principles, for example the doctrine of uberrima fides, and its
may be necessary to know whether a contract is one of insurance in order to know whether
this doctrine applies. Furthermore, a statute may include within or exempt from its operation
'contracts of insurance' without defining these. The obvious case is the exemption of such
contracts from the Unfair Contract Terms Act, 1977. One area which has given rise to
litigation and to

Arjun Bhattacharya and O'Niel Rane, Nationalization of Insurance in India, Centre for Civil
Society. Working paper No.0073, 2003 at p.no.377. difficulties is that of distinguishing
bdtract of insurance from the contracts of guarantee.

It is suggested that a contract of insurance is any contract whereby. one party assumes the
risk of an uncertain event, which is not within his control, happening at a future time, in
which event the other party has an interest, and under which contract the first party is bound
to pay money or provide its equivalent if the . uncertain event occurs.It would follow that
anyone who regularly enters into such contracts as the party bearing the risks is carrying on
insurance business for the purposes of the statute regulating insurance business.

The fundamental function of insurance to shift the loss suffered by a sole individual to a
willing and capable professional risk-bearer in consideration of a comparatively small
contribution called the premium. From the viewpoint of an economist, insurance is a process
whereby the risk of financial loss arising from death or disability of a person or damage,
deterioration, destruction or loss of prope1iy owing to perils to which they ate exposed, is
assumed by another process, the professional risk-bearer collects some small rate of
contribution from a large number of people and if there is any unfotiunate person amongst
them, the risk-bearer, i.e., the insurer, relieves the sufferer from the effects of the oss by
paying the insurance money.

According to MACLEAN, "insurance is a method of spreading over a large number of

persons a possible 1 financial loss too serious to be conveniently borne by an individual.

Thus insurance serves two-fold purpose, the itmhediate short" h.ge and .the proximate
purpose and the far-sighted long range purpose. The pr6ximate purpose is to protect the
individual assured from any loss or damage to his; life or

"It serves the social purpose; it is a social device whereby uncertain risks of individuals may
be combined in a group and thus made more certain; small periodic contribution by the
individuals providing a fund out of which those who suffer losses may be reimbursed."

The larger and the much-wider purpose is the social purpose accelerating the economic
growth of the nation. The insurers collect the savings of numerous policy-holders and these
funds are invested in organized commerce and industry, thus helping in mobilizing capital
formation and establishment of industries.

Insurance thus reduces the fears of future risk to the individual insured and by capital
formation it helps the growth of industry, accelerates production, lubricates the machinery of
production and distribution and improves the economy of the nation. It mobilizes the
resources, accelerates and stabilizes growth and helps in the establishment of a welfare state.

In modem times, the happening of any event may be insured against at a premium directly
proportional to the risk involved on its happening. An element of uncertainty must be present
in the course of happening of the event insured against; in some cases, in almost all non-life
insurance contracts, the happening of the event itself is uncertain while in life insurance the
event insured, that is the death of an individual is a certain event, but the uncertainty lies in
the time when it happens.

The essentials of an insurance contract are

1. general nature of a contract

2. insurable interest

Riegel and Miller, Insurance principles and practice, P.10.

3. utmost good faith and

4. representation warranties.

Since insurance contract is seen as a . contract between two parties for aconsideration,
the general principles under the law of contract apply to insurance contracts also. These
general principles applied to the insurance contracts are offer and acceptance, consideration,
competence of parties, legality of object and free consent of pannies.
While the above recital has answered the questions raised by the general principles of
contract, it is also necessary to look at the exclusive nature of an insurance contract.

Legal entitlement - First there must clearly be a binding contract, and the insurer. must be
legally bound to compensate the other part.

Uncertainty - Secondly, the uncertainty which is a necessary feature of ins'urance, as we have

already seen, is in most cases as to whether or not the event insured

against will occur. In life insurance, it is as to the time when it will occur.

Insurable interest - Thirdly, the other party, the insured, must have an insurable

interest in the property or life or liability which is the subject of the insuraricfo.

This is the most important requirement of the contract of insurance.: It is assimilated into an
actionable claim transferable to the same extent and within the

same limitations. In fact, it is this element alone which distinguishes an insurance contract
from a contract of wager

The term insurable interest has been defined by PATTERSON as 'a elation between the
insured and the event insured against, such that the occurrence of the event will cause
substantial loss or injury of some kind to the insured'. 13

II M.N.Mishra -Law of lnsuance (7111 ed. 2006) p.no.5.

12 Supra note 7 at p.no.14.

13 E W Patterson -Elements of Insurance, Supra note 1 at p.no.60.

W.H.RODDA defined this term as 'an interest of such a nature that the occurrence of the
event insured against would cause financial loss to the insured'.

When the assured is so situated that the happening of the event on which the insurance money
is to be payable would as an appropriate result involve in the loss or diminution of any right
recognized by law or in any legal liability there is an insurable interest to the extent of the
possible loss or liability. Thus it is any interest which the assured is deemed to have in the
subject matter of insurance if in the event of its loss, damage, or destruction that person will
be subject to risk of losing some economic benefit or advantage. It is an interest or right
which the law will recognize in the preservation of the thing or the continuance of the life
which has been insured. In Lucena V. Crawford 14, Lawrence, J defined the concept in a
very lucid mahner, 'if the event happens, the party will gain advantage, if it is frustrated, he
will suffer a loss. The above explanation emphasizes the benefit and detrimental aspects of
the legal interests that the assured must necessarily possess to be a rightful party to take out a
valid policy of insurance. Insurable interest thus is a property in the nature of an actionable
claim.
Control - Fourthly, it seems essential that the event insured against be outside the control of
the party assuming the risk.

The above discussion highlights that the insurance contracts follow certain general principles
of contract law which can be listed in the following words. 16

INDEMNITY

A contract of insurance contained in a fire, marine, burglary or any other policy (excepting
life assurance and personal accident and sickness insurance) is a contract of indemnity. This
means that the insured, in case of loss against which

14 (1806) 2 B&P 269, 301 (NR). Supra note 1 at p.no.61.

15 Supra note 7 at P.no.14.

16 uamp.wits.ac.za/sebs/downloads/2006/general_principles of_insurance_law .doc accessed

on 15-6-2008 the policy has been issued, shall be. paid the achtual amolint of loss not
exceeding the amount of the policy, i.e. he shall be fully indemnified. The object of every
contract of insurance is to place the insured in the same financial position, as nearly as
possible, after the loss, as if the loss had not taken place at all. it would be against public
policy to allow an insfired to make a profit out of his loss or damage.

UTMOST GOOD FAITH

Since insurance shifts risk from one party to another, it is essential that there must be utmost
good faith and mutual confidence between the insnred and the insurer.

In a contract of insurance the insured knows more about the subject mattet of the contract
than the insurer. Consequently, "hy -i.s duty bound to disclose accurately all material facts
and nothing should be withheld or concealed. Any fact is rhaterial, which goes to the root of
the contract of insurance and has a bearing on- the risk invoived. It is only when the insurer
knows the whole truth that he is in a position to judge (a) whether he should accept the risk
and (b) what premium he should charge. If that were so, the insured might be tempted to
bring about the event insured against in order to get money.

Insurable Interest - A contract of insurance effected without insurable interest is void. It

means that the insured must have an actual pecuniary interest an:d not a mere anxiety or
sentimental interest in the subject matter of the insurance. The insured must be so situated
with regard to the thing .insulted that he woud have benefit by Its existence and loss from its
destruction. The owner of a ship run a risk of losing his ship, the charterer of the ship runs a
risk of losing his freight and the owner of the cargo incurs the risk of losing his goods and
profit. So, ail these persons have something at stake and all of them have insurable interest. It
is the existence of insurable interest in a contract of insurance, which distinguishes it from a
mere watering agreement. Causa Proxima - The rule of causa proxima means that the cause
of the loss must be proximate or immediate and not remote. If the proximate cause of the loss
is a peril insured against, the insured can recoyer. When a loss has been brought about by two
or more causes, the question arises as to which is the causa proxima, although the result could
not have happened without the remote cause. But if the loss is brought about by any cause
attributabie to the misconduct of the insured, the insurer is not liable. Risk - In a contract of
insurance the insurer undertakes to protect the insured from a specified loss and the insurer
receive a premium for running the risk of such loss. Thus, risk must attach to a policy.

Mitigation of Loss - In the event of some mishap to the insured property, the insured must
take all necessary steps to mitigate or minimize the loss, just as any prudent person would do
in those circumstances. If he does not do so, the insurer can avoid the payment of loss
attributable to his negligence. But it must be remembered that though the insured is bound to
do his best for his insurer, he is, not bound to do so at the risk of his life.

Subrogation - The doctrine of subrogation is a corollary to the principle of indemnity and

applies only to fire and marine insurance. According to it, when an insured has received full
indemnity in respect of his loss, all rights and remedies which he has against third person will
pass on to the insurer and will be exercised for his benefit until he (the insurer) recoups the
amount he has paid under the policy. It must be clarified here that the insurer's right of
subrogation arises only when he has paid for the loss for which he is liable under the policy
and this right extend only to the rights and remedies available to the insured in respect of the
thing to which the contract of insurance relates.

Contribution - Where there are two or more insurance on one risk, the principle of
contribution comes into play. The aim of contribution is to distribute the actual amount of
loss among the different insurers who are liable for the same risk under different policies in
respect of the same subject matter. Any one insurer may pay to the insured the full amount of
the loss covered by the policy and then become entitled to contribution from his coinsds
.proportion to the amount which each has undertaken to pay in case of loss of the same
subject-matter.

In other words, the right of contribution arises when (I) there are different policies which
relate to the same subject-matter (ii) the policies cover the same peril which caused the loss,
and (iii) all the public are in force at the time of the loss, and (iv) one of the insurers has paid
to the insured more than his share of the loss.

1.4 The Different Categories of Insurance

A classification well recognized in law and meaningful m msurance circles, distinguishes

between life insurance on the one hand and all other forms of insurance on the other. asically
insurance activity is studied under two categories, life and non-life. Both of them are studied
as insurance contracts, only the insurable interest is different. The general principles remain
almost the same.

There is a great variety of forms of insurance, ranging from pure, whole life insurance, an
undertaking to pay a certain sum on the death of the life 'insured whenever this occurs, to
endowment policies whereby the insured receives a sum if he survives beyond a certain age,
and to modern devices which com?ine an element of life insurance with the more substantial
element of investrhent in securities or property. Accordingly, contracts of life insurance and
related ones . such as personal accident insurances are regarded simply as contracts for
contingency insurance, in other words, contracts to pay an agreed sum o(money when the
event insured against occurs. Non-life insurance contracts :are, in general, contracts to
indemnify the insured only in respect of the loss suffered if it is actually suffered and only to
the amount of the loss suffered. We shall return to this distinction at the relevant points
throughout this book.

1.4.1 - Life insurance

The life insurance is, by far, seen as the most important aspect of the busihess of the
insurance industry. Under this form of insurance, the insurable interest is the indemnification
of any loss of life of the assured person. As has been discussed in the preceding paragraphs,
the first form of life insurance was seen in Rome, were citizens came together to form burial
clubs to meet their funeral expenses as well as help survivors make payments. Such practices
were also seen in the Buddhist period to help the surviving dependents build houses and meet
their economic needs.

The essential features of life insurance are the following:

1) It is a contract relating to life.

2) There need not be an express provision that the payment is due on the death of the
person.

3) The contract provides for payment of lumpsum money.

4) The amount is paid at the expiration of a certain period or on death of the person.20

Life insurance has both short range and long. range advantages. Primarily it encourages thrift
in the individual and serves also to form capital. It protects the potential estate of the policy
holder as distinguished from acquired estate. It saves the insured from worry and makes him
a little more carefree.

Life insurance manifests in different permutations. Some of the standard versions of life
insurance are whole life insurance, endowment insurance, joint-life insurance, annuity
insurance, fixed-terms marriage endowment insurance, two year temporary insurance,
children's deferred insurance, limited payment life insurance.

Another modern form of assurance is the advance insurance in which the policy provides for
the payment of a lumpsum amount to the assured in consideration of his agreeing to pay the
premiums for a specified period or for the life of the assured if his life should terminate
before the end of that period. Examples of this kind of insurance may be found in contracts to
furnish funds for the building of a house, to be repaid by monthly or quarterly installments,
which shall cease on death.

Every person has unlimited insurable interest on his own life. From this viewpoint every
individual is a prospect for life insurance. In reality, financial status effectually limits this
potential, not only because of the practical consideration of insurable worth of a person to the
insurer in financial terms but more so owing to the prospect's capacity to pay insurance
premium after meeting other pressing needs. Then again, there are many practical factors
affecting 'insurability', such as-old age, past and present illness, various physical and mental
impainnents (including defective genes), etc. Apart from these very basic aspects, at the time
of assessing the real potential for life insurance business it is important to consider the
feasibility of reaching all these prospects with available reoutces and also the profitability of
providing life insurance to them - in other terms, the cost and profitability of exploiting the
life insurance potential otherwise calculated.

In fact, the concept of insurance potential has two dimensions. One dimenion is the
'extension' of coverage, in terms of ;number' of prospects, the other dimension relates to the
'intensity' of coverage, i.e., in terms of 'amount' of insurance: cover (and consequential
insurance premium) in view of paying capacity and real need for insurance. The population in
the age group 15 to 59 is usually regarded as the insurable population, since this can be
considered as the main 'active' age :group

(in the sense of working, earning, supporting others etc.) and beyond :.this :range life risk
may be considered to be too low or too high, not worth insuring. The intensity of insurance
coverage will, however, be largely determined by the pattern of distribution of income in
society, level of employment in the country, area-wise concentration of people in the middle
to high income range, level of insurance awareness, etc. One relative measure of insurance
penetration is defined in the international market as premium volume as a share of the gross
domestic product which measures the significance of the insurance industry in relation to the
country's entire economic productivity.

It is obvious that for assessing the practical business potential of life insurance in terms of
population, the eligible population needs to be 'qualified' in relation to other factors including
those mentioned above.

1.4.2 - Non-life insurance

The other important part of the classification of insurance is the non-life insurance category.
Insurance other than 'Life Insurance' falls under the category of General Insurance. General
Insurance comprises of insurance of property against fire, burglary etc, personal insurance
such as Accident and Health Insurance, and liability insurance which covers legal liabilities.
There are also other covers such as En-ors and Omissions insurance for professionals, credit
insurance etc.

Non-life insurance companies have products that cover property against Fire and allied perils,
flood storm and inundation, earthquake and so on. There are products that cover property
against burglary, theft etc. The non-life companies also offer policies covering machinery
against breakdown, there are policies that cover the hull of ships and so on. A Marine Cargo
policy covers goods in transit including by sea, air and road. Further, insurance of motor
vehicles against damages and theft forms a major chunk of non-life insurance business.
In respect of insurance of property, it is important that the cover is taken for the actual value
of the property to avoid being imposed a penalty should there be a claim. Where a prope1iy is
undervalued for the purposes of insurance, the insured will have to bear a rateable proportion
of the loss. For instance if the value of a prope1iy is Rs. l00 and it is insured of Rs.5.0/ ' in the
event of a loss to the extent of say Rs.50/-, the maximum claim amount payable Would be
Rs.25/- (50% of the loss being borne by the insured for .underinsuring the property by 50% ).
This concept is quite often not understood by most insured. Personal insurance covers
include policies for Accident, Health etc. Products offering Personal Accident cover are
benefit policies. Health insurance covers offered by non-life insurers .are mainly
hospitalization covers either on reimbursement or cashless basis. The cashless service is
offered through Third Party Administrators who have arrangements with various service
providers, i.e., hospitals. The Third Party Administrators also provide service for
reimbursement

claims. Sometimes the insurers themselves process reimbursement claims.

Accident and health insurance policies free available for individuals as well as groups. A
group could be a group of employees of an organization or holders of credit cards or deposit
holders in a ban,k etc. Normally when a group is covered, . insurers offer group discounts.

Liability insurance covers such as Motor Third Party Liability Insurance,

Workmen's Compensation Policy etc offer cover against legal liabilities tht may arise under
the respective statutes- Motor Vehicles Act, The Worlqmen's

Compensation Act etc. Some of the covers such as the foregoing (Motor\ Third

Party and Workmen's Compensation policy) are compulsory by statute. Liability

Insurance not compulsory by statute is also gaining popularity these days. '.Many

industries insure against Public liability. There are liability covers available for Products as
well.27

There are general insurance products that are in the nature of package policies offering a
combination of the covers mentioned above. For instanc:, there are package policies available
for householders, shop keep•e; and•:.:,als? for professionals such as doctors, chartered
accountants etc. Apart from offering standard covers, insurers also offer customized or tailor-
made ones.

Suitable general Insurance covers are necessary for every family. It is important to protect
one's property, which one might have acquired from one's hard earned income. A loss or
damage to one's property can leave one shattered. Losses created by catastrophes such as the
tsunami; earthquakes, cyclones etc have left many homeless and penniless. Such losses can
be devastating but insurance could help mitigate them. Property can be covered, so also the
people against Personal Accident. A Health Insurance policy can provide financial relief to a
person undergoing medical treatment whether due to a disease or an injury.
Industries also need to protect themselves by obtaining insurance covers to protect their
building, machinery, stocks etc. They need to cover their liabilities as well. Financiers insist
on insurance. So, most industries or businesses that are financed by banks and other
institutions do obtain covers. But are they obtaining the right covers? And are they insuring
adequately are questions that need to be given some thought. Also organizations or industries
that are self-financed should ensure that they are protected by insurance. Most general
insurance covers are annual contracts. However, there are few products that are long-term.

It is important for proposers to read and understand the terms and conditions of a policy
before they enter into an insurance contract. The proposal form needs to be filled in
completely and correctly by a proposer to ensure that the cover is adequate and the right one.

Certain important and .traditional categories of general insurance are manne insurance, fire
insurance, aviation insurance and accident risk insurance. I shall now explain each of these
important categories.

1.4.2.1 - Marine insurance

Marine insurance has been the torchbearer for the modern insurance law and had in effect
supplied the major part of modern insurance law. It is not an overstatement to say that
composition of modern insurance law largely borrowed from the practices of risk coverage
adopted by the merchants at sea. The origins of the modern insurance contract are to be
found in the practices adopted by

Italian merchants from the fourteenth century onwards, although there is• little doubt that the
concept of insuring was known long before then. Maritime risks,• the risk of losing ships and
cargoes at sea, instigated the practice of medieval insurance and dominated insurance for
many years. The habit spread to London merchants but not, it appears, until the sixteenth
century. At first, there ere no separate insurers. A group of merchants would agree to
bear each othets' risks

among themselves. For a long time, the common law played little or nd part in

the regulation of disputes concerning insurance. For this purpose metchants in

1601 secured the establishment by statute of a chamber of assurance. Towards the eighteenth
century, the common law courts took an interest in insurance ccinttacts.

In Lloyd v. Fleming Blackbum J defined a policy of marine insurance as a contract of

indemnity against all losses occurring to the subject-matter of the policy from certain perils
during the adventure. 28 A contract of marine insurance may, by its express terms, or by
usage of trade, be extended so as to protect the assured against losses on inland waters or on
any land risk which 'may be incidental to any sea voyage.29

In a contract of marine insurance, what is hisureci is notthe prope1iy exposed to peril but
only the risk or adventure of the assured. There is marine adventure where:

a) Any ship, goods or other movable property are exposed to maritim perils;
b) The earning or acquisition of any freight, passage money, corhmission, ptofit or other
pecuniary benefit, or the security fot any advances; loan ot disbursements, is endangered by
the exposure of the properties described aforesaid to maritime perils;

c) Any liability to a third paiiy may be incurred by the owner of, 'or other person
interested in or responsible for such property by reason of maritime perils.

Maritime perils are the perils consequent on, or incidental to, the navigation of the sea, that is
to say, perils of the seas, fire, war perils, pirates, rovers, thieves, captures, seizures, restrains
and detainments of princes and peoples, jettisons, barratry and any other perils either of the
like kind, or which may be designated by the policy. 31

EVIDENTIARY VALUE OF COVERNOTE

In marine insurance generally the broker contacts the parties and takes the particulars on a
slip of a paper. He takes them to different insurance companies

and the insurance company which is willing to insure makes a mark or initials of the officer
on the covernote.32 From the period of marking by the insurance company, the covernote
becomes a legal document though of limited legal value.

In Ionides v. Pacific Marine Insurance Co., Lord Blackburn said, "as the slip is clearly a
contract for marine insurance and is equally clearly not a policy it is by virtue of these
enactments (the stamp laws) not valid, that is not enforceable at law or in equity; but it may
be given in evidence wherever it is, though not valid material."33

A covernote therefore is admissible in evidence not only to prove that contract but also to
explain the meaning of any ambiguous term in the policy. The policy may be rectified if it is
contrary to the covernote and for such collateral purposes it can be used in evidence.

The Indian law on marine insurance holds similar view. In Lateef Ali V. Royal Exchange
Corp. it was held tat the cover note is not a policy and according to

S.7 of the Stamp Act, a contract of sea insurance should be expressed in a sea policy and
duly stamped. As the practice is not to stamp a covernote it is admissible only to prove the
agreement. It cannot be used for any purpose except

to compel the delivery of a policy in accordance with its tertns.3in

Bhagawandas v. Netherlands Insurance Co,.35 it was laid down that the f Ontract was not
enforceable under a covernote; but an action for specific perfor alice is maintainable for the
issue of a policy. In .sutajmal v. Trefon Insurance Co., the • Privy Council laid down that an
agreenint of sea.insurance otherwise tfian in a policy is forbidden in public interest and the
statutory insistence on a policy is hot• a mere collateral requirement.

In India, the Government of India enacted the Marine lnsurance Act, 19631 'to give
a statutory clarity on matters concerning marine insurance and also coify the principles lying
scattered hitherto. Section 24 of the Act lays down that a contract of marine insurance shall
be admitted.f:ip evidence unless it is embodied in a marine policy according to the Act. The
policy may be issued after the•con:tract is concluded. Section 25 lays down the contents of
the marine policy:

a) The name of the assured or the person who effects the insurance

b) The subject matter insured and the risk insured against; '

c) The voyage or the period of time or both;

d) The sum or sums insured; and

e) The name of the insurer or insurers.

"' .

The policy must be signed by the insurer himself. Section 28 states that the

subject matter must be designated with reasonable certainty. The nature and extent of the
interest of the assured need not be specified. Section 32 provides tha:t the policy maybe in the
form given in the schedule and subject to the provision of the Act and unless the context of
the policy othetis• requires, .the terms and expressions mentioned in the schedule shall be
construed as having-the scope and meaning assigned to them in the schedule.

34 Supra note 1 at page 257

35 (1888) 161 LA 60. Supra note 1 at page 257.

36 S.25 of the Marine Insurance Act, 1963. http://vlex.in/vid/the-marine

insw;ance-act 29631517 on

The principles developed in regard to marine insurance have by and large been applied to the
other types of insurance subsequently developed.

1.4.2.2 - Fire insurance

Fire insurance is a contract to indemnify the insured for destruction of or damage to property
or goods, caused by fire, during a specified period. The contract specifies the maximum
amount, agteed to by the parties at the time of the contract, which the insured can claim in
case of loss. This amount is not, however, the measure of the loss. The loss can be
ascertained only after the fire has occurred. The insurer is liable to make good the actual
amount of loss not exceeding the maximum amou,nt fixed under the policy.

CAUSA PROXIMA

It is a rule of law that in actions on fire policies, full regard must be had to the causa proxima.
Ifthe proximate cause of the loss is fire, the loss is recoverable. If the cause is not fire but
some other cause remotely connected with fire, it is not recoverable, unless specifically
provided for. Fire risks do not cover damage by explosion, unless the explosion causes actual
ignition, which spreads into fire. The cause of the fire is immaterial, unless it was the
deliberate act of the insured.

STEPS TO BE TAKEN IN FIRE INSURANCE CLAIMS

It is the duty of the insured, or any other person on his behalf, to give immediate notice of fire
to the insurance company so that they can safeguard their interest, such as, deal with the
salvage, judge the cause and nature of fire and assess the extent of loss caused by the fire.

Failure to give notice may avoid the policy altogether.

The insured is further required by the terms of the policy, to furnish within the specified time,
full paiiiculars of the extent of loss or damage, proof of the value of the prope1iy and if it is
completely destroyed, proof of its existence.

Delivery of all these details to, the. company is a condition precedent to the claim of the
assured to recover the loss. If the assured prefers a fraudulent

claim, whether for whole or part of the policy, he would forfeit all benefits under the policy,
whether or not there is a condition to this effect ih the policy. Generally, the fraud consists i:n
over -valuation, but overvaluation due to mistake is not fraudulent. In a majority of fire
insurance claims, the expert assessors of the company are able to anive at mutually aceptable
valuation.

1.4.2.3 - Aviation Insurance

Since the end of World War the aerospa2' illdustty has developed at a vertiginous speed and
the aviation insurance market has followed that pace. The upstjrge and

present importance of the aviation insurance business is definitely due to the

uprising costs of new generations of modem, enormous aircraft, andi to the increase in
liability limits for international air transport passengers. Consequently, insurance has become
the essential protection mechanism of the aviation industry against loss and damages. Also, it
has enabled large aircraft financing en,tities to protect their property in cumbersome leasing
contracts.

Although some sources indicate that the first aviation insurance policy was

written by Lloyd's of London in 1912 and others contend that the first hviation

insurance contract was entered into to insure third-party liability during the 1910 London-
Manchester race ('which did result in several accidents), there is an authority that reports that
insurance for flying machines and their inherent risk can

be traced back to the year 1908 in London. Yet another source po.st.ulates !that the

. . \ .." ' '

birth of aviation insurance dates back to the year 1911 but this comment perhaps refers to the
birth of aviation insurance at Lloyd's.37

The first standard policy issued by Lloyd's came into existence in 1911 nd was commonly
known as the White Wings Policy. It afforded coverage for only third party liability claims.
In 1912, a draft policy by Messrs. Matthews, Wrightson & Company Limited was accepted
by the Executive Committee of the Royal Aero Club. The policy carried an endorsement
stating that it was approved and

recommended by the Royal Aero Club of the United Kingdom.

In 1919 the first attempt was made to unify laws relating to international aviation. Certain
European countries met in Paris to formulate Rules for the Regulation of International
Aviation. This meeting became known as the Convention of Paris.

International law regarding aviation insurance has been primarily concerned with the
regulation of liabilities to third parties and passengers injured by aircraft operations in
international civil aviation. At present, there are no international legal instruments ruling
aircraft hull insurance matters. They are usually deemed the exclusive province of the aircraft
operator, or, at best, of the State of registry. Whenever there is an accident resulting from the
operation of an aircraft, two categories of claims for damages are filed against the operator.
One category includes claims made by injured passengers and consignors of luggage or
goods, in which case, liability arises from a contractual obligation derived from the contract
of carriage. The other category consists of claims by third parties who suffered damages on
the surface and which have no contractual relation with the operator, in which case liability
arises from a tort (civil offence). Under Article 12 in The Rome Convention, every aitcraft
registered in the territory of a Contracting Party shall, for the purpose of flying above the
territory of another Contracting Party, be insured within some limits of maximum amount of
liability. The municipal law of each Contracting Party may agree to substituting another form
of guarantee for insurance. These provisions give rise to many doubts and mistrust
concerning the effectiveness of the Convention as an instrument of unification •of Law
because it remits the question of the insurer's obligation regarding insured persons to the
respective legislation. The Rome Convention canonized the existing principles ofliability in
the following words:

a) the aircraft operator has objective liability for• damage caused to third pCj.tt:ies oil
the surface;

b) the aircraft operator has limited liability at fixed sums; and

c) the fulfillment of the obligations resulting from liability is guaranteed by the

requirement of insurance or another security.

The aviation insurance policy is structured to divide the insurable risks into three main
sections, which are Section I- Loss of or Damage to the Aircraft, Se'tion 11- Legal Liability
to Third Parties (Other than Passengers), and Section III- Legal Liability to Passengers. 39
Some operators request additional coverage for bodily injuries and/or death for the
operational crew of the aircraft which do not have a transportation contract, and such
coverage is granted through personal accident coverage, commonly called "seat insurance".
The AVN lA policy is generally used for undertaking risks associated with aviation in
general, that is to say civil and commercial operations, but not for.the operation of
commercial airlines -as a .whole. This is due to the fact that the nature of the operations of an
airline and the particular characteristics of each airline (e. g.: their operating experience)
require stipulating special conditions to satisfy the individual needs of each comparty.40

In addition to these policies, there are others, less frequently used, that cover sporadic risks or
very rare risks; these are issued by companies specialized in these kinds of risks. The contents
of the policies may vary according to the risks covered or to the paiiicular demands of each
legislation; however, in general, the model contains a description of the insured risk(s),
exclusions, general conditions applicable to all of the sections, warranties, definitions of
relevant terms, and obviously, the policy schedule.

Hull coverage is granted either based on the "insured value" or on the "agreed value". In the
first situation, the parties agree upon a figure that normally represents the market value of the
aircraft and this figure will be the maximum

insured limit that can be claimed, even if the loss exceeds such quantity. In the second
situation, the parties agree to 'write the policy for an aircraft value that satisfies the purposes
of the contracting parties. This figure is used when the insured wants to be certain that it will
be completely indemnified in the event of a total loss or a total constructive loss, especially in
events in which there are very high mortgages or warranties on the aircraft. It is also useful
when there are relatively few aero planes of a particular kind and when it is difficult to
establish a

market value for the aircraft, in case of loss.41

If a total loss or total constructive loss occurs - 'which in aviation insurance occurs when the
aircraft has suffered damage of such a magnitude that it is

economically impossible to repair it, no matter what its insured or agreed value -

and the policy is issued under the insured value, the insurer has the option of replacing the
aircraft or paying the insured amount. In the latter case, according to the policy, the insurer
will be empowered to take possession of the aircraft (along with its documents, titles and
registrations) as salvage. Unless there is an agreement stating otherwise. Payment must be
made for the market value of the aircraft upon the day of the occurrence, making sure that
such value does not exceed the insured amount stipulated in the policy; if that should be the
case. The insurer would only respond for up to the insured amount.

LEGISLATIVE STRUCTURE WITH REGARD TO AVIATION LAW AND AVIATION

INSURANCE

One of the most impo1iant legislations in this area has been the Carriage by Air Act, 1972
which is a refurbished version of the legislation in its earlier incarnation, the Aircraft Act,
1934. This legislation is in fulfillment of the treaty responsibility that India has contracted to
by signing the treaties of Warsaw on Air traffic regulation and insurance of 1938 and The
Hague and Montreal protocols that have been added to the Warsaw convention later. Some of
the amendments•effected by the Hague Protocol to the Warsaw Convention are-

(a) An increase in the amount specified as the maximum Stltn fot which the carrier may
be liable to a passenger, that is to say: the limits of the liability of the carrier in respect of a
passenger has been doubled, and unless a higher, figure is agreed to by a special contract, the
liability is raised from 1,25,000 gold francs per passenger to 2,50,000 gold francs per
passenger:

(b) Making the carrier liable where the damage was caused by an error in piloting . or in
the handling of the aircraft or in navigation. 42

The Act provides that the carrier is responsible for any loss suffered by the passengers and
in the event of death to the-relatives in damages. Section 5 of the ' \ ;.:
legislation explains the nature of the liability of the carrier in the event of the death of the
passenger

Liability In case of death

(1) Notwithstanding anything :contained in the Fatal Accidents Act, 1855or any other
enactment or rule of law in force in any part of India, the rules cont;;rined in the First
Schedule and in the Second Schedule shall, in all cases to which those rules apply, detennine
the liability of a carrier in respect of the deth of a passenger.

(2) The liability shall be enforceable for the benefit of such of the members of the passenger's
family as sustained damage by i•eason of his death.

Explanation: - In this sub-section, the expression "member of a family''• means

wife or husband, parent, step-parent, gtant-parent, brother, sistr, half-brother,

. . ' • ' .-•-:' . '

half-sister, child, step-child, grand-child;

Provided that in deducing any relationship as aforesaid any illegitimate person and any
adopted person shall be treated as being or as having been, the legitimate•

child of his mother and reputed father or, as the case tnay be, of his adopters.

42 Supra note 37.

43 http:/ivlex.in/vid/the-carriage-air-a:ct-29632856 o'r\ 21-8-2008.

28

(3) An actio'n to enforce the liability may be brought by the personal representative of the
passenger or by any person for whose benefit the liability is under sub-section (2)
enforceable, but only one action shall be brought in India in respect of the death of any one
passenger, and every such action by whomsoever brought shall be for the benefit of all such
persons so entitled as aforesaid as either are domiciled in India or not being domiciled there
express a desire to take the benefit of the action.

(4) Subject to the provisions of sub-section (5) the amount recovered in any such action,
after deducting any costs not recovered from the defendant, shall be divided between the
persons entitled in such proportion as the Court may direct.

(5) The Court before which any such action is brought may, at any stage of the
proceedings, ake any such order as appears to the Court to be just and equitable in view of
the provisions of the First Schedule or of the Second Schedule, as the case may be, limiting
the liability of a can-ier and of any proceedings which have

been or are likely to be commenced outside India in respect of the death of the

passenger m.

quest1.0n.44

1.4.2.4 Accident Insurance

In order to give effective rights to the person injured or expired in an accident, Fatal
Accidents Act, 1885 was enacted in India. This Act provided only a procedure and a right of
named legal heirs to claim compensation from the person committing negligence. This
enactment has worked in India for a comfortable long period. Because of increase in
automation and consequential losses of life and property in accident, it was considered that to
give relief to the victims of accident claims an effective law should be brought in. To
facilitate this, provisions have been inserted for compulsory third party insurance and to
provide a machinery of adjudication of claim in Motor Vehicle Act by amending Act No.110
of 1956, by which Section 93 to 109 with reference to third party

44 This section's material has been largely resourced from Avtar Singh -
MNSrinivasan's Principles of Insurance Law (2004) at pages 386-390.
29

insurance and Section 11O(A) to 11O(F) with reference to creation of Moto Accident Claims
Tribunal and procedure for adjudication of claim has been provided. Initially the liability was
restricted to a particular sum but after 1982 the liability of the Insurance Company has
been made unlimited and even the

defences of the Insurance Companies have been restricted so as to ensure payment of

compensation to third parties.45

In the year 1982 a new concept of providing interim compensation on 'No Fault' basis have
been introduced by addition of Section 92(A) to 92(E). By the same amendment, relief has
also been given those persons who expire by hit and run accidents, where the offending
vehicles are not identified. 46

Chapter 11 (Section 145 to 164) provides for compulsory third party i which is required to be
taken by every vehicle owner. It has been spt. Section 146(1) that no person shall use or
allow using a motor vehicle place unless there is in force a policy of insurance complying \
requirement of this chapter. Section 147 provides for the requirement o and limit of liability.
Every vehicle owner is required to take a policy c,

against any liability which may be incurred by him in respect of death or injury including
owner of goods or his authorized representative carried

vehicle or damage to the property of third party and also death or bodily inj

any passenger of a public service vehicle. According to this section the polil require covering
the liability of death or injuries arising to the employees i course of employment except to the
extent of liability under Work Compensation Act. Under Section 149 the insurer have been
statutorily liabl satisfy the judgment and award against the person insured in respect of third
p: risk.

(1) Use of vehicle for hire .

(2) For organizing racing and speed testing

(3) Use of transport vehicle not allowed by permit.

(4) Driver not holding valid driving license or have been disqualified for holding such
license.
(5) Policy taken is void as the same is obtained by non-disclosure of material fact.
Section 163A has been added in this Chapter by amending Act 54 of 1994 w.e.f.

14.11.94 whereby special provision as to payment of compensation on structural

formula basis has been provided. This provision is being introduced to provide

compensation to the third party victims without proving negligence or tortious act.

Schedule-II has been appended to the Acfto•give such structural formula. Hon'ble Supreme
Court has held that award under Section 163A is final, independent and not in addition of
award in claim petition under Section 166 where claim is sought on negligence basis. Thus,
one can claim compensation in either of the Section.

Claim Application:

Claim application can be filed under Section 163A for claim to be determined on structural
formula basis provided in Schedule-IL Schedule-II has been adjudged as suffering from
severe mistakes and the Supreme Court has held that total reliance cannot be placed on this
schedule. Further the Schedule do not provide any computation chart for the persons having
m:ore than Rs.40,000/-' annual income. Claim petition can alo be filed under Section 166 of
Motor Vehicle Act pleading negligence where the claim shall be assessed by the Judge not on
the basis of structural formula but on the basis of evidence led.

The injured or the legal representatives of deceased can file claim application ina prescribed
format making driver, owner and insurer as party. Driver is not a necessary party in some
states. For e.g. in the Rajasthan Motor Accident Claims Tribunal Rules only owner and
insurer ate required to be party. No limitation has been prescribed for filing of •the claitn
application. Initially when the law has

come into force the limitation was 6 months which was later increased to one year and
ultimately in the garb of welfare legislation the provision of limitation has been deleted. In
my humble view when there is limitation prescribed for all type of causes, some limitation of
2 or 3 years must be prescribed for filing of claim application. It should not be made
indefinite, as it will cause serious problems to the defendant. The procedure has been
prescribed as a summary procedure for determining the compensation.

Accidents arising out of use of Motor Vehicle:

Section 165 provides the form of constitution of Claim Tribunal in adjudging claims of
compensation in respect of accidents involving the death of bodily injury to persons "arising
out of the use of Motor Vehicle". Being welfare legislation the scope of this tetrn have been
widened which includes accident by a stationery vehicle, injuries suffered by passengers in
bomb blast, injuries due to fire in petrol tanker. Murder in a motor vehicle has also been
covered as a motor accident.

Assessment of Claim:
The assessment of compensation, however, be made good but cannot be said to be foolproof.
In every such assessment certain assumptions are to be made and there is all possibility of
variance from Judge to Judge in applying the various principles enunciated by the Courts
from time to time. Lord Viscount Simon has evolved a method of assessment known as
"Nance's method" more popularly as "discounting method". The another popular method,
which is known as Davis Method was evolved by Lord Wright.

Hon'ble Supreme Court while dealing with a matter evolved a formula. Yearly Income
Yearly expenditure on Deceased gives the sum expended on legal representatives. If this
amount is capitalized subject to certain deductions, pecuniary loss to the family can be
assessed. While improving the above f01mula Supreme Court in CKS Iyer's case has stated
that there is no exact uniform rule

for measuring the value of human life and measure of damages cannot be arrived . at by a
mathematical calculation but the amount recoverable depends upon life expectancy of legal
representative beneficiaries. In the same period Lord Diplock has evolved Interest
Capitalization method by calculating net pecuniary loss on annual basis and multiplied with
number"of years purchase. The Hon'ble Supreme Court of India with the development of
accident claims has decided the landmark case of Susamma Thomas47 has started giving
appreciation to the annual income of deceased. This appreciation ranges to the double of
income depending tfpon the nature of job, age, future prospects etc. Supreme Court has
held that after determining and doubling annual income, 1/3 should be deducted towards
the expenses to be incurred on the deceased and the remaining• amount should be multiplied
by a multiplier depending ort':the age of deceased and beneficiary. The maximum multiplier
approved by Supreme Court in this case was 16. Later,. Supreme Court's 3 Judges bench
have approved the Davis formula along with determination of dependency on unit basis in
which the adults hve been•taken as- 2 units ar.id the minors has been taken as 1 unit. The
multiplier, which was approved as 16 in Susamma Thomas case, was increased to maximum
of 18. In this case the court did not allow double of the amount except that a premium may

be given looking to the future prospects. But, in a recent Suprem Court

judgment, in order to make compensation just and to take conideration ofloverall .

factors multiplier was reduced from 16 to 12 in case of deceased of 38 years. In same facts
and circumstances, in another case Supreme Court has said for determination of multiplier
depends upon (1) age of deceased (2) age of claimants

(3) marital status (4) education and employment of the claimants; and (5) loss of
pecuniary benefits. The Supreme Court has also held that criterja of awarding compensation
include some guess work, some hypothetic.al --og;fd atin and .

some amount of sympathy linked with the nature of disability caused are all

involved. But, all such elements ate required to be viewed with the objective standard.

(1994) 4 sec 176.

In view of the above case laws, one can say that the assessment of compensation is to be
guided by way of applying precedents on the facts and circumstances of a particular case. It
should not be misunderstood that an injured or legal representatives of the deceased should be
given exorbitant claim, but the law restrict them to be "just compensation" so as to save the
injured or legal representatives of deceased from possible pecuniary and non-pecuniary losses
guided by the above judgments.

Legal defence available to the Insurance Companies towards third party:

The Insurance Company cannot avoid the liability except on the grounds and not any other
ground, which have been provided in Section 149(2). In recent time, Supreme Court while
dealing with the provisions of Motor Vehicle Act has held that even if the defence has been
pleaded and proved by the Insurance Company, they are not absolve from liability to make
payment to the third party but can receive such amount from the owner insured. The courts
one after one have held that the burden of proving availability of defence is on Insurance
Company and Insurance Company has not only to lead evidence as to breach of condition of
policy or violation of provisions of Section 149(2) but has to prove also that such act happens
with the connivance or knowledge of the owner. If knowledge or connivance has not been
proved, the Insurance Company shall remain liable even if defence is available.

Driving License:

Earlier not holding a valid driving license was a good defence to the Insurance Company to
avoid liability. It was been held by the Supreme Court that the Insurance Company is not
liable for claim if driver is not holding effective & valid driving licence. It has also been held
that the learner's licence absolves the insurance Company from liability, but later Supreme
Court in order to give purposeful meaning to the Act have made this defence very difficult. In
Sohan Lal Pasi's case it has been held for the first time by the Supreme Court that the breach
of condition should be with the knowledge of the owner. If owner's knowledge with reference
to fake driving licence held by driver is not proved: by the Insurance Company, sue defence,
which was . otherwise available, can not absolve insurer from the liability. Recently in a
dynamic judgment :in case

of Swaran Singh,48 the Supreme Court h'fl.s almost taken away the said right• by .

holding;

(i) Proving breach of condition or not holding driving licence or holding fake licence or
carrying gratuitous passenger would not absolve the Insurance Company until it is proved
that the said breach was with the knowledge of owner.

(ii) Learner's licence is a licence and will not absolve Insurance Company from liability.

(iii) The breach of the conditions of the policy even within the scope of Section
149(2) should be material one which must have been effect cause of accident and

thereby absolving requirement of driving licence to those accidents with standing vehicle, fire
or murder during the course of use of vehicle.

This judgment has created a landmark history and is a message to the Govrnment to remove
such defence from the legislation as the victim has to be given compensation.

Gratuitous Passenger:

A gratuitous or fare paying passenger in a goods vehicle or fare paying passenger in private
vehicle has been proved to be a good defence. In Motor Vehile Act 1939 the gratuitous
passenger was not covered under the insurance policy but a fare passenger in a goods vehicle
was considered to be covered by 5 :Judges Bench judgment of Rajasthan High Court. In new
Motor Vehicle .A(a Division Bench of Supreme Court held that Insurance Company is liable
for a passehget in goods vehicle. In another judgment of 3 Judges Bench of Supreme Court it
was held that the Insurance Company is not liable for the gratuitous passenger

2004 (3) sec 291 : 2004-SLT-345

traveling in the goods vehicle. In number of other cases this judgment has been reiterated
with a direction that the Insurance Company shall first make payment of the compensation to
the claimant and then recover it from the owner.49

The time is now for bringing legislation for award of the fixed compensations as in case of
rail or airways. A person dying in rail accident cannot get beyond Rs. 4 lakh but a person
dying in road accident• can get Rs.4 crore. The payment of compensation based on the
vehicle is not reasonable and a structural basis compensation formula without reference to
income or age may be brought in so that each and everybody can get compensation of their
life irrespective of his poverty or richness. A Scheme should be formulated with the State
Police Authorities and the Insurance Companies by which the Insurance Company must
know immediately after happening of accident and can make necessary investigations.
Insurance Company comes in picture when the claim petition is filed and by that time the
evidence can be created to convert the non-accident into accident and also on quantum. The
intention of legislation is to provide just compensation and not exorbitant compensation. This
should always be kept in mind.

1.4.2.5 Health Insurance

The term health insurance is generally used to describe a form of insurance that pays for
medical expenses. It is sometimes used more broadly to include insurance covering disability
or long-term nursing or custodial care needs. It may be provided through a government-
sponsored social insurance program, or from private insurance companies. It may be
purchased on a group basis (e.g., by a firm to cover its employees) or purchased by individual
consumers. In each case, the covered groups or individuals pay premiums or taxes to help
protect themselves from high or unexpected healthcare expenses. Similar benefits paying for
medical
Further readings on this topic included the judgment of Justice KT Thomas in NEW
INDIA ASSURANCE COMPANY v. SATPAL SINGH AND OTHERS. 2000-(099)-
COMPCAS - 0258 -SC sourced from http://www.vakilno1.com/
juclgements/companiesact/2000- 099co!I!Qcas025 8sc.htm on 21-8-2008.

expenses may also be provided tfuough social welfare programs funded by the government.

By estimating the overall risk of healthcare expenses, a routine finance structure (such as a
monthly premium or annual tax) can be developed, ensuring that money is available to pay
for the healthcare benefits specified in the insurance agreement. The benefit is administered
by a central organization, most often

either a government agency or a private or not-for-profit entity operating a health

plan.so

A health insurance policy is a contract between an insurance company and an individual or

his sponsor (e.g. an employer). The contract can be renewable

annually or monthly. The type and amount of health care costs that will be

covered by the health insurance company are specified in advance, in the member

contract or "Evidence of Coverage" booklet. The individual insured person's obligations may
take several fc;irms

Premium: The amount the policy-holder or his sponsor (e.g. an employer)

pays to the health plan each month to purchase health coverage.

Deductible: The amount that the insured must pay out-of-pocket before the health insurer
pays its share. For example, a policy-holder might have to

pay a $500 deductible per year, before any of their health care is cov6red by

the health insurer. It may take several doctor's visits or presctiptiorl refills before the insured
person reaches the deductible and the insurance cdmpany starts to pay for care.

Co-payment: The amount that the insured person must pay out of°pocket

before the health insurer pays for a particular visit or service. Fo1\exam:ple, an

insured person might pay f $45 co-payment for a doctor's visit, or.to obtain a

prescription. A co-payment must be paid each time a particular service is obtained.

How Private Insurance Works: A Primer by Gary Claxton, Institution for Health Care
Research and Policy, Georgetown University, on behalf of the Henry J. Kaiser Family
Foundation www.en.wikipedia.org on 2-1-2009.
Co-insurance: Instead of, or in addition to, paying a fixed amount up front (a co-payment),
the co-insurance is a percentage of the total cost that insured person may also pay. For
example, the member might have to pay 20% of the cost of a surgery over and above a co-
payment, while the insurance company pays the other 80%. If there is an upper limit on
coinsurance, the policy-holder could end up owing very little, or a great deal, depending on
the actual costs of the services they obtain.

Exclusions: Not all services are covered. The insured person is generally expected to pay the
full cost of non-covered services out of their own pocket.

Coverage limits: Some health insurance policies only pay for health care up to a ce1iain
dollar amount. The insured person may be expected to pay any charges in excess of the health
plan's maximum payment for a specific service. In addition, some insurance company
schemes have annual or lifetime coverage maximums. In these cases, the health plan will stop
payment when they reach the benefit maximum, and the policy-holder must pay all remaining
costs.

Out-of-pocket maximums: Similar to coverage limits, except that in this case, the insured
person's payment obligation ends when they reach the out- of-pocket maximum, and the
health company pays all further covered costs. Out-of-pocket maximums can be limited to a
specific benefit category (such as prescription drugs) or can apply to all coverage provided
during a specific benefit year.

Capitation: An amount paid by an insurer to a health care provider, for which the provider
agrees to treat all members of the insurer.

In-Network Provider: (U.S. term) A health care provider on a list of providers preselected .by
the insurer. The insurer will offer discounted coinsurance or co-payments, or additional
benefits, to a plan member to see an in-network provider. Generally, providers in network are
providers who have a contract with the insurer to accept rates further discounted from.the
"usual and customary" charges the insurer pays to out-of-network providers.

Prior Authorization: A certification or authorization that . an insurer provides prior to medical

service occurring. Obtaining •afi authorization means that the insurer is obligated to pay for
the service, assume it matches what was authorized. Many smaller, routine services do not
require authorization.

Explanation of Benefits: A document sent by an insurer to a patient explaining what was

covered for a medical service, and how they arrived at the payment amount and patient
responsibility amount.51

Crop Insurance

The two general categories of crop insurance ate called cropyield insurance and crop-revenue
insurance. Crop insurance is purchased by agricultural producers,
including farmers, ranchers, '1;11d others to protect themselves against either the loss of their
crops due to natural disasters, such as hail, drought, and floods, or.the loss of revenue due to
declines in the prices of agricultural commodities.

Crop-yield insurance: There are two main classes of . crop-yield msurance:

Crop-hail insurance is generally available from private insurers (in countries with private
sectors) because hail is a narrow peril that occurs in a limited place and its accumulated
losses tend • not to

overwhelm the capital reserves of private insurers. The earliest crop-

hail programs were begilil by fatmets cooperatives in Frane and Gel'many in the 1820s.

Multi-peril crop insurance (MPCI): covets the broad perils of drought, flood, insects, disease,
etc., which may affect many insured's at the same time and present the insurer with exces
V:ejosses. To make this class of insurance, the perils are often bundled to.gether frr a single
policy, called a multi-peril crop insurance (MPCI) policy. MPCI coverage is usually offered
by a government insurer and premiums are usually partially subsidized by the government.
The earliest MPCI program was first implemented by the Federal Crop Insurance

Corporation (FCIC), an agency of the U.S. Department of Agriculture, in 1938. The FCIC
program has been managed by the Risk Management Agency (RMA), also a U.S. Department
of Agriculture agency, since 1996.

rop-revenue insurance: is a combination of crop-yield insurance and price insurance. For

example, RMA establishes crop-revenue insurance guarantees on corn by multiplying each
farmer's corn-yield guarantee, which is based on the fa1mer's own production history, times
the harvest.:.time futures price discovered at a commodity exchange before the policy is sold
and the crop planted. There is a single guarantee for a certain number of dollars. The policy
pays an indemnity if the combination of the actual yield and the cash settlement price in the
futures market is less than the guarantee.

Crop-revenue insurance covers the decline in price that occurs during the crop's growing
season. It does not 'cover declines that may occur from one growing season to another. That
would. be called "price support," and would raise a series of complex agricultural-policy and
international-trade issues.

1.4.2.7 Fidelity bonds

A fidelity bond is a fo1m of protection that covers policyholders for losses that they incur as
a result of fraudulent acts by specified individuals. It usually insures a business for losses
caused by the dishonest acts of its employees.

While called bonds, these obligations to protect an employer from employee- dishonesty
losses are really inurance policies. 52 These insurance policies protect from losses of
company monies, securities, and other property from employees
who have a manifest intent to cause the company loss. There are also many other forms of
crime-insurance policies (burglary, fire, general theft, computer theft, disappearance, fraud,
forgery, etc.) to protect company assets.

1.4.2.8 Trade Credit Insurance

Trade credit insurance, business credit insurance, export credit insurance, or credit insurance
is an insurance poliy and a risk management product offered by private

insurance companies and goverru'nental export credit agencies to business entities wishing to
protect their balance sheet asset, accounts receivable, from foss due to credit risks such as
protracted default, insolvency, bankruptcy, etc. This insurance product, commonly referred to
as credit insurance, is a type of property

& casualty insurance and should not b:e Cbnfused with such products as ct.edit life or credit
disability insurance, which the insured obtains to protect against the risk of loss of income
needed to pay debts. Trade Credit Insurance can include a component of political risk
insurance which is offered by the same insurers to insure the risk of non-payment by foreign
buyers due to currency issues, political unrest, expropriation, etc.

This points to the ma1or role trade credit msurance plays m facilitating international
trade. Trade t{:edit is offered by vendors to their customers as an alternative tC? prepayment
or cash on delivery terms, providing time for the customer to generate income from sales to
pay for the product or

service. This requires the vndor to assume non-payment risk. In a local or domestic
situation as well as, in an export transaction, the risk increase when laws, customs
communications and • customer's reputation are not fully
understood. In addition to increased risk of nonpayment, international trade presents the
problem of the time between product shipment and its availability for sale. The account
receivable is like a loan and represents capital investe,d, and • often borrowed, by the vendor.
But this is not a secure asset until it is paid: Ifthe customer's debt is credit insured the large,
risky asset becomes more secure, like an insured building. This asset may then be viewed
as collateral by lending institutions and a loan based upon it used to defray the expenses of
the transaction

and to produce more product. Trade credit insurance is, therefore, aArde finance ,

tool

1.4.2.9 Livestock insurance

This category of insurance is one of the important categories of insurance irt the rural sector.
It is explained that livestock insurance aims to provide protection

mechanism to the farmers and cattle rearers against any eventual loss of their animals due to
death and to demonstrate the benefit of the insurance of livestock to the people and
popularize it with the ultimate goal of attaining qualitative improvement in livestock and their
products. This category sees the benefit of the rural sector as its main priority. The major
beneficiaries under this form of insurance are farmers (large/small/marginal) and cattle
rearers. This is an msurance scheme sponsored by the Central Government with budgetary
allocation.

A centrally sponsored scheme Livestock Insurance, was implemented on pilot basis during
the years 2005-06 and 2006-07 of the 10111 Five Year Plan and 2007- 08 of the Eleventh
Plan in I 00 selected districts across the country. Under the Scheme, crossbred and high
yielding cattle and buffaloes were insured at

maximum of their current market value. The premium of the insurance was subsidized to the
tune of 50% by the Central Government. Rest 50% of the premium was borne by the
beneficiaTies.

Implementation of the scheme during 2008-09 and remaining years of the XI Plan
(proposed):

The scheme was in effective, implementation for about 19 months during the financial years
2005-06 to 2007-08. The scheme was evaluated independently by Institute of Rural
Management, Anand during the year 2007-08. Based on the findings and suggestions of te
study, a fresh proposal for implementation of the

scheme is being prepared for implementation during 2008-09 and remaining years of the
Eleventh Plan.

Under the Livestock Insurancie Policy, cover is provided for the sum insured or the market

value of the animal at the time of death whichever is less. Animals are normally insured up to
100 percent of their market vaue. •The "Cieneral Insurance Corporation of India (GIC)
implements various cattle insurance programmes.

1.5 Hypothesis of the Research

The present research is undertaken to m1derstand arid highlight the new vistas in legal
delineation of the insurance activity. This research makes an ill depth analysis of the pre- and
post-liberalization stages in the Indian insurance industry.

The researcher believes that the judiciary has in a very innovative manner made the insurance
industry more responsible • and responsive to the needs of the policyholder. The following
pages go ahifad in proving the above statement.

Scheme of Chapterization

Chapter two of the research fraces the historical development of the concept of Insurance in
India. It begins with understanding the beginnings of insurance and how the insurance traced
its foundations in pre-independent India. The chapter

makes a chronological statemnt of the origins of the insurance sector in In'dia and
the Way it functioned. This chapter explains the classification of inurance

business undertaken by these insurance companies, both Indian and non Ihdian,

and also explains the nature of the business adopted by these companies. The chapter makes a
table representation of the share of these insurance companies and the changes recorded in
such business share before and consequent to the legal regulation of such insurance activity.
This chapter traces the devel?prnent

of the industry till the period of nationalization of the insurance_jn.dustry by

independent India's first Republican government in furtherance of its sbcialist ideals.

The third chapter begins with understanding the circumstances that necessitated
nationalization, the policy goals as well as the changed social circumstances and needs". It
explains the imperatives before the government for nationalization of the industry, especially
for making it more amenable to the insurance needs of the neglected sectors of the
population, the rural India and the poor and marginal farmers and people belonging to the
unorganized sectors who form the majority of India's population. This chapter explains the
process of nationalization and the legislative delineation of the process of nationalization.
The chapter also explains the insurance business of the Life insurance corporation, the public
sector conglomerate created by the government after nationalizing the insurance business of
the erstwhile private Indian and non-Indian offices of the insurance industry in India. This
chapter also explains the nature of the business undertaken by the LIC and gives a figurative
explanation of the insurance business in India, post-nationalization to pre-liberalization era.
This chapter also goes on to explain

the nationalization of the general insurance business and the creation of a

corporation and subsidiaries to look after the general insurance business. The

chapter makes an analysis of the business done by these two corporations and how they have
reformed their business models based on the circumstantial requirements and goes on to
examine with figures whether LIC was successful at least relatively in answering the
imperatives for which it was created. The chapter also looks at the statutory instruments for
the purpose of regulation of insurance industry. This chapter also explains the refo1ms
suggested in the Insurance sector by the Malhotra committee.

The fourth chapter takes a more analytical approach to these reforms suggestions made by the
Malhotra committee and looks at the factors that went into the liberalization and allowing
private players into the insurance industry. This chapter looks into the process of
liberalization as well as the regulatory structures and mechanisms created for the
strengthening of the insurance industry and making th •entry of private players welcome as
well as responsible and responsive. This chapter answers my first hypothesis that the
insurance industry in India is scaling new heights in reaching out to the uninitiated in
insurance and also is becoming more responsive to the needs of the those initiated.
The fifth chapter takes a peek•into the judicial attitude• towards handling, matters on
insurance regarding the rights of the policy holders; The chapter analyzes the judicial
understanding on the role of the insurance ombudsman, . regulatory mechanisms and
especially the status•of the policyholder vis'"a-vis the isurance company. It explains the
judicial delineation of the fact that the policy holder is a consumer under the Consumer
Protection Act, 1986, thus making available all the rights of a consumer and most importantly
also providing the policyholder with an alternative forum to make an easy and less
cumbersome appeal, the Consumer forum. Thus this chapter proves my second hypothesis
about the judiciary playing a major role in defining the nature of insurance industry
functioning in this country.

The final chapter is a conclusion statement, explaining how the insurance industry has created
new benchmarks for itself and new goals to achieve, new heights to be

scaled and yet be grounded in meeting the needs of the poorest of the poor, which'

has been the primary aim of the insurance industry both pre and post-

liberalization of the sector. The chapter also makes a few suggestions, which the researcher
feels will be of help to the insurance industry.