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General Principles of INSURANCE

Dr.Ashok R Patil Associate Professor in Law Chair on Consumer Law and Practice NLSIU, Bangalore

Nature of the Insurance Contract

a. Contract is Aleatory: contract of speculation; `depending on uncertain event or contingency as to both profit and loss' b. Contract of Utmost Good Faith (Uberrima fides) c. Contract of Indemnity d. Not a Wager Contract

Insurable Interest means

"A relation 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".

Insurable Interest

1. The interest should not be a mere sentimental right or interest, for example, love & affection alone cannot constitute insurable interest. 2. It should be a right in property or a right arising out of a contract in relation to the property.

Cont..

3. The interest must be pecuniary, that is, capable of estimation in terms of money. -In other words, the peril must be such that its happening may bring upon the insured an actual or deemed pecuniary loss. Mere disadvantage or inconvenience or mental distress cannot be regarded as an insurable interest. 4. The interest must be lawful, that is, it should not be illegal, unlawful, immoral or opposed to public policy.

When Insurable Interest must Exist?

i. Life Insurance: at the time of beginning/inception ii. Fire Insurance: both at the time of beginning and at the time of loss iii. Marine Insurance: at the time of loss

i.

Insurable Interest and Life Insurance

Insurable interest should exist at the time of taking the policy. It need not exist at the time when the loss takes place or even when the claim is made under the policy. Life insurance contracts, as we have noted, are not strictly speaking contracts of indemnity.

The following persons have been recognised as having insurable interest and they may conveniently be considered under three main headings, namely: a) By relationship by marriage, blood or adoption b) By contractual relationship, and c) By statutory duty

a) Blood Relationship

On one's own life: Every person is presumed to have insurable interest in his own life without any limitation. Every person is entitled to recover the sum insured whether it is for full life or for any time short of it. If he dies, his nominee or dependents are entitled to receive the amounts. ii) By Husband or Wife: iii) Parent and Child: iv) Other relations i)

ii) By Husband or Wife

Griffiths v Fleming (1909) - It is now well settled in England and America that a wife has an insurable interest in the life of the husband and vice versa. - It forms an exception to the general rule that interest necessary to support the insurance of another person's life must be capable of expression it terms of money or pecuniary interest.

The husband and wife are dependent on each other, that is presumed as insurable interest in the life of each other. Insurable interest should be existed at the time of entering in to the contract. They will continue to be operative even after the dissolution of the marriage.

Example

A takes out a policy on the life of his wife B and subsequently even if they are divorced still the policy continues to be valid. On other hand, if A takes out a policy on the life of B whom he proposes to marry or who has been divorced by him, the policy is not valid for want of insurable interest at the commencement of the risk, that is, at the time when the contract is made.

ii) Parent and Child

If the person has any pecuniary interest in the life of the child, whether natural or adopted, he can take out an insurance policy on the life of such child. A child whether natural or adopted is presumed to have an insurable interest in the life of the parent because it depends on the life of the parent for support whether natural or adopted. Even if such interest is proved, if a person effects a life insurance on a boy whom he intends to adopt, the insurance is not valid.

b) Contractual Relationship

Debtor and Creditor Partner and Co-partner Principal and Agent Master and Servant

Debtor and Creditor Relationship

A creditor has an insurable interest in the life of the debtor [Godsall v Baldero (1807)] It is immaterial whether the debt is secured or unsecured. The creditor's interest has an insurable interest in the life of the debtor because the chance of obtaining repayment materially depends upon the continuance of the life of the debtor. The creditor has also an insurable interest in the life of the surety, as a surety is only a favoured debtor.

On the same principle the surety has an insurable interest in the life of the principal debtor. A policy on the life of the debtor will not cease to be operative even though the debt has been satisfied or the debt becomes time barred before the debtor dies.

Similarly

Surety can insure the life of a co-surety Mortgagee can insure life of his mortgagor

In these relationship it may be noted that the person who is in the position of a creditor only has an insurable interest in the life of the person in the position of the debtor and not vice-versa

Utmost Good faith/ Uberrima fides

A contract of insurance is a contract based upon the utmost good faith, and, if the utmost good faith be not observed by either party, the contract may be avoided by the other party.

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

In a landmark decision the SC has held that the onus of proving that the policy holder has failed to disclose information on material facts lies on the corporation. In this case the assured who suffered from tuberculosis and died a few months after the taking of the policy, the court observed that it is well settled that a contract of insurance is contract uberrimae fides, but the burden of proving that the insured had made false representation or suppressed the material facts is undoubtedly on the corporation.

Sec.45 of Insurance Act 1938

The insurance contract is a contract of utmost good faith and therefore if the assured has not disclosed all the material facts, the insurance company can avoid the contract. It has become the practice of the insurers to insert a clause in the policies and proposal forms as we have already noted, to declare that all the answers stated in the proposal form shall form the basis and form part of the terms of the contract in the policy.

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

It was held that a policy cannot be avoided on the ground of misrepresentation unless the following are established by the insurer namely, a. The statement was inaccurate or false. b. Such statement was on a material matter or that the statement suppressed facts which it was material to disclose. c. The statement was fraudulently made d. The policy holder knew at the time of making the statement that it was false or that fact which ought to be disclosed has been suppressed.

Cont..

By such a declaration, for any variation of the state of things from the representations in the proposal form, whether in fact is material or not, and however slight the variation may be the insurer gets a right to avoid the policy. Section 45 of the Insurance Act 1938, modified this rule materially and mitigated the rigour of the rule of utmost good faith.

Cont...

It lays down that no policy can be challenged after two years from the date of the policy on the ground that any statement made in the proposal or in any report of the medical officer or any document was inaccurate or false unless it is material to disclose and it was fraudulently made and the policy holder knows at the time that it was false or he suppressed the fact material to be disclosed,

Cont..

provided that nothing in that section prevents the insurer from calling for proof of age of the assured or to adjust the rate of premium according to the correct age proved subsequently.

Mithoolal v. Life Insurance Corporation, AIR 1962 SC 814

LIC challenged a policy after two years after its issue. It was in evidence that the assured fraudulently suppressed facts. It was held that the LIC was not liable

LIC v. Janaki Ammal, AIR 1968 Mad 324.

Following the SC observations of the Mithoolal case referred to above held that if a period of two years has expired from the date on which the policy of life insurance was effected, that policy cannot be called in question by an insurer on the ground that a statement made in the proposal for insurance or on any report of a medical officer or referee, or a friend of the insured, or in any other document leading to the assure of the policy, was inaccurate or false.

Present Position

If the policy is questioned after a period of two years the insurer can repudiate the policy only if he knows that such a statement was on a material matter or the insured suppressed facts which it was material to disclose and that it was fraudulently made by the policy holder and that the policy holder knew at the time of making it that the statement was false or that it suppressed facts which it was material to disclose.

Special Doctrines

Reinstatement Subrogation Contribution

Special Doctrines Reinstatement

Reinstatement literally means - replacement of what is lost or - repairing the damaged property and bringing it to its original value and utility.

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

Lord Esher MR explained: we have come to the conclusion that the words `reinstate' and `replace' should thus be applied: - if the property is wholly destroyed, the company may, if they choose, instead of paying the money replace the things by others which are equivalent; or, - if the goods insured are damaged but not destroyed, may exercise the option to reinstate them, ie, to repair them and put them in a condition in which they were before the fire.

Right of Reinstatement

This right of the insurers to reinstate the property instead of paying the money may spring up; a. either from a contract in the form of a clause under the policy, or b. under a statute. This type of clause is not inserted in all policies in all branches of insurances, eg, it is not and cannot be included in life policies.

Only in indemnity insurances, in appropriate branches of insurance, like fire, burglary, steam boilers, or motor vehicle insurances, this clause called the reinstatement clause, entitling the insurers to exercise an option, on the happening of the insured event, either to reinstate or to pay the insured money can be incorporated.

Times Fire v Hawke, 1858

When once the option to reinstate is expressly or by implication exercised in favour or reinstatement, it amounts to a new contract and they cannot go back and say that they would pay money. The selection of one alternative amounts to an abandonment of the other.

In Brown v Royal Assurance co Ltd, 1859 CJ Campebell observed: " On exercising the option the case stands as if the policy had been simply to reinstate the premises in case of fire; because, where a contract provides for an election, the party making the election is in the same position as if he had originally contracted to do the act which he has elected to do"

In reinstatement, it is sufficient that a substantially similar building is construed although the new building is not identical in all minute details with the destroyed one. But if the new building is by far less than the original building, they have to make good the loss.

In Brown v Royal Insurance Co

It has been held that if the new building is costlier than the original building, on that count they cannot go back from their duty nor in the absence of a specific agreement, require the assured to contribute for the balance.

Smith v Colonial Mutual Fire, 1880

It was held that if a fire occurs for a second time during the reinstatement, they are their own insurers and so cannot claim credit for what they have already spent. They should replace a similar building.

Subrogation

Randal v. Cockran (1748) 1 Ves Sen 98 The doctrine of subrogation is a necessary incident to a contract of indemnity and therefore is applicable to a contract of fire insurance and one of marine insurance.

It is given statutory recognition in sec.79 of the Marine Insurance Act 1906. Under this doctrine, as applicable to fire insurance, the insurer has a right of standing in the shoes of the insured and avail himself of all the rights and remedies of the insured, whether already enforced or not. The principle of subrogation prevents an insured who holds a policy of indemnity from recovering from the insurer the sum greater than the economic loss he has sustained.

Therefore, if a loss occurs under such circumstances that insured has an alternative right to recover damages, under common law, tort or statute and if the loss is also covered by the policy and so he can recover the entire loss from the insurer and if he so receives, the insurer is entitled to, or is subrogated to, the former alternative rights and remedies of the insured and this is technically called `subrogation'.

Limitation on the Doctrine

i. Does not apply to life and personal accident policies; Before the doctrine is applied, there must be indemnity. Since life and personal accident policies are not governed by strict principle of indemnity the doctrine applies only to fire, marine and other non-life policies; ii. Insurer must pay before he claim subrogation;

iii. Assured must have been able to bring action. For Example. where two ships belonging to the same owner collided by fault of one of them, the insurers of the ship not at fault have been held not to be entitled to make any claim on the owner of the ship at fault, though the insurers of cargo owned by a third party can claim subrogation [Simpson v. Thompson, 1877 (3) AC 279]. Similarly, where the assured and the wrongdoer are co-assureds the doctrine does not apply [Petrofira v. Magnaload, 1983 (2) Lloyd's Rep 91].

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

COPRA S.2(1)(d) - CONSUMER PROTECTION - "Consumer" - Insurance company compensating consignor for loss of goods during transit - Insurance company taking letter of subrogation, filed consumer complaint for recovery of amount against carrier of goods Letter of subrogation was in effect an assignment -

Therefore, insurance company being an assignee was not beneficiary of services hired by consumer from carrier - Insurance company not consumer vis-a-vis the carrier Consumer complaint by Insurance Company, not maintainable Insurance company can file civil suit for recovery of amount.

Contribution

Like subrogation, contribution is also a corollary to the principle of indemnity. Therefore contribution generally arises only in property insurance. The rule is of ancient origin and was recognized by the chancery courts.

North British and Mercantile v. Liverpool and London Globe, (1977)3 Ch.D 569

The doctrine is defined and explained in this judgment as: Contribution exists where the thing is done by the same person against the same loss, and to prevent a man first of all recovering more than the whole loss or if he recovers the whole loss from one which he could have recovered from the other, then to make the parties contribute rateably. But that only applies where there is the person insuring the same interests with more than one office.

Contribution arises because of the liberty of the assured to insure the same property with more than one insurer which is called `double insurance'. By mere double insurance and, over insurance, the right of contribution springs up.

Essential conditions of Contribution

i. All the insurance must relate to the same subject-matter. ii. The policies concerned must all cover the same interest of the same insured. iii. The policies concerned must all cover the same peril which caused the loss. iv. The policies must have been in force and all of them should be enforceable at the time of loss.

Example

If a house is insured with company X for Rs.5,000 and with company Y for Rs.10000 and the damage amounts to Rs.1200, company X will apparently be liable to contribute Rs.400 and company Y Rs.800.

Differences between the Doctrines of Contribution and Subrogation

i. In contribution the purpose is to distribute the loss while in subrogation the loss is shifted from one person to another ii. Contribution is between insurers but subrogation is against third party iii. In contribution there must be more than one insurer but in subrogation there may be one insurer and one policy.

Cont..

iv. In contribution the right of the insurer is claimed but in subrogation the right of the insured is claimed. In modern fire policies we find the `contribution clause' which enables the insurer to claim contribution from other co-insurers.

Information

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