School of Management Studies Nagaland University

DC Court Junction Dimapur-797112 Nagaland

(A Central University Established by an Act of Parliament 1989)

Law of Insurance
(MGT 206 Legal Aspects of Business)

Submitted by

Group No. 01

April 18, 2012

Semester II (February May 2012)

MGT 206 LEGAL ASPECTS OF BUSINESS

Content Sl. No. Particular 1 Group Chapter 1 Principles of Insurance Contract of Insuarance Nature of Contract Page No.

4 4

Group Report 02

Page 2

MGT 206 LEGAL ASPECTS OF BUSINESS Group No.01 Topic Allotment Sl. No. Name 1 2 3 4 Rokov N. Zhasa (NU/MN-22/11) Nukchala Jamir (NU/MN-19/11) Ahuto Swu (NU/MN-03/11) Dilip Kumar Sah (NU/MN-06/11) Topic Principles of Insurance Life Insurance Fire Insurance Marine Insurance

Group Report 02

Page 3

MGT 206 LEGAL ASPECTS OF BUSINESS

Chapter 1 Principles of Insurance

Rokov N. Zhasa

Risk and uncertainty are incidental to life. Man may meet an untimely death. He may suffer from accident, destruction of property, fire, sea perils, floods, earthquakes and other natural calamities. Whenever there is uncertainty, there is risk as well as insecurity. It is to provide against risk and uncertain events; it only spreads the loss the loss over a larger number of people who insure themselves against that risk. The main principle underlying insurance is the pooling of risks. It is thus a co-operative device to spread the loss caused by a risk (which is covered by insurance) over a large number of persons who are also exposed to the same risk and insure themselves against that risk. Contract of insurance Contract of insurance: A contract of insurance is a contract by which a person, in consideration of a sum of money, undertakes to make good the loss of against a specified risk, e.g., fire, or to compensate him or his estate on happening of a specified event. E.g., accident or death. Insurer and insured: The person undertaking the risk is called the insurer, assure or underwriter and the person whose loss is to be made good is called the insured or assured. Premium: The consideration for which the insurer undertakes to indemnify the assured against the risk is called the premium. It may either be a single or a periodical payment. Policy: The instrument in which the contract of insurance is generally embodied is called the policy. The policy is not the contract; it is the evidence of contract. Subject-matter of insurance and insurable interest: The thing or property insured is called the subject-matter of insurance, and the interest of the assured in the subjectmatter is called his insurable interest. Perils insured against: That which is insured is the loss arising from uncertain events or causalities, i.e., destruction of or damage to the property or the death or disablement of a person, and these are called perils insured against.

There are a number of kinds of insurance, but the following kinds stand out as being of special importance: 1. Life insurance: In this case a certain fixed amount becomes payable on the death of the assured or on the expiry of certain fixed period, whichever is earlier. 2. Fire insurance: It covers losses caused by fire. 3. Marine insurance: It covers all marine losses, that is to say, the losses incidental to marine adventure. 4. Personal accident insurance: In this case, the amount payable is a compensation for any personal injury caused to the assured. Life insurance was nationalised on 19th January, 1956, and the general insurance business on the 13th May, 1971. Nature of contract of insurance Insurance is the laws attempt to socialise responsibility. When it first appeared as a strange intruder in the field of jurisprudence, it was dismissed as a kind of gambling and wagering. In Carter v. Boehm, (1765) 1 Sm. L.C. 546, Lord Mansfield described insurance as a contract
Group Report 02 Page 4

MGT 206 LEGAL ASPECTS OF BUSINESS on speculation, which in the legal sense means a wagering agreement. A wagering agreement is one in which a person promise to pay money or transfer property upon the happening or non-happening of an uncertain event. A contract of insurance bears a superficial resemblance to a wagering agreement. With social evolution, the attitude that insurance was a contract on speculation changed, and the law came to recognize insurance as a system of sharing risk too great to be borne by one individual. The contract of insurance is an aleatory (depending on contingencies) contract. It depends on an uncertain event. But, it is not a wagering agreement. Difference between insurance and wager 1. A contract of insurance (except life, accident and sickness insurance) is a contract of indemnity. It seeks to indemnify the assured for the loss suffered by him on the happening of an uncertain event. In life insurance, the amount payable in case of death of the assured is ascertained and fixed in advance. In a wagering agreement, however, there is no question of indemnity as the parties do not intend to cover any risk. 2. The object of a contract of insurance is to protect the assured against losses on the happening of some uncertain events, whereas the object of a wagering agreement is to earn speculative gains. 3. In a contract of insurance the assured must have a pecuniary or insurable interest in the subject-matter of insurance. In a wagering agreement neither party has any pecuniary interest except that created by the contract itself. 4. A contract of insurance is a contract requiring utmost good faith by the parties to the contract. In a wagering agreement good faith need not be observed. 5. A wagering agreement is void ab initio, because it is against public policy. A contract of insurance is legally enforceable and is encouraged as it benefits the community as a whole. 6. A contract of insurance is based on scientific and actuarial calculation of risks and the premium is calculated taking into account all the circumstances attending on the risk. A wagering agreement is a mere gamble and there is no scientific calculation of risk. 7. An insured event may cause varying degrees of loss or damage. A wager is either won or lost. A contract of insurance, if it by way of wagering, is void (Sec. 6 of the Marine Insurance Act, 1963). Contract of Insurance-A species of the general contract A Contract of insurance is a species of the general contract. It is governed by the same general principles of law as other contracts. It comes into existence by the process of offer in the form of proposal and its acceptance (by the issue of a policy). The proposal is made by one party (assured or insured) to the other party (insurer, assurer or underwriter) for insurance against same loss should it occur on the happening of an uncertain event within a limited tike. If the insurer or underwriter accepts the proposal unconditionally, he must communicate his acceptance to the person making the offer. Silence on his part does not denote acceptance [Life Insurance Corpn. Of India v. Vasireddy, AIR (1984) S.C. 1014]. If the parties are agreed on all the martial terms such as the nature, time of commencement and duration, of the risk, the amount to be insured, and the premium to be paid, a contact comes into existence. The object of contract must be lawful. The consent of the parties must be free and genuine. The contract must be supported by consideration and must be embodied in a formal document called policy. The policy must be duly executed.
Group Report 02 Page 5

MGT 206 LEGAL ASPECTS OF BUSINESS Cover note It is a document issued by an insurer or underwriter on receiving a proposal pending the execution of the policy it covers the risk between the date of the contract of insurance and actual issue of the policy of insurance. It cannot be regarded in law as either an insurance policy or an agreement to issue an insurance policy. But, it has been held that if the cover note is properly stamped, a suit for specific performance of the contract can be founded thereon (Surajmal v. Triton Insurance Co., 52 Cal . 408). The liability of the insurer under the cover note ceases when he intimates to the assured the rejection of the proposal. Example. A cover note was issued on 18th June, which covered the risk from 15th June. Unknown to both the parties, the goods had been destroyed by the fire on 16th June. Held, the insurance company was liable and there was no question of mistake under Sec. 20 of the Indian Contract Act, 1872 (Indian Trade & General Insurance Co, v. Bhailal, AIR (1954) Bom. 148). Fundamental elements of Insurance 1. Utmost good faith: The general rule in a of contract is that each party to the contract is entitles to make the best bargain he can. But there are certain cases where the knowledge of facts is almost exclusively on one side. In such cases, the contract is vitiated by a non-disclose of any material facts. Such contacts are known as contracts of uberrimae fidei (of the fullest confidence) or contracts requiring utmost good faith. The rule of caveat emptor i.e., let the buyer beware does not apply to them and nondisclosure of material facts would go to the root-it being regarded as fatal to the validity of contract. Contracts of insurance are based on the rocky foundation of utmost good faith. In contracts of insurance, the assured is on the vantage ground. He knows more about the subject-matter of the contract than the insurer. Consequently, he is under a duty to disclose accurately all material facts with perfect degree of accuracy and no such fact should be withheld or concealed. Where the assured does not make a complete disclosure of everything which it was material for the insurer to know in order to judge (a) whether he should accept the risk, and (b) what premium he should charge, the insurer can avoid the contract (Mithoolal Nayak v. Life Insurance Corpn. Of India, AIR (1962) S.C. 814). Any fact is material which goes to the root of the contract of insurance, and which will affect the willingness or otherwise of the insurer to take up risk relating to the subject-matter of insurance. In other words, any fact is material if it has a bearing on the risk and would materially affect the insurer in deciding to make the contract or not. If the assured has knowledge of a fact which the insurer cannot ordinarily have, then he should not indulge himself in suppression very (suppression of the truth or passive misinterpretation) suggestion faults (active misrepresentation) by making a suggestion which is false or suppressing a matter which is true (V. Srinivasa Pillai v. LIC of India, AIR (1977) 181). Example. In making a proposal for insurance, M. in reply to a question asking wherther previous proposal on his life had been made to any office, and if so whether thay had been accepted at the ordianary rates said that he was then insured at two offices at the ordinary rates. He omitted to disclose that his proposal for life insurance had been declined by several
Group Report 02 Page 6

MGT 206 LEGAL ASPECTS OF BUSINESS other offices. Held, this was a material failure to disclose and the policy could be set aside (London Insurance Co. v. Mansel, (1879) 11 Ch. D. 363). Whether the omission to disclose any particular circumstances or concealment of a fact is material so as to render the contract voidable is a question is a question of fact in each case. Example. In a proposal form, the proposer in answer to a question if he consulted any physician in the last five years said none. In fact he had consulted a doctor who prescribed tonics, but he had never been away from work. The insurers doctor said he would have still recommended the case at the ordinary premium even if the proposer had answered the question in the affirmative. Held, there was no material concealment and the policy could not be avoided. [Mutual Life Insurance Co. of New York v. Ontario Metal Products Co., (1925) A.C. 344]. A proposer should disclose all material facts at the time of making the proposal for insurance and must continue to do so till the negotiations are completed. Example. L made a proposal to an insurance company for an insurance on his life for Rs.50,000. He truthfully answered various questions on the proposal form and disclosed all relevant facts. A few days later but before the proposal was accepted by the insurance company. L was taken ill with pneumonia. Two days later, he died of pneumonia and the company learned of this illness for first time. Held the company was not liable to pay the claim [Looker v. Law Union & Rock Insurance Co. Ltd. (1928) 1 KB 554] as notice of illness which amounted to material alternation in the risk between the date of the proposal and its acceptance was not given. The proposer should disclose not only those facts which he honestly thinks to be material but every fact which a reasonable man would have thought to be material. The duty to disclose, however, is not continuing obligation. The assured is under no legal obligation to disclose any facts which may come to his knowledge after the contract of insurance has been conducted. 2. Indemnity: A contract of insurance (except life, personal accident and sickness insurance) is a contract of indemnity. This means that the assured, in case of loss against which the policy has been issued, shall be paid the actual amount of loss not exceeding the amount of the policy. Indemnity is the controlling principle in contracts of fire, marine and burglary insurance. The object of every contract of insurance likes to place the assured 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 assured to make a profit out of the happening of the loss or damage insured against. This is because, if that were so, the assured might be tempted to bring about the event insured against in order to get the money. Moreover, in the absence of principle of indemnity, there might be a tendency in the direction of over-insurance. Example. P insured his house against fire. Subsequently he agreed to sell his house to R for Rs. 340000. Before the sale could be completed the house was destroyed by fire and P received its value from the insurance company. P then received the price from R as per the contract of sale. Held, the insurance company could recover from P the money they had paid [Castellain v. Preston, (1883) 11QBD 380].

Group Report 02

Page 7

MGT 206 LEGAL ASPECTS OF BUSINESS A contract of life insurance is not a contract of indemnity. In this case the insurer is liable to pay the sum mentioned in the policy upon the happening of the contingency (death or expiry of a certain period, whichever takes place earlier) specified in the policy. 3. Insurable interest: Insurable interest is necessary to support every contract of insurance. It is the legal right of a person to insure. It means that the assured must be in a legally recognized relationship to what is insured so that he will suffer a direct financial loss on the happening of the event insured. It exists where a person is so circumstances with respect to the subject-matter of the policy as to have benefit from its existence or prejudice from its destruction. [Lucena v. Craufurd, (1806) 2 BPNR 269]. It is the existence of insurable interest in a contract of insurance which distinguishes it from a wagering agreement. It is not the owner alone to take the case of fire or marine insurance, but every person who would suffer direct financial loss if the property or goods were damage of or destroyed, who has insurable interest. Likewise, A cannot insure the life of B. But if he has some pecuniary interest in the life of B, he can insure Bs life. In life insurance, insurable interest must be present at the time when the insurance is effected. In fire insurance, it must be present both at the time of insurance and at the time of loss of the subject-matter. In marine insurance, it must be present at the time of loss of the subjectmatter. 4. Causa proxima: The assured can recover the loss only if it is proximately caused by any of the perils insured against. This is called the rule of causa proxima. The rule is causa proxima non remota spectator, i.e., the proximate or immediate and not the remote cause is to looked to, and if the proximate cause of loss is a peril insured against, the assured can recover the amount of the loss from the insurer. Every loss that clearly and proximately results, whether directly or indirectly, from the event insured against is within the policy. The question, which is the causa proxima of a loss arises only when there is a succession of causes. When a result has been brought about by two or more causes, one has, in insurance law to look to the nearest cause, although the result would, no doubt, not have happened without the remote or other causes. Proximate does not mean the nearest in time. The cause which is truly proximate is that which is proximate in efficiency. If the loss is the result of such efficient cause, it will be regarded as having been caused by the proximate cause. The choice of the real or efficient cause from out of the whole complex of the facts must be made by applying common sense standards. Bur if the loss is brought about by any applying commonsense standards. But if the loss is brought about by any cause attributable to the misconduct of the assured, the insurer is not liable. Examples. (a) A ship carrying the cargo of oranges collided with another ship. As a result of collision, cargo was mishandled and there took place some delay. The cargo consequently deteoriated. Held damage to the cargi was not the direct result of collision but if the delay and mishandling, and as such the assured could not recover the loss [Pink v. Fleming, (1899) 25 QBD 396].

Group Report 02

Page 8

MGT 206 LEGAL ASPECTS OF BUSINESS (b) A ship was insured against damage by enemy action. It was damaged by passing over a torpedoed ship. Held, no damage could be recovered as the loss in this case was not due directly to enemy action but to the torpedoed ship [William & Co. v. North of England, etc., Assurance Co, (191) 2 KB 527]. (c) The cargo of rice in a ship was destroyed by sea-water flowng in the ship through a hole made by rats in a bathroom lead pipe. Held, the underwater was liable as the damage was due to a peril of the sea. The proximate cause of the damage in this case is sea-water. If, however, the loss is caused directly by rats or vermin, the underwriter will not be liable [Hamilton Fraser & Co. v. Pandrof, (1887) 12 App. Cas, 518]. (d) A ship carrying meat was delayed by a storm in consequence of which it became decomposed and had to be thrown overboard. Held, the loss of meat was not a loss by the perils of the sea [Taylor v. Dunbar, (1869) 4PC 206]. 5. Risk must attach: The insurer receives the premium in a contract of insurance for running a certain risk. If for any reason the risk is not run, the consideration for which the premium was given fails. In such an event the insurer must return the premium. The premium is also to be returned even where the risk is not run or could not be run due to the fault, will or pleasure of the assured. 6. Mitigation of loss: In the event of some mishap to the insured property, the assured must take all necessary steps or measures as may be reasonable for the purpose of averting or minimising a loss [British & Foreign Marine Ins. Co. v. Grant, (1921) All. E.R. 44].He must act as an uninsured prudent person would act under similar circumstances in his own case. If he does not do so, the insurer can avoid the payment of loss attributable to his negligence. In short, he bound to do his best under the circumstances, but he is not bound to do so at the risk of his life. 7. Contribution: Where there are two or more insurance on one risk, the principle of contribution applies as between different insurers. 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. In case of loss, any one insurer may pay to the assured the full amount of the loss covered by the policy. Having paid this amount, he is entitles to contribution from his co-insureres in proportion to the amount which each has undertaken to pay in case of loss of the dame subject-matter. E.g., A insures his house against fire for Rs. 10, 000 with insurer X, and for Rs. 20,000 with insurer Y. A loss of Rs. 12,000 occurs. X is liable for Rs. 4000 and Y for Rs.8000. If the whole amount of the loss is paid by Y, he can recover Rs.4000 from X. The liability of X and Y in this case will be expressed by the following formula: Sum insured with an individual insurer (i.e., X or Y) Total sum insured x Loss

Thus the liability of X will be Rs.(10,000/30,000)x12,000, i.e., Rs. 4,000 And the liability of Y will be Rs. (20,000/30,000) x 12,000, i.e., Rs. 8000.

Group Report 02

Page 9

MGT 206 LEGAL ASPECTS OF BUSINESS The right of contribution arises when (1) there are different policies which relate to the same subject-matter; (2) the policies cover the same peril which caused the loss; (3) all the policies are the force at the time of the loss; and (4) one of the insurers has paid to the assured more than his share of loss. 8. Subrogation: The doctrine of subrogation is a corollary to the principle of indemnity and applies only to fire and marine insurances. According to it, the insurer, on making good the loss, is entitled to be put in to the place of the assured. He succeeds to all the ways and means by which the assured might have protected himself against the loss [Burnand v. Rodocanachi, (1882) App. Cas. 333). Whenever, therefore, an assured has received full indemnity in respect of his loss, all rights and remedies which he has against third persons must be held and exercised for the benefit of the insurer until he (the insurer) recoups the amount he has paid under the policy. In simple words, the insurer steps into the shoes of the assured or he is entitled to every right of the assured or he is entitled to every right of the assured [Castellain v. Preston, (1893) 11 QBD 388]. If at a subsequent time he assured recovers more than the full indemnity, i.e., both from the insurer and from the person responsible for the loss, he loss, he holds the excess reoccupied the trust for the insurer, and the insurer is entitled to recover from the assured any sum which he may have received in excess of the loss actually sustained by him. Example. A insures his goods with B for Rs. 1000. The goods are damaged by fire caused by C, a miscreant. A recovers the loss from B and subsequently he succeeds in recovering this loss from C also. He must hold the amount recovered from C in trust for B. The principle of subrogation is subject to the following limitations: (1) The insurer is subrogated to only the rights and remedies available to the assured in respect of the thing to which the contract of insurance relates E.g., (a) M owned two vessls, R and S, which were insured with different insurers. The two vessels collided due to the fault of vessel R. The insurer of vessel S indemnified the owner, M, under the policy, and then proceded against M as the owner of vessel R by virtue of the doctrine of subrogation for claiming the amount paid in respect of ship R. Held, he could not recover as the insurer is subrogated to only the rights of M, the insured , and as no person will succeed against himself, the insurer of vessel S did not get any right as both the ships were owned by M [Simpson v. Thomson, (1887) 3 App. Cas.279]. (b) S insured his furniture with M, an insurance company. Ss wife put the furniture to fire after she had some domestic quarrel with her husband. M indemnified S under the policy and then wanted to proceed against S wife in tort for damages. Held, M could not do so as a husband had no such right against his wife, and therefore, M was not subrogated to any right to proceed against S wife [Midland Insurance Co. v. Smith, (1881) 6 QBD 561]. (2) The insurer right of subrogation arises only when he pays the loss for which he is liable under the policy. (3) The insurer is not entitled to the benefit of what is recovered until the assured has recovered a full indemnity.

Group Report 02

Page 10

MGT 206 LEGAL ASPECTS OF BUSINESS 9. Period of insurance: A contract of life insurance is a continuing contract with a condition that the premium is to be paid at regular intervals. If the premium is not paid regularly, the contract lapses and can be revived subject to the fulfilment of certain period, usually a year. The contract automatically comes to an end after the expiry of the fixed period. A contract of marine insurance may be for a particular perios or for a particular voyage. If it is for a particular period and the voyage has not ended during the period, the liability of the insurer comes to an end. If the contract is for a particular voyage, the voyage may take longer than a year. In that case the insurer continues to be liable for the perils insured against till the voyage is completed. Premium Premium is the consideration paid by the assumed to the insurer for the risk undertaken by the latter. It may be in cash or kind. But usually it is in the form of cash. It is determined by the insurer by taking into account the average of losses and the contributions (in the form of premiums) that he receives. Besides taking into account the special circumstances affecting risk in a particular case, the insurer also keeps a margin for his overhead and other expenses and profit. A simple illustration would explain the point. Suppose there are 10, 0000 houses in a locality an the owners of 8000 of them decide to get their houses insured. Experience shows that every year two houses (on average) catch fire. Let us assume that each house is valued at R. 2,00,000. This means the average loss arising from fire to the house in any year will work out to be Rs.4, 00,000. If the insurer fixes up the rate of premium, at say, Rs. 100 per house, his total receipts from premium will aggregate to Rs.8,00,000. Out of this sum, he will make good the loss of the assured, meet overhead expenses and will be left with some profit. It is simple common sense that if some houses are subject to more than ordinary risk, the insurer would charge some additional premium to protect himself against the extra risk, the insurer would charge some additional premium to protect himself against the extra risk. The premium in marine insurance is also fixed on like consideration. In life insurance, the premium is based on the average rate of mortality. The duty of the assured to pay the premium and the duty of the insurer to issue the policy to the assured are concurrent conditions. The parties may also agree otherwise. The premium is usually paid by instalments which may be annual, half-yearly, quarterly or monthly. The policy lapses if the premium is not paid when it falls due or within the days of grace. Return of premium. The premium is returnable: 1. Where the consideration for the premium has totally failed, for example, where the subject-matter ceases to exist or if the insured vessel has already arrived safely at the time the contract is entered into. Where the consideration has partially failed, appointment is made. 2. Where there never was a binding contract of insurance between the parties to the contract, for example, where the policy is void ab initio provided there has been no fraud or illegality on th part of the assured or where the contract is ultra vires the insurers. 3. Where the assured has no insurable interest at any time during the currency of the risk.

Group Report 02

Page 11

MGT 206 LEGAL ASPECTS OF BUSINESS 4. Where the assured bona fide over-insures on an unvalued policy. In that case, proportionate premium is returnable. 5. Where the assured over-insures by double insurance, bonafide and not knowingly. If the risk is run even for a very short period, the premium is not returnable. Also if the contract of insurance is induced by fraud or misinterpretation on the part of the assured, and the insurer avoids the policy, the premium is not returnable at law. Re-Insurance and Double Insurance Re-insurance Every insurer has a limit to the risk that he can undertake. If at any time a profitable venture comes his way, he may insure it even if the risk involved is beyond his capacity. Then in order to safeguard his own interest, he may insure the same risk either wholly or partially with other insurers. This is called re-insurance. The reason for re-insurance like the reason for original insurance is the necessity of spreading the risk. Re-insurance can be resorted to in all kinds of insurance. The insurer has an insurable interest in the subject-matter insured to the extent of the amount by him because a contract of reinsurance is also called a contract of indemnity. The re-insurers are liable to pay the amount of the loss to the original insurer only if the original insurer has paid the amount to the assured. The re-insurer is, however, not liable to the insured or assured. This is because there is no privity of contract between them. But reinsurance is entitled to all the benefits which the original insurer is entitled to under the policy. The policy of re-insurance, in other words, is co-extensive with the original policy. If the original policy for any reason comes to an end or is avoided, the policy of re-insurance comes to an end. A contract of re-insurance is also a contract of uberrimae fidei. The original insurer, vis--vis the re-insurer, is in the position of the assured. He must disclose to the re-insurer all the material facts disclosed to him. On payment of the loss under the policy of re-insurance, the re-insurer is subrogated to all rights of the original insurer including the rights of the assured to which the original insurer is subrogated. Double insurance Where the assured insures the same risk with two or more independent insurers,and the total sum insured exceeds the value of the subject-matter, the assured is said to be over-insured by double insurance. There is over-insurance where the aggregate of all the insurances exceeds the total value of the assureds interest at risk. If there is no express condition in a contract of insurance, both double insurance and over-insurance are perfectly lawful. Example. A insures his house worth Rs.50,000 with B for Rs.40,000 and with C for Rs. 30,000. There is double insurance. If he insures his house with B and C for Rs. 25,000 each, there is no double insurance. 1. Recovery of actual loss: A man may insure with as many insurers as he pleases and up to the full value of his interest with each one. If a loss in no event is he entitled to recover more than his loss, because a contract of insurance is a contract of indemnity only. This right to sue his insurers in any order he likes is a valuable right for the assured. It protects him against loss in the event of one or more of the insurers becoming insolvent.
Group Report 02 Page 12

MGT 206 LEGAL ASPECTS OF BUSINESS 2. Excess amount recovered to be held in trust. If an assured recovers more than the value of his interest in case of loss, he holds the excess amount recovered for the insurers according to their respective rights inter se (among themselves), as a trustee. 3. Liability of insurers-contribution. The insurers as between themselves are liable to contribute to the loss in proportion to the amount for which each one is liable. If an insurer pays more than his rateable proportion of the loss, he has a right to recover the excess from his co-insurers who have paid less than their rateable proportion. 4. No limit on life insurance: In case of life insurance, an assured may take any number of policies on his life and for any amount.

Group Report 02

Page 13

MGT 206 LEGAL ASPECTS OF BUSINESS Chapter II Life Insurance Contract Nukchala Jamir The contracts of life insurance in India are governed by the insurance Act, 1938 and the Life Insurance Corporation Act, 1956. The life insurance business in india was nationalised on January 19, 1956. And on September 1, the same year, under sec. 3 of the Life Insurance Corpration Act,1956, the Life Insurance Corporation of India came into being. The nationalisation of life insurance is a vital link in the process of widening and deepening of all possible channels of public savings for the development of the country. It is an important steps towards mobilising savings.

A contract of life insurance is a contract by which the insurer, in consideration of the payment of certain sums, called premiums,undertakes to pay a certain sum of moneyon the death of a person whose life is insured, or on the expiry of a certain period, whichever is earlier.The premium may be paid in a lump sum or by periodical instalments. Types of Contract There are varioyus types of policies of life insurance. These are issued to meet the varying and special needs of the members of the community. The main and important types are as follows: 1. Endowmernt policy: It provides for payment of the sum assured at the end of a specified term of years or at death should it occur sooner. This is the most important form of life insurance. Children endowment policy: such a policy may be taken for the provision of the marriage of the children when they attain a certain age.It may also be taken to ensure for the education of the children after the death of the life assured, by means of annuity payments payable at the end of the selected term of years. 2. Whole- life policy: Under this policy, premiums are payable throughout the life time of the life assured. The sum assured becomes payable only on the death. It is the cheapesr form of policy. 3. Limited-payment life policy: In this case, premiums are payable for a selected period of years or until death if it occurs within this period. The assured knows how much amount he will be required to pay, no matter how long he lives. This policy resembles endowment policy as regards payment of premiums, the term being fixed in both the cases.But in case of limited payment policy, the amount becomes payable only on the death of the assured. 4. Joint life policy: The sum assured uner a joint life policy (on two or more lives) is payable at the end of the endowment term or on the first death of any of the lives assured, if earlier. Partnership firms usually go in such for policies to provide for the return of the capital of the deceased partner. 5. Convertible whole life policy: This policy is designed to meet the needs of young persons who are on the threshold of their career and have prospects of increase in income after some years. In the earlier years the premiums are payable at a lower rate. Then after the expiry of a certain period, the assured is given an option to convert the policy into an endowment policy. If the option is not exercised, the policy continues as a whole life policy with premiums ceasing at a certain age.
Group Report 02 Page 14

MGT 206 LEGAL ASPECTS OF BUSINESS 6. Anticipated policy: This is a policy which provides for payment of the sum assured at the end of specified intervals, say 20 per cent at the end of first five years, 20 per cent at the end of next five years and the balance at the end of the term of the policy. Should death take place earlier, the full amount of the policy becomes payable. 7. Annuity policy: This is a policy under which the amount is payable by the insurer not in one lump-sum, but by monthly, quaterly, half-yearly or annual instalments after the assured attains a certain age. The assured may pay the premiums regularly over a certain periodor he may pay a single premiums at the outset.The annuity is useful to those who desire to provide a regular income for themselves and their dependents after the expiry of a specified period. 8. Sinking fund policy: This policy is very useful for companies for redeeming their debentures or paying off their loans. A fixed amount is paid as premium annualy. It goes on accumulating at a certain rate of interest. At the end of the required period, the amount of the policy is paid to the company. Out of the amount so received,the company redeems its debentures or pays off the loan. Such policies may also be taken for making a provisions for the replacement of an asset afrer a period of time. 9. Janata Policy: It is a policy wich covers risk of death by accident for one year only. The premium charged is very nominal and in case of dearth aby accident a fixed amount is payable. Assignment and nomination Assignment An inrterest in a policy of life insurance, which is an actionable claim, can be assigned. Assignement has the effect of transfering the rights of th transferor in respect of the policy to the asignee. Sec 38 of the Insurance Act, 1938 contains the following rules regarding assignment of life policies; 1. Procedures: The assignment, whether with or without consideration, can be made by an indorsement upon the policy itself or by a separate instrument must be signed by the assignor, and attested by at least ibe wutness. 2. Notice: the assignment is binding upon the insurer after a notice in writing and indorsement on the instrument or a certified copy thereoff is delivered to him 3. Priority: Incase of more than one assignment, the priority of the claims of the assigness is governed by the order in which the notice to the insurer is delivered. 4. Recognition: the insurer recognise the rights of the assignees from the date of the receipt of the notice. 5. Assignment subject to equities: the assignee, after the notice of the assignment is given to the insurer, is the only person entitled to benefit under the policy. This is subject to all liabilities and equities to which the assignor is subject at the date of assignment. 6. Conditional assignment: the assignment may be absolute or conditional. Thus there is an assignment in favour of a person subject to the condition that the interest shall pass to some other person on the happening of a specified event during the lifetime of the assured, the assignment is valid. Nomination: The holder of the policy of life insurance on his own life may nominate the person to whom the money secured by the policy is to be paid in the event of his death. This may be done at the time when the policy is taken out or at anytime before the policy matures for
Group Report 02 Page 15

MGT 206 LEGAL ASPECTS OF BUSINESS payment. The person who nominate in the policy is called the nominee. The holder may also appoint more than one nominee. Section 39 of the insurance act, 1938 contains the following rules regarding nomination; 1. Procedure: the nomination is usually incorporated in the policy itself. It may also be made by an indorsement on the policy. In this case, this would be communicated to the insurer and registered by him in the records telating to the policy. The insurer is bound to furnish to the policy holder a written acknowledgement of having registerd the nomination. 2. Cancellation and change: A nomination may be cancelled or change before the policy matures for payment, by notice in writing to the insurer. 3. Automatic cancellation: A transfer or assignment of a policy automatically cancels a nomination. Where the policy matures for payment during the lifetime of the person whose life is insured, the amount secured by the policy becomes payable to the policy holder or his heirs or legal representatives. Same will happen if the nominee dies before the policy matures for payment. If the nominee survives the person whose life is insured, the amount secured by the policy becomes payable to him. 4. Discharge of insurer: the insurer is discharged from his liability under the policy by paying the amount due to the nominee. If the policy matures for payment during the lifetime of the assured, the insurer must pay the money to the policy holder. The strict legal position of the nominee is that he is entitled to receive and collect the moneys under the policy only as trusty for the benefit of legal hires of the decades. Nomination does not clothe the nominee with title to an insurance money. It only indicates the hands which is authorised to receive the amount on the payment of which the insurer gets a valid discharge of his liability under the policy. The amount however can be claim by the heirs of the assured in accordance with the law of succession governing them.

Group Report 02

Page 16

MGT 206 LEGAL ASPECTS OF BUSINESS Chapter III Fire Insurance Ahuto Swu Definition Fire insurance means insurance against any loss caused by fire. Section 2 (6A) of the Insurance Act defines fire insurance as follows: Fire insurance business means the business of effecting, otherwise than incidentally to some other class of business, contracts of insurance against loss by or incidental to fire or other occurrence customarily included among the risks insured against in fire insurance policies. What is fire? The term fire in a Fire Insurance Policy is interpreted in the literal and popular sense .There is fire when something burns .In English cases it has been held that there is no fire unless there is ignition. Stnaley v. Western insurance CO. Fire produces heat and light but either of them alone is not fire. Lightening is not fire but. But if lightening ignites something, the damage may be covered by a fire-policy. The same is the case with electricity. Characteristics of fire insurance 1. Fire insurance is a contract of indemnity: The insurer is liable only to the extent of the actual loss suffered. If there is no loss there is no liability even if there is a fire. 1. A fire insurance is a contract of good faith: The policy- holder and the insurer must disclose all the material facts known to them. 2. A fire insurance policy is usually made for one year only. The policy can be renewed according to the terms of the policy. 3. The contract of insurance is embodied in a policy called the fire policy. Such policies usually cover specific properties for a specified period. 4. Insurance interest: A fire policy is valid only if the policy holder has an insurable interest in the property covered. Such interest must exist at the time when the loss occurs. 5. Assignment: According to English law a policy of fire insurance can be assigned only with the consent of the insurer. In India such consent is not necessary and the policy can be assigned as a chose-in-action under the Transfer of Property Act. Formation of contract. A contract of fire insurance is entered into by the process of a proposal by one party and its acceptance by the insurer. The proposal is made in writing by filling up a printed form, and paying the premium or a part of it to the insurer. On receipt of the proposal and premium ,the insurer issues a deposit receipt usually called a cover note. Subsequently if the proposal is accepted the insurer issue a regular policy. Example. Property worth rs 100000 is insured for rs 80000 the policy contains an average clouse. If half of the is burnt down, the assured can recover only 40000. This is worked out as follows sum to be recovered=value of policy/full value of subject matter *actual loss 80000/100000*500000=40000 The assured could recover the full amount of Rs 50,000 i.e, half of 100000. Rights of insurer. 1. Right of avoiding the contract for non-disclosure or concealment of any material fact. If the assured mis-states any fact or withholds any material fact, the insurer

Group Report 02

Page 17

MGT 206 LEGAL ASPECTS OF BUSINESS avoid the contract. The assured is bound to disclose not only the facts which he really knows but also those which he is deemed to know. Right of control over the property. When the property or goods are damaged or destroyed, the insurer has an implied right to assume control over the damaged property .It is the insurer who is ultimately to suffer the loss under the fire insurance contract .In order to safeguard his interests, he can adopt any means he likes to mitigate further loss. Right of entering the property .The insurer has, on a notice of fire by the assured, a further rights to enter the premises insured or the premises where the things insured are lying. Right to salvage. When the subject matter is destroyed or damaged by fire, the insurer has a right to take possession of the salvage. i.e, the property or things saved after fire. This right of the insurer is absolute and flows from the contract of indemnity. Right of contribution. If the same subject-matter is insured with two or more insurers, and if in case of loss, one of the insurers has paid the full amount of loss to the assured, the insurer has the right to claim contribution from the other co-insurers.

2.

3.

4.

5.

Types of fire policies 1. Specific policy: A specific policy is one under which the liability of the insurer is limited to a specified sum which is less than the value of the property. 2. Valued Policy: The valued policy is one under which the insurer agrees to pay a specific sum irrespective of the actual loss suffered. A valued policy is not a contract of indemnity. 3. Average policy: Where a property is insured for a sum which is less than its value, the policy may contain a clause that the insurer shall not be liable to pay the full loss but only that proportion of the loss which the amount insured for, bears to the full value of the property. 4. Floating policy: It is a policy which covers property at different places against loss by fire. 5. Replacement or reinstatement policy: In orders to prevent fraudulent devise by the assured, the insurer usually insert a clause in the policy, is called re-instatement clause Assignment A fire policy can be assigned like a chose-in-action under the Transfer or Property Act, 1882. The assignment must be by endorsement on the policy or by a separate deed of assignment. But the insurer must be given notice of assignment. Section 135 and 49 of the Transfer of Property act, 1882 deal with assignment of fire policies. The sections are reproduced below. Every assignee, by endorsement or other writing, of a policy of insurance against fire, in whom the property in the subject insured shall be absolutely vested at the date of the assignment, shall have transferred and vested in him all rights of suits as if the contract contained in the policy had been made with himself.(sec 135) Where immovable property is transferred for consideration, and such property or any part thereof is at the date of transfer insured against loss or damage by fire, the transferee , in case of such loss or damage ,may, in the absence of a contract to the contrary , require any

Group Report 02

Page 18

MGT 206 LEGAL ASPECTS OF BUSINESS money which the transferor actually receives under the policy , or so much thereof as may be necessary, to be applied in reinstating the property. (sec 49).

Group Report 02

Page 19

MGT 206 LEGAL ASPECTS OF BUSINESS Chapter IV Marine Insurance Dilip Kr. Sah According to Marine Insurance Act of 1963, Sec. (3) A contract of marine insurance is an agreement whereby the insurer undertakes to indemnify the assured, in the manner and to the extent thereby agreed, against marine losses, that is to say, losses incidental to marine adventure. Marine Insurance is an attempt to minimize the loss due to perils of the sea in course of sea voyage. The marine insurance is affected for three kinds of goods: 1. Hull Insurance: The Hull Insurance is affected against the loss of ship in the voyage. 2. Cargo insurance: This is an insurance affected against the goods loaded on the ship. The goods in the upper deck of the ship are generally not covered under this insurance. 3. Freight Insurance: Sometimes shipping freight is payable on the destination. Thus, it is doubtful for the shipping company that it may not be paid freight when the ship will not reach at the destination. The freight insurance is a provision against this risk. Warranties in a Marine Insurance: In marine insurance the insured is required is required to fulfill certain conditions compulsorily. These conditions are called warranties. Some of the conditions are mentioned in the insurance policy. They are called expressed warranties. Some compulsory conditions are not mentioned in the policy, but it is essential to fulfill these conditions to make insurance contract legally valid. Such conditions are implied warranties. There are three implied warranties: 1. Seaworthiness of the ship: It is essential in the marine insurance contract that the ship should be worthy of transporting goods to the destination or it should have seaworthiness. It is the responsibility of the shipping company to make the ship seaworthy. If the insurance company proves that the ship had no seaworthiness, it will not be liable to indemnify loss. 2. Legality of venture: The object of sea voyage should not be illegal. Trade with alien countries, illegal trade etc., are the illegal ventures of the ships. 3. Non-deviation: Most of the insurance policies contain this condition these days. However, this clause was omitted in the policies of old age. This clause signifies that the ship voyage should be on the sea routes mentioned in the policy as far as practicable. Moreover, the voyage should be on the operating sea routes as far as practicable if the route is not mentioned in the policy. The insurance company may be liable to indemnify the loss, if the ship captain does not follow this principle. However the deviation is allowed in the following circumstances: a) When the insurance policy permits deviation. b) When it was essential in the interest of safety and security of both the ship and the cargo.
Group Report 02 Page 20

MGT 206 LEGAL ASPECTS OF BUSINESS c) When deviation is effected to save the life of a person on the ship or for medical help. Marine Losses Marine losses are generally divided into two groups: 1) Total Loss: When there is loss of ship or cargo or freight in entirety, it is called total loss. 2) Partial Loss: When a part of the subject of insurance is lost, it is called partial loss. Features and Requisites of a Marine Policy: A marine insurance policy to be valid must fulfill the following requirements: 1) Essential elements: A contract of marine insurance must fulfill all the essential elements of a valid contract, for example the marine adventure which is the subject matter of insurance, must be lawful. 2) Time of contract: A contract of marine insurance is deemed to be concluded when the proposal of the assured is accepted by the insurer, whether the policy is then issued or not, and for the purpose of showing when the proposal was accepted, reference may be made to the slip, covering note or other customary memorandum of the contract although it be unstamped Sec. 23. 3) The Policy: The contract must be written in a document called a sea policy or a marine policy or a marine policy. Sections 24 to 33 of the Act lay down the rules regarding the policy. The document must be stamped in accordance with the provisions of the Stamp Act. 4) Insurable Interest: A marine policy is enforceable only if the policy-holder has an insurable interest at the time when the claim is made. 5) Good faith: The contract of marine insurance is a contract good faith and the insured must disclose all the material facts. Types of Marine Insurance: There are various types of risks in the sea voyage. The insurance companies issue different types of marine policies to cover these risks. Some of the important marine policies are as follows: 1) Voyage Policy: It is the marine policy issued for a specific sea voyage viz. Delhi to London voyage insurance. The insurance company is liable to indemnify the losses in this particular voyage. Such insurance is more suitable for cargos. 2) Time Policy: It is a marine policy issued for a specific period of time, viz. the policy for the period of 1st Jan 2011 to 1st Jan 2012. This policy is generally affected for the instance of the ship. The ship voyages may be at different times during the period. 3) Mixed Policy: This policy is affected in the combined form of voyage and time policies. This policy is generally obtained for the ships which operate in between two ports. 4) Valued Policy: This policy contains the value of the subject of the insurance. The loss is indemnified on the basis of that value. 5) Unvalued Policy: The value of the subject of the insurance is not mentioned in this policy. The actual loss is ascertained and claims are paid on the basis of actual loss.
Group Report 02 Page 21

MGT 206 LEGAL ASPECTS OF BUSINESS 6) Floating or Open Policy: When a businessman makes shipment of the goods on different times, he will obtain a floating or open insurance policy. The insured will have to inform the insurance company about shipment of the goods and the name of the ship within a particular period of time. This process continues till the shipment of goods is made to the amount of insurance policy. 7) Block Policy: The policy covers other risks also in addition to the risks of sea routes. These other risks are not concerned with sea voyage such as risk of transport from coal mines to the port. The place of origin of this policy is the gold mines in Africa. 8) Wager Policy: The wager policy is obtained for the insurance of such subject in which the insured has no insurable interest. This policy is not legally valid. In fact, it is not a policy but a kind of wagering contract. 9) Currency Policy: The insurance policy issued in foreign currency is known as currency policy. This policy is affected to cover the risk of loss due to variations in the rate of exchange. 10) Construction Policy: This policy covers the risks during the construction period of the ship. This policy continues till the ship is worthy for the sea voyage. Important Clauses of a Marine Insurance Policy: Generally the following are the important clauses of a marine insurance policy: 1) Name of the Insured or his Agent: This clause contains the name of the insured or his agent. There is also provision in this clause to mention the name of assignee of the policy. 2) Lost or not lost clause: Sometimes marine insurance is affected after the departure of the ship. In this condition, both the insured and insurance company has no knowledge about the safety of goods and the arrival of the ship to the destination. Thus this clause signifies that the goods are insured by the insurance company whether lost or not lost. 3) At and From clause: This clause is used in voyage policy. Full description of the voyage is mentioned in it. It also contains the times of beginning and end of the voyage. When From is mentioned in this policy, the risk of the insurance company will begin from the departure of the ship. And in case of At and from clause the risk begins from the time of loading the goods on the ship. 4) Name of the Vessel: This clause contains the name of the vessel through which shipment of goods is made. There will be no change of ship without the permission of the insurance company. 5) Name of the Captain: This clause contains the name of the captain of ship, but it is not compulsory. 6) Touch and Stay: This clause contains the name of all those ports where the ship will stay. The time of stay of the ship at each port is also mentioned in this clause. 7) Valuation: This clause contains the value of goods insured. In the absence of this clause, the loss is determined by making valuation of the goods insured. 8) Perils: This clause contains the perils of the sea for which the insurance company bears the risks to indemnify the loss. The perils of the sea are accidental,
Group Report 02 Page 22

MGT 206 LEGAL ASPECTS OF BUSINESS extraordinary and unknown, such as foundering, stranding, collision, seawinds etc. from which the ship is damaged. 9) Premium: This clause contains the amount of premium. 10) Sue and Labour: The sue and labour clause empowers the insured to realize all those expenses from the insurance company which may be incurred in connection with the saving or reducing the possibilities of perils of the sea. Reference: Sen, Anil, Kumar, Mitra, Jitendra, Kumar Commercial law and Industrial Law, World Press 2008 Kapoor, N. D., Mercantile Law, Sultan Chand Verma, Yogendra, Prasad, Elements and Organization of Commerce
*******

Group Report 02

Page 23