december2a- gen princiles of insurance law
TRANSCRIPT
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General Principles of
INSURANCE
Dr.Ashok R PatilAssociate Professor in LawChair on Consumer Law and PracticeNLSIU, Bangalore
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Nature of the Insurance Contract
a. Contract is Aleatory: contract ofspeculation; depending on uncertainevent or contingency as to bothprofit and loss
b. Contract of Utmost Good Faith(Uberrima fides)
c. Contract of Indemnityd. Not a Wager Contract
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Insurable Interest means
A relation between the insuredand the event insured against,such that the occurrence of the
event will cause substantialloss or injury of some kind to
the insured.
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Insurable Interest
1. The interest should not be a meresentimental right or interest, forexample, love & affection alone
cannot constitute insurableinterest.
2. It should be a right in property or
a right arising out of a contract inrelation to the property.
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Cont..
3. The interest must be pecuniary, that is,
capable of estimation in terms of money. --In other words, the peril must be suchthat its happening may bring upon theinsured an actual or deemed pecuniaryloss. Mere disadvantage or inconvenienceor mental distress cannot be regarded asan insurable interest.
4. The interest must be lawful, that is, itshould not be illegal, unlawful, immoral oropposed to public policy.
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When Insurable Interest mustExist?
i. Life Insurance: at the time ofbeginning/inception
ii. Fire Insurance: both at the time of
beginning and at the time of lossiii. Marine Insurance: at the time of loss
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i. Insurable Interest andLife Insurance
Insurable interest should exist at thetime of taking the policy. It need notexist at the time when the loss takesplace or even when the claim is madeunder the policy.
Life insurance contracts, as we have
noted, are not strictly speakingcontracts of indemnity.
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The following persons have beenrecognised as having insurableinterest and they may convenientlybe considered under three main
headings, namely:a) By relationship by marriage, blood or
adoption
b) By contractual relationship, andc) By statutory duty
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a) Blood Relationship
i) On ones own life: Every person is
presumed to have insurable interest in hisown life without any limitation. Everyperson is entitled to recover the suminsured whether it is for full life or for anytime short of it. If he dies, his nominee ordependents are entitled to receive theamounts.
ii) By Husband or Wife:iii) Parent and Child:
iv) Other relations
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ii) By Husband or Wife
Griffiths v Fleming (1909)
- It is now well settled in England and Americathat a wife has an insurable interest in thelife of the husband and vice versa.
- It forms an exception to the general rulethat interest necessary to support theinsurance of another persons life must be
capable of expression it terms of money orpecuniary interest.
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The husband and wife are dependenton each other, that is presumed asinsurable interest in the life of eachother.
Insurable interest should be existedat the time of entering in to thecontract. They will continue to be
operative even after the dissolution ofthe marriage.
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Example
A takes out a policy on the life of his wife B
and subsequently even if they are divorcedstill 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 orwho has been divorced by him, the policy isnot valid for want of insurable interest at
the commencement of the risk, that is, atthe time when the contract is made.
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ii) Parent and Child
If the person has any pecuniary interest in
the life of the child, whether natural oradopted, he can take out an insurancepolicy on the life of such child.
A child whether natural or adopted is
presumed to have an insurable interest inthe life of the parent because it depends onthe life of the parent for support whethernatural or adopted.
Even if such interest is proved, if a personeffects a life insurance on a boy whom heintends to adopt, the insurance is not valid.
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b) Contractual Relationship
Debtor and Creditor
Partner and Co-partner
Principal and Agent
Master and Servant
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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 creditors interest has an insurable
interest in the life of the debtor because thechance of obtaining repayment materiallydepends upon the continuance of the life ofthe debtor.
The creditor has also an insurable interestin the life of the surety, as a surety is onlya favoured debtor.
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On the same principle the surety hasan insurable interest in the life of theprincipal debtor.
A policy on the life of the debtor willnot cease to be operative eventhough the debt has been satisfied or
the debt becomes time barred beforethe debtor dies.
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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 theposition of a creditor only has aninsurable interest in the life of the
person in the position of the debtorand not vice-versa
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Utmost Good faith/ Uberrima fides
A contract of insurance is a contractbased upon the utmost good faith,and, if the utmost good faith be notobserved by either party, the contractmay be avoided by the other party.
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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 hasfailed to disclose information on material factslies on the corporation.
In this case the assured who suffered from
tuberculosis and died a few months after thetaking of the policy, the court observed that itis well settled that a contract of insurance iscontract u b e r r i m a e f i d e s , but the burden of
proving that the insured had made falserepresentation or suppressed the material factsis undoubtedly on the corporation.
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Sec.45 of Insurance Act 1938
The insurance contract is a contract of utmost
good faith and therefore if the assured hasnot disclosed all the material facts, theinsurance company can avoid the contract.
It has become the practice of the insurers to
insert a clause in the policies and proposalforms as we have already noted, to declarethat all the answers stated in the proposal formshall form the basis and form part of the terms
of the contract in the policy.
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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 followingare 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 wasmaterial 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 whichought to be disclosed has been suppressed.
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Cont..
By such a declaration, for any variation of
the state of things from therepresentations in the proposal form,whether in fact is material or not, and
however slight the variation may be theinsurer gets a right to avoid the policy.
Section 45 of the Insurance Act 1938,
modified this rule materially andmitigated the rigour of the rule of utmostgood faith.
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Cont
It lays down that no policy can be
challenged after two years from the dateof the policy on the ground that anystatement made in the proposal or in
any report of the medical officer or anydocument was inaccurate or
false unless it is material to disclose andit was fraudulently made and the policy
holder knows at the time that it wasfalse or he suppressed the fact materialto be disclosed,
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Cont..
provided that nothing in thatsection prevents the insurerfrom calling for proof of age of
the assured or to adjust therate of premium according to
the correct age provedsubsequently.
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Mithoolal v. Life InsuranceCorporation, AIR 1962 SC 814
LIC challenged a policy after two
years after its issue. It was inevidence that the assuredfraudulently suppressed facts. It washeld that the LIC was not liable
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LIC v. Janaki Ammal, AIR 1968Mad 324.
Following the SC observations of the
Mithoolal case referred to above held that ifa period of two years has expired from thedate on which the policy of life insurancewas effected,
that policy cannot be called in question byan insurer on the ground that a statementmade in the proposal for insurance or onany report of a medical officer or referee,or a friend of the insured, or in any otherdocument leading to the assure of thepolicy, was inaccurate or false.
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Present Position
If the policy is questioned after a period of
two years the insurer can repudiate thepolicy only if he knows that such astatement was on a material matter or theinsured 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 statementwas false or that it suppressed facts whichit was material to disclose.
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Special Doctrines
Reinstatement
Subrogation
Contribution
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Special DoctrinesReinstatement
Reinstatement literally means
- replacement of what is lost or
- repairing the damaged property and
bringing it to its original value andutility.
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In Anderson v. Commercial Assurance Co,(1955) 55 DJQB 146 (CA)
Lord Esher MR explained: we have come to
the conclusion that the words reinstateand replace should thus be applied:- if the property is wholly destroyed, thecompany may, if they choose, instead of
paying the money replace the things byothers which are equivalent; or,- if the goods insured are damaged but notdestroyed, may exercise the option to
reinstate them, ie, to repair them and putthem in a condition in which they werebefore the fire.
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Right of Reinstatement
This right of the insurers to reinstate
the property instead of paying themoney may spring up;a. either from a contract in the formof a clause under the policy, orb. under a statute.
This type of clause is not inserted inall policies in all branches ofinsurances, eg, it is not and cannotbe included in life policies.
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Only in indemnity insurances, in
appropriate branches of insurance, likefire, burglary, steam boilers, or motorvehicle insurances, this clause called
the reinstatement clause, entitling theinsurers to exercise an option, on thehappening of the insured event, either
to reinstate or to pay the insuredmoney can be incorporated.
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Times Fire v Hawke, 1858
When once the option to reinstate is
expressly or by implication exercisedin favour or reinstatement, itamounts to a new contract and they
cannot go back and say that theywould pay money.
The selection of one alternative
amounts to an abandonment of theother.
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In Brown v Royal Assurance co Ltd, 1859
CJ Campebell observed:
On exercising the option the case standsas if the policy had been simply toreinstate the premises in case of fire;
because, where a contract provides foran election, the party making theelection is in the same position as if he
had originally contracted to do the actwhich he has elected to do
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In reinstatement, it is sufficient
that a substantially similar buildingis construed although the newbuilding is not identical in all
minute details with the destroyedone.
But if the new building is by far
less than the original building, theyhave to make good the loss.
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In Brown v Royal Insurance Co
It has been held that if the newbuilding is costlier than theoriginal building, on that count
they cannot go back from theirduty nor in the absence of aspecific agreement, require the
assured to contribute for thebalance.
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Smith v Colonial Mutual Fire, 1880
It was held that if a fire occursfor a second time during thereinstatement, they are their
own insurers and so cannotclaim credit for what they havealready spent.
They should replace a similarbuilding.
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SubrogationRandal v. Cockran (1748) 1 Ves Sen 98
The doctrine of subrogation is a
necessary incident to a contract ofindemnity and therefore is applicableto a contract of fire insurance and
one of marine insurance.
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It is given statutory recognition in sec.79
of the Marine Insurance Act 1906. Underthis doctrine, as applicable to fireinsurance, the insurer has a right ofstanding in the shoes of the insured and
avail himself of all the rights andremedies of the insured, whether alreadyenforced or not.
The principle of subrogation prevents an
insured who holds a policy of indemnityfrom recovering from the insurer the sumgreater than the economic loss he hassustained.
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Therefore, if a loss occurs under such
circumstances that insured has analternative 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 lossfrom the insurer and if he so receives,the insurer is entitled to, or issubrogated to, the former alternativerights and remedies of the insured andthis is technically called subrogation.
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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 principleof indemnity the doctrine applies only tofire, marine and other non-life policies;
ii. Insurer must pay before he claimsubrogation;
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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 atfault have been held not to be entitled to make anyclaim on the owner of the ship at fault, though the
insurers of cargo owned by a third party can claimsubrogation [Simpson v. Thompson, 1877 (3) AC279].
Similarly, where the assured and the wrongdoer are
co-assureds the doctrine does not apply [Petrofira v.Magnaload, 1983 (2) Lloyds Rep 91].
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AIR 2001 SC 2630 "Savani Road Lines v.Sundaram Textiles Ltd."
COPRA S.2(1)(d) - CONSUMER
PROTECTION - "Consumer" - Insurancecompany compensating consignor forloss of goods during transit - Insurance
company taking letter of subrogation,filed consumer complaint for recoveryof amount against carrier of goods -
Letter of subrogation was in effect anassignment -
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Therefore, insurance company being
an assignee was not beneficiary ofservices hired by consumer fromcarrier - Insurance company not
consumer vis-a-vis the carrier -Consumer complaint by InsuranceCompany, not maintainable -
Insurance company can file civil suitfor recovery of amount.
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Contribution
Like subrogation, contribution is also
a corollary to the principle ofindemnity. Therefore contributiongenerally arises only in property
insurance. The rule is of ancientorigin and was recognized by thechancery courts.
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Contribution arises because of the
liberty of the assured to insure thesame property with more than oneinsurer which is called double
insurance. By mere double insuranceand, over insurance, the right ofcontribution springs up.
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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 thesame peril which caused the loss.
iv. The policies must have been in force and
all of them should be enforceable at thetime of loss.
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Example
If a house is insured with company X for
Rs.5,000 and with company Y forRs.10000 and the damage amounts toRs.1200,
company X will apparently be liable tocontribute Rs.400 and company YRs.800.
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Differences between the Doctrines
of Contribution and Subrogation
i. In contribution the purpose is to
distribute the loss while in subrogationthe loss is shifted from one person toanother
ii. Contribution is between insurers butsubrogation is against third party
iii. In contribution there must be morethan one insurer but in subrogationthere may be one insurer and onepolicy.
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Cont..
iv. In contribution the right of the
insurer is claimed but insubrogation the right of theinsured is claimed.
In modern fire policies we find thecontribution clause which enables
the insurer to claim contributionfrom other co-insurers.