Guide to understanding Insurance Law in India

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  • 9 Min Read
  • By Taxmann
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  • Last Updated on 11 September, 2023

Insurance Law

Table of contents

  1. Nature of Insurance Business
  2. Contract of Insurance
  3. Contract of insurance is Uberrimae fidei contract
  4. Insurance Business is based on law of probability
  5. Insurance policy is an actionable claim and can be assigned
  6. Categories of Insurance
  7. Re-insurance business
  8. Background of Insurance Business in India
  9. Life Insurance Business in India
  10. General Insurance Business in India
  11. Opening of Indian economy and entry of private sector in insurance business
  12. IRDAI to regulate Insurance Sector
  13. Regulations issued by IRDA
Check out Taxmann's Insurance Laws Manual which  provides comprehensive coverage of Insurance Laws in India. It covers updated & amended text of the IRDA Act, 75+ IRDA Rules/Regulations, the Insurance Act, and RBI's FED Master Direction on Insurance.

1. Nature of Insurance Business

‘Insurance’ is an arrangement by which a company or the State undertakes to provide a guarantee of compensation for specified loss, damage, illness, or death in return for payment of a specified premium.

Insurance is a means of protection from financial loss. It is a form of risk management primarily used to hedge against the risk of a contingent, uncertain loss.

An entity which provides insurance is known as an insurer, insurance company, or insurance carrier. A person or entity who buys insurance is known as an insured or policyholder. The insurance transaction involves the insured assuming a guaranteed and known relatively small loss in the form of payment to the insurer in exchange for the insurer’s promise to compensate the insured in the event of a covered loss. The loss may or may not be financial, but it must be reducible to financial terms, and must involve something in which the insured has an insurable interest established by ownership, possession, or pre-existing relationship.

2. Contract of Insurance

The insured receives a contract, called the insurance policy, which details the conditions and circumstances under which the insured will be financially compensated. The amount of money charged by the insurer to the insured for the coverage set forth in the insurance policy is called the premium. If the insured experiences a loss which is potentially covered by the insurance policy, the insured submits a claim to the insurer for processing by a claims adjuster.

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3. Contract of insurance is Uberrimae fidei contract

In some contracts, all material facts must be disclosed, whether or not asked by other party. These are termed as Uberrimae fidei contracts, i.e. contracts of ‘utmost good faith’. In such cases, non-disclosure may amount to fraud or misrepresentation and contract can be avoided by aggrieved party.

Contract of insurance is Uberrimae fidei – V Srinivasa Pillai v. LIC of India AIR 1977 SC 381 * Contship Container Lines v. D K Lall (2010) 4 SCC 256. A contract of insurance is contract of ‘uberrimae fidei’ and insured person and insurer must disclose all material facts on their own, even if other party does not specifically ask them.

In General Assurance Society Ltd. v. Chandumull Jain 1966 (3) SCR 500 (SC Constitution Bench), it was held that in a contract of insurance, there is requirement of uberrime fidei, i.e. good faith on the part of assured and the contract is likely to be construed contra proferentem i.e. against the insurance company in case of ambiguity or doubt – quoted and followed in United India Insurance Co. Ltd. v. Pushpalaya Printers 2004 AIR SCW 1140 = 51 SCL 331 (SC).

Insurance claim can be repudiated if all material facts were not disclosed – Satwant Kaur Sandhu v. New India Assurance Co. Ltd. (2009) 8 SCC 316.

Fraudulent suppression of material facts vitiates claim under the policy – Mithoolal Nayak v. LIC – AIR 1962 SC 814 – decision not under Consumer Protection Act, but highly relevant. In LIC of India v. Smt. Asha Goel 2001 AIR SCW 161 = 104 Comp Cas 79 (SC), it was observed that insurance contract is uberrimae fidei (of utmost good faith) and there must be utmost good faith on the part of assured. All material facts must be disclosed to insurer. However, it was also observed that approach of LIC in repudiation of contract should be one of extreme care and caution. It should not be dealt with in a mechanical and routine manner.

Insurance claim can be repudiated if all material facts were not disclosed – Satwant Kaur Sandhu v. New India Assurance Co. Ltd. (2009) 8 SCC 316.

3.1 Strict interpretation of terms of insurance contract

In interpreting documents relating to a contract of insurance, the duty of the court is to interpret the words in which the contract is expressed by the parties, because it is not for the Court to make a new contract, however reasonable, if the parties have not made it themselves – General Assurance Society v. Chandmull Jain AIR 1966 SC 1644 = (1966) 3 SCR 500 (Constitution Bench) – quoted with approval in Suraj Mal Ram Niwas Oil Mills v. United India Insurance Co. Ltd. (2010) 10 SCC 567.

3.2 Both insurer and insured must disclose all facts

Principles of Insurance contract are different from other contracts. The insured must disclose all material facts about the property or thing to be insured. Insurance contract is contract of utmost good faith. In United India Assurance Co. v. MKJ Corporation (1998) 92 Comp Cas 331 = (1996) 6 SCC 428 = AIR 1997 SC 408 = 1996 AIR SCW 3787 = (1997) 5 CTJ 649 (SC), it was held that this principle is applicable both to insured as well as insurer. Thus, an insurer cannot change terms of policy without informing the same to the insured. In Modern Insulators Ltd. v. Oriental Insurance Co. Ltd. 2000 AIR SCW 680 = AIR 2000 SC 1014 (SC) also, it was held that utmost good faith and disclosure of all material facts is duty of both the parties, i.e. insured as well as insurer. If the insurer does not inform ‘exclusion clause’ to the insured, the exclusion clause will not be binding on the insured.

3.3 Owner liable if compensation cannot be recovered from driver

If compensation cannot be recovered from driver, the liability to make payment of compensation. This would be so even if driver had no license as it is obligation of owner to take adequate care to see that the driver had appropriate license – Ishwar Chandra v. Oriental Insurance Co. Ltd. (2007) 10 SCC 650 – quoted with approval in Jawahar Singh v. Bala Jain (2011) 6 SCC 425.

3.4 Ambiguity to be interpreted in favour of insured person

In General Assurance Society Ltd. v. Chandumull Jain AIR 1966 SC 1644 = 1966 (3) SCR 500 (SC Constitution Bench), it was held that in a contract of insurance, there is requirement of uberrimae fidei, i.e. good faith on the part of assured and the contract is likely to be construed contra proferentem i.e. against the insurance company in case of ambiguity or doubt – quoted and followed in United India Insurance Co. Ltd. v. Pushpalaya Printers (2004) 51 SCL 331 (SC).

In case of ambiguity in a contract of insurance, the ambiguity should be resolved in favour of the claimant and against the insurance company – New India Assurance v. Zuari Industries (2009) 9 SCC 70.

4. Insurance Business is based on law of probability

The insurance business is based on laws of probability which presupposes that only a fraction of the policies issued would result in claims. The total sum insured by an insurance company would be several times its net worth. It is based on this same probability of loss that insurance companies fix the insurance premium. The premiums are fixed in such a manner that the total premium collected would be enough to pay for the total claims incurred after providing for expenses.

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5. Insurance policy is an actionable claim and can be assigned

As per section 3 of Transfer of Property Act, actionable claim means a claim to any debt, other than a debt secured by mortgage of immovable property or by hypothecation or pledge of movable property, or to any beneficial interest in movable property not in possession, either actual or constructive, of the claimant, which the Civil Courts recognise as affording grounds for relief, whether such debt or beneficial interest be existent, accruing, conditional or contingent.

Section 130 of Transfer of Property Act provides that an actionable claim may be assigned for consideration or without consideration. Transfer of actionable claim shall be effected only by execution of an instrument in writing signed by the transferor or his authorized agent. Once transferred, the transferee can sue or institute proceedings for the same in his own name without any consent of transferor or without making him a party thereto.

Basically, actionable claim means a claim for any amount receivable (debt) or claim for benefit of any movable property not in possession for which relief can be claimed in Civil Court. Such claim can be assigned/transferred.

An actionable claim can be enforced only through Court of Law and cannot be bought and sold as goods, though it can be assigned.

6. Categories of Insurance

Insurance can be broadly classified as

(i) Life Insurance and

(ii) General Insurance.

As per section 2(6B) of Insurance Act, 1938, ‘general insurance business’ means fine, marine or miscellaneous insurance business, whether carried on singly or in combination with one or more of them.

As per section 2(11) of Insurance Act, 1938, ‘life insurance business’ means business of effecting contracts of insurance upon human life. The contract is subject to payment of premiums for a term dependant on human life. Life Insurance Business includes granting disability benefit, double or triple indemnity accident benefit, granting of annuities upon human life and granting superannuation allowances and benefit payable out of any fund to a group of persons.

Life Insurance Business includes Unit Linked Insurance Policy, which provides a component of investment and a component of insurance.

Marine Insurance Business means business of effecting contracts of insurance of vessels, cargoes, freights, goods, wares, merchandise and property insured for transit by land or water [section 2(13A) of Insurance Act, 1938].

Health Insurance Business means the effecting of contracts which provide for sickness benefits or medical, surgical or hospital expense benefits whether in-patient or out-patient. It also includes personal accident cover [section 2(6C) of Insurance Act, 1938].

7. Re-insurance business

Reinsurance is a process whereby one entity (the reinsurer) takes on all or part of the risk covered under a policy issued by an insurance company in consideration of a premium payment. In other words, it is a form of an insurance cover for insurance companies. Unlike co-insurance where several insurance companies come together to issue one single risk, reinsurers are typically the insurers of the last resort.

8. Background of Insurance Business in India

Law of Insurance in India is governed by Insurance Act, 1938.

In 1968, the Insurance Act was amended to regulate investments and set minimum solvency margins. The Tariff Advisory Committee was also set up then.

Initially, at the time of independence, insurance business was in private sector and there were many private insurance companies.

9. Life Insurance Business in India

An Ordinance was issued in January, 1956 nationalising the Life Insurance sector and Life Insurance Corporation came into existence in the same year. The LIC absorbed 154 Indian, 16 non-Indian insurers as also 75 provident societies—245 Indian and foreign insurers in all. The LIC had monopoly till the late 90s when the Insurance sector was reopened to the private sector.

Life Insurance Corporation of India practically had monopoly in life insurance business, till insurance sector was opened to private sector after liberalisation in 1994.

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9.1 Initial Public Offer by LIC

Life Insurance Corporation of India Act, 1956 was amended vide Finance Act, 2021 to enable LIC to make public issue of its equity shares. The Initial Public Offer (IPO) of LIC of India was made in May 2022. The price was Rs. 949 per share with discount of Rs. 45 per share for retail investors and employees i.e. at Rs. 904. Policy holders got shares at Rs. 889. However, the market price of equity shares fell below the initial offer price and price per share in November 2022 is around Rs. 650.

As per FDI policy as amended on 12-4-2022, foreign direct investment in LIC of India is permitted upto 20% under Automatic Route.

10. General Insurance Business in India

In 1972 with the passing of the General Insurance Business (Nationalisation) Act, general insurance business was nationalized with effect from 1st January, 1973. At that time, 107 insurers were amalgamated and grouped into four companies, i.e. National Insurance Company Ltd., the New India Assurance Company Ltd., the Oriental Insurance Company Ltd. and the United India Insurance Company Ltd. The General Insurance Corporation of India was incorporated as a company in 1971 and it commence business on 1st January, 1973.

During 1973 to 1994, the insurance business was under public sector. General Insurance business was conducted by four insurance companies, all of which were in Public Sector.

11. Opening of Indian economy and entry of private sector in insurance business

After opening of Indian economy and liberalisation stated in 1991, insurance business was opened to private sector. Private players entered into general insurance business though some private players are in life insurance business also.

Presently, there are around 31 general insurance companies including the ECGC and Agriculture Insurance Corporation of India and 24 life insurance companies operating in the country.

12. IRDAI to regulate Insurance Sector

In view of entry of private sector in insurance business, need was felt to regulate the sector. Hence, Insurance Regulatory and Development Authority of India [IRDAI] was constituted under Insurance Regulatory and Development Authority, 1999. The Act received assent of President on 19-4-2000.

The IRDA was incorporated as a statutory body in April, 2000. The key objectives of the IRDA include promotion of competition so as to enhance customer satisfaction through increased consumer choice and lower premiums, while ensuring the financial security of the insurance market.

National Insurance Academy, Pune is apex insurance capacity builder institute promoted with support from Ministry of Finance and by LIC, Life & General Insurance Companies.

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13. Regulations issued by IRDA

Over the years, IRDA has issued many regulations to regulate various aspects of insurance business. Major among them are given below. It can be seen that regulations have been prescribed for all aspects of insurance business.

    • Appointment of Insurance Agents
    • Actuarial Report
    • Annual Report, Furnishing of Returns, Statements and Other Particulars
    • Assets, Liabilities and Solvency Margins of Insurance Companies
    • Distribution of Surplus
    • Expense Management of Insurers
    • Fees for various purposes
    • Reinsurance
    • Health Insurance
    • Insurance Advertisements and Disclosures
    • Insurance Surveyors and loss assessors
    • Investment
    • Issuance of capital
    • Licensing of banks as insurance brokers
    • Licensing of various intermediaries
    • Maintenance of records

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