Contract of Insurance - UPSC PDF Download

Introduction

Life is filled with uncertainties, and individuals often face the risk of unforeseen events that can lead to personal and property losses. In response to these potential risks, the concept of insurance has emerged as a means of protection.

Section 2(8) of the Insurance Act, 1938, provides a legal definition of an "Insurance Company" as any entity, including a company, association, or partnership, that can be legally dissolved under the Companies Act, 1956, or the Indian Partnership Act, 1932. Additionally, Section 2(9) of the Act defines an "insurer" as any person, group of individuals, or corporate entity engaged in the business of insurance.

Insurance contract: Meaning 

• An insurance contract is essentially a contract between two parties, where one of them is called an “insurer” and the other party is “insured”. 
• In this type of contract, the insurer promises the insured party that he will save or indemnify him from losses caused by a particular contingent event, on the payment of an amount called “premium”. 
• Insurer usually refers to the insurance company that sells the insurance and the insured or policyholder is the person who buys it by paying the premium. In a contract of insurance, the insurer or insurance company advertises the insurance policy, which is an invitation to offer. 
• Then, on seeing the invitation to offer, the insured makes an offer to the insurer. When the insurer accepts, it becomes an insurance contract.

Purpose of insurance 

 The following are the two main purposes of insurance contracts: 

• Protection against uncertain events: The main purpose of an insurance contract is to make the insured person secure and financially protected from certain uncertain contingencies that would cause a huge financial burden. 
• Better management of finances: Many people have the tendency to make poor financial decisions that could potentially leave them without any support when faced with an unfortunate situation. By subscribing to an insurance policy, the insured would be able to make better financial decisions.

Types of insurance 

 There are two primary categories of insurance based on what they cover: life insurance and general insurance.

• Life Insurance: Life insurance is designed to provide coverage for the life of the insured individual. In the event of the insured person's death, the insurance company pays a predetermined sum of money to the nominee or beneficiary of the policy. This type of insurance offers assurance that the insured's family will have financial stability even in the event of the insured's demise. Various types of life insurance policies are available, including endowment plans, child plans, pension plans, and more.
• General Insurance: General insurance, on the other hand, covers a wide range of aspects of life other than the individual's life itself. It includes insurance for health, property (e.g., house), motor vehicles, fire, travel, and more. General insurance provides financial protection against losses incurred from events other than the death of the insured. It serves to safeguard individuals and their assets from various risks and unexpected events.

History of the insurance sector in India

• Ancient Era: In ancient India, the concept of insurance was informally practiced. It was also referred to in ancient religious texts like Dharmasastra and Arthasastra. These texts described how communities would pool their resources and distribute them to mitigate the impact of natural disasters.
• British Colonial Rule: During British colonial rule, the insurance landscape in India transformed. The first British insurance company in India, the Oriental Life Insurance Company, was established in 1818, although it eventually failed in 1834. In 1870, the British Insurance Act was introduced. At this time, many insurance companies operating in India were foreign-owned. The Indian Life Assurance Companies Act of 1912 marked a significant step, and the Indian government began publishing data on insurance companies in 1914. In 1928, the Indian Insurance Companies Act empowered the government to collect information on both Indian and foreign insurers. The Insurance Act of 1938 was enacted but later overshadowed by subsequent legislation.
• Post-Independence: Following India's independence, the government initiated the process of nationalizing the insurance sector. The Life Insurance Corporation Act of 1956 led to the establishment of the Life Insurance Corporation (LIC), which held a monopoly in the life insurance business. After this act, life insurance was no longer governed by the Insurance Act of 1938. In 1973, the General Insurance Business (Nationalisation) Act of 1972 nationalized the general insurance business.
• Liberalization Policy: The year 1991 marked a significant turning point for India as the country embraced liberalization and privatization of its economy. The government recognized the need to open up the insurance sector to private players. To assess the necessary changes, a committee chaired by R.N. Malhotra, a former RBI governor, was appointed. This committee recommended privatizing the insurance sector and establishing the Insurance Regulatory and Development Authority (IRDA) as an autonomous body to regulate the insurance industry. The Life Insurance Corporation's monopoly in the life insurance sector came to an end, and the IRDA Act of 1999 was enacted, allowing private players to participate.

Principles and characteristics of an insurance contract 

• Essentials of a Valid Contract: An insurance contract adheres to the essential elements of a valid agreement, as outlined in Section 10 of the Indian Contract Act, 1872. These elements include offer and acceptance, the competence of the parties, free consent, lawful consideration, and a lawful object.
• Indemnity Contract: Insurance contracts often serve the purpose of indemnity, defined in Section 124 of the Indian Contract Act, 1872, as an agreement where one party promises to protect the other from losses due to the promisor's actions or those of others. However, this indemnity does not extend to losses caused by non-human factors, such as acts of God.
• Aleatory Contract: An aleatory contract is contingent on uncertain events beyond the control of both parties, often related to natural disasters or deaths. Such contracts are present in many insurance policies and are referred to as aleatory insurance. Payment by the insurer occurs only when the specified uncertain event transpires.
• Uberrimae Fidei: Insurance contracts are contracts of "uberrimae fidei," signifying "good faith." Both the insurer and the insured must be completely transparent about all material facts, withholding no information against the other party's interest.
• Contract of Adhesion: Insurance policies are typically standardized and non-negotiable. As the insured does not have input into policy terms, it is the insurer's responsibility to explain the clauses to the insured. The insured must carefully understand the terms and select the policy that aligns with their interests.
• Principle of Subrogation: Subrogation, meaning substitution, is often employed in insurance contracts. It allows a third party, frequently the insurer, to sue and claim damages on behalf of another party. After paying for the insured's losses, the insurer can seek reimbursement from the party responsible for the loss.
• Insurable Interest: An insurable interest is a fundamental element in insurance contracts. It requires the insured to have a pecuniary interest in the subject matter of the insurance contract, meaning they would face financial losses if it were destroyed.
• Principle of Contribution: In cases where the insured has multiple insurance policies covering the same subject matter, the insured cannot make more than one claim for the same loss to profit from it.
• Reinsurance: Under certain circumstances, an insurer may seek to have the insured property reinsured by another insurer, especially if they fear that a claim exceeding their capacity might arise. This process is known as "insurance for insurance."
• Principle of Loss Minimization: This principle obligates the insured to take reasonable steps to protect the subject matter of the insurance contract, minimizing financial losses to the subject matter as much as possible.
• Principle of Proximate Causes: When an accident results from multiple causes, this principle dictates that the nearest or most proximate cause should be considered. The insurer would pay for losses caused by the nearest cause.

Process of Forming an Insurance Contract

The process of establishing life insurance and general insurance contracts involves several key steps:

Life Insurance:

• Proposal Form Submission: The applicant must complete a proposal form, providing personal information such as name, nationality, address, occupation, date of birth, and medical history, including any pre-existing conditions. Additional details may include the risk associated with the event, coverage amount, policy term, premium payments, and existing double insurance.
• Age Verification: Documentary proof of age, such as school certificates or municipal records, must be submitted to verify the applicant's age. This step is significant because older individuals are typically associated with higher risks, resulting in increased premium rates.
• Proposal Form Review by Agent: The insurance agent reviews the proposal form and supporting documents, verifying their authenticity. The agent then prepares a report based on this assessment.
• Medical Examination: The insured person's health status, family medical history, habits, occupation, income, and other relevant information must be provided. This medical examination is usually conducted by doctors authorized by the Life Insurance Corporation (LIC).
• Branch Office Evaluation: The branch office scrutinizes the agent's report and the medical report to determine whether the proposal should be accepted.
• Final Decision: Based on the scrutiny results, the branch office either accepts or rejects the proposal and notifies the applicant of the decision.
• Premium Payment: Upon acceptance, the branch office sends a notice to the insured individual, specifying the premium payment schedule. Premiums may be paid periodically.
• Issuance of Insurance Policy: Following premium payment, the life insurance policy is issued. This document outlines essential details of the insured and the policy's terms and conditions.

General Insurance:

• Selection of Insurer: The policyholder must first select an appropriate insurance policy that aligns with the subject matter and their interests.
• Proposal Form Completion and Goodwill Certificate: The proposer completes a proposal form with personal details, similar to health policy requirements. Additionally, a certificate of goodwill is presented.
• Agent's Recommendation: The recommendation of an insurance agent is crucial for the proposal form's effectiveness.
• Subject Matter Survey: The insurance company assesses the subject matter based on the agent's recommendation to ascertain the validity of the proposal.
• Insurer's Decision: Following the subject matter survey, the insurance company makes a decision regarding the proposal and informs the proposer accordingly.
• Premium Payment: Once the proposal is accepted, the insurer notifies the proposer about the premium amount to be paid.
• Policy Issuance: After the premium is remitted, the insurance company issues a temporary cover note for the insurance policy. Subsequently, after the temporary coverage period expires, a permanent cover note for the insurance policy is provided.

Conclusion

As insurance contracts are standardised, the formation of insurance contracts does not go through a phase of negotiation. On observing the formation of insurance contracts, one can find that insurance policies by nature are invitations to offer and the real offeror is the insured. Insurance contracts possess features that are contracts on their own, such as contracts of indemnity and aleatory contracts.