Insurance Law Project

S.S.JAIN SUBODH LAW COLLEGE

“PRINCIPLES OF INSURANCE”

Submission To:

Submitted By:

MRS. ANUSHA TOMAR ASST. PROF. OF LAW

GAURAV SHARMA Roll no: - 16 VI Semester S.S. Jain Subodh Law College

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TABLE OF CONTENTS 1. 2. 3. 4. 5. 6.

Declaration………………………………………………………………………....iii Certificate………………………………………………………………….............iv Acknowledgment......................................................................................................v List of abbreviation………………………………………………………………..vi Review of literature…………………………………………………………...…..vii Research methodology …………………………………………………………...viii  Aims and Objectives  Hypothesis  Statement of research problem  Data Collection:  Method of Writing and Mode of Citation 7. Case list…………………………………………………………………..................ix 8. Introduction………………………………………..……………………………10-12 9. Main content…………………………………………………………………….13-17 10. Recommendation/ suggestion ………………………………………..…………..xviii 11. Conclusion………………………………………………………………………...xviii 12. Bibliography..............................................................................................................xix

DECLARATION

I, Gaurav Sharma, do hereby declare that, this research project titled “Principle of Insurance” is an outcome of the research conducted by me under the guidance of Mrs. Anusha Tomar (Asst. Prof. of Law) at S.S. Jain Subodh Law College in fulfillment for the award of the degree of B.A.LL.B. at the University of Rajasthan. I also declare that, this work is original, except where assistance from other sources has been taken and necessary acknowledgements for the same have been made at appropriate places. I further declare that, Page | 2 S.S. JAIN SUBODH LAW COLLEGE, JAIPUR

this work has not been submitted either in whole or in part, for any degree or equivalent in any other institution.

Date: 21 February 2017 Place: Jaipur GAURAV SHARMA

CERTIFICATE

To whomsoever it may concern, This is to certify that, the research project titled “Principles of Insurance” submitted by Gaurav Sharma in fulfillment for the award of the degree of B.A.LL.B. at S.S. Jain Subodh Law College is the product of research carried out under my guidance and supervision. Page | 3 S.S. JAIN SUBODH LAW COLLEGE, JAIPUR

Mrs. Anusha Tomar Asst. Prof. of Law S.S. Jain Subodh Law College

AKNOWLEDGEMENT I acknowledge with profundity, my obligation to Almighty God and my parents for giving me the grace to accomplish my work, without which this project would not have been possible. I express my heartfelt gratitude to my respected faculty, Mrs. Anusha Tomar (Asst. Prof. of Law) for providing me with valuable suggestions to complete this research project.

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I am especially grateful to all my faculty members at SS Jain Subodh Law College who have helped me imbibe the basic research and writing skills. Lastly, I take upon myself, the drawbacks and limitations of this study, if any.

Date: 21 February 2017 Place: Jaipur Gaurav Sharma

LIST OF ABBREIVEATION

1. 2. 3. 4. 5.

Edition Professor Assistant Supreme Court Cases Supreme Court

Edn. Prof. Asst. SCC SC

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REVIEW OF LITERATURE 

“Insurance may be described as a social device whereby group of individuals through a system of equitable contributions may reduce or eliminate certain measurable risks

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of economic loss group” (by:- Encyclopaedia Britannica) “A social device providing, financial compensation for the effects of misfortune, the payment being made from the accumulated contribution of all parties participating in the scheme” (by:- Prof. D.S.Hansell)

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“Insurance is a plan by which large numbers of people associate themselves and transfers to the shoulders of all, risks that attach to individuals.” (by:- Prof. John H.

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Magee) “Insurance is a contract by which one party, for compensation called the premium assumes particular risk of the other party and promises to pay to him or his nominee certain of ascertainable sum of money on a specified contingency.” (by:- E.W.

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Patterson) Insurance is a device for shifting the risk of an individual to the insurer in consideration of a nominal cost called premium. The main purpose of insurance is to

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transfer the losses of few persons among large number of persons. (by:-W. Beveridge) The theory of co-operation is the basis of insurance, insurance is a co-operative device. If a person is providing for his own losses, it cannot strictly be insurance, because in insurance, the loss is shared by a group of persons who are willing to cooperate. In ancient period, the member of a group willingly shared the losses caused to the member of the group. They used to share the loss to a member of a group at the time of damage. They collect enough funds from the society and paid to the dependents of the deceased or the person suffering property losses. (by:- M.N. Mishra)

RESEARCH METHODOLOGY Statement of research problem: What are the different principles of insurance, what is the need of those principles in general prospectus, in insurance sector? Aims and Objectives:

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The aim of the project is to present a detailed study of the topic “PRINCIPLES OF INSURANCE” forming a concrete informative capsule of the same with an insight into its relevance in the insurance sector. Hypothesis: Principles of Insurance Data Collection: The following secondary sources of data have been used in the project

Case Study

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Websites

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Case Laws

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Books Method of Writing and Mode of Citation: The method of writing followed in the course of this research project is primarily analytical. The researcher has followed Uniform method of citation throughout the course of this research project.

CASES LIST

1. Beresford V. Royal Insurance Co.1, 2. Carter v. Boehm,2 1 [1938] AC 586. 2 (1766) 3 burr 1905. Page | 8 S.S. JAIN SUBODH LAW COLLEGE, JAIPUR

3. 4. 5. 6.

Fender V. St John Mildmay,3 life insurance corp. of India v. Asha Goel4 London Assurances V. Mansel,5 Willians V. Baltic Ins Asson Of London,6

INTRODUCTION

3 [1938] AC 1 4 SCC(2001) 601. 5 (1879) 11 Ch D 363, 367. 6 [1924] 2KB 282. Page | 9 S.S. JAIN SUBODH LAW COLLEGE, JAIPUR

The theory of insurance is based on the principle that whatever has been crated will be destroyed. Therefore if one cannot protect that which has been created- what to do? What will happen if the creation is destroyed? What about the loss which will occur due to its destruction? The answer to all these is Insurance. Human life is full of dangers, risk and uncertainties. The safety remedy against such risks is insurance. Insurance is a cooperative device to spread the loss caused by a particular risk over a number of persons who are exposed to it and who agree to ensure themselves against that risk. Insurance works on the basic principle of risk-sharing. A great advantage of insurance is that is spreads the risk of the few people over a large group of people exposed to risk of similar types. Definitions: 1. According to Encyclopaedia Britannica: “Insurance may be described as a social device whereby group of individuals through a system of equitable contributions may reduce or eliminate certain measurable risks of economic loss group”7 2. According to Prof. D.S.Hansell: “A social device providing, financial compensation for the effects of misfortune, the payment being made from the accumulated contribution of all parties participating in the scheme” 3. According to Prof. John H. Magee: “Insurance is a plan by which large numbers of people associate themselves and transfers to the shoulders of all, risks that attach to individuals.” 4. According to E.W. Patterson: “Insurance is a contract by which one party, for compensation called the premium assumes particular risk of the other party and promises to pay to him or his nominee certain of ascertainable sum of money on a specified contingency.” Nature of Insurance: 1. Sharing of risk. 2. Co-operative device. 3. Value of risk. 7 Available at: Accessed on 16 February , 2017 Page | 10 S.S. JAIN SUBODH LAW COLLEGE, JAIPUR

4. 5. 6. 7.

Amount of payment. Large number of insured persons. Insurance is not gambling. Insurance is not charity.

Need of Insurance: 1. Protection. 2. Social security tool. 3. Economic development. Types of insurance: 1. Life insurance. 2. General insurance. 3. Social insurance. Theories of Insurance Insurance is a device for shifting the risk of an individual to the insurer in consideration of a nominal cost called premium. The main purpose of insurance is to transfer the losses of few persons among large number of persons. ‘W. Beveridge’ has rightly said, ‘the collective bearing or risk is insurance’.8 The law of insurance is based in the following two theories: 1. Theory of co-operation9: The theory of co-operation is the basis of insurance, insurance is a co-operative device. If a person is providing for his own losses, it cannot strictly be insurance, because in insurance, the loss is shared by a group of persons who are willing to cooperate. In ancient period, the member of a group willingly shared the losses caused to the member of the group. They used to share the loss to a member of a group at the time of damage. They collect enough funds from the society and paid to the dependents of the deceased or the person suffering property losses. “Insurance is pre-eminently social in nature, it represents, in the highest degree of cooperation for mutual benefit”. Similar view has been given by ‘Sir Willian Beveridge’ who states that: 8 W. Beveridge, Insurance For All And Everything, The University Of California, Daily News Limited, 1924. 9 M.N. Mishra And S.B. Mishra, Insurance – Principles And Practice, S. Chand, Delhi, P.6. Page | 11 S.S. JAIN SUBODH LAW COLLEGE, JAIPUR

“Insurance is co-operative from of distributing risks over a group of persons exposed to similar risks.” 2. Theory of probability10: The science of insurance is based on the theory of probability and the entire business of insurance is carried on the application of this theory. The theory of probability works on the basis of the past experience of losses such as, in life insurance mortality tables, in indemnity insurance past record of volume and extent of loss occurrence caused by similar risk. In this way, insurance premium, as expressed in the forms of rates can only be determined on the basis of portability. The theory of probability is defined by ‘Crobaugh’ as follows: “It refers to fact that most of the phenomenon which we call chance become defined and understood if sufficient observations are made of the particular result over a period of time and sufficient numbers of events are taken into consideration”.

PRINCIPLES OF INSURANCE

1. INSURABLE INTEREST: The first principle of insurance is the principle of insurable interest. The assured must have an actual interest called the insurable interest, in the subject matter of insurance. It means that the insured should stand in such relation to subject matter of insurance that he suffers loss by the destruction or damage and is benefited by its safety, or existence. It has been said that it is a general principle of common law that every contract entered into by the parties is 10 M. Arif Khan, Theory And Practice Of Insurance, Educational Book House, Aligarh, 1994, P.9 Page | 12 S.S. JAIN SUBODH LAW COLLEGE, JAIPUR

enforceable at their instance irrespective of it s subject matter provided it is not either illegal, immoral or contrary to public policy.11 So in the beginning an insurable interest was not a requirement for the validity of a contract of insurance and ‘Roche J’ observed that, there is nothing in the common law of England which prohibits insurance even if no interest exists 12. It is in fact a principle of public policy that persons who enter into contractual engagement should be required to fulfil them13, and contract of insurance are no exception to it. The concept of ‘insurable interest’ is a subsequent development of insurance practice. Definition: insurable interest has not been defined by any statue. Even in India, the insurance Act 1938 does not contain a definition of insurable interest. The only section, namely section 68 which made a passing reference to the word,’ insurable interest’, stands repealed by section 48 of the insurance amendment act, 1950. According to ‘professor Hansell’: “Insurable interest is a financial, involvement which is able to be isured”14. According to Patterson: “A relation between the insure and the event insured against, such that the occurrence of the event will cause substantial loss or injury of some to the insured”15.

2. GOOD FAITH: (UBERRIMAE FIDEI) ‘Good faith lies at the root of the insurance contract.’ The cardinal principle of commercial law is the principle of caveat emptor i.e., let the buyer beware. According to this principle it is the duty of the buyer to check the products and take care of his interest and the seller is under no duty to disclose any defect which an ordinary inquiry would reveal. But contracts of insurance are an exception to this principle and the parties do not stand on the same footing either with regard to the knowledge of the subject matter or with regard to the economic aspect of the obligation.

11 Fender V. St John Mildmay, [1938] AC 1. 12 Willians V. Baltic Ins Asson Of London, [1924] 2KB 282. 13 Beresford V. Royal Insurance Co., [1938] AC 586. 14 Ibid, 10, p. 48,49 15 EW Ptterson, Elements of Insurance Law, P. 109. Page | 13 S.S. JAIN SUBODH LAW COLLEGE, JAIPUR

Lord Mansfield is said to be the father of the principle of good faith 16. The principle was laid down in the land mark case of Carter v. Boehm, 17in which lord Mansfield stated the principle of good faith as: The other jurist who is greatly associated with this principles is jessel, M.R. who held in London Assurances V. Mansel,18 that, “good faith forbids either party, by concealing what he privately knows , to draw the other into a bargain from his ignorance of the fact and his believing the contrary.” In India, the same principle has been followed by the supreme court in life insurance corp. of India v. Asha Goel19 where it was held that, contract of insurance are contract uberrimae fidei and every material fact must be disclose otherwise, there is a good ground for recession of the contract. The duty to disclose material facts continues right up to the conclusion of the contact.

3. INDEMNITY: Indemnity means security or compensation against loss or damage. The principle of indemnity is such principle of insurance stating that an insured may not be compensated by the insurance company in an amount exceeding the insured’s economic loss. In type of insurance the insured would be compensation with the amount equivalent to the actual loss and not the amount exceeding the loss. This is a regulatory principal. This principle is observed more strictly in property insurance than in life insurance. The purpose of this principle is to set back the insured to the same financial position that existed before the loss or damage occurred.20 16 R.N. Chaudhary, General Principles of Insurance Law, 1st Edn, Central Law Publications, Allahabad, 2012, p. 55. 17 (1766) 3 burr 1905. 18 (1879) 11 Ch D 363, 367. 19 SCC(2001) 601. 20 Available at: Accessed on 17 February , 2017

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It means a promise to save another person from harm or from any loss caused as a result of transaction entered into at the instance of the promisor. ‘prof Hansell’ defines it as “an exact financial compensation”.21 The Indian contract act defines indemnity as ‘a contract by which one party promises to save the other from loss caused to him by the conduct of the promisor himself or by the conduct of another person.22

4. SUBROGATION: The term subrogation is derived from two latin word: sub, meaning “under”, and rogare, meaning “to ask”. Thus, subrogation literally means “Asking (for payment) under another’s name”. ‘Evelyn Thomas’ defines: “right to which one person has to stand in the place of another and avail himself of all the rights and remedies of that other”23 The principle of subrogation enables the insured to claim the amount from the third party responsible for the loss. It allows the insurer to pursue legal methods to recover the amount of loss, For example, if you get injured in a road accident, due to reckless driving of a third party, the insurance company will compensate your loss and will also sue the third party to recover the money paid as claim.24 In principles of insurance, a principle of subrogation is the fundamental principle. Principle of indemnity, is the outcome from this principle. Therefore, life insurance is not applicable in this principle. This principle applies in fire and marine insurance. This principle is established to compensate to the loss against the damages of the insure. If the claim is settled by the insurer, then the ownership of that entire property would be of the insurer company. This principle helps the insurer company from to prevent double insurance.25 According to the principle of subrogation, when the insured is compensated for the losses due to damage to his insured property, then the ownership right of such property shifts to the insurer.26 21Ibid, 10, p.52. 22 Section 124, Indian Contract Act, 1872. 23 Ibid,10, p.59. 24 Available at: Accessed on 17 February , 2017 25 Available at: Accessed on 17 February , 2017 Page | 15 S.S. JAIN SUBODH LAW COLLEGE, JAIPUR

5. CONTRIBUTION: “The right of an insurer to call upon others similarly, but not necessarily equally, liable to the same insured to share the cost of an indemnity payment”. 27 It has been defined as, “the right of an insurer who had paid a loss under a policy, to recover a proportionate amount from other insurer who are liable for the loss”.28 In principles of insurance, a principle of contribution is the fundamental principle. The principle of indemnity is conclusive to the principle of contribution. Under this principle, the insured has the liberty to claim only on the actual damages from any one insurer or all the other insurers.29 Principle of Contribution is a corollary of the principle of indemnity. It applies to all contracts of indemnity, if the insured has taken out more than one policy on the same subject matter. According to this principle, the insured can claim the compensation only to the extent of actual loss either from all insurers or from any one insurer. If one insurer pays full compensation then that insurer can claim proportionate claim from the other insurers.30

6. PROXIMATE CAUSE: The insurer’s liability under the policy arises only if the cause of loss is peril insured against and not an expressly excluded or other peril.31 Proximate cause literally means the ‘nearest cause’ or ‘direct cause’. This principle is applicable when the loss is the result of two or more causes. The proximate cause means; the 26 Available at: Accessed on 17 February , 2017 27 Available at: Accessed on 5 August, 2014. 28 Federation of Insurance Institute, Bombay. 29 Available at: Accessed on 17 February , 2017 30 Available at: Accessed on 17 February , 2017 31 M.N. Shrinivasan, Principles Of Insurance Law, 9th Edn., Lexis Nexis Butterworths Wadhwa, Nagpur, 2009, P.435. Page | 16 S.S. JAIN SUBODH LAW COLLEGE, JAIPUR

most dominant and most effective cause of loss is considered. This principle is applicable when there are series of causes of damage or loss.32 In principles of insurance, a principle of Principle of causa proxima is the fundamental principle. This principle consists of, to find or more reasons for the cause, and the nearest cause should be taken into account to decide the liability of the insurer.33

7. MITIGATION OF LOSS: According to the Principle of Loss Minimization, insured must always try his level best to minimize the loss of his insured property, in case of uncertain events like a fire outbreak or blast, etc. The insured must take all possible measures and necessary steps to control and reduce the losses in such a scenario. The insured must not neglect and behave irresponsibly during such events just because the property is insured. Hence it is a responsibility of the insured to protect his insured property and avoid further losses. In principles of insurance, a principle of mitigation of loss is the fundamental principle. Under this principle, the insured must give his 100% to save his property and not just sit and watch destruction of his property. All tough his property is insured his effort should be there to minimize the losses.34

8. ATTACHMENT OF RISK: Another fundamental principle of insurance is that a contract of insrance can be enforced only if the risk has attached. The liability under a contact of insurance commences only after the attachment of risk and then only the insurer becomes liable for any loss or damages that may result from a risk insured against.35

32 Available at: Accessed on 17 February , 2017

33 Available at: Accessed on 17 February , 2017 34 Available at: Accessed on 17 February , 2017 35 Available at: - accessed on 5 August, 2014. Page | 17 S.S. JAIN SUBODH LAW COLLEGE, JAIPUR

RECOMMENDATION/SUGGESTION

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IRDA has to set strict rules and regulations for save the peoples from the frauds done

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by the insurance companies of India as well as foreign. Principles of insurance were strictly followed by all types of the insurance company’s government as well as private companies.

CONCLUSION Insurance law in India has its origin in the United Kingdom with the establishment of a British firm, the Oriental Life Insurance Company in 1818 in Calcutta, followed by the Bombay Life Assurance Company in 1823, the Madras Equitable Life Insurance Society in 1829 and the Oriental Life Assurance Company in 1874. However, till the establishment of the Bombay Mutual Life Assurance Society in 1871, Indians were charged an extra premium upto 20% as compared to the Britishers. The first statutory measure in India to regulate the life insurance business was taken in 1912 with the passing of the Indian Life Assurance Companies Act, 1912 (which was based on the English Act of 1909). Other classes of insurance business were left out of the scope of the Act of 1912, as such kinds of insurance were still in rudimentary form and legislative controls were not considered necessary.

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BIBLIOGRAPHY

Books: 

Mishra N.M. And Mishra S.B. , Insurance – Principles And Practice, S. Chand, Delhi.

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Arif Khan M., Theory And Practice Of Insurance, Educational Book House, Aligarh,

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1994. Chaudhary R.N., General Principles of Insurance Law, 1st Edn, Central Law

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Publications, Allahabad, 2012. Rastogi S., Insurance law and Principles, 1st Edn, Lexis Nexis, 2014.

Websites:   

http://definitions.uslegal.com/a/attachment-of-risk/ http://articles-junction.blogspot.in/2014/07/principles-of-insurance-basic.html?m=1 http://www.yourarticlelibrary.com/insurance/7-most-important-principles-of-

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insurance/7536/ https://www.linkedin.com/pulse/principles-insurance-7-basic-general-jennifer-allsop http://www.moneymatters360.com/index.php/understanding-the-doctrine-of-

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contribution-29280/; https://www.britannica.com/topic/insurance

Articles/Journals/Electronic journal: 

W. Beveridge, Insurance for All And Everything, The University Of California, Daily News Limited, 1924.

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