B.A.LL.B.

( SEM- IX)

INSURANCE LAW
(Discriptive Notes)
 INDEX

1. SYLLABUS

2. LECTURE PLAN

3. UNIT 1 NOTES

4. UNIT 2 NOTES

5. UNIT 3 NOTES

6. UNIT 4 NOTES
 LL.B. (Integrated) Five Years Degree Course

(Fifth Year)

IX Semester

Paper Code : LB-806(C)

Paper VI

Elective Groups –II: Business Groups-C(2)

Paper 2: Insurance Law

Unit I: Insurance (Lecture 05)

i. Introduction, Meaning of Insurance

ii. Historical Aspect

iii. Characteristics of Insurance, nature of Insurance Contract

Unit II: Theories of Insurance (Lecture 05)

i. Theory of Cooperation

ii. Theory of Probability

iii. Principles of Insurance, Utmost Good Faith

iv. Insurable Interest

Unit III: Types of Insurance (Lecture 07)

i. Types of Insurance: Life Insurance, Marine Insurance, Fire Insurance

ii. Re-insurance, Double Insurance, Insurance and Wages

iii. Miscellaneous Insurance

Unit IV: Basic Principles and IRDA ( Lecture 08)

i. Indemnity, Subrogation, Causa Proxima, Mitigation of Loss, Attachment of Risk,

Contribution

ii. Constitution, Function and Powers of Insurance Regulatory and Development Authority

iii. Application of Consumer Protection Act,1986

 LECTURE RE- PLAN
Unit I: Insurance (Lecture 05)

Lecture 1 :- Introduction & Meaning of Insurance

Lecture 2:- Historical Aspect

Lecture 3 :- Characteristics of Insurance

Lecture 4 :- Nature of Insurance Contract

Unit II: Theories of Insurance (Lecture 05)

Lecture 1:- Theory of Cooperation

Lecture 2:- Theory of Probability

Lecture 3:- Principles of Insurance

Lecture 4:- Utmost Good Faith

Lecture 5:- Insurable Interest

Unit III: Types of Insurance (Lecture 07)

Lecture 1:- Life Insurance

Lecture 2:- Marine Insurance

Lecture 3:- Fire Insurance

Lecture 4:- Re-insurance and Double Insurance

Lecture 5:- Insurance and Wages, Miscellaneous Insurance

Unit IV: Basic Principles and IRDA ( Lecture 08)

Lecture 1:- Indemnity, Subrogation, Causa Proxima

Lecture 2:- Mitigation of Loss, Attachment of Risk, Contribution

Lecture 3:-Constitution, Function and Powers of Insurance Regulatory and Development

Authority
Lecture 4:- Application of Consumer Protection Act,1986

UNIT I: INSURANCE

Question: What do you understand by Insurance? Explain different types of insurances

while mentioning the different advantages of insurance.

Answer: Insurance, serves as a critical tool for managing risk by mitigating the potential
impact of uncertain losses. It involves the equitable transfer of risk from one entity to another
in exchange for payment. The entity selling insurance is known as the insurer, while the
purchaser of the insurance policy is called the insured or policyholder. The cost of insurance
coverage, known as the premium, is determined based on factors such as the type and amount
of coverage needed, the risk profile of the insured, and the likelihood of claims.

Risk management, a specialized field, involves assessing and controlling risks to minimize
their impact. Insurance transactions typically involve the insured paying a predictable
premium to the insurer. In return, the insurer promises to compensate (indemnify) the insured
in the event of a significant, potentially devastating loss.

The insurance policy, a legally binding contract, outlines the terms and conditions under
which compensation will be provided. This includes specifying covered risks, exclusions,
deductibles, and limits of coverage.

Insurance is a form of contract or agreement which one party agrees in return of a

consideration to pay an agreed amount of money to another party to make good for a loss,
damage, injury to something of value in which the insured has to pay as a result of some
uncertain event. Thus, insurance is a method of securing protection against future calamities
and uncertainties.

Definition of Insurance

 Insurance is a cooperative form of distributing a certain risk over a group of persons

who are exposed to it. – Ghosh and Agarwal

 Insurance is a contract in which a sum of money is paid to the assured as

consideration of insurer’s incurring the risk of paying a large sum upon a given
contingency. – Justice Tindall
  Insurance is an instrument of distributing the loss of few among many. – Disnadle

 The collective bearing of risk is Insurance. – W. Beverideges

 A provision which a prudent man makes against fortuitous or inevitable

contingencies, loss or misfortune. – Thomas

Meaning: The literal meaning of insurance would be an assurance against unforeseen and
unfortunate loss. This means, that if you encounter a less than normal event in your normal
course of life, and happen to incur a financial loss because of it, you can be compensated.

For example, you met with an accident on your way to the office in your car and the car
suffers damage. Your insurer can reimburse the repair expenses in this case. However, the
insurer will not reimburse normal wear and tear like a headlamp stopped working.

Legally insurance has been defined as a contract where the insurer agrees to compensate the
insured against the losses incurred due to any unforeseen contingency. The contract also
involves a consideration which is called a premium. The maximum available benefit amount
is called sum assured or sum insured.

Definition of Insurance

Insurance is a contractual agreement between two parties. In this agreement, one party
assumes the risks of the other in exchange for a payment known as a premium. The insurer
undertakes to pay a specified sum of money to the insured upon the occurrence of an
uncertain event, such as death in the case of life insurance, or at the end of a specified period.
For general insurance, the insurer promises to indemnify the insured against losses resulting
from specified events.

 Insurance is a cooperative form of distributing a certain risk over a group of persons

who are exposed to it. – Ghosh and Agarwal

 Insurance is a contract in which a sum of money is paid to the assured as

consideration of insurer’s incurring the risk of paying a large sum upon a given
contingency. – Justice Tindall

 Insurance is an instrument of distributing the loss of few among many. – Disnadle

 The collective bearing of risk is Insurance. – W. Beverideges

  A provision which a prudent man makes against fortuitous or inevitable
contingencies, loss or misfortune. – Thomas

Types of Insurance

a) Life Insurance: Provides financial benefits to beneficiaries upon the insured's death.
Contract to pay a certain sum of money on death of a person in consideration of due payment
of a certain annuity for his life calculated according to probable duration of life.

b) Marine Insurance: Marine insurance covers the loss or damage of ships, cargo, terminals
and any transport or cargo by which property is transferred, acquitted or held between the
points of origin and final destination.

c) Fire Insurance: Fire insurance covers damage or loss to a property because of fire. It is a
specific form of insurance in addition to homeowner's or property insurance, and it covers the
cost of replacement and repair or reconstruction above what the property insurance policy
covers. Fire insurance policies cover damage to the property, and may also cover damage to
nearby structures, personal property and costs because of not having the capacity to live in or
use the property if damages occur.

d) Re-Insurance: Reinsurance is essentially insurance for insurance companies. It involves

transferring a portion of the financial risks that insurance companies undertake when insuring
cars, homes, individuals, and businesses to another entity known as a reinsurer. This
arrangement helps insurance companies manage their exposure to large or unexpected losses.

e) Double Insurance: Double Insurance refers to the method of getting insurance of same
subject matter with more than one insurer or with same insurer under different policies. This
means that one can get insurance policies on a subject matter more than its value.

f) Health Insurance: Covers medical expenses and treatments for insured individuals.

g) Property Insurance: Protects against damage to property (e.g., home insurance, car
insurance).

h) Liability Insurance: Covers legal liabilities arising from injuries or damages caused to
others.
Advantages of Insurance: Insurance plays a crucial role in providing financial security and
stability, allowing individuals, businesses, and society as a whole to manage risks effectively
and plan for the future with confidence.

1. Provide certainty: Insurance helps the insured to convert his uncertainties into certainties
by entering into contract with insurer. The payment of premium by insured enables to reduce
the risk.

2. Distribution of losses: It helps to distribute the losses as it enables to transfer the risks and
spread the financial loss of insured members over the whole insurers.

3. Social security: It acts as an instrument to fight against evils of poverty, unemployment,

disease, old age, accidents, fire and other calamities.

4. Credit facility: The policies issued by insurance companies can be made use to raise policy
loans from insurance company, as well traders are in the position to raise loans and get credit
facilities from various financial institutions.

5. Increase efficiency: It reduces the risk and increases the efficiency in business. It provides
security for business community which in turn paves the way for growth and diversification
of the industry.

6. Earns foreign exchange: It provides security to the international traders, shippers and
banking institutions, thus paves the way for expansion of foreign trade. The increased foreign
trade activities lead to securing foreign exchange which makes the country to become
economically strong.
Question: Describe the evolution of Insurance law in India. Briefly determine the
historical relevance of Insurance.

Answer: The history of insurance stretches back thousands of years, evolving from simple
mutual aid arrangements to the sophisticated global industry we know today. Here’s a concise
overview:

1.Ancient Beginnings: The concept of insurance can be traced to ancient civilizations such
as Babylon, where traders would spread their goods across multiple ships to reduce the risk of
loss due to shipwrecks. Ancient Greek and Roman societies also had forms of burial clubs
that provided financial assistance to families upon the death of a member.

2.Medieval Guilds and Merchant Practices: During the Middle Ages in Europe, guilds and
merchant groups developed systems to protect their members from losses due to fire, theft, or
death during travel. These early arrangements laid the groundwork for modern insurance
principles of risk pooling and spreading.

3.Emergence of Modern Insurance: The 17th century saw the formalization of insurance as
we recognize it today. In England, Edward Lloyd's coffeehouse became a hub for marine
insurers and merchants to discuss and underwrite insurance policies. This laid the foundation
for Lloyd’s of London, one of the world’s oldest and most renowned insurance markets.

4.Actuarial Science and Regulation: The 18th and 19th centuries marked a period of
significant growth and refinement in insurance practices. Actuarial science emerged,
providing mathematical and statistical tools to assess and manage risk more accurately.
Governments began to regulate insurance to protect policyholders and ensure solvency of
insurers.

5. Global Expansion and Diversification: By the 20th century, insurance had expanded
beyond maritime and property risks to encompass life insurance, health insurance, and
liability coverage. The industry grew globally, adapting to local regulations and market needs
in different countries.

6. Technological Advancements: In the late 20th and early 21st centuries, advancements in
technology, data analytics, and digitalization revolutionized the insurance industry. Insurtech
companies emerged, leveraging artificial intelligence and big data to streamline processes and
offer innovative insurance products.
7. Challenges and Future Trends: Today, the insurance industry faces challenges such as
climate change, cybersecurity risks, and demographic shifts. The future promises further
evolution with the potential for blockchain technology to enhance transparency and efficiency
in insurance transactions.

Evolution of Insurance in India:

In India, insurance has a deep-rooted history. It finds mention in the writings of Manu
(Manusmrithi), Yagnavalkya (Dharmasastra) and Kautilya (Arthasastra). The writings talk in
terms of pooling of resources that could be re-distributed in times of calamities such as fire,
floods, epidemics and famine. This was probably a pre-cursor to modern day insurance.
Ancient Indian history has preserved the earliest traces of insurance in the form of marine
trade loans and carriers ‘contracts. Insurance in India has evolved over time heavily drawing
from other countries, England in particular. 1818 saw the advent of life insurance business in
India with the establishment of the Oriental Life Insurance Company in Calcutta. This
Company however failed in 1834. In 1829, the Madras Equitable had begun transacting life
insurance business in the Madras Presidency. 1870 saw the enactment of the British Insurance
Act and in the last three decades of the nineteenth century, the Bombay Mutual (1871),
Oriental (1874) and Empire of India (1897) were started in the Bombay Residency. This era,
however, was dominated by foreign insurance offices which did good business in India,
namely Albert Life Assurance, Royal Insurance, Liverpool and London Globe Insurance and
the Indian offices were up for hard competition from the foreign companies. In 1914, the
Government of India started publishing returns of Insurance Companies in India. The Indian
Life Assurance Companies Act, 1912 was the first statutory measure to regulate life business.
In 1928, the Indian Insurance Companies Act was enacted to enable the Government to
collect statistical information about both life and non-life business transacted in India by
Indian and foreign insurers including provident insurance societies. In 1938, with a view to
protecting the interest of the Insurance public, the earlier legislation was consolidated and
amended by the Insurance Act, 1938 with comprehensive provisions for effective control
over the activities of insurers.

The Insurance Amendment Act of 1950 abolished Principal Agencies. However, there were a
large number of insurance companies and the level of competition was high.

There were also allegations of unfair trade practices. The Government of India, therefore,
decided to nationalize insurance business. An Ordinance was issued on 19th January, 1956
nationalizing 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. The history of general
insurance dates back to the Industrial Revolution in the west and the consequent growth of
sea-faring trade and commerce in the 17th century. It came to India as a legacy of British
occupation. General Insurance in India has its roots in the establishment of Triton Insurance
Company Ltd., in the year 1850 in Calcutta by the British. In 1907, the Indian Mercantile
Insurance Ltd was set up. This was the first company to transact all classes of general
insurance business. 1957 saw the formation of the General Insurance Council, a wing of the
Insurance Association of India. The General Insurance Council framed a code of conduct for
ensuring fair conduct and sound business practices. In 1968, the Insurance Act was amended
to regulate investments and set minimum solvency margins. The Tariff Advisory Committee
was also set up then. In 1972 with the passing of the General Insurance Business
(Nationalization) Act, general insurance business was nationalized with effect from 1st
January, 1973. 107 insurers were amalgamated and grouped into four companies, namely
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 commenced business on
January 1st 1973. In December 2000, the GIC subsidiaries were restructured as independent
insurance companies. At the same time, GIC was converted into a national re-insurer. In July
2002, Parliament passed a bill, delinking the four subsidiaries from GIC.

The principal legislation regulating the insurance business in India is the Insurance Act of
1938. Some other existing legislations in the field are – the Life Insurance Corporation (LIC)
Act, 1956, the Marine Insurance Act, 1963, the General Insurance Business (GIB)
(Nationalization) Act, 1972 and the Insurance Regulatory and Development Authority
(IRDA) Act, 1999. The provisions of the Indian Contract Act, 1872 are applicable to the
contracts of insurance, whether for life or non-life. Similarly, the provisions of the Companies
Act, 1956 are applicable to the companies carrying on insurance business. The subordinate
legislation includes Insurance Rules, 1939 and the Ombudsman Rules, 1998 framed by the
Central Government under Sec.114 of the principal Act as also 32 regulations made by the
IRDA under Sec.114 A of the principal Act and Sec.26 of the IRDA Act 1999.

Malhotra Committee Report:

In the backdrop of new industrial policy, the Government of India set up in 1993 a high-
powered committee headed by Mr. R. N. Malhotra to examine the structure of the insurance
industry, to assess its strength and weaknesses in terms of the objective of providing high
quality services to the public and serving as an effective instrument for mobilization of
financial resources for development, to review the then existing structure of regulation and
supervision of insurance sector and to suggest reforms for strengthening and modernizing
regulatory system in tune with the changing economic environment. The Malhotra
Committee submitted its report in 1994. Some of the major recommendations made by it
were as under: -

(a) the establishment of an independent regulatory authority (akin to Securities and

Exchange Board of India);

(b) allowing private sector to enter the insurance field;

(c) improvement of the commission structure for agents to make it effective instrument for
procuring business especially rural, personal and non-obligatory lines of business;

(d) insurance plans for economically backward sections, appointment of institutional agents;

(e) setting up of an institution of professional surveyors/loss assessors; (f) functioning of

Tariff Advisory Committee (TAC) as a separate statutory body;

(g) investment on the pattern laid down ins.27; (h) marketing of life insurance to relatively
weaker sections of the society and specified proportion of business in rural areas;

(i) provisions for co-operative societies for transacting life insurance business in states;

(j) the requirement of specified proportion of the general business as rural non- traditional
business to be undertaken by the new entrants;

(k) welfare-oriented schemes of general insurance;

(l) technology driven operation of General Insurance Corporation of India (GICI); GIC to
exclusively function as a reinsurer and to cease to be the holding company;

(m) introduction of unlinked pension plans by the insurance companies; and

(n) restructuring of insurance industry.

In conclusion, the history of insurance is a testament to humanity’s ability to innovate and
collaborate in managing risks. From its humble beginnings in ancient times to its complex
global structure today, insurance continues to play a vital role in safeguarding individuals,
businesses, and societies against unforeseen events.
Question: What are the Characteristics of Insurance?

Answer: Nature of Insurance:

 The Insurance is a contract. Thus, all the essentials of contract must be fulfilled.

 The Insurance contract should be based on the subject matter which has an Insurable
Interest in it. Like for vehicle owner his vehicle is an insurable interest because in
case of loss or damage to the said vehicle he/she can suffer financial crises/loss. It can
be compensated through the insurance if he/she insured their vehicle.

 The Insurance is for pure risk. The person can't insure the subject matters in which the
probability of risk is not involved in it. So the contract of Insurance compensates for
loss or damages which an insurer will incur due to such risk.

 The Insurance is based on certain principles. The parties to the Insurance contract
must act in accordance with such principles and in-case of non-compliance the
aggrieved party can proceed in accordance with the due procedure of law or in
accordance with term of insurance contract.

 The nature of Insurance is a medium of sharing risk by a massive number of people

amongst the few who are open to risk by some or other reason.

 If a huge number of insured people serve the purpose of compensation for a few
among them exposed to uncertain risk, this nature of insurance is described as a co-
operative device.

 The amount of compensation in an insurance is predefined according to the terms and

condition of the insurance contract.

 Insurance provides aspects of financial help in case of an uncertain event.

 The payment of compensation in an insurance contract primarily depends on the value

of the insurance policy/contract.

 As insurance is contractual in nature, it is regulated under due procedure of law.

Because of which the amount of insurance can either be paid as a gambling or as
charity, it has to be paid according to the terms and condition of the insurance
contract.
Principles Of Insurance:

 Utmost Good Faith: According to this principle both the parties to the insurance
contract must disclose all the facts required and necessary for a particular insurance
contract.
Ex: The insurance company must disclose all information relating to the insurance
policy to the insured. If on the later stage the insured find out that company does not
disclose any facts, then the insured can cancel the insurance contract any time.
Likewise, the insurer can also do the same for ex: in case of a Health insurance the
insured person has a habit of smoking but he has not disclosed the fact to the insurer.
Meanwhile the insured person got cancer and then he goes to claim the insurance
expenses according to the insurance contract in this scenario according to this
principle the company can reject the claim. Stating that the insured not acted as a
common prudent person and not fully disclosed all facts necessary for Health
insurance contract.

 Proximate Cause: In case the property/building has sustained losses due to an

uncertain event. According to the principle of proximate cause the accident i.e. the
proximate cause shall be taken into consideration by the insurer for giving the claim
for losses occurred to a particular property or building and not events happened in
connection to that particular accident.
Ex: There were two adjacent building in one of the building fire accident took place
and the municipality decided to demolish that building in which fire accident
happened because of which the adjacent building sustained damages. So according to
this principle of proximate cause, for damages to the property is caused by the fire
accident which is covered under the insurance contract and the insured can claim the
same.

 Insurable Interest: According to this principle i.e. insurable interest the particular
subject matter/property to the insurance contract must be an insurable interest which
means a particular person's livelihood is based on such property which is being
insured.
EX: A taxi driver or a person is the single earning member of family and the family is
 wholly dependent on his income. In case of uncertain event the family will suffer
huge damage and financial crises.

o In case of taxi driver- his livelihood is running on the vehicle which is being
used. So the vehicle is the insurable interest.

o In the case were the person is the single earning member of the family. So that
person can get insured of life insurance for himself. Which is an insurable
interest.

 Indemnity:
The insurance contract is based on the principle of indemnity which means the insurer
shall only indemnify for any loss or damage to the insured subject matter or property
which has occurred due to an uncertain event.

EX: In a building fire accident took place. In this case insured can claim damages
under fire insurance contract and can retrieve the building's earlier condition but he
can't claim more than that i.e. he cannot claim under the insurance contract for further
development of building or for decoration or renovation of that particular building.
Basically insured can't claim amount which is not required or not covered under the
insurance policy. He can't get benefit out of the claim amount other than for retrieving
the building.

 Subrogation:
In this type of insurance contract where damage is caused by third party. Then the
insurance company claim compensation from that person's insurance and give it to the
insured. This principle is called as principle of subrogation.

 EX: In a motor vehicle insurance every vehicle should at least have a third party
insurance to compensate injury/loss which may be caused to the third party.

If 'A' hits with a vehicle on B's vehicle, then 'A' has third party insurance and 'B' is
also insured then the insurer shall claim the compensation claim from A's insurance
and give it to 'B' who is insured. So the insurance contract is based on the principle of
subrogation.
  Contribution:
According to the principle of contribution in insurance contract. If a subject
matter/property is insured by from one or more insurer, then in case of loss/injury
occurred the claim for compensation shall be equally contributed by all the insurers
this principle is called as principle of contribution.

EX: If A's vehicle is insured from three different insurances companies, then if that
vehicle met with an accident. The loss/injury caused to the vehicle shall be equally
contributed by the three insurance companies for the claim of compensation this is
known as principle of contribution.

 Loss Minimization:

According to this principle of loss minimization The insured must take all reasonable
and just step to safeguard the subject matter/property to the insurance contract from
damage or loss. He should take appropriate steps to minimize the loss of subject
matter/property in case of occurrence of uncertain event.

EX: In a fire insured building fire accident took place. The insured should take all
appropriate and reasonable steps to minimize the loss to the properties in the building.
He should not standstill thinking that I have insured and I can retrieve the building's
earlier condition and should not act unreasonably. If he has not acted in prudent
manner in that case company will not provide him the compensation or claim for loss.
This principle is called as Loss minimization.

Characteristics of Insurance:

Insurance is characterized by several key features that distinguish it from other financial
products and services. These characteristics include:

1. Risk Transfer: Insurance involves the transfer of risk from an individual or entity (the
insured) to an insurance company (the insurer). In exchange for a premium, the insurer agrees
to compensate the insured for specified losses, such as damage to property, illness, injury, or
death.

2. Pooling of Risks: Insurance operates on the principle of pooling risks among a large group
of policyholders. This spreads the financial impact of individual losses across many
policyholders, making it more manageable for the insurer and reducing the financial burden
on any one insured.

3. Payment of Premiums: Insured individuals or entities pay premiums to the insurer in

exchange for coverage. Premiums are typically paid periodically (e.g., monthly, quarterly,
annually) and are based on factors such as the type of coverage, insured amount, risk profile
of the insured, and the insurer’s underwriting criteria.

4. Legal Contract: An insurance policy is a legal contract between the insured and the
insurer. It specifies the terms and conditions of coverage, including what risks are covered,
exclusions, limitations, deductibles, and the obligations of both parties.

5. Indemnity: Insurance aims to provide indemnity, meaning that the insured should be
restored to the financial position they were in before the loss occurred. This principle helps
prevent the insured from profiting from their loss and promotes the principle of compensation
rather than speculation.

6. Risk Assessment and Underwriting: Insurers assess risks before issuing policies through
a process known as underwriting. This involves evaluating factors such as the insured’s risk
profile, claims history, and other relevant information to determine the appropriate premium
and terms of coverage.

7. Actuarial Science: Insurance pricing and risk management are informed by actuarial
science, which uses statistical methods to analyze past data and predict future risks and
losses. Actuaries play a crucial role in setting premiums and ensuring the financial stability of
insurers.

8. Financial Protection: Insurance provides financial protection against unforeseen events or

losses that could otherwise result in significant financial hardship for individuals, businesses,
or organizations. This protection can include reimbursement for medical expenses, property
damage, liability claims, and more.

9. Regulation: Insurance is subject to regulatory oversight to protect policyholders’ interests,

ensure solvency of insurers, and maintain the stability of the insurance market. Regulatory
requirements vary by jurisdiction but generally include licensing of insurers, financial
reporting, and consumer protection measures.
10. Risk Management Tool: Beyond providing financial compensation for losses, insurance
serves as a risk management tool that allows individuals and businesses to mitigate the
financial impact of uncertain events. It enables them to transfer certain risks to insurers while
focusing on their core activities and objectives.

These characteristics collectively define the nature and function of insurance as a vital
component of modern economies and societies, providing peace of mind and financial
security to individuals and businesses alike.
Question: What is Insurance Contract? Explain.

Answer: Many uncertain events can occur in a person’s life causing damage to his life and
property. This incites a need to protect oneself from the losses incurred from such events.
This is what the concept of insurance is based on.

Section 2(8) of the Insurance Act, 1938, defines an “Insurance Company’ as any company,
association or partnership that can be wound up under the Companies Act, 1956, or the
Indian Partnership Act, 1932. Section 2(9) of the Act defines an ‘insurer’ as any individual,
body of individuals or any corporate body that carries on an insurance business.

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:

1. 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.
 2. 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.

Principles and characteristics of an insurance contract

The following are the fundamental principles and characteristics of an insurance contract :

1. Essentials of a valid contract

An insurance contract is just like any other contract, and hence it has the essentials of a valid
agreement, as per Section 10 of the Indian Contract Act, 1872. The following are the features
of a valid contract:

 Offer and acceptance,

 Competency of parties,
 Free consent,
 Lawful consideration,
 Lawful object.

2. Indemnity contract

Indemnity is one of the main purposes of an insurance contract. Section 124 of the Indian
Contract Act, 1872, has defined indemnity contract as an agreement between two parties
where one party promises to save the other from some loss that would occur to him due to the
conduct of the promisor himself or any other person. But one cannot make a promise to
indemnify another from loss caused to him due to something caused not by a human, like the
Act of God. Thus, the concept of life insurance falls outside the purview of indemnity, as per
the decision in Gajanan Moreshwar v. Moreshwar Madan Mantri.

3. Aleatory contract

An aleatory contract is a type of contingent contract whose performance depends on the

occurrence of an uncertain event, beyond the control of both parties. Such events are usually
natural disasters and deaths. This concept can be seen in many insurance policies and thus,
aleatory contracts are sometimes called aleatory insurance. Under such insurance policies, the
insurer has to pay only when an uncertain event occurs. For example, A and B enter into a
contract where A promises to provide B with financial support if B’s house catches fire. Here,
B’s house catching fire is an uncertain event. The contract can be performed only when B’s
house catches fire and not any time before that.

4. Uberrimae Fidei

Insurance contracts are contracts of uberrimae fidei. The term ‘uberrimae fidei’ means ‘good
faith’. This means that, in a contract of insurance, both the insurer and the insured must be
fully transparent with each other about all the material facts, and not withhold any
information that goes against the interest of the other party.

5. Contract of Adhesion

Insurance policies are normally standardised and fixed. Thus, as the terms of an insurance
policy are not formed with the consent of the insured, the insurer must explain the clauses in
the insurance policy to the insured. The insurer party is at an advantage as the insured does
not get to negotiate on the terms of the contract. The insured must understand all the terms
well and choose the policy that suits his interests the best.

6. Principle of Subrogation

The term subrogation also means substitution, where one party is substituted by another
party, which allows a third party to sue and claim damages on behalf of another. This
principle is used frequently in insurance contracts. It allows the insurer to have all the rights
that the insured has against the third party who caused an insurance loss to the insured. Thus,
after the insured faces losses, the insurance company pays for those losses and then claims
reimbursement from the other party or his insurance company.

7. Insurable Interest

Insurable interest is one of the requisite elements in an insurance contract. A thing is insurable
only if the insured will face pecuniary losses when it is destroyed. Thus, the insured must
have an actual financial interest in the subject matter of the insurance contract.

8. Principle of Contribution

In some instances, an insured may subscribe to multiple insurance policies in respect of the
same subject matter, and it is not forbidden by law. It is also called double or multiple
insurances. In such cases, the insured cannot make more than one claim for the same loss to
make a profit.

9. Reinsurance

In certain situations, the insurer might get the insured property, reinsured by another insurer,
if he fears that an insurance claim above his capacity may arise. It is also called ‘insurance for
insurance’.

10. Principle of Loss Minimization

According to this principle, the insured must take the necessary steps, like any reasonable
prudent man, in taking care of the subject matter of the insurance contract, so that financial
losses to the subject matter are reduced as much as possible.

11. Principle of Proximate Causes

In some instances, an accident may be caused by multiple causes. In such cases, it is the
nearest or the most proximate cause that must be taken into account. The insurer would pay
only for the nearest cause.

As insurance contracts are standardized, 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.