1

Principles: Life and Non-Life

Insurance Contracts

Characteristics of Insurance Contracts

All Valid Contracts
Offer & Acceptance
Consideration
Capacity
Legal Purpose
Insurance Contracts
1. Indemnity
: Insurable Interest, Actual
Cash value, Subrogation
2. Adhesion
:
3. Personal feature :
4. Utmost good faith : Warranty, Representation,
Concealment
5. Aleatory
:

Indemnity: Insurance contract is designed to provide compensation for losses sustained by an

Insured.
The Insured should not make profit from an insurance transaction
Indemnity means that the insured should be in the same financial position after the loss
as before the insured event took place.
The Indian Contract Act 1872, Sec-124 defines Indemnity as a contract by which one
party promises to save the other form loss caused to him by the conduct of the
promisor himself or by the conduct of another person

Castellian V preston (1883) 2 QB 380

Every contract of Insurance, except life insurance is a contract of Indemnity
Facts: A house was insured against the fire. The insured then contracted to sell the
house for a fixed sum, the contract containing no reference to insurance.
After the date of contract, but before the date fixed for compensation, the house was
damaged by fire and the insured received 330 from the insurer as indemnity against the
loss.

Contd.
The sale was afterwards completed, the vendor receiving the full agreed price without
any abetment for the damaged caused.
On learning this, Insurer brought an action to recover back the 330 as the insured had
suffered no real loss.
The insurance company was allowed to recover the amount.
Brett LJ observed:
Every contract of marine or fire insurance is a contract of Indemnity and of indemnity
only,

Contd.
The meaning of which is that the assured is in case of loss is to receive a full indemnity,

The meaning of which is that the assured is in case of loss is to receive a full indemnity,
but is never to receive more.
Every rule of insurance law is adopted in order to carry out this fundamental rule, and if
ever any proposition is brought forward, the effect of which is opposed to this
fundamental rule, it will be found to be wrong
The doctrine of constructive total loss is adopted in Marine Insurance solely in order to
carry out the fundamental rule. This rule is adopted to carry out the fundamental
doctrine and give the assured a full indemnity
7

Contd.
Grafted on that doctrine came the doctrine of abandonment, which is only applicable to
cases of constructive total loss, and is introduced infavour underwriter, so that they may
have to pay no more than an indemnity
These two doctrines were introduced in order to carry out the two limits of the
fundamental doctrine namely,
That the assured shall get a full indemnity &
That he shall get no more

Cond.
Similarly, the doctrine of subrogation has been introduced to carry out the fundamental
rule of indemnity
Explaining this, Brett L.J observed: The doctrine of subrogation was introduced in favour of the underwriters, in order to
prevent their having to pay more than full indemnity, not on the ground that the
underwriters were sureties, for they are not so always, although their rights are some
times similar to those of sureties, but in order to prevent the assured recovering more
than a full indemnity

Contd.
" The doctrine is well established that where something is insured against loss either in
a marine or a fire policy, after the assured has been paid by the insurers for the loss, the
insurers are put into the place of the assured with regard to every right given to him by
the law respecting the subject-matter insured :"
" What is the principle of subrogation ?
On payment, the insurers are entitled to enforce all the remedies, whether in contract
or in tort, which the insured has against third parties, whereby the insured can compel
such third parties to make good the loss insured against."

10

Illustrations
Ex." Where the owner of a building insures, and the building is destroyed by a riot, the
insurers, on payment, are sub-rogated to their right against the hundred.
Ex. Where the landlord insures, and he has a covenant by the tenant to repair, the
insurance office, on payment, in like manner succeeds to the right of the landlord
against the tenant,"

11

Contd.
A is responsible for a collusion with B.
B may sue for damages or he may collect from his own automobile collusion
If B chooses to collect his own insurance, his insurance company will be subrogated to
his right to sue A.
B cannot collect for his loss both from his insurer and from A

B cannot collect for his loss both from his insurer and from A
Subrogation enforces rule of indemnity.
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Exceptions to the rule

1. Life insurance: is one of them. No money value can be placed on human life, there
fore, the insurance undertakes to pay a fixed or guaranteed sum irrespective of the loss
suffered
In Gould v Curtis [1913] 3 KB 84: distinction between indemnity policies and
contingency policies was drawn
The former, as their name implies, are those policies which are intended to indemnify
the insured against a specific measurable loss resulting from an insured peril,
whereas the latter are those which are intended to pay a specified sum of money on the
happening of a given event, irrespective of the loss actually suffered.
The most common example of a contingency policy is a policy of life assurance, though
many personal accident policies are also contingency policies.

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ExceptionsContd.
2. Accident and sickness insurance(Health Insurance policy): In these also the liability is
to pay a fixed without measuring the actual loss suffered
3. The valued insurance policies:
Where the value of the subject-matter and the amount payable in the event of loss are
agreed upon before hand, that case also, though not strictly speaking is not a case of
contract of indemnity.

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Insurable Interest
If an individual could insure property or a life not his or her own, and in which the
individual had no financial interest, insurance contract would become gambling devices.
All individuals are presumed to have an unlimited insurable interest in their own lives
and thus may purchase insurance on their own lives for any amount that an insurer will
sell to him
In the absence of an insurable interest in the life or thing insured, the insurance will
simply be a wager and there fore, void. Thus insurable interest is necessary to the
validity of every insurance policy.

15

Definition
Patterson: Insurable interest is a relation between the insured and the event insured
against, so that the occurrence of the event would result in substantial loss or injury of
some kind to the insured.
Mehr and cammack: In property insurance, insurable interest is any financial interest
based upon some legal right in the preservation of the property. In life insurance an
insurable interest is any reasonable, expectation of financial loss arising from the death
of the person where life is assured.

16

Macaura v Northern Assurance Co. Ltd and others, (1925) AC 619

LORD BUCKMASTER, LORD ATKINSON, LORD SUMNER, LORD WRENBURY AND LORD
PHILLIMORE
Facts: there was a small private company carrying on timber business, created by the
plaintiff Mecaura. He sold the whole timber thereon to a timber company in
consideration of fully paid up shares in the company.
He had also made advances to the company so that the company was heavily indebted
to him.

to him.
He took out a policy of insurance effected in his own name with several insurance
companies he insured the timber against the fire
17

Contd.
Most of the timber having been destroyed by fire,
He sued the insurance companies to recover the loss, but the actions were stayed and
the matter was referred to arbitration in pursuance of the conditions contained in the
policies.
HELD:
(1) THAT the claimant had not either as shareholder or creditor any insurable interest in
the goods;
(2) that the claimant having allowed the point of want of insurable interest to be raised
before the arbitrator without objection, it was not open to him to call in question the
authority of the arbitrator to entertain it.
He stood in no legal or equitable relation to the timber at all. He had no concern in the
subject insured. His relation was to the company, not to its goods.

18

Contd.
Neither a share holder nor a simple creditor of a company has any insurable interest in
any particular asset of the company.
New India Assurance co. Ltd V M/s. TT finance Ltd, AIR 2011 Del 121
The respondent a finance co. entered into a lease agreement with one-Mr.x for a
Matador tempo and there by financed the vehicle.
According to respondent/insured/plaintiff since lease installments were not being paid
by Mr.X, the vehicle was taken back from him and there after given to respondent
No.2(Mr.Y) under hire purchase agreement. The vehicle was involved with an accident
resulting total loss of the vehicle.
The respondent/plaintiff preferred the claim, the appellant/insurer rejected.

19

Contd.
The issues before trial court: 1. whether there was privity of the contract between the defendant(now appellant) and
the plaintiff
2. whether the plaintiff is entitled to any insurable interest in the property as being a
financer under hire purchase agreement(now respondent TT finance ltd)
The trail court held that there was a privity of the contract and insurable interest of the
plaintiff being financer of the agreement.

20

Contd.
The High court held that insurable interest is not complete ownership.
It need not necessarily even strictly be title and interest in the object insured.
Insurable interest qua a vehicle policy is such interest in the subject matter of insurance
where by the insured can seek to recover the monetary claim for any damage or loss to
the insured vehicle.

21

New In In Co.Ltd V B.N. Sainani, AIR 1997 SC 2938

The interest of the insured must exist in the case of marine insurance at the time of loss
and the assured must have some relation or to concern in the subject of the insurance.

and the assured must have some relation or to concern in the subject of the insurance.
The service which the insurer offers is with reference to the goods and insurable interest
has to be in respect of the goods.
To put it in other words insurable interest in property would be such interest as shall
make the loss of the property to cause pecuniary damage to the assured.
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M/s oriental In Co. Ltd v sham Lal matoo, AIR 2006 J&K 103
Insurable interest is not synonymous with legal interest. Thus an interest on an
agreement to purchase is an insurable interest.
A ware house man who has assumed the obligation to insure the goods while in his
possession has an insurable interest.
Even the interest of bailee is sufficient to establish an interest and an unpaid vendor of
goods as an insurable interest in the property.

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Contd.
Similarly, a husband has an insurable interest in his wifes property and a wife in turn has
an insurable interest in the property of her husband.
Landlord may insure his rent which he may lose through the destruction of his premises,
a tenant of premises has an insurable interest founded upon the beneficial enjoyment
of the premises, which he loses in the event of their destruction so also a tenant renting
a furnished house has an insurable interest in the furniture.

24

Gnana sundaram V Vulcan Insurance co. Ltd

Not necessarily be a whole but can be a part:
The suit was filed for recovery of an amount under an insurance policy in respect of the
house, and the objection that was raised by the insurance company was that the
plaintiff is only an agreement holder and since he has no right of ownership and he is
not entitled to claim the amount insured.
It was held that interest need not necessarily be a right to the whole but can be a part.

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Contd.
A person is interested in preservation of thing and such interest can be insured and he
can recover only to that extent to which the insurable interest is damaged by the loss
and not the amount insured as such.
Wilson V Jones
A person can be said to have insurable interest in the subject matter insured where he
has a relation or connection with or concern in, such property that ha: (i) will derive pecuniary benefit or advantage from its preservation or
(ii) will suffer pecuniary loss or damage from its destruction, termination or injury by the
happening of the event insured against.

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Kinds of insurable interest

(a) Contractual and
(b) Statutory
Contractual: Contract of insurance in general term is a indemnity contract, unless there
is a some proprietary interest which is sought to be covered by the policy, there is no
loss suffered and in such type therefore the contract by its very nature requires some
interest to be involved in the subject matter and this is called contractual interest.
Statutory: the interest required under various legislations.

Statutory: the interest required under various legislations.

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Contd.
Ex: The life Assurance Act, 1774 was passed making insurable interest a statutory
requirement
Sec-5 of The marine insurance Act 1906
Sec-7 of the Indian Marine Insurance Act 1963
Insurance Act 1938 does not defines
Time and duration of Insurable interest: Life-the presence of insurable interest is necessary at the commencement of the policy
although it is not necessary afterwards, not even at the time of occurrence of the risk

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Cond.
Non-life: u/s.8 of the Marine Insurance Act 1963
(1) The assured must be interested in the subject matter insured at the time of loss.
Though he need not be interested when the insurance is effected.
Provided that, where the subject matter is insured lost or not lost the assured may
recover although he may not have acquired his interest after the loss, unless at the time
of effecting the contract of insurance the assured was aware of the loss, and the insurer
was not.

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Cond.
(2) where the assured has no interest at the time of the loss, he can not acquire interest
by any act or election after he is aware of the loss
In case of fire and motor insurance it must exists both at the time of formation of
contract as well as at the time of loss.( national Insurance Co V LIC Dhamin, 1995 CPJ 14,
chandmal Jain V General Insurance society, AIR 1959 cal 558)
Co-sharer of the property: insurable interest
United India Insurance Co. Ltd V Parmeshwari sawney, AIR 2010 J&K 138

30

Contd.
The court held that is is equally settled that a person having partial interest in the
property is entitled to ensure to the extent of full value of the property rather than to
the extent of his actual interest. It is also not necessary that all the co-shares should
become a party to the insurance policy.
Once the insurance company receives premium for the whole property from the
insured, it makes itself liable to indemnify the loss to the property and not the extent of
share of the co-sharer who steps forward to insure the property. One or more co-sharer
may obtain the insurance policy not necessarily restricted to their share in the building
and may obtain an policy for whole.

31

Contd.
Actual cash value-exception: A second method of preventing an insured from profiting from insurance is to limit
recovering to the actual cash value of the property at the time of loss
Actual cash value is fair market value. This serves to prevent an insured from profiting

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Actual cash value is fair market value. This serves to prevent an insured from profiting
ACV = Replacement Cost - Applicable Depreciation
Calculation of the actual cash value can be illustrated with an example. Assume an
insured purchased an asset that cost $600 and insured the asset on an actual cash value
basis. The asset was later destroyed by an insured peril. The asset was 40 percent
depreciated at the time of the loss. However, the cost to replace the asset had increased
to $700 when the loss occurred. Using the above equation, the insurer would be liable
for:
Actual Cash Value = $700 - (40%) x ($700)
Actual Cash Value = $420

Contd.
Contract of Adhesion: For a contract to be treated as a contract of adhesion, it must be presented on a
standard form on a take it or leave it basis and give the purchaser no ability to
negotiate because of their unequal bargaining position
Usually consumers cannot bargain with the insurer about the wording of the contract.
They may accept the contract unaltered or they may reject it.
Because of unequal knowledge and unequal bargaining power, any ambiguities found
in insurance contracts are construed in favour of the insured and against the insurer.
Ex. Water damage is excluded from coverage
Water damage may include: flood, waves, tidal water, overflow of streams etc.

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Utmost good faith(uberrima fides)

Most abundant faith
It is the name of the legal doctrine, which governs insurance contracts. This means that
all parties to an insurance contract must deal in good faith, making a full declaration of
all material facts in the insurance proposal.
A person buying insurance is held to the highest standard of honesty in dealings with
the insurer. A lessor level of truthfulness is the insurers right to avoid the contract.

34

LIC V GM channnabasamma, AIR 1991 SC 392

S.C held that there must be complete good faith on the part of the insured. The insurer
as well as insured both are under duty to make disclose of all material facts within their
knowledge which the other does not know or is not deemed to know prior to the
conclusion of the contract.
A failure to disclose, however innocent entitles the other party to avoid the contract and
such avoidance will take effect ab initio as if no contract has been formed. But such
evidence must be taken within a reasonable time of becoming aware of the nondisclosure

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Contd.
A concealment of fact may also have same effect subject to the provisions of Indian
Contract Act.
Since insurance is also a contract therefore, consent of either party may not be caused
by coercion, undue influence, fraud and misrepresentation.
Where it is so caused, contract would be avoidable at the option of such party where
consent has been so caused.

consent has been so caused.

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Cond.
Carten V Boehm : Lord mansfield as a father of the English Commercial and Insurance
law: Insurance law is a contract upon speculation. The special facts upon which the
contingent chance is to be computed lie more commonly in the knowledge of the
insured only; the underwriter trusts to the insureds representation and proceeds upon
confidence that he does not keep back any circumstances in his knowledge to mislead
the underwriter into a belief that the circumstance does not exist, and to induce him to
estimate the risk as if it did not exist.

37

Contd.
The keeping back of such circumstances is a fraud and therefore, the policy is void.
Although the suppression should happen through mistake without any fraudulent
intention, yet the underwriter is deceived and the policy is void; because the risk run is
really different from the risk understood and intended to be run at the time of the
agreement.

38

Contd.
Life Insurance Corp. Of India V Asha Goel, AIR 2001 SC 601
It was held that the contracts of insurance are contracts uberrima fides and every fact of
material must be disclosed otherwise, there is good ground for recession of the
contract. The duty to disclose material facts continues right up to the conclusion of the
contract.

39

Contd.
If the material facts listed in the insurance application is false or was not revealed, then
the insurance company will be able, in most cases, to avoid the contract and deny the
payment of any claims.
Three components: 1. Warranty: A warranty in insurance terminology is a promise by the insurance
applicant to do certain things or to satisfy certain requirements or it is a statement of
fact that is attested by the insurance applicant.

40

Contd.
If the insured breaches the warranty, the insurer can void the contract and deny
payment of a claim.
The traditional doctrine of warranty, which has its origin in ocean marine insurance, is
very strict: any breach of warranty by an insured will allow the insurer to void the
contract.
Ex: A ship owner might warrant his ship to be in seaworthy condition (Affirmative
warranty) and will sail from new work to Amsterdam carrying a glass ware (promissory
warranty)

41

Contd.
Suppose if the ship were leaking, if the destination were Hong Kong or if the cargo were
liquor
Any one of these deviations from what was warranted would constitute a breach of
warranty
The law relating to good faith requirement is contained in the Marine Insurance Acts
S-17 of M.I Act 1906 and S-19 of the M.I Act 1963(india) says that, A contract of marine

S-17 of M.I Act 1906 and S-19 of the M.I Act 1963(india) says that, A contract of marine
insurance is a contract based upon the utmost good faith, and if the utmost good faith
is not observed by either party, the contract may be avoided by the other party.
42

Contd.
Bank of Nova Scotia V Hellenic Mutual War Risks Association (1990) 1 Q.B 818:
It was held that a breach of warranty in a marine insurance policy automatically
discharged the insurer from liability, in accordance with the literal meaning of the words
in sec.33(3) of the M.I Act, 1906.
If the warranty be not exactly complied with, then subject to any express provision in
the policy, the insurer is discharged from liability as from the breach of warranty, but
without prejudice to any liability incurred by him before that date.

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Contd.
2. Representations:
Before a consumer completes the purchase of insurance, he or she will be asked certain
questions by the insurer. The answers supplied to the insurer, usually in a formal
application are called representations.
The general rule with respect to the representations is that, if the consumer gives false
answers and the answers are material to the risk, the insurer can void the contract.

44

Contd.
3. concealment: Concealment is closely related to misrepresentation- It is the failure to disclose material
information.
Concealment is silence when obligated to speak.
Non-disclosure is a negative omission of a positive duty
Concealment involves a positive breach of negative duty

45

Srinivas pillai V L.I.C,AIR 1977 Mad 381

Facts: Srinivas pillai and his wife Ranganayagi took out a joint life endowment policy
Rs.25000/ Commencing on 31st dec, 1959 at pondicherry. They gave the usual statements and
joint declarations.
In answer to the question in column No. 12(8) relating to the date of last delivery.
Ranganayagi stated that she had delivered a female child on 18th May 1959, but in fact
she delivered on 31st Aug, 1959.

46

Contd.
There is a rule of LIC that not to issue a policy to a female, when she is pregnant or
within six months after delivery.
After taking the policy, the wife fell ill and was admitted in a hospital on 10th Jan 1960
and died on 17th Jan 1960
the husband filed a case
LIC repudiated a claim on the ground that she delivered her last child within 6 months
before the policy and that she was also suffering from tuberculosis.

47

Contd.
LIC failed to prove that she had TB, but the other ground was established that the
insured had knowingly falsely stated the date of her last delivery in order to obtain the
policy, the court upheld the repudiation and dismissed the claim.

policy, the court upheld the repudiation and dismissed the claim.
The court observed that,
Contracts of insurance are based on the rocky foundation of utmost good faith. Such
good faith is not a matter of art but has to be really and sincerely appreciated by the
insured who proposes their lives for insurance with the corporation.
48

Principle of Contribution
North British and Merchutile V Liverpool and London Glob: It was held that the
contribution exists where the thing is done by the same person against the same loss,
and to prevent a man first of all
(1) recovering more than the whole loss or
(2) if he recovers the whole loss from one which he could have recovered from the
other, then to make the parties contribute rateably

49

Contd.
Principle of contribution has application where there is the person insuring the same
interests with more than one office. The genesis of contribution lies in liberty of the
assured to insure the same property with more than one insurer which is called double
insurer.
Contribution in relation to the insurance has been defined as:
Contribution is the right of an insurer who has paid a loss under a policy, to recover a
proportionate amount from other insurer who are liable for the loss

50

Contd.

51

Conditions for contribution:1. all the insurance must relate to the same subject matter
2. the insured must be the same individual
3. the insurance must of the same interest
4. the policies concerned must all cover the same peril which caused the loss
5. all policies must be in operation at the time of loss
6. the insurable interest must be the same for all policies
7. all the policies should be legally enforceable

Contd.
8. this principle is applicable in indemnity insurance insurance only
9. This principle does not applicable to life and personal accident policies
10. the insured who has paid first in full, the assured can claim contribution from other
co-insurers.
Calculation of contribution: Contribution(c)= Sum assured with each insurer/Total sum Assured x Loss

52

Contd.
Ex. A insures a building against fire with A, B and c insurer with Rs. 10000, Rs.20000 and
Rs.10000 respectively. A fire takes place during the period of policies and total loss is
Rs.30000.
The contribution from A, B and C will be as under: As Contribution= 10000x30000/40000=7500
Bs contribution= 20000x30000/40000=15000
Cs Contribution= 10000x30000/40000=7500

53

The Aleatory feature

10

 An Aleatory contract is a contract in which the performance of one or both parties is

contingent upon the occurrence of particular event
That in insurance contracts, the parties to the contract know in advance that the
amount they will exchange will be unequal.
The insured pays a relatively small premium and may collect a relatively large sum if a
large loss occurs or he may collect nothing if there is no loss. Thus there is speculation
and it is called as Aleatory feature.

54

Life Insurance Contracts: formalities

Offer and Acceptance: An offer to enter into an insurance contract may be made by a
prospective insured or by an insurer.
At the initial stage, it will in practice made by the proposed insured.
The insurer may simply accept the offer made or may accept it with qualifications, in
which case the acceptance may in law amounts to counter offer.(An alternative view
could be that the completion of the proposal form by the insured is an invitation to
treat, the insurer makes the offer of insurance and the insured accepts by paying the
premium)

55

Contd.
Counter-offer: It may be noted that the insurer does not simply accept the proposers
offer, but states that acceptance is subject to payment of the first premium or fulfilling
certain conditions. It is clear that in law this generally amounts to counter-offer. So there
is no binding contract until the premium is in fact paid or fulfilling certain conditions.
As a matter of general principle, until this act of acceptance, either party should be free
to withdraw
However, the law appears to be that the insurers act constitutes a counter-offer which
the proposer may decline to accept but which the insurer cannot revoke, unless there is
a change in the risk involved between the original offer and the insureds acceptance by
payment of the premium.
In other words, the insurer is bound by its counter-offer so long as the risk remains the
same..If the risk changes, the tender of the premium by the insured constitutes a new
offer that the insurer is at liberty to reject it.

56

Contd.
On-line Insurance Contract:
The insured could be regarded as making an invitation to treat rather than an offer
when filling out an on-line proposal form. The insurer would make the offer by quoting
the premium and inviting the insured to accept it, and the insured would accept by
clicking the appropriate button. Assuming for the present that there appears to have
been an offer and an unqualified acceptance of that offer
Canning V farquhar (1886) 16 QBD 727
A proposal for life insurance was accepted on Dec-14 on the terms that:-

57

Contd.
no insurance is to take effect until the first premium was paid, the premium was
tendered on Jan-9, but four days previously the proposer had fallen and suffered

11

tendered on Jan-9, but four days previously the proposer had fallen and suffered
serious injuries from which he subsequently died.
The court of appeal ruled that the insurer was not bound to pay: Change in the risk:
(1) If there is any material changes in the risk between the date of proposal and date of
conclusion of the contract, then it must be disclosed to the insurer in accordance with
the general duty of the disclosure

58

Contd.
Failure to do so renders the contract voidable at the option of the insurer.
But if the insurer accepts the insureds offer unconditionally, he is there upon bound to
pay, even if the contract provides that the risk will not run until the premium is paid.
(2) the proposal and intimation of its acceptance merely amounted to preliminary
expression of mutual willingness to enter into a contract and could not amount to
acceptance.

59

Contd.
(2) the so called acceptance letter was in reality a counter offer, which cannot be
considered to have force after the risk has been changed and that
(3) it was an implied condition that the risk should be the same, when the contract is
concluded
LIC V Komalavalli (1984) 2 SCC 719
Rajareddy sent a proposal for insurance of Rs.50000 on his wife on 27-12-1960 and
report of his medical examiner and two cheques towards first premium.

60

Contd.
The cheques were encashed on 29-12-1960 and 11-01-1961
He died on 12-01-1961 and his widow claimed the sum assured by the policy.
The DM of Masulipatam said the proposal was not yet accepted. Acc. To financial
powers standing order 1960 the DM was the competent authority to underwrite the
proposal for Rs. 50000 and above and he had not ordered acceptance of the proposal

61

Contd.
High court held in favour of the Komalavalli
LIC appealed against the order of the High court.
SC dismissed the claim holding that the mere receipt and retention of the premium until
after the death of the applicant or mere preparation of the policy document is not an
acceptance. Acceptance must be signified by some act or acts agreed on by the parties
or from which the law raises a presumption of accetance.
LIC V Brazinha (AIR 1995 Bom 223)
The LIC received a proposal for insurance policy along with the necessary documents
and premium amount. The amount was acknowledged and kept in suspense for
completion of scrutiny of the papers before a decision to accept the proposal

62

Contd.
In the meantime the proposer died and his wife made a claim for the sum assured.
LIC rejected the claim on the ground that mere acceptance of the amount and issuance

12

LIC rejected the claim on the ground that mere acceptance of the amount and issuance
of receipt does not amount to acceptance of the proposal.
Elsa Tony Philip V LIC, AIR 2009 NCC 785
The court held that mere acceptance of cheque and encashment thereof is not sufficient
for formation of contract where insurance company has neither signified acceptance
offer not issued insurance policy.
63

Commencement of risk:
Whichever is later:-The risk under the corporation policies commences on the date of
receipt of the premium in full or the date of acceptance, whichever is later.
If the acceptance of a proposal is conditional upon the proposers compliance with any
requirements, then the risk under the policy will commence on the date on which all
requirements are satisfactorily complied with or on the date of receipt of the first
premium paid in full, whichever is the later

64

Back dating policies & risk

Normally policies can be backdated, if desired, within the financial year for a period not
exceeding three months without any extra charge
Benefits: He shall get income tax benefits of the whole premium paid in a particular financial year
etc
If it is so when the risk will commence in case of back dating policies?

65

LIC Vs Dharm vir anand (1998) 7 SCC 348

66

The policy was taken on 25-03-1990

The policy was issued from 31-03-1990
It was back dated from 10-05-1989
There was a clause in the policy, namely clause 4B which provided:Notwithstanding and agree that in the event of the death of life assured occurring as a
result of intentional self injury, suicide or attempting to suicide.on or after the date on
which the risk under the policy has commenced, but before the expiry of the three years
from the date of this policy, the corporations liability shall be limited to the sum equal
to the total amount of premiums paid under the policy without interest

Contd.
The assured committed suicide on 15-11-1992. the claim was repudiated on the ground
that the suicide had taken place within three years from the date of issue of policy ie, on
31-03-1990.
Arguments of behalf of the petitioner: It was admitted that the back dating the policy was permissible under the law
The acceptance of the proposal was conveyed on 31-03-1990 but one of the terms of
contract was that the same should be given effect from a back date i.e, on 10-05-1989

67

Contd.
On the completion of the contract all terms of the contract including the term for giving
the back date effect came into force and the contract must be deemed to have come
into force on 10-05-1989
Hence, suicide was not within three years from the date of policy.

13

Hence, suicide was not within three years from the date of policy.
This view was upheld by the state commission also by the National commission
The corporation then preferred an appeal to the supreme court the S.C observed:68

Contd.
Undoubtedly the date on which the risk under the policy had commenced on 10-051989 but the date of policy is on 31-03-1990, on which date of policy has been issued.
The risk under the policy can be said to be have commenced with effect from 10-051989 but the date of the policy still remains the date on which the policy was issued or
the date of acceptance or date of conclusion of concluded i.e, 31-03-1990.
The death of the life assured having occurred as a result of the suicide committed by
the assured before the expiry of three years from the date of the policy, i.e, the terms
contained in clause 4B of the policy would be attracted.

69

Contd.
There fore the liability arises would be limited to the sum equal to the total amount of
premium paid under the policy without interest and not the entire sum for which the life
had been insured.
LIC Vs. Mani Ram (2005) 6SCC 274
The policy was taken on 21-08-1995
The policy effected from the back date i.e., from 28-04-1995
The date of next premium was due on 28-04-1996

70

Contd.
If grace period one month is included the next premium was payable by 28-04-1996
The insured died in an accident on 02-08-1996
The claim was repudiated as the premium was not paid even within the grace period
and the policy was lapsed.
The contention of the complaint, however was that since the policy was effected on 2108-1995, the next premium was due on 21-08-1996, if grace period would have been
taken into consideration, this date would be 21-09-1996.

71

Contd.
The district forum observed that no doubt the policy was back dated but since the
premium was paid on 21-08-1995, the next premium was payable by 21-08-1996 and as
the insured died within the grace period, the LIC was liable to pay.
The state and National commission also of the same view.
The matter reached the SC, where the decision of Dharam vir anands case was referred
by the insurance company.

72

Contd.
The question was weather on 02-08-1996 (the date when the insured died) the policy
could be said to be valid and subsisting
The court referred to condition-2 of the policy that provided that, if the premium is not
paid before the expiry of the days of grace, the policy would lapse.
The court observed that, the contention of the insurance company was right in
submitting that one year came to an end on 28-04-1996 and the insured was liable to
pay the premium on the date as it became due.

73

Cont.

14

 Taking into account of grace period of one month, the premium amount ought to have
been paid latest by 28-05-1996. Admittedly no premium was paid up to the aforesaid
dates. Thus it was concluded that the policy had lapsed.

74

Contd.
LIC V sudha Jain, (2005) 2 CPJ 235:
The insured had two double benefit policies including insurance for life and accident
benefit. He met with an accident on 2-10-1993 and died on 8-2-1994.
The insurance company claim was paid by the LIC but accident benefit was denied on
the ground that the insured died after 120 days of accident.
The evidence showed that the insured was in coma for 130 days.

75

Contd.
The reliance was mainly placed on clause 10(b) of the policy: the insurance company will pay an additional sum equal to the assured under the
policy, if the life assured sustain any bodily injury resulting solely and directly from the
accident caused by outward, violent and visible means and such injury causes death of
the insured within 90 days of the occurrence
The insurance company itself had waived this clause of policy because in the written
version it was alleged that the period of 90 days had been extended to 120 days after
15-9-1989

76

Contd.
Thus the commission observed, what was the contract between the parties was the
terms of the policy, and any outside direction was not a term of the policy and
according to the own admission of Insurance company, this term of the policy had been
waived and had been extended to 120 days.
The commission further observed that if by separate notification or direction, the period
of 90 days could be extended to 120 days, it could be extended to 130 days. The victim
had gone into coma and if it was his mistake that he died within 130 days the
complainant could not be blamed for that. In suitable cases this period of remaining
into coma can be excluded

77

Insurable Interest
(1) In every contract of insurance, the insured or the person for whose benefit the
insurance was effected must have an interest in the subject matter.
(ii) The person for whose benefit the policy was effected shall not recover more than the
value of such insurable interest, and
(iii) every policy shall contain the name of the person interested or for whose benefit
the policy was taken
In life policies, having relationship by marriage, blood or adoption by contractual
relationship and by statutory duty have been recognized as having insurable interest.

78

Contd.
In life policies, the following persons have been recognized having insurable interest: (a) relationship by marriage, blood or adoption
(b) relationship by contract

15

79

Contd.

80

(b) relationship by contract

(c) relationship by recognized under statutes
Above relation exists between the following:Husband and wife
Parent and child
Creditors or debtor to the extent of debts
Surety and principal debtor

Partners of a partnership in the lives of co-partner

Employers and employees
Landlord and tenants
Share holders and company
Master and servants
Principal and Agents
Trustee and to trustee
(i) Husband and wife:(ii) Parents and children:-A Hindu is under a legal obligation to maintain his parents.

Contd.
Sec-20 of HA and M Act gives statutory to the legal obligation.
The parents have, therefore, a right to maintenance subject to their agreed
However, the pecuniary interest is must, unless the parent is unable to maintain himself
or herself
Therefore parent cannot have insurable interest in the life of a child until the right to
maintenance arises
Employers and employees:-An employer can create insurable interest in the lives of his
employees by undertaking to provide monetary benefit to the family or estate of the
employees in the event of death.
Group insurance effected by companies on the lives of their employees are on the basis
of insurable interest.

81

Contd.
Creditor and debtor: A creditor has insurable interest in the life of his debtor up to the
amount of the debt
However this may not be satisfactory basis; for in the event of death of the debtor after
the debt has been repaid, the creditors would still be entitled to the policy moneys and
thus can be in a position to gain by the death of the debtor once the loan is repaid.
The better arrangement would be for the debtor to take out a policy for the required
amount and mortgage the policy to the creditor. The creditor than cannot take under
the policy anything in excess of his dues

82

Contd.
A partner has insurable interest in the life of his co-partner to the extent of the capital
to be brought in by the latter.
A surety has insurable interest in the life of his co-surety to the extent of the proportion
of his debt and also in the life of his principal debtor
As a life insurance contract is not one of indemnity, the existence of insurable interest
and the amount thereof will have to be considered at the time of effecting the contract
since the lack such interest would render the contract void.

16

since the lack such interest would render the contract void.
83

Human life value concept

Human life value concept propounded by s.s Huebner of wharton school of finance and
Management, U.S.A has been increasingly accepted for measuring the quantum of life
insurance.
The head of the family has to provide for the social and economic, start-in-life, marriage
or to maintain a standard of living appropriate to the status of the family
The net value of all these contributions in other words the Human Life Value(HLV)
though longevity is variable and differs from person to person.

84

Representation and warranty

New India Assurance Co. Ltd V Tambi reddi and Sibhas Raghava reddi (1961 AP 295)
The practice in this country is to issue the policy on the understanding that the
statements made in the proposal are true.
The contract is based on the warranty that the answers given by the proposer to the
questions in the are true so that it will not be necessary for the insurer to show whether
the matter warranted is or is not material to the risk.

85

Contd.
Now, the aim of all life insurance is to make provision agaisnt the dangers which beset
human life. The subject matter of contract of life assurance is a human being who,
according to the law of nature, is bound to die some time or other. It is a most natural
event but is uncertain as to the point of time at which it will happen,
Every man must face the risk of death although there are various facts contributing to
its happening sooner or later, the circumstances in which he is placed, habits, the
mode of life, his age, occupation and the host of other circustance

86

Non-disclosure and misrepresention.

45. No policy of life insurance effected before the commencement of this Act shall after
the expiry of two years from the date of commencement of this Act and no policy of life
insurance effected after the coming into force of this Act shall, after the expiry of two
years from the date on which it was effected be called in question by an insurer on the
ground that statement made in the proposal or in any report of a medical officer, or
referee, or friend of the insured, or in any other document leading to the issue of the
policy, was inaccurate or false,
unless the insurer shows that such statement was on a material matter or suppressed
facts which it was material to disclose and that it was fraudulently made by the policyholder and that the policy-holder knew at the time of making it that the statement was
false or that it suppressed facts which it was material to disclose:

87

Contd.
Provided that nothing in this section shall prevent the insurer from calling for proof of
age at any time if he is entitled to do so, and no policy shall be deemed to be called in
question merely because the terms of the policy are adjusted on subsequent proof that
the age of the life insured was incorrectly stated in the proposal.
Interpretation of the clause: Section 45 places restrictions on the right of the insurer to repudiate his liability under
the policy.
This section provides that a life insurance policy cannot be called in question after the

17

This section provides that a life insurance policy cannot be called in question after the
expiry of two years from the date on which it was effected on the ground of misstatement in the policy unless it is shown that all the three conditions enumerated in
second part of s.45 are satisfied,

88

three conditions
(i) the statement must be on a material fact,
(ii) there has been suppression of the material fact which it was material to disclose or
the facts have been fraudulently made by the policy holder,
(iii) the policy holder must have known at the time of making the statement that it was
false or that it suppressed facts which it was material.

89

Contd.
The section was enacted to prevent immense loss and hardships caused to the insured
and his legal representatives because the insurers avoided contract of life insurance
policy due to incorrect statements whether material or not made by the insured even
after the policy had been in force for several years and all the premium paid were
forfeited in that case by the insurer.
Thus the provision in effect mitigated the rule of uberrima fides, i.e., utmost good faith.
The life insurance contracts are basically governed by this rule and obligation to deal
fairly and honestly is upon both the parties equally.

90

Contd.
The provisions of this section does not affect the insurers right for a period of two years
from the date of the policy, but thereafter, no policy can be challenged on the ground
that mis-statement made in the proposal or in any report of the medical officer was
inaccurate or false unless it was material to disclose and it was fraudulently made.
However, the provisions of this section do not confirm any right on the insurer to
repudiate a policy which has been in force for less than two years on the grounds as
stated above irrespective of its materiality.

91

Contd.
In the past, problems have arisen with misrepresentation or non-disclosure whenever
personal characteristics are collected by insurance agents for risk classification.
The legal questions involving this characteristic usually center on the disclosure of
material information by the insured. In this context, the issue is when would failure to
make such a disclosure render the contract void or voidable.

92

Contd.
There have been several judgments of the Honble Supreme Court in this regard which
have underscored the importance of the burden of proof shifting to the insurer after the
expiry of two years after the effective date of the policy, if the insurer seeks to repudiate
the claim on the basis of fraud or suppression of facts which were material be disclosed.
(For e.g., Mithoolal Nayak v. Life Insurance Corporation of India, AIR 1962 SC 814 and
Life Insurance Corporation of India v. Smt. G.M. Channabasamma, (1991) 1 SCC 357).

93

Mithoolal Nayak v. LIC

Insurance-Life Policy-Obtained, by deliberate mis-statement and fraudulent
suppression- Repudiation, by Company after two years-Whether proper-Refund of
money paid as premium-Insurance Act, 1938 (4 of 1938) s. 45

18

money paid as premium-Insurance Act, 1938 (4 of 1938) s. 45

In 1942, one M sent a proposal for the insurance of his life. He was examined by Dr. D
who submitted two reports, one with the proposal form and one confidential. The
confidential report showed that M was anaemic, had a dilated heart and his right lung
showed indications of an old attack of pneumonia or pleurisy and that he was a total
physical wreck. Nothing came out of this proposal and it lapsed. In 1943, M consulted
and was treated by one Dr. L for anaemia oedema of the feet, diarrhoea and panting on
exertion.
94

Contd.
In 1944, M made a second proposal for insurance of his life. Against the question in the
proposal form whether he had consulted any medical man for any ailment within the
last five years, he gave the answer, "No'.
He also did not disclose any of his ailments. After medical examination by one Dr. K the
proposal was accepted and a policy for Rs. 25,000/- was issued on March 13, 1945. The
policy lapsed for non-payment of premium but was revived in July, 1946.
In November, 1946, M died. His assignee, the appellant, made a demand for Rs.
26,000/-but the Company on October 10, 1947, repudiated it on the ground that the
policy had been obtained by deliberate mis-statement and fraudulent suppression of
material facts.

95

Contd.
Held, that the policy-holder was guilty of fraudulent suppression of material facts
relating to his health and the Company was entitled to avoid the contract.
Section 45 Insurance Act applied to the case as two years had lapsed since the policy
was effected; in view of the language of s.45 the two years could not be counted from
the date of the revival of the policy. The second part of s. 45 entitled the company to
repudiate the contract even after the expiry of two years if three conditions were
fulfilled viz.
(a) the statement was on a material matter or there was suppression of facts which it
was material to disclose;
(b) the suppression was fraudulently made by the policy-holder, and
(c) the policy-holder must have known at the time of the making of the statement that it
was false or that it suppressed facts which it was material to disclose.

96

Contd.
When M was treated in 1943 by Dr. L he was suffering from serious ailments.
He must have known that it was material to disclose this but made a false statement
that he had not been treated by any doctor for any serious ailment. There was
deliberate suppression fraudulently made by M.
Even though the Company had got M examined by four doctors before issuing the
policy, it was not estopped from questioning the policy. It had no means of knowing
that M had been treated by Dr. L for serious ailments.

97

Contd.
Held, further, that the appellant was not entitled even to a refund of the money paid as
premium as one of the terms of the policy was that all monies paid belonged to the
company if the policy was vitiated by fraudulent suppression of material facts

19

98

LIC V Smt. G.M. Channabasamma

It is well settled that a contract of insurance is contract uberrima fides and there must
be complete good faith on the part of the assured. The assured is thus under a solemn
obligation to make full disclosure of material facts which may be relevant for the insurer
to take into account while deciding whether the proposal should be accepted or not.
While making a disclosure of the relevant facts, the duty of the insured to state them
correctly cannot be diluted. Section 45 of the Act has made special provisions for a life
insurance policy if it is called in question by the insurer after the expiry of two years
from the date on which it was effected.

99

Life Insurance Corporation Of ... vs Smt.Asha Goel & Anr

Brief facts: Late Naval Kishore Goel, husband of Smt. Asha Goel respondent No.1, was an
employee of M/s Digvijay Woollen Mills Limited at Jamnagar as a Labour Officer. He
submitted a proposal for a life insurance policy at Meerut in the State of U.P. on 29th
May, 1979 which was accepted and the policy bearing No.48264637 for a sum of
Rs.1,00,000 (Rs. One lakh) was issued by the Corporation in his favour. The insured
passed away on 12th December, 1980 at the age of 46 leaving behind his wife, a
daughter and a son.
The cause of death was certified as acute Myocardial Infarction and Cardiac arrest. The
respondent No.1 being nominee of the deceased under the policy informed the
Divisional Manager, Meerut City, about the death of her husband, submitted the claim
along with other papers as instructed by the Divisional Manager and requested for
consideration of her claim and for making payment. The Divisional Manager by his
letter dated 8th June, 1981 repudiated any liability under the policy and refused to
make any payment on the ground

100

Contd.
that the deceased had withheld correct information regarding his health at the time of
effecting the insurance with the Corporation.
The Divisional Manager drew the attention of the claimant that at the time of
submitting the proposal for insurance on May 29, 1979, the deceased had stated his
usual state of health as good; that he had not consulted a medical practitioner within
the last five years for any ailment requiring treatment for more than a week; and had
answered the question if remained absent from place of your work on ground of health
during the last five years in the negative.
According to the Divisional Manager, the answers given by the deceased as
aforementioned were false.

101

Contd.
Writ petition: Since the respondent no.1 failed to get any relief from the authorities of
the Corporation despite best efforts she filed the writ petition seeking a writ of
mandamus directing the Corporation and its officers to pay the sum assured and other
accruing benefits with interest
The writ petition was opposed by the Corporation on the ground of maintainability.
Alternatively the contention was raised that in case the High Court is inclined to
entertain the writ petition then opportunity should be given to the Corporation to lead
evidence in support of its plea of repudiation of the claim.
The learned single Judge after examining the question of maintainability of the writ
petition from different angles, held that in view of the provisions of the Life Insurance

20

petition from different angles, held that in view of the provisions of the Life Insurance
Corporation Act, 1956 and the relevant provisions of the Insurance Act, 1928 which are
applicable to the Corporation liability of the Corporation under a policy of life insurance
is a statutory liability and hence a writ petition can lie under Article 226 of the
Constitution.
The learned Judge also considering the question on the assumption that the liability of
the Corporation under the policy is not a statutory liability but a contractual liability,
held that even then a writ petition under Article 226 of the Constitution can lie against
the Corporation for enforcement of such liability. On these findings the learned single
Judge rejected the objection of the Corporation against maintainability of the writ
petition
102

Contd.
The learned Judge did not feel satisfied that this is a fit case in which the Corporation
should be granted liberty to lead evidence before the High Court. Examining the matter
on merits the learned single Judge referred to the provisions of section 45 of the
Insurance Act, 1938 which imposes certain restrictions on the scope of repudiation of a
claim by the insurer and held that the Corporation has not brought on record
satisfactory evidence to establish any of the conditions envisaged in the second part of
section 45.
The learned Judge refused to draw a conclusion that the deceased was having heart
ailment in 1976 for which he had taken 13 days sick leave and held that much
importance cannot be attached to the leave records in the matter. On such findings, the
learned Single Judge rejected the case of the Corporation on merit. The operative
portion of the judgment reads as follows:
In the result, the Life Insurance Corporation of India and the Respondent No.3 are
hereby directed to pay to the petitioner an amount of Rs.1,00,000/- (One Lakh) arising
out of Life Insurance Policy of her husband deceased Naval Kishore Goel, bearing
No.48264637, together with all the benefits accruing there from with interest at the rate
of 15% from the date of the death of the petitioners husband within a month. The LIC is
also directed to pay cost of Rs.2,000/- to the petitioner.

103

Contd.
The Corporation carried the matter to division bench
The Division Bench was of the opinion that it is not possible to accept the submission
that relief against the Corporation can never be granted to a policy holder or a person
entitled to benefit of the policy under the writ jurisdiction.
The Division Bench found justification in the grievance raised on behalf of the
Corporation that if the writ court felt that it had the jurisdiction to grant relief to the
petitioner then it committed error in rejecting the application made by the Corporation
for leading evidence and denial of such opportunity would vitiate the judgment.

104

Contd.
Then the Division Bench scrutinized the materials produced by the parties before the
Court, perused the original documents, particularly the medical certificates produced by
both the parties the Court was of the opinion that the original records of the hospital
will have to be seen to come to a definite conclusion if there was any previous diagnosis
of Myocardial infarction of the insured. The court upheld the single judge order
Appeal to Supreme court

21

105

Gowramma V LIC
The husband of the Complainant-respondent herein, was carrying on Kirana Business at
Mailapur, Tehsil- Yadagir and he insured his life with the petitioner on 28.06.1997 for a
sum of Rs.1,00,000/-. Premium was to be paid @ Rs.1,419/- per quarter. According to
the respondent, the deceased was paying premium regularly and the last premium was
paid on 24.03.2000.
Husband of the Complainant died on 08.05.2000. Respondent, being the nominee,
claimed the insured amount.
Petitioner repudiated the claim on the ground that deceased made deliberate
misstatements and withheld correct facts regarding the state of his health. Thereafter,
respondent filed a complaint before the District Forum.

106

Contd.
The defense taken was that the deceased did not remit the quarterly premium on time.
Intermittently, there were certain lapses but the installments were paid later on with late
fee. As the deceased failed to pay one of the quarterly installments, the policy had
elapsed which was got renewed only five months prior to his death.
It was further stated that insured had given a false declaration regarding the condition
of his health at the time of revival of the Policy. Parties led their evidence. District Forum,
vide its Order dated 31.12.2002, allowed the complaint and directed the petitioner to
pay the insured amount of Rs.1,00,000/- along with interest @ of 12% p.a. from the date
of filing of the complaint

107

Contd.
petitioner filed an Appeal before the Karnataka State Consumer Disputes Redressal
Forum
The State Commission, by the impugned Order, has dismissed the Appeal.
The state commission observed that
It is not disputed before us that the Policy was not repudiated on the ground that at
the time when initial Policy was taken, there was any misrepresentation or initial
concealment of facts by the deceased.
In the present case, two years had elapsed after the issuance of the Policy and the
burden to prove that the deceased had concealed the facts was on the Insurance
Company in terms of Section 45 of the Life Insurance Act, 1938.

108

Contd.
Learned Counsel appearing for the petitioner, relying upon a Judgment passed by a 4Member Bench of this Commission in L.I.C. of India and Another v. Parveeen Dhingra
reported in II (2003) CPJ 70 (NC), contended that the revival of the Policy constituted
new contract between the parties and two years have to be counted from the date of
revival of the Policy.
This submission cannot be accepted in view of the law laid down by the Honble
Supreme Court of India in Mithoolal Nayak v. Life Insurance Corporation of India
reported in AIR 1962 Supreme Court 814 in which Honble Supreme Court has clearly
held that for purposes of Section 45 of the Life Insurance Act, 1938, the period of two
years has to be counted from the date on which the Policy was originally effected and
not from the date of revival of the Policy

22

not from the date of revival of the Policy

109

Contd.
In the case before us the policy was issued on March 18, 1945 and it was to come into
effect from January 15, 1945. The amount insured was payable after January 15, 1968 or
at the death of the insured, if earlier.
The respondent company repudiated the claim by its letter dated October 10, 1947.
Obviously, therefore, two years had expired from the date on which the policy was
effected. We are clearly of the opinion that S.45 of the Insurance Act applies in the
present case in view of the clear terms in which the section is worded

110

Contd.
LIC V S. Rajalalkshmi (2006) 4 CPJ 170
The deceased had a life policy and died within 6 months of the commencement of the
policy
Allegedly due to heart attack.
The appellants repudiated the contract on the ground that deceased suppressed the
material facts with regard to his health condition at the time of submitting the proposal.
It was alleged by the LIC that the on investigation it was found that the deceased was
alcoholic, suffered from peptic ulcer prior to submitting the proposal

111

Contd.
As per the leave record with the employer, he had taken leave for 48 days for treatment
of peptic ulcer. This vital information was suppressed.

112

112th LCI Report:

1) No policy of life insurance shall be called in question after the expiry of three years
from the date on which the policy is effected or where the policy is revived after it has
lapsed for any reason, from the date on which it is so revived.
(2) A policy of life insurance may be called in question at any time within three years
from the date on which the policy is effected or, as the case may be, the date on which
it is revived, on the ground that any statement being a statement material to the
expectancy of the life of the insured was incorrectly made in the proposal or other
document on the basis of which the policy was issued or revived.

23