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Insurance Law Project

Formation of Insurance Contract.

Prof. Sujith Surendran Akhila Raj.G
1. Abstract
2. Introduction
3. Research Question
4. Research Methodology
5. Origin of History of Insurance
6. Elements of Insurance Contract
A. Elements of General Contract

• Offer

• Acceptance

• Legal consideration
• Competent

• Consent
• Legal object
B. Elements of Special Contract relating to Insurance

• Insurable Interest

• Utmost Good Faith

• Indemnity
• Subrogation

• Warranties
• Proximate Cause

• Nominations and Assignments

• Return of premium
5. Bibilography

The requirement for an insurance cover is developing today attributable to the event and danger of
upgraded hazards, which were beforehand obscure to life, trade, and business. Insurance is intended
to defend man from unexpected occasions, which may be of some burden to him. It furnishes him
with an affirmation to spare him from any misfortune which may be realised by the occurrence of
any unexpected incident either to his life or property. insurance is a contract by which one gathering
in light of a cost (called the premium) paid to him, sufficient to the hazard, moves toward becoming
security to the next that he will not endure misfortune, harm or preference by the incident of the
risks determined to specific things which might be presented to them. There must be either some
vulnerability whether the occasion will occur or not, or if the occasion is one which must occur
eventually, there must be a vulnerability with regards to the time at which it will happen. This
research paper gives an understanding into the idea of insurable interest by portraying the idea of
insurable interest and furthermore clarifies the need of an insurable enthusiasm for respect to Life
Insurance, Fire Insurance, and Marine Insurance and furthermore the different people who have an
insurable interest for these agreements along with all the special elements required by an insurance


A contract whereby, for specified consideration, one party undertakes to compensate the other for a
loss relating to a particular subject as a result of the occurrence of designated hazards.1

The insurance can be defined as “a process by which one party (the insurer) undertakes to provide,
within the regulatory framework of a contract, a benefit in case of occurrence of a risk to another
party (the Insured), subject to the payment of a premium or contribution. The insurer then realises the
pooling of risks by using the law of large numbers and the laws of statistics “

Research question:
Analysis of the elements of Insurance Contract?

Research Methodology :

This data which is already available in the market and/or have been used by several researchers
known as secondary data. Such type of data would be collected through websites of respective
organization, their annual reports, various journals, news papers and books on related topics.

Research has been carried out with the help of books relating to Insurance Law. The methodology
includes publication research, present and historical information, few commentaries and extracted
factual data.

Origin and History of Insurance

Amid the old days, different types of protection were pervasive. Of them, marine protection is the
most seasoned type of protection. The reason is self-evident. Explorers via ocean and water were
especially presented to the danger of loosing their vessels and stock because of tempest and theft on
the vast oceans (burglary). The hazard to the proprietors of such ships was gigantic and in this manner
the marine dealers formulated a strategy for spreading over the monetary misfortune, which couldn't
be borne by a solitary individual merchant. The gadget in the first place was very wilful.

The marine approaches in its present structure were sold in the start of the fourteenth century by the
Brugians. After the marine protection, fire protection was created in the present structure. It has been
begun in Germany in the start of the sixteenth century.

The flame protection got energy in England after the Great Fire in 1666 when the flame misfortunes
were shocking. With provincial advancement of England, the flame protection spread everywhere
throughout the world in the present structure. Disaster protection showed up in England in a similar

The primary enlisted life office was the 'Connected at the hip Fire and Life Insurance Society' built
up in the year 1696 in England. In any case, it didn't flourish in USA amid the eighteenth century
because of the genuine changes in the passing rate.
Yet, soon, after 1800, the extra security business prospered in U.S.A. moreover. In India, a few
Europeans began the primary flame insurance agency in Bengal Presidency viz., the Orient Life
Assurance Company in 1818.Triton Insurance was started at Calcutta in 1850 to carry on general
insurance business. The year 1870 was a year of landmark in the history of Indian Insurance Business.
In 1871, the Bombay Mutual Life Assurance Society made its beginning.

The next important life office was Oriental Government security Life Assurance Co. Ltd., which
started its operations since 1874. Since then, several insurance companies developed. With
inauguration of LIC; the life insurance business is developing speedily all over the country.

Elements of Insurance Contract

This Act says that all agreements are the contract if they are made by free consent of the parties,
competent to contract, for a lawful consideration and with a lawful object and which are not at this
moment declared to be void”.
The insurance contract involves—(A) the elements of the general contract, and (B) the element of
special contract relating to insurance.

General Contract
The valid contract, according to Section 10 of Indian Contract Act 1872, must have the following

1. Agreement (offer and acceptance),

An offer can be communicated in any form, generally an offer is a promise to do something, if the
person the offer is directed towards does something in return. An offer can also be a proposal by
one party to enter into a legally binding contract with another party. An offer must also be
distinguished from an invitation to treat, which lacks the intent for a person to accept.
An offer can be made to:
• A particular person
• A group of persons
• The whole world
An offer must follow these basic rules or laws:
• An offer must be communicated to the person accepting the offer
• All terms of the offer must be communicated to the offeree and brought to his/her notice
• Offer may specify conditions to be followed
• An offer may be withdrawn/revoked at any time before acceptance
• Some contracts require people to be of a certain age
• The offer must be legal

Case Law: Carlill v Carbolic Smoke Ball Co2

Mrs Carlill was entitled to the reward. There was a unilateral contract comprising the offer (by
advertisement) of the Carbolic Smoke Ball company) and the acceptance (by performance of
conditions stated in the offer) by Mrs Carlill.

• There was a valid offer

◦ An offer can be made to the world
◦ This was not a mere sales puff (as evidenced, in part, by the statement that the
company had deposited £1,000 to demonstrate sincerity)
◦ The language was not too vague to be enforced
• Although as a general rule communication of acceptance is required, the offeror may
dispense with the need for notification and had done so in this case. Here, it was implicit
that the offeree (Mrs Carlill) did not need to communicate an intention to accept; rather
acceptance occurred through performance of the requested acts (using the smoke ball)
• There was consideration; the inconvenience suffered by Mrs Carlill in using the smoke ball
as directed was sufficient consideration. In addition, the Carbolic Smoke Ball received a
benefit in having people use the smoke ball.

An acceptance is a legally binding statement by the offeree, agreeing to the offer from the offerer.
An acceptance must follow these rules:
• An acceptance must be clearly communicated
• An offer must be wholly accepted. If an acceptance cannot be made a counter offer can
• Any condition stated in the offer must be followed before and acceptance can be said to
have taken place

Case Law: Crown v Clarke3

Court of Appeal [1893] 1 QB 256; [1892] EWCA Civ 1
(1927) 40 CLR 227
The Court held that in providing the information leading to conviction of others Clarke was acting
to secure his own release and not in response to the offer of reward. Although performance of an act
(or acts) specified in an offer as constituting acceptance may be presumed to be performed in
response to an offer, this presumption may be rebutted. It was rebutted in this case by the evidence
of Clarke himself. There was no agreement.

2. Legal consideration,
The promisor to pay a fixed sum at a given contingency is the insurer who must have some return or
his promise. It need not be money only, but it must be valuable.
It may be summed, right, interest, profit or benefit Premium being the valuable consideration must
be given for starting the insurance contract.
The amount of premium is not important to begin the contract. The fact is that without payment of
premium, the insurance contract cannot start.
The, agreement is legally enforceable, only when the contract is supported by consideration, i.e.,
when both the parties give something in return. In insurance both parties provide consideration.
Consideration from the insured to the insurer is the premium while from the insurer to the insured is
a promise to compensate the insured or to make certain payment in the event of certain happenings
taking place.

For a contract to be enforceable, the promise or promises it contains must be supported by

consideration. Consideration can be defined as the value given in exchange for the promises sought.
In an insurance contract, consideration is given by the applicant in exchange for the insurer’s
promise to pay benefits. It also consists of the application and the initial premium. This is why the
offer and acceptance of an insurance contract are not complete until the insurer receives the
application and the first premium. The Consideration clause also contains information such as
the schedule and amount of premium payments.

Case Laws: National insurance Co.Ltd vs Seema Malhotra4

19….“Under Section 25 of the Contract Act an agreement made without consideration is void.
Section 65 of the Contract Act says that when a contract becomes void any person who has received
any advantage under such contract is bound to restore it to the person from whom he received it. So,
even if the insurer has disbursed the amount covered by the policy to the insured before the cheque
was returned dishonoured, insurer is entitled to get the money back”.

2001(3) SCC 151
3. Competent to make a contract,

To constitute a valid and binding contract one of the essential is that the parties to the contract must
be competent to contract. A person is competent to contract when he is not minor ,or he is not of
unsound mind or is not in any way disqualified by any law to which he is subject.
One of the essentials of a valid contract is the competency of the parties to make contract. Law has
laid down certain rules as to who are competent to enter into a valid contract. As per Section
11 Every person is competent to contract who is of the
1. age of majority according to the law to which he is subject, and
2. who is of sound mind and
3. is not disqualified from contracting by any law to which he is subject

Position of Minor or Awareness when entering contract with Minor5.

• As per section 3 of the Indian Majority Act of 1875, every person in India is a minor if he
has not attained the age of 18 years of age.
• Age should be 21,

1. In case of a minor of whose person or property or both a guardian has been

appointed under the Guardian and Wards Act, 1890
2. Whose property is under the superintendence of any court of wards before he attains
18 years.

The position of Minor’s agreement and effect thereof is as under;

(a) An agreement with a minor is void ab-initio.
(b) The law of estoppels does not apply against a minor. It means a minor can always his plead his
minority despite earlier misrepresenting to be a major. In other words he can not be held liable on
an agreement on the ground that since earlier he had asserted that he had attained majority.
(c) Doctrine of Restitution does not apply against a minor i.e., As per section 70 Obligation of
person enjoying benefit of non-gratuitous act does not apply.

Section 11 in The Indian Contract Act, 1872
(d) Ratification of agreement is not permitted: Ratification means approval or confirmation. A
minor cannot confirm an agreement made by him during minority on attaining majority. If he wants
to ratify the agreement, a fresh agreement and fresh consideration for the new agreement is
(e) Contract beneficial to Minor; A minor is entitled to enforce a contract which is of some benefit
to him. Minority is a personal privilege and a minor can take advantage of it and bind other parties.
(f) Minor as an agent. A minor can be appointed an agent, but he is not personally liable for any
of his acts.
(g) Minor’s liability for necessities: “Any person supplying necessaries of life to persons who are
incapable of contracting is entitled to claim the price from the other’s property”6.


A person is said to be of sound mind for the purposes of making a contract if, at the time when he
makes it, he is capable of understanding it and of forming a rational judgment as to its effect upon
his interests.
• A person, who is usually of unsound mind, but occasionally of sound mind, may make a
contract when he is of sound mind.
• A person, who is usually of sound mind, but occasionally of unsound mind, may not make a
contract when he is of unsound mind.

Case Laws: Mohiribibi Vs. Dharmodas Ghose8:

“Looking at Section 11 their Lordships are satisfied that the Act makes it essential that all
contracting parties should be competent to contract and expressly provides that a person who by
reason of infancy is incompetent to contract cannot make a contract within the meaning of the Act.”

Case Laws: Aamir Masood VS. Khurshid Begum9

” Where it was proved that the vendor was minor when the sale was made, the vendee
was rendered defenceless. Mere fact that the vendor was a minor at the time of sale
would render the sale document void and no plea of estoppel or bona fide purchase
or even ratification upon attaining majority by the minor would be available to the

Section 12 in The Indian Contract Act, 1872
Ilr (1903) 30 Cal 539 (Pc)
2001 MLD 159
vendee to defend the document”
• Right of other party to contract: Even though a minor’s contract is a nullity, a
person who parts with goods under it does not loose his title to them an can trace them in the and of
the minor and recover them. But he cannot be allowed to recover their price or damages, for if he is
permitted to do that., it would amount to allowing him to enforce the contract and recover damages
for the breach.

• Fraudulent representation by minor as to his age: not enforceable.

Case Laws: Noor Muhammad VS, Muhammad Ishaq10

“Any person who had not attained majority, though could not enter into an agreement of – sale to
sell his property nor sale deed purportedly executed by minor regarding his property could operate
against his interest, but if a minor was beneficiary of transaction and was vendee, he could
successfully avail the benefits.”

4. Free consent
A critical requirement of any valid contract is that the parties to it are ad idem, i.e. of the same
mind. If the agreement is induced by coercion, undue influence, fraud misrepresentation etc., there
is absence of free consent. The principle of consensus ad idem is critical to insurance. The parties to
a contract cannot be said to be in ad idem if the proposer withholds material information form the
insurer. The latter is then accepting the risk without being able to make a proper assessment of the
same. The ‘Basis Clause’ in every insurance contract implies that the statements made by the
insured in the proposal and other submissions form the basis of the contract. If they are not true, the
contract can be held to be void. By the same token, the insurance company also has the obligation to
fully explain the implications of the basis clause to the insured. Thus:

If the insurer wants to repudiate a policy on the grounds of misstatement by the insured, he must
establish to the satisfaction of the court that he acted fairly and honourably to the insured by
explaining properly the implications of declaration to be signed by the insured and the range or
amplitude of the questions required to be answered. This is very important because very often an
inaccurate and, therefore, ‘strictly’ false answer is in another sense a true answer if considered

Clauses are introduced into policies of insurance which ‘unless they are fully explained to the
parties will lead a vast number of persons to suppose that they have made a provision for their

2000 MLD 251
families by an insurance on their lives and by payment of perhaps a very considerable proportion of
their income, when a point of fact, from the very commencement, they policy was not worth the
paper upon which it was written......” Fletcher Moulton.11

The consent will be free when it is not caused by—

(1) coercion,
(2) undue influence,
(3) fraud, or
(4) misrepresentation, or
(5) mistake.
When there is no free consent except fraud, the contract becomes voidable at the option of the party
whose consent was so caused. In case of fraud, the contract would be void.
The proposal for free consent must sign a declaration to this effect, the person explaining the
subject matter of the proposal to the proposer must also accordingly make a written declaration or
the proposal.

5. Legal object.
The object of the contract must be lawful. Thus, the object of the agreement must not be illegal,
immoral, or opposed to public policy. If an agreement suffers from any legal flaw, it would not be
enforceable by law. For example a landlord knowingly lets a house to terrorist to carry out his
activities, and he cannot recover the rent through the court of law.
To be a valid, a contract must be for a legal purpose & not contrary to public policy. Insurance is
legal business therefore it cannot be illegal on the part of the insurer. An individual can take the life
Insurance of his own life or his/her family members. If an individual takes a policy on the life of an
unknown person it will not be a valid contract as it will amount to gambling.
Another example is that the contract will not be legal if it has anything to do with stolen property or
if it is in respect of any unlawful activity. Hence Insurance of stolen goods or the Insurance of
smuggling operation shall not stand scrutiny in the court of law and such contracts will be void.

Special contract principles:

The special contract of insurance involves principles:

1. Insurable Interest.

Quoted by A.P. High Court in LIC Vs Shakuntala Bai, 1975 AIR (AP) 68.
According to Rodda12 Insurable interest may be defined as an interest of such a nature that the
occurrence of the event insured against would cause financial loss to the insured.
Insurable interest is one of the basic requirements of the insurance without it the insurance contract
is a mere wagering agreement.

According to E.W.Patterson13 “insurable interest is a relation between insured and the event insured
against such occurrence of events will cause substantial loss or injury of some kind to the insured”.

In Lucena v craufurd14, Lawerence J defined Insurable interest. In his words ‘Insurable Interest’
means ‘if the events happens, the party will gain advantage, if it is frustrated, he will suffer a loss’.

In India it is strange that the insurance Act 1938 does not contain a definition of insurable interest the
only section, namely section 68 which makes a passing reference to the words ‘insurable
interest’ stands repeated by section 48 of The Insurance Amendment Act 1950. Briefly stated there
is no legislative guidance in Indian law on the subject but still marine insurance defines under section
7 of the marine insurance act 1963 defines insurable interest .

7. Insurable interest defined15.—

(1) Subject to the provisions of this Act, every person has an insurable interest who is interested in a
marine adventure.
(2) In particular a person is interested in a marine adventure where he stands in any legal or
equitable relation to the adventure or to any insurable property at risk therein, in consequence of
which he may benefit by the safety or due arrival of insurable property, or may be prejudiced by its
loss, or by damage thereto, or by the detention thereof, or may incur liability in respect thereof.

The interest should not be a mere sentimental right or interest, for example love and affection alone
cannot constitute insurable interest. It should be a right in property or a right arising out of a
contract in relation to the property. The interest must be pecuniary i.e; capable of estimation in
terms of money. In other words, the peril must be such that its happening may bring upon the
insured an actual or deemed pecuniary loss.

Rodda definition of Insurable Interest
E.w patterson definition of Insurable Interest
(1806) 2 Bos & Pul MR 269
section 7 of the marine insurance act 1963
Insurable interest is also defined as a legal right to insure asset or person. These are the following few
principle of insurable interest.

▪ In theory, therefore, noting more is payable than the amount of actual loss.

▪ It follows that unless the assured has a pecuniary interest in the thing insured, no question of
loss or indemnity shall arise.

▪ A person cannot therefore insure a thing, the loss of which cannot cause him any financial

▪ A policy of insurance, therefore, is void if the insured has no such pecuniary interest in the
subject matter of the insurance.

▪ Any person, who would suffer from destruction or loss of a thing, has insurable interest in
that thing.
The Insurable Interest must:-

▪ Be definite

▪ Be capable of valuation

▪ Be legally valid and subsisting

▪ Involve the loss of legal right

▪ Involve a legal liability

In the case of Brahma Dutt v. LIC16 one Mukhtar Singh a petty school teacher on salary of Rs 20
took a policy for Rs 35,000 on his life making false statements in the proposal and nominated a
stranger Brahma Dutt for the policy. The nominee paid the first two quarterly premiums by which
time the life insured died. The nominee intimated the insured’s death and claimed the sum assured. It
was found on evidence that Brahma Dutt had taken the policy without any insurable interest in the
life of the deceased for his own benefit and that therefore it was void being a wagering agreement.

Supreme court in case of Suraj Mal Ram Niwas Oil Mills (Private) Limited v United India
Insurance Company Limited and another17 held that the objection of the insurer about the non-
disclosure of dispatch of each and every consignment, as pointed by the second surveyor, learned
counsel submitted that the said condition has to be understood in the context of the fundamental

AIR 1966 All 474
I (2003) CPJ 82 NC
condition that the insurance cover was intended to secure only the “insurable interest” of the appellant
in the dispatches. It was urged that the appellant had declared only those consignments in which they
had an “insurable interest” as in relation to dispatches which had not been declared, the consignees
had desired that their consignments should be dispatched without an insurance cover.

In all such cases, the purchasers took the risk of loss to their goods, and hence the appellant had no
“insurable interest” in them, unlike in the consignment in question for which due declaration was
made. Reference was made to the decisions of this Court in New India Assurance Co. Ltd v. G.N.
Sainani 18 , and New India Assurance Company Limited v. Hira Lal Ramesh Chand & Ors 19 ,
wherein it was held that “insurable interest” over a property is “such interest as shall make the loss
of the property to cause pecuniary damage to the assured and under this case it will make a damage
to the interest of the insured.

2. Utmost Good Faith.

Uberrima fidesis a Latin phrase meaning "utmost good faith" (literally, "most abundant faith"). It is
the name of a 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.It is defined as “firm adherence to promises made to another including
disclosure of all relevant facts and complete trust in the fidelity of the other.”

It has long been recognised that insurance contracts are governed by a higher standard of utmost
good faith which does not apply to other contracts.

In the leading case of Carter v Boehm20 (1776), Lord Mansfield stated that if the true facts are
concealed in any way, whether fraudulently or not, then the risk taken by the insurers may be
different from the risk they intended to take in which case the policy would be void. This was seen
as a natural consequence of an imbalance of knowledge under which the insured (usually) has sole
knowledge of most of the key information which should form the basis for a risk assessment by the

This general principle of good faith is affirmed in section 17 of the Marine Insurance Act 1906.

(1997) 6 SSC 383
(2008) 10 SCC 626
(1766) 3 Burr 1905
17.”A contract of marine insurance is a contract upon the utmost good faith, and if the utmost good
faith be not observed by either party, the contract may be avoided by the other party.”21

Under Section 45 of Insurance Act 1938 states that if within 2 years of commencement or revival of
the insurance policy, the insurer get to know that there has been a non-disclosure or
misrepresentation of material facts, then the insurer can call the policy null and void.

45. Policy not to be called in question on ground of mis-statement after two years22.—
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 a statement made in the proposal for
insurance 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 1[was on a material matter or suppressed facts which it was material to disclose and

that it was fraudulently made] by the policy-holder and that the policy‑holder knew at the time of

making it that the statement was false 2[or that it suppressed facts which it was material to
disclose]: 2[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.
The general duty of good faith manifests itself in at least two important respects:

(1) a positive duty to disclose material information; and

(2) a duty not to make any material misrepresentations.

In practice these good faith duties are significantly more onerous for the insured than for the
insurer. The Law Commissions of England and Scotland are engaged in an ongoing review of
insurance law. As part of that review they have identified several potentially unfair aspects of the
current law:

• The insured can be unaware of their duty to volunteer information which applies to
information not specifically asked for by the insurer on the proposal form;

section 17 of the Marine Insurance Act 1906. (UK)
Section 45 in The Insurance Act, 1938
• The law requires the insured to assess whether information would be relevant to the
assessment of risk by a "prudent underwriter". This test for materiality, which underlies the
rules on disclosure and misrepresentation, assesses the insured by reference to the
professional knowledge of the insurer;
• The insured can still be in breach even if their error was reasonable in the circumstances; for
example if a question was unclear or required specific technical knowledge which they did
not have;
• The only remedy for breach of the good faith duties is retrospective avoidance of the entire
• The insurer does not require to show that the non-disclosure / misrepresentation had any
causal link to the claim in order to avoid the contract. For example, if a claim was submitted
relating to flood damage the insurer could avoid the whole contract if the insured had failed
to disclose that their alarm system was not functioning;
• Intermediaries, including brokers, are generally treated as being agents of the insured. As
such, the insured is held responsible for any failings on their part. That is so even where in
practice the intermediary is most closely connected with the insurer.

3. Indemnity.
The word indemnity means security or protection against a financial liability. It typically occurs in
the form of a contractual agreement made between parties in which one party agrees to pay for
losses or damages suffered by the other party.
The principle of indemnity asserts that on the happening of a loss the insured shall be put back into
the same financial position as he used to occupy immediately before the loss.
In other words, the insured shall get neither more nor less than the actual amount of loss sustained.
This, of course, is always subject to the limit of the sum insured and also subject to certain terms
and conditions of the policy.Therefore, to put it in a much better way, on the happening of a loss,
the insurers will try to put back the insured into the same financial position as the insured used to
occupy immediately before the happening of the loss, only if the insurance is properly arranged on
full value insurance.
In India indemnity is defined in Indian contract Act in section 124
Section-124 of Indian Contract Act 23 - A contract of indemnity means "a contract by which one
party promises to save the other from loss caused to him by the conduct of the promisor himself or

section 124 Indian contract Act 1872
by conduct of any other person." This Provision incorporates a contract where one party promises to
save the other from loss which may be caused, either
(i) by the conduct of the promisor himself, or,
(ii) by the conduct of any other person.

Under-insurance and restrictive terms of the policy may preclude the insured from getting the actual
loss.On the other hand, even if the sum insured is more than the actual value of the property or
subject matter; this would not entitle the insured to get more than the actual loss.

In United India Insurance Co. vs. M/s. Aman Singh Munshilal24. The cover note stipulated
delivery to the consigner. Moreover, on its way to the destination the goods were to be stored in a
godown and thereafter to be carried to the destination. While the goods were in the godown, the
goods were destroyed by fire. It was held that the goods were destroyed during transit, and the
insurer was liable as per the insurance contract.

In the judgement of Mario Misfud v. Montaldo Insurance Agency Limited Noe25, the plaintiff after
purchasing a new car had a road accident. The claim was presented to court due to the fact that the
claimant argued that he should receive the full amount of the vehicle without any deductions made
for depreciation, since the vehicle was on road for only 20 days. With reference to the indemnity
principle, the Court concluded that the costs should be borne by the Company, without any
deductions for depreciation.

The principle of indemnity was well cared for in the leading case of Castellain V. Preston26 (1883)
in the following way “A contract of insurance is necessarily a contract of indemnity (except life and
personal accident insurance) and of indemnity only, and this means that in case of a loss the insured
shall be fully indemnified, but shall never be more than fully indemnified.

That is the fundamental principle of insurance and if ever a proposition is brought forward, which is
at variance with it, that is to say, which either will prevent the insured from obtaining a full
indemnity or which will give the insured more than a full indemnity, that proposition must certainly
be wrong”.

A.I.R. 1994 P. & H. 206.
Mario Misfud v. Montaldo Insurance Agency Limited Noe 2004
(1883)11 QBD 380 (CA)
The principle of indemnity in insurance law holds that an insured is entitled to receive a full
indemnity for his or her loss, no more and no less. However, Ridgecrest NZ Ltd v IAG New
Zealand Ltd (Ridgecrest)27, a 2014 case in the New Zealand Supreme Court, has brought the nature
of the principle into question. When an insured building owned by Ridgecrest NZ Ltd (Ridgecrest)
sustained damage in successive Canterbury earthquakes, the Supreme Court held that Ridgecrest
could claim up to the full amount of the sum insured per happening, despite being underinsured and
not having repaired the damage from the earlier quakes when the insured building became a total
loss.Ridgecrest could therefore obtain more than the amount they had insured for, a result that
appears to be somewhat at odds with the indemnity principle. This article explores the uncertainties
surrounding the scope of the principle that arise in light of the decision in Ridgecrest.

Two other cases from 2014 dealing with the indemnity principle and Canterbury quake damage are
also considered. The first is Tower Insurance Ltd v Skyward Aviation 2008 Ltd (Skyward)28, a
Supreme Court decision that affirms the approach taken in Ridgecrest. 2 Also discussed is the
decision in QBE Insurance (International) Ltd v Wild South Holdings Ltd (QBE Insurance)29,
released a few weeks after Ridgecrest, in which the Court of Appeal clearly stated that the principle
of indemnity survived Ridgecrest. 3 Before these more recent cases are dealt with, this article
evaluates the significance of three elements of the indemnity principle:the principle's underlying
rationales, the rules the principle creates and supports, and the exceptions to the principle. Relevant
law reform is also considered.

4. Subrogation.
Subrogation is the act of one party claiming the legal rights of another that it has reimbursed for
losses. Subrogation occurs in property/casualty insurance when a company pays one of its insured’s
for damages, then makes its own claim against others who may have caused the loss, insured the
loss, or contributed to it.

When insurer (insurance company) pays full compensation for any insured loss (of insured
property), the insurer (insurance company) holds the legal right (claim) of the insured property.
This also means the insurer (insurance company) has the legal right to claim any future gains from
the said property for any recovery and/or settlement.

[2014] NZSC 117, [2015] 1 NZLR 40 [Ridgecrest].
Tower Insurance Ltd v Skyward Aviation 2008 Ltd [2014] NZSC 185, [2015] 1 NZLR 341 [Skyward].
QBE Insurance (International) Ltd v Wild South Holdings Ltd [2014] NZCA 447, [2015] 2 NZLR 24 [QBE
Insurance], at [77]–[80].
Subrogation is essential in light of the fact that any monies recuperated through the subrogation
procedure go legitimately to the insurance agency's primary concern. The advantages of subrogation
have been exhibited in organization execution. This is as indicated by the Ward Financial Group, a
firm that investigates property/loss activities and recognizes operational benchmarks that recognise
high performing organizations. As indicated by an examination by Ward, organizations that
accomplished unrivalled working outcomes subrogate claims at about double the rate of normal
organizations and recuperated generously higher rates of their misfortune instalments through
subrogation. An organization with a viable subrogation office can offer lower premiums to their

Following an auto collision, a protection supplier can utilize subrogation to seek after the driver of
the vehicle that is ruled to blame to recover misfortunes. For instance, if a SUV runs a red light and
hits a greens keeper's organization possessed pickup truck, the exterior decorator records a case on
his commercial accident protection, and his protection supplier sends him a check to cover the
harms. After the case is settled, the exterior decorator's protection supplier utilizes subrogation to
look for repayment from the SUV proprietor by going to court for the benefit of the greens keeper.

The common-law concept for subrogation by an insurer to the rights of its insured was designed to
place ultimate responsibility for loss upon the wrongdoer, i.e., on whom in good conscience it
should fall, and to reimburse the innocent party who is compelled to pay.

As a general rule, an insurer does not have a right of subrogation or indemnification against its own
insured. More specifically, an insurer has no right of subrogation against its own insured for claims
arising from the very risk for which the insured was covered.

In most instances, these separate and distinct rules respecting an insurer's right of subrogation, and
respecting the prohibition against subrogating against an insured, do not conflict nor pose a problem
for most insurers; nor, do they generally pose a problem for the typical insured who may be liable
for a negligent act.

However, where the insured has intentionally caused damage to the insured property, and where the
insurer is required to pay an innocent coinsured, the two above-mentioned rules of law conflict.
Thus, in instances where an insured is guilty of fraud or deceit, and where an insurer has paid a
claim to an innocent coinsured, the insurer will, as subrogee and contrary to the general rules of
law, seek to recover from the tortfeasor-insured an amount equivalent to that paid the innocent
Economy Fire and Casualty Co. v. Warren30

For example, in Economy Fire and Casualty Company v. Warren, the plaintiff settled a fire loss
claim with its insureds -- a husband and wife -- for $20,514.05. Within two months following the
settlement of the claim, the insured-wife gave a written statement admitting to intentionally causing
the fire to the insured dwelling. The insurer then sought to rescind the settlement agreement entered
into with its insureds, and also sought restitution of the entire amount of proceeds paid towards the

The Court in Economy Fire concluded that the arson committed by the wife should not be imputed
to the husband who was innocent of any wrongdoing so as to bar the husband's recovery. The Court
held that the husband, as an innocent coinsured, was entitled to one-half of the insurance proceeds,
and further held that the insurer was entitled to an equitable lien in its favour to the extent of the
proceeds paid to the innocent co-insured. From an insured's perspective, Economy Fire stands for
the proposition that an innocent coinsured is entitled to recover their proportionate share of
insurance proceeds when, based upon a co-insured's intentional act, an insurer has a valid coverage
defense against the non-innocent coinsured. Conversely, from an insurer's perspective, Economy
Fire stands for the proposition that, when an insured breaches the terms of a policy by intentionally
causing a loss, an insurer is entitled to an equitable lien in its favour to the extent of the proceeds
paid to the innocent co-insured.

It is apparent that the court in Economy did not see the equity in allowing the innocent coinsured to
be barred from recovery. Neither did they see the equity in forcing an insurer to pay insurance
proceeds without allowing the insurer a chance to seek out the responsible party and make that party

Madsen v. Threshermen's Mutual Ins. Co31

In Madsen v. Threshermen's Mutual Insurance Company, the Wisconsin Court of Appeals

acknowledged the general principle of insurance law, i.e., that an insurer does not have subrogation
or indemnification rights against its own insured. The Madsen court also recognised, however, the
inequity wrought by this long-standing principle when an insured intentionally causes a loss.

71 Ill. App.3d 625 (1979)
149 Wis. 2d 594 (1989)
In its analysis, the Court in Madsen reasoned that common sense fairness requires an insured to be
held liable for a loss that he or she intentionally causes:

Ordinarily, an insurer does not have a right of subrogation or indemnification against its own
insured... adhering to this principle in this instance would defeat a purpose of subrogation, which is
to ultimately place the loss on the wrongdoer. Here, the wrongdoer and the insured are the same
person .Thus, requiring [the insured-wrongdoer] to reimburse [the insurer] would appropriately
place the loss on the wrongdoer.

5. Warranties.
In contract law, a Warranty has different implications yet, for the most part, implies a certification
or guarantee which gives confirmation by one gathering to the next gathering that particular realities
or conditions are valid or will occur. This authentic assurance might be authorized paying little
respect to materiality which takes into account a lawful cure if that guarantee isn't valid or pursued.

The term "warranty" was, it seems, first introduced into marine insurance policies of the
seventeenth century. Before it appeared in the reported insurance cases it already had an established
meaning in the law of sales, and one may reasonably infer that it was introduced into the insurance
contract by laymen rather than by law.

Excluding for the moment the implied warranties of marine insurance, a warranty may be defined as
A warranty in insurance law32 is (1) a term of an insurance contract (2) which prescribes, as a
condition of the insurer's promise, (3) a fact, antecedent to, or contemporaneous with, an insured
event, (4) the existence of which, regarded as of the time of contracting, will or may render less
probable than its absence (opposite) the occurrence of an in- sured event.

This definition involves a relation between four facts:

(1) A term of the contract.
(2) The condition (event or situation) to which that term refers.
(3) The insured event.
(4) The judgment of a court in a suit involving the contractual right of the insured.

37 The distinction is clearly made by Professor Corbin, Conditions in the Law of Contract (1919) 28 YALE
L. J. 739, 743, SELECTED READINGS IN TIE LAW OF CONTRACTS (1931) 871, 875. See
A Warranty in a protection arrangement is a guarantee by the safeguarded party that announcements
influencing the legitimacy of the agreement are valid. Most protection contracts require the
guaranteed to make certain warranties. For instance, to get a Health Insurance arrangement, a
protected gathering may need to warrant that he doesn't experience the ill effects of a fatal infection.
In the event that a warranty portrayed by a safeguarded gathering turns as false, the insurer may
drop the arrangement and will not cover claims.

Not all errors made by a protected gathering give the backup plan the privilege to drop an approach
or deny a case. Just deceptions on conditions and warranties in the agreement give a safety net
provider such rights. To qualify as a condition or warranty, the announcement must be explicitly
incorporated into the agreement, and the arrangement should unmistakably demonstrate that the
gatherings planned that the privileges of the protected and back up plan would rely upon the reality
of the announcement.

Warranties in insurance contracts can be isolated into two sorts: affirmative or promissory. An
affirmative warranty is an announcement with respect to reality at the time the agreement was
made. A promissory warranty is an announcement about future actualities or about certainties that
will keep on being valid all through the term of the strategy. An untruthful affirmative warranty
makes a protection contract void at its origin. On the off chance that a promissory warranty turns
out to be valid, the backup plan may drop inclusion at such time as the guarantee ends up false. For
instance, if an insured warrants that property to be secured by a flame protection arrangement will
never be utilized for the blending of explosives, the safety net provider may drop the approach if the
safeguarded party chooses to begin blending explosives on the property. Warranty arrangements
ought to contain language demonstrating whether they are affirmative or promissory.

“A warranty must be exactly complied with, whether material to the risk or not”. wow…this is
incredibly harsh. So if you store stock at 10cm not 15cm and there is a theft of your computers, the
insurer could throw out the whole policy (which would include not paying for the theft claim)

The theory is that if you are not good at keeping promises (which is effectively what a warranty is)
then you should not benefit from insurance cover at all.

Conditions precedent to liability

If there is a condition that a burglar alarm is turned on and working whenever the property is
unattended then as long as this is complied with at the time of a theft the claim will be paid even if
it was not complied with at some other time.

If you had warranted (promised) that the alarm was turned on and working whenever the property is
unattended, even if it was so at the time of the theft the insurer could avoid the claim if they could
prove that it was not the case at any time during the policy year.

BlueBon Ltd v Ageas (UK) Ltd33

The case highlights the need for policyholders to review wordings of insurance policies and
insurance policy applications/declarations carefully and to ensure compliance with all warranties, so
as to avoid the risk that an insurer will deny a claim, even if failure to comply with a warranty may
not necessarily invalidate the entire policy under the current law.

The Commercial Court in London has recently held that breach of a specific policy provision
described as a warranty in a buildings insurance policy allowed an insurer to avoid coverage for a
fire claim, but was not grounds for making the policy completely void from inception, as the insurer
had argued.

Hibbert v. Pigou34
The doctrine that a temporary breach of warranty does not avoid the policy means that the insured
can recover on the policy although a literal breach of the warranty, as interpreted by the court, is
indubitably shown, if it is also shown that the warranty was fully complied with at the time when
the insured event occurred, and that the breach did not contribute to the loss.

Thus in this case if it be true that the departure without convoy did not contribute to the loss by
storm which subsequently occurred (as may be fairly inferred), the insured would, by the
application of this doctrine, have been allowed to recover.

Breach of Warranty
If there is a breach of warranty, the insurer is not bound to perform his part of the contract unless he
chooses to ignore the breach.

[2017] EWHC 3301 (Comm)
16 PARK, INSURANCE (3d ed. 1796) 339 [1785]
The effect of a breach of warranty is to render the contract voidable at the option of the other party
provided there is no element of fraud. In case of fraudulent representation or promise, the contract
will be void “ab initio”.

6. Proximate Cause.
Causa Proxima is a Latin phrase, which means proximate cause. The rule is that immediate and not
the remote cause is to be regarded. The maxim is “Sed causa proxima non-remota spectature” i.e.
see the proximate cause and not the distant cause. The real cause of the loss must be considered while
payment of the loss. If the real cause of loss is not insured, the insurance company is not liable to
indemnify the loss sustained by the insured.

Although there is no doubt as to the acceptance of the rule of proximate cause especially after it
is embodied in section 55 of MIA 1906 in marine insurance law, but the meaning of proximate
cause has not yet been completely agreed upon.
The Oxford English Dictionary defines the meaning of the world ‘proximate’ as ‘closest in
relationship’ and ‘immediate’ then it defines ‘immediate’ as ‘nearest in time or relationship’. So
the proximate cause may be interpreted in two distinct and different ways. One is temporal
immediacy and another is dominance in efficacy35

In twentieth century the courts unambiguously adopted the dominance in efficacy approach and
rejected temporal immediacy or last in time approach. But even before twentieth century we can
see the seeds and routs of current understanding of proximate cause in the case of Reischer v
Borwick (1894).

Reischer v Borwick36
A tug called Rosa insured with the defendants only against collision with any object including
ice. In her voyage along the River Danub, She collided with a floating snag, causing damage to
her machinery and a hole in the cover of the condenser, which allowed water to enter the tug.
She was then anchored and by temporary measures the hole was plugged, but afterwards when
another tug arrived and started towing her towards the nearest dock, the hole reopened because
of the motions and she filled with water. Finally Rosa was beached and abandoned.

Howard N. Bennett, Causation in the Law of Marine Insurance: Evolution and Codification of the
Proximate Cause Doctrine, The Modern Law of Marine Insurance (D. Rhidian Thomas, LLP, 1996) 173.
(1894) 2 QB 548, CA
The insured claimed damages for the total loss of the tug but the underwriters only paid for the
damage from the snag and denied greater liability. At first instance, judgment was
given the insured for the whole amount claimed, so the underwriters appealed. The court of
appeal upheld the decision of the trial judge and ruled in favor of the insured, holding that the
collision was the efficient and predominant cause of the loss of Rossa.
Lopes LJ in his judgment truly stated:
In cases of marine insurance, it is well settled law that it is only the proximate cause that is to be
regarded and all others rejected, although the loss would not have happened without them.
Damage received in collisions must, therefore, in this case be proximate cause of the loss to
entitle the plaintiff to recover. The damage received in the collision was the broken condenser,
and it was the broken condenser which really caused the proximate loss. The tug was
continuously in danger from the time condenser was broken, and the broken condenser never
ceased to be an imminent element of danger, though the danger was mitigated for a time by the
insertion of the plug in the outside of the vessel. The cause of the damage to the condenser was
the collision and the consequences of the collision-that is, the broken condenser- never ceased to
exist, but constantly remained the efficient and predominant peril to which the damage now
sought to be recovered was attributable.

There are two different consequences of proximate cause doctrine for the insurers and assureds.
Firstly it narrows the insurers liability to only loss proximately caused by insured perils, and
secondly to the contrary, it widens the underwriter's liability with regards to the remoter causes,
contributed by certain circumstances or conduct without which, such an event would not have
happened.37 Application of the proximate cause doctrine is not difficult when there is only one
proximate cause. The court must simply determine whether that particular cause of loss is, or is
not, an insured risk under the policy38. But the application of proximate cause rule is not easy
when a court must pick the proximate cause from more than one cause contributing to the loss.
The situation even worsens when those causes appear to be equally influential.

Heskell v Continental Express and Another39

An export that in this case is plaintiff sold three bales of poplin to a Persian buyer and instructed
Continental Express to forward the bales to the vessel Mount Orford Park. Continental Express
negligently did not forward the goods. Strick Line Ltd, the charterer of Mount Orford Park,

Arnould's Law of Marine Insurance and Average, 763 at p. 185 (Sir M.J. Mustill
& J.C.B. Gilman, 16th ed. 1981).
Arnould's Law of Marine Insurance and Average, 763 at p. 341 (Sir M.J. Mustill
& J.C.B. Gilman, 16th ed. 1981).
[1950] 1 All ER 1033
allocated space for the bales of poplin in the vessel, by mistake, issued a bill of lading for the
goods that were never actually received. The ship arrived in Persian Gulf without the goods and
it was discovered that the goods had never been dispatched from the warehouse. The plaintiff
after he had made recompense to the buyer, claimed against the two company, Continental
Express and Strick Line Ltd.
The court ruled that the issuing of bill of lading by Strick Line Ltd was a misstatement but since
there was no contractual relationship between the plaintiff and Strike Line Ltd the plaintiff could
not recover from them. However, damages were awarded against Continental Express for a
breach of contract.
This case shows a situation, which there is two proximate cause of loss of equal efficiency, one
cause is the initial breach of contract and the other, an intervening act by another party. The court
was faced with the problem that the intervening act of the issuing of the bill of lading, and the
initial failure of Continental Express to forward the goods to the ship, were equally operative
cause of the loss. Judge Devlin observed that40:
There are many cases where a loss is foreseeable, but does not in fact occur, because some act
intervenes, as piece of good fortune for the wrongdoer, to prevent the natural and probable
consequences of his wrong from operating. Likewise the intervening act, while not destroying
the wrong as a causative event, may contribute to the damage that occurs; the damage is then
caused both by the wrong and by the intervening act. That is, I think what happened here.

The determination of the real cause depends upon the working and practice of insurance and
circumstances to losses. The question of determining the real cause shall become difficult, when there
is a series of causes.

A loss may not be occasioned merely by one event. If there are concurrent causes or chain of causes,
it is necessary to look into the nearest cause and not to the remote cause. The term nearest cause here
means the cause actually responsible for the loss.

7. Assignment and Nomination.

Marine and life insurance policies can be assigned to someone without the prior consent of the
insurance company. However, fire and accident policies can be assigned to someone only with the
prior consent of the insurer.

[1950] 1 All ER 1033, at p 1047.
Assignment means the transfer of the right to claim the money from the insurance company. When a
policy is assigned in favour of someone, the assignee becomes entitled to receive the amount of the
policy and the policyholder shall be debarred from claiming the right.

Assignment refers to the transfer of certain or all (depending on the agreement) rights to another
party. The party which transfers its rights is called an assignor, and the party to whom such rights are
transferred is called an assignee. Assignment only takes place after the original contract has been
made. As a general rule, assignment of rights and benefits under a contract may be done freely, but
the assignment of liabilities and obligations may not be done without the consent of the original
contracting party.

The liability on a contract cannot be transferred so as to discharge the person or estate of the original
contractor unless the creditor agrees to accept the liability of another person instead of the first.41

Assignment under various laws in India

There is no separate law in India which deals with the concept of assignment. Instead, several laws
have codified it under different laws. Some of them have been discussed as follows:

Under the Indian Contract Act

There is no express provision for the assignment of contracts under the Indian Contract Act. Section
37 of the Act provides for the duty of parties of a contract to honour such contract (unless the need
for the same has been done away with). This is how the Act attempts to introduce the concept of
assignment into Indian commercial law. It lays down a general responsibility on the “representatives”
of any parties to a contract that may have expired before the completion of the contract. (Illustrations
to Section 37 in the Act).

An exception to this may be found from the contract, e.g. contracts of a personal nature.
Representatives of a deceased party to a contract cannot claim privity to that contract while refusing
to honour such contract. Under this Section, “representatives” would also include within its ambit,
transferees and assignees.[vii]

Section 41 of the Indian Contract Act applies to cases where a contract is performed by a third
party and not the original parties to the contract. It applies to cases of assignment.[viii] A promisee
accepting performance of the promise from a third person cannot afterwards enforce it against the

J.H. Tod v. Lakhmidas, 16 Bom 441, 449
promisor.[ix] He cannot attain double satisfaction of its claim, i.e., from the promisor as well as the
third party which performed the contract. An essential condition for the invocation of this Section is
that there must be actual performance of the contract and not of a substituted promise.

Under the Insurance Act

The creation of assignment of life insurance policies is provided for, under Section 38 of the Insurance
Act, 1938.

• Endorsement has to be made on the policy or on a separate document, signed by assignor (or
agent authorized by him), attested by at least one witness specifying the fact of the assignment.
The assignment is complete and effectual with the execution of such a document. However,
it will not be operative against the insurer (no assignee has the right to sue for any policy
amount from the insurer) unless the above-mentioned endorsement or separate policy has been
delivered to the insurer.

• When the insurer receives the endorsement or notice, the fact of assignment shall be recorded
with all details (date of receipt of notice – also used to prioritise simultaneous claims, the
name of assignee etc). Upon request, and for a fee of an amount not exceeding Re. 1, the
insurer shall grant a written acknowledgment of the receipt of such assignment, thereby
conclusively proving the fact of his receipt of the notice or endorsement. Now, the insurer
shall recognize only the assignee as the legally valid party entitled to the insurance policy.

Under the Transfer of Property Act

Indian law as to assignment of life policies before the Insurance Act, 1938 was governed by Sections
130, 131, 132 and 135 of the Transfer of Property Act 1882 under Chapter VIII of the Act – Of
Transfers of Actionable Claims. Section 130 of the Transfer of Property Act states that nothing
contained in that Section is to affect Section 38 of the Insurance Act.

I) Section 130 of the Transfer of Property Act

An actionable claim may be transferred only by fulfilling the following steps:

• Execution of an instrument
• In writing

• Signed by a transferor (or his authorized agent)

The transfer will be complete and effectual as soon as such an instrument is executed. No particular
form or language has been prescribed for the transfer. It does not depend on giving notice to the

The proviso in the section protects a debtor (or other person), who, without knowledge of the transfer
pays his creditor instead of the assignee. As long as such payment was without knowledge of the
transfer, such payment will be a valid discharge against the transferee. When the transfer of any
actionable claim is validly complete, all rights and remedies of transferor would vest now in the
transferee. Existence of an instrument in writing is a sine qua non of a valid transfer of an actionable

II) Section 131 of the Transfer Of Property Act

This Section requires the notice of transfer of actionable claim, as sent to the debtor, to be signed by
the transferor (or by his authorized agent), and if he refuses to sign it, a signature by the transferee
(or by his authorized agent). Such notice must state both the name and address of the transferee.
This Section is intended to protect the transferee, to receive from the debtor. The transfer does not
bind a debtor unless the transferor (or transferee, if transferor refuses) sends him an express notice,
in accordance with the provisions of this Section.

III) Section 132 of the Transfer Of Property Act

This Section addresses the issue as to who should undertake the obligations under the transfer, i.e.,
who will discharge the liabilities of the transferor when the transfer has been made complete – would
it be the transferor himself or the transferee, to whom the rest of the surviving contract, so to speak,
has been transferred.

This Section stipulates, that the transferee himself would fulfill such obligations. However, where an
actionable claim is transferred with the stipulation in the contract that transferor himself should
discharge the liability, then such a provision in the contract will supersede Ss 130 and 132 of this Act.
Where the insured hypothecates his life insurance policies and stipulates that he himself would pay
the premiums, the transferee is not bound to pay the premiums.

Under Life insurance Policies, upon death of the life assured, the Sum Assured is required to be
paid to the Legal heirs of the deceased life assured. However, if there is a dispute between legal
heirs, the benefits may not reach the intended beneficiaries on time. To avoid the above scenario,
the facility of nomination is provided to the Person who is taking the Policy at the time of taking the
Policy, by filling the names of Nominee(s) in the Proposal form and his/her relationship to the Life
Therefore, nomination is the right of the Policyholder to designate a beneficiary who will receive
the Sum assured and other benefits under the Life insurance policy from the Insurance company in
the event of his unfortunate death during the term of the Insurance Policy. The role of Nominee is
restricted to receiving benefits only upon death of the life assured.

However, where the Life assured survives the date of maturity of the Policy, but dies before the
maturity proceeds could be paid to him, the Maturity proceeds shall be paid to the Nominees. The
Person taking the Policy (Policyholder) can be the Life assured himself (own life policy) or the
Person taking the Policy can be different from the Life assured. For example, if Wife is the
Policyholder, Husband can be the Life assured. Nomination is required only if a person takes own
life policy. Where the Policyholder and Life assured are different, upon death of the Life assured,
the death benefits are payable only to the Policyholder.

It is to be noted that there is no death claim under a Policy upon death of the Policyholder, unless
he himself is the life assured as well. Only upon death of the life assured, the question of payment
of death claim arises.

Types of Nominees:

Generally, the role of Nominee is that of a Trustee and he can give a valid discharge upon
settlement of dues under a Life insurance policy to him. However, a Nominee as a Trustee is
accountable to the legal heirs and such legal heirs can claim from Nominees.

There were many legal disputes in the past where Legal heirs made a counter-claim with the Life
insurance companies for their share in the proceeds of death claim benefit and this resulted in delays
in settlement of the claim till the legal dispute is resolved in the Court of law. As a result, the
intended objective of providing an immediate succour to the bereaved family upon the death of the
bread-winner was not achieved in many cases.
Therefore, the Government amended Section 39 of the Insurance Act, 1938, by recognising 2 types
of Nominees – a Beneficial Nominee and a Collector Nominee.

As per Section 39(7) of Insurance Act, 1938, the following relatives of Life assured are categorised
as Beneficial Nominees who are beneficially entitled to the proceeds of Life insurance policy to the
exclusion of other legal heirs:

• Spouse

• Children

• Parents
Where a person nominates any of the above relatives, even if there is a rival claim from other legal
heirs, Insurance companies can proceed with settlement of claims in favour of the above category of

Further, Section 39(8) provides that even if such Beneficial nominees die after the death of the life
assured, but before receiving the death benefit, the legal heirs of such Beneficial nominees shall be
entitled to the Claim proceeds. This goes to prove that the death claim amount for a Beneficial
nominee vests in the estate of such Beneficial nominee and shall become their asset. However, a
Collector Nominee does not have such a vested right.

The provisions of Section 39(7) & (8), which were inserted under the Insurance Laws (Amendment)
Act, 2015, have been made applicable even for Insurance Policies issued before the said
Amendment Act.

Where the Nominee is any other person not covered under the above 3 relationships, he is called a
Collector Nominee who merely acts as a Trustee for other Legal heirs.

While Insurance companies can settle the claim in favour of such Collector Nominees, his claim is
subject to claim, if any, by other legal heirs.

• Other points to be noted concerning Nominations:

• • Where Minor is appointed as Nominee, an Appointee (Guardian) has to be appointed in the

Proposal form. Such Appointees are entitled to receive Policy benefits during the minority of the
Nominee as Trustees for the Minors.

• Nomination made in proposal or can be made (or changed) subsequently

• For Policies issued under Section 6 of the Married Women’s Property Act, 1874, only Wife
and/or Children can be Nominees and the Policy benefits cannot be attached even by the
Creditors of the husband-Life assured. The provisions of Section 39 of Insurance Act are not
applicable to such Policies and vice versa

• Nomination to be recorded in the Policy. document by Insurer, based on the nomination details
provided by the Proposer in the Proposal form

• Nomination can be changed subsequent to issuance of Policy – Insurer shall register changes to
nominations and shall issue an acknowledgement.

• If the Nominee(s) pre-decease the Life assured and no fresh nomination made thereafter, the
benefits payable upon subsequent death of the life assured shall accrue to the legal heirs of the
deceased life assured.

8. Return of Premium.
An insurance premium is the amount of money that an individual or business must pay for an
insurance policy. The insurance premium is income for the insurance company, once it is earned
and also represents a liability in that the insurer must provide coverage for claims being made
against the policy.
Premium once paid shall not be refunded. In other words, the question of returning the premium shall
not arise in all types of insurance including life insurance. In case of general insurance, a single
premium is paid and it will not be returned, even if the contingency does not occur during policy is
in force. However, in case of life insurance, the policy amount will be paid to the policyholder in the
event of expiry of the term assured.

Return of Premium term life insurance policy is also referred to as Term Insurance Return of
Premium (TROP). Having all the benefits of a simple term plan, with TROP, you can even avail of
income replacement and premium refund at maturity. Basically, ROP is a term plan with death
benefits, in which, if the policyholder survives the policy term, it returns the premium that’s paid.
On the other hand, in a regular term insurance, insurers pay only when the insured person dies.

Reasons to invest in a return of premium term life insurance policy:

• Refund at maturity: If the policyholder survives the tenure, a TROP offers a premium
refund at maturity. This way, you don’t lose the premium paid over the years. This makes it
a very lucrative deal for policy buyers who are looking for term insurance covers, and are
keen on receiving the money back. The TROP, in a way, tries to get the best deal for the
buyer by combining the large cover of term plans, and the saving aspect of traditional plans
such as endowment plans.
• Guaranteed returns on premiums: With an ROP plan, the policyholders need not worry
about their money being returned to them as this policy assures them that. This policy
provides guaranteed returns on the total amount of the paid premium, excluding additional
premium(s) for enhancing coverage with rider, (if any).
• Paid-up option for non-earning investors: For people who do not have a fixed source of
income, ROP has something called the ‘paid up’ option. This feature helps policyholders
during instances when they default the payment of premium.
• Premium payment options: ROP plans provide an individual a variety of Life Insurance
premium payment options, ranging from monthly to yearly, and other such options. This
policy allows the buyer an option to choose the payment option that suits him/her the best.
For example, if the policyholder has just started out his career, he can choose the singe
payment option, as there are chances he might have other priorities to take care of.
• Get tax benefits: ROP provides tax benefits as per the current tax laws. Under Section
80C and 10(10D) of Income Tax Act42, 1961, the premium paid and the amount drawn are
tax-free. Policyholders can optimize the premium amount they’ve spent for TROP to reduce
their tax liabilities to a certain extent. The Income Tax Act allows a deduction of Rs 1.5
lakhs, if the amount is invested in the right channel.

Payment of the policy amount is also subject to various conditions. They are:

1. The premium on such policy must have been paid regularly.

2. The policy must be in force.
3. If the policy is surrendered, only a lesser amount known as surrender value shall be paid to
the policyholder.

Insurance is a large investment and you will most likely purchase multiple policies throughout your
lifetime. It is essential that you know what each type of insurance covers and how it works so you
can make the best decision about what to buy.

Insurance is a tool by which fatalities of a small number are compensated out of funds collected
from plenteous. Insurance is a safeguard against uncertain events that may occur in the future.

Income tax Act 1961
Company image is the highly important criteria that consumers consider before taking up a life
insurance. This is mainly because people expect safety and secure for their money which they
invest, followed by the factor Premium which we pay to the insurer and then Bonus and Interest
paid by the company, services etc.
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1. Modern law of insurance in India by kin Murthy and kvs sarma