Insurance Law, UncategorizedAdvocate Tanwar

What is Insurance Law

Insurance laws establish a legal framework to regulate the insurance profession and its agreements. Insurance constitutes a contract of indemnity, where an insurer indemnifies a different party from a loss that occurs following the occurrence of a contingent event.

This part of law is regulated by the IRDAI. It provides cover against several kinds of risks. Insurance is a contract of indemnity. It is based on the principle of uberrimae fides, which is in utmost good faith. It implies that both the insurer and insured should reveal all the material facts regarding the person or property to be insured.

Insurance comes under the broad categories of life, property, marine, aviation, health, transport, motor vehicle—third-party liability, and personal accident and sickness.

Definition under Insurance Act, 1938

  • Section 2(8) of the Insurance Act, 1938, defines an “insurance company’ as any company, association, or partnership that may be wound up under the Companies Act, 1956, or the Indian Partnership Act, 1932.
  • Section 2(9) of the Act states that an ‘insurer’ means any individual, group of individuals, or any corporated entity that carries on an insurance business.

Insurance contract

  • An insurance contract is a mere contract between two parties, one of which is referred to as an “insurer” and the other party as “insured.”
  • Here, in this kind of contract, the insurer undertakes to the insured party that he will indemnify or save him from losses occasioned by a specific contingent event on receipt of an amount referred to as “premium.”
  • Insurer typically means the insurance company that offers the insurance, and the insured or policyholder is the one who purchases it by paying the premium. Under a contract of insurance, the insurer or insurance company puts the insurance policy to public notice, which is an invitation to offer.
  • Then, after seeing the offer to invite, the insured sends an offer to the insurer. Once the insurer accepts, it becomes an insurance contract.

Purpose of insurance

The two primary purposes of insurance contracts are as follows:

  1. Protection from uncertain events: The primary purpose of an insurance contract is to render the insured person secure and financially protected from certain uncertain events that would incur a massive financial burden.
  2. Improved finance management: Most people have the habit of making bad financial choices that can, in turn, leave them with no one to help in case of an unfortunate event. With the insured subscribing to an insurance cover, he or she would be able to make improved financial choices.

Nature of Insurance

  • Insurance is a contract. Therefore, all the requisites of a contract must be satisfied.
  • The insurance contract must be grounded on the subject matter that has an insurable interest in it. Similar to the owner of the vehicle, his vehicle is an insurable interest because in the event of loss or damage to the aforementioned vehicle, he/she can face financial crises/loss. It can be compensated through the insurance if he/she insured their vehicle.
  • The insurance is for pure risk. The individual can’t insure the subject matters wherein the possibility of risk is not included in it. Therefore, the insurance contract reimburses the loss or damage that an insurer would suffer as a result of such risk.
  • Insurance is premised on certain principles. Such principles must be followed by the parties to the insurance contract, and in case of default, the aggrieved party can proceed as per due procedure of law or as per the terms of the insurance contract.
  • The nature of insurance is a medium of sharing risk by a massive number of people amongst the few who are open to risk by some or other reason.
  • If a huge number of insured people serve the purpose of compensation for a few among them exposed to uncertain risk, this nature of insurance is described as a co-operative device.
  • The level of compensation in an insurance is fixed based on the terms and conditions of the insurance contract.
  • Insurance offers elements of financial assistance in the event of an uncertain situation.
  • The compensation payment in an insurance contract largely relies on the value of the insurance policy/contract.
  • Since insurance is contract-based, it comes under due procedure of law. Due to which the premium of insurance either gets paid in the form of gambling or charity, it needs to be paid as per the terms and condition of the insurance policy.

Principles of Insurance

  1. Utmost Good Faith: This principle states that both parties to the insurance contract are required to reveal all the facts needed and necessary for a specific insurance contract.
  2. Both the insurer and the insured must disclose all relevant information in an insurance contract. If the insurer hides details, the insured can cancel the policy anytime. Likewise, if the insured conceals crucial facts—like smoking in a health insurance policy—the insurer can reject claims, especially if a non-disclosed condition, like cancer, arises later.
  3. Proximate Cause: If the property/building has incurred losses due to an uncertain event. Under the doctrine of proximate cause the accident i.e. the proximate cause will be considered by the insurer for granting the claim for losses incurred to a specific property or building and not events occurred in relation to that specific accident.
  4. If a fire damages a building, leading to the demolition of a neighboring one, the fire remains the proximate cause. Since fire is covered under the policy, the insured can claim compensation for the damages.
  5. Insurable Interest: Under this rule i.e. insurable interest the specific subject matter/property to the insurance contract shall be an insurable interest meaning a specific individual’s livelihood  depends upon such property which is being insured.
  6. A sole earner’s family depends on their income, making their life an insurable interest. Similarly, a taxi driver relies on their vehicle for livelihood, making it an insurable interest under insurance.
  7. Indemnity: The policy of insurance is based on the law of indemnity which means that the insurer indemnifies only for any damage or loss to the subject matter or property insured which has resulted from an uncertain event.
  8. In a fire accident, the insured can claim only for restoring the building to its previous condition. They cannot claim extra for reconstruction, decoration, or renovation beyond the policy coverage.
  9. Subrogation: This is one form of insurance contract in which damage is inflicted by third party. Then the insurance company claim compensation from insurance of that person and provide it to the insured. This rule is referred as principle of subrogation.
  10. In motor insurance, third-party coverage is mandatory. If A damages B’s vehicle, B’s insurer pays for the loss and then recovers the amount from A’s insurer, following the principle of subrogation
  11. Contribution: As per the principle of contribution in insurance contract. If a subject matter/property is insured by from one or more insurer, then in case of loss/injury happened the claim for compensation shall be equally contributed by all the insurers this principle is referred as principle of contribution.
  12. If A’s car is insured by three companies and gets into an accident, the compensation is shared equally among them, following the principle of contribution.
  13. Loss Minimization: As per this rule of loss minimization the insured is required to do all reasonable and fair steps to protect the subject matter/property to the insurance contract from loss or damage. He ought to do right steps to reduce the loss of subject matter/property in event of happening of uncertain event.
  14. In a fire accident, the insured must take reasonable steps to reduce losses. If they act negligently, assuming insurance will cover everything, the insurer can deny the claim under the principle of loss minimization.

Conclusion

Insurance law ensures fair risk management and financial protection through principles like utmost good faith, indemnity, and loss minimization. It operates as a cooperative system, preventing unjust enrichment while offering security against unforeseen losses. By following legal and contractual obligations, insurance maintains balance and stability in financial planning.

Contributed by Hetu (Intern)