Insurance: An Introduction

By Ghanavi Umesh

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Insurance is generally understood as an arrangement or a contract by which a company agrees to provide a guaranteed compensation for loss of property, damage, illness or death in return for a payment of certain amount of premium over a period of time. Insurance policies are a great way to ensure economic protection, reduce future risk, and it helps in tax savings.

There are various types of insurance to protect different types of risk: life, motor, travel, health, property, mobile, etc. When you are buying an insurance policy, you must take into consideration the following things:

• Sum Insured
• Speed of Insurance Claims
• Service Benefits
• Best Value

The person buying the insurance policy is known as the ‘Insured’ whereas the person or, more often than not, a company is known as the ‘Insurer’. The contract of insurance between the two parties is not much different from a usual contract. The same requirements of offer, consideration and acceptance apply to insurance contracts. However, the question of which of the two parties gives the final acceptance depends on the negotiations of the policy. Further, the general requirements of acceptance in contracts that the acceptance must be explicitly given applies to insurance policies as well. Unless otherwise explicitly mentioned in the policy, the insurer’s liability would be covered from the preceding midnight of the date of the policy.

A contract of insurance is one of utmost good faith and both the parties must disclose every material fact relevant to the insurance policy. The insurer also has the obligation to not charge additional premium or not escape liability by stating that the situation does not warrant the insurance cover. The Insurance Act 1938 lays down the conditions to establish a misrepresentation as intention. A misrepresentation is basically any false statements made about any issue relevant to the insurance policy. If a statement which is material is suppressed fraudulently when it had to be disclosed or is made knowing that it is false by the policy-holder, it amounts to a willful misrepresentation. In such a situation, the insurer has the right to terminate the policy.

An important aspect of insurance is that there must be an insurable interest in the subject matter of the insurance policy. An insurable interest means that the interest should be such that the risk would by its proximate effect cause damage or pecuniary loss to the insured. A person having a limited interest can also insure such an interest. In case of life and personal accident insurance, it is enough if the insurable interest is present at the time of taking the policy. In case of fire and motor insurance, the insurable interest must exist both at the time of taking at the policy and at the time of the claim. For marine insurance however, it need not exist while buying the policy.

Most types of insurance are those of indemnity, except for life and personal accident insurances. An indemnity insurance means that the insurer guarantees to pay a compensation for the loss or damage sustained by the insured. It essentially aims to place the insured at the same monetary situation as if the loss had not occurred. However, the indemnity amount is subject to certain conditions: (1) The loss suffered must be proved; (2) The indemnity cannot be more than the amount specified in the policy; (3) Only those losses resulted from proximate causes are compensated; and (4) The indemnity amount is determined by the market value of the property.

While indemnity is the fundamental principle of insurance, subrogation is a corollary to it. Subrogation allows the insurer to seek the remedies which the insured has against the third party responsible for the damage to the insured. This hence entitles the insurer to sue the third party in the name of the insured. An example of subrogation is when an insured driver’s car is damaged due to another’s negligent driving. The insurer reimburses the insured under the terms of the policy and then pursues legal action against the negligent driver.

Insurance is also covered under the Consumer Protection Act. Aggrieved policy holders can approach the consumer forums with their complaints against insurance companies. Issues before consumer courts usually include repudiation of the insurance claim, admission of the claim or calculation of the amount of the claim. However, the insurer i.e. the company providing insurance policies does not come under the ambit of ‘consumer’ and hence the insurer can only approach the civil courts for any remedies.

In addition to the consumer protection act, the IRDA Act of 1999 set up the Insurance Regulatory and Development Authority which consists of members well versed in Insurance, Actuarial science, Law and Economics as a statutory regulator to regulate the insurance industry and protect the interests of policy-holders in India. This body has been given powers and responsibilities to regulate the investments of funds by insurance companies, maintenance of the margin of solvency, adjudicate the disputes between insurance companies and intermediaries and regulate the rates, advantages, terms and conditions offered by the various insurance companies through the Tariff Advisory Committee.

Further, any aggrieved policy-holder may file a complaint against an insurer before the Ombudsman within the jurisdiction if the complaint has been rejected or ignored by the insurer. This is an option available to policy-holders apart from the Consumer forums. The Ombudsmen act as mediators and try to settle the matter in the interest of both the parties. If there is a failure in arriving at a solution, the ombudsman has the power to pass an award of compensation within the loss suffered by the complainant or not exceeding 20 lakh rupees (whichever is lower).

 

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Ghanavi Umesh is a 2^nd year student at National Law University Delhi. She has a keen interest in Constitutional law, Environmental law and Intellectual Property law. She is also interested in Economics and Philosophy. One can either find her reading something or bingeing on a TV show in her leisure time. She also loves painting occasionally.