CHANAKYA NATIONAL LAW UNIVERSITY, PATNA

INSURANCE LAW

Project on:-
INSURANCE LAW – ESSENTIAL TENETS

Submitted To: MS NIDHI KUMAR

Submitted By: SATYAM JAIN
Roll No. : 1560
Semester : VIII, 4th Year.
 TABLE OF CONTENT

ACKNOWLEDGEMENT .............................................................................................................................................. 3
INTRODUCTION .......................................................................................................................................................... 4
RESEARCH METHODOLOGY................................................................................................................................ 4
MEANING AND CONCEPT OF INSURANCE ........................................................................................................... 5
Insurance is based upon: ............................................................................................................................................. 5
Nature And Charactristic Of Insurance: ..................................................................................................................... 6
PRINCIPLES OF INSURANCE LAW .......................................................................................................................... 7
Principle Of Utmost Good Faith/ Uberrima Fides ...................................................................................................... 7
Principle Of Insurable Interest .................................................................................................................................. 10
Principle Of Indemnity ............................................................................................................................................. 14
Principle Of Subrogation .......................................................................................................................................... 16
Principle Of Contribution ......................................................................................................................................... 18
Principle Of Loss Minimization................................................................................................................................ 19
Doctrine Of Proximate Cause ................................................................................................................................... 19
CONCLUSION ............................................................................................................................................................. 22
BIBLIOGRAPHY ......................................................................................................................................................... 23
Books Referred: ........................................................................................................................................................ 23
Websites Referred: .................................................................................................................................................... 23
 ACKNOWLEDGEMENT

The present project on the “Insurance Law – Essential Tenets” has been able to get its final shape with the support
and help of people from various quarters. My sincere thanks go to all the members without whom the study could not
have come to its present state. I am proud to acknowledge gratitude to the individuals during my study and without
whom the study may not be completed. I have taken this opportunity to thank those who genuinely helped me.
With immense pleasure, I express my deepest sense of gratitude to Dr. Nidhi Kumar, Faculty for Insurance Law,
Chanakya National Law University for helping me in my project. I am also thankful to the whole Chanakya National
Law University family that provided me all the material I required for the project. Not to forget thanking to my
parents without the co-operation of which completion of this project would not had been possible.
I have made every effort to acknowledge credits, but I apologies in advance for any omission that may have
inadvertently taken place.
Last but not least I would like to thank Almighty whose blessing helped me to complete the project.
 INTRODUCTION

RESEARCH METHODOLOGY
Method of Research:
The researcher has adopted a purely doctrinal method of research. The researcher has made extensive use of the
library at the Chanakya National Law University and also the internet sources.

Aims and Objectives:

The aim of the project is to present an overview of the terms “Insurance Law – Essential Tenets” through different
cases, writings and articles

Sources of Data:
The following secondary sources of data have been used in the project-
1. Cases
2. Books
3. Websites

Method of Writing:
The method of writing followed in the course of this research paper is primarily analytical.
 MEANING AND CONCEPT OF INSURANCE

Insurance is one of the devices by which risks may be reduced or eliminated in exchange for premium. Insurance
policies are a safeguard against the uncertainties of life. As in all insurance, the insured transfers a risk to the insurer,
receiving a policy and paying a premium in exchange. The risk assumed by the insurer is the risk of death of the
insured in case of life insurance.
Insurance policies cover the risk of life as well as other assets and valuables such as home, automobiles, jewelry etc.
On the basis of the risk they cover, insurance policies can be classified into two categories:
(a) Life Insurance
(b)Non-Life Insurance or General Insurance
Life insurance products cover risk for the insurer against eventualities like death or disability. Non-life insurance
products cover risks against natural calamities, burglary, etc. Insurance is system by which the losses suffered by a
few are spread over many, exposed to similar risks. With the help of Insurance, large numbers of people exposed to a
similar risk make contributions to a common fund out of which the losses suffered by the unfortunate few, due to
accidental events, are made good. Insurance is a protection against financial loss arising on the happening of an
unexpected event. Insurance policy helps in not only mitigating risks but also provides a financial cushion against
adverse financial burdens suffered.1
Insurance is defined as a co-operative device to spread the loss caused by a particular risk over a number of persons
who are exposed to it and who agree to ensure themselves against that risk.2
The definition of insurance can be seen from two view points:
(a) Functional Definition
Insurance is a co-operative device of distributing losses, falling on an individual or his family over large number of
persons each bearing a nominal expenditure and feeling secure against heavy loss.
(b) Contractual Definition
Insurance may be defined as a contract consisting of one party (the insurer) who agrees to pay to other party (the
insured) or his beneficiary, a certain sum upon a given contingency against which insurance is sought.
Insurance is a contract in which a sum of money is paid by the assured in consideration of the insurer's incurring the
risk of paying larger sum upon a given contingency.3
Insurance is based upon:

(a) Principles of Co-operation

Insurance is a co-operative device. If one person is providing for his own losses, it cannot be a strictly insurance
because in insurance the loss is shared by a group of persons who are willing to co-operate. Insurance is a co-
operative endeavour. People, who are exposed to similar risks come together and pool up a fund out of which the
loss suffered by a single person is met. Pooling of risks and resources is the essence of insurance.

1
http://www.investopedia.com/university/insurance/insurance2.asp as accessed on 28th April, 2020.
2
Ibid.
3
Singh, Avtar, “Law of Insurance”, Eastern Book Company, 2Nd Edition, 2010. Page no. 19.
(b) Principles of Probability
The loss in the form of premium can be distributed only on the basis of theory of probability. The chances of loss are
estimated in advance to affix the amount of premium. Since the degree of loss depends upon various factors, the
affecting factors are analyzed before determining the amount of loss.
With the help of this principle, the uncertainty of loss is converted into certainty. The insurer will not have to suffer
loss as well as gain windfall. Therefore, the insurer has to charge only so much of amount which is adequate to meet
the losses.4
The insurance, on the basis of past experience, present conditions and future prospects, fixes the amount of premium.
Without premium, no co-operation is possible and the premium cannot be calculated without the help of theory of
probability, and consequently no insurance is possible.

Nature And Charactristic Of Insurance:

Insurance contracts like other contracts are governed by the general principles of the law of contract as codified in
the Indian contract act 1872, which prescribed the following essential elements in order for contract to be legally
valid:
a) Offer and acceptance
b) Consideration
c) Agreement between parties
d) Capacity of the parties
e) Legality of the contract5

4
Ibid.
5
Singh, Avtar, “Law of Insurance”, Eastern Book Company, 2Nd Edition, 2010. Page no. 29
 PRINCIPLES OF INSURANCE LAW

Principle Of Utmost Good Faith/ Uberrima Fides

Utmost Good Faith
Utmost Good Faith can be defined as “A positive duty to voluntarily disclose, accurately and fully all facts material
to the risk being proposed whether requested for or not”.
In Insurance contracts Utmost Good Faith means that “each party to the proposed contract is legally obliged to
disclose to the other all information which can influence the others decision to enter the contract”.
The following can be inferred from the above two definitions:
(1) Each party is required to tell the other, the truth, the whole truth and nothing but the truth.
(2) Unlike normal contract such an obligation is not limited to any questions asked and
(3) Failure to reveal information even if not asked for gives the aggrieved party the right to regard the contract as
void.6

MATERIAL FACT
Material fact is every circumstance or information, which would influence the judgement of a prudent insurer in
assessing the risk or those circumstances which influence the insurer decision to accept or refuse the risk or which
effect the fixing of the premium or the terms and conditions of the contract must be disclosed. Test of Determination-
Whether a particular fact is material depends upon the circumstances of a particular case. The test to determine
materiality is whether the fact has any bearing on the risk undertaken by the insurer.
If the fact has any bearing on the risk it is a material fact, if not it is immaterial. Only those facts, which have a
bearing on the risk, are material facts. Otherwise, they are not material facts, which need to be disclosed.

(Rohini Nandan V/s. Ocean Accident and Guarantee Corporation)7

Materiality is a question of fact, to be decided in the circumstances which would influence the judgment of a prudent
insurer in fixing the premium on determining whether he will take the risk and if so, at what premium and on what
conditions.

FACTS, WHICH MUST BE DISCLOSED

i. Facts, which show that a risk represents a greater exposure than would be expected from its nature e.g., the fact
that a part of the building is being used for storage of inflammable materials.
ii. External factors that make the risk greater than normal e.g. the building is located next to a warehouse storing
explosive material.
iii. Facts which would make the amount of loss greater than that normally expected e.g. there is no segregation of
hazardous goods from non-hazardous goods in the storage facility.

6
Srinivasan, M.N., Joga Rao, S.V., “Principles of Insurance Law”, Lexis Nexis Butterworths Wadhwa, 9th Edition, Nagpur, 2009. Page no.
87.
7
AIR6 1960 Kolkata 696.
iv. History of Insurance (a) Details of previous losses and claims (b) if any other Insurance Company has earlier
declined to insure the property and the special condition imposed by the other insurers; if any.
v. The existence of other insurances
vi. Full facts relating to the description of the subject matter of Insurance
Details of previous losses are a material fact which is relevant to all policies.

FACTS, WHICH NEED NOT BE DISCLOSED

a) Facts of Law: Everyone is deemed to know the law. Overloading of goods carrying vehicles is legally banned. The
transporter cannot take excuse that he was not aware of this provision.
b) Facts which lessen the Risk: The existence of a good fire-fighting system in the building.
c) Facts of Common Knowledge: The insurer is expected to know the areas of strife and areas susceptible to riots and
of the process followed in a particular trade or Industry.
d) Facts which could be reasonably discovered: For e.g. the previous history of claims which the Insurer is supposed
to have in his record.
e) Facts which the insurers representative fails to notice: In burglary and fire Insurance it is often the practice of
Insurance companies to depute surveyors to inspect the premises and in case the surveyor fails to notice hazardous
features and provided the details are not withheld by the Insured or concealed by him them the Insured cannot be
penalized.
f) Facts covered by policy condition: Warranties applied to Insurance policies i.e. there is a warranty that a
watchman be deployed during night hours then this circumstance need not be disclosed.

Duration of Duty of Disclosure

The duty of disclosure remains in force throughout the entire negotiation stage and till the contract is finalized. Once
the contract is finalized than the contract is subject to ordinary simple good faith. However when an alteration is to
be made in an existing contract then this duty of full disclosure recovers in respect of the proposed alteration.
Ratan Lal Vs. Metropolitan Insurance Co. Ltd.8:- Pyare Lal (insured) died on 19-4-1946, plaintiff in this case were
his sons (successors and heirs). On accord of his policy, it so happened that before the acceptance could be
supplemented with regular policy, the assured died on 19-4-1946. But the amount which had been paid up by the
deceased was first kept in suspense account and thereafter on 28-3-1946 was adjusted it first annual premium.
Therefore it could be said that on the date of adjustment of account, the policy was deemed to be a binding contract
between the parties. But the company contended that though deceased died after the acceptance of policy but illness
which was responsible for bringing about his death had already set in since 23-3-1946, much within the time the policy
was still under consideration before the company. On this, plaintiff replied that the illness had set in for the first time on
23-3-1946 and not any time before that, and the intimation was made to the company about the illness.

Trial court held the company liable to pay the sum to the insured, but defendants didn‟t find their way to make any
payment to the plaintiffs and hence this appeal came before the High Court. Court on the facts observed that: -
Principle of uberrima fidea would follow till the conclusion of the contract is made by the company. And if breach
occurs the contract would be voidable the instance of the party to whom “ubarrima fides” is due.

8
AIR 1959 Pat 413
Great care must be taken in deciding the difference as to what would be mere illness or what‟s ordinary simple
disorder, and what would constitute material change in health there‟s a great danger for one being take for another.
Therefore, if in his honest judgment there was no illness or any change of health but only an ordinary disorder, the
mere non-communication of that event to the company cannot be a ground for the insurer to avoid the policy.
Therefore, the moment the proposal was accepted by the company, the condition as to the remittance of the first
instalment by the assured and the acceptance of the same by the company also automatically stood complied with,
26th March, 1946. He had already sent for the doctor on the previous evening, namely, on 27th March, 1946, but on
that day the complaint, if any, was nothing more than exhaustion or what we may call ordinary simple disorder
otherwise had there been anything serious, the doctor should have undoubtedly prescribed some medicine to the
patient. And therefore the complaint was of an ordinary disorder character and not illness. If that is so then there was
no breach of warranty by Pyare Lal if he did not send any information of his illness which began on the 28th March,
1946 and wherein the policy had already been accepted by company.
The duty of disclosure also revives at the time of renewal of contract since legally renewal is regarded as a fresh
contract. For example: a landlord at the time of proposal has disclosed that the building is rented out and is being
used as an office. If during the continuation of the policy the tenants vacate the building and the landlord
subsequently rents it out to a person using it as a godown then he is required to disclose this fact to the Insurer as this
is a change in material facts and effects the risks.
BREACHES OF UTMOST GOOD FAITH
Breaches of Utmost Good Faith occur in either of 2 ways.
(1) Misrepresentation, which again may be either innocent or intentional. If intentional then they are fraudulent
(2) Non-Disclosure, which may be innocent or fraudulent. If fraudulent then it is called concealment. It is important
to distinguish between the two: Misrepresentation and Non-Disclosure

Misrepresentation:
Innocent: This occurs when a person states a fact in the belief or expectation that it is right but it turns out to be
wrong. While taking out a Marine Insurance Policy the owner states that the ship will leave on a specific date but in
fact the ship leaves on a different date.
Intentional: Deliberate misrepresentation arises when the proposer intentionally distorts the known information to
defraud the insurer. The selfish objective is somehow to enter the contract or to get a reduction in the premium e.g.,
If an applicant for motor Insurance stated that no one under 18 would drive the vehicle when in fact his 17 years old
son drives frequently. Such a misrepresentation would be material as it would affect the decision of the insurer.

Non-Disclosure
Innocent: This arises when a person is not aware of the facts or when even though being aware of fact does not
appreciate its significance e.g. A proposer at the time of effecting the contract has undetected cancer therefore does
not disclose it or A proposer had suffered from Rheumatic fever in his childhood but he does not disclose this not
knowing that people who have this are susceptible to heart diseases at a later age.
Deliberate: This is done with a deliberate intention to defraud the insurer entering into a contract, which he would
not have done had he been aware of that fact.
A proposer for fire Insurance hides the fact knowingly by not disclosing that he has an outhouse next to his building,
which is used as a store for highly inflammable material.9

9
https://www.google.co.in/url?sa=t&rct=j&q=&esrc=s&source=web&cd=2&cad=rja&uact=8&ved=0CCMQFjAB&url=http%3A%2F%2F
www.belmontint.com%2F_uploads%2FBelmont_Virtual_Academy%2FThe-six-
.

How to Deal With Breaches

How breaches are dealt with depends upon whether the breaches are
1) Innocent
2) Deliberate
3) Material to the risk
4) Immaterial to the risk
When Breach of Utmost Good Faith occurs the aggrieved party gets the right to avoid the contract. The contract does
not become automatically void and it must decide on the course to be taken. The options available are on case-to-
case basis like: -
1) The contract becomes void from the very beginning if deliberate misrepresentation or non-disclosure is resorted to
with the intention of misleading the insurer to enter into a contract.
2) To consider the contract void, the bereaved party, must notify the offending party that breach has been noticed and
as per the conditions of the contract he is no longer
governed with the terms of the contract agreed upon in covering the risk. In case the breach is discovered at the time
of claim he will refuse to honour his promise and will not pay the claim. This again occurs when there has been a
deliberate breach.
3) When the breach is innocent but it is material to the fact then the insurer may impose a penalty in the form of
additional Premium.
4) Where the breach is found to be innocent and is not material the insurer can choose to ignore the breach or waive
off the breach.
Principle Of Insurable Interest
One of the essential ingredients of an Insurance contract is that the insured must have an insurable interest in the
subject matter of the contract. Insurance without insurable interest would be a mere wager and as such unenforceable
in the eyes of law. The subject matter of the Insurance contract may be a property or an event that may create a
liability but it is not the property or the potential liability which is insured but it is the pecuniary interest of the
insured in that property or liability which is insured.
The concept is the basis of the doctrine of insurable interest and was cleared in the case of Castellain v/s Priston in
1883as follows:
“What is it that is insured in a fire policy? Not the bricks and materials used in building the house but the interest of
the Insured in the subject matter of Insurance.”
The subject matter of the contract is the name given to the financial interest, which a person has in the subject matter
and it is this interest, which is insured.

principles.pdf&ei=_b9DVZiFL42puwTRnoGwCQ&usg=AFQjCNEh1Kk3ucTxpAMW5bDC8UyGiKaJaQ&sig2=1VqRoq9OZxynI5oloU0
llg&bvm=bv.92189499,d.c2E as accessed on 28th April, 20
The insurable interest is the pecuniary interest whereby the policy-holder is benefited by the existence of the subject-
matter and is prejudiced by the death or damage of the subject-matter.10
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.
Insurable Interest is defined as “The legal right to insure arising out of a financial relationship recognized under the
law between the insured and the subject matter of Insurance”.
There are four essential components of Insurable Interests
1) There must be some property, right, interest, life, limb or potential liability capable of being insured.
2) Any of these above i.e. property, right, interest etc. must be the subject matter of Insurance.
3) The insured must stand in a formal or legal relationship with the subject matter of the Insurance. Whereby he
benefits from its safety, well-being or freedom from liability and would be adversely affected by its loss, damage
existence of liability.
4) The relationship between the insured and the subject matter must be recognized by law.

HOW IS INSURABLE INTEREST CREATED

There are a number of ways by which Insurable Interest arises or is restricted.
1) By Common Law: Cases where the essential elements are automatically present can be described as Insurable
Interest having arisen by common law. Ownership of a building, car etc, gives the owner the right to insure the
property.
2) By Contract: In some cases a person will agree to be liable for something which he would not be ordinarily for. A
lease deed for a house for example may make the tenant responsible for the repair and maintenance of the building.
Such a contract places the tenant in a legally recognized relationship with the house or the potential liability and this
gives him the insurable interest.
3) By Statute: Sometimes an Act of the Parliament may create an insurable interest by granting some benefit or
imposing a duty and at times removing a liability may restrict the Insurable Interest.
4) Anti-Wagering Legislations
Insurable Interest is applicable in the Insurance of property, life and liability. In case of property Insurance, insurable
interest arises out of ownership where the owner is the insured but it can arise due to other situations & financial
interests which gives a person who is not an owner, insurable interest in the property and some of the situations are
listed below.
1) Mortgagee and Mortgagers: The practice of Mortgage is common in the area of house & vehicle purchase. The
mortgagee is the lender normally a bank or a financial institution, and the mortgager is the purchaser. Both have an
insurable interest; the mortgager because he is the owner and the mortgagee as a creditor with insurable interest
limited to the extent of the loan.
As per Section 72 of the Transfer of property Act, 1882 where the property is by its nature insurable, the mortgagee
may also, in the absence of a contract to the contrary, insure and keep insured against loss or damage by fire the

10
10 http://law.freeadvice.com/insurance_law/insurance_law/insurable_interests.htm as accessed on 28th April, 20.
whole or any part of such property, and the premiums paid for any such insurance shall be 5[added to the principal
money with interest at the same rate as is payable on the principal money or, where no such rate is fixed, at the rate
of nine per cent. per annum]. But the amount of such insurance shall not exceed the amount specified in this behalf
in the mortgage-deed or (if no such amount is therein specified) two-thirds of the amount that would be required in
case of total destruction to reinstate the property insured.
2) Seller and Buyer:
In The Transfer of Property Act, 1882 Section 49 talks about transferee‟s right under policy. Where immoveable
property is transferred for consideration, and such property or any part thereof is at the date of the transfer insured
against loss or damage by fire, the transferee, in case of such loss or damage, may, in the absence of a contract to the
contrary, require any money which the transferor actually receives under the policy, or so much thereof as may be
necessary, to be applied in reinstating the property.
3) Bailee: Bailee is person legally holding the goods of another, may be for payment or other reason. Motors garages
and watch repairers have a responsibility to take care of the items in their custody and this gives them an insurable
interest even though he is not owner.
4) Trustees: They are legally responsible for the property under their charge and it is this responsibility which gives
rise to insurable interest.
5) Part Ownership: Even though a person may have only part interest in a property he can insure the entire property.
He shall be treated as a trustee or the co-owners; and in the event of a claim he will hold the money received by him
in excess of his financial interest in trust for the others.
6) Agents: When the principal has an insurable interest then his agent can insure the property. But only that agent
can insure who is having possession of the property.
7) Liability: In Liability Insurance a person has insurable interest to the extent of any potential liability which may be
incurred due to damages and other costs. It is not possible to foretell how much liability or how often a person may
incur liability and in what form or shape it arises. In this way Insurable Interest in Liability Insurance is different
than Insurable Interest in life & property - where it is possible to predetermine the extent of Insurable Interest.
Therefore in liability assurance the insured is asked to choose the amount of sum insured as the maximum figure that
he estimates is ever likely to be required to settle the liability claims.

Insurable Interest in Life Insurance

The object of Insurance should be lawful for this purpose; the person proposing for Insurance must have interest in
the continued life of the insured & would suffer pecuniary loss if the insured dies. If there is no insurable interest, the
contract becomes wagering (gambling) contract. All wagering contracts are illegal & therefore null & void.

Own Life Policy

So long as the Insurance is on one‟s own life, the “Insurance Interest” presents no difficulty. A person has insurable
interest in his own life to an unlimited extent. The absence of a limit in this case is reasonable. When a person
insures his life he obtains protection against loss to his estate; for in the event of his untimely death the estate would
not benefit by the future accumulation he hopes to make during the normal span of life. It is not easy to compute
with any degree of certainty what the future earnings of a person would be. Hence no limit may be fixed in respect of
life Insurance he may effect. Where, however, insurer rejects a proposal for an amount of assurance, which is
disproportionate to the means of the proposer, it is not normally for lack of Insurable interest but on considerations of
“moral hazard”. Indeed it may also be presumed in a case where a person proposes for a policy for a large amount,
which he may not be able to maintain having regard to his income, that it will be financed by some other person and
that there is no insurable interest.
Insurance on the Life of Spouse (Husband and Wife)
As a wife is normally supported by her husband, she can validly effect an insurance on her life for adequate amount.
The service and help rendered by the wife used to be thought of as the basis of insurable interest which supports any
policy which a man takes on the life of his wife. In Griffiths v. Elemming the Court of Appeal in England stated that
it was difficult to uphold such interest on the basis of pecuniary interest but thought that such interest could be
presumed on broader grounds.

Parent and Child

Following the practice in U.K. in India also a parent is not considered to have insurable interest in the life of the
child unless he/she has pecuniary interest in the life of the child. The same is the case with a child in respect of his
parent‟s life. Whether this position requires to be reviewed now appears to be engaging the attention of people here.
A Hindu is under a legal obligation to maintain his parents. Even as per traditional law Sec.20 of the Hindu Adoption
and Maintenance Act has given statutory form to the legal obligation. The parents have, therefore, a right to
maintenance subject to their being aged or infirm. An order for maintenance of parents may also be passed under
Section 125 of the Code of Criminal Procedure, 1973. It may be stated, therefore, that a parent has pecuniary interest
in the life of the child, and an assurance effected on that basis cannot be hit by Section 30 of the Contract Act as a
wagering contract. However, it may be noted that the pecuniary interest is not a present interest unless the parent is
unable to maintain himself or herself at the time when the Insurance is effected. It may therefore, be argued that a
parent cannot have insurable interest in the life of the child until the right to maintenance arises; but when a person is
not able to maintain oneself how can he be expected to have the means to insure the life of his children? As a matter
of fact in India, even today a child is a potential breadwinner for the parents in their old age. The present affluent
circumstances of a parent do not alter that situation. Under the traditional law a right to maintenance could be
claimed only against the sons; the statute has now extended the obligation to the daughters as well. Having regard to
the social and economic set up of the people in the country a review of the question seems to be appropriate.

On the life of other relations

In the case of other relations, insurable interest cannot be presumed from the mere existence of their relationship.
Moral obligations or duties are not sufficient to sustain an insurable interest.
In every other case, the insurable interest must be a pecuniary interest and must be founded on a right or obligation
capable of being enforced by Courts of law.
Creditor – debtor: A creditor has insurable interest in the life of his debtor upto the amount of the debt; This is not a
satisfactory basis; for in the event of death of the debtor after the debt has been repaid, the creditor 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 then cannot take benefits under the policy in excess of his dues.
Partner: 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.
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 lack of such interest would render the contract void.
If insurable interest existed at the inception of the policy, the contract would be enforceable though such interest
might cease later.

WHEN SHOULD INSURABLE INTEREST EXIST

In a marine insurance contract the presence of insurable interest is necessary only at the time of the loss. It is
immaterial whether he has or does not have any insurable interest at the time when the marine insurance policy was
taken.
(i) In Life Insurance Insurable Interest must exist at the time of inception of Insurance and it is not required at the
time of claim
(ii) In Marine Insurance Insurable Interest must exist at the time of loss / claim and it is not required at the time of
inception.
(iii) In Property and other Insurance Insurable Interest must exist at the time of inception as well as at the time of
loss/ claims.

Other Salient Features of Insurable Interest

(i) Insurable Interest of Insurers: Once the Insurers have accepted the liability they derive an insurable interest, which
arises from that liability thus they are free to insure a part or whole of the risk with another insurer. This is done by
reinsurance.
(ii) Legally Enforceable: The Insurable Interest must be legally enforceable. The mere expectation that one may
acquire insurable interest in the future is not sufficient to create insurable interest.
(iii) Possession: Lawful possession of property together with its responsibility creates an insurable interest.
(iv) Criminal Acts: A person cannot avail benefits from Insurance to cover penalties because of a criminal act but
insurance to take care of civil consequences arising out of his criminal act can be done. This is applicable in the case
of motor Insurance where a driver found guilty of an offence which is involved in an accident receives the claim for
damage to his own car and also liability incurred due to damage to another‟s property but he shall not be insured for
the amount of penalty that was imposed for his offense.
(v) Financial Value: Insurable interest must be capable of financial evaluation. In the case of property and liability
incurred it is easily evaluated but in life it is difficult to put a value on the life of a person or his spouse and this
depends on the amount of premium the individual can bear. However in cases where lives of others are involved a
value on life can be placed i.e. creditor can put a value on the life of debtor restricted to the extent of the loan.11
Principle Of Indemnity
Indemnity according to the Cambridge International Dictionary is “Protection against possible damage or loss” and
the Collins Thesaurus suggests the words “Guarantee”, “Protection”, “Security”, “Compensation”, “Restitution” and
“Reimbursement” amongst others as suitable substitute for the word “Indemnity”. The words protection, security,
compensation etc. are all suited to the subject of Insurance but the dictionary meaning or the alternate words
suggested do not convey the exact meaning of Indemnity as applicable in Insurance Contracts.
In Insurance the word indemnity is defined as “financial compensation sufficient to place the insured in the same
financial position after a loss as he enjoyed immediately before the loss occurred.” Indemnity thus prevents the
insured from recovering more than the amount of his pecuniary loss. It is undesirable that an insured should make a
profit out of an event like a fire or a motor accident because if he was able to make a profit there might well be more
fires and more vehicle accidents. As in the case of Insurable Interest, the principle of indemnity also relies heavily on
the financial evaluation of the loss but in the case of life and disablement it is not possible to be precise in terms of
money.

USES
To avoid intentional loss: According to the principle of indemnity insurer will pay the actual loss suffered by the
insured. If there is any intentional loss created by the insured the insurer‟s is not bound to pay. The insurer‟s will
pay only the actual loss and not the assured sum (higher is higher in over-insurance).

11
Supra Note 3. Page no. 29.
To avoid an Anti-social Act: If the assured is allowed to gain more than the actual loss, which us against the
principle of indemnity, he will be tempted to gain by destruction of his own property after it insured against a risk.
So, the principle of indemnity has been applied where only the cash-value of his loss and nothing more than this,
through he might have insured for a greater amount, will be compensated.12

Conditions of Indemnity Principle

The following conditions should be fulfilled in full application of principle of indemnity.
• The insured has to prove that he will suffer loss on the insured matter at the time of happening of the event and the
loss is actual monetary loss.
• The amount of compensation will be the amount of insurance. Indemnification cannot be more than the amount
insured.
• If the insured gets more amount then the actual loss; the insurer has right to get the extra amount back.
• If the insured gets more amount then from third party after being fully indemnified by insurer, the insurer will have
right to receive all the amount paid by the third party.
• The principle of indemnity does not apply to personal insurance because the amount of loss is not easily calculable
there.
Insurance may be for less than a complete indemnity but it may not be for more than it.
However there are two modern types of policy where there is a deviation from the application of this principle. One
is the agreed value policy where the insurer agrees at the outset that they will accept the value of the insured property
stated in the policy (sum insured) as the true value and will indemnify the insured to this extent in case of total loss.
Such policies are obtained on valuable pieces of Art, Curious, Jewellery, Antiques, Vintage cars etc. The other type
of policy where the principle of strict indemnity is not applied is the Reinstatement policy issued in Fire Insurance.
Here the Insured is required to insure the property for its current replacement value and the Insurer agrees that in the
event of a total loss he shall replace the damaged property with a new one or shall pay for the replacement in full.
Other than these there are Life and Personal Accident policies where no financial evaluation can be made. All other
Insurance policies are subjected to the principle of strict Indemnity. In most policy documents the word indemnity
may not be used but the courts will follows this principle in case of any dispute coming before them.

HOW IS INDEMNITY PROVIDED?

The Insurers normally provide indemnity in the following manner and the choice is entirely of the insurer:
1. Cash Payment
In majority of the cases the claims will be settled by cash payment (through cheques) to the assured. In liability
claims the cheques are made directly in the name of the third party thus avoiding the cumbersome process of the
Insurer first paying the Insured and he in turn paying to the third party.
2. Repair
This is a method of Indemnity used frequently by insurer to settle claims. Motor Insurance is the best example of this
where garages are authorized to carry out the repairs of damaged vehicles. In some countries Insurance companies
even own garages and Insurance companies spend a lot on Research on motor repair to arrive at better methods of
repair to bring down the costs.

12
http://www.uslegalforms.com/?auslf=definitions-ad&page=/i/indemnity-principle/&ad_id=default_ad_3 as accessed on 28th April, 20.
3. Replacement
This method of Indemnity is normally not preferred by Insurance companies and is mostly used in glass Insurance
where the insurers get the glass replaced by firms with whom they have arrangements and because of the volume of
business they get considerable discounts. In some cases of Jewellery loss, this system is used specially when there is
no agreement on the true value of the lost item.
4. Reinstatement
This method of Indemnity applies to Property Insurance where an insurer undertakes to restore the building or the
machinery damaged substantially to the same condition as before the loss. Sometimes the policy specifically gives
the right to the insurer to pay money instead of restoration of building or machinery. Reinstatement as a method of
Indemnity is rarely used because of its inherent difficulties e.g., if the property after restoration fails to meet the
specifications of the original in any material way or performance level then the Insurer will be liable to pay damages.
Secondly, the expenditure involved in restoration may be much more than the sum Insured as once they have agreed
to reinstate they have to do so irrespective of the cost.13

Limitations on Insurers Liability

1. The maximum amount recoverable under any policy is the sum insured, which is mentioned on the policy. The
amount is not the agreed value of the property (except in Valued policies) nor is it the amount, which will be paid
automatically on occurrence of loss. What will be paid is the actual loss or sum insured whichever is less.
2. Property Insurance is subjected to the Condition of Average. The underlying principle behind this condition is that
Insurers are the trustees of a pool of premiums from which they meet the losses of the few who suffer damage, so it
is reasonable to conclude that every Insured should bring a proper contribution to the pool by way of premium.
Therefore if an insured deliberately or otherwise underinsures his property thus making a lower contribution to the
pool, he is not entitled to receive the full benefits.
The application of this principle makes the insured his own Insurer to the extent of under-insurance i.e. the pro-rata
difference between the Actual Value and the sum insured.
The amount of loss will be shared between the Insurer and the insured in the proportion of sum insured and the
amount underinsured. The formula applicable for arriving at the amount to be paid by the Insurance Co. is Claim =
Loss X (Sum Insured / Market Value).14
Principle Of Subrogation
Subrogation is the right of insurers, once they have paid the insurance money due, to exercise any rights or remedies
of the insured arising out of the insured event to recover their outlay from a culpable third party.
It has already been established that the purpose of Indemnity is to ensure that the Insured does not make a profit or
gain in any way as a consequence of an accident. He is placed in the same financial position, which he had occupied
immediately before the loss occurred. As an off shoot of the above it is also fair that the insurer having indemnified
the insured for damage caused by another (A Third Party) should have the right to recover from that party the
amount of damages or part of the amount he has paid as indemnity.
This right to recover damages usually lies with the bereaved or injured party but the law recognises that if another
has already paid the bereaved or injured party then the person who has paid the compensation has the right to recover
damages.
13
https://www.coursehero.com/u/file/21351588/INSURANCE-LAW-ESSENTIAL-TENETS/?justUnlocked=1#doc/qa accessed on 20
march, 20.
14
Ibid
In case the insured after having received indemnity also recovers losses from another then he shall be in a position of
gain which is not correct and this amount recovered from another shall be held in trust for the insurer who have
already given indemnity. Subrogation may be defined as the transfer of legal rights of the insured to recover, to the
Insurer.
Why Subrogation is called a corollary of Indemnity and not treated as a separate basic Principle of Insurance can be
traced to the judgement given in the case of Casletlan V Preston (1883) in U.K. It was said in this case:
“That doctrine (Subrogation) does not arise upon any terms of the contract of Insurance, it is only the other
proposition, which has been adopted for the purpose of carrying out the fundamental rule i.e. indemnity. “It is a
doctrine in favour of the underwriters or insurers, in order to prevent the insured from recovering more than a full
indemnity; it has been adopted solely for that reason.”
Subrogation does not apply to life and personal accidents as these are not contracts of Indemnity. In case death of a
person is caused by the negligence of another than the legal heirs of the deceased can initiate proceedings to recover
from the guilty party in addition to the policy proceeds. If the insured is not allowed to make profit the insurer is also
not allowed to make a profit and he can only recover to the extent he has indemnified the Insured.

Subrogation can arise in 4 ways

a) Tort
b) Contract
c) Statute
d) Subject matter of Insurance
1) Tort: When an insured has suffered a loss due to a negligent act of another then the Insurer having indemnified the
loss is entitled to recover the amount of indemnity paid from the wrongdoer. The Insured has a right in Tort to
recover the damages from the individuals involved. The Insurers assume these rights and take action in the name of
the insured and take his permission before starting legal proceedings.
2) Contract: This can arise when a person has a contractual right to compensation regardless of a fault then the
Insurer will assume the benefits of this right.
3) Statute: Where the Act or Law permits, the insurer can recover the damages from Government agencies like the
Risk (Damage) Act 1886 (UK) gives the right to insurers to recover damages from the District Police Authorities in
respect of the property damaged in Riots which has been indemnified by them.
4) Subject Matter of Insurance: When the Insured has been indemnified and the property treated as lost he cannot
claim salvage as this would give him more than indemnity.
Therefore when Insurers sell the salvage as in the case of damaged cars it can be said that they are exercising their
right of subrogation.15

Subrogation – When?
Subrogation means substituting one creditor for another. Principle of Subrogation is an extension and another
corollary of the principle of indemnity. It also applies to all contracts of indemnity. According to the principle of
subrogation, when the insured is compensated for the losses due to damage to his insured property, then the

15
http://injury.findlaw.com/accident-injury-law/insurance-law-what-is-a-subrogation-action.html as accessed on 28th April, 20
ownership right of such property shifts to the insurer. This principle is applicable only when the damaged property
has any value after the event causing the damage. The insurer can benefit out of subrogation rights only to the extent
of the amount he has paid to the insured as compensation.
According to common law the right of subrogation arises once the Insurers have admitted the claim and paid it. This
can create problems for the Insurers as delay in taking action could at times hamper their chance of recovering the
damages from the wrongdoer or it could be adversely affected due to any action taken by the Insured. To safeguard
their rights and to ensure that they are in control of the situation from the beginning Insurers place a condition in the
policy giving themselves subrogation rights before the claim is paid. The limitation is that they cannot recover from
the third party unless they have indemnified the insured but this express condition allows the insurer to hold the third
party liable pending indemnity being granted.
Many individuals having received indemnity from the Insurer lose interest in pursuing the recovery rights they may
have. Subrogation ensures that the negligent do not get away scot free because there is Insurance. The rights which
subrogation gives to the Insurers are the rights of the Insured and it places certain obligations on the Insured to assist
the Insurers in enforcing their claims and not to do anything which would harm the Insurers chances to recover
losses.16
Principle Of Contribution
Principle of Contribution is a corollary of the principle of indemnity. It applies to all contracts of indemnity, if the
insured has taken out more than one policy on the same subject matter. According to this principle, the insured can
claim the compensation only to the extent of actual loss either from all insurers or from any one insurer. If one
insurer pays full compensation then that insurer can claim proportionate claim from the other insurers.
Contribution is a right that an insurer has, who has paid under a policy, of calling other interested insurers in the loss
to pay or contribute rateably to the payment. This means that if at the time of loss it is found that there is more than
one policy covering the same loss then all policies should pay the loss proportionately to the extent of their
respective liabilities so that the insured does not get more than one whole loss from all these sources. If a particular
insurer pays the full loss than that insurers shall have the right to call all the interested insurers to pay him back to the
extent of their individual liabilities, whether equally or otherwise. So, if the insured claims full amount of
compensation from one insurer then he cannot claim the same compensation from other insurer and make a profit.
Secondly, if one insurance company pays the full compensation then it can recover the proportionate contribution
from the other insurance company.

Conditions when Contribution operates

Before contribution can operate the following conditions must be fulfilled:
(i) There must be more than one policy involved and all policies covering the loss must be in force.
(ii) All the policies must cover the same subject-matter. If all the policies cover the same insured but different
subject-matters altogether then the question of contribution would not arise.
(iii) All the policies must cover the same peril causing the loss. If the policies cover different perils, some common
and some uncommon, and if the loss is not caused by a common peril, the question of contribution would not arise.
(iv) All the policies must cover the same interest of the same insured.
(v) All the policies must operational in the eyes of law.17

16
http://injury.findlaw.com/accident-injury-law/insurance-law-what-is-a-subrogation-action.html as accessed on 28th April, 20
17
Supra Note 6. Page 95.
It should be remembered that if any of the above four factors is not fulfilled, contribution will not apply.

Principle Of Loss Minimization

According to the Principle of Loss Minimization, insured must always try his level best to minimize the loss of his
insured property, in case of uncertain events like a fire outbreak or blast, etc. The insured must take all possible
measures and necessary steps to control and reduce the losses in such a scenario. The insured must not neglect and
behave irresponsibly during such events just because the property is insured. Hence it is a responsibility of the
insured to protect his insured property and avoid further losses.
For example :- Assume, Mr. John's house is set on fire due to an electric short-circuit. In this tragic scenario, Mr.
John must try his level best to stop fire by all possible means, like first calling nearest fire department office, asking
neighbours for emergency fire extinguishers, etc. He must not remain inactive and watch his house burning hoping,
"Why should I worry? I've insured my house.18"
Doctrine Of Proximate Cause

Properties are exposed to various perils like fire, earthquake, explosion, perils of sea, war, riot and so on and every
event is the effect of some cause. The law however refuses to enter into a subtle analysis or to carry back the
investigation further than is necessary. It looks exclusively to the immediate and proximate cause, all causes
preceding the proximate cause being rejected as too remote.

Proximate cause
Proximate cause is a key principle of insurance and is concerned with how the loss or damage actually occurred and
whether it is indeed as a result of an insured peril. The doctrine of proximate cause, which is common to all branches
of insurance, must be applied with good sense so as to give effect to and not to defeat the intention.
Wherever there is a succession of causes which must have existed in order to produce the loss, or which has in fact
contributed, or may have contributed to produce it, the doctrine of proximate cause has to be applied for the purpose
of ascertaining which of the successive causes is the cause to which the loss is to be attributed within the intention of
the policy.19
„Proximate Cause‟ is defined as “The active, efficient cause that sets in motion a chain of events, which brings about
a result, without the intervention of any new or independent force” Proximate cause refers to an action that leads to
an unbroken chain of events; events that end with someone suffering a loss. Proximate cause is used to examine how
a loss occurred and how many may have played a role in causing the loss. Proximate cause refers to the initial action
that caused a loss. Proximate cause is the starting point in the chain of events that led to a loss. As the well known
maxim of lord Bacon runs: “It was infinite for the law to consider the causes of causes and their impulsions one of
another therefore it contended itself with the immediate cause” and rejects all causes preceding the proximate cause
as too remote.
Sometimes the direct cause is easy to determine; someone throws a ball through a window and breaks a window. In
this case, the direct cause is the act of throwing and it is easy to make the connection between the cause and the loss.
However, if a child lights a firecracker, then fearing that the firecracker will explode in his or her hands, tosses the
firecracker to a second child.
The second child also fears the impending explosion and proceeds to toss the firecracker to a third child. This third
child is the unlucky recipient of the firecracker at the precise moment of explosion; a loss occurs as the child is

18
https://insurancecompanyblog.wordpress.com/2012/08/15/in-the-advent-o as accessed on 28th April, 20.
19
http://www.irmi.com/online/insurance-glossary/terms/p/proximate-cause.aspx as accessed on 28th April, 15.
injured. The question of proximate cause becomes important in determining who is responsible for the injuries to the
third child. Direct cause is very easy to connect to the loss.
The second child tossed the firecracker to the third child knowing that there would be an explosion. This act
demonstrates either malicious intent or at least a degree of wanton disregard for another‟s safety. The second child is
then directly responsible for the third child‟s injuries; the direct cause of loss.

Perils Relevant to Proximate Cause:

There are three types of relevant perils, which are as follows:
• Insured Perils: Those which are stated in the policy as insured, such as fire, burglary, flood and lightning.
• Excepted or Excluded Perils: Those stated in the policy as excluded either as causes of insured perils, such as riot
or earthquake or as a result of insured perils.
• Uninsured or Other Perils: Those not mentioned in the policy at all. Storm, smoke and water are not excluded nor
mentioned as insured in a fire policy. It is possible for a water damage claim to be covered under a fire policy, if for
example, a fire occurs and the fire brigade extinguishes it with water.

Proximate Cause v. Remote Cause

The practical solution devised by law for fixing the cause of the loss is the doctrine of proximate cause, expressed in
the legal maxim, Causa Proxima Non Remota Spectator, which means that proximate and not remote cause shall be
taken as the cause of the loss. “Where various factors or causes are concurrent and has to be selected, the matter is
determined as one of fact and choice falls upon the one to which may be variously ascribed the qualities of reality,
predominance, efficiency”

Test for Determining Proximate Cause:

Courts have formulated some general rules for determining proximate cause in cases where perils are acting
consecutively or concurrently as follows:
A. Where perils are acting consecutively in an unbroken sequence, that is, one peril is caused by and follows from
another peril, “where perils are acting consecutively in an unbroken consequence, that is one peril is caused by and
follows from or each cause in the sequence is the reasonable and probable consequence, directly and naturally
resulting in the ordinary course of events from the cause which precedes it.
The difficulty arises when the consequence can be assigned with precision neither to the peril nor to the excepted
cause:
a) The excepted peril precedes an insured peril, the insurer is not liable. Where an earthquake fire (an excepted peril)
spread by natural means and burnt the insured premises, the insurer was not liable as the loss was proximately caused
by the excepted peril.
b) The excepted peril follows an insured peril; the insurer is not liable if the loss caused by each is undistinguishable.
Lawrence v. Accident Insurance Co. Wherein it was held that the death of a person falling from a railway platform in
a fit and being killed by a passing train is not proximately caused by the fit.
B. Where perils are acting in consecutively in broken sequence, each peril is independent of other,
a) If no excepted peril is involved, the insurer will be liable for losses caused by the insured peril.
b) If an expected peril is involved and precedes an insured peril the insurer is liable for the loss caused by the insured
peril. Thus a plate glass insurance policy covered breakages from any risk except fire. A fire occurred in the
neighbouring premises and taking advantage of it a mob broke the insured plate glass to commit theft. It was held
that mob action was the cause of loss and not fire and so the insurer was liable.
C. Where the perils are acting concurrently that is simultaneously. Where the loss is caused by the action of two
concurrent and independent causes one of which is the peril insured against the other an excepted cause, the loss is
not within the policy since it may be accurately described as caused by the excepted cause and it is immaterial that it
may be described in another way that would not bring it within the exception.
a) The insurer is liable if one of them is an insured peril and none of them is an excepted peril or the losses caused by
the insured and excepted peril can be distinguished.
b) The insurer is not liable if the losses cannot be distinguished. Where the cases are very complicated, the strict
legal provision is not invoked but settled by compromise usually by the insurers by a generous interpretation of the
facts.20

Burden of Proof in Relation to Proximate Cause

In the majority of claims, the cause is obvious and so it is relatively easy to establish whether it is a peril covered by
the Policy. Difficulties arise when there are exceptions in the Policy or when more than one cause has operated and
not all are covered. As already discussed, the proximate cause must be identified before it is possible to decide
whether the loss or damage is covered by the Policy. There is a general rule that applies to the burden of proof.
The Policyholder (Assured) must demonstrate that an insured peril has caused the loss or damage and, having done
so, it is then for the Insurer to demonstrate the operation of any exclusion (if they wish to deny policy liability).
The situation is slightly different with an „All Risks Policy‟. In this instance, the Policyholder need only demonstrate
that damage has occurred to the insured property during the period of insurance. If an Insurer wishes to apply
exclusion, the Insurer must then prove that the cause was one of the excluded events.21

20
Supra Note 6. Page no. 110.
21
Ibid.
 CONCLUSION

Human life is exposed to many risks, which may result in heave financial losses. Insurance is one of the devices by
which risks may be reduced or eliminated in exchange for premium. "Insurance is a contract in which a sum of
money is paid by the assured in consideration of the insurer's incurring the risk of paying larger sum upon a given
contingency". In its legal aspects it is a contract whereby one person agrees to indemnify another against a loss
which may happen or to pay a sum of money to him on the Occurring of a particular event. All contacts of insurance
( except marine insurance ) may be verbal or in writing, but particularly contracts of assurance are included in a
document.
The main motive of insurance is cooperation. Insurance is defined as the equitable transfer of risk of loss from one
entity to another, in exchange for a premium.
The following are the basis essentials or requirement of insurance irrespective of the type of insurance concerned:
PRINCIPLE OF UTMOST GOOD FAITH/ UBERRIMA FIDES
PRINCIPLE OF INSURABLE INTEREST
PRINCIPLE OF INDEMNITY
PRINCIPLE OF SUBROGATION
PRINCIPLE OF CONTRIBUTION
PRINCIPLE OF LOSS MINIMIZATION
DOCTRINE OF PROXIMATE CAUSE
These principles are the essential elements for legality of Insurance Contracts and they govern the functioning of
Insurance contract.
 BIBLIOGRAPHY

Books Referred:

1. Singh, Avtar, “Law of Insurance”, Eastern Book Company, 2Nd Edition, 2010.
2. Srinivasan, M.N., Joga Rao, S.V., “Principles of Insurance Law”, Lexis Nexis Butterworths Wadhwa, 9 th Edition,
Nagpur, 2009.

Websites Referred:

1. http://www.investopedia.com/university/insurance/insurance2.asp
2.http://www.lawyersclubindia.com/articles/Utmost-Good-Faith-in-Insurance-Contracts3098.asp#.VUPAR9KUemY
3. http://law.freeadvice.com/insurance_law/insurance_law/insurable_interests.htm
4. http://www.uslegalforms.com/?auslf=definitions-ad&page=/i/indemnity-principle/&ad_id=default_ad_3
5. http://injury.findlaw.com/accident-injury-law/insurance-law-what-is-a-subrogation-action.html
6. https://insurancecompanyblog.wordpress.com/2012/08/15/in-the-advent-o/
7. http://www.irmi.com/online/insurance-glossary/terms/p/proximate-cause.aspx