Open Vocational Education Programme

Diploma in Insurance
Services

5
LEGAL FRAMEWORK

Designed & Developed

by
Dr. Ajay Garg
Senior Executive Officer
Business & Commerce

NATIONAL INSTITUTE OF OPEN SCHOOLING

A-24-25, INSTITUTIONAL AREA, SECTOR 62, NOIDA (U.P.)
 Diploma in Insurance Services

LEGAL FRAMEWORK

CONTENTS

Sr.No. Lesson Name Page No.

1. Insurance Regulatory & Development Authority Act 1

2. Regulations issued by IRDA 13

3. Investments, Accounts & Misc Provisions 32

4. Rights & Remedies Available to Consumers 47

5. Public Liability Insurance Act 1991, Workmen

Compensation Act 1923 and Motor Vehicle Act 1988 60

6. Laws Related to Marine Insurance and Income Tax

Provisions Related to Insurance 68
Chairman's Message .....

Dear Learner,
Welcome to the National Institute of Open Schooling!
By enrolling with this institution, you have become a part of the family of the
world’s largest Open Schooling System. As a learner of the National Institute
of Open Schooling’s (NIOS) Vocational Programme, I am confident that you
will enjoy studying and will benefit from this very unique School and method
of training.
Before you begin reading your lessons and start your training, there are a few
words of advice that I would like to share with you. We, at the NIOS, are well
aware that you are different from other learners. We realize that there are
many of you who may have rich life experiences; you may have prior knowl-
edge about trades and crafts that are part of your family’s legacy; you may
have a sharp business sense that will make you fine entrepreneur one day.
Most importantly, you have the drive and motivation that has made you enroll
with this institution, which believes in the spirit of freedom. Yes, we are
aware that you have many positive aspects in your personality, which we
respect and relate to them.
During the course of your study, NIOS will treat you as the manager of your
own learning. This is why your course material has been developed keeping in
mind the fact that there is no teacher to teach you. You are your own teacher.
Of course, if you have a problem, we have provided for a teacher at your
Accredited Vocational Institution (AVI). I would advise you that you should
always be in touch with your AVI for collection of study material, examination
schedules etc. You should also always at tend the Personal Contact
Programmes and practical/ Training sessions held at your study centres. These
will give you the necessary hands on training that is very essential to master
a vocational course.
Studying for a vocational course is different from any other academic course.
Here, while the marks obtained in the examination will indicate your grasp on
your subject knowledge, your real achievement will be when you are able to
apply your vocational skills in the market. I hope that this skill-based learning
will help you perform your tasks better .This course of One year duration
Diploma Course in Insurance Services developed by leading experts of Insur-
ance sector. It is a multi-skilled programme, which will expose you to a vari-
ety of skills in Insurance sector. We hope that you will find it useful. On behalf
of NIOS, I wish you the very best for a bright and successful future.

Dr. S. S. Jena
Chairman
National Institute of Open Schooling
A Note From the Director

Dear Learner,
In the fast expanding world of activities, learning new skills has become a
necessity. Learning and re-learning has become essential for all. In such an
environment, vocational education has assumed great importance. Vocational
education, as a stream of education, promotes skill development and training
of youth and directs them towards meaningful employment.
In keeping with the needs of the Learners, NIOS conducts Vocational
Education Programmes in many areas through distance mode. These
programmes include Agriculture, Business & Commerce, Home Science,
Engineering & Technology, Computer Science, and Health & Paramedical.
The Courses offered in these areas are aimed at providing self employment &
wage employment opportunities for NIOS learners.
Diploma in Insurance Services is a One year Diploma course in Insurance
Services. This course has been developed with the help of many leading experts
of Insurance Sector. The course syllabus is designed keeping in view the
requirements of the insurance sector.
This is multi-skilled programme, which will expose you to variety of skills. It
includes Business Environment, Principles of Insurance, Life Insurance,
General Insurance and Legal framework. This will help in identifying learner’s
preference for future vocation. We are confident that this course will prove
to be beneficial to you.
We wish you all the best in your future career.

Dr. K. P. Wasnik
Director (VE)
National Institute of Open Schooling
A Word With You . . .

Dear Learner,
This programme is specially for all those who are school dropouts and have
started small enterprises, want to work in the Insurance sector as a skilled
workforce and contribute substantially to the progress of India.
The multi-skill content with hands-on experience of this programme
stimulates the intellect by going through concrete operations and then
abstracting the concepts. At the same time by giving a variety of skills usable
in everyday life, allowing them to form their preferences and know their
aptitudes thus enabling them to choose a career. It also improves their self-
image and gives them confidence and hope for the future.
The Insurance sector has completed its full circle in the year 2000, i.e.
Private sector to Public sector and now back to Private sector. After 44
years, the monopoly of Life Insurance Corporation is no more and after 27
years four Public Sector general Insurance companies lost their monopoly.
As on date there are 50 life and general insurance companies and few are
queue to get license.
These insurance companies need trained manpower to be present on all
India bases. To cater the needs of the insurance industry NIOS has designed
a course namely “Diploma in Insurance Services” for the students who
have minimum qualification of 12th standard.
The course syllabus is designed keeping in view of the requirements of the
insurance sector.
In this module the student will be made familiar with the activities related to
industry and commerce, job opportunities in the insurance sector, various
forms of business organization, basic accounting principles as well as
principles of management.
We hope that this programme will help you to carve an niche in your career
and play an important role in the society.
With best wishes.
Dr. Ajay Garg
Senior Executive Officer
(Business & Commerce)
National Institute of Open Schooling
 ACKNOWLEDGEMENT
Advisory Committee

Dr. S. S. Jena Dr. K. P. Wasnik Dr. Mamta Srivastava

Chairman Director (VED) Deputy Director (VED)
NIOS NIOS NIOS
Noida Noida Noida

Course Curriculum Committee

Sh. A. K. Saijpal Smt. Gayatri Subramaniam Dr. Ajay Garg

Professor Programme Coordinator Sr. Executive Officer (B&C)
Punjab University Indian Institute of Corp. NIOS
Chandigarh Affairs, New Delhi Noida

Mr. Rakesh Agarwal Ms. Anitha Nair Sh. S.K. Jain

Asstt. Editor Asstt. Director (SSS Dept.) Managing Director
The Insurance Times NIOS Embee Insurance Brokers Ltd.
Kolkata Noida Chandigarh

Lesson Writing

Sh. S. K. Jain
Managing Director
Embee Insurance Brokers Ltd.
Chandigarh

Course Coordinator

Smt. Anitha Nair Dr. Ajay Garg

Asstt. Director (SSS) Sr. Executive Officer (B&C)
NIOS NIOS
Noida Noida

Editor

Sh. Vijay Sharma

Manager
United India Insurance Co ltd
New Delhi

Graphics & Cover Design

M/s Shivam Graphics, Rani Bagh, New Delhi.

Insurance Regulatory & Development Authority Act MODULE - 5
Legal Framework

1
Notes

INSURANCE REGULATORY &

DEVELOPMENT AUTHORITY ACT

1.0 INTRODUCTION
In other modules of this course you have studied the meaning
of insurance and its importance and how it plays a very
important role in economic development of the country. By now
you must be well versed that in insurance business, there is a
contract between individuals or group or businessmen and
insurance companies. The duration of these contracts varies
from one year to thirty years or more and volume of such
contracts are also very large.
As you know the insurance contract is of promises or
assurances by the insurance companies to compensate the
insured in case of mishappening but nothing is tangible. When
the product is intangible (which can not be seen or touch) and
volume of such contracts is huge then the disputes do arise in
any industry. To settle these disputes the Government of any
country appoints regulator and also enforces the law which
controls the industry.
1.1 OBJECTIVES
In this module we will study various Acts which are directly
related to insurance business and some acts which indirectly
deal with the insurance business. In the following para we have
referred about two Acts LIC Act 1956 and GIBN Act 1972 but
we will not explain these acts as they have lost their importance
due to changed scenario in respect of the Insurance sector in
the country. We will be covering the following Acts in this
module:

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z Insurance Regulatory & Development Authority Act 1999.

z Insurance Act 1938.
z Consumer Protection Act 1986.
z Insurance Ombudsman.
Notes z Marine Insurance Act 1963.
z Carriage of Goods by sea Act 1925.
z Bill of Lading Act 1855.
z Motor Vehicle Act 1988.
z Inland Steam Vessels Act 1977.
z Public Liability Act 1991.
z Workman’s Compensation Act 1923.
For the benefit of those of you who are studying various Acts
for the first time, we would like to mention that Acts lay down
the rules and regulations framed by the Government in respect
of specific activities. These rules & regulations are explained
in sections which have been serially numbered and are called
“Section 1 or 2 or 30 and so on”.
At the end of this lesson, you will be able to:
¾ Know about the Controlling and regulating Authority for
Insurance sector in India.
¾ Define how many members constitute the Authority.
¾ Enumerate procedure of their appointment.
¾ Enlist the Duties, Power and functions of Authority.

1.2 HISTORY
In India also, Government started exercising control on
Insurance business by passing two acts in the year 1912
namely
z Provident Insurance Societies Act V of 1912 and
z Indian Life Insurance Companies Act VI of 1912.
These acts were later comprehensively amended and a new Act
namely Insurance Act 1938 came into existence for controlling
z Investment of funds,

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z Expenditure and
z Management of the insurance companies
The Office of Controller was established to implement this act.
Again, this Act was amended in 1950 as per the need of the
hour. But in view of growing malpractices in Life Insurance Notes
business and also due to the illiteracy level being high and lack
of will for spread of Life Insurance business, it was nationalized
by Government of India.
LIC Act was passed in June; 1956, and this Act came into force
from 1st Sept.1956. Similarly general insurance business was
nationalized Act came into force w.e.f 1st April 1973 through
General Insurance Business Nationalization Act 1972 (GIBNAct
1972). To implement these acts the Government made some
minor changes in the Insurance Act 1938.
In early 90’s, with the world market forces playing with full
strength; growing literacy level; better regulatory systems and
need for fast growth in this sector, the need of the hour was to
go with the world and throw open Life & General Insurance
Sector to private entrepreneurs once again so that there is no
monopoly and the customer/ consumer/ buyer gets more
choices than one type of Insurance product.
To study the liberalization process in Insurance sector in India,
Malhotra Committee was formed under the Chairmanship of
Late Shri R.N. Malhotra. The Malhotra committee submitted
its report in 1994 which recommended that private companies
be allowed to operate in India. The Government accepted the
Committee’s recommendation and Insurance Regulatory
Authority (IRA) was set up in 1996 to show the path for
privatization of insurance Industry. The main aim was the
development of Insurance covering all strata of society (to not
only rich but poor, folks from rural, tribal, unorganized sector,
social sector, disabled community, daily wagers, women at
large, etc.) gained importance through concerns put forth by
political leaders, trade unionists, social organisations, co-
operatives and policy makers; which amended the name IRA
to IRDA (Insurance Regulatory & Development Authority).
Again some amendments were made in the Insurance Act 1938
for smooth functioning of IRDA.

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1.3 INSURANCE REGULATORY DEVELPMENT
AUTHORITY ACT (IRDA) 1999
This Act was passed by Parliament in Dec.1999 & it received
presidential assent in Jan.2000. The aim of the Authority is
“to protect the interest of holders of Insurance policies to
Notes regulate, promote and ensure orderly growth of Insurance
industry & for matters connected therewith or incidental
thereto.”
Under this Act, an authority called IRDA is established which
replaces Controller of Insurance under Insurance Act 1938.
1.3.1 Definitions
Like any other Act, various terms have been defined as follows
under section 2: -
a) “Appointed Day” means the date on which the Authority
is established.
b) “Authority” means the Insurance Regulatory and
Development Authority.
c) “Chairperson” means the chairperson of the Authority.
d) “Fund” means the Insurance Regulatory and Development
Authority Fund.
e) “Interim Insurance Regulatory Authority” means the
Insurance Regulatory Authority set up by the Central
Government.
f) “Intermediary or Insurance intermediary” includes
Insurance brokers, reinsurance brokers, insurance
consultants, surveyors and loss assessors.
g) “Member” means a whole time or a part time member of
the Authority and includes the Chairperson.
h) “Notification” means a notification published in the Official
Gazette.
i) “Prescribed” means prescribed by rules made under this
Act.
j) “Regulations” means the regulations made by the
Authority.

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1.3.2 Features of Authority
z Corporate body by the aforesaid name which means it will
act as group of persons, called members, who will work
jointly not as an individual person like Controller of
Insurance.
Notes
z Having perpetual succession which means any member
may resign or die but the Authority will work.
z A common seal with power to enter into a contract by
affixing a stamp on the documents.
z Sue or be sued means the Authority can file a case against
any person or organization and vice versa.
1.3.3 Composition of Authority
The Authority shall consist of nine persons as per details given
below:.
z Chairperson.
z Not more than 5 whole time members.
z Not more than 4 part time members.
These persons shall be appointed by the Central Govt. from
amongst persons of ability, integrity & standing who have
knowledge or experience in life Insurance, general Insurance,
actuarial science, finance, economics, law accountancy,
administration or other discipline which would in the opinion
of the Central Govt. be useful to the Authority. (Section 4)
1.3.4 Tenure (Section 5)
z The Chairman tenure will be for 5 years and eligible for
reappointment till he attains the age of 65 years.
z The appointment of members will be for 5 years and eligible
for reappointment but not exceeding the age 62 years.
1.3.5 Removal of Members (Section 6)
The Central Government can remove any member of the
Authority if he :-
a) Is declared bankrupt
b) Has become physically or mentally incapable of acting as
a member

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c) Has been awarded punishment by any Court.
d) Has acquired such financial or other interest which affect
his function as a member.
e) Has so abused his position as to render his continuation
in office detrimental to the public interest.
Notes
But no member can be removed form the office unless & until
the reasonable opportunity of being heard is given to such
member in the matter.
1.3.6 Salary & Allowances (Section 7)
The Chairperson and full time members’ shall receive the salary
& allowance as prescribed by the Government.
1.3.7 Bar on future employment (Section 8)
The Chairperson and the whole time members cannot accept
any appointment without Govt. approval within 2 years from
the date on which he ceases or retires from the office.

INTEXT QUESTIONS 1.1

1. List the Composition of Authority.
2. The Authority shall consist of nine persons i.e.
Chairperson, not more than 5 whole time members and
not more than 4 part time members.
3. Mention the maximum age of the Chairperson of IRDA.
a. Maximum age of Chairperson of IRDA is 65 years.

1.3.8 Superintendence & Direction (Section 9)

The Chairperson shall have overall control & provide direction
in respect of all administrative matters of the Authority. He will
chair the meeting as and when he is present in the meeting.
1.3.9 Meeting of Authority (Section 10)
The meeting of the Authority will be held at the time and place
as decided by the Chairperson as per regulation made under
this act. If the Chairperson is unable to attend the meeting
then the members will choose the Chairperson from amongst
the present members.
All the issues to be discussed in the meeting shall be decided

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by a majority of votes by the present and voting. In case of equal
voting the decision of Chairperson of that meeting will be final.
1.3.10 Invalidation of proceedings of Authority
(Section 11)
The proceedings of Authority will not become invalidate ( not
Notes
valid in the eyes of law) due to following reasons:-
z Defects in the formation of the Authority.
z Defect in appointment of any Member.
1.3.11 Officers & Employees of Authority (Section 12)
The Authority may appoint officers and employees as it
considers necessary for the efficient discharge of its functions.
The terms & conditions of such officers shall be governed as
per the regulations made under this Act.
1.3.12 Transfer of Assets, Liabilities etc (Section 13)
As stated above that initially the Authority was formed under
the name “Insurance Regulatory Authority (IRA)” and later on
the name was changed to “Insurance Regulatory &
Development Authority.”(IRDA) Therefore the assets and
liabilities of IRA will be transferred to IRDA on the date of
establishment of the Authority.
1.3.13 Duties, Powers & Functions of Authority
(Section 14)
Duties: The Authority shall have the duty to regulate, promote
and ensure orderly growth of the Insurance business and re-
insurance business subject to the provisions of any other
provisions of the act.
Powers & Functions to:-
(a) Issue to the applicant (Insurance company or Insurance
Agent or Surveyors or Insurance Brokers or Third Party
Administrators) a certificate of registration, renew, modify,
withdraw, suspend or cancel such registration;
(b) Protection of the interests of the policyholders in matters
concerning assigning of policy, nomination by
policyholders, insurable interest, settlement of insurance
claim, surrender value of policy and other terms and
conditions of contracts of insurance;

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 MODULE - 5 Insurance Regulatory & Development Authority Act
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(c) Specifying requisite qualifications, code of conduct and
practical training for insurance brokers , agents,
surveyors, Third Party Administrator ;
(d) Specifying the code of conduct for surveyors and loss
assessors (Who assess the loss of policyholder in case of
Notes General Insurance);
(e) Promoting efficiency in the conduct of insurance business;
(f) Promoting and regulating professional organisations
connected with the insurance and re-insurance business;
(g) Levying fees and other charges on insurance companies,
Agents, Insurance Brokers, Surveyors and Third party
Administrator;
(h) Calling for information from, undertaking inspection of,
conducting enquiries and investigations including audit
of the insurers, intermediaries, insurance intermediaries
and other organisations connected with the Insurance
business;
(i) Control and regulation of the rates, advantages, terms and
conditions that may be offered by insurers in respect of
general insurance business not so controlled and
regulated by the Tariff Advisory Committee under section
64U of the Insurance Act, 1938 (w.e.f., 1/1/2007 TAC has
ceased to function).
(j) Specifying the form and manner in which books of account
shall be maintained and statement of accounts shall be
rendered by insurers and other insurance intermediaries;
(k) Regulating investment of funds by insurance companies;
(l) Regulating maintenance of margin of solvency i.e., having
sufficient funds to pay insurance claim amount;
(m) To settle the disputes between insurers and intermediaries
or insurance intermediaries;
(n) Supervising the functioning of the Tariff Advisory
Committee;
(o) Specifying the percentage of premium income of the
insurer to finance schemes for promoting and regulating
professional organisations referred to in clause(f);
(p) Specifying the percentage of life insurance business and
general insurance business to be undertaken by the
insurer in the rural or social sector; and
(q) Exercising such other powers as may be prescribed.

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1.3.14 Grants from the Central Government (Section 15)
The Government after approval from the Parliament may grant
funds to discharge their duties as per this Act.
1.3.15 Constitution of Funds (Section 16)
(1) There shall be a fund to be called “The Insurance Notes
Regulatory and Development Authority Fund” and there
shall be credited there to:—
a. all Government grants, fees and charges received by
the Authority;
b. all sums received by the Authority from such other
source as may be decided upon by the Central
Government;
c. the percentage of prescribed premium income received
from the insurer/insurance intermediaries.
(2) The Fund shall be applied for meeting:—
a. the salaries, allowances and other remuneration of the
members, officers and other employees of the
Authority:
b. the other expenses of the Authority in connection with
the discharge of its functions and for the purposes of
this Act.
1.3.16 Accounts and Audit (Section 17)
(1) The Authority shall maintain proper accounts and other
relevant records and prepare an annual statement of
accounts in such form as may be prescribed by the Central
Government in consultation with the Comptroller and
Auditor-General of India.
(2) The accounts of the Authority shall be audited by the
Comptroller and Auditor-General of India at such intervals
as may be specified by him and any expenditure incurred
in connection with such audit shall be payable by the
Authority to the Comptroller and Auditor-General.
(3) The Comptroller and Auditor-General of India and any
other person appointed by him in connection with the
audit of the of the accounts of the Authority shall have the
same rights, privileges and authority in connection with

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such audit as the Comptroller and Auditor-General
generally has in connection with the audit of the
Government accounts and, in the particular shall have the
right to demand the production of books of account,
connected vouchers and other documents and papers and
to inspect any of the offices of the Authority.
Notes
(4) The accounts of the Authority as certified by the
Comptroller and Auditor General of India or any other
person appointed by him in this behalf together with the
audit-report thereon shall be forwarded annually to the
Central Government and that Government shall cause the
same to be laid before each House of Parliament.
1.3.18 Establishment of Insurance Advisory Committee
(Section 25)
(1) The Authority may, by notification, establish with effect
from such date as it may specify in such notification, a
Committee to be known as the Insurance Advisory
Committee.
(2) The Insurance Advisory Committee shall consist of not
more than twenty-five members excluding ex-officio
members to represent the interests of commerce, industry,
transport, agriculture, consumer fora, surveyors, agents,
intermediaries, organisations engaged in safety and loss
prevention, research bodies and employees’ association in
the insurance sector.
(3) The Chairperson and the members of the Authority shall
be the ex-officio Chairperson and ex officio members of the
Insurance Advisory Committee.
(4) The objects of the Insurance Advisory Committee shall be
to advise the Authority on matters related to insurance.
(5) The Insurance Advisory Committee may advise the
Authority on such other matters as may be prescribed.
1.3.19 Miscellaneous Provisions
z The Central Government can issue the direction to the
Authority on policy matters not on administrative and
technical matters and the Authority is bound to follow
such direction.
z The Central Government can supersede any act of the
Authority.

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z The Chairperson, Members and employees of Authority
shall be deemed to be public servant while performing the
duties as per the provision of this Act.
z The Authority can delegate its powers to Chairperson or
members or officers and employees of the Authority as per
regulation made under this act. Notes
z The Authority has the power to make rules related to
salary & allowances and other terms & conditions to be
applicable to its Chairperson, members, employees or
officers.
z The Authority has power to make regulations to be
followed at its meetings
z The rule & regulation made by the Authority shall be
placed before the Parliament.
z Any rule or regulations made under this act will bar the
applicability of other laws of the land.
z The Authority has the powers to make amendment in
Insurance Act 1938, LIC Act 1956 & GIBN Act 1972.
1.4 SUMMARY
The main aim to form IRDA is to create a regulator which will
regulate and develop the insurance sector in the country and
control all individuals or organizations who are directly or
indirectly involved with the insurance sector. The Authority has
the powers to issue regulations related to insurers, insurance
intermediaries, surveyors, third party administrators for their
registration, renewal of their license and review their workings
for smooth functioning of insurance sector. The Authority also
protects the interest of the policyholders for whom the insurers
are issuing the policies. With this the Authority does not
become supreme as it is accountable to the Central
Government.

1.5 TERMINAL QUESTIONS

1. Explain the power & functions of the Authority.
2. What is the composition of the Authority and its tenure?
3. Define Insurance intermediary, appointed day and
member.

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1.6 OBJECTIVE TYPE QUESTIONS

1. IRDA was formed in _______(1999/2001)
2. Total members of IRDA are _____(9/10)
3. The retirement age of member is ___(62/65)
Notes
4. Choose the correct option
IRDA does not specify requisite qualifications, code of
conduct and practical training for
a) insurance brokers.
b) agents & surveyors.
c) Third Party Administrator.
d) Insurer.
5. ______can supersede the IRDA (Central Govt/Supreme
Court)

1.7 ANSWERS TO OBJECTIVE TYPE QUESTIONS

1. 1999
2. 9
3. 62
4. d
5. Central Govt.

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Regulations issued by IRDA MODULE - 5
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2
Notes

REGULATIONS ISSUED BY IRDA

2.0 INTRODUCTION

Till 1999 the insurance sector was controlled by Controller of

Insurance as per the provisions of Insurance Act 1938 but after
formation of the IRDA it is felt by the Authority that the most
of the provisions of this Act were irrelevant in the present
scenario of the country. Therefore the Authority issued various
regulations, as deemed fit, to develop the insurance sector in
the country.

Therefore, we shall be discussing the following important

regulations in this following chapters :–

Procedure of :–
z Granting of license to companies to start insurance
business.
z Approval of insurance product.
z Appointment of different insurance intermediary.
z Investing the insurance premium.
z Accounting & audit.
z Miscellaneous important provisions of Insurance Act.

These regulations were not issued in the above sequence but

we have followed this logic - firstly the insurance company will
come into existence, secondly the insurance product will be
design and developed, thirdly the manpower is required to sell
the product, fourthly the premium received by the insurance
companies is to be invested, fifthly the accounts are to be
maintained and lastly, various provisions.

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2.1 OBJECTIVES
At the end of this lesson you will be able to know:-
z The procedure of getting the license of insurance from
IRDA.
Notes z The procedure to get approval of insurance product from
IRDA.
z The procedure to appoint an insurance inter-mediatory.

Before we start explaining the first regulations, we shall discuss

various terms defined in Insurance Act 1938

2.2 DEFINITIONS

1 “Actuary” means an actuary possessing such qualifications

as may be prescribed;
2 “Authority” means the Insurance Regulatory &
Development Authority established under the Insurance
Regulatory and Development Authority Act, 1999.
3 “Policy-holder” includes a person to whom the whole of the
interest of the policy-holder in the policy is assigned once
and for all, but does not include an assignee thereof
whose interest in the policy is defeasible or is for the time
being subject to any conditions;
4 “Approved Securities” means –
i. Government securities and other securities charged
on the revenue of the Central Government or of the
Government of a State or guaranteed fully as regards
principal and interest by the Central Government or
the Government of any State;
ii. Debentures or other securities for money issued
under the authority of any Central Act or Act of a State
Legislature by or on behalf of a port trust or municipal
corporation or city improvement trust in any
presidency-town;
iii. Shares of a corporation established by law and
guaranteed fully by the Central Government or the
Government of a State as to the repayment of the
principal and the payment of dividend;

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iv. Securities issued or guaranteed fully as regards
principal and interest by the Government of any Part
B State and specified as approved securities for the
purposes of this Act by the Central Government by
notification in the Official Gazette;
5. “Auditor” means a person qualified under the Chartered Notes
Accountants Act, 1949 to act as an auditor of companies;
6. “Certified” in relation to any copy or translation of a
document required to be furnished by or on behalf of an
insurer certified by a principal officer of such insurer to
be a true copy or a correct translation, as the case may
be;
7. “Court” means the principal Civil Court of original
jurisdiction in a district, and includes the High Court in
exercise of its ordinary original civil jurisdiction;
8. “Fire Insurance Business” means the business of effecting,
otherwise than incidentally to some other class of
insurance business, contracts of insurance against loss by
or incidental to fire or other occurrence customarily
included among the risks insured against in fire
insurance policies.
9. “General Insurance Business” means fire, marine or
miscellaneous insurance business, whether carried on
singly or in combination with one or more of them.
10. “Government Security” means a Government security as
defined in the Public Debt Act,
11. “Indian Insurance Company” means any insurer being a
company:—
(a) which is formed and registered under the Companies
Act, 1956 (1 of 1956);
(b) in which the aggregate holdings of equity shares by
a foreign company, either by itself or through its
subsidiary companies or its nominees, do not exceed
twenty-six per cent paid-up equity capital of such
Indian insurance company;
(c) whose sole purpose is to carry on life insurance
business or general Insurance business or re-
insurance business.

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12. “Insurance Agent” means an Insurance agent duly licensed
and who receives or agrees to receive payment by way of
commission or other remuneration in Consideration of his
soliciting or procuring Insurance business including
business Relating to the continuance, renewal or revival
of policies of Insurance;
Notes
13. “Life Insurance Business” means the business of effecting
contracts of insurance upon human life, including any
contract whereby the payment of money is assured on
death (except, death by accident only) or the happening
of any contingency dependent on human life, and any
contract which is subject to payment of premiums for a
term dependent on human life and shall be deemed to
include:—
(a) the granting of disability and double or triple
indemnity accident benefits, if so provided in the
contract of Insurance.
(b) the granting of annuities upon human life.
(c) the granting of superannuation allowances and
annuities payable out of any fund applicable solely to
the relief and maintenance of persons engaged or who
have been engaged in any particular profession, trade
or employment or of the dependents of such persons.
14. “Marine Insurance Business” means the business of
effecting contracts of insurance upon vessels of any
description, including cargoes, freights and other interests
which may be legally insured, in or in relation to such
vessels, cargoes and freights, goods, wares, merchandise
and property of whatever description insured for any
transit by land or water, or both, and whether or not
including warehouse risks or similar risks in addition or
as incidental to such transit, and includes any other risks
customarily included among the risks insured against in
marine Insurance policies;
15. “Miscellaneous Insurance Business” means the business
of effecting contracts of insurance which is not principally
or wholly of any kind or kinds included in fire, marine
insurance business.

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2.3 PROCEDURE OF GRANTING OF LICENSE TO
COMPANIES TO START INSURANCE BUSINESS

No person can carry on Insurance business unless & until he

has obtained a certificate from the Authority for a particular
class of Insurance business. For e.g. A person can start life
Insurance, marine Insurance, fire Insurance, health Insurance Notes
etc. But a life Insurance business cannot be combined with
other type of Insurance business. Those who are already in
Insurance Business like General Insurance Corp., National
Insurance, New India Assurance, Oriental Insurance & United
India Insurance have to obtain a fresh certificate within 3
months from the date of commencement of this Act or before
such date as fixed by the Govt.

Even those insurers for whom the registration was not

necessary before the commencement of this Act will require the
registration certificate.

To get the registration certificate the following procedure is to

be followed:

Every application in the prescribed form (IRDA/R1) for

registration shall be made with the following enclosures:—

1. A certified copy of Memorandum and Articles of association

if the applicant is a company.
2. The name, address & the occupation of the directors of the
company.
3. A statement of the class of insurance business proposed
to be carried on.
4. A statement indicating the sources that will contribute the
share capital.
On receiving the above documents IRDA will verify the contents
and may ask for additional information if any. The Authority
may ask the Principal Officer to appear to their office for any
information or clarification.

If the Authority is satisfied with the information and documents

provide with the application form (IRDA/R1), the Authority may
ask for an additional application in the prescribed form (IRDA/
R2) which should be accompanied with then following
documents:—

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1. Every Insurance shall deposit in cash or in approved
securities or partially in cash or partially in approved
securities as per details given below: -
(i) In case of Life Insurance business, a sum equivalent
to 1% of his total gross premium written in India in
Notes any financial year commencing after the 31st day of
March 2000 not exceeding rupees ten crores (Rs.10
crores).
(ii) In the case of General Insurance business a sum
equivalent to 3% of his total gross premium written in
India in any financial year commencing after 31/3/
2000 not exceeding rupees ten crores (Rs.10 crores).
(iii) In case of reinsurance business, a sum of rupees
twenty crores (Rs.20 crores).
(iv) If the business is to be done in marine Insurance only
& relates exclusively to country craft or its cargo or
both the amount to be deposited Rs.1,00,000/- (Rs.1
lakh) only.
(v) A certificate from the Reserve Bank of India showing
the amount deposited.
2. A declaration verified by an affidavit from the “Principal
Officer” that the equity capital of the company has been
complied with.
The paid up equity excluding preliminary expenses and
registration charges should be Rs.100 crores for life or
General Insurance business and Rs.200 crores for the
Reinsurance business.
If any insurer is carrying on business of insurance already
then within 6 months from the commencement of the Act
the paid up capital should be as per prescribed limits in
the Act.
3. A certified copy of the published prospects and of the
standard policy forms of the insurer.
4. Statement of assured rate, advantages, terms & conditions
to be offered in connection with Insurance policies.
5. In the case of the business the certificate from the actuary
that such rates are workable & sound.
6. In the case of marine accident & miscellaneous Insurance

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business other than workmen’s compensation & motor car
Insurance the available forms, prospects and statements
to be submitted.
7. The receipt of deposit of Rs. 50,000/- for each class of
business.
8. If there is any foreign partner, a certified copy of Notes
Memorandum of understanding between Indian promoter
and Foreign promoter including details of support comfort
letters exchanged between the parties.
9. Any other document as desired by the Authority after
scrutiny the application.
2A) If on the receipt of an application for registration and the
authority is satisfied that
a) The financial condition & the general character of
management of the applicant are sound.
b) The volume of business likely to be available to & the
capital structure & earning prospects of the applicant
will be adequate.
c) The interest of the general public will be served if the
certificate of registration is granted to the applicant
then the certificate of registration is granted.

Refusal of Registration
z If the Authority refuses the registration the reason of such
decision will be intimated to the applicant.
z The Applicant whose application has been rejected can file
an appeal before the Central Govt. within 30 days from
the date on which a copy of the decision is received.
z The decision of the Govt. shall be final and shall not be
questioned before any court.

Cancellation of Registration

The Authority has the right to cancel the certificate of

registration either wholly or in so far as it relates to a particular
class of Insurance business if the any of the conditions specified
for registration is not complied with.

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Renewal of Registration
Every year the registration is to be renewed and the application
is to be made to the Authority before 31st Dec. of the preceding
years with the prescribed fees i.e.,

(i) 1/4th of 1% of premium received or Rs. 5 crores whichever

Notes is less.
(ii) It should not be less than Rs. 50,000 in each class of
business.
(iii) For reinsurer companies 1/4th of 1% will be considered of
total premium in respect of facultative reinsurance
accepted in India.
(iv) Fees to be paid in Reserve Bank of India.

INTEXT QUESTIONS 2.1

1. Mention the fees to be paid by any life insurer on

registration and on renewal.
2. Mention the minimum capital requirement for any
Insurer.

2.4 REGULATION FOR PRODUCT APPROVAL

No Insurance Company can sell any insurance product unless

& until the product is approved by the Authority. The procedure
to get the approval from the Authority is as follows:—

Life Insurance Products

The life Insurance products are classified as:—

1) Linked Business.
2) Non-Linked Business.
3) Non-life/General Insurance Business.

An insurer who wishes to introduce a new product or to make

changes to any existing product or to withdraw an existing
product shall submit the application in the prescribed proforma
to IRDA with full details and reasons to make changes in any
existing product or to withdraw an existing product.

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The insurer shall not commence selling the product in respect
of which additional information has been sought by the
Authority until the Authority confirms in writing. If no such
information is sought by the Authority, the insurer can
commence selling the product in the market.
Period of Approval Notes
Within 15 days (earlier 30 days) of the receipt of the application
the Authority may seek additional information with regard to
the product, and the insurer shall not commence selling the
product in respect of which additional information has been
sought by the Authority, until the Authority confirms in writing
having noted such information. If no such information is
sought by the Authority, the insurer can commence selling the
product in the market, as set out in the application after the
expiry of the said 15 days (earlier 30 days) period. This
procedure is known as “File & use.”
2.5 DISTRIBUTION CHANNELS
Distribution refers to the arrangement by which the product,
after manufacture is moved till it reaches the customers, the
objective is to ensure that the product is available to the
customer when he wants to buy it.
Generally for the tangible products the distribution channels
is as follows:
Manufacturer

Whole Saler/ Stockists

Network Marketing

Retail Outlet Door to Door Sales

Retailers

Customer

Wholesaler/ Stockists: The Wholesaler will buy the goods from

the manufacturer in large quantities and hold the stock and
distribute them to retailers as per their requirements.

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Retailers: The retailer is one of the last distribution channel,
who is selling the product to the customer.
Retail outlet: Sometimes the manufacturer open a retail outlet
in each part of country to have a direct access with customer.
For e.g.; BATA showroom for shoes, Titan for wrist watches.
Notes
Door to Door Sales: Under this system, the sale is made directly
to the customer through the salesman who is visiting at
residence of the customer prospects.
For e.g.; Eureka Forbes Products – Water filter, Vacuum
Cleaner, Tupperware, Avon Cosmetic.
Network Marketing: This concept of marketing started few
years back under which the manufacturer is selling the product
to an individual and forms a chain to provide more benefit to
the customers. For e.g. Amway
If we look at the distribution channel of an Insurance Company,
it may be different because the insurance is a intangible
product. The distribution channels before nationalization were
as follows:
Before Nationalization

Insurance Companies

Principal / Chief/ Special Agents Agents

Agents

Customers

The distribution channel of insurance sector is regulated by

the Insurance Act 1938.
Principle Agent/ Chief/ Special Agents:
These Agents were appointed under Section 42A, 42B and 42C
of the Insurance Act 1938. But the appointment of these agents
was stopped w.e.f. 1/4/1950 therefore the explanation of these
provisions is not given.

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After Nationalization
Insurance Companies

Agent Notes

Customers
The Insurance product is being sold either through an agent
or directly by the company.
After Privatization of 2000
Insurance Companies

Broker Agent Corporate Agent

Bancassurance

Agent

C U S T O M E R
The Indian Insurance Sector is exposed to various criticisms
like :—
z Relating to service level
z Speed of claim settlement
z Efficiency
z Value for money
z Standards of technical competency in staff
In fact the customer expectations are
Tangible :—
z Choice
z Better cost
z Better products
z Better administration

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Infact the customer expectation are Intangible:—

z They want to be treated like individuals
z They want attention of their problems
z They want to be understood
Notes z They expect an ethical approach to business
In fact the customer wants to be recognized as being a valuable
and integral part of Insurance business. Insurance companies
need innovation and expertise to respond.
The Indian Insurance sector has a vast potential considering
the country’s large population, a growing and affluent middle
class, large household saving and increased trade volume.
Therefore Insurance Companies will have to identify the thrust
areas i.e. individual or business issues must be involved in
marketing services i.e. trained manpower and designing the
marketing strategy in the changing scenario that understand
the customer needs, identification of features the consumer is
looking for in the insurance service and the price the customer
is willing to pay for the service. To protect the interest of
customers IRDA has set regulations to appoint various
distribution channels and in the following paragraphs the
regulations related to Agents/Corporate Agent/ Insurance
broker are explained:
2.5.1 Agent:
An agent can work for any one life insurance and one general
insurance company and the appointment of an agent will be
as per regulation prescribed by IRDA as explained below:
Issue of License:
IRDA or an officer authorized by it in this behalf will issue a
license. These Regulations specify:
– Authorizes designated persons, being officers of Insurers
to issue such license for three years
– The license may be to act as an
z Agent for the “Life Insurer” or
z Agent for the “General Insurer” or
z Agent as a “Composite Insurance Agent” means Agent
for life insurance as well as general insurance.

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z Fee for the license (Rs. 250/-)
z The manner of making an application etc.
Qualification
A person must:—
Notes
1. Be at least 18 years of age.
2. Have passed 12th standard or equivalent examination if he
is to be appointed in a place with population of 5,000 and
more or 10th standard otherwise.
3. Have undergone practical training in an approved
Institute, in life or general insurance as the case may be
for 50 hrs. (on renewal for 25 hours) spread over 3 to 4
weeks for either of the licenses, and 75 hours spread over
6 to 8 weeks for composite license There are relaxations
in the hours of Training for some Professionals, like CA’s,
MBA, Associates/Fellows.
4. Have passed the examination conducted by Insurance
Institute of India or any other examination body
recognized by the authority. He will have to qualify 2 hrs.
written test by obtaining 50 marks out of 100 marks.
5. The fees for each license is prescribed as Rs. 250/-. If the
application for renewal is late but made before expiry of
the license than Rs. 100/- will be charged extra. In case
license has expired already then application for renewal
will normally be turned down but if hardship is proved
then license may be renewed.
Disqualification
A person would be debarred from obtaining a license if he is
found to be:—
1. A minor.
2. Of unsound mind declared by court of competent
jurisdiction.
3. Guilty of criminal breach of trust, misappropriation,
cheating, forgery or abetment or attempt to commit any
such offence.
Code of Conduct
(1) Every person holding a license, shall adhere to the code
of conduct as specified like identify himself and the

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insurance company of whom he is an insurance agent,
Disclose his license to the prospect on demand,
disseminate the requisite information in respect of
insurance products offered for sale by his insurer, disclose
the scales of commission in respect of the insurance
product offered for sale, if asked by the prospect, indicate
Notes
the premium to be charged by the insurer for the
insurance product offered for sale, about proposal form etc
(2) No insurance agent shall, like solicit or procure insurance
business without holding a valid license; induce the
prospect to omit any material information in the proposal
form; induce the prospect to submit wrong information in
the proposal form or documents submitted to the insurer
for acceptance of the proposal; behave in a discourteous
manner with the prospect; interfere with any proposal
introduced by any other insurance agent; offer different
rates, advantages, terms and conditions other than those
offered by his insurer; etc.
Cancellation of License
The designated person may cancel a license of an insurance
agent, if the insurance agent suffers, at any time during the
currency of the license, from any of the disqualification as
stated above and recover from him the license and the identity
card issued earlier. Even on non performance of minimum
business expectation by the Insurer the agency can be
terminated.
2.5.2 Corporate Agent:
The provisions of appointment of an agent are applicable for
the Corporate Agent subject to the additional provisions as
explained below:
1. Corporate Agent can be only firm or company.
2. Insurer may decide on case to case basis for having share
capital of Rs 15 lakhs.
3. A person known as Principal Officer should be qualified
as Associate of Insurance Institute of India Mumbai (AIII)
and if a corporate in existence then with in 3 years from
the date of renewal the principal office should acquire the
said qualifications.

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INTEXT QUESTIONS 2.2

1. Minimum qualification to be insurance Agent.
2. How much Share capital is required to become a Corporate
Agent?
Notes
2.5.3 Brokers
An insurance broker is a new distribution channel introduced
in 2002 by IRDA. The insurance broker is professional & expert
organization who deals with all insurance companies and area
of operation is on all India bases.
The Brokers are categorized under three types:—
(a) Direct broker; It means the broker can deal in life and
general insurance business.
(b) Reinsurance broker; It means the broker can deal with
reinsurance business.
(c) Composite broker; It means the broker can deal with
reinsurance and life & general insurance business.
Requirements of Capital:—
Any applicant seeking to become an insurance broker should
satisfy the following conditions:
a) It shall have a minimum amount of capital as mentioned
below:
Category Minimum amount (Rupees)
Direct broker fifty lakhs
Reinsurance broker two hundred lakhs
Composite broker two hundred and fifty lakhs
b) The capital in the case of a company limited by shares and
a cooperative society shall be in the form of equity shares.
c) The capital in the case of other applicants shall be brought
in cash.
d) The applicant shall exclusively carry on the business of an
insurance broker as licensed under these regulations.
e) No part of the capital of an applicant shall be held by a
non-Indian interest beyond 26% at any time.
f) Principal Officer: In any insurance broking firm a person
called Principal Officer will be responsible for insurance

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business and day to day function of the broking firm. To
become the principal officer he should fulfill the following
criteria:
z The Principal officer should have minimum
qualification of graduation or as prescribed by IRDA
Notes
z The principal officer of the applicant has received at
least one hundred hours/fifty hours of theoretical and
practical training from an institution recognised by
the Authority from time to time.
z Has passed an examination, at the end of the period
of training conducted by the National Insurance
Academy, Pune or any other examining body
recognised by the Authority.
Validity of licence:— A licence once issued shall be valid for
a period of three years from the date of its issue, unless the
same is suspended or cancelled by IRDA.
Fees:—
Category Amount
Direct Broker Rs 20,000/- at the time of license and
every year 0.5% of brokerage earned
minimum Rs 25,000/- & maximum Rs
1,00,000/-
Reinsurance Broker Rs 40,000/- at the time of license and
every year 0.5% of brokerage earned
minimum Rs 75,000/- & maximum Rs
3,00,000/-
Composite Broker Rs 50,000/- at the time of licenses and
every year 0.5% of brokerage earned
minimum Rs 1,25,000/- & maximum
Rs 5,00,000/-
Professional indemnity insurance :— Every insurance broker
shall take out and maintain and continue to maintain a
professional indemnity insurance cover throughout the validity
of the period of the licence. The amount of indemnity should
be three times of the brokerage earned during last year or Rs
50.00 lakhs which ever is higher.
2.6 SUMMARY
Though the insurance sector is liberalized in the year 2000 but

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keeping in view of the nature of product i.e intangible IRDA
has full control over the insurance companies/ product
approval/Distribution Channels. To start insurance business
in India one has to get registered with IRDA and invest
minimum Rs 100 crores for life Insurance/general insurance
and Rs 200 crores for reinsurance business. Life insurance Notes
business cannot be merged with general insurance business
therefore two different companies have to be formed for starting
both insurance businesses. Apart from the capital
requirements a lengthy procedure is to be followed to get a
license to start the insurance business. After registration an
insurance company needs a product to sell in the market.
Again the product should be approved by IRDA and the
procedure is simple “file & use”, which means the product
features are to be submitted in the prescribed form and
market after 15 days if no objection is raised by IRDA.
Being intangible product the trained manpower is required to
sell the insurance product. These products can be sold through
Agents, Corporate Agents or Broker who are licensed by IRDA.
These individuals/Directors will have minimum qualifications
and undergo training of 100 hours in IRDA approved institutes
and pass the examination conducted by Insurance Institute of
India/National Insurance Academy. It is not permitted to sell
the insurance product by the persons not qualified as
mentioned above. The difference among the different
distributions channels is that the Agents and Corporate Agents
can sell the product of one insurance company while an
insurance broker can sell the product of all the insurance
companies. An insurance broker can work on all India basis
while an Agent/Corporate Agent can work in particular city and
attached with one particular office of the insurer.

2.7 TERMINAL QUESTIONS

(a) Explain the procedure to obtain a license of an insurance

Broker.
(b) Discuss the code of conduct of an agent.
(c) Distinguish between an Agent and an Insurance Broker.

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2.8 OBJECTIVE TYPE QUESTIONS

Choose the correct option

1. Who can sell the insurance product other than Insurer ?

Notes a. Any person

b. A person who is licensed by IRDA
c. A person who is authorized by Insurer.
d. A person who is authorized by Govt.
2. Choose the correct option
Statement A: The share capital of any Insurance company
is Rs 100 crores.
Statement B: The Share capital of Direct Broker is Rs 100
lakhs.
a. Statement A b. Statement B c. Both d. None
3. Choose the correct option
Statement A: To become an Insurance Agent in rural area
minimum qualification is 12th passed.
Statement B: To become an Insurance Broker in rural
area minimum qualification is 10th passed.
a. Statement A b. Statement B c. Both d. None
4. Choose the correct option
Statement A: Insurer can sell any product.
Statement B: Insurer can sell any product with the
approval of IRDA.
a. Statement A b. Statement B c. Both d. None
5. Choose the correct option
Statement A: A Principal Officer is must for all
distribution channel of insurance product.
Statement B: A Principal Officer is required only for
Insurers.
a. Statement A b. Statement B c. Both d. None

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2.9 ANSWERS TO INTEXT QUESTIONS

2.1
1. Rs 10 crores at the time of registration and 0.25% of
premium received or Rs 5 crores which ever is less at the
time of renewal of registration. Notes
2. Rs 100 crores.
2.2
1. Have passed 12th standard or equivalent examination and
10th standard to become Insurance Agent in Rural area.
2. Rs 15 lakhs.

2.10 ANSWERS TO OBJECTIVE TYPE QUESTIONS

2.8

1. b

2. a

3. d

4. b

5. none

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3
Notes

INVESTMENTS, ACCOUNTS &

MISC PROVISIONS

3.0 INTRODUCTION

After selling the insurance products either directly by insurer

or through insurance inter-mediatory the insurer gets the
amount by way of premium which every Insurance company
will invest its funds (collection of premium) as per “THE
INSURANCE REGULATORY AND DEVELOPMENT AUTHORITY
(INVESTMENT AMENDMENT) REGULATIONS, 2001. The
different investment pattern has been defined for life, general,
and re-insurer in the said regulations and the same is explained
in the following paragraphs.

In addition to the investment the insurer has to maintain the

accounts properly as the insurer is to pay the amount at the
time of claim in case of general insurance and on maturity or
death of the insured the amount is to be paid to the insured
or their nominee as the case may be. The procedure of
accounting the premium and their investment is prescribed in
the regulation defined by IRDA in INSURANCE REGULATORY
& DEVELOPMENT AUTHORITY (PREPARATION OF FINANCIAL
STATEMENTS & AUDITOR’S REPORT OF INSURANCE
COMPANIES) REGULATIONS 2000.

3.1 OBJECTIVES
At the end of this chapter you will know:—
z How the premium amount is invested by Insurer
z How the accounts are being maintained by Insurer

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z Investment in Rural and social sector.
z Penalty for non compliance of provision of the Act.

3.2 INVESTMENTS

3.2.1 Life Insurance Company: Notes

The life insurance company business has been divided in two
parts as follows:—
z Life Insurance Business
z Pension & General Annuity Business
z Unit Linked Insurance Business

The investment pattern of controlled funds of Life Insurance

Business is as follows:
Investment in Govt. securities Not less than 25%
Investment in Govt. security or Not less than 50% including
approved securities above security
Infrastructure and Social Sector Not less than 15%
Investments in approved Not exceeding 35% and not
investments and other than exceeding 15% in other
approved investments than approved investments

The investment pattern of Pension and General Annuity

Business:
Investment in Govt. securities Not less than 20%
Investment in Govt. security or Not less than 40%
approved securities including above security
Investments in approved Not exceeding 60%
investments and as per
exposure norms

Unit Linked Life Insurance Business:

Every insurer shall invest and at all times keep invested his
segregated fund of unit linked life Insurance business as per
pattern of investment offered to and approved by the
policyholders. Unit Linked policies may only be offered where
the units are linked to categories of assets which are both
marketable and easily realizable. However the total investment
in other than approved category of investments shall at no time
exceed 25% of the fund.

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3.2.2 General Insurance Company
The investment pattern of total assets general insurance
company is as follows:
Investment in Govt. securities Not less than 20%

Notes Investment in State Govt security Not less than 30% including
and other guaranteed securities above security
Housing and Loans to State Not exceeding 5%
Government for Housing and
Fire Fighting equipment, being
not less than, (Subscription to/
purchase of Bonds/ debentures
issued by HUDCO, National
Housing Bank or House building
institutions duly accredited by
National Housing Banks, for
house building activities, duly
guaranteed by Government or
carrying current rating of not
less than ‘AA’ by independent,
reputed and recognized rating
agencies would also qualify
for compliance of this regulation.)
Infrastructure and Social Sector Not less than 10%
Investments in approved
investments and non approved Not exceeding 55% and not
investments more than 25% in non
approved investments

3.2.3 Reinsurance Business

Every reinsurer carrying on reinsurance business in India shall
invest and at all times keep invested his total assets in the same
manner as set out above, until such time separate regulations
in this behalf are made by the Authority.
Approved Securities & Investments:
The meaning of approved securities and investments has been
defined under section 27(A) and 27 (B) of Insurance Act 1938.
The list is lengthy but the main is aim that the insurance
company should invest the funds which are very safe & sound
as the fund is public money and the insurer is to pay back the
sum insured in case of maturity or if claim arises.

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Infrastructure
Infrastructure facility means
(i) A road, highway, bridge, airport, port, Railways including
BOLT, road transport system, a water supply project,
irrigation project, industrial parks, water treatment
system, solid waste management system, sanitation and Notes
sewerage system;
(ii) Generation or distribution or transmission of power;
(iii) Telecommunication;
(iv) Project for housing;
(v) Any other public facility of a similar nature as may be
notified by the Authority in this behalf in the Official
Gazaette;
Obligation of Rural and Social Sector:—
Rural Sector:—
(i) Five percent in the first financial year;
(i) Seven percent in the second financial year;
(ii) Ten percent in the third financial year;
(iii) Twelve percent in the fourth financial year;
(iv) Fifteen percent in the fifth financial year;

Social Sector:—
(i) Five thousand lives in the first financial year;
(ii) Seven thousand five hundred lives in the second financial
year;
(ii) Ten thousand lives in the third financial year;
(iii) Fifteen thousand lives in the fourth financial year;
(iv) Twenty thousand lives in the fifth financial year;

3.3 PROCEDURE OF INVESTMENTS

z Every insurer shall constitute an Investment Committee

which shall consist of a minimum two non-executive
directors of the Insurer, the Principal Officer, Chiefs of
Finance and Investment division, and wherever appointed
actuary is employed, the Appointed Actuary.

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z The decision taken by the Investment Committee shall be
properly recorded and be open to inspection by the officers
of the Authority.
z Every insurer shall draw up annually an Investment Policy
and place the same before its Board of Directors for its
Notes approval.
z The investment policy as approved by the Board will be
implemented by the investment committee, which shall
keep the Board informed periodically about is activities.
z The Board shall review its investment policy and its
implementation on an half-yearly basis or at such short
intervals to protect the policyholder’s interest.
z The details of the Investment Policy or its review as
periodically decided by the Board shall be submitted to
the Authority within 30 days of its decision thereto. The
Authority may call for further information from time to time
from the insurer as it deems necessary and in the interest
of policyholders issue such directions to the insurers as
it thinks fit.

INTEXT QUESTIONS 3.1

1. List the investment pattern of life insurer.

2. List the Obligations of Rural & Social Sector.

3.4 ACCOUNTS

Under Section 4 of the Insurance Act 1938, the IRDA has

framed the rules & regulations known as Insurance Regulatory
& Development Authority (Preparation of Financial
Statements & Auditor’s Report of Insurance Companies)
Regulations 2000.

Life Insurance and General Insurance Business shall prepare

the financial statements :—
a) Balance Sheet.
b) Revenue Account [Policyholders’ Account], life insurance.
c) Revenue Account [Fire, Marine and Miscellaneous],
General Insurance.

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d) Receipts and Payments Account [Cash Flow statement]
and,
e) Profit and Loss Account [Shareholders’ Account].

The abovementioned shall be prepared as per the Accounting

Standards prescribed by Institute of Chartered Accountants of Notes
India.

3.5 MISCELLANEOUS PROVISION

3.5.1 Insurance Business in Rural or Social Sector:—

Every insurer shall undertake such percentages of life
Insurance business and general Insurance business in the
rural or social sector, as stated above.

3.5.2 Obligations of Insurer in Respect of Rural or

Unorganized Sector / Backward Classes
Every insurer shall discharge the obligations specified -
persons residing in the rural sector, workers in the
unorganized or informal sector or for economically vulnerable
or backward classes of the society and other categories of
persons as stated above.

3.5.3 Assignment and Transfer of Insurance Policies (38)

A transfer or assignment of a policy of life Insurance, whether
with or without consideration, may be made only by an
endorsement upon the policy itself or by a separate instrument,
signed in either case by the transferor or by the assignor or
his duly authorized agent and attested by at least one witness,
specifically setting forth the fact of transfer or assignment.
The transfer or assignment shall be complete and effectual
upon the execution of such endorsement or instrument duly
attested but except where the transfer or assignment is in favor
of the insurer shall not be operative as against an insurer and
shall not confer upon the transferee or assignee, or his legal
representative, any right to sue for the amount of such policy
or the moneys secured thereby until a notice in writing of the
transfer or assignment and either the said endorsement or
instrument itself or a copy thereof certified to be correct by both
transferor and transferee or their duly authorized agents have
been delivered to the insurer.

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3.5.4 Nomination by Policyholder (39)

1. The holder of a policy of life Insurance on his own life, may,

when affecting the policy or at any time before the policy
matures for payment, nominate the person or persons to
whom the money secured by the policy shall be paid in
Notes
the event of his death.
2. Any such nomination in order to be effectual shall, unless
it is incorporated in the text of the policy itself, be made
by an endorsement on the policy communicated to the
insurer and registered by him in the records relating to
the policy and any such nomination may at any time before
the policy matures for payment be cancelled or changed
by an endorsement or a further endorsement or a will, as
the case may be, but unless notice in writing of any such
cancellation or change has been delivered to the insurer,
the insurer shall not be liable for any payment under the
policy made bona fide by him to a nominee mentioned in
the text of the policy or registered in records of the insurer.
3. The insurer shall furnish to the policyholder a written
acknowledgement of having registered a nomination or a
cancellation or change thereof, and may charge a fee not
exceeding one rupee for registering such cancellation or
change.
4. A transfer or assignment of a policy made in accordance
with section 38 shall automatically cancel a nomination.
5. Where the policy matures for payment during the lifetime
of the person whose life is insured or where the nominee
or, if there are more than one nominees, all the nominees
die before the policy matures for payment, the amount
secured by the policy shall be payable to the policyholder
or his heirs or legal representatives or the holder of
succession certificate, as the case may be.
6. Where the nominee or if there are more than one
nominees, a nominee or nominees survive the person
whose life is insured, the amount secured by the policy
shall be payable to such survivor or survivors.

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3.5.5 Limitation of Expenses of Management in Life
Insurance Business – (Section 40B)

Every insurer transacting life Insurance business in India shall

furnish to the Authority statements in the prescribed form duly
certified by an actuary on the basis of premium currently used
by him in regard to new business in respect of mortality, rate Notes
of interest, expenses & bonus loading.

No insurer shall spend as expenses of management exceeding

the prescribed limits in any calendar year.

The expenses of management include commission payments

of all kinds and any amount of expenses capitalized. In case
of an insurer having his principal place of business outside
India, a proper share of head office expenses which shall not
be less than such percentage as may be prescribed of the total
premiums (less reinsurances) received during that year in
respect of life Insurance business transacted by him in India.
But it does not include in the case of an insurer having his
principal place of business in India any share of head office
expenses in respect of life Insurance business transacted by
him outside India.

If in any year the expenses of management exceeds the

prescribed limits then it will be contravention of the provision
if the excess amount so spent is within such limits as may be
fixed in respect of the year by the Authority after consultation
with the executive committee of life Insurance council by which
the actual expenses incurred may exceed the expenses
permissible.

Every statement shall be signed by the chairman and two

directors of the company, the principal officer and auditor’s
certification and duly certifying that all expenses of
management in respect of life Insurance business transacted
by the insurer in India have been debited in the revenue
account as expenses.

If the insurer is carrying on any other class of Insurance

business in addition to life Insurance business an auditor’s
certificate certifying that all charges incurred in respect of his
life Insurance business and in respect of his business other
than life Insurance business have been fully debited in the
respective revenue accounts.

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3.5.6 Limitation of Expenses of Management in General
Insurance Business (40C)

No insurer shall in respect of any class of general Insurance

business transacted by him in India spend in any calendar year
as expenses of management including commission or
Notes remuneration for procuring limits and in prescribing any such
limits regard shall be had to the size & age of the insurer. If
an insurer has spent as such expenses in any year an amount
in excess of the amount permissible and the same shall not
be contravention of the provision of this section, if the excess
amount is within the limit as may be fixed in respect of the year
by the Authority after consultation with Executive Committee
of the General Insurance council which the actual expenses
incurred may exceed the expenses permissible.

Every insurer shall incorporate in the revenue account a

certificate signed by the Chairman and two directors & by the
principal officer and an auditor certifying that all expenses of
management have been fully debited in the revenue account
as expenses.

3.5.7 Prohibition of Rebates (41)

No person shall allow rebate on any Insurance policy (life as

well as general) to induce any person to take the Insurance
policy. The rebate may be allowed in accordance with the
published prospectuses or tables of the insurer. If any
Insurance agent takes the Insurance policy for himself then it
will not be considered as rebate of commission.

3.5.8 Penalty to be Imposed for Non-compliance of the

Various Important Provisions of the Act.

Section 102. If any person, who is required under this Act, or

rules or regulations made there under:—
(a) To furnish any document, statement, account, return or
report to the Authority, fails to furnish the same.
(b) To comply with the directions, fails to comply with such
directions.
(c) To maintain solvency margin, fails to maintain such
solvency margin.

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(d) To comply with the directions on the insurance treaties,
fails to comply with such directions on the insurance
treaties, he shall be liable to a penalty not exceeding five
lakh rupees for each such failure and punishable with
fine.
Section 103:— If a person makes a statement, or furnishes Notes
any document, statement, account, return or report which is
false and which he either knows or believes to be false or does
not believe to be true:—

(a) He shall be liable to a penalty not exceeding five lakh

rupees for each such failure.
(b) He shall be punishable with imprisonment which may
extend to three years or with fine for each such failure.
3.5.9 Penalty for False Statement in Document of
Investment

Section 104:— If a person fails to comply with the provisions

of section 27(investment) or section 27A (investment of Life
Insurer) or section 27B (investment of General Insurer) or
section 27C (prohibition of investment) or section 27D (Manner
of investment), he shall be liable to penalty not exceeding five
lakh rupees for each such failure.

3.5.10 Wrongfully Obtaining or Withholding Property.

Section 105:— If any director, managing director, manager or

other officer or employees of an insurer wrongfully obtains
possession of any property or wrongfully applies to any purpose
of the Act, he shall be liable to a penalty not exceeding two lakh
rupees for each such failure.

3.5.11 Offences by Companies

Section 105A

(1) Where any offence under this Act has been committed by
a company, every person who, at the time the offence was
committed, was in charge of, and was responsible to, the
company for the conduct of the business of the company
as well as the company shall be deemed to be guilty of the
offence and shall be liable to be proceeded against and
punished accordingly.

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(2) Where any offence under this Act has been committed by
a company and it is proved that the offence has been
committed with the consent or connivance of, or is
attributable to any neglect on the part of, any director,
manager, secretary or other officer of the company, such
director, manager, secretary or other officer shall be
Notes
deemed to be guilty of that offence and shall be liable to
be proceeded against and punished accordingly.

3.5.11 Penalty for Failure to Comply with Section 32B

(Insurance Business in Rural or Social sector).
Section 105B:— If an insurer fails to comply with the provisions
of section 32B, he shall be liable to a penalty not exceeding
five lakh rupees for each such failure and shall be punishable
with imprisonment which may extend to three years or with
fine for each such failure.

3.5.12 Penalty for Failure to Comply with Section 32C

(Obligation of Insurer in respect of rural or
unorganized sector):—
105C:— If an insurer fails to comply with the provisions of
section 32C, he shall be liable to a penalty not exceeding
twenty-five lakh rupees for each such failure and in the case
of subsequent and continuing failure, the registration granted
to such insurer under section 3 shall be cancelled by the
Authority.

3.5.13 No Risk to be Assumed Unless Premium is Received

in Advance Section 64VB:—
No insurer shall assume the risk in India unless & until the
premium payable is received by him in advance.
In case the premium is tendered by postal money orders or
cheques sent by post the risk may be assumed on the date on
which the money order is booked or the cheques is posted as
the case may be.
Where an Insurance agent collects a premium on a policy of
Insurance on behalf of an insurer, he shall deposit with or
dispatch by post to the insurer within 24 hours of the collection
excluding bank & postal delays.
The agent is not to deduct his commission from the premium
amount.

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Declaration of Interim Bonus (112)
The insurer who is carrying a business of life Insurance shall
be at liberty to declare an interim bonus or bonus to
policyholders whose policies mature for payment by reason of
death or otherwise.
Notes
Surrender Value 113
If any life Insurance policy in which the premium have been
paid in full for atleast three consecutive years will acquire
guaranteed surrender value. The bonus will also be in addition
to the guaranteed surrender value.

INTEXT QUESTIONS 3.2

1. List the Accounting Statements to be prepared by any

general insurer.
2. Meaning of 64 VB.

3.5 SUMMARY
In this chapter we have explained various important activities
of an insurance company whether it is doing the business of
life or general or re-insurer. The utilization of premium amount
received by insurance companies are very important as this
amount belongs to the public (policyholders) to whom the
amount is to be paid back as and when claim arises or on
maturity. Therefore the insurer will invest such funds to earn
maximum return with safety as per the norms prescribed by
IRDA so that the public funds are not misused and lost by the
insurer so that the insurer does not have any funds to pay the
claim or maturity amount.

Similarly the accounts of any insurer are being maintained as

the guidelines framed by IRDA related to preparation of
financial statements of any insurer. It is to ensure that the
public gets true and fair picture of workings of any insurer.

3.6 TERMINAL QUESTION

1. Mention the investment pattern of Life Insurance

Company.

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2. Distinguish between assignment and nomination.
3. List the provisions of rural and social sector.

3.7 OBJECTIVE TYPE QUESTIONS

1. One of the following Accounting Statements does not form

Notes part of Specified Financial Statements comprising under
regulation called IRDA (Preparation of Financial
Statements and Auditors Report of Insurance Companies)
Regulations 2000. Identity that statement.
(a) Balance Sheet.
(b) Revenue Accounts.
(c) Profit and Loss Account.
(d) Fund-Flow Statement.
2. Choose the Correct Option
Statement A: Life insurer will invest not less than 25%
in Central Government Securities.
Statement B: Life insurer will invest not less than 50%
in Central & State Government Securities.
a. Statement A b. Statement B c. Both d. None
3. Choose the Correct Option
Statement A: General insurer will invest not less than
20% in Central Government Securities.
Statement B: General insurer will invest not less than
30% in Central & State Government Securities.
a. Statement A b. Statement B c. Both d. None
4. Choose the Correct Option
Statement A: It is not obligatory for Life insurer to invest
in rural sector.
Statement B: It is obligatory for General Insurer to invest
in rural sector.
a. Statement A b. Statement B c. Both d. None
5. Choose the Correct Option
Statement A: Nomination is must in all Life insurance
products.

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Statement B: Nomination is not compulsory in all Life
insurance products.
a. Statement A b. Statement B c. Both d. None
6. Choose the Correct Option.
Statement A: It is a legal requirement to pay the premium Notes
in advance in Life insurance only.
Statement B: It is a legal requirement to pay the premium
in advance in general Insurance only.
a. Statement A b. Statement B c. Both d. None
7. The life insurance premium should be paid for
minimum _____ years.
a. 3 b. 4 c. 5 d. 1
8. Choose the Correct Option
Statement A: IRDA can put limit on the management
expenses of the Life insurer only.
Statement B: IRDA can put limit on the management
expenses of the General insurer only.
a. Statement A b. Statement B c. Both d. None
9. Choose the Correct Option
Statement A: IRDA can impose fine on insurer if
obligation of Rural and Social sector is not fulfilled.
Statement B: IRDA can impose fine on insurer for non
compliance of submission of documents.
a. Statement A b. Statement B c. Both d. None
10. Infrastructure facility means
(a) A road, highway, bridge, airport, port, Railways
including BOLT, road transport system, a water supply
project, irrigation project, industrial parks, water
treatment system, solid waste management system,
sanitation and sewerage system.
(b) Generation or distribution or transmission of power.
(c) Telecommunication.
(d) All above

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3.8 ANSWERS TO INTEXT QUESTIONS

3.1
1. Life Insurance and General Insurance Business shall
prepare the financial statements
Notes a) Balance Sheet.
b) Revenue Account [Policyholders’ Account], life
insurance.
c) Revenue Account [Fire, Marine and Miscellaneous],
General insurance.
d) Receipts and Payments Account [Cash Flow
statement] and
e) Profit and Loss Account [Shareholders’ Account].

2. No insurer shall assume the risk in India unless & until

the premium payable is received by him in advance.
In case the premium is tendered by postal money orders
or cheques sent by post the risk may be assumed on the
date on which the money order is booked or the cheques
is posted as the case may be.
Where an Insurance agent collects a premium on a policy
of Insurance on behalf of an insurer, he shall deposit with
or dispatch by post to the insurer within 24 hours of the
collection excluding bank & postal delays.
The agent is not to deduct his commission from the
premium amount.

3.2

1. Fire, Marine and Miscellaneous accounts.

2. The premium received by the insurance company in
advance and the risk will start once the premium
received by the insurance company.

3.9 ANSWER TO OBJECTIVE TYPE QUESTIONS

1. d 2. c 3. c 4. b
5. a 6. d 7. a 8. d
9. c 10. d

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4
Notes

RIGHTS & REMEDIES AVAILABLE

TO CONSUMERS

4.0 INTRODUCTION

Man is a social & rational animal. He has throughout his

evolution tried to improve upon everything, he has laid his
hands upon, anything which he has thought & about
everything which he has invented or discovered. This special
faculty which has been blessed on man & which inspires a
person to channelize all his energies to reach a destination of
perfection in life is the power to think. One cannot survive
alone. Interaction is must. There is interaction between two
individuals, between families, between societies, between
nations and so on & so forth. Education, trade and commerce,
all are focuses of human interaction. But the indispensable
interaction between the entities, if one may think of minutely
keeping in view the commercialization of every sphere of life
is the interaction between the seller & the buyer, the giver &
the recipient, the skilled ones & the beneficiaries, the trader
& the consumer. In fact, every body is a consumer because one
may sell something but at the same time has to buy also.
Insurance activity is also one of the intangible products i.e
which can not be seen or touched. In fact it is only a promise
on piece of paper which no consumer/buyer reads unless &
until any dispute arises in fulfilling the promises by the
insurers. The government/IRDA has protected the interest of
the consumers/policyholders through various laws which have
been explained in this chapter.

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4.1 OBJECTIVES
After this chapter you will be able to know various remedies
for the Policyholders under the following acts
z Protection of Policyholders Interest.
Notes z Consumer Protection Act 1986.
z Insurance Ombudsman.

4.2 PROTECTION OF POLICYHOLDERS’ INTERESTS

Under the provisions of Protection of Policyholder’s Interest

the procedure is defined for the insurance companies to be
followed at the time of issue of policies and the documents
required at the time of claim and how the disputes are to be
resolved.

4.2.1 Procedure before the sale of product:—

A prospectus of any insurance product shall clearly state the

scope of benefits, the extent of insurance cover and in an
explicit manner explain the warranties, exceptions and
conditions of the insurance cover and, in case of life insurance,
whether the product is participating (with-profits) or non-
participating (without-profits). The allowable rider or riders on
the product shall be clearly spelt out with regard to their scope
of benefits, and in no case, the premium relatable to all the
riders put together shall exceed 30% of the premium of the
main product.

4.2.2 Proposal for insurance:—

Except in cases of a marine insurance cover, where current

market practices do not insist on a written proposal form, in
all cases, a proposal for grant of a cover, either for life business
or for general business, must be evidenced by a written
document. It is the duty of an insurer to furnish to the insured
free of charge, within 30 days of the acceptance of a proposal,
a copy of the proposal form.

The proposal forms and documents used in the grant of cover

may, depending upon the circumstances of each case, be made
available in languages recognised under the Constitution of
India.

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4.2.3 Grievance redressal procedure
Every insurer shall have in place proper procedures and
effective mechanism to address complaints and grievances of
policyholders efficiently and with speed and the same along-
with the information in respect of Insurance Ombudsman shall
be communicated to the policyholder along-with the policy Notes
document and as may be found necessary.

4.2.4 Claims procedure in respect of a life insurance policy

A life insurance policy shall state the primary documents which
are normally required to be submitted by a claimant in support
of a claim.

A life insurance company, upon receiving a claim, shall process

the claim without delay. Any queries or requirement of
additional documents, to the extent possible, shall be raised
all at once and not in a piece-meal manner, within a period of
15 days of the receipt of the claim.

A claim under a life policy shall be paid or be disputed giving

all the relevant reasons, within 30 days from the date of receipt
of all relevant papers and clarifications required. However,
where the circumstances of a claim warrant an investigation
in the opinion of the insurance company, it shall initiate and
complete such investigation at the earliest. Where in the
opinion of the insurance company the circumstances of a claim
warrant an investigation, it shall initiate and complete such
investigation at the earliest, in any case not later than 6 months
from the time of lodging the claim.

If a claim is ready for payment but the payment cannot be made

due to any reasons of a proper identification of the payee, the
life insurer shall hold the amount for the benefit of the payee
and such an amount shall earn interest at the rate applicable
to a savings bank account with a scheduled bank (effective from
30 days following the submission of all papers and information).

Where there is a delay on the part of the insurer in processing

a claim for a reason other than the above, the life insurance
company shall pay interest on the claim amount at a rate which
is 2% above the bank rate prevalent at the beginning of the
financial year in which the claim is reviewed by it.

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4.2.5 Claim procedure in respect of a general
insurance policy

An insured or the claimant shall give notice to the insurer of

any loss arising under contract of insurance at the earliest or
within such extended time as may be allowed by the insurer.
Notes On receipt of such a communication, a general insurer shall
respond immediately and give clear indication to the insured
on the procedures that he should follow. In cases where a
surveyor has to be appointed for assessing a loss claim, it shall
be so done within 72 hours of the receipt of intimation from
the insured.

Where the insured is unable to furnish all the particulars

required by the surveyor or where the surveyor does not receive
the full cooperation of the insured, the insurer or the surveyor
as the case may be, shall inform in writing the insured about
the delay that may result in the assessment of the claim. The
surveyor shall be subjected to the code of conduct laid down
by the Authority while assessing the loss, and shall
communicate his findings to the insurer within 30 days of his
appointment with a copy of the report being furnished to the
insured, if he so desires. Where, in special circumstances of
the case, either due to its special and complicated nature, the
surveyor shall under intimation to the insured, seek an
extension from the insurer for submission of his report. In no
case shall a surveyor take more than six months from the date
of his appointment to furnish his report.

If an insurer, on the receipt of a survey report, finds that it is

incomplete in any respect, he shall require the surveyor under
intimation to the insured, to furnish an additional report on
certain specific issues as may be required by the insurer. Such
a request may be made by the insurer within 15 days of the
receipt of the original survey report.

The surveyor on receipt of this communication shall furnish

an additional report within three weeks of the date of receipt
of communication from the insurer.

On receipt of the survey report or the additional survey report,

as the case may be, an insurer shall within a period of 30 days
offer a settlement of the claim to the insured. If the insurer,
for any reasons to be recorded in writing and communicated
to the insured, decides to reject a claim under the policy, it shall

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do so within a period of 30 days from the receipt of the survey
report or the additional survey report, as the case may be.

Upon acceptance of an offer of settlement by the insured, the

payment of the amount due shall be made within 7 days from
the date of acceptance of the offer by the insured. In the cases
of delay in the payment, the insurer shall be liable to pay Notes
interest at a rate which is 2% above the bank rate prevalent at
the beginning of the financial year in which the claim is
received by it.

General

Any breach of the obligations cast on an insurer or insurance

agent or insurance intermediary in terms of these regulations
may enable the Authority to initiate action against each or all
of them, jointly or severally, under the Act and/or the
Insurance Regulatory and Development Authority Act, 1999.

INTEXT QUESTIONS 4.1

1. What penalties are imposed on Insurer on delaying the

payment of claim?
2. Mention the procedure to be followed by Insurer to sell
their product.

4.3 CONSUMER PROTECTION ACT 1986

As every one is a consumer therefore, the legislative has
enacted the Consumer Protection Act 1986, which was made
more powerful by the Consumer Protection (Amendment) Act
1993 to arm each & every consumer or consumer associations
with rights to seek speedy & cheap remedies in such manner
which is proving to be very popular & effective as well, leaving
behind a trail of rulings & findings where under so many of
us have benefited.

The statute has been enacted to provide for better protection

of the interests of consumers and for that purpose to make
provisions for the establishment of consumer councils and
other authorities for the settlement of consumer’s disputes and
for matters connected therewith.

Let us discuss the various provisions of the Act in brief to

explain the basics of Consumer Protection Act 1986.

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4.3.1 General

1. This is Act applies to all the goods and services.

2. It covers private, public and cooperative sectors.

Notes 4.3.2 Rights of the consumers

The Act seeks to promote and protect the rights of the

consumers such as: -

(i) The right to be protected against marketing of goods which

are hazardous to life and property.
(ii) The right to be informed about the quality, quantity,
potency, purity, standard and price of goods to protect the
consumer against unfair trade practices.
(iii) The right to be heard and assured that consumer’s
interests will receive due consideration at appropriate
forums.
(iv) The right to seek redressal against unfair trade practices
or unscrupulous exploitation of consumers.
(v) The right to consumer education.

4.3.3 Who is a consumer for the purpose of services?

a) One who hires any services for a consideration, which has
been paid or promised or partly paid or partly promised
or under any system of deferred payments.
b) It includes any beneficiary of such service other than the
one who actually hires the service for consideration and
such services are availed with the approval of such person.

4.3.4 What constitutes a defect or deficiency?

A defect or deficiency is a
z Fault.
z Imperfection.
z Shortcoming.
z Inadequacy.
z Quality.
z Nature.

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z manner of performance which is required to be.
z maintained by or under any law.
z in pursuance of a contract.
z undertaking in relation to that service.

4.3.5 The main objective of the Act is:— Notes

z To provide simple, speedy and inexpensive redressal to the

consumer’s grievances.
z To provide this, a three-tier quasi-judicial machinery at
the national, state and district level has been envisaged
under the Act.
z National Consumer Disputes Redressal Commission
(National Commission).
z State Consumer Disputes Redressal Commission (State
Commission).
z District Consumer Disputes Redressal Forum (District
Forum).

4.3.6 Who can file a complaint?

1. Consumer.
2. Any voluntary organisation representing consumers
registered under Companies Act/Societies Act.
3. Central Government.
4. State Government or Union Territory.

A group of consumers having common dispute.

4.3.7 Where to file a complaint?

1. If the cost of goods or services and compensation asked for

does not exceed Rs.20 lakhs then the complaint can be
filed in the District Forum which has been notified by the
government for the District where the cause of action has
arisen or where party resides.
2. If the cost of goods or services and compensation asked for
is more than Rs. 20 lakhs but less than 1 Crore, the
complaint can be filed before State Commission.

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3. If the cost of goods or services and compensation asked for
exceeds Rs. 1 Crore, the complaint can be filed before the
National Commission.

4.3.8 Appeals:

Notes If a person is not satisfied with the decision of the district forum,
he can file an appeal with the state commission and in case of
not being satisfied with the decision of state commission;
appeal can be filed before the national commission. Appeals
against the decision of the national commission can be filed
in the Supreme Court.

4.3.9 Relief available to consumers:

Depending on the nature of relief sought for by the consumer
and facts, the redressal forum may give order for one or more
of the following relief:-

1. Removal of defects from the goods.

2. Replacement of goods.
3. Refund of consideration paid.
4. Award of compensation for the loss or injury suffered.

4.3.10 Limitations:
Complaint is to be filed within 2 years from the date on which
cause of action has arisen. Time-barred complaints shall not
be entertained by Forums.

INTEXT QUESTIONS 4.2

1. Whether an individual can file complaint in the Consumer

Courts on account of repudiation of the claim?
2. Where to file a complaint if the disputable amount is more
than Rs 20 lakhs?

4.4 OMBUDSMAN SCHEME

Introduction to the Scheme:—

(i) Central Government framed rules known as Redressal of

Public Grievances Rule 1998, in exercise of the powers
vested in it under section 114(1) of Insurance Act, 1938.

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(ii) These rules are in respect of the Ombudsman Scheme to
resolve all complaints relating to claims against insurers.
(iii) Complaints are to be resolved in cost effective, efficient and
impartial manner.
(iv) The Scheme has been notified in the Gazette of India on
11.11.98. Notes

4.4.1 The Ombudsman may receive and consider

complaints of individuals relating to:

(i) Any partial or total repudiation of claim by an insurer.

(ii) Any dispute in regard to premium paid or payable in terms
of the policy.
(iii) Any dispute in regard to the legal construction of the
policies in so far as such disputes relate to the claims.
(iv) Delay in settlement of claims.
(v) Non-issue of an insurance document to customers after
receipt of premium.
(vi) The Ombudsman shall act as counselor and mediator in
matters which are within his terms of reference and, if
requested to do so in writing by mutual agreement by the
insured person and insurance company.
(vii) The Ombudsman’s decision whether the complaint is fit
and proper for being considered by it or not shall be final.

4.4.2 When can a complaint be made to the Ombudsman?

(i) If the insurer has rejected a written representation of the
complainant.
(ii) The complainant had not received any reply within one
month after the insurer received his representation.
(iii) The complainant is not satisfied with the reply given to him
by the insurer.
(iv) The complaint is made not later than 1 year after the
insurer had rejected the representation or sent his final
reply on the representation of the Complainant.
(v) The complaint is not on the same subject matter, for which
any proceedings “before any court, or Consumer Forum,
or arbitrator” is pending or were so earlier.

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4.4.3 Recommendations:

When a complaint is settled through mediation of the

Ombudsman.

(i) He makes a ‘recommendation’ which he considers fair in

Notes the circumstances of the case.
(ii) Copies of the ‘recommendation’ shall be sent to the
complainant and the insurance company.
(iii) Such ‘recommendation’ shall be made not later than one
month from the date of the receipt of the complaint.
(iv) If a complainant accepts the recommendations of the
Ombudsman, he will communicate his acceptance within
15 days of receipt of the recommendation.
(v) Acceptance letter to the Ombudsman should clearly state
that the settlement reached is acceptable to him in totality
in full and final settlement of his claim.
(vi) Thereafter, the Ombudsman will send a copy of the
recommendation along with complainant’s acceptance
letter to the insurance company.
(vii) The insurer shall comply with the terms and conditions
of the recommendation immediately but not later than 15
days of the receipt of such recommendations.
(viii) Finally, the insurer shall inform the Ombudsman about
its compliance.

4.4.4 Awards

Where complaint is not settled through mediation of the

Ombudsman
(i) He shall pass an Award.
(ii) Which he considers fair in the facts of the case.
(iii) Award shall be in writing.
(iv) It shall state the amount awarded to the complainant.
(v) Ombudsman shall not award any compensation in excess
of the loss suffered by the complainant or 20 lakh,
whichever is less.
(vi) Award shall be passed within a period of three months
from the date of receipt of the complaint.

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(vii) Copies of the award shall be sent to the insurer and the
complainant.
(viii) Complainant shall furnish to the insurer within one
month, a letter of acceptance that award is in full and final
settlement of his claim.
(ix) Insurer shall comply with the award within 15 days from Notes
the receipt of the acceptance letter and intimate
compliance to the Ombudsman.
4.4.5 Consequences of non-acceptance of award:
If the complainant does not intimate acceptance within one
month from the date of receipt of the award, the insurance
company may not implement the award.
4.4.6 Ex-gratia payment
If the Ombudsman deems fit, he may award an Ex-gratia
payment.
The decision of the ombudsman is binding on the insurers, but
the consumer if he feels aggrieved by the decision can approach
the civil courts for relief.

INTEXT QUESTIONS 4.3

1. What are the consequences of non acceptance of award?

2. When the Scheme of Ombudsman was implemented?

4.5 SUMMARY
As and when any business activity increases the disputed do
arise and to resolve the disputes at the earliest the Govt has
framed the Consumer protection Act 1936, and IRDA has
issued regulations to protect the interest of Policyholders. Any
dispute related to insurance activity can be resolved though
Insurance ombudsman or filing a complaint at IRDA. If a person
is not satisfied with the decision of any of such legal
organization then the policyholder can file an appeal in the
Courts.

4.6 TERMINAL QUESTIONS

1. What are the rights of consumer under Consumer

protection Act 1986?

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2. List the remedies available to the policyholders under

Protection of Policyholder rights.
3. What action will be taken by Ombudsman if a policyholder
is not satisfied with the decision of the Ombudsman?

Notes 4.7 OBJECTIVE TYPE QUESTIONS

1. The limit of dispute can be referred to the District

Consumer Court _______(up to Rs 20 lakhs/ up to Rs 25
lakhs).
2. The limit of dispute can be referred to the State Consumer
Court _______(Rs 100 lakhs/Rs 50 lakhs).
3. The limit of dispute can be referred to the District
Consumer Court _______(More than Rs 100 lakhs/Rs 250
lakhs).
4. The limit of dispute can be referred to the Insurance
Ombudsman ________ (Rs 20 lakhs/Rs 10 lakhs).
5. Consumer Protection Act is applicable to
a. Goods
b. Service
c. Goods & Services
d. None

4.8 ANSWRES TO INTEXT QUESTIONS

4.1
1. In the cases of delay in the payment, the insurer shall be
liable to pay interest at a rate which is 2% above the bank
rate prevalent at the beginning of the financial year in
which the claim is reviewed by it.
2. A prospectus in which the details of the products is
explained will be provided to the customers.
4.2
1. Yes an individual can file an complaint on the basis of
deficiency of the service.
2. State Consumer Court.

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4.3
1. If the complainant does not intimate acceptance within one
month from the date of receipt of the award, the insurance
company may not implement the award.
2. In Nov 1998
Notes
4.9 ANSWRES TO OBJECTIVE TYPE QUESTIONS

1. 20 lakhs

2. 100 lakhs

3. More than 100 lakhs

4. 20 Lakhs

5. C

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5
Notes

PUBLIC LIABILITY INSURANCE ACT

1991, AND WORKMEN COMPENSATION
ACT 1923 AND MOTOR VEHICLE
ACT 1988

5.0 INTRODUCTION
In this chapter we will discuss various Acts where an employee
or third party will get compensation because of no fault of his/
her. For eg. A vehicle driver hits pedestrian on road with out
his fault then the owner of vehicle is responsible to payment
the compensation to the nominee of the deceased. But an
individual may not be financial strong to pay the compensation
therefore the law was enacted to insure all the vehicles so that
affected person gets the compensation from insurer. Similarly
the owner of any industry may have to pay compensation to
the general public because of no fault but they are affected
because of the industry.
5.1 OBJECTIVES

At the end of this lesson, you will be able to

z How the compensation can be claimed from the
industrialist because of general public is affected.
z How the industrialist can cover their risk through
insurance.

z How the vehicle owner can protect himself to pay the

compensation.

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5.2 PUBLIC LIABILITY ACT 1991
5.2.1 Introduction
The workers who are handling hazardous substances and likely
to fall victims of accidents. The employees used to escape their
liability on the grounds of assumed risk or contributory
Notes
negligence brought legislation to protect the workers for their
safety in hazardous occupation. One of the ways to protect
workers is through providing Insurance to them. The employer
has also to share the burden in this.
Very often, the majority of the people affected are from the
economically weaker sections & suffer great hardships because
of delayed relief & compensation. While workers and employees
of hazardous installations are protected under separate laws,
members of the public are not assured of any relief except
through long legal processes. Industrial units seldom have the
willingness to readily compensate the victims of accidents &
the only remedy now available for the victims is to go through
prolonged litigation in the court of law.
It is, therefore, essential to provide for Mandatory Public
Liability Insurance for installations handling hazardous
substances to provide minimum relief to the victims. Such
Insurance, apart from safe guarding the interests of the victims
of accidents would also provide cover & enable the industry to
discharge its liability to settle large claims arising out of major
accidents. If the objective of providing immediate relief is to be
achieved, the mandatory public liability Insurance should be
on the principle of “no fault” liability as it is limited to only relief
on a limited scale. However, availability of immediate relief
would not prevent the victims to go to courts for claiming
higher compensation.
An Act to provide for public liability insurance for the purpose
of providing immediate relief to the persons effected by accident
occurring while handling any hazardous substance and for
matters connected therewith or incidental thereto, was
introduced in 1991. The Act gives relief on the principle of “No
Fault”.
Where death or injury to any person (other than a workman)
or damage to any property has resulted from an accident, the
owner shall be liable to give following relief for such death,
injury or damage.

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(i) Reimbursement of medical expenses incurred upto a
maximum of Rs. 12,500 in each case.
(ii) For fatal accidents the relief will be Rs. 25,000 per person
in addition to reimbursement of medical expenses, if any
incurred on the victim up to a maximum of Rs. 12,500.
Notes (iii) For permanent total or permanent partial disability or
other injury or sickness, the relief will be (a)
reimbursement of medical expenses incurred, if any, upto
a maximum of Rs. 12,500/- in each case and (b) cash relief
on the basis of percentage of disablement as certified by
an authorised physician. The relief for total permanent
disability will be Rs. 25.000.
(iv) For loss of wages due to temporary partial disability, which
reduces the earning capacity of the victim, there will be a
fixed monthly relief not exceeding Rs. 1,000/-per month
up to a maximum of 3 months provided the victim has been
hospitalised for a period exceeding 3 days and is above 16
years of age.
(v) Upto Rs. 6,000 depending on the actual damage, for any
damage to private property.

INTEXT QUESTIONS 5.1

1. Mention the compensation payable under permanent

disability.
2. Mention the medical expenses payable.

5.3 WORKMEN’S COMPENSATION ACT 1923

5.3.1 Introduction
The Workmen’s Compensation Act 1923 came into force w.e.f.
1/7/1924. The object of this Act is to make provision for the
payment of compensation to a workman only i.e. to the
concerned employee himself in case of his surviving the injury
in question and to his dependents in the case of death.
The growing complexity of industry in the country, with the
increasing use of machinery & consequent danger to workmen,
along with the comparative poverty of the workmen themselves
renders it advisable that they should be protected from
hardship out of accidents. A legislation of this kind helps to
reduce the number of accidents in a manner that cannot be

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achieved by official inspection and to mitigate the effect of
accidents by provision for suitable medical treatment, thereby
making industry more attractive to labour & increasing its
efficiency.
The Act provides for cheaper & quicker disposal of disputes
relating to compensation through tribunals than was possible Notes
under the civil law.
Section 2 (1) & (4) of the Act defines the amount of
compensation to be paid in the case of death, permanent total
disablement and Permanent partial disablement due to an
injury while on duty or due to disease contracted which is
peculiar to that environment also called “occupational disease”.
The following is the amount payable in different cases:—
(a) On death an amount equal to 50% of the monthly wages
last drawn by the deceased workman multiplied by the
relevant factor or Rs.80,000/- whichever is more.
(b) Where permanent total disablement occurs an amount
equal to 60% of the monthly wages last drawn by the
injured workman multiplied by the relevant factor or
Rs.90,000/- whichever is more.
(The relevant factor mentioned in (a) & (b) above is based
on the age of the employee and is given in the act. For e.g.
at age 16 the factor is 228.54; at age 30 it is 207.98; at
age 50 it is 153.90. For the purpose of arriving at the
compensation the act has fixed the maximum monthly
wages of Rs.4,000/- p.m. and in case his salary is more
than Rs.4,000/- p.m. he shall be deemed to be getting a
wage of Rs.4,000/- p.m. only).
(c) In case of permanent partial disablement the amount
payable will be a percentage of the amount payable due
to permanent total disability and the percentage is
specified in the act. Some examples are:
Amputation through shoulder joint - 90%
Loss of thumb - 30%
Loss of four fingers of one hand - 50%
Loss of middle finger (whole) - 12%
Loss of Ring or little finger (whole) - 7%

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(d) In case of temporary total or partial disablement a half
monthly payment of the sum equivalent to 25% of the
monthly wages of the workman.
In addition to the above in case of death of an employee,
a sum of Rs.2,500/- is required to be deposited by the
Notes employer with the commissioner for payment to the eldest
surviving dependant of the workman towards funeral
expenses.
Some examples of occupational disease are:
1. Hearing impairment caused by noise.
2. Lung cancer caused by asbestos.
3. Lung disease caused by cotton, flex, hemp etc.
4. Skin disease caused by physical, chemical or
biological agents.
5.4 THE MOTOR VEHICLE ACT 1988
5.4.1 Introduction:
The first law relating to Motor Vehicles was the Indian Motor
Vehicle Act 1914, which stayed in operation till the year 1939.
During this long period there was a vast change in the transport
scenario and the need was felt to comprehensively renew the
old law as the developments rendered the working of the old
Act of 1939 inconvenient and it was not in tune with the change
in time and the new Act of 1988 was enacted.
The Motor Vehicle Act was amended in 1988 to make Third
Party Liability Insurance compulsory thus no uninsured
vehicle is allowed to play on the roads or in any public place
in India. The need of this enactment was felt due to the growing
number of vehicles and the increasing number of accidents
causing injury and death of the people involved in the accident
and not being able to get relief from the owner/ driver of the
vehicle because of long protracted legal battle involved, which
many victims could not afford. (Section 146)
The Act now provides that irrespective of the fact that the fault
was of the driver/ owner or not (No-fault) the victim of an
accident will be entitled to a payment of Rs. 50,000/- in case
of death and Rs. 25,000/- in the case of grievous bodily injury.
Motor Accident Claim Tribunals (MACT) have been set up by
the State Government to provide speedy redressal of Third

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Party claims. Damage to property of Third party is also covered
and the limit is Rs.6,000/-.(Section 140 of Motor Vehicle Act).
In addition to the above claim the affected party can claim more
compensation on account of death or permanent disability
under any other law of the country. (Section 141 & 142).
Notes
Motor Vehicle Act also provides for the creation of a “Solatium
Fund” to cater to the victims of Hit and Run cases. The fund
is created by the contribution from Insurance companies,
state and central Government and the victims of Hit & Run
cases are entitled to receive Rs.25,000/- in case of death and
Rs.12,500/- in the case of grievous bodily injury. (Section 161)
Section 147 defines the requirement of an Insurance policy
and the limits of its liability. It also makes the issue of certificate
of Insurance compulsory, as well as the limitation of a cover
note.
Section 163A makes special provisions for payment of
compensation on a structured formula basis by the insured or
the insurer as the case may be. The structure formula is based
on the age of the deceased or injured person, his earning
capacity and his/her dependents.

INTEXT QUESTIONS 5.2

1. What is relevant factor under WC Act 1923?

2. Why is MACT set up?

5.5 SUMMARY
To protect an individual on account of any accidents because
of no fault then he is entitled for the compensation under
Public liability Act or Motor Vehicle Act and if he/she happens
to be an employee in any industry then he/she is entitled for
the compensation under Workman’s Compensation Act. Under
these Acts the amount or formula is defined so that every
individual is compensated properly or sufficiently, not
arbitrarily. In-spite of these acts there are many disputes in
respect of compensation as the affected parties demand more
compensation because of his/her earning capacity and age etc.
In Indian Courts most of the cases are related for Motor Vehicle
Act. To settle these cases speedily the Govt has set up Tribunal
i.e. Motor Accidents Claim Tribunal(MACT) in each State.

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5.6 TERMINAL QUESTIONS

1. Mention the compensation amount payable under Public

Liability Act 1991.
2. Write short note on Workman’s Compensation Act 1923
Notes or Motor Vehicle Act 1988.

5.7 OBJECTIVE TYPE QUESTIONS

1. Death Benefit under Public Liability Act 1991

a. Rs 25,000/- b. Rs 50,000/-
c. Rs 1,00,000/- d. Rs 12,500/-
2. Public Liability Act 1991 is applicable to ________(All
Industries/ hazardous industries).
3. No benefit is available in case of bodily injury under Public
Liability Act 1991. (wrong/correct)
4. Workmen’s Compensation Act is applicable to _________.
(manufacturing/ service industry)
5. If a workman dies due to accident, the minimum
Compensation is payable under Workman’s
Compensation Act is _______ (Rs 80,000/-/ Rs 90,000/-).
6. Under Motor Vehicle Act, 1988 Third Party claims can
be adjudicated by:
a. Insurable Ombudsman b. Motor Accident Claims
Tribunal
c. Lok Adalat d. Lok Nyayalaya
7. Compensation for death U/S 140 of the Motor Vehicle
Act is:
a. Rs.25,000 b. Rs.12,500
c. Rs.50,000 d. Unlimited
8. Third Party death liability in Private Car is unlimited.
The liability in case of Motor Vehicle is:
a. Rs.5 lakh b. Rs.1 lakh
c. Unlimited d. None of the above
9. Compulsory insurance of motor vehicle is provided for
the first time under:

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a. Motor Vehicle Act, 1988.
b. Motor Vehicle Act, 1939.
c. Insurance Act, 1938.
d. Road Transport Authority Act
10. The compensation for death U/S 161 of the Motor Notes
Vehicle Act is:
a. Rs.50,000 b. Rs.25,000
c. Motor vehicle act Rs.12,500 d. Unlimited

5.8 ANSWERS TO INTEXT QUESTIONS

5.1
1. Rs 25000/-
2. Rs 12500/-
5.2
1. Age of the employee at the time of accident.
2. For speedy redressal of the settlement of claim.

5.9 ANSWERS TO OBJECTIVE TYPE QUESTIONS

1. a 2. hazardous industry
3. wrong 4. Manufacturing
5. Rs 80000/- 6. b
7. c 8. c
9. a 10. b

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6
Notes

LAWS RELATED TO MARINE

INSURANCE AND INCOME TAX
PROVISIONS RELATED TO
INSURANCE

6.0 INTRODUCTION
The Marine Insurance Act, 1963 codifies the law relating to
Marine Insurance. With a few exceptions this Act closely follows
the UK Marine Insurance Act, 1906. Under his Act various
definitions of principles of insurance and terminology have
been defined which we have explained in the other module
under Chapter “Marine Insurance”. Kindly read those clauses
& terminology carefully. In addition to the Marine Insurance
Act, 1963 the following laws governs the practice of marine
Insurance contracts. A good working knowledge of these laws
is necessary for underwriters to pursue rights of recovery from
carriers or bailees under subrogation proceedings.
6.1 OBJECTIVES
At the end of this lesson, you will be able to:
z Know the related laws to marine insurance.
z How the Transporter is responsible for the loss of goods
during transit.
z Income tax provisions related to Life Insurer, General
Insurer, Business organization and Individuals.
6.2 MARINE INSURANCE ACT, 1963
6.2.1 The Carriage of Goods by Sea Act, 1925
This Act defines the minimum rights, liabilities and immunities

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of a ship-owner in respect of loss or damage to cargo carried.
Broadly, speaking, the Act deals with three aspects of a ship
owner’s liabilities towards cargo owners. They are:
a) The circumstances when the ship owner is deemed to be
liable for loss or damage to cargo.
b) The circumstances when the shipowner is exempted from Notes
liability, i.e. when loss or damage is caused by events
outside his control, e.g. perils of the seas.
c) The limits of liability of a ship owner for loss of or damage
to cargo calculated in monetary terms per package or unit
of cargo.
6.2.2 The Merchant Shipping Act, 1958
This Act also provides for protection to shipowners. The liability
of a shipowner can be limited to certain maximum sums for
certain losses, provided the incident giving rise to such claims
has arisen without the actual fault or privity of the shipowner
whether the claim relates to loss of life, personal injury, or
damage to property on land or water. The Act also confers an
obligation on the shipowner to send his ship to sea in a
seaworthy and safe condition.
6.2.3 The Bill of Lading Act, 1855
This Act defines the character of the Bill of lading as an
evidence of the contract of carriage of goods between the
shipowner and the shipper, as an acknowledgement of the
receipt of the goods on board the vessel and, as a document of
title. The bill of lading is one of the documents required in
connection with settlement of Marine Cargo claims.
6.3 THE INDIAN PORTS (MAJOR PORTS) ACT, 1963
This Act defines the liability of Port Trust Authorities for loss
of or damage to goods whilst in their custody and prescribes
time limits for filing monetary claim on, or suit against, the Post
Trust Authorities.
6.3.1 The Carriage by Air Act, 1972
This Act gives effect to the provisions of the Warsaw Convention,
1929 and the Hague Protocol, 1955 relating to international
carriage of passengers and goods by air. The Act defines the
liability of the air carriers for death of or injury to passengers
and for loss of or damage to registered luggage and cargo. The

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Act also prescribes the maximum limits of liability for death,
injury, damage etc. and also prescribes the time limits within
which claims have to be filed on the air carrier. The provisions
of the Act also apply, with some changes, to domestic carriage,
that is carriage within India.
Notes 6.3.2 Multi- Modal Transportation Act, 1993
The Act provides for registration of multi-modal transport
operators who are engaged in transportation of goods under
more than one mode of transport i.e. rail, road and sea. The
Act prescribes limits of liability of the operator, contents of
documents issued by them, notice of loss etc.
6.4 THE CARRIERS ACT 1865
With the growth of industries movement of goods and property
became an integral part of the society. The carriers role for the
movement of goods became very important. In the beginning
individual carriers came into existence and later many
companies were formed. Tramways and Indian Railway
Companies were formed under the enactments and their role
as common carriers was of prime importance. While operating
as common carriers loss or damage to the goods and property
being carried were occasioned by the negligence or criminal
acts of themselves, their servants or agents. It became
necessary to make common carriers liable for the loss or
damage so caused. To enable common carriers to limit their
liability for loss of, or damage to, property delivered to them to
be carried and also to declare their liability for loss of, or damage
to, such property occasioned by the negligence or criminal acts
of themselves, their servants or agents a Bill was introduced
in the legislature.
This Act defines the right & liabilities of truck owners or
operators who carry goods for public hire in respect of loss or
damage to goods carried by them. The act also prescribes the
time limit within which notice of loss or damage must be filed
with the road carries.
Under the Act the Common Carrier includes any association
or body of persons, whether incorporated or not, other than
the Govt. carrying on business of transporting property from
one place to another by land or inland navigation for all
persons & for some consideration or reward.

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The person does not include a Govt., Postal Deptt., the Indian
Airlines etc. It includes an association or a body of persons
which may be a co-operative society, a partnership firm or any
other public or private company.
Under section 3 of the Act
Notes
“Carriers are not to be liable for loss of certain goods as given
in the schedule above one hundred rupees in value.
Schedule
Gold and silver coin, Gold and silver in a manufactured
or un-manufactured state, Precious stones and pearls.
Jewellery, Time-pieces of any description, Bills and
Hundis,
Currency notes of the Central Government, or notes of
any Bank, or securities for payment of money, English or
Foreign. Stamps and stamped paper, Maps, prints and
works of art etc etc.

INTEXT QUESTIONS 6.1

1. What is represented by the Bill of lading?

2. What is multi modal transportation?

6.5 INDIAN INCOME TAX ACT 1961

6.5.1 Terminology
To understand the Income Tax Act one has to understood the
various terms which are used frequently.
Income: Any earning by way of salary, profit or loss or rental
income or interest income or profit or loss on sale of any capital
assets or lottery, prizes is considered as income under Income
Tax Act.
Assessee: An assessee is a person whose income is being
assessed. For e.g., Mr. ‘A’ is a govt. employee or in job; his salary
is an income, therefore - Mr. A will be considered as assessee.
Financial Year: The financial year is of 12 months starting from
1st April & ending to 31st March of the succeeding year.
Previous Year: The financial year in which the income is earned
is known as the previous year.

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Assessment Year: It is the succeeding year of the previous year
and the year in which the income is assessed.
For e.g., Mr. A is in service and earning Rs.10,000 p.m. from
1/1/1999.
Financial Year: 1/4/98 to 31/3/99
Notes
Previous Years are: 1/4/98 to 31/3/99; 1/4/99 to 31/3/2000
& 1/4/00 to 31/3/2001
Assessment Year: (1/4/99 to 31/3/2000) will assess the
income earned during the previous year 1/4/98 to 31/3/99.
Assessment year (1/4/00 to 31/3/2001) will assess the income
earned during the previous year 1/4/99 to 31/3/2000.
6.5.2 Income Heads
Under section 14 of the Income Tax Act all incomes for the
purpose of charge of Income Tax & Computation of total income
have been classified under the following five heads of Income.
1) Salaries Section 15-17
2) Income from House Property Section 22 to 27
3) Profits & gains of Business Section 28 to 44
& Profession
4) Capital gains Section 45 to 55
5) Income from other sources Section 56 to 59
Income, which falls within one head cannot be assigned to or
taxed under another head. Further, income computed under
each distinct head is not separately chargeable to tax. Income
tax is only one tax levied on the aggregate of income classified
and chargeable under the different heads.
The brief explanation of these heads are as under: -
1. Salary
Salary received and due during the previous year is chargeable
to tax. However, if any salary has been included in the total
income for any previous year on the basis of receipt it shall not
be included again on the total income when it becomes due.
Similarly, when any salary due (arrear) is not included in the
total income it shall be included in the total income when it is
received. The advance salary is included in the total income but
not a loan taken by an employee from the employer.

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Salary due means what is legally due or where a legally
enforceable right has vested in the employee against the
employer.
2. Income From House Property
The buildings include residential buildings let out for business
Notes
or profession or for storage or warehouse or auditoriums for
entertainment programmes. Cinema Halls, building let out for
office, dance halls, music halls etc. But it does not include
temporary hutments in the vacant land & any rental income
there from will be assessed under the head “Income from other
Sources”. The location of building is immaterial. It may be
located in India or abroad. If a company is incorporated with
the object of promoting & developing a building for market
place, the income of the company is not assessable under the
head “Income from Business & Profession” but it is assessable
under the head “Income from House Property”. In case, the
business carried on by the assessee has been stopped & the
business premises have been based out the rental income is
assessable as income from property.
3. Profit & Gains of Business or Profession Business
[Sec.2(13)]
Business includes any trade, commerce or manufacture or any
adventure or concern in the nature of trade, commerce or
manufacture. For practical purposes, business means the
purchase and sale or manufacture of a commodity with a view
to make profit. Business includes banking, transport business
or any other adventure. In this connection it is not necessary
that there should be a series of transactions in a business and
that it should be carried on permanently. Neither repetition
nor continuity of similar transactions is necessary. Profit of an
isolated transaction is also taxable under this head provided
that it is a venture in the nature of business or trade. A
transaction may be a single one and in that sense isolated but
it must comprise some activity in the nature of operations,
which are ordinarily followed in respect of trade. In this
connection intention of purchase is very important. One may
purchase an article for one’s own use and without any
intention to sell it and the mere fact that he subsequently sells
it at a profit will not make the transaction of purchase and sale
an adventure in the nature of trade. If, however, at the date of
the purchase and sale an adventure in the nature of trade. If,

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however, at the date of the purchase the object of the purchase
was not to bring the article in his own use but to sell it at a
profit, there can hardly be any doubt that in that case the
transaction would be a venture in nature of trade. Where a
persons purchased, land and resold as building sites after
Notes plotting out within two years of purchase, it was held that the
transaction was in the nature of trade and assessable as
business income.
Profession includes vocation [Sec.2(36)]
Profession means those activities for earning livelihood which
require intellectual skill or manual skill, e.g., the work of a
lawyer, doctor, auditor, engineer and so on, are in the nature
of profession. Vocation means activities which are performed
in order to earn livelihood, e.g., brokerage, Insurance agency,
music, dancing, etc. As the rules for the assessment of
business, profession or vocation are the same, there is no
importance of making any distinction between them from the
income tax point of view.
4. Income from Capital Gains
Any profits & gains arising from the transfer of a capital assets
effected in the previous year shall be chargeable to income tax
under the head “Capital Gains” and shall be deemed to be the
income of the previous year in which the transfer took place.
5. Income from other resources
This is a residuary head of income and all such income profits
& gains which are not chargeable to income tax under any of
the first four heads.
6.5.3 Taxation Provisions for Insurers, Insured
Like every commercial contract, there are two or more persons
are involved in the insurance contracts. The persons involved
in these contracts are called Insurer (The seller) and the Insured
(Buyer). As the obligations are of these persons are different,
therefore the provisions of income tax are also different which
are explained as under:—
The Tax provisions in the Insurance sector can be discussed
under the following heads:

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Taxation

Insurer Insured

Life Insurer General insurer Reinsurer Individual Business

O i i

1. Insurer Notes
a) Life Insurer:
As per the Insurance Act 1938 amended up to date in India,
only companies registered under Indian Companies Act 1956
can start the Insurance business. As the companies are also
conducting the commercial transaction business therefore
these should also be considered at par with the other
commercial organization under the head “Income from
Business and Profession” but Income Tax Act considers Life
insurer differently because the income generated by them is
from contribution made by the general public for the risk
coverage and saving. If the same is taxed at the rate applicable
then it is taxed on the saving of an individual.
Hence section 44 (A) of the Act deals the taxation provisions
related to life insurer and explained as under:
If the person who carries on or at any time in the previous year
carried on life insurance business the profit & gains of such
person from that business shall be computed separately from
his profit and gains from any other business and further
adjusted the surplus or deficit by the Actuarial valuation.
The Actuarial valuation means the liability of the life insurance
company to be paid to the policyholders either on death or on
maturity including bonus.
For eg: If a Life Insurance Company has earned Rs. 10 crores
from life insurance and other activities then the profit say Rs.
3 crores from other activities and actuarial liability say Rs. 5
crores then the income form business will be as follows:—
Rs. in crores
Total Income of Life Insurance Company 10.00
Less income form other activities 3.00
Income of life insurance business 7.00
Less Actuarial valuation 5.00
Taxable income of Life insurance company 2.00

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The life insurance company will pay tax @ 12.5% on Rs. 2.00
crores under section 115B of Income Tax Act and normal rate
(30% as on date) on income from other activities
b) General Insurer and Reinsurer:

Notes in the case of these organizations the profit and gains are
computed as in the case of other organization except that the
reserve for unexpired risks may be allowed. Reserve for
unexpired risks means provision of claims has been made on
the general insurance polices who has not expired but claim
may arise in future or the next financial year. The normal
income tax rate will be applicable to these two insurers.
2. Insured
a) Individual:—
The following benefits are available to an individual who invest
his income in insurance:—
i) Payment of life insurance premium: The payment of
premium up to Rs 1.00 lakhs can be reduced from the
taxable income of an individual. Premium may be life
insurance or Annuity plan.
ii) Payment of Health insurance; The payment of premium
on health insurance can be reduced from the taxable
income of an individual up to Rs 15000/- (Rs 20000/- if
any family member is senior citizen).
b) Business Organization:—
Any business organization incurring any expenditure by way
of insurance premium is allowed as expenditure. In other words
the income will be reduced by the expenses incurred on
insurance for Plant & Machinery, Building, stock etc. Even if
the insurance premium is paid for welfare of the employees are
allowable expenditure.

INTEXT QUESTIONS 6.2

1. Define Income under Income Tax Act 1961.

2. Define Previous year under Income Tax 1961.

6.6 SUMMARY
As material is insured under marine insurance and the goods

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are sent through various modes of transportation like rail/
road/sea/air and transporter is acting as a bailee and he is
supposed to transport the goods in safe and sound condition.
In case of loss he can not be made liable for the total loss and
his liability will be limited under various acts.
In Income Tax Act the special consideration has been given to Notes
both life insurer and insured to popularize insurance. The
income of life insurer is taxed at lower rate but the income of
general insurer or Reinsurer at normal rate. The premium paid
by the insured also gets the benefits by reducing his income
as a result his tax liability also reduces.

6.7 TERMINAL QUESTIONS

1) How actuarial valuation is related with income tax

treatment for insurer?
2) List the deduction allowed to business entity and an
individual.
3) Discus the Carrier Act.
4) Write short note on
a. The Carriage of Goods by Sea Act, 1925.
b. The Merchant Shipping Act, 1958.
c. Various Income heads under IT Act.

6.8 OBJECTIVE TYPE QUESTIONS

1. Under Indian Income Tax Act 1961 the Income can

classified under ______heads(5/6).
2. Previous year and financial year can be same. (Correct/
incorrect).
3. Income Tax Rate for life insurance business is ________
________( 12.5%/ 30%).
4. The maximum limit for health insurance premium is
__________ ( Rs. 15,000/-, Rs. 25,000/-).
5. Income Tax Rate for General insurance business is
_______________( 12.5%/ 30%).

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6.9 ANSWERS TO INTEXT QUESTIONS

6.9.1
1. Bill of lading as an evidence of the contract of carriage of
goods between the shipowner and the shipper, as an
Notes acknowledgement of the receipt of the goods on board the
vessel and, as a document of title.
2. Multi-modal transportation means transportation of goods
under more than one mode of transport i.e. rail, road and
sea.
6.9.2
1. Any earning by way of salary, profit or loss or rental income
or interest income or profit or loss on sale of any capital
assets or lottery, prizes is considered as income under
Income Tax Act.
2. The financial year in which the income is earned is known
as the previous year.

6.10 ANSWERS TO OBJECTIVE TYPE QUESTIONS

1. 5
2. Correct
3. 12.5%
4. Rs 15,000/-
5. 30%

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