🛡

Introduction to Insurance
Course 🔐 Insurance Law
Faculty Ms. Divya Singh Rathore

📔 Modern Law of Insurance (Murthy), 📔 MN Srinivasan & K Kannan Principles of Insurance Law, 10
Resources ed, 📔 Insurance Law NLUO Course Material, Historical Development of Insurance Law,
Introduction to Insurance

Status Class Notes Only

Topic
1
No

Introduction & Meaning of Insurance

Background
Risk is inherent in our life - it is so, in whatever we do in our day to day life including business - because of
contextual relativity, some people may attach importance to such risk and some others may not - BUT it is of
common understanding that in certain respects, people do take steps to respond to such risk - Insurance is
acknowledged as an appropriate response, in this regard.

Risk is closely connected with ownership - owners want to save themselves from risk and out of this desire, the
business of insurance born - aim of all insurance is to protect the owner from a variety of risks which he anticipates.

Assured or Insured Assurer or Insurer

Person who seeks protection of insurance Person who takes the risk by undertaking to protect the
assured from loss - also known as underwriter - he
undertakes this risk for a consideration called Premium.

Contract of Insurance
A contract whereby one person, called the insurer, undertakes, in return for the agreed consideration, called the
premium, to pay to another person, called assured, a sum of money or its equivalent on the happening of a specified
event.

Element of Uncertainty Risk Insurance Types

An element of uncertainty must The specified event must involve The nature of insurance depends
be present in the course of the some loss to the assured or at least on the nature of the risk sought to
happening of the event insured should expose him to adversity be protected - classical types of
against. which is in the law of insurance insurance contracts are - life, fire
commonly called the risk. and marine, however, in modern
In all insurance contracts the
times new types of insurance are
happening of the event itself is
being added to the list like
uncertain - EXCEPT in case of
liability insurance and third-
life-insurance contracts where
party risk.
the event i.e. is death is certain
BUT the time when it happens is Today, the happening of ANY
uncertain. event may be insured against at a
premium directly proportional to
the risk involved on its
happening

Purpose of Insurance

Introduction to Insurance 1
 To shift the loss suffered by a sole individual to a willing and capable professional risk-bearer in consideration of a
comparatively small contribution called the premium - it is a method of spreading over a large number of persons a
possible financial loss too serious to be conveniently borne by an individual (John Bayne Maclean).

Insurance acts as a Risk Transfer Mechanism - persons (insured) can exchange their uncertainty for certainty
i.e. in return for a definite loss (the premium) they are relieved from a uncertain and potentially much larger loss
(the specified uncertain event).

Social Purpose: it is a social device where uncertain risks of individuals may be combined in a group and thus made
more certain - small periodic contribution by the individuals to a fund out of which those who suffer losses may be
reimbursed (Riegel and Miller).

Short-term purpose Long-term purpose

The immediate and direct object is to protect the The far-sighted and remote purpose is to accelerate
individual assured from any loss or damage to his life the economic growth of the nation - the premium
or property - by distributing the loss among a large collected from numerous policy-holders are invested
number of persons, professional risk-bearers (the back into the economy - they subsequently fund the
insurers). operation of large industries and mobilize capital
formation.
This also serves the above mentioned sociological
purpose. Insurance on life of workmen help relieve their
anxiety and worry allowing them to put their heart &
soul in their work - the employers too having insured
their workman, machinery, factory, etc. will have
peace of mind - thus the overall productivity of a
unit/company will increase - and collectively this will
boost economic production and growth.

Definitions of Insurance
E. R. Hardy Ivamy Lawrence J in Channel J in Peter Webster in
Lucena v Craufurd Prudential Callaghan v Dominion
(1806) Insurance v IRC Insurance (1997)
‘Insurer’,
(1904)
undertakes, in the
return for the “Insurance is a “Insurance is an
agreed contract by “A contract of agreement to
consideration which the one insurance is one confer upon the
called the party in whereby one insured a
‘Premium’ to pay consideration of party promises contractual right
to another person, a price paid to in return for a which, prima
called the him adequate to money facie, comes into
‘Insured’ a sum of the risk, consideration to existence
money, or its becomes pay to the other immediately when
equivalent on the security to the party some of loss is suffered by
happening of a other that he money or to the happening of
‘specified’ event. shall not suffer provide him an event insured
loss, damage, with against, to be put
or prejudice by corresponding by the insurer into
Widely accepted
the happening benefit upon the the
Elements under the of the perils occurrence of same position in
defenition: specified to one or more which the insured
1. Contract; certain things specified would have been
which may be events.” had the event not
2. insurer; exposed to occurred, but in
3. undertaking (risk); them.” no better position.”
There must be either
4. in return for agreed uncertainty whether
consideration the event will happen Emphasis on payment
(premium); or not, or, if the of actual loss.
event is one which

Introduction to Insurance 2
 5. pay a sum of money must happen at
or equivalent sometime, there
(claim) must be uncertainty
as to the time at
6. to insured;
which it will happen.
7. on happening of
specified even.

History of Insurance
Ancient Era
Concept of insurance existing since ancient times.

Babylonian Traders (2nd Millenia BCE) Chinese Traders Indian Traders (3rd
First methods of transferring or distributing risk in a (3rd Millenia BCE) Century BCE)
monetary economy practiced in Babylonia - Chinese merchants The earliest traces of
developed a system that was recorded in the famous traveling treacherous Insurance in the
Code of Hammurabi, (c. 1750 BC) and practiced by river rapids would ancient Indian history
early Mediterranean sailing merchants. redistribute their was in the form of the
wares across many marine trade loans or
Bottomry Contracts: loans were granted to
vessels to limit the carrier’s contracts,
merchants with the provision that if the shipment was
loss due to any single which can be found in
lost at sea the loan did not have to be repaid -
vessel's capsizing. Kautilya’s Arthashatra,
interest on the loan covered the insurance risk.
Yajnyavlkya’s
Such contracts later came to be practiced in Ancient
Dharamshastra and
Roam & Greece [creation of Benevolent societies which
Manu’s Smriti.
cared for the family of deceased members & paid
funeral expenses] as well as India in 600 BCE.

Marine Insurance
England India
Oldest type of insurance in England and it was During Aryan period, there was evidence of the
imported from the cities of Northern Italy (practiced existence of some thing like marine insurance - but
since end of 12th Century). the origin of marine insurance can be attributed to
England only - marine insurance companies that were
Individual merchants met to effect contracts of
started in England had their branches in India - early
marine insurance and they continued as competitors
monopoly and later increased rates of duties charged
to the chartered companies - the Bubble Act 1720
on British offices tempted them to form independent
created monopoly in favour of 2 Chartered Companies
offices in the colonies - rules in English law were
(Royal Exchange Assurance & the London Exchange)
applied in India with little variation.
and other persons, corporations and societies were
prohibited from engaging in marine insurance as a After Independence and with the abolition of the
business. Privy Council, Indian courts started drawing
authority from the other foreign sources, like the
Late 17th and early 18th century; marine insurance
American cases - marine insurance in India is
was started as a specialised business - businessmen
regulated by the Indian Marine Insurance Act 1963,
met at coffee-houses to negotiate important business
which is a replica of the English Marine Insurance Act
transactions - Lloyds coffee-house (owned by Edward
1906.
Lloyd) became a prominent one among ship owners,
seamen and merchants - thus the 2 Chartered
companies and Lloyds becoming common among
insurance underwriters led to the development of
insurance in England.

However, by 1824 the 2 companies lost their

monopoly with the entry of Joint Stock Companies
(and passing of Joint Stock Companies Act 1862) -
with the invention of steamship foreign trade

Introduction to Insurance 3
 improved and the scope of insurance business
expanded for joint stock companies as well as
individual underwriters.

Later the Marine Insurance Act 1906 was enacted

which forms the basis for modern marine insurance
regulations - this act itself was based on the marine
insurance policy evolved by Edward Lloyd.

Fire Insurance
England America India
After marine insurance, fire insurance was the next to develop in In Colonial In India most of the
England - the Great Fire of London 1666 was responsible for the America, the first successful fire
development of Fire Insurance - the advent of Industrial Revolution insurance company insurance business
also created an urgent need for Fire Insurance as there was an that underwrote fire was only through
enormous increase in the risk of fire to properties. insurance was brokers and branches
formed in 1732 - of foreign companies
Fire Insurance Office, a mutual society was formed in 1681 in
Benjamin Franklin of Britain, America,
England - a number of attempted fire insurance schemes came
helped to popularize and even Japan - the
to nothing - in 1681, economist Nicholas Barbon and eleven
and make standard Alliance British and
associates established the first fire insurance company, the
the practice of Foreign Fire Insurance
"Insurance Office for Houses" - many similar companies were
insurance, Co first established an
founded in the following decades.
especially fire agency office at
Initially, each company employed its own fire department to insurance in the Madras and probably
prevent and minimize the damage from fires on properties form of perpetual this agency office was
insured by them - BUT the system was soon exposed as terribly insurance - in 1752 the first to issue a fire
flawed, as rival brigades often ignored burning buildings once he founded a policy in India - soon
they discovered that it had no insurance policy with their company that made other companies set
company - a solution was agreed upon in which all the contributions up offices in other
insurance companies would supply money and equipment to a toward fire presidency towns -
municipal authority charged with stationing fire prevention prevention - the Many fire offices came
assets and firefighters equally around the city to respond to all company warned to be et up too.
fires - this partially failed too as the brigades still tended to against fire hazards
favor saving insured buildings to those without any insurance at & refused to insure
all. certain buildings
where the risk of fire
was too great.

Life Insurance
Egypt Greece and England India
2500 BC, Rome Mutual life assurance was prevalent in Known history of life
stonemasons Formation of the 17th century commencing with short insurance commenced in
pooled their benevolent term insurances and all these mutual 1871 with the starting of
money to fund societies that offices disappeared with the passing of the Bombay Mutual
the burial of offered an early the Bubble Act 1720 - Amicable Society followed by Oriental in
their members - form of life survived - the first plan of life insurance 1874 - there was a steady
insurance, which was that = each member paid a fixed growth from 1870 to the
paid the burial annual payment per share with beginning of 19th century
expenses of its consideration to age of the members as many other life offices
members, and being 12 to 55 - at the end of the year a were stablished in India -
sometimes portion of the "amicable contribution" development of life
provided a was divided among the wives and insurance thereafter is
payment to the children of deceased members (in discussed below.
widows and proportion to the shares the heirs Indian Legislations:
orphans of the owned).
deceased 1. Indian Companies
members Act, 1882;

Introduction to Insurance 4
 In 1807, a fresh charter was obtained 2. Indian Life
and the Amicable Society thereafter Assurance
transacted life insurance according to Companies Act,
modern methods - for a long time it was 1912;
the only society that offered life
3. Indian Insurance
insurance - soon mortality tables were
Companies Act,
prepared which made it possible to do
1928;
profitable and scientific life insurance
business - by end of the 17th century 4. Insurance Act,
the requirement of insurable interest 1938;
was done away with & insurance 5. MV Act, 1939;
business became a way for gambling.
6. LIC Act, 1956;
Thus the Life Assurance Act 1774 was
7. Marine Insurance
passed - big joint stock companies
Act, 1963;
entered which started business on
sound and scientific principles - further 8. General Insurance
many protective regulations were Business
passed leading to the modern (Nationalisation)
legislation of Insurance Companies Acts, act 1972;
1958.
9. MV Act, 1988 and
Later on the scope of life insurance
10. IRDA Act, 1999.
expanded to cover accidental and
industrial insurance - also formed the
basis for liability insurance
(engineering, motor vehicles and
aviation insurances).

Period of Mushroom Growth (1900 - 1912)

During this period there was a mushroom growth of Indian companies and this was mainly due to the Swadeshi
movement which promoted the boycott of British goods, institutions, etc - this encouraged the involvement of
indigenous talent and capital - many life offices were set up with purely Indian capital.

This spontaneous growth came with some evils - thus the Indian Life Assurance Act (Act 6) of 1912 (along the lines of
English law) was passed - the authoritative history of Indian insurance began to be recorded for the first time when
Gov of India under this act started publishing returns of life insurance companies in India in 1914.

Period of Steady Growth (1913 - 1938)

Period between the two world wars - indigenous life offices had to pass through a critical period - the sudden growth
of business came with evils due to accumulation of wealth and inexperience in business - the 1912 act and the
economic impact of WWI resulted in businesses struggling for steady growth - many small offices were shut down &
the ones that survived faced heavy competition from flourishing foreign offices.

After WWI, when Britain refused to grant the promised dominion status - there was once again a united national
movement demanding independence & boycotting British institutions - again gave life to the Indian life offices and
their business - Gov compelled to protect Indian insurance business;

1934, Sri SC Sen was appointed as special officer to investigate and report on reform of insurance law - 1936, Sri
NN Sircar committee was appointed to examine the report of the special officer - 1937, a draft bill was
introduced - 1938 the Insurance Act was passed - act provided for a uniform control by government over all
insurers (Indian & foreign) - led to many foreign companies discontinuing their business.

Period of Stability and Consolidation (1938 - 1950)

Free from foreign competition Indian offices gained stability and they brought about the necessary changes (in office
organisation, terms and conditions in their policies etc) to conform to the provisions of the 1938 Act - business of
insurance assumed significant size and importance as large amounts of capital were available with them for
investment in the developing industries.

Sometimes malinvestment of insurance funds for the selfish purposes of the people in charge of these offices - 1945,
Cowasji Jehangir Committee appointed which condemned the malpractices in the matter of investing the funds

Introduction to Insurance 5
 available with the insurers - led to regulation of investments and amendments to the Insurance Act.

Partition made many policy holders leave the country - SR Ranganathan committee instituted; reviewed the entire
insurance law and submitted its report on the basis of which the Insurance (Amendment) Act 1950 was passed - far
reaching changes to make insurance institutions more useful for the country's economic growth;

appointment of a controller of insurance;

constitution of a life insurance council and a general insurance council;

provisions for the appointment of investigators and administrators for ill-managed and sick companies;

provisions regarding investments and

to reduce drain of foreign exchange compulsory reinsurance with Indian insurers was insisted upon.

Period of Boom and Nationalisation (1950 to date)

Under PM Nehru - Five Year Plans; industrialization of agrarian society - most importantly education levels rising -
insurance awareness among people increased along with increased confidence in domestic companies.

Leading insurers also indulged in vigorous developmental programmes - contributed to a boom in the insurance
business, particularly life insurance - huge capital created with insurers to be used by the government in
developmental plans.

Life insurance business was first nationalised in 1956 by the passing of the Life Insurance Corporation Act 1956 -

LIC had exclusive privilege of carrying on life insurance business in India except to the extent otherwise
expressly provided in the Act.

Controlled business of all insurers whose business was nationalised was taken over by LIC with their assets &
liabilities - creation, control and extension of LIC with Central Gov.

LIC absorbed 154 Indian, 16 Non-Indian insurers and also 75 provident societies = 245 Indian & foreign
insurers in all.

Along with life, fire and marine other types of insurance also developed - motor vehicles, aviation, burglary and
other liability insurances.

1968 Amendment - more effective control and supervision was provided over the general insurance companies;

requiring increased deposits from them and

giving controller of insurance more powers to inspect and issue directions to the insurers in all matters
including the appointment and removal of their directors, control and regulate the rates of premiums,
conditions of policies, etc.

Despite such control, there was public demand for nationalization of general insurance businesses - President
passed General Insurance (Emergency Provisions) Act 1971 - 1972, the general insurance business also nationalised by
setting up a government corporation called the General Insurance Corporation (with 4 subsidiaries) for carrying on
General Insurance business.

107 insurers amalgamated and grouped into 4 companies - National Insurance Company Ltd.; New India
Assurance Ltd.; Oriental Insurance Company Ltd. and United India Insurance Company Ltd.

Reforms in Insurance Sector & Era of Privatisation

The insurance sector opened to private insurance entities on the recommendation of the Malhotra Committee -
reforms in the insurance sector in order to compliment the reforms initiated in the financial sector - both public and
private sector entities play their roles simultaneously.

The committee also recommended that foreign companies be allowed to enter by floating Indian companies,
preferably a joint venture with Indian Partners.

More competitive environment and rapid expansion in insurance sector - nature and scope of the insurance sector is
fast changing & IRDA Act 1999 was passed.

The Insurance Regulatory and Development Authority

(IRDA)

Introduction to Insurance 6
 Background and Establishment Preamble
The wave of liberalization in all sectors including the
insurance sector - the Malhotra Committee (1993) An Act to provide for the establishment of an
submitted its report in 1994 to then Union Finance authority to protect the interests of holders of
Minister recommending many changes including insurance policies, to regulate, promote and
privatisation - ensure orderly growth of the Insurance industry
Recommendations were also sought from the and for matters connected therewith or
committee for strengthening and modernisation of incidental thereto and further to amend the
the insurance regulatory system for smooth Insurance Act 1938, the Life Insurance
development of the insurance sector - far-reaching Corporation Act 1956 and the General
recommendation were made to combat the monopoly Insurance Business (Nationalisation) Act 1972
in the insurance market;

1. Entry of private entities into the insurance sector First objective is to establish a regulatory authority as
to introduce healthy competition with existing recommended by the Malhotra Committee - WHEN
monopolistic entities. the insurance industry was part of the public sector
with monopoly with a single entity, the government -
2. Gradual withdrawal of government capital in the
it was sufficient for regulation to be done by a
existing public sector monopolistic entities, the
governmental body like Controller of Insurance - BUT
Life Insurance Corporation and the General
with privatization there is a greater need for a
Insurance Corporation and its subsidiaries (&
regulatory authority to maintain customer confidence
their delinking to make independent).
on the new entrants in the market - if the customers
3. General Insurance Corporation would exclusively cannot repose trust in the company to keep the
deal with the reinsurance business. promises it makes, the insurance products pale into
insignificance in their value of the customer-
4. Spread the insurance sector to rural areas by
consumers.
taking assistance of institutions like panchayats -
selected voluntary organizations like Mahila The regulatory framework wrt. insurance seeks to
Mandal & cooperatives. address 3 major concerns;

5. To establish a Provisional Insurance Regulatory 1. protection of the interest of the consumers;

and Development Authority to replace the
2. ensure the financial soundness of the insurance
erstwhile authority called the Controller of
industry and
Insurance, constituted under the Insurance Act
1938. 3. pave the way for the healthy growth of the
insurance market, where both the government
Thus the Insurance Regulatory and Development
and private parties play simultaneously
Authority (IRDA) was established under the Insurance
Regulatory and Development Authority Act 1999
💡 Another aim of the IRDA Act was to amend the
provisions of Insurance Act, 1938; LIC Act &
GIC Act.

Establishment and Incorporation Composition

(Section 3) One chairperson - NOT more than 5 full-time
Establishment provided under Chapter 2 of the act - members & 4 part-time members appointed by
shall be a body corporate - Central Gov.

1. Perpetual succession, Chairperson & members hold office for 5 years,

eligible for reappointment -
2. Common seal,
Age cap: 65 years for Chairperson & 62 years for
3. Power to acquire, hold and dispose of property, other members.

4. Power to contract chosen amongst persons of ability, integrity and

standing who have knowledge and experience in:
5. Sue and be sued.
life insurance, general insurance actuary science,
Head Office: Hyderabad - Branch Office: any place finance, economics, law, accountancy,
as notified by the Central Gov. administration or any other discipline [either
inclusive or in alternative] which would be useful
(in opinion of Central Gov) -

Introduction to Insurance 7
 Provided at least Chairman and one full-time
member has knowledge or experience in life
insurance, general insurance, or actuarial
science.

Bar on future employment (section 8)

The chairperson OR full-time members shall not for a
period of 2 years from the date they cease to hold
office (except where previous approval from Central
Gov. has been sought) accept any employment either
under Central or State Gov OR any appointment in
any company in the insurance sector.

Rationale:

Duties, Powers and Functions of the Authority

Section 14 under Chapter IV of the act provides for Duties, Powers and Functions of the authority.

Duties Powers and Functions (just understand no need to memorize - need to know Role of
IRDA)
Only duty is to
regulate, promote Section 14 (2) [from sub-clause (a) to (q)] specify the powers and functions of the Authority -
and ensure orderly sub-clause (q) suggests that the powers and the functions mentioned therein are not exhaustive
growth of the and the Authority reserves its powers to add to the list.

insurance and the (a) issue to the applicant a certificate of registration, renew, modify, withdraw, suspend or
reinsurance cancel such registration;
business - this is
(b) protection of the interests of the policy-holders in matters concerning assigning of
subject to the
policy, nomination by policy-holders, insurable interest, settlement of insurance claim,
provision of the Act
surrender value of policy and other terms and conditions of contracts of insurance;
and any other law
for the time being (c) specifying requisite qualifications, code of conduct and practical training for insurance
in force. intermediaries and agents;

(d) specifying the code of conduct for surveyors and loss assessors;

(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 for carrying out the purposes of this Act;

(h) calling for information from, undertaking inspection of, conducting inquiries 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 s 64 U of the Insurance Act 1938 (4 of 1938);

(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;

(m) adjudication of 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

Introduction to Insurance 8
 (q) exercising such other powers as may be prescribed.

Finance and Accounts Control by Central Government

Chapter 5 deals with finance, accounts and audit of Chapter 6 (miscellaneous) - Sections 18 - 20 preserves
the Authority - s. 15: Central Government may grant the control of the Central Government over the
such sums of money as the government may think Authority which intends to control the insurance
necessary - s. 16: a fund maybe created and called The sector - s. 18: Central Government power to give
Insurance Regulatory and Development Authority direction to the Authority on the question of policy:
Fund consisting of:
Supersession: Central Government; power to
1. the government grants, fees and charges received supersede the Authority by notification in the
by the Authority; official gazette when the Authority does not
discharge its duties properly or defies the
2. all sums received by the authority from such other
directions of the Central Government.
sources as may be decided upon by the Central
Government and Parliamentary Control: ultimate control is
vested with Parliament - u/s. 20 furnish an
3. the percentage of prescribed premium income
annual report of its activities to be laid before
received from the insurer.
each house of Parliament.
To be utilised for the payment of the salaries,
allowances, etc of the members and other employees
of the Authority and other expenses of the Authority
incurred in discharging its functions - the authority to
maintain property accounts & shall be audited by
Comptroller and Auditor-General of India.

Insurance Advisory Committee

Section 25 - establishment of an Insurance Advisory Committee - chairperson and members of the Authority shall be
ex-officio members - ≤ 20 members - advise the Authority in making regulations and on such other prescribed matters.

Rule Making Power

Rules made under:

Section 24 (Power to make rules): empowers the State and Central Governments to make rules, for carrying
out provisions of the act.

Section 26 (Power to make regulations): empowers the Insurance Regulatory Authority to make regulations
on the subjects mentioned in the respective sections.

Such rules and regulations made to be placed before each House of Parliament.

Section 28: provisions of the act shall be in addition to and not in derogation of any law for the time being in force.

3 Schedules:

1. Schedule I: amendments in the Insurance Act 1938; [shift all the powers & duties of Central Government,
Controller of Insurance & Insurance Tariff Commissioner (to an extent) to Chairperson of IRDA]

2. Schedule II: amendments in the Life Insurance Corporation Act 1956 - [Only one section; abolishing exclusive
privilege of LIC in conducting life insurance business]

3. Schedule III: amendments in the General Insurance Business (Nationalisation) Act 1972 - [Only one section;
abolishing exclusive privilege of GIC (and its subsidiaries) in conducting general insurance business]

Introduction to Insurance 9