INSURANCE LAW

MODULE 1

1. NATURE OF INSURANCE

1) Insurance is a contract: Insurance is a contract entered into between two

parties and is governed by the law of contracts. Insurance contract must
contain the essentials of contract under section 10 of the contract act 1872. An
insurance is a contract in which, one party agrees to pay a sum of money upon
the happening of a particular event contingent upon the duration of the policy
in exchange of the payment of consideration.

2) Insurance is a cooperative device: The most important feature of every

insurance plan is the cooperation of large number of persons who, in effect,
agree to share the financial loss arising due to a particular risk which is
insured.

3) Sharing of risk: Insurance is a device to share the financial losses which

might befall on an individual or his family on the happening of a specified
event. The loss arising from these events if insured are shared by all the
insured in the form of premium.

4) Value of risk: The risk is evaluated before insuring to charge the amount of
share of an insured, i.e. the premium. If there is an expectation of more loss,
higher premium may be charged. So, the probability of loss is calculated at the
time of insurance.

5) Payment of contingency: The payment is made at a certain contingency

insured. If the contingency occurs, payment is made, otherwise no payment is
given to the policy holder.

6) Amount of payment: The amount of payment depends upon the value of loss
occurred due to the particular insured risk provided insurance is there upto
that amount.

7) Large number of insured persons: To spread the loss immediately, smoothly

and cheaply, large number of persons should be insured because the lesser
would be the cost of insurance and so, the lower would be premium.in order to
function successfully, the insurance should be joined by a large number of
persons.
8) Insurance is a business not a charity: Insurance companies function to get
profits and not for social service. The business of insurance is nothing but one
of sharing. The insured who suffer loss get relief because his loss is made good.

9) Contract is ‘Aleatory’: The term ‘aleatory’ is derived a Latin term ‘aleator’

which means ‘dice player’. Insurance contract is a contract of speculation. The
insurance contracts considered as depending on uncertain event as to both
profit and loss.

2. GENERAL PRINCIPLES OF INSURANCE LAW

Insurance is an important aid to commerce and industry. Every business

enterprise involves large number of risks and uncertainties. It may involve risk
to premises, plant and machinery, raw material and other things. Goods may
be damaged or may be destroyed due to fire or flood. Some risk can be avoided
by timely precautions and some are unavoidable and are beyond the control of
a business. These unavoidable risks can be protected by insurance. Insurance
is one of the devices by which risks may be reduced or eliminated in exchange
for premium. “Insurance is a contract in which a sum of money is paid by the
assured in consideration of the insurer's incurring the risk of paying larger
sum upon a given contingency”.

In its legal aspects it is a contract whereby one person agrees to indemnify

another against a loss which may happen or to pay a sum of money to him on
the occurring of a particular event.

1. Principle of Uberrimae fidei (Utmost Good Faith)

Principle of Uberrimae fidei (a Latin phrase), or in simple English words, the

Principle of Utmost Good Faith, is a very basic and first primary principle of
insurance. According to this principle, the insurance contract must be signed
by both parties (i.e. insurer and insured) in an absolute good faith or belief or
trust. The insured is of the obligation to declare full and true disclosure of facts
to the insurer. The insurance company on the facts declared by the insured
will decide the type of insurance and the liability and as well as the premium.
So, the true disclosure of all facts is necessary. The insurance company may
declare any contract as void, if later found that the facts declared by the
insured are not true. So, all contracts of insurance are the contracts
“Uberrimae fidei”, i.e., the contracts of utmost good faith and therefore non-
disclosure of a material fact entitles other party to avoid the contract. A new
material fact, which is not material at the time of entering into the contract but
later it became material during the course of time on the basis of which the
insurer may declare the contract void or not ready to renew the contract,
should be declare by the insured to the insurer as soon as he came to know
the fact. Any material facts come in the knowledge of the insured subsequently
need not to be disclosed.

In Insurance contracts the seller is the insurer and he has no knowledge about
the property to be insured. The proposer on the other hand knows or is
supposed to know everything about the property. The condition is reverse of
ordinary commercial contracts and the seller is entirely dependent upon the
buyer to provide the information about the property and hence the need for
Utmost Good Faith on the part of the proposer. It may be said here that the
insurer has the option of getting the subject matter of Insurance examined
before covering the risk. This is true that he can conduct an examination in the
case of a property being insured for fire risk or of getting a medical examination
done in the case of a health policy. But even then, there will be facts which
only the insured can know e.g., the history of Insurance of the property
whether it has been refused earlier for Insurance by another company or
whether it is also already insured with another company and the previous
claim experience. Similarly, a medical examination may not reveal the previous
history i.e. details of past illness, accidents etc. Therefore, Insurance contracts
insist on the practice of Utmost Good Faith on the part of the Insured.
Secondly, Insurance is an intangible product. It cannot be seen or felt. It is
simply a promise on the part of Insurer to make good the loss incurred by the
Insured if and when it occurs. Thus, the Insurer is also obliged to practice
Utmost Good Faith in his dealings with the Insured. He cannot and should not
make false promises during negotiations. He should not withhold information
from the Insured such as the discounts available for good features e.g., fire
extinguishing Appliances discount in fire policies or that Earthquake risk is not
covered under the standard fire policy but can be covered on payment of
additional premium. Utmost Good Faith can be defined as “A positive duty to
voluntarily disclose, accurately and fully all facts material to the risk being
proposed whether requested for or not”. In Insurance contracts Utmost Good
Faith means that “each party to the proposed contract is legally obliged to
disclose to the other all information which can influence the others decision to
enter the contract”. The following can be inferred from the above two
definitions:

(1) Each party is required to tell the other, the truth, the whole truth and
nothing but the truth.
(2) Unlike normal contract such an obligation is not limited to any questions
asked

and

(3) Failure to reveal information even if not asked for gives the aggrieved party
the

right to regard the contract as void.

Facts, which must be disclosed

(i) Facts, which show that a risk represents a greater exposure than would be
expected from its nature e.g., the fact that a part of the building is being used
for storage of inflammable materials.

(ii) External factors that make the risk greater than normal e.g. the building is
located next to a warehouse storing explosive material.

(iii)Facts, which would make the amount of loss greater than that normally
expected e.g. there is no segregation of hazardous goods from non-hazardous
goods in the storage facility.

(iv)History of Insurance (a) Details of previous losses and claims (b) if any other
Insurance Company has earlier declined to insure the property and the special
condition imposed by the other insurers; if any.

(v) The existence of other insurances

(vi)Full facts relating to the description of the subject matter of Insurance.

Some examples of material facts are:

(a) In Fire Insurance: The construction of the building, the nature of its use i.e.
whether it is of concrete or Kucha having thatched roofing and whether it is
being used for residential purposes or as a warehouse, whether firefighting
equipment is available or not.

(b) In Motor Insurance: The type of vehicle, the purpose of its use, its age
(Model), Cubic capacity and the fact that the driver has a consistently bad
driving record.

(c) In Marine Insurance: Type of packing, mode of carriage, name of carrier,

nature of goods, the route.
(d) In Personal Accident Insurance: Age, height, weight, occupation, previous
medical history if it is likely to increase the choice of an accident, Bad habits
such as drinking etc.

(e) Burglary Insurance: Nature of stock, value of stock, type of security

precautions taken.

Facts, which need not be disclosed

(a) A). Facts of Law: Everyone is deemed to know the law. Overloading of goods
carrying vehicles is legally banned. The transporter cannot take excuse that he
was not aware of this provision.

(b) B). Facts which lessen the Risk: The existence of a good firefighting system
in the building.

(c) C). Facts of Common Knowledge: The insurer is expected to know the areas
of strife and areas susceptible to riots and of the process followed in a
particular trade or Industry.

(d) D). Facts which could be reasonably discovered: For e.g. the previous
history of claims which the Insurer is supposed to have in his record.

(e) E). Facts which the insurers representative fails to notice: In burglary and
fire

Insurance it is often the practice of Insurance companies to depute surveyors

to inspect the premises and in case the surveyor fails to notice hazardous
features and provided the details are not withheld by the Insured or concealed
by him them the Insured cannot be penalized.

(f) F). Facts covered by policy condition: Warranties applied to Insurance

policies i.e. there is a warranty that a watchman be deployed during night
hours then this circumstance need not be disclosed.

Duration of Duty of Disclosure: The duty of disclosure remains in force

throughout the entire negotiation stage and till the contract is finalized. Once
the contract is finalized than the contract is subject to ordinary simple good
faith. However, when an alteration is to be made in an existing contract then
this duty of full disclosure recovers in respect of the proposed alteration. The
duty of disclosure also revives at the time of renewal of contract since legally
renewal is regarded as a fresh contract. For example: a landlord at the time of
proposal has disclosed that the building is rented out and is being used as an
office. If during the continuation of the policy the tenants vacate the building
and the landlord subsequently rents it out to a person using it as a godown
then he is required to disclose this fact to the Insurer as this is a change in
material facts and effects the risks. It must be noted that in long term
Insurance Business the Insurer is obliged to accept the renewal premium if the
Insured wishes to continue the contract and there is no duty of disclosure
operating at the time of renewal. Normally Insurer arranges inspection on each
renewal.

Breaches of Utmost Good Faith

It occurs in either of 2 ways.

(1) Misrepresentation, which again may be either innocent or intentional. If

intentional then they are fraudulent

(2) Non-Disclosure, which may be innocent or fraudulent. If fraudulent then it

is called concealment.

Misrepresentation:

(a) Innocent: This occurs when a person states a fact in the belief or
expectation that it is right but it turns out to be wrong. While taking out a
Marine Insurance Policy the owner states that the ship will leave on a specific
date but in fact the ship leaves on a different date.

(b) Intentional: Deliberate misrepresentation arises when the proposer

intentionally distorts the known information to defraud the insurer. The selfish
objective is somehow to enter the contract or to get a reduction in the premium
e.g., If an applicant for motor Insurance stated that no one under 18 would
drive the vehicle when in fact his 17 years old son drives frequently.

Such a misrepresentation would be material as it would affect the decision of

the insurer.

Non-Disclosure

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

How to Deal with Breaches

When Breach of Utmost Good Faith occurs, the aggrieved party gets the right
to avoid the contract. The contract does not become automatically void and it
must decide on the course to be taken. The options available are on case-to-
case basis like: -

1) the contract becomes void from the very beginning if deliberate

misrepresentation or non- disclosure is resorted to with the intention of
misleading the insurer to enter into a contract.

2) To consider the contract void, the bereaved party, must notify the offending
party that breach has been noticed and as per the conditions of the contract he
is no longer governed with the terms of the contract agreed upon in covering
the risk. In case the breach is discovered at the time of claim he will refuse to
honour his promise and will not pay the claim. This again occurs when there
has been a deliberate breach.

3) When the breach is innocent but it is material to the fact then the insurer
may impose a penalty in the form of additional Premium.

4) Where the breach is found to be innocent and is not material the insurer can
choose to ignore the breach or waive off the breach.

LIC v. G.M.C Hannabsemma, (AIR 1991 SC 392) - In a landmark decision the

SC has held that the onus of proving that the policy holder has failed to
disclose information on material facts lies on the corporation. In this case the
assured who suffered from tuberculosis and died a few months after the taking
of the policy, the court observed that it is well settled that a contract of
insurance is contract uberrimae fides, but the burden of proving that the
insured had made false representation or suppressed the material facts is
undoubtedly on the corporation.
New India Insurance Company v. Raghava Reddy (AIR1961 AP 295) - It was
held that a policy cannot be avoided on the ground of misrepresentation unless
the following are established by the insurer namely,

a. The statement was inaccurate or false.

b. Such statement was on a material matter or that the statement suppressed

facts which it was material to disclose.

c. The statement was fraudulently made d. The policy holder knew at the time
of making the statement that it was false or that fact which ought to be
disclosed has been suppressed.

LIC v. Janaki Ammal (AIR 1968 Mad 324) – it was held that if a period of two
years has expired from the date on which the policy of life insurance was
effected, that policy cannot be called in question by an insurer on the ground
that a statement made in the proposal for insurance or on any report of a
medical officer or referee, or a friend of the insured, or in any other document
leading to the assure of the policy, was inaccurate or false.

2. Principle of Insurable Interest

One of the essential ingredients of an Insurance contract is that the insured

must have an insurable interest in the subject matter of the contract.
Insurance without insurable interest would be a mere wager and as such
unenforceable in the eyes of law. The subject matter of the Insurance contract
may be a property, or an event that may create a liability but it is not the
property or the potential liability which is insured but it is the pecuniary
interest of the insured in that property or liability which is insured.

Insurable Interest is defined as “The legal right to insure arising out of a

financial relationship recognized under the law between the insured and the
subject matter of Insurance”. There are four essential components of Insurable
Interests

1) there must be some property, right, interest, life, limb or potential liability
capable of being insured.

2) Any of these above i.e. property, right, interest etc. must be the subject
matter of

Insurance.
3) The insured must stand in a formal or legal relationship with the subject
matter of the Insurance. Whereby he benefits from its safety, well-being or
freedom from liability and would be adversely affected by its loss, damage
existence of liability.

4) The relationship between the insured and the subject matter must be
recognized by law.

For example: - The owner of a taxicab has insurable interest in the taxicab
because he is getting income from it. But, if he sells it, he will not have an
insurable interest left in that taxicab. From above example, we can conclude
that, ownership plays a very crucial role in evaluating insurable interest. Every
person has an insurable interest in his own life. A merchant has insurable
interest in his business of trading. Similarly, a creditor has insurable interest
in his debtor.

How is Insurable Interest Created?

There are a number of ways by which Insurable Interest arises or is restricted.

(a) By Common Law: Cases where the essential elements are automatically
present can be described as Insurable Interest having arisen by common law.
Ownership of a building, car etc., gives the owner the right to insure the
property.

(b) By Contract: In some cases a person will agree to be liable for something
which he would not be ordinarily for. A lease deed for a house for example may
make the tenant responsible for the repair and maintenance of the building.
Such a contract places the tenant in a legally recognized relationship with the
house or the potential liability and this gives him the insurable interest.

(c) By Statute: Sometimes an Act of the Parliament may create an insurable

interest by granting some benefit or imposing a duty and at times removing a
liability may restrict the Insurable Interest. Insurable Interest is applicable in
the Insurance of property, life and liability.

In case of property Insurance, insurable interest arises out of ownership where

the owner is the insured but it can arise due to other situations & financial
interests which gives a person who is not an owner, insurable interest in the
property and some of the situations are listed below.

(i) Mortgagee and Mortgagers: The practice of Mortgage is common in the area
of house & vehicle purchase. The mortgagee is the lender normally a bank or a
financial institution, and the mortgager is the purchaser. Both have an
insurable interest; the mortgager because he is the owner and the mortgagee
as a creditor with insurable interest limited to the extent of the loan.

(ii) Bailee: Bailee is person legally holding the goods of another, may be for
payment or other reason. Motors garages and watch repairers have a
responsibility to take care of the items in their custody and this gives them an
insurable interest even though he is not owner.

(iii) Trustees: They are legally responsible for the property under their charge
and it is this responsibility which gives rise to insurable interest.

(iv) Part Ownership: Even though a person may have only part interest in a
property he can insure the entire property. He shall be treated as a trustee or
the co-owners; and in the event of a claim he will hold the money received by
him in excess of his financial interest in trust for the others.

(v) Agents: When the principal has an insurable interest then his agent can
insure the property.

(vi) Husband & Wife: Each has unlimited interest in each other’s life and hence
they have an insurable interest in each other’s property. These parties can
insure each other’s lives as they stand to lose in the event of death of any of
them.

(vii) Creditor: Similarly a creditor may lose financially if a debtor dies before
paying the loan so the creditor gets an Insurable Interest in the life of the
debtor to the extent of the loan amount.

(viii) Liability: In Liability Insurance a person has insurable interest to the

extent of any potential liability which may be incurred due to damages and
other costs. It is not possible to foretell how much liability or how often a
person may incur liability and in what form or shape it arises. In this way
Insurable Interest in Liability Insurance is different than Insurable Interest in
life & property - where it is possible to predetermine the extent of Insurable
Interest. Therefore, in liability assurance the insured is asked to choose the
amount of sum insured as the maximum figure that he estimates is ever likely
to be required to settle the liability claims.

When Insurable Interest should exist

(i) In Life Insurance Insurable Interest must exist at the time of inception of
Insurance and it is not required at the time of claim
 (ii) In Marine Insurance Insurable Interest must exist at the time of loss /
claim and it is not required at the time of inception.

(iii) In Property and other Insurance Insurable Interest must exist at the time of
inception as well as at the time of loss/ claims.

A factory owner has insurable interest in the factory or if a person has a car
has insurable interest in the car. Suppose Mr. A has car and the car cannot
insured by Mr. B, since Mr. B has no insurable interest in Mr. A’s car.

Other Salient Features of Insurable Interest

(i) Insurable Interest of Insurers: Once the Insurers have accepted the liability
they derive an insurable interest, which arises from that liability thus they are
free to insure a part or whole of the risk with another insurer. This is done by
reinsurance.

(ii) Legally Enforceable: the Insurable Interest must be legally enforceable. The
mere expectation that one may acquire insurable interest in the future is not
sufficient to create insurable interest.

(iii) Possession: Lawful possession of property together with its responsibility

creates an insurable interest.

(iv) Criminal Acts: A person cannot avail benefits from Insurance to cover
penalties because of a criminal act but insurance to take care of civil
consequences arising out of his criminal act can be done. This is applicable in
the case of motor Insurance where a driver found guilty of an offence which is
involved in an accident receives the claim for damage to his own car and also
liability incurred due to damage to another’s property but he shall not be
insured for the amount of penalty that was imposed for his offense.

(v) Financial Value: Insurable interest must be capable of financial evaluation.

In the case of property and liability incurred it is easily evaluated but in life it
is difficult to put a value on the life of a person or his spouse and this depends
on the amount of premium the individual can bear. However, in cases where
lives of others is involved a value on life can be placed i.e. creditor can put a
value on the life of debtor restricted to the extent of the loan.

Employers have an insurable interest in the lives of their employees because if

the employee dies there will be cost on training of the replacement and in the
case of death of a key employee there may be loss of income as well. The
amount of insurable interest cannot be exactly determined but it should be
reasonable and proportionally related with salary of an employee; contribution
level of a key personal or equity contribution in case of partners. Assignment of
policies is possible but normally not without the permission of the Insurer
because it can mean a change in the underwriting consideration as the new
policyholder may not have the same insurable interest. Fire and other Misc.
policies are not freely assignable as the Insurer at the time of underwriting has
satisfied himself about the Insureds attitude or treatment of the subject matter
and its loss causing capability. This would however change in the case of an
assignee and it is reasonable to give the insurer a chance to consider the
credentials of the new proposer.

When the Insurer gives his consent to the assignment of the policy a new
contract is in fact being entered into and this is called NOVATION.

In some cases, only the proceeds of the policy are assigned. There is normally
no objection to such assignments as the assured is still a party to the contract
with the insurer and he has to continue to comply with all the terms and
conditions of the policy with the only difference being that in event of a claim
the insurer is directed to pay the amount to the Assignee. Insurers protect
themselves by taking a receipt from the person receiving the amount
discharging the Insurer from any further liability. This condition arises often in
motor claims when bills of repair are directly paid to the garage and not the
owner of the vehicle. In these cases, the garage owners obtain a letter of
satisfaction from the owner and submit his bills to the Insurer directly for
payment.

3.Principle of Indemnity

In Insurance the word indemnity is defined as “financial compensation

sufficient to place the insured in the same financial position after a loss as he
enjoyed immediately before the loss occurred.” Indemnity thus prevents the
insured from recovering more than the amount of his pecuniary loss. It is
undesirable that an insured should make a profit out of an event like a fire or a
motor accident because if he was able to make a profit there might well be
more fires and more vehicle accidents. As in the case of Insurable Interest, the
principle of indemnity also relies heavily on the financial evaluation of the loss
but in the case of life and disablement it is not possible to be precise in terms
of money. An Insurance may be for less than a complete indemnity but it may
not be for more than it. To illustrate let us take the example of a person who
insures his car for Rs.4 lacs and it meets with an accident and is a total loss. It
is not certain that he will get Rs.4 lacs. He may have over valued the car or
may be the prices of cars have fallen since the policy was taken. The Insurer
will only pay an amount equal to the value of the car at the time of loss. If he
finds that a car of the same make and model is available in the market for Rs.3
lac then he is not liable to pay more than this sum and payment of Rs.3 lacs
will indemnify the Insured. Similarly, in the case of partial loss if some part of
the car needs to be replaced the Insurer will not pay the full value of the new
part. He shall assess how much the old part had run and after deduction of a
proportionate sum he shall pay the balance amount.

An insured is not entitled to new for old as otherwise he would be making a

profit from theNaccident.

However, there are two modern types of policy where there is a deviation from
the application of this principle. One is the agreed value policy where the
insurer agrees at the outset that they will accept the value of the insured
property stated in the policy (sum insured) as the true value and will indemnify
the insured to this extent in case of total loss. Such policies are obtained on
valuable pieces of Art, Curious, Jewellery, Antiques, Vintage cars etc. The other
type of policy where the principle of strict indemnity is not applied is the
Reinstatement policy issued in Fire Insurance. Here the Insured is required to
insure the property for its current replacement value and the Insurer agrees
that in the event of a total loss he shall replace the damaged property with a
new one or shall pay for the replacement in full. Other than these there are Life
and Personal Accident policies where no financial evaluation can be made. All
other Insurance policies are subjected to the principle of strict Indemnity. In
most policy documents the word indemnity may not be used but the courts will
follow this principle in case of any dispute coming before them.

The Insurers normally provide indemnity in the following manner and the
choice is entirely of the insurer

1. Cash Payment: In majority of the cases the claims will be settled by cash
payment (through cheques) to the assured. In liability claims the cheques are
made directly in the name of the third party thus avoiding the cumbersome
process of the Insurer first paying the Insured and he in turn paying to the
third party.

2. Repair: This is a method of Indemnity used frequently by insurer to settle

claims. Motor Insurance is the best example of this where garages are
authorized to carry out the repairs of damaged vehicles. In some countries
Insurance companies even own garages and Insurance companies spend a lot
on Research on motor repair to arrive at better methods of repair to bring down
the costs.

3. Replacement: This method of Indemnity is normally not preferred by

Insurance companies and is mostly used in glass Insurance where the insurers
get the glass replaced by firms with whom they have arrangements and
because of the volume of business they get considerable discounts. In some
cases of Jewellery loss, this system is used specially when there is no
agreement on the true value of the lost item.

4. Reinstatement: This method of Indemnity applies to Property Insurance

where an insurer undertakes to restore the building or the machinery damaged
substantially to the same condition as before the loss. Sometimes the policy
specifically gives the right to the insurer to pay money instead of restoration of
building or machinery.

Reinstatement as a method of Indemnity is rarely used because of its inherent

difficulties e.g., if the property after restoration fails to meet the specifications
of the original in any material way or performance level then the Insurer will be
liable to pay damages. Secondly, the expenditure involved in restoration may
be much more than the sum Insured as once they have agreed to reinstate they
have to do so irrespective of the cost.

Limitations on Insurers Liability

1. The maximum amount recoverable under any policy is the sum insured,
which is mentioned on the policy. The amount is not the agreed value of the
property (except in Valued policies) nor is it the amount, which will be paid
automatically on occurrence of loss. What will be paid is the actual loss or sum
insured whichever is less.

2. Property Insurance is subjected to the Condition of Average. The underlying

principle behind this condition is that Insurers are the trustees of a pool of
premiums from which they meet the losses of the few who suffer damage, so it
is reasonable to conclude that every Insured should bring a proper
contribution to the pool by way of premium. Therefore, if an insured
deliberately or otherwise underinsures his property thus making a lower
contribution to the pool, he is not entitled to receive the full benefits. The
application of this principle makes the insured his own Insurer to the extent of
under-insurance i.e. the pro-rata difference between the Actual Value and the
sum insured. The amount of loss will be shared between the Insurer and the
insured in the proportion of sum insured and the amount underinsured.
Example: Mr. Sudhir Kumar has insured his house for Rs.5 lacs and suffers a
loss of Rs.1 lac due to fire. At the time of loss, the surveyor finds that the
actual market value of the house is Rs.10 lacs. In this case applying the above
formula the claim will be as under: Loss = 1 lac sum insured = 5 lacs Market
Value = 10 lacs Therefore, 1 lac X 5 lacs / 10 lacs = 50,000/- Claim = Rs
50,000

Corollaries of Indemnity

There are two corollaries to the principle of Indemnity and these are

(a) Subrogation and

(b)Contribution.

4.(a) Subrogation

It has already been established that the purpose of Indemnity is to ensure that
the Insured does not make a profit or gain in any way as a consequence of an
accident. He is placed in the same financial position, which he had occupied
immediately before the loss occurred. As an off shoot of the above it is also fair
that the insurer having indemnified the insured for damage caused by another
(A Third Party) should have the right to recover from that party the amount of
damages or part of the amount he has paid as indemnity. This right to recover
damages usually lies with the bereaved or injured party but the law recognises
that if another has already paid the bereaved or injured party then the person
who has paid the compensation has the right to recover damages. In case the
insured after having received indemnity also recovers losses from another then
he shall be in a position of gain which is not correct and this amount recovered
from another shall be held in trust for the insurer who have already given
indemnity.

Subrogation may be defined as the transfer of legal rights of the insured to

recover, to the Insurer.Why Subrogation is called a corollary of Indemnity and
not treated as a separate basic Principle of Insurance can be traced to the
judgement given in the case of Casletlan V Preston (1883) in U.K. “That
doctrine (Subrogation) does not arise upon any terms of the contract of
Insurance, it is only the other proposition, which has been adopted for the
purpose of carrying out the fundamental rule i.e. indemnity. Which I (Judge)
have mentioned “it is a doctrine in favour of the underwriters or insurers, in
order to prevent the insured from recovering more than a full indemnity; it has
been adopted solely for that reason.” Subrogation does not apply to life and
personal accidents as these are not contracts of Indemnity. In case death of a
person is caused by the negligence of another than the legal heirs of the
deceased can initiate proceedings to recover from the guilty party in addition to
the policy proceeds. If the insured is not allowed to make profit the insurer is
also not allowed to make a profit and he can only recover to the extent he has
indemnified the Insured.

For example: - Mr. John insures his house for $ 1 million. The house is totally
destroyed by the negligence of his neighbour Mr. Tom. The insurance company
shall settle the claim of Mr. John for $ 1 million. At the same time, it can file a
law suit against Mr. Tom for $ 1.2 million, the market value of the house. If
insurance company wins the case and collects $ 1.2 million from Mr. Tom,
then the insurance company will retain $ 1 million (which it has already paid
to Mr. John) plus other expenses such as court fees. The balance amount, if
any will be givento Mr. John, the insured.

Subrogation can arise in 4 ways

(i) Tort (ii) Contract (iii) Statute (iv) Subject matter of Insurance

(i) Tort: When an insured has suffered a loss due to a negligent act of another
then the Insurer having indemnified the loss is entitled to recover the amount
of indemnity paid from the wrongdoer. The Insured has a right in Tort to
recover the damages from the individuals involved. The Insurers assume these
rights and take action in the name of the insured and take his permission
before starting legal proceedings. Another reason for seeking permission of the
insured is that the Insured may be having another claim which was not
insured arising from the same incident which he may wish to include because
the law allows one to sue a person only once for any single event.

(ii) Contract: This can arise when a person has a contractual right to
compensation regardless of a fault then the Insurer will assume the benefits of
this right.

(iii) Statute: Where the Act or Law permits, the insurer can recover the
damages from Government agencies like the Risk (Damage) Act 1886 (UK) gives
the right to insurers to recover damages from the District Police Authorities in
respect of the property damaged in Riots which has been indemnified by them.

(iv) Subject Matter of Insurance: When the Insured has been indemnified and
the property treated as lost he cannot claim salvage as this would give him
more than indemnity. Therefore, when Insurers sell the salvage as in the case
of damaged cars it can be said that they are exercising their right of
subrogation.

Suppose two ships were insured and belong to Mr. X and Mr. Y, they have
collided and Mr. X received insurance claim from insurance company. Now in
this case insurance company may sue Mr. Y for negligence and claim for
damages.

The right of subrogation arises once the Insurers have admitted the claim and
paid it. This can create problems for the Insurers as delay in taking action
could at times hamper their chance of recovering the damages from the
wrongdoer or it could be adversely effected due to any action taken by the
Insured. To safeguard their rights and to ensure that they are in control of the
situation from the beginning Insurers place a condition in the policy giving
themselves subrogation rights before the claim is paid. The limitation is that
they cannot recover from the third party unless they have indemnified the
insured but this express condition allows the insurer to hold the third party
liable pending indemnity being granted. Many individuals having received
indemnity from the Insurer lose interest in pursuing the recovery rights they
may have.

Subrogation ensures that the negligent do not get away scot free because there
is Insurance. The rights which subrogation gives to the Insurers are the rights
of the Insured and it places certain obligations on the Insured to assist the
Insurers in enforcing their claims and not to do anything which would harm
the Insurers chances to recover losses.

5.(b) Contribution

Contribution is the second corollary of Indemnity. An individual may have

more than one policy on the same property and in case there was a loss and he
were to claim from all the Insurers then he would be obviously making a profit
out of the loss which is against the principle of Indemnity. To prevent such a
situation the principle of contribution has been evolved under common law.

Contribution may be defined as the “right of Insurers who have paid a loss to
recover a proportionate amount from other Insurers who are also liable for the
same loss”. The common law allows the insured to recover his full loss within
the sum insured from any of the insurers.

Condition of Contribution will only arise if all the following conditions are met:

1) Two or more policies of Indemnity should exist

2) The policies must cover a common interest

3) The policies must cover a common peril which is the cause of loss

4) The policies must cover a common subject matter

5) The policies must be in operation at the time of loss It is not necessary that
the policies be identical to one another. What is important is that there should
be an overlap between policies, i.e. the subject matter should be common and
the peril causing loss should be common & covered by both.

Example: - If a house is insured with company X for Rs.5,000 and with

company Y for Rs.10000 and the damage amounts to Rs.1200, company X will
apparently be liable to contribute Rs.400 and company Y Rs.800. The law gives
the right to the insured to recover the loss from any one insurer who will then
have to effect proportionate recoveries from other insurers, who were also liable
to pay the loss. To avoid this the Insurers modify the common law condition of
contribution by inserting a clause in the policy that in the event of a loss they
shall be liable to pay only their “Rate-able proportion” of the loss. It means that
they will pay only their share and if the Insured wants full indemnity he should
lodge a claim with the other Insurers also. Rateable Proportion The accepted
way to interpret the term Rate-able Proportion is exhibited.

First being that the Insurers should pay in the proportion to the sum insured
for example,

Sum Insured Policy A = 10,000/- Sum Insured Policy B = 20,000/- Sum

Insured Policy C =30,000/- Total = 60,000/-

In case of a claim of Rs.6000/- the three insurers would be liable to pay in the
proportion 1:2:3 i.e. ‘A’ pays Rs.1000/- ‘B’ pays Rs.2000/- and ‘C’ pays
Rs.3000/-. However, the drawback of this simplistic method is that the terms
and conditions of the policies may be different and it would not be prudent to
ignore these terms and conditions. For example, the condition of average may
apply to one or more policies or there may be an excess clause in one policy
which may affect their share of contribution to the loss. It would therefore be
correct to assess the loss as per the terms and conditions of the individual
policy and pay the claims accordingly. If by following this method the total sum
of the liability of the Insurers is more than the claim amount then the Insurers
shall pay in proportion to the amount of liability of each.

Difference between the doctrines of Contribution and Subrogation are –

• In contribution the purpose is to distribute the loss while in subrogation the
loss is

shifted from one person to another.

• Contribution is between insurers but subrogation is against third party.

• In contribution there must be more than one insurer but in subrogation there
may be one insurer and one policy.

• In contribution the right of the insurer is claimed but in subrogation the right
of the insured is claimed.

6.Proximate Cause

There are three types of perils related to a claim under an Insurance policy

(1) Insured Perils: These are the perils mentioned in the policy as being insured
e.g. Fire, lightening, storm etc. in the case of a fire policy

(2) Excepted Perils: These are the perils mentioned in the policy as being
excepted perils or excluded perils e.g. Riot strike, flood etc. which may have
been excluded and discount in premium availed.

(3) Uninsured Perils: Those not mentioned in the policy at all either in Insured
or excepted perils e.g. snow, smoke or water as perils may not be mentioned in
the policy. Insurers are liable to pay claims arising out of losses caused by
Insured Perils and not those losses caused by excepted or Uninsured perils.

Example: If stocks are burnt then the cause of loss is fire which is an Insured
Peril under a fire policy and claim is payable. If the stocks are stolen the loss
would not be payable as Burglary is not an Insured peril covered in fire policy
Burglary policy is needed to take care of ‘theft’. It is therefore important to
identify the cause of loss and to see if it is an Insured peril or not before
admitting a claim.

Need to Identify Proximate Cause

If the loss is brought about by only one event then there is no problem in
settlement of liability but more often than not the loss is a result of two or more
causes acting together or in tandem i.e. one after another. In such cases it is
necessary to choose the most important, most effective and the most powerful
cause which has brought about the loss. This cause is termed the Proximate
Cause and all other causes being considered as “remote”. The proximate cause
has to be an insured peril for the claim to be payable. The following illustration
may help in distinguishing between the proximate cause and the remote cause.

I. “A person was injured in an accident and was unable to walk and while lying
on the ground he contracted a cold which developed into pneumonia and died
as result of this. The court ruled that the proximate cause of death was the
accident and Pneumonia (which was not covered) was a remote cause and
hence claim was payable under the Personal Accident Policy.”

II. “A person injured in an accident was taken to a hospital where he

contracted an infection and died as a result of this infection. Here the court
ruled that infection was the proximate cause of death and the accident was a
remote cause and hence no claim was payable under the Personal Accident
Policy.

III. A cargo ship's base was punctured due to rats and so sea water entered
and cargo was damaged. Here there are two causes for the damage of the cargo
ship - (i) The cargo ship getting punctured because of rats, and (ii) The sea
water entering ship through puncture. The risk of sea water is insured but the
first cause is not. The nearest cause of damage is sea water which is insured
and therefore the insurer must pay the compensation.

The Meaning of Proximate Cause

The doctrine of proximate cause is based on the principle of cause and effect,
which states that having proved the effect and traced the cause it is not
necessary to go any further i.e. cause of cause. The law provided the rule
“Cause Proxmia non Remote spectator”. The immediate cause and not the
remote one should be taken into consideration. Therefore the proximate cause
should be the immediate cause. Immediate does not mean the nearest to the
loss in point of time but the one most effective or efficient. Thus if there are a
number of causes and the proximate cause has to be chosen the choice should
be of the most predominant and efficient cause i.e. the cause which effectively
caused the result. Proximate cause has been defined as “The active efficient
cause that sets in motion a train of events which bring about a result without
the intervention of any force started and working actively from a new and
independent source”. It is important to note that in Insurance Proximate has
got nothing to do with time even though the Dictionary defines Proximity as
‘The state of being near in time or space’ (period or physical) and the
Thesaurus given the alternate words as “adjacency of” “closeness”, “nearness”
“vicinity” etc. But in Insurance Proximate cause is that which is Proximate in
efficiency. It is not the latest but the direct, dominant, operative and efficient
cause.

Losses can occur in the following manners:

I. Loss due to a single cause. i). A series or chain of events one following and
resulting from the other causing the loss ii). A series or chain of events which is
broken by a new event independently from a different source causing the loss –
Broken sequence and iii). A contribution of two or more events occurring
simultaneously and resulting in loss. In the case of a single cause being the
cause of loss then if that peril is covered the claim is payable and if not covered
claim is not payable.

i) Loss due to a series or chain of events. This can be illustrated by the

following example event. a) A driver of a car meets with an accident

b) As a result of the accident he suffers from concussion (shock)

c) Because of the concussion he strayed around not aware where he was

going

d) While straying he fell into a stream

e) He died of drowning in the stream It is clear that the above is a chain of

events one leading to the other. The proximate cause would be accident
(covered under PA Policy) which resulted in concussion (Disease – not covered)
and hence the claim would be payable. Irrespective of the fact that subsequent
causes are covered or not if it is established that the event starting the chain is
a covered peril then claim is payable.

However, if reverse were the case and the chain was started by an excepted or
excluded peril then the claim would not be payable. For e.g. A person suffers a
stroke and falls down the steps resulting in his death. He will not be entitled to
any claim under his personal accident policy as the chain was started by a
stroke which is an excepted peril.

ii). In case of the broken sequence or Interrupted chain of events if the chain of
events is started by an Insured peril but interrupted by an excepted or
excluded peril then the claim is paid after deducting the damage caused by the
excluded peril. For example, the burglars enter the house and leave the gas
stove on leading to a fire and the house is damaged in the fire. The “burglary
Insurance” will only pay for the loss due to theft but exclude loss due to fire,
which is accepted peril under the burglary policy. In case the sequence of
events started by an excluded peril is broken by an Insured peril, as a new and
independent cause then there is a valid claim for even the damage caused by
exempted peril. The burglars enter the house and after carrying out thefts put
the house on fire. The fire policy will pay for the damages due to theft as well
(which is an excluded peril). 4. In the case of loss due to concurrent causes or
two or more causes occurring simultaneously then all the causes will have to
be Insured perils only then the claim would be payable but even if one of the
causes is an excluded peril the claim will not be payable.

Example: i) A house collapses due to an earthquake, which results in fire.

Under the fire policy earthquake is not a covered risk, hence the claim will not
be payable. To really understand the complexities of proximate cause and its
proper identification one must go through the case studies and a few are being
given hereunder.

ii) An army officer insured under a personal accident policy, which excluded
accident directly or indirectly due to war during war time went to the railway
line to inspect the sentries. While on the visit he was hit by a train and he died
as a result of the accident. It was ruled that the policy did not cover as he was
there on the line because of the war and the policy did not cover accident due
to war.

iii) A surveyor on surveying a factory damaged in a fire came to the conclusion

after detailed investigation that the fire was caused by negligence as well as
defective design and both these causes worked together to cause the damage.
While the Insurance policy covered negligence it did not cover Defective Design
and hence claim was denied.

iv) In an incident where stocks of potatoes kept in a cold storage got damaged
due to leakage of ammonia gas. The stock was insured against contamination /
Deterioration / putrefaction due to rise in temperature in the refrigeration
chamber caused by any loss or damage due to an accident. The Insurance
Company did not pay the claim saying that the leakage of gas was not
accidental and hence the risk was not covered. The aggrieved approached the
consumer forum which held that the leakage of gas was not foreseen or
premeditated or anticipated and loosening of the nuts and bolts of the flanges.
The consequential escape of gas was within the meaning of the word accident
and hence ordered the Insurance Co. to pay the claim.

v) A trawler vessel was insured against losses resulting from collision. Co-
incidentally a trawler vessel gets to collide, which result in further delay for few
days. Because of this delay, the banana on the trawler vessel got putrid and
was unsuitable for consumption. Hence there are two reasons for the losses
one is of collision and other is delay, the closest cause of putrid banana was
delay. As the trawler vessel was insured only for collision and not for the delay,
sofor putrid bananas the insured will not get any compensation from the
insurance company. But trawler vessel will get compensation for collision.

7.Principle of Loss Minimization

According to the Principle of Loss Minimization, insured must always try his
level best to minimize the loss of his insured property, in case of uncertain
events like a fire outbreak or blast, etc. The insured must take all possible
measures and necessary steps to control and reduce the losses in such a
scenario. The insured must not neglect and behave irresponsibly during such
events just because the property is insured. Hence it is a responsibility of the
insured to protect his insured property and avoid further losses.

The plaintiff must take all reasonable steps to mitigate the loss which he has
sustained consequent upon the defendant's wrong, and, if he fails to do so, he
cannot claim damages for any such loss which he ought reasonably to have
avoided. The plaintiff is only required to act reasonably, and whether he has
done so is a question of fact in the circumstances of each particular case, and
not a question of law. He must act not only in his own interests but also in the
interests of the defendant and keep down the damages, so far as it is
reasonable and proper, by acting reasonably in the matter. In cases of breach
of contract the plaintiff is under no obligation to do anything other than in the
ordinary course of business, and where he has been placed in a position of
embarrassment the measures which he may be driven to adopt in order to
extricate himself ought not to be weighed in nice scales at the instance of the
defendant whose breach of contract has occasioned the difficulty. The plaintiff
is under no obligation to destroy his own property, or to injure himself or his
commercial reputation, to reduce the damages payable by the defendant.
Furthermore, the plaintiff need not take steps which would injure innocent
persons.

The general principles deducible from the above stated Principle are:

1) As far as possible a party who has proved a breach of the contract, is to be

placed, as far as money can do it, in as good a situation as if the contract had
been performed.
2) A statutory duty is cast on the plaintiff who has proved the breach of the
contract of taking all reasonable steps to mitigate the loss consequent on the
breach of the contract.

3) If the plaintiff, who proves the breach of the contract but fails to prove that
he took all reasonable steps to mitigate the loss consequent to the breach of
the contract, he will be debarred from claiming damages to the extent he could
have mitigated the same by taking such steps.

For example: - Assume, Mr. John's house is set on fire due to an electric short-
circuit. In this tragic scenario, Mr. John must try his level best to stop fire by
all possible means, like first calling nearest fire department office, asking
neighbours for emergency fire extinguishers, etc. He must not remain inactive
and watch his house burning hoping, "Why should I worry? I've insured my
house.

In Murlidhar Chiranjilal vs. M/s. Harishchandra Dwarkadas & Anr, the

Supreme Court observed that, "The two principles on which damages in such
cases are calculated are well settled. The first is that, as far as possible, he who
has proved a breach of a bargain to supply what he contracted to get is to be
placed, as far as money can do it, in as good a situation as if the contract had
been performed; but this principle is qualified by a second, which imposes on a
plaintiff the duty of taking all reasonable steps to mitigate the loss consequent
on the breach and debars him from claiming any part of the damage which is
due to his neglect to take such steps".

In the case of United India Insurance Co Ltd and Others vs Orient

Treasures Pvt Ltd and Others, the Supreme Court held that where insured
pays additional premium to the insurer to secure more safety and coverage of
their insured goods, it is permissible to do but if the party only agrees and pay
nothing additional in form of money then the insurance company is not liable
for any extended safety and coverage.

MODULE-2

1.MEASURE OF INDEMNITY

As per provisions of the Marine Insurance Act, 1963,  

Extent of liability of insurer for loss. (section 67)  

(1) The sum which the assured can recover in respect of a loss on a policy by
which he is  insured, in the case of an unvalued policy to the full extent of the
insurable value, or, in the  case of a valued policy to the full extent of the value
fixed by the policy is called the measure  of indemnity. 

(2) Where there is a loss recoverable under the policy, the insurer, or each
insurer if there be  more than one, is liable for such proportion of the measure
of indemnity as the amount of his  subscription bears to the value fixed by the
policy in the case of a valued policy, or to the  insurable value in the case of an
unvalued policy. 

Extend of liability for Total loss. (section 68) 

Subject to the provisions of this Act and to any express provision in the policy,
where there is  a total loss of the subject-matter insured, — 

(1) If the policy be a valued policy, the measure of indemnity is the sum
fixed by the policy:

(2) If the policy be an unvalued policy, the measure of indemnity is the

insurable value of the subject-matter insured.

Partial loss of ship (section 69)

Where a ship is damaged, but is not totally lost, the measure of indemnity,
subject to any express provision in the policy, is as follows: —

(1) Where the ship has been repaired, the assured is entitled to the reasonable
cost of the repairs, less the customary deductions, but not exceeding the sum
insured in respect of any one casualty:

(2) Where the ship has been only partially repaired, the assured is entitled to
the reasonable cost of such repairs, computed as above, and also to be
indemnified for the reasonable depreciation, if any, arising from the
unrepaired damage, provided that the aggregate amount shall not exceed the
cost of repairing the whole damage, computed as above:

(3) Where the ship has not been repaired, and has not been sold in her
damaged state during the risk, the assured is entitled to be indemnified for the
reasonable depreciation arising from the unrepaired damage, but not
exceeding the reasonable cost of repairing such damage, computed as above.
Partial loss of freight (section 70)

Subject to any express provision in the policy, where there is a partial loss of
freight, the measure of indemnity is such proportion of the sum fixed by the
policy in the case of a valued policy, or of the insurable value in the case of an
unvalued policy, as the proportion of freight lost by the assured bears to the
whole freight at the risk of the assured under the policy.

Partial loss of goods, merchandise, etc. (section 71)

Where there is a partial loss of goods, merchandise, or other movables, the

measure of indemnity, subject to any express provision in the policy, is as
follows: —

(1) Where part of the goods, merchandise or other movables insured by a

valued policy is totally lost, the measure of indemnity is such proportion of the
sum fixed by the policy as the insurable value of the part lost bears to the
insurable value of the whole, ascertained as in the case of an unvalued policy:

(2) Where part of the goods, merchandise, or other movables insured by an

unvalued policy is totally lost, the measure of indemnity is the insurable value
of the part lost, ascertained as in case of total loss:

(3) Where the whole or any part of the goods or merchandise insured has been
delivered damaged at its destination, the measure of indemnity is such
proportion of the sum fixed by the policy in the case of a valued policy, or of
the insurable value in the case of an unvalued policy, as the difference
between the gross sound and damaged values at the place of arrival bears to
the gross sound value:

(4) “Gross value” means the wholesale price, or, if there be no such price, the
estimated value, with, in either case, freight, landing charges, and duty paid
beforehand; provided that, in the case of goods or merchandise customarily
sold in bond, the bonded price is deemed to be the gross value. “Gross
proceeds” means the actual price obtained at a sale where all charges on sale
are paid by the sellers.

General provisions as to measure of indemnity (section 75)

(1) Where there has been a loss in respect of any subject-matter not expressly
provided for in the foregoing provisions of this Act, the measure of indemnity
shall be ascertained, as nearly as may be, in accordance with those provisions,
in so far as applicable to the particular case.

(2) Nothing in the provisions of this Act relating to the measure of indemnity
shall affect the rules relating to double insurance, or prohibit the insurer from
disproving interest wholly or in part, or from showing that at the time of the
loss the whole or any part of the subject-matter insured was not at risk under
the policy.

MODULE-3

1. LIFE INSURANCE SETTLEMENT OF CLAIMS

The very purpose of a life insurance policy is to secure the breadwinner’s life
and his family’s future. Payment of claim is the ultimate objective of life
insurance and the policyholder has waited for it for quite a long time; and in
some cases, for the entire life time literally for the payment. It is the final
obligation of the insurer in terms of the insurance contract, as the
policyholder has already carried out his obligation of paying the premium
regularly as per the conditions mentioned in the schedule of the policy
document. The policy document also mentions in the schedule the event or
events on the happening of which the insurer shall be paying a predetermined
amount of money.

Life insurance gives cash benefits to the policyholder during his critical life
milestones such as  child’s higher education and marriage, health care
emergencies and retirement or after the event  of his unfortunate death. The
benefit(s) received from the purchase of a life insurance policy  in return of the
premiums paid is called a claim. 

There are four important types of claims in life insurance policies: 

1. Survival claim 

2. Maturity claim 

3. Death Claim 

4. Accidents and Disability Claim 

Settlement of claims under life insurance policies depend upon the nature of a
claim, eligibility  to policy moneys, proof of the happening of the event insured
against, proof of title, and so on. 

1.Survival Claim 

Survival claim is not payable under all types of plans. It is payable in

endowment or moneyback plans after a lapse of a fixed period say four to five
years, provided firstly the policy  is in force and secondly the policyholder is
alive. As the insurer sends out premium notices to  the policyholder for
payment of due premium, so it sends out intimation also to the policyholder  if
and when a survival benefit falls due. The letter of intimation of survival benefit
carries with  it a discharge voucher mentioning the amount payable. The policy
holder has merely to return  the discharge voucher duly signed along with the
policy document. The policy document is  necessary for endorsement to the
effect that the survival benefit that was due has been payed.  The survival
benefit can take different forms under different types of policies. 

2.Maturity Claim 

It is a final payment under the policy as per the terms of contract. Any insurer
is under  obligation to pay the amount on the due date. Therefore, the
intimation of the maturity claim  and discharge voucher is sent in advance
with the instruction to return it immediately. 

If the life assured dies after the maturity date, but before receiving the claim,
there arises a  typical problem as to who is entitled to receive the money. As
the policyholder was surviving  till the date of maturity, the nominee is not
entitled to receive the claim. 

The policy under such condition is treated as a death claim where the policy
does not have a  nomination. The insurer in such a case shall ask for a will or
succession certificate, before it  can get a valid discharge for payment of this
maturity claim. In case the policy has been taken  under Married Women’s
Property Act, the payment of maturity claim has to be made to the  appointed
trustees, as the policy holder has relinquished his right to all the benefits
under the  policy. It is for this relinquishment of right that the policy money
enjoys a privileged status of  being beyond the bounds of creditors. If the
maturity claim is demanded within one year, before  the maturity, it is called a
discounted maturity claim. This amount is much less than the actual  maturity
claim amount. 
3.Death Claim 

If the life assured dies during the term of the policy, the death claim arises. If
the death has  taken place within the first two years of the commencement of
the policy, it is called an early  death claim and if the death has taken place
after two years, it is called a non-early death claim. 

Death claim settlement naturally assumes very great importance in the total
operations of any  life insurance company. Unlike in maturity and survival
claims the policyholder is not alive.  This itself poses many problems. Broadly
the problems in the settlement of death claims can  be discussed under two
categories. 

They are 

a) Obtaining satisfactory proof of death, and 

b) Obtaining satisfactory proof of title. 

These two requirements are independent of each other. It is necessary for an

insurance company  to decide first whether any liability lies in a death claim.
This not only depends on the proof of  the happening of the event, i.e. death
but also the status of the policy as on the date of death. It  is necessary to
verify whether the policy in question is force or in a reduced paid-up
condition.  In these cases, some money becomes payable. However, there may
be cases where the policy  has lapsed without acquiring any value. It is also
necessary for the office to verify whether any  claim concessions or
administrative concessions are applicable or whether the claim can be 
considered on ex-gratia basis. Cause of death also assumes importance. If it
was suicide, it is  also to be considered whether it was within one year from the
date of the policy. If it was  accident, it is to be verified whether accident benefit
becomes payable. Once liability is  admitted, the office will have to verify
position of title to the policy moneys and arrange  payments to the persons
legally entitled to receive the same. 

The company is not expected to know about the death of a policyholder unless
the same is  intimated by the claimants. Any action can therefore be initiated
only after receipt of such  intimation. The letter of intimation should contain
certain particulars. They are as follows 

a) Policy number and the name of the life assured. These two should match,
otherwise the  policy number must be wrong. 
b) Date of death, on which depends the status of the policy and amount
payable. c) Name and address of the claimant as requirements are too called
from them. 

Usually, the nominee or assignee or someone near and dear shall send the
death intimation to  the deceased life assured. If the intimation is received from
a stranger, the office should be  careful to verify as to why a stranger should be
interested in the policy moneys. 

Once a proper intimation is received, the insurance office will process the same
to know  whether anything is due at all under the policy. This usually depends
on the status of the policy  on the date of death. A calculation of the claim
amount will be made and requirements are  called for from the claimant. If
there is a valid nomination or assignment under the policy, duly  registered in
the books of the insurance company, requirements will be called for from such 
nominee or assignee only and not from the claimant. 

In considering a death claim, it becomes necessary to verify the duration of the

policy, i.e. The  time elapsed from the date of commencement of risk under the
policy (or date of revival of a  lapsed policy) to the date of death. Normally, if the
duration is two years or less, such a claim  is considered as “Early claim”. If
the duration is more than two years, such a claim is considered  as a “non-
early claim”. This becomes necessary because of application of section 45 of
the  Insurance Act, 1938, which is otherwise called “Indisputability Clause”.
This provision of law  is of great significance and it was incorporated in the
Insurance Act as a protection to policy  holders and their claimants.

To ensure that the insurance companies do not go to unreasonable levels and

repudiate liability  under a policy invoking the principles of utmost good faith,
the Insurance Act provides  protection to the policy holders and the claimants
under sec 45. To avoid liability under a policy  of life insurance two years after
the policy was effected (i.e. date of commencement of risk),  the life insurance
company will have to prove that: 

a) There was suppression of facts by the life assured, 

b) What was suppressed was a material fact, and 

c) Such suppression was done intentionally with a view to defraud the

insurance company 

The onus proof of all the above lies on the insurance company only. The above
also is an  indication that when the death of a policyholder is within two years
after the policy was  effected, the company can avoid the liability after proving
suppression of material facts by the  life assured at the time of taking the
policy. It is not necessary to prove whether such  suppression was intentional
or unintentional in such cases. The said provision in the Insurance  Act refers
to the period elapsed from the date on which the policy was effected. However,
a  typical and different situation arises when a policy lapses due to non-
payment of premium and  subsequently revived. The question arises whether
the duration of the policy should be  reckoned in such cases from the date on
which the policy was affected or from the date on  which it was revived. The
legal provision that is sec45 indicates the former but is silent on the  latter. 

The Life Insurance Corporation of India treats revival of a lapsed policy as a

novatio ie. A new  contract and so applies the provisions of sec45 of the Life
Insurance Act to a case where death  of the policyholder takes place within two
years from the date of revival of the policy.  

In one case, the Supreme Court set aside the repudiation of liability made by
the LIC of India  on the grounds of suppression of material facts by the life
assured at the time of revival of his  lapsed policy as not coming under sec45.
If the section does not apply to cases of revival of  lapsed policies, then there is
always a possibility of policy holders taking policy on their lives,  immediately
lapsing the same and get them revived just when they are on the death bed by 
supressing facts about their health. If the Life insurance companies have to
assume liability and  cannot dispute the same, it will be against public policy.
The duty of disclosure of material  facts by the applicant is not limited only to
the statement made by him in the Proposal Form.  It continues till the date of
acceptance of the proposal by the insurance company. 

This condition is also called ‘Continued Insurability Condition’. It therefore

becomes necessary  for the insurance company, when they receive an
information of death of a life assured, to  verify the duration of the policy i.e.
from the date of commencement of risk or date of revival  of the policy to the
date of death. If the cause of death is such that it can be only a long duration 
disease, it leads to the suspicion of suppression of material facts about the
health of the life  assured in cases where the duration as mentioned is two
years or less. For this reason, the  requirements to be called for in cases of
Early Claims are to some extend different from those  needed for considering
Non-Early Claims. LIC of India calls for the following requirements in  cases of
death claims: 
I. Original Death Certificate issued by the Municipality/ Corporation/ Revenue
officials in the  form prescribed by the government. 

II. Claimant’s statement: Here the claimant furnishes the following information 

a) About the deceased life assured, his/her age, date of death, cause of death,
place of  death, if hospitalised during a period of three years earlier to death,
details of the  same; 

b) Details of the claimant- Name, address, how relayed to the life assured, in
what  capacity claim is being made 

c) Details of any other policy/policies of the life assured so that all claims can
be  considered together. 

III. Statements from the hospital / nursing home where the life assured had
treatment for  terminal illness in which the hospital / nursing home authorities
furnish information about the  life assured, hi/her address, date of admission,
date of discharge/ date of death, time of death,  reasons for admission, primary
cause of death, secondary causes, duration of illness ,whether  treated in the
same hospital / nursing home at any time earlier for any ailment , if so
details ,  whether treated by any doctor earlier, if so details. 

IV. Statement from the doctor who attended to the deceased life assured last;
identification of  the life assured, how long the doctor treated him, for what
ailments  

V. Statement by a gentleman who is not related to the deceased life assured

and who is not  interested in the policy money, who has attended the burial/
cremation of the deceased life  assured 

VI. If the deceased life assured was an employee of any organisation, a

statement from the  employer furnishing details of the life assured, date of
joining service, designation, date last  attended duty  

VII. In case of death due to unnatural causes like accidents and suicide the
following records  are called for: 

1. FIR of the police 

2. Panchnama Report/ Police Inquest Report 

3. Post Mortem Report 

A few cases arise when it may not be possible for the claimants to obtain and
submit the  Original Death Certificate issued by the concerned authorities. In
such cases alternative proofs  are also considered. E.g. Death in an air crash –
where there are no survivors, the list of  passengers as per the records of the
airline company can be accepted as an alternate proof of  death. 

Presumption of death: as per sec108 of the Indian evidence act, 1872, if a

person has not been  heard of for seven years by those who would naturally
have heard of him had he been alive,  there is presumption of law that he is
dead. Here the death of the life assured is presumed but  not the date of death.
Hence the date of the order of the court declaring presumption of death  is
taken as date of death. 

On receipt of the requirements, the insurance office decides whether there is

any liability or  not. In cases where the office could obtain documentary
evidence of suppression of material  facts by the deceased life assured at the
time of taking the policy or at the time of revival of the  lapsed policy, the
liability is repudiated. Where the liability is admitted, the office proceeds to  the
next step viz. verifying the title to the policy moneys.

Evidence of title: there are different kinds of evidence of title to policy moneys.
The simplest of these are the Nomination and Assignment effect as per sec 39
and 38 respectively of the Insurance Act 1938.

4.) Accident and Disability Claim

Accident Claim

Death should be due to accident, i.e. by external, violent and visible means.
Death must be directly due to the accident and there should be no intervening
cause. E.g. if a person meets with an accident admitted to the hospital,
develops gangrene due to his diabetic condition and then dies, it is not taken
as death due to accident because there is an intervening cause viz diabetes.

Death should take place within a specified period of time after the accident. As
per the rules of LIC of India, this period is 120 days.

Proof satisfactory to the insurance company should be submitted. the

requirements called for are as follows:

1. FIR

2. Panchnama/ Police Inquest Report

3. Post Mortem Report

If it were sent for chemical examination, then the report of the Forensic Lab is
also called for, these reports indicates the cause and circumstances of death.

The policy must be in full force at the time of death. The policy holder should
have availed of the Accidents Benefits Claim by paying the necessary
additional premium. He must not have been aged 70 years and above at the
time of death. There are several exclusions in considering granting Accident
Benefit. The life assured should not be under the influence of any intoxicating
liquor, drug or narcotic at the time of the accident. The accident should not be
because of the life assured being engaged in an activity which is Breach of Law.
The accident should not have happened when the life assured is involved in
war or war like operations, or when the life assured was flying in an aircraft
other than as a passenger , or in police or police like operations; he must not
have been engaged in hazardous sports, like car or motorcycle racing ,
mountaineering etc or the life assured making an attempt to commit suicide
( whether sane or not at that time).

Subject to all the above conditions being satisfied, the insurance company
decides to allow the extra benefit.

The benefit is generally paid along with the normal liability under the policy.
Disability Benefit Claim

There are two types of disability benefits claim. They are:

• Waiver of Premiums

• Payment of an income to the life assured apart from waiver of premiums.

The exclusions mentioned in respect of accident benefit are equally applicable

to disability  benefit claims also. In addition, disability itself is defined as
permanent loss of two limbs due  to accident, by amputation or otherwise. 

The life assured should not be in a position to peruse the same occupation he
was engaged in  earlier to the accident. The proof disability should be
satisfactory in the insurance company.  

The following requirements are called for 

1. FIR of the police 

2. A declaration from the life assured explaining the details of the accident and
the  treatment undergone and the type of disability suffered 

3. Records of the hospital where treatment was given. 

4. A statement from the hospital about the extent of the disability, whether
permanent or  temporary, details of any surgery performed, percentage of
disability etc  Subject to the above being found satisfactory, the insurance
company considers granting the disability benefits to which the policy is
eligible. Payment depends upon the type of annuity  and also the mode of
payment of pension chosen by the annuitant.

MODULE 4

PROPERTY INSURANCE AND LIABILITY INSURANCE

Property insurance provides protection against most risks to property, such as

fire, theft and some weather damage. This includes specialized forms of
insurance such as fire insurance, flood insurance, earthquake insurance,
home insurance, or boiler insurance. Property is insured in two main ways—
open perils and named perils.

Open perils cover all the causes of loss not specifically excluded in the policy.
Common exclusions on open peril policies include damage resulting from
earthquakes, floods, nuclear incidents, acts of terrorism, and war. Named
perils require the actual cause of loss to be listed in the policy for insurance to
be provided. The more common named perils include such damage-causing
events as fire, lightning, explosion, and theft.

Property insurance as the name suggests provides cover against damage and
theft of property to the owner or tenant of the property. It can be used to cover
the structure of a building, or the contents kept inside the building by its
owner(s) or tenants.

This insurance policy will help the insured reduce the financial burden of
recovering from loss due to:
• Accidental damage to the structure of the property

• Theft or burglary of the contents inside the property

• Physical harm caused to a third party on the premises of the property

Property insurance is a combination of multiple covers as mentioned above,

and policy can be bought as a comprehensive all-inclusive policy or as a
package policy excluding some of the unwanted covers.

A comprehensive cover may include any or all the following covers:

• Fire Insurance

• Burglary Insurance

• Flood & Earthquake Cover

• Office Insurance and

• All Risk Insurance

Package or Umbrella policies There are package or umbrella covers available

which give, under a single document, a combination of covers. For instance,
there are covers such as Householders Policy, Shopkeepers Policy, Office
Package policy etc that, under one policy, seek to cover various physical assets
including buildings, contents etc. Such policies, apart from seeking to cover
property may also include certain personal lines or liability covers.

The most popular property insurance is the standard fire insurance policy. The
fire insurance policy offers protection against any unforeseen loss or damage
to/destruction of property due to fire or other perils covered under the policy.

Burglary Insurance A Burglary Insurance policy may be offered for a business

enterprise or for a house. The policy covers property contained in the premises
including stocks/goods owned or held in trust if specifically covered. It also
covers cash, valuables, securities kept in a locked safe or cash box in locked
steel cupboard if you specifically request for it. Apart from offering cover for
the contents in the premises, a Burglary Insurance policy covers damage to
your house or premises caused by burglars during burglary or attempts at
burglary. The Policy pays actual loss/damage to your insured property caused
by burglary/house breaking subject to the limit of Sum Insured. If Sum
Insured is not adequate, Policy pays only proportionate loss. Hence, you must
ensure that you value the property covered correctly to ensure that there is no
underinsurance. A Burglary Insurance Policy can generally be extended to
cover Riot, Strike, Malicious Damage and Theft.

All Risks Insurance All Risks Insurance generally offers cover for jewellery
and/or portable equipment etc. This cover is generally offered selectively. The
design of the policy may vary from company to company. It is important to
note that an All Risks policy is not free from exclusions. So, the term “All
Risks” doesn’t mean that anything and everything is covere

The most popular Property Insurance is the Standard Fire & Allied Perils
Policies which covers most of the perils the property is exposed to like fire,
riots, flood, and storm. Loss of current assets due to burglary and theft can be
covered under Burglary & House Breaking Insurance Policy. Valuables can be
covered under All Risks Policies and there are 10 11 package policies for house
owners and shopkeepers.

How does one fix the sum insured? A. Generally, there are two methods. One is
Market Value (MV) and the other is Reinstatement Value (RIV). In the case of
M.V, in the event of a loss, depreciation is levied on the asset depending on its
age. Under this method, the insured is not paid amount sufficient to buy the
replacement. In the RIV method, the Insurance Co. will pay the cost of
replacement subject to ceiling of S.I. Under this method, no depreciation is
levied. One condition is that the damaged asset should be repaired / replaced
in order to get the claim. It may be noted that RIV method is allowed only for
FIXED ASSETS and not for other assets like stocks and stocks in process .

LIABILITY INSURANCE

Insurance not only protects the risk to life and property but also the risk of
liability that a person may incur towards a third person. Liability insurance
provides covers against various forms of legal liabilities towards third parties
risks. Just as a person can insure himself against the risk of death and
personal injury, or risk of damage, deterioration or destruction of property,
similarly he can insure himself against the risk of incurring liability to third
parties. The hallmark of liability insurance is that like property insurance, it is
a contract of indemnity and therefore, no obligation arises on the part of the
insurer to pay a claim until the insured has suffered a loss.

Liability policies are generally expressed as providing indemnity against

‘liability at law’. This phrase ‘liability at law’ is invariably understood and
primarily used to cover liability arising out of negligence. The Court of Appeal
held in M/s A Swan Engg v. Iron Traders Mutual that term covered besides
liability in tort, the liability in contract under the Sale of Goods Act. The 
liability of a building contractor to a third party arising out of the faulty design
of a structure  was held covered though there is no negligence. In another case,
it was held that, the word  ‘accident’ in a householders’ comprehensive
insurance policy, covered nuisance liability which  had occurred without any
negligence on the part of the assured. This risk must be separately  and
specifically insured and that type of insurance comes within the category of
what is  commonly called ‘liability insurance*. 

The liability to third parties may arise by one’s own conduct or in using his
property. The  privity of contract is exempted in case of third-party liability
insurance and it is permissible for  the third parties to recover directly from the
insurer the damages awarded to him against the  assured. The third-party
actions and award of compensations under the Motor Vehicles Act is  a direct
example of such rights. However, third party stands in no better position than
the  assured in enforcing a contract of liability insurance against the insurer.
Determination of rights  necessarily involves the application of all the terms of
the contract and the consideration of any  defence, which would have been
available to the insurers against the insured. 

The policy usually provides that the total liability under that policy in respect
of damages  recovered or costs shall, under no circumstances, exceed a stated
sum. Such a provision will  be construed strictly since it could operate harshly
against the assured if, for example, the  insurer has the right to defend and
does defend a doubtful case with the result that damages and  costs are
recovered far in excess of the sum insured, although in the first instance the
claim  might have been settled for a sum which would have been covered by
the policy. 

Liability insurance Includes: 

1. Employer’s liability insurance, 

2. Professional negligence liability, 

3. Public liability insurance, 

4. Compulsory insurance, 

5. Guarantee insurance. 

1.) Employer’s Liability Insurance 

Employer’s liability insurance is a form of cover which insures against liability
for bodily  injury or disease sustained by his employees and arising out of and
in the course of their  employment. Thus, it protects an employer against any
claims for damages which may arise  out of the injuries to employees in the
course of their work. Various enactments such as  Factories Act, Workmen’s
Compensation Act, impose a duty on the insured to prevent personal  injury to
his employees arising out of and in the course of their employment. 

The employers are tempted to take out insurances against such liabilities. An
insurance  company undertakes to pay the claim for damages against an
employee who is insured against  such a risk on payment of premium. A
contract of insurance is to be construed in the first place  from the terms used
in it. On construction of the contract in question it is clear that the insurer 
had not undertaken the liability for interest and penalty, but had undertaken
to indemnify the  employer only to reimburse the compensation and so the
insurer cannot be made liable to pay  interest and penalty to the workmen
unless there is a special contract between the parties to that  effect.

Employers’ liability policies are contracts of indemnity and are governed by

general principles  of insurance applicable to fire and other indemnity policies.
The main question that arises in  such cases is, whether a person is a
workman of a particular employer. The general test for the  purposes of liability
is not who employs and pays the workman, but who has at the moment the 
right to control the manner of execution of the acts of the servant. 

It is to be remembered that the insurers are not concerned with each and every
minor incident  but evolve a practical system of reporting accidents which
results in an employee’s absence  from work for 3 days or more. 

Section 4(l)(c) of the Workmen’s Compensation Act, 1923 makes it clear that
even for the  injury not specified in Schedule I, if there is any evidence
regarding permanent disablement,  either total or partial, or there is any loss of
earning capacity due to the injury/injuries, the  applicant is entitled
compensation under the Workmen’s Compensation Act from the employer 
concerned. Under Section 149(1) there is a statutory liability on the part of the
insurer even to  pay interest, which is awarded in pursuance of any enactment,
and even the parties cannot  contract out of this liability. The Supreme Court
had held that, the insurer’s liability under the  Workmen’s Compensation Act
extends to payment of principal amount of compensation  computed by
Commissioner and interest levied under Section 4A(3)(a) does not extend to 
penalty levied under Section 4A(3)(b). 
2.) Professional Negligence Liability 

Professional indemnity insurance is a very important subclass of liability

insurance. This  provides cover to professional people for any negligence in the
course of their professions. The  importance of this type of policies has
increased, especially in the aftermath of the landmark  decision of the House of
Lords in Hedley Byrne & Co. v. Heller and Partners, which they  have held
that in some circumstances a duty of care could be owed by those
professionals, who  made statements that are intended to be relied upon, to
those who in fact relied upon such  statements and suffered loss thereby. 

In M. Veerappa v. Evelyn Sequevis, the Supreme Court observed that, ‘no

legal practitioner  who has acted or agreed to act shall merely by reason of his
status as a legal practitioner be  exempt from liability to be sued in respect of
any loss or injury due to any negligence in the  conduct of his professional
duties.’ 

In India, the most prevalent form of professional indemnity insurance is in the

field of medical  negligence. The consumer cases against doctors are on the
increase with a large number* of  awards of compensation, as a result of which
the indemnity insurance has taken deep roots  among medical professionals. In
other professions the trend is yet to catch up. 

3.) Public Liability Insurance 

‘Public Liability’ here does not mean liability of the state or its agencies but
means liability  imposed by law as opposed to self-imposed liability as in
contract. The Public Liability  Insurance Act, 1991 is intended to provide
immediate relief to the persons affected by accidents  occurring while handling
any hazardous substance and for matters connected therewith and  incidental
thereto. Bhopal Gas Leak case was a major reason for this enactment. 

The growth of hazardous industries, processes and operations also brings with
it the growing  risks from accidents. Such accidents not only cause harm to the
workmen alone but also the innocent people who are in the vicinity. They cause
death and injury to human beings and other living beings and damage private
and public properties. 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 and the only remedy
now available to the victims is to go through prolonged litigation in a court of
law. Some units may not have the financial resources to provide even
minimum relief. It is felt that therefore, to provide for mandatory public
liability insurance for installations handling hazardous substances to provide
minimum relief to the victim. Such insurance, apart from safeguarding the
interests of the victim of accidents, would also provide cover and enable the
industry to discharge its liability to settle large claims arising out of major
accidents.

Section 3 of the Act provides that 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 such relief as is specified in the schedule for
such death, injury or damage. The section further provides that the claimant
shall not be required to plea and establish that the death, injury or damage in
respect of which the claim has been made was due to any wrongful act, neglect
or default of any person. Public Liability Insurance also involves the concept of
No-Fault Liability. In these cases, as a matter of public policy and social
welfare, statutory liability is placed on the insurer and the assured to pay
certain amount, without any liability being proved against them.

Section 4 of the Act imposes a duty on the employer to take insurance policies
before he starts handling any hazardous substance in order to provide relief
mentioned in Section 3.

Whenever it comes to the notice of the Collector that an accident has occurred
at any place within his jurisdiction, he shall verify the occurrence of such
accident and cause publicity to be given in such manner as he deems fit, for
inviting applications from the below:

(a) Persons who have sustained injury

(b) Owner of the property to which damage has been caused

(c) All or any legal representative of the deceased where death has resulted
from the accident

(d) Any duly authorised agent of such person or owner of such property or all
or any of the legal representative of the deceased, as the case may be.

On receipt of applications, the Collector shall after giving notice of the

application to the owner and after giving the parties an opportunity of being
heard, hold an inquiry into the claim, and may make an award determining
the amount of relief which appears to him to be just and specifying the person
or persons to whom such amount of relief shall be paid. When an award is
made under this Act, the insurer who is required to pay any amount in terms
of such award shall within a period of 30 days of the date of announcement of
the award, deposit that amount in such manner as the Collector may direct.
The Collector shall arrange to pay from the Relief Fund, in terms of such
award and in accordance with the scheme under section 7 A, to the Person or
persons specified in the award. The owner also shall within such period,
deposit such amount in such manner as the Collector may direct.

Before an indemnity could be obtained under a Public Liability insurance

policy, there had to be sums which the insured shall become legally liable to
pay as damages or compensation in respect of loss of or damage to property;
in this context “sums” means sums paid or payable to third party claimants.
Legally liable to pay must obviously involve payment to a third-party claimant
and not expenses incurred by the insured in carrying out works on his land
and the  liability must be to pay damages or compensation. “Loss or damage to
property” was a  reference to the property of the third-party claimant and not
the insured. 

The relief under this Act does not affect the right of the individual to claim any
compensation  in respect of any death, or injury to any person or damage to
any property under any other law  for the time being in force. The right to relief
under this Act shall be in addition to any other  right, subject to the condition
that where the owner is liable to pay any compensation under  any other Act,
the amount paid under this Act shall be deductible. 

4.) Compulsory Insurance 

The Employees State Insurance Act, 1948, makes it compulsory for the
employer to insure his  workmen by providing certain benefits to them in the
event of their sickness, maternity and  employment insurance. The employees
insured under the Act and their dependents shall be  entitled to: 

Sickness Benefit: Periodical payment to any insured person in case of his

sickness certified by  a duly appointed medical practitioner or by any other
person possessing such qualifications and  experience as the Corporation may,
by regulations, specify in this behalf. 

Maternity Benefit: Periodical payments to an insured woman in case of

confinement or  miscarriage, or sickness arising out of pregnancy,
confinement, premature birth of child or  miscarriage, such woman being
certified to be eligible for such payments by an authority  specified in this
behalf. 
Disablement Benefits: Periodical payments to an insured person suffering
from disablement  as a result of an employment injury sustained as an
employee under this Act and certified to be eligible for such payments by an
authority specified in this behalf by the regulations. 

Dependants’ Benefit: Periodical payments to such dependants of an insured

person who dies  as a result of an employment injury sustained as an employee
under this Act, as are entitled to  compensation under this Act. 

Medical Benefit: Medical treatment for and attendance on insured persons.

This benefit is  extendable to the family of an insured person at the request of
the appropriate government and  subject to conditions laid down in the
regulations. 

Funeral Expenses: Payment to the eldest surviving member of the family of an

insured person  who has died, towards the expenditure on the funeral of the
deceased insured person or, where  the insured person did not have a family or
was not living with his family at the time of his  death, to the person who
actually incurs the expenditure on the funeral of the deceased insured 
person. 

The funds for providing these benefits and for the administration of the scheme
under the Act  are derived mainly from contributions from employers and
workmen in the nature of premiums  for their insurance. Employees state
insurance courts decide disputes and adjudicate on claims. 

5.) Guarantee Insurance

Guarantee Insurance is recent in origin and is rapidly coming into practice.

Though guarantee business is already working in society, and governed by the
principles of Contract Act under which a friend or relative of the principal
debtor used to stand as a surety for due performance of a promise or
discharge of a loan in case where principal debtor makes default. Want of
sureties proved to be setback to business and employment.

There are two methods by which this guarantee was given, namely;

(a) the insurance company or underwriter stands a surety for the due
completion of a Contract or fidelity of an employee; and

(b) the underwriter insures the promisee or employer against the loss arising by
non performance of the obligor or the dishonesty of the employee.
The first type of contracts is simple contract of guarantee which has nothing to
do with the law of insurance. It is only the latter type of arrangements with
which insurance is concerned. The chief types of policies included in
guarantee insurance are:

(a) insurance for performance of contract - The subject-matter of such contract

is due performance of a contract.

(b) insurance of debts - A creditor may insure the repayment of a debt which he
advanced or will advance in future. Such policies sometimes cover non-
payments from specified causes only and in such cases only the causes for
non-payment become relevant. When the creditor insures the repayment of a
debt, on default by the debtor, the creditor can straight claim the money from
the insurer.

(c) fidelity policies

MODULE -5

1.MOTOR INSURANCE

What is motor insurance claim? It involves damage to insured’s vehicle,

damage to the third party motor vehicle, injury or death of the third party, this
where a third-party claims  compensation for injuries/death caused due to the
negligence. 

The insured will refer all claims for third party claims against them to
professional insurance.  Insured shall not enter into any negotiation or agree to
settle the claim outside insurance without  the corporations consent. 

What is third party insurance? There are two quite different kinds of
insurance involved in  the damages system. One is Third Party liability
insurance, which is just called liability  insurance by insurance companies and
the other one is first party insurance. 

A third-party insurance policy is a policy under which the insurance company

agrees to  indemnify the insured person, if he is sued or held legally liable for
injuries or damage done to  a third party. The insured is one party, the
insurance company is the second party, and the  person you (the insured)
injure who claims damages against you is the third party. 
The Motor Vehicles (MV) Act, 1988 mandates payment of compensation to the
victims of  accidents arising out of the use of a motor vehicle or motor vehicles,
in public places by the  owner or owners, as the case may. The MV Act further
provides that no person shall use a  motor vehicle in public places without a
policy of insurance complying with the requirements  of the MV Act. In such a
policy of insurance, the insurer agrees to indemnify the user of the vehicle
against the legal liability to pay compensation payable to the victims (third
parties) of  accidents (death, injury, disability, property damages, etc.) arising
out of the use of the motor  vehicle. 

Apart from the legal liabilities to third parties, the general insurers also cover
pecuniary losses  arising out of damages to the vehicle of the insured. This
insurance cover is commonly known  as Own Damage Cover. The motor
insurance portfolio has, thus, two distinct sections - one  relating to the cover
for the vehicle and its physical damage (OD) and the other relating to  injury or
death of other parties (TP). The cover for OD is optional and the cover for TP is 
mandatory. The Motor Third Party policies have to comply with the
requirements of the MV  Act. The compensation payable to the claimants is
determined by the Motor Accident Claims  Tribunals (MACT) established under
the MV Act. 

The motor portfolio constitutes around 40 per cent of the non-life insurance
premium  underwritten in India. The motor policies were governed by the tariff
prescribed by Tariff  Advisory Committee. 

Sections 140 to 144 provides for interim compensation on ‘No Fault’ Basis.
According to this  provision Rs. 50,000/- is to be given to the kith and kin of
the deceased and Rs. 25,000/- to the  grievously injured victim. The
compensation under Section 140 is made payable if prima facie  evidence of
following is available; 

(1) Accident by the offending vehicle; 

(2) Offending vehicle being insured; 

(3) Death or grievous injuries have been caused. 

(Section 145 to 164) provides for compulsory third-party insurance, which is

required to be  taken by every vehicle owner. It has been specified in Section
146(1) that no person shall use  or allow using a motor vehicle in public place
unless there is in force a policy of insurance  complying with the requirement
of this chapter. Section 147 provides for the requirement of  policy and limit of
liability. Every vehicle owner is required to take a policy covering against  any
liability which may be incurred by him in respect of death or bodily injury
including owner  of goods or his authorized representative carried in the vehicle
or damage to the property of  third party and also death or bodily injury to any
passenger of a public service vehicle.  According to this section the policy not
require covering the liability of death or injuries arising  to the employees in the
course of employment except to the extent of liability under Workmen 
Compensation Act. Under Section 149 the insurer have been statutorily liable
to satisfy the  judgment and award against the person insured in respect of
third-party risk. 

Insurance Companies have been allowed no other defence except the

following:  

(1) Use of vehicle for hire and reward not permit to ply such vehicle. 

(2) For organizing racing and speed testing; 

(3) Use of transport vehicle not allowed by permit. 

(4) Driver not holding valid driving license or have been disqualified for holding 
such license. 

(5) Policy taken is void as the same is obtained by non-disclosure of material

fact.

The Motor Vehicles Act, 1988: The Motor Vehicles Act, 1988 is an Act of the
Parliament of India which regulates all the aspects of road transport vehicles.
This Act came into force from 1 July 1989. This act replaced the previous
motor vehicle act 1939 which earlier replaced the motor vehicle act 1914.
Motor vehicles act created a new forum named motor accidents claims
tribunals which substituted civil courts in order to provide cheaper and
speedier remedy to the victims of accident of motor vehicles. Earlier to file a
suit, suit for damages had to be filed with civil court, on payment of ad
valorem court fee. But under the provision of motor vehicle act, an application
claiming compensation can be made to the claim’s tribunal without payment of
ad valorem court fee.

Necessity for insurance against third party risk Section 146 of the above Act
states that no person shall use, other than as a passenger or allow to use a
motor vehicle in a public place unless a policy of insurance which covers the
liability to third party on account of death or bodily injury to such third party
or damage to any property of a third party arising out of the use of the vehicle
in a public place. Therefore, it is mandatory for the owner of any motor vehicle
to obtain, at the minimum, a policy from any General insurance company
holding a valid licence from IRDA, which covers the risk of death or bodily
injury to a third party arising out of usage of the vehicle in a public place.

The liabilities which require compulsory insurance are as follows:

(a) death or bodily injury of any person including the owner of the goods or his
authorised representative carried in the carriage

(b) damage to any property of a third party

(c) death or bodily injury of any passenger of a public service vehicle

(d) liability arising under the Workmen’s Compensation Act, 1923 in respect of
death or bodily injury of the paid driver of the vehicle, conductor or ticket
examiner (public service vehicles) and workers carried in a goods vehicle (e)
The limit of liability to third party property is Rs.6,000.

The Tribunal is to follow a summary procedure for adjudication of claims being

provided, the sections do not deal with the substantive law regarding
determination of liability. They only furnish a new mode of enforcing liability.
For determination of liability one has still to look to the substantive law in the
law of torts and Fatal Accident Act, 1855 or at any rate to the principles
thereof.” In the case of oriental fire & general insurance co. vs. Kamal Kamini ,
it was critically explained that the liability is still based on law of torts and
enactment like the fatal accident act. Section 169 corresponds to Section 110-
C of the motor vehicles act, 1959.

Issuance of Certificate of Insurance As per the Act, policy of insurance shall

have no effect unless and until a certificate of insurance in the form prescribed
under the Rules of the Act is issued. The only evidence of the existence of a
valid insurance as required by the Motor Vehicles Act acceptable to the police
authorities and R.T.O. is a certificate of insurance issued by the insurers.

“Hit and Run” Accident Section 161 defines “hit and run motor accident” as
accident arising out of a motor vehicle or motor vehicles the identity of whereof
cannot be ascertained in spite of reasonable efforts for the purpose. The
Section provides for payment of compensation as follows in such cases:

(a) In respect of death of any person resulting from a “hit and run” accident, a
fixed  sum of Rs.25,000  
(b) In respect of grievous hurt to any person resulting from a hit and run
motor  accident, a fixed sum of Rs.12,500  

(c) Compensation known as Solatium is payable out of a “Solatium Fund” 

established by the Central Government. 

CLAIM PROCEDURE FOR MOTOR INSURANCE 

(a) Vehicle Accident Claims After the insured submit his claim form and the
relevant  documents, the insurer appoints a surveyor to inspect the vehicle and
submit his/her report to  the insurance company. Insured also get the details
of the surveyor's report. In case of major  damage to the vehicle, the insurer
arranges for a spot survey at the site of accident.  

The insured can undertake repairs only on completion of the survey. Once the
vehicle is  repaired, the insured should submit duly signed bills/cash memos
to the insurance company. In  some cases, companies have the surveyor re-
inspect the vehicle after repairs. In such a scenario,  the insured should pay
the workshop/garage and obtain a proof of release document (this is an 
authenticated document signed by you to release the vehicle from the garage
after it is checked  and repaired).  

Once the vehicle has been released, insured should submit the original bill,
proof of release,  and cash receipt from the garage to the surveyor. The
surveyor sends the claim file to the  insurance company for settlement along
with all the documents and Finally, the insurance  company reimburses the
insured.  

In case of an accident, the insurance company pays for the replacement of the
damaged parts  and the labor fees.  

The costs that the insured has to bear include:  

A. The amount of depreciation as per the rate prescribed  

B. Reasonable value of salvage (to be discussed separately)  

C. Voluntary deductions under the policy, if the insured have opted for any  D.
Compulsory excesses levied by the insurer  

In the insured uses the cashless repair facility, the claim money is paid directly
to the workshop  or garage. Otherwise, the amount of claim is paid to the
insured.  
(b) Third Party Insurance Claim In the event of a third-party claim, the
insured should notify  the insurance company in writing along with a copy of
the notice and the insurance certificate.  The insured should not offer to make
an out-of-court settlement or promise payment to any  party without the
written consent of the insurance company. The insurance company has a right 
to refuse liabilities arising out of such promises.  

The insurance company will issue a claim form that has to be filled and
submitted along with:  

(a) Copy of the Registration Certificate  

(b) Driving license  

(c) First information report (FIR) 

After verification, the insurance company will appoint a lawyer in the defence of
insurer and  the insurer should cooperate with the insurance company,
providing evidence during court  proceedings. If the court orders compensation,
the insurance company will then do it directly.

2.ACCIDENT INSURANCE

Accident insurance helps you pay for medical and other out-of-pocket costs
that you may incur after an accidental injury. This includes emergency
treatment, hospital stays, medical exams, as well as other expenses you may
face such as transportation and lodging needs.

Accident insurance plans are purchased like other types of insurance plans.
You will pay a premium for your coverage, which will vary based on your
location and the specific plan you choose.

What does accident insurance cover?

Accident insurance covers qualifying injuries, which might include a broken

limb, loss of a limb, burns, lacerations, or paralysis. In the event of your
accidental death, accident insurance pays out money to your designated
beneficiary. While health insurance companies pay your provider or facility,
accident insurance pays you directly.

Accident insurance is considered supplemental insurance and is most helpful

when it is used in combination with a major medical plan. Your accident
coverage will take care of expenses not covered by your medical plan, such as
copayments and your deductible. It will also cover non-medical costs like
mortgage or rent, utility bills, and other daily expenses.

3.MOTOR ACCIDENT CLAIMS TRIBUNALS

POWERS & FUNCTIONS

S.165. Claims Tribunals.

(1) A State Government may, by notification in the Official Gazette, constitute

one

or more Motor Accidents Claims Tribunals (hereafter in this Chapter referred to

as Claims Tribunal) for such area as may be specified in the notification for the
purpose of adjudicating upon claims for compensation in respect of accidents
involving the death of, or bodily injury to, persons arising out of the use of
motor vehicles, or damages to any property of a third party so arising, or both.

Explanation. --For the removal of doubts, it is hereby declared that the

expression "claims for compensation in respect of accidents involving the death
of or bodily injury to persons arising out of the use of motor vehicles" includes
claims for compensation under section 140.

(2) A Claims Tribunal shall consist of such number of members as the State
Government may think fit to appoint and where it consists of two or more
members, one of them shall be appointed as the Chairman thereof.

(3) A person shall not be qualified for appointment as a member of a Claims

Tribunal unless he--

1. Is, or has been, a Judge of a High Court, or

2. Is, or has been, a District Judge, or

3. Is qualified for appointment as a Judge of a High Court.

Where two or more Claims Tribunals are constituted for any area, the State
Government, may by general or special order, regulate the distribution of
business among them.

S.168. Award of the Claims Tribunal.

(1) On receipt of an application for compensation made under section 166, the
Claims Tribunal shall, after giving notice of the application to the insurer and
after giving the parties (including the insurer) an opportunity of being heard,
hold an inquiry into the claim or, as the case may be, each of the claims and,
subject to the provisions of section 162 may make an award determining the
amount of compensation which appears to it to be just and specifying the
person or persons to whom compensation shall be paid and in making the
award the Claims Tribunal shall specify the amount which shall be paid by the
insurer or owner or driver of the vehicle involved in the accident or by all or
any of them, as the case may be:

Provided that where such application makes a claim for compensation under
section 140 in respect of the death or permanent disablement of any person,
such claim and any other claim (whether made in such application or
otherwise) for compensation in respect of such death or permanent
disablement shall be disposed of in accordance with the provisions of Chapter
X.

(2) The Claims Tribunal shall arrange to deliver copies of the award to the
parties concerned expeditiously and in any case within a period of fifteen
days from the date of the award.

(3) When an award is made under this section, the person who is required
to pay any amount in terms of such award shall, within thirty days of the
date of announcing the award by the Claims Tribunal, deposit the entire
amount awarded in such manner as the Claims Tribunal may direct.

S.169. Procedure and powers of Claims Tribunals.

(1) In holding any inquiry under section 168, the Claims Tribunal may, subject
to any rules that may be made in this behalf, follow such summary procedure
as it thinks fit.

(2) The Claims Tribunal shall have all the powers of a Civil Court for the
purpose of taking evidence on oath and of enforcing the attendance of
witnesses and of compelling the discovery and production of documents and
material objects and for such other purposes as may be prescribed; and the
Claims Tribunal shall be deemed to be a Civil Court for all the purposes of
section 195 and Chapter XXVI of the Code of Criminal Procedure, 1973. (2 of
1974.)

(3) Subject to any rules that may be made in this behalf, the Claims Tribunal
may, for the purpose of adjudicating upon any claim for compensation, choose
one or more persons possessing special knowledge of any matter relevant to the
inquiry to assist it in holding the inquiry.
Scope of section 169

Section 169 simply vests tribunal with powers of civil court for particular
purpose of taking evidence on oath and of enforcing attendance of witness.
Held that it does not exclude either expressly or by necessary implications,
application of other provisions of code. It also does not restrict inherent
powers to secure ends of justice. oriental insurance co. ltd. v. Subrata Mitra.

S.170. Impleading insurer in certain cases.

Where in the course of any inquiry, the Claims Tribunal is satisfied that-

(a) There is collusion between the person making the claim and the person
against whom the claim is made, or

(b) the person against whom the claim is made has failed to contest the claim,
it may, for reasons to be recorded in writing, direct that the insurer who may
be liable in respect of such claim, shall be impleaded as a party to the
proceeding and the insurer so imp leaded shall thereupon have, without
prejudice to the provisions contained in sub-section (2) of section 149, the
right to contest the claim on all or any of the grounds that are available to the
person against whom the claim has been made.
S. 171. Award of interest where any claim is allowed.

Where any Claims Tribunal allows a claim for compensation made under this
Act, such Tribunal may direct that in addition to the amount of compensation
simple interest shall also be paid at such rate and from such date not earlier
than the date of making the claim as it may specify in this behalf.

Procedure to Be Followed

Section 169 expressly empowers the claims tribunals to formulate its own
procedure. since the claims tribunals has all the powers equal to high court, it
may choose to follow the procedure laid down in the CPC. in holding an
enquiry under the section 168 of the act, the claims tribunal is empowered to
follow such summary procedure as it thinks fit. The intention is that the
enquiry should not take the shape of elaborate and long-drawn proceedings as
a regular civil suit but should be concluded as much speedily as possible. the
nature of enquiry should be more or less like a judicial enquiry. There can be
no gain saying that vast power exists in the claims tribunal to determine its
own procedure in dealing with the claim applications. The claims tribunal has
all the trappings of a court and the proceedings before it closely resembles the
proceedings in a civil court. the whole intention of the legislature is to ensure a
speedy disposal of the claim applications filed by the injured persons or the
legal representatives of the deceased. Krishna reddy v. ramalamma. And in
case of absence of any restraining provisions the claims tribunal has the liberty
to follow any procedure that it may choose to evolve for itself as long as it is
consistent with the rules of natural justice and does not contravene the
provisions of law.

S.172. Award of compensatory costs in certain cases.

172. Award of compensatory costs in certain cases. —

(1) Any Claims Tribunal adjudicating upon any claim for compensation under
this Act, may in any case where it is satisfied for reasons to be recorded by it in
writing that—

(a) (a) the policy of insurance is void on the ground that it was obtained by
representation of fact which was false in any material particular, or

(b) (b) any party or insurer has put forward a false or vexatious claim or
defence, such Tribunal may make an order for the payment, by the party who
is guilty of misrepresentation or by whom such claim or defence has been put
forward of special costs by way of compensation to the insurer or, as the case
may be, to the party against whom such claim or defence has been put
forward.

(2) No Claims Tribunal shall pass an order for special costs under sub-section
(1) for any amount exceeding one thousand rupees.

(3) No person or insurer against whom an order has been made under this
section shall, by reason thereof be exempted from any criminal liability in
respect of such mis-representation, claim or defence as is referred to in sub-
section (1).

(4) Any amount awarded by way of compensation under this section in respect
of any misrepresentation, claim or defence, shall be taken into account in any
subsequent suit for damages for compensation in respect of such
misrepresentation, claim or defence.

S.174. Recovery of money from insurer as arrear of land revenue.

Where any amount is due from any person under an award, the Claims
Tribunal may, on an application made to it by the person entitled to the
amount, issue a certificate for the amount to the Collector and the Collector
shall proceed to recover the same in the same manner as an arrear of land
revenue.

4. SOCIAL SECURITY INSURANCE

All the industrial countries of the world have developed measures to promote
the economic security and welfare of individual and his family. These measures
have come to be called as social security. Social security is dynamic concept
and an indispensable chapter of a national programme to strike at the root of
poverty, unemployment and diseases.

Social security may provide for the welfare of persons who become incapable of
working by reason of old age, sickness and invalidity and or unable to earn
anything for their livelihood.

It is necessary to analyze various definition of social security in order to

appreciate the nature and concept of social security.

Friedlander defines social security as “a programme of protection provided by

society against these contingencies of modem life, like sickness,
unemployment, old age, dependency, industrial accidents, and invalidism
against which the individual cannot be expected to protect himself and his
family by his own ability or foresight”.

In 1942, Sir William Beveridge headed a committee that reviewed the national
schemes of social insurance in Great Britain during the post war period. In his
report he defines social security as follows:

“The security of an income to take place of the earnings when they are
interrupted by unemployment by sickness or accident to provide for retirement
through age, to provide against the loss of support by the death of another
person and meet exceptional expenditure, such as those connected with birth,
death and marriage.

The Beveridge report argued that there were ‘five giants’ that were stalking the
land and that should be tackled. They are want, disease, ignorance, squalor
and idleness.

AIM OF SOCIAL SECURITY

Social Security is for the people. Social Security is required for meeting certain
needs which are basically rooted in lack, loss or inadequacy of income or
assets due to unemployment, sickness, accidents, maternity, disability, old age
or death. These incidents may affect an individual or community as a whole.
Hence the aim of all social security measures is three - fold namely,
compensation, restoration and prevention.

Compensation: It aims to substitute income when earning of an individual is

interrupted temporarily or comes to an end permanently during spells of risk.

Restoration: Restoration is designed to provide certain services like medical to

the sick and invalid, and rehabilitation in eases of need.

Prevention: Social security system not only provides necessary measure when
it is required but also prevent the risks from arising in the first place itself. So
as to help the individuals and families to make the best possible adjustment
when faced with disabilities and disadvantages which have not been or could
not be prevented. So social security requires not only cash but also a wide
range of health and social services.

CHARACTERISTICS OF SOCIAL SECURITY

The purpose of any social security measure is to provide individuals and

families the confidence that their standard of living will not be eroded by
meeting with such socio-economic contingencies in their life. The concept of
social security varied from country to country. This is understandable in a way
because of the differential social and economic development of societies in
difference parts of the world. But the need for economic protection is universal
and hence social security measures have three major characteristics even
though they vary from country to country and from time to time according to
the need of the people and countries resources. They are as follows:

1. Social security measures are established by law.

2. They provide cash benefit to replace at least a part of income in meeting

contingencies such as unemployment, maternity, employment injury, sickness,
old age etc.

3. These benefits are provided in three major ways such as social assistance,
social insurance and public services. The most well-known techniques adopted
by social security at present are no doubt social assistance and social
insurance which are discussed as follows:

Social Assistance
Social assistance is a devise organised by the state by providing cash
assistance and medical relief, to such members of the society as they cannot
get them from their own resources. The ILO defines social assistance scheme
as one that provides benefits to persons of small means granted as of right in
amounts sufficient to meet a minimum standard of need and financed from
taxation.

The special characteristic of this measure is that it is financed wholly from the
general revenues of the state and the benefits are provided free of cost. But the
beneficiary has to satisfy means test which means certain prescribed
conditions. The first risk to be covered was that old age, but gradually non-
contributory benefits were also introduced for invalids, survivors and
unemployed persons as well. Today social assistance programmes cover
programme like unemployment assistance, old age assistance, national
assistance. Thus, the social assistance underlines the idea that the care of
people could not be left to voluntary charity and should be placed on a
compulsory and statutory basis. It represents, “the unilateral obligation of the
community towards its dependent groups.

Social Insurance

Social Insurance was first introduced in Germany by Bismarck and since

spread all over the world. Social insurance is a plan insurance which aimed for
protecting the wages of those workers who do not have sufficient source to
support their own self or their families in case of loss of income due to meeting
contingencies in their work life.

Lord William Beveridge has defined social insurance as “plan of insurance of

giving in return for contributions benefits upon subsistence level, as a right
and without means test so that individuals made build freely upon it.”

From the above analysis the following ingredients may be regarded as basic
features of scheme of social insurance:

• Certain risks which cannot be faced by the persons in their individual

capacity are faced collectively by a group of persons;

• For that purpose, they have pooled together their resources;

• Benefits are provided to them in case of contingency;

• This makes them maintain their standard up to a subsistence level;

• Benefits are payable to them according to rates prevalent as a matter of right
in accordance with their salary or income; and

• The payment of contribution is obligatory since they are insured against the
risk

compulsorily

Similarities and Differences between Social Assistance and Social

Insurance

Social assistance and social insurance have some similar features because
both are social in approach and are organised under a law passed in this
behalf. Both provide a legal title to benefits. But both differ from each other in
some respects.

First, social assistance is financed by the general tax payers, while social
insurance is financed by tripartite or bipartite contributions.

Secondly, social assistance aims at to provide minimum subsistence to those

who cannot make it on their own. Hence, the beneficiary has to satisfy a means
test for being entitled to such benefits while social insurance schemes aim to
protect a minimum standard of living related to beneficiaries’ immediate
standard of living as reckoned by his daily earning.

Thirdly, social insurance ignores the income and means of liable relations while
social assistance makes the beneficiary a first charge on the liable relation.
Benefits are paid only when the specified relations do not possess sufficient
means to support the beneficiary. Thus, social assistance is a progression from
private charity towards private insurance whereas social insurance is a
progression from private insurance towards public welfare measures.

SOCIAL SECURITY AND HUMAN RIGHTS

The International Labour Conference emphasised that social security is the

basic human right and the fundamental means for creating social position,
thereby helping to ensure social peace and social inclusion. It is an
indispensable part of government social policy and an important tool to prevent
and alleviate poverty. Hence the concept of social security as a human right
originated with the Universal Declaration of Human Rights. The need for social
security as human right has been enumerated as follows:
“Everyone, as a member of society, has the right to social security and is
entitled to realisation,through national efforts and international cooperation
and in accordance with the organization and resources of each state, of the
economic, social and cultural rights indispensable for his dignity and the free
development of his personality”. [Art.22 of The Universal Declaration of Human
Rights, 1948.]

“Everyone has the right to a standard of living adequate for the health and
well-being of himself and of his family, including food, clothing, housing and
medical care and necessary social services, and the right to social security in
the event of unemployment, sickness, disability, widowhood, old age or other
lack of livelihood in circumstances beyond his control.

Motherhood and childhood are entitled to special care and assistance. All
children, whether born in or out of wedlock, shall enjoy the same social
protection”. [Art.25 of The Universal Declaration of Human Rights, 1948.]

CONSTITUTIONAL STATUS OF SOCIAL SECURITY IN INDIA

The constitution of India guarantees fundamental rights to every citizen

including the right to life and as the Supreme Court in Olga Tellis v. Bombay
Municipal Corporation has pointed out that the right to livelihood is inherent in
the right to life. The ultimate aim of social security is to ensure that everyone
has the means of livelihood and hence the right to social security and
protection of the family are integral part of right to life. Further, the Supreme
Court in S.K.Mastan Bee v. G.M., South Central Railway, has also held that
security against sickness and disablement and also right to family pension held
to be forming part of right to life under Article 21.

The Directive Principles of State policy set standard of achievement of

socialistic pattern of society as it embraces principles and policies pertaining to
social security measures which are to be followed by the state in future. It is
pertinent to discuss the following provisions which are relevant to social
security:

To Secure a Social Order for the Promotion of Welfare of the People

[Article 38]

It is the duty of the state is to promote the welfare of its people by securing and
protecting social order in which justice, social, economic and political, shall
inform all the institutions of the national life. Art.38 incorporates part of the
preamble within it concerning justice, social, economic and political. This class
has often been relied upon to sustain and demand social welfare measures and
to remain the state about the kind of society the constitution expects it to
create.

Further, the constitution mandates the state to strive to minimise inequalities

in status, facilities and opportunities, not only amongst individuals but also
amongst groups of people residing in different areas or engaged in different
vocations

Directives to the State to Secure Social Security Measures While Enacting

Legislations[Article 39]

While enacting social security legislations the state has been directed to secure
the following measures:

• Adequate means of livelihood;

• Proper distribution of ownership and control of the material resources of the

community so that it may sub serve the common need;

• Prevention of the concentration of wealth and means of production;

• Equal pay for equal work for men and women;

• The health and strength of workers; and

• Childhood and youth are protected against exploitation.

Right to Work, to Education and to Public Assistance in Certain Cases

[Article 41]

The state has been directed to ensure to the people within the limits of its
economic capacity and development to secure the right work, employment,
education and public assistance in cases of unemployment, old age, sickness
and disablement and in other cases of underserved want. It is usual to refer to
matters specified in the directive as measures of social security.

The Article 41 has no bearing on the interpretation of Article 16 as it is

manifest that the term public assistance or relief to people who are
unemployed or old, or sick or disabled, or in other similar cases of undeserved
want.

Provision for Just and Humane Conditions [Article 42]

It exhibits the concerns of the framers for the welfare of the workers by
requiring the state to make provisions for securing just and humane condition
of work and for maternity benefit.

While upholding the claim of non-regularised female workers for maternity

relief, the Supreme Court has stated in Municipal Corporation of Delhi v.
Female Workers,: “Since Article 42 specifically speaks of ‘just and humane
conditions of work’ and maternity relief, the validity of an executive or an
administrative action in denying maternity benefit has to be examined on the
anvil of Article 42 which, though not enforceable at law, is nevertheless
available for determining the legal efficacy of the action complaint of.”

Living Wage, etc. for Workers [Article 43]

Article 43 requires the state to strive to secure to the worker work, a living
wage, conditions of work ensuring a decent standard of life and full enjoyment
of leisure and social and cultural opportunities.

5. EMPLOYEES’ STATE INSURANCE (ESI)

The promulgation of the ESI Act, by the Parliament was the major legislation
on social security for workers in independent India. It was a time when the
industry was still in a nascent stage and the country was heavily dependent on
an assortment of imported goods from the developed or fast developing
countries.

History

In March 1943, B. P. Adarkar was appointed by Government of India to create

a report on health insurance scheme for industrial workers. The report became
the basis for the Employment State Insurance (ESI) Act of 1948. The
promulgation of Employees’ State Insurance Act, 1948 envisaged an integrated
need based social insurance scheme that would protect the interest of workers
in contingencies such as sickness, maternity, temporary or permanent physical
disablement, death due to employment injury resulting in loss of wages or
earning capacity. The Act also guarantees reasonably good medical care to
workers and their immediate dependents. Following the promulgation of the
ESI Act the Central Govt. set up the ESI Corporation to administer the Scheme.
The Scheme, thereafter was first implemented at Kanpur and Delhi on 24
February 1952. The Act further absolved the employers of their obligations
under the Maternity Benefit Act, 1961 and Workmen’s Compensation Act 1923.
The benefit provided to the employees under the Act are also in conformity with
ILO conventions.

The act was initially intended for factory workers but later became applicable to
all establishments having 10 or more workers. As on 31 March 2016, the total
beneficiaries are 82.8 million.

ESI Act

Employees' State Insurance Corporation (ESIC), established by ESI Act, is an

autonomous corporation under Ministry of Labour and Employment,
Government of India. As it is a legal entity, the corporation can raise loans and
take measures for discharging such loans with prior sanction of the central
government and it can acquire both movable and immovable property and all
incomes from the property shall vest with the corporation. The corporation can
set up hospitals either independently or in collaboration with state government
or other private entities, but most of the dispensaries and hospitals are run by
concerned state governments.

Benefits

For all employees earning ₹21,000 (US$290) or less per month as wages, the
employer contributes 4.75 percent and employee contributes 1.75 percent,
total share 6.5 percent. S This fund is managed by the ESI Corporation (ESIC)
according to rules and regulations stipulated there in the ESI Act 1948, which
oversees the provision of medical and cash benefits to the employees and their
family. ESI scheme is a type of social security scheme for employees in the
organised sector.

The employees registered under the scheme are entitled to medical treatment
for themselves and their dependents, unemployment cash benefit in certain
contingencies and maternity benefit in case of women employees. In case of
employment-related disablement or death, there is provision for a disablement
benefit and a family pension respectively. 67 Outpatient medical facilities are
available in 1418 ESI dispensaries and through 1,678 private medical
practitioners. Inpatient care is available in 145 ESI hospitals and 42 hospital
annexes with a total of 19,387 beds. In addition, several state government
hospitals also have beds for

exclusive use of ESI Beneficiaries. Cash benefits can be availed in any of 830
ESI centres throughout India.

New Amendment
The Employees’ State Insurance Corporation (ESIC) raised the monthly wage
limit to Rs. 21,000, from the existing Rs. 15,000, for coverage with effect from 1
January 2017.

Applicability

Under Section 2(12) the Act is applicable to non-seasonal factories employing

10 or more persons. Under Section 1(5) of the Act, the Scheme has been
extended to shops, hotels, restaurants, cinemas including preview theatres,
road-motor transport undertakings and newspaper establishments employing
10 or more persons. Further under section 1(5) of the Act, the Scheme has
been extended to Private Medical and Educational institutions employing 10 or
more persons in certain States/UTs.

Areas Covered

The ESI Scheme is now notified in 526 Districts in 34 States and Union
Territories, which include 346 complete District, 95 District Headquarters and
in 85 Districts. The scheme is implemented in centers. The scheme is yet to be
implemented in Arunachal Pradesh and Lakshadweep.

Administration

The comprehensive and multi-pronged social security programme is

administered by an apex corporate body called the Employees' State Insurance
Corporation. It comprises members representing vital interest groups,
including, employees, employers, the Central and State Government,
representatives of Parliament and medical profession.

The Corporation is headed by the Union Minister of Labour, as its Chairman,

whereas the Director General, appointed by the Central Government functions
as its Chief Executive Officer. The broad-based corporate body is, primarily,
responsible for coordinated policy planning and decision making for growth,
development and efficacy of the scheme. A Standing Committee, constituted
from amongst the members of the Corporation, acts as an Executive Body. The
Medical Benefit Council, constituted by the Central Government, is yet another
Statutory Body that advises the Corporation on matters related to effective
delivery of medical services to the Beneficiary Population.

The Corporation, with its Central Headquarters at New Delhi, operates through
a network of 63 Regional and Sub- Regional located in various States. The
administration of Medical Benefit is taken care of by the respective State
Government except in case of Delhi and Noida/Greater Noida area in Uttar
Pradesh where the Corporation administers medical facilities directly. The
Corporation has taken over the administration of 36 ESI Hospitals in various
States for developing them as ESIC Model Hospitals.

Finance

ESI Scheme, like most of the Social Security Schemes the world over, is a self-
financing health insurance scheme. Contributions are raised from covered
employees and their employers as a fixed percentage of wages. As of now,
covered employees contribute 1.75% of the wages, whereas, the employers
contribute 4.75% of the wages, payable to their employees. Employees earning
upto Rs.137/- a day are exempted from payment of their share of contribution.
The State Governments, as per provisions of the Act, contribute 1/8th of the
expenditure of medical benefit within a per capita ceiling of Rs. 1500/- per
Insured Person per annum. Any additional expenditure incurred by the State
Governments, over and above the ceiling and not falling within the shareable
pool, is borne by the State Governments concerned.

Contribution

E.S.I. Scheme being contributory in nature, all the employees in the factories
or establishments to which the Act applies shall be insured in a manner
provided by the Act. The contribution payable to the Corporation in respect of
an employee shall comprise of employer's contribution and employee's
contribution at a specified rate. The rates are revised from time to time.
Currently, the employee's contribution rate (w.e.f. 1.1.97) is 1.75% of the wages
and that of employer's is 4.75% of the wages paid/payable in respect of the
employees in every wage

period. For newly implemented areas, the contribution rate is 1% of wages of

Employee and 3% payable by Employers for first 24 months (w.e.f. 06.10.2016)
Employees in receipt of a daily average wage upto Rs.137/- are exempted from
payment of contribution. Employers will however contribute their own share in
respect of these employees.

Collection of Contribution

An employer is liable to pay his contribution in respect of every employee and

deduct employee’s contribution from wages bill and shall pay these
contributions at the above specified rates to the Corporation within 15 days of
the last day of the Calendar month in which the contributions fall due. The
Corporation has authorized designated branches of the State Bank of India and
some other banks to receive the payments on its behalf.

Contribution Period and Benefit Period

There are two contribution periods each of six months duration and two
corresponding benefit periods also of six months duration as under.
Contribution period Corresponding Cash Benefit period

Benefits

The section 46 of the Act envisages following six social security benefits: -

(a) Medical Benefit : Full medical care is provided to an Insured person and his
family members from the day he enters insurable employment. There is no
ceiling on expenditure on the treatment of an Insured Person or his family
member. Medical care is also provided to retired and permanently disabled
insured persons and their spouses on payment of a token annual premium of
Rs.120/-.

1. System of Treatment

2. Scale of Medical Benefit

3. Benefits to Retired IPs

4. Administration of Medical Benefit in a State

5. Domiciliary treatment

6. Specialist consultation

7. In-Patient treatment

8. Imaging Services

9. Artificial Limbs & Aids

10. Special Provisions

11. Reimbursement

(b) Sickness Benefit(SB) : Sickness Benefit in the form of cash compensation

at the rate of 70 per cent of wages is payable to insured workers during the
periods of certified sickness for a maximum of 91 days in a year. In order to
qualify for sickness, benefit the insured worker is required to contribute for 78
days in a contribution period of 6 months.

1. Extended Sickness Benefit (ESB) : SB extendable upto two years in the

case of 34 malignant and long-term diseases at an enhanced rate of 80 per
cent of wages.

2. Enhanced Sickness Benefit : Enhanced Sickness Benefit equal to full wage

is payable to insured persons undergoing sterilization for 7 days/14 days for
male and female workers respectively.

(c) Maternity Benefit (MB) : Maternity Benefit for confinement/pregnancy is

payable for Twenty Six (26) weeks, which is extendable by further one month
on medical advice at the rate of full wage subject to contribution for 70 days in
the preceding Two Contribution Periods.

(d) Disablement Benefit

1. Temporary disablement benefit (TDB) : From day one of entering insurable

employment & irrespective of having paid any contribution in case of
employment injury. Temporary Disablement Benefit at the rate of 90% of wage
is payable so long as disability continues.

2. Permanent disablement benefit (PDB) : The benefit is paid at the rate of

90% of wage in the form of monthly payment depending upon the extent of loss
of earning capacity as certified by a Medical Board

(e) Dependants Benefit(DB) : DB paid at the rate of 90% of wage in the form of
monthly payment to the dependants of a deceased Insured person in cases
where death occurs due to employment injury or occupational hazards.

(f) Other Benefits :

• Funeral Expenses: An amount of Rs.10,000/- is payable to the dependents or

to the person who performs last rites from day one of entering insurable
employment.

• Confinement Expenses: An Insured Women or an I.P.in respect of his wife in

case confinement occurs at a place where necessary medical facilities under
ESI Scheme are not available.

In addition, the scheme also provides some other need-based benefits to

insured workers.
1.) Vocational Rehabilitation: To permanently disabled Insured Person for
undergoing VR Training at VRS.

2.) Physical Rehabilitation: In case of physical disablement due to employment

injury.

3.) Old Age Medical Care: For Insured Person retiring on attaining the age of
superannuation or under VRS/ERS and person having to leave service due to
permanent disability insured person & spouse on payment of Rs. 120/- per
annum.

Rajiv Gandhi Shramik Kalyan Yojana : This scheme of Unemployment

allowance was introduced w.e.f. 01-04-2005. An Insured Person who become
unemployed after being insured three or more years, due to closure of
factory/establishment, retrenchment or permanent invalidity are entitled to: -

• Unemployment Allowance equal to 50% of wage for a maximum period of

upto Two Years.

• Medical care for self and family from ESI Hospitals/Dispensaries during the
period IP receives unemployment allowance.

• Vocational Training provided for upgrading skills - Expenditure on

fee/travelling

allowance borne by ESIC. Incentive to employers in the Private Sector for

providing regular employment to the persons with disability:

• Minimum wage limit for Physically Disabled Persons for availing ESIC
Benefits is 25,000/-.

• Employers’' contribution is paid by the Central Government for 3 years.

6.INSURANCE FOR SEA MEN

The Seamen’s Insurance system is designed to ensure stable livelihood of

mariners working on seagoing ships/vessels in an unexpected life event. For
this purpose, these mariners shall pay contributions. The system provides
insurance benefits to mariners and their dependents for non-occupational
sickness, injury, and death as well as childbirth. It also provides mariners with
insurance benefits for sickness, injury, disability, and death on occupational
causes including commuting.
It is a compulsory system in which all mariners must be covered by law, not a
contract which mariners or their employers may opt for the coverage or
withdraw.

Coverage

Compulsory Coverage

All mariners employed to work on a seagoing ship/vessel, regardless of their

nationality, must be covered by the Seamen’s Insurance system.

A mariner referred in the Seamen’s Insurance means a mariner defined in the

Mariners Act, and it includes a captain, crew members, and reserved crew
members onboard the following ships/vessels:

1. A ship/vessel owned by a Japanese national, Japanese company, or

Japanese public office

2. A ship/vessel rented/leased by a Japanese national, Japanese company

or Japanese public office, or chartered for navigation from a port in
Japan to a port in a foreign country

3. A ship/vessel whose crew members are assigned by the Japanese

government

4. A ship/vessel that navigates only between domestic ports

[Note] Crew members onboard the following ships/vessels are not subject to
mariners:

1. A ship whose gross tonnage is less than five tons

2. A ship that only navigates lakes, rivers, or within a port.

3. A yacht or motorboat used for sports and recreation

4. Specific fishing boats with tonnage of less than 30 tons (fishing boats for
coastal fishery, non-powered craft, etc.)