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(..5..)
Introduction to Insurance.
QUESTION BANK
Q.1. Write a detailed note on the nature of the contract of Insurance. Explain the role of
Insurable Interest in a contract of Insurance.
Q.2. What is risk? Explain the circumstances affecting risk.
Q.3. What is insurable interest? Explain the role of insurable interest in the Insurance
contract.
Q.4. What is an insurance contract? What is the effect of misrepresentation on an insurance
contract?
Q.5. Explain in detail the nature of an Insurance Contract, emphasising the requirement of
utmost good faith.
Q.6. Write a detailed note on the nature of an insurance contract in the light of insurable
interest.
Q.7. Write a detailed note on the contract of Insurance and explain the nature and
characteristics of Insurance.
Short Notes
1. Principle of good faith.
2. Effect of misrepresentation on insurance contract.
Table of Contents
I. Meaning of ‘insurance’:-................................................................................................57
II. Definition of ‘insurance’:- ............................................................................................58
1. Ghosh and Agrawal:-.................................................................................................58
2. Rock Fell:- .................................................................................................................58
3. E.W.Pattreson:-..........................................................................................................58
4. Justice Tindall:-..........................................................................................................58
III. Characteristics of an Insurance contract,- ...................................................................58
1. Personal contract:.......................................................................................................58
2. Undertaking of risk:...................................................................................................58
3. Cooperative device: ...................................................................................................58
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“Law Master’s” Publication “Negotiable Instruments Act” Prof. S.D. Bhosale
6. Contract of adhesion:.................................................................................................59
7. Indemnification:.........................................................................................................59
IV. Types of Insurance:-....................................................................................................59
a. Life insurance:- ..........................................................................................................59
Some of the common types of life insurance are:-.....................................................59
(b) General Insurance:- ..................................................................................................60
(i) Health insurance:...................................................................................................60
(ii) Motor insurance: ..................................................................................................60
(iii) Home insurance:..................................................................................................60
(iv) Fire insurance: .....................................................................................................61
(v) Travel insurance: ..................................................................................................61
V. Principles of Insurance:-...............................................................................................61
1. Principle of utmost good faith: ..................................................................................61
2. Principle of insurable interest: ...................................................................................62
3. Principle of indemnity: ..............................................................................................63
4. Principle of subrogation:............................................................................................63
5. Proximate Cause in Insurance:- .................................................................................63
6. Principe of Contribution:-..........................................................................................64
7. Principle of Loss minimisation:-................................................................................64
I. Meaning of ‘insurance’:-
Insurance is a contract between an individual or organisation, called the ‘insured’,
and an insurance company called the ‘insurer’, in which the insurer agrees to compensate
the insured for financial losses that may arise from certain events in exchange for the
payment of a premium. Insurance is a means of protection from any unforeseen losses and
contingencies. This premium is a fee that the insured pays the insurer to be covered by the
‘insurance policy’.
Insurance is a form of risk management primarily used to hedge against a contingent
or uncertain loss risk. It is a way of transferring the risk of financial loss from the insured
to the insurer. In return for the premium, the insurer assumes the risk of the insured's loss
and agrees to pay the insured a sum of money in the event that the loss occurs.
The purpose of insurance is to provide financial protection against losses that may
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arise from various events, such as property damage, liability, life, and health.
II. Definition of ‘insurance’:-
There are various definitions of Insurance based on its functions or nature of
contract as follows:-
1. Ghosh and Agrawal:-
‘Insurance’ is a cooperative form of distributing a certain risk over a group of
persons who are exposed to it.
2. Rock Fell:-
Insurance is a source of distribution of loss of a few person into many persons.
3. E.W.Pattreson:-
Insurance is a contract by which one party, for a consideration called ‘premium’
assumes a particular risk of the other party and promises to pay him or his nominee a certain
or ascertainable sum of money on a specified contingency.
4. Justice Tindall:-
Insurance is a contract in which a sum of money is paid to the assured as
consideration of insurers incurring the risk of paying a large sum upon a given contingency.
Some of the characteristics or features of insurance:-
III. Characteristics of an Insurance contract,-
From the above definitions, we may lay down the following characteristics of the
contract of insurance.
1. Personal contract:
Insurance contracts are generally personal in nature. They are agreements between
the insurance company and the insured, and such agreements are bound by certain
obligations. Both parties are required to fulfil their obligations to keep the contract legal.
2. Undertaking of risk:
In an insurance contract, bearing and protecting risk is the subject matter of the
contract. For example, paying the insured amount in case of death of the assured, loss by
fire or happening of marine perils. The risk is undertaken by the insurer to compensate the
insured for the risk mentioned in the policy. The insurance company bears the risk and
3. Cooperative device:
Insurance is a cooperative device that shares the burden of risk of one on the
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4. Premium:
Payment of premiums by the insured is another feature of an insurance contract.
Like other contracts, the premium fulfils the factor of consideration because it is the subject
for which the insurer promises to undertake or bear the risk if insured. In the absence of a
5. Payment of policy amount on the happening of events:
On the happening of a specified event, the insurance company is bound to make
good the loss to the insured. The happening of an event is specific in life insurance, that is,
death, but it is not so in the case of marine, fire or accidental insurance
6. Contract of adhesion:
Insurance contracts are contracts of adhesion, which means that they are drafted by
the insurer, and the insured has little or no ability to make changes to them. The insured
must accept the entire contract with all of its terms and conditions. contract ambiguity or
7. Indemnification:
Insurance contracts are based on the principle of indemnity, which means that the insured
is restored to the same financial position as before the loss occurred. The insured cannot
make a profit from the insurance claim. The amount of compensation is limited by the
IV. Types of Insurance:-
Insurance contracts provide financial protection against various risks and
uncertainties. There are two main categories of insurance: life insurance and general.
a. Life insurance:-
Life Insurance covers the risk of death or disability of the insured person. It is also
called personal insurance. The insurance company pays a fixed amount (sum assured) to
the beneficiary or nominee in case of the insured’s demise, permanent disability, or illness
(health). Life insurance can also provide savings and investment benefits, such as maturity
benefits, bonuses, tax deductions, etc.
Some of the common types of life insurance are:-
(i) Term life insurance:
This is the simplest and cheapest form of life insurance. It provides coverage for a
1 https://lawcorner.in/characteristics-of-insurance/
2 https://lawcorner.in/characteristics-of-insurance/
3 https://www.oreilly.com/library/view/principles-of-
risk/9780134082578/xhtml/fileP800041001600000000000000002E6BE.xhtml
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(ii) Whole life insurance:
This type of life insurance covers the insured for their entire lifetime. The sum
assured is paid to the beneficiary upon the insured's death.
(iii) Endowment plans:
These types of life insurance combine protection and savings. They pay the sum
assured either on the insured's death or on the completion of a specified term (maturity).
(iv) Unit-linked insurance plans (ULIPs):
These types of life insurance link the sum assured to the performance of a fund
chosen by the insured. They offer flexibility, transparency, and market-linked returns. They
(iv) Child plans:
These types of life insurance aim to secure the future of the insured’s children. They
provide funds for the children's education, marriage, and other needs. They also offer death
(vi) Pension plans:
These types of life insurance provide a regular income (annuity) to the insured after
retirement. They help the insured maintain their living standard and cope with inflation.
(b) General Insurance:-
General insurance covers all insurances except life insurance. It covers the risk of
loss or damage to the insured’s property, health, or liability. The insurance company pays
or reimburses the expenses incurred due to the occurrence of an insured event. General
party damages. Some of the common types of general insurance are:
(i) Health insurance:
This is a type of general insurance that covers the insured's medical expenses due to
illness or injury. It can also cover the cost of preventive care, hospitalization, surgery,
(ii) Motor insurance:
This is a type of general insurance that covers the loss or damage to the insured’s
vehicle due to accidents, theft, fire, natural calamities, or vandalism. It can also cover the
(iii) Home insurance:
This is a type of general insurance that covers the loss or damage to the insured’s
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house or its contents due to fire, burglary, earthquake, flood, or other perils. It can also
(iv) Fire insurance:
This type of general insurance covers the loss or damage to the insured’s property
due to fire or lightning. It can also cover the loss of profits, rent, or other consequential
(v) Travel insurance:
This type of general insurance covers the risks and uncertainties associated with
V. Principles of Insurance:-
Principles of insurance are the basic rules or guidelines that govern the formation
and operation of insurance contracts. Some of the most important principles of insurance
are:
1. Principle of utmost good faith:
This principle requires both the insurer and the insured to disclose all material facts
that may affect the insurance contract's risk or premium. The principle is also known as
‘Uberrimae Fidei” in Latin. A material fact is any information that would influence the
judgment of a prudent insurer in assessing the risk or fixing the premium. If either party
fails to disclose or misrepresents a material fact, the other party may avoid the contract.
Facts:- This case dealt with the principle of utmost good faith and the defence of non-est
factum. The insured had taken a life insurance policy from the insurer but had not disclosed
his pre-existing medical condition of chronic renal failure. He had also signed the proposal
form without reading or understanding its contents, as he was illiterate. He died within two
months of taking the policy, and his widow claimed the sum assured from the insurer. The
insurer repudiated the claim for non-disclosure and misrepresentation of material facts. The
widow challenged the repudiation in the consumer court and argued that the insured was
not aware of the contents of the proposal form and that he had signed it under the influence
of the insurance agent. The consumer court allowed the claim, but the Supreme Court
reversed the decision and held that the insurer was justified in repudiating the claim.
The Supreme Court observed that the insured had a duty to disclose his medical
condition, which was a material fact for the insurer, and that his failure to do so amounted
to a breach of utmost good faith. The Supreme Court also rejected the defence of non-est
factum, which means that the contract is not binding on a party who signed it without
4 Civil Appeal No. 4261 of 2019
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knowing or understanding its terms. The Supreme Court held that this defence is not
available to a party who signs a document without taking reasonable care to ascertain its
contents and that the insured could not blame the insurance agent for his own negligence.
2. Principle of insurable interest:
This principle requires the insured to have a legal or financial interest in the subject
matter of the insurance contract, such that the insured would suffer a loss or damage if the
insured event occurred. The insurable interest must exist at the time of entering into the
contract and at the time of the occurrence of the insured event. For example, in Life
the insured’s mother had an insurable interest in his (son's) life, as she was dependent on
him for her maintenance and support.
The contract of insurance has little resemblance to the wagering agreement, but it is
not a wagering agreement. The distinction between these two is well maintained by
legislatures. One of the essential requirements of a wagering agreement is that there should
not be any other interest in the event except the amount of the bet. In an insurance contract,
it is necessary that the person insured has ‘insurable interest’ in the subject matter insured.
The Insurance policy without ‘insurable interest’ is a wager. ‘Insurable interest’
means an interest in the ‘existence and preservation of the thing insured’. For example, if
the husband has an ‘insurable interest’ in his wife’s life, he can take an insurance policy on
his wife’s life by paying a regular premium. However, it is wager to take insurance in the
name of the other’s wife because it lacks ‘insurable interest’. Similarly, he can insure his
car, house or any other property because he has an interest in its existence and preservation
(i.e. Insurable interest’). But if he takes insurance on ‘The Great Wall of China’ or on ‘The
Taj Mahal’ or on ‘Best Bakery’ or any property of another. In that case, the agreement is a
wager due to the absence of insurable interest in the subject matter.
Facts: The plaintiff (Brahm Dun Sharma) financed an insurance policy taken by Mukhtar
Singh on his life for Rs. 35,000. Mukhtar Singh did not have sufficient means to afford an
insurance policy. Mukhtar Singh made the nomination in favour of the plaintiff and not in
favour of his own wife and children. On Mukhtar Singh's death, whether the plaintiff could
recover the sum insured arose.
The Court held:- that the plaintiff had affected and financed this insurance policy on the
life of the deceased without having an ‘insurable interest’ in his life, and as such, the
insurance contract was in the nature of a wagering contract and, therefore, void.
5 CIVIL APPEAL NO.3944 OF 2019
6
AIR 1966 All. 474.
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3. Principle of indemnity:
This principle requires the insurer to compensate the insured for the actual loss or
damage suffered by the insured due to the insured event, subject to the limit of the sum
insured. The insurer cannot pay more than the actual loss or damage, as insurance aims to
restore the insured to the same financial position as before the loss or damage and not to
make a profit out of it. This principle applies to most types of non-life insurance, such as
fire, marine, and motor insurance. For example, in Oriental Insurance Company v
pay the insured the actual cost of repairing the damaged machinery, not the depreciated
value of the machinery, as the insured had opted for a reinstatement value policy.
4. Principle of subrogation:
This principle allows the insurer to step into the shoes of the insured and exercise
all the rights and remedies that the insured has against a third party who is responsible for
the loss or damage. The insurer can recover the amount paid to the insured from the third
party, either by suing the third party in the insured's name or by obtaining an assignment
of the insured’s rights against the third party. This principle prevents the insured from
recovering twice for the same loss or damage and reduces the insurer’s liability. This
principle applies to most types of non-life insurance, except personal accident insurance.
Court of India held that the insurer was entitled to recover the amount paid to the insured
from the thief who had stolen the insured’s jewellery, as the insurer had obtained a letter
of subrogation from the insured.
5. Proximate Cause in Insurance:-
The principle of proximate cause plays a crucial role in determining whether an
insurance company is liable for a claim. It essentially identifies the primary or most
immediate cause of an event or loss to determine if it falls within the scope of coverage. In
other words, it seeks to establish a clear connection between the loss and the insured perils
specified in the insurance policy. The principle is also called the “principle of Causa
Proxima” in Latin.
The principle of proximate cause states that an insurance company should not be
held liable for losses that are not directly related to the risks it has agreed to cover. It helps
ensure that insurance claims are assessed based on the root cause of the loss rather than
remote or unrelated events.
7
CIVIL APPEAL NO.3359 OF 2019
8
CIVIL APPEAL NO(s). 7972 OF 2002
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Facts—The insured's machinery was damaged when it slipped on hilly terrain due to a
mechanical defect. The insured claimed that the damage was caused by the mechanical
failure, but the insurer (Insurance Company) argued that it was caused by the hilly terrain
itself.
The court held that the mechanical failure was the proximate cause of the damage because
it was the dominant and foreseeable cause.
This case, though decided by an English court, has been referred to in Indian courts
and is considered relevant for understanding the proximate cause principle.
6. Principe of Contribution:-
The principle of contribution in insurance is a rule that applies when a person insures
the same object or risk with two or more insurance companies. It means that if a loss occurs,
the insured can only claim the actual amount of the loss from one or more insurers, and the
insurers will share the payment proportionally according to their liabilities. This principle
prevents the insured from profiting from multiple claims. It preserves the principle of
indemnity, which states that the insured should be restored to the same financial position
as before the loss, no more and no less.
7. Principle of Loss minimisation:-
The principle of loss minimisation in insurance is a rule that requires the insured to
take reasonable steps to prevent or reduce the loss of the insured property or risk. It is based
Facts: The plaintiff insured his cotton cargo against marine risks with the defendant.
The cargo was damaged by seawater during the voyage. The plaintiff sold the damaged
cotton cheaply and claimed the difference from the insurer. The insurer argued that the
plaintiff had failed to minimise the loss by not drying and reconditioning the cotton.
*****
References:-
9 The Times, 17 October 1908
10
(1921) 7 Ll.L.Rep. 62
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