1. The Insurance Act, 1938
Act was passed to control the working and activities of the
companies carrying on business of life, fire, marine and
accident insurance.
Apart from the above Act, the Indian insurance business is
governed by the following special Acts.
1. The Life Insurance Corporation Act, 1956
2. The Marine Insurance Act, 1963 and
3. The General Insurance Business (Nationalization) Act 1972

2. Why insurance?
To provide against the risk and insecurity
But, it does not avert or eliminate loss arising from uncertain events
It only spreads the loss over a large number of people
Contract of Insurance
A contract of insurance is a contract by which a person, in
consideration of a sum of money, undertakes to make good the
loss of another against a specified risk e.g. fire or to compensate
him or his estate on happening of a specified event, e.g. accident or
death.

3. Essential elements
1. Insurer and insured
2. Premium : The consideration for which the insurer
undertakes to indemnify the insured against the risk –
may be single or periodical
3. Policy
4. Subject matter of insurance
5. Perils insured against.

4. Kinds of insurance
1. Life insurance
2. Fire insurance
3. Marine insurance
4. Personal accident insurance

5. Nature of the contract of insurance
 The contract of insurance is called an aleatory contract
 At first sight, this would seem to be a wagering
agreement, because insurer betting with the insured that
his house will not be burnt
 But, modern view is that insurance contracts are not
speculative or wagering
 In actual practice, it is a valid contract, because the
insured is only indemnified for his loss and he dose not
gain by the happening of the event insured against.
 Plus he must have an insurable interest in the subject
matter

6.  Contract of insurance is a species of the general
contract
 Comes into existence by the process of offer by insured
to insurer
 Insurer should communicate its acceptance
 Object of insurance must be lawful and consent must be
free and genuine
 Contract must be supported by consideration

7. Differences between insurance and wager
Insurance Wager
Contract of indemnity No question of indemnity
Object is to make good the loss Object is to earn speculative gains
Has pecuniary or insurable No pecuniary or insurable interest
interest
Utmost good faith to be observed Good faith need not be observed
Legally enforceable Void ab initio
Scientific calculation of risk and Mere gamble
premium
Cause varying degrees of loss or Either won or lost
damage

8. Fundamental principles of insurance contracts
1. Utmost good faith
2. Insurable interest
3. Indemnity
4. Causa Proxima
5. Mitigation of loss
6. Risk must attach
7. Doctrine of subrogation
8. Doctrine of contribution
9. Period of insurance

9. Utmost good faith (uberrimae fidei )
 Utmost good faith must be observed by either party – otherwise
 Whole truth must be told about the subject matter
 Fraud, concealment or misrepresentation of the material facts is
fatal to the contract
 Material facts: needed to judge (a) whether he should accept the
risk and (b) what premium he should charge
 Proposer should disclose at the time of making the proposal and
must continue to do so till the negotiations are completed but need
not after the contract
 Principle of caveat emptor is not applicable
 Exceptions:

10. Insurable interest
• Insured must be in a legally recognized relationship to what is
insured so that he will suffer a direct financial loss on the happening
of the event insured ( or benefit from the existence of the subject
matter)
• It is the legal right of the person to insure
• It is not the owner alone, but every person who would suffer direct
financial loss from the destruction
• Existence of insurable interest for different types of insurance
 Life insurance : at the time of insurance
 Fire insurance : both at the of insurance and loss
 Marine insurance : at the time of loss

11. Causa proxima
 Insurer is liable only for those losses which have been proximately
caused by the peril insured against
 Maxim is : Causa Proxima Non remota Spectatur ( the proximate
or immediate and not the remote cause is to be looked to)
 The question, which is the causa proxima of a loss arises only
when there is a succession of causes
 When a loss has been brought about by two or more causes, one
has to look to the nearest cause, although the loss would no doubt
not have happened without the remote or other causes
 Commonsense is to be used
 Loss if brought about by a cause attributable to the misconduct of
the insured - insurer is not liable
 Cases: read out

12. Risk must attach
 The insurer receives the premium for running a certain
risk
 If risk is not run, the consideration for which the
premium was given fails
 Then, insurer must return the premium
 The premium is also to be returned even where the risk
is not run or could not be run due to the fault, will or
pleasure of the insured

13. Mitigation of loss
 The insured must take all necessary steps for the
purpose of averting or minimizing loss
 He must act as an uninsured prudent person
 If insured dose not do so, the insurer can avoid the
payment of loss attributable to his negligence
 He is not bound to do so at the risk of his life

14. Doctrine of contribution
No person is prevented from effecting two or more insurances in respect of the same
subject matter
But, in case of there is a loss or damage the insured will have no right to recover more
than the full amount of his actual loss
To apply principle between two or more companies :
1. There are different policies which relate to the same subject matter
2. The event insured must be the same
3. The insured must be the same
4. All the policies are in force at the time of loss
5. One of the insurer has paid to the insured more than his share of loss
In case of loss, any one insurer may pay and he is entitled to contribution from
coinsurers
In proportion to the amount which each has undertaken to pay in case of loss

15. A insures his house against fir for Rs. 10000/ with insurer
X and
For Rs.20000 with insurer Y
A loss of Rs.12000
X is liable for Rs.4000/ and Y for Rs.8000/
Formula:
Sum insured with an individual insurer
X 100
Total sum insured

16. Doctrine of subrogation
 Applies only to fire and marine insurances
 The insurer, on making good the loss, is entitled to be
put into the place of insured
 So, whenever an insured has received full indemnity in
respect of his loss, all rights and remedies which he has
against the third persons must be held and exercised for
the benefit of the insurer.

17.  Limitations:
1. The insurer is subrogated to only the rights and
remedies available to the insured in respect of the
thing
2. The insurer’s right of subrogation arises only when he
pays the loss for which he is liable under policy
3. The insurer is not entitled to the benefit of what is
recovered until the insured has recovered a full
indemnity

18. Period of insurance : period or time for which the insurance contract
has been entered into
 Life insurance
 Fire insurance
 Marine insurance
Premium
 The consideration paid by the insured to the insurer for the risk
undertaken by the latter
 Determined by taking into : average of losses, total premium he
receives, overhead and other expenses and profit

19. Illustration
 Suppose there are 10,000 houses in a locality
 Owners of 8000 of them decide to get their houses insured
 Experience shows ( and sometime on the basis of probability
models) : every year average 2 houses catch fire
 Each house is valued at Rs. 2,00,000 – So average loss Rs.
4,00,000
 Assume premium of Rs.100/ per house
 So, total premium Rs.8,00,000
 Now, Rs. 8,00,000 – Rs. 4,00,000 = Rs. 4,00,000
 Deduct overhead expenses and left with profit
In case of fire and marine on similar considerations but in life :
mortality rate

20. Return of premium
1. Where the consideration for the premium has totally
failed
2. Where the policy is void ab initio
3. Where the assured has no insurable interest
4. Where the assured bona fide over-insures

21. Re-insurance
Insuring the same risk either wholly or partially with other
insurers to safeguard his own interest
The re-insurer is not liable to the insured
The policy of re-insurance is co-extensive with the original
policy
All principles are applicable between original insurer and
re-insurer

22. Double insurance
Where the insured insures the same risk with two or more
independent insurers
Over-insurance
Where the insured insures the same risk with two or more
independent insurers and the total sum insured exceeds
the value of the subject matter
If no express contract, both are valid

23. Rules applicable
1. Recovery of actual loss
2. Excess amount recovered to be held in trust
3. Liability of insurers – contribution
4. No limit on life insurances

24. Life insurance
The contracts are governed by:
1.The insurance Act, 1938
2.The Life Insurance Corporation Act, 1956
Contract of life insurance:
A contract by which the insurer, in consideration of the
payment