ALL YOU NEED TO KNOW ABOUT INSURANCE

CONTRACT LAW
 Introduction
 Definition of an insurance contract
 Formation of insurance contracts
o Agreement
o Lawful consideration
o Free consent
o Competency of the parties
o Lawful object
 Principles of insurance contracts
o Principle of Insurable Interest
o Principle of utmost good faith
o Principle of indemnity
o Principle of proximate cause
o Principle of subrogation
o Principle of loss minimization
o Principle of contribution
 Process of settlement of insurance claim
 Reasons for rejection of insurance claim
o Inadequate disclosure
o Delay in filing an insurance claim
o Delay in paying a premium
o Pre-existing condition
o Concealment of information
 Conclusion

Introduction
Life is a chain of uncertain events that can never be predicted. One moment
we are very happy and balling around with our friends, and in another, we
may face the worst fears of our lives. Let me support my statement with an
example, suppose you’re going to a nightclub with your friends, you’re very
excited, and suddenly your car meets with an accident. You’ll obviously get
very dejected. This is what I meant when I said life is unpredictable. This
makes it necessary to take precautions against suffering losses due to such
occurrences. This is what the concept of insurance is based on.

Definition of an insurance contract

An insurance contract is an agreement between the insurer, i.e., the
insurance company, and the insured, i.e., the policyholder, in which the
insurer agrees to compensate the insured for any future loss suffered by
him, and he does so by accepting a premium. In India, insurance contracts
are governed by the Insurance Act of 1938 and other rules and regulations
issued by the Insurance Regulatory and Development Authority of
India (IRDAI).

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Formation of insurance contracts
As for the formation of contracts, the contract has to fulfil the criteria laid
down in Section 10 of the Indian Contract Act of 1872. In a similar way,
insurance contracts also have to meet the essential criteria mentioned in
Section 10 of the Indian Contract Act of 1872, which are as follows:

Agreement

An agreement is when one party makes an offer to another party and the
other party accepts that offer unconditionally, which forms the basis of
consideration for each other.

Agreement= offer+acceptance+consideration

In an insurance contract, when an offeror makes an offer to the insurer that

he desires to take an insurance policy from the insurer and is ready to pay
the premium, the insurer accepts that offer, and the acceptance of the offer
is communicated to the offeror. The insurance agreement is then formed
between the parties.

Lawful consideration

Section 2(d) of the ICA defines consideration. In an insurance contract, the

insured pays consideration to the insurer in the form of a premium for the
insurance, and the insurer pays consideration by indemnifying the insured.
So from this, it can be concluded that the consideration should come from
each contracting party; though the form may be different.

Free consent

Section 13 of the ICA defines consent as when two or more persons agree
upon the same thing in the same sense, then it is said that they have
consented. Consent is said to be free consent when it is not caused by
coercion, fraud, mistake, or misrepresentation.

Competency of the parties

Section 11 of the ICA states that the parties who have attained majority, i.e.,
18 years, the person of sound mind who can understand the consequences
of entering into a contract, and the person who is not disqualified by any
law to enter into a contract, are said to be competent persons to enter into a
contract.

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Lawful object

An agreement whose object is unlawful is void. Section 23 of the ICA states

that an object is lawful unless:

1. The law prohibits it;

2. It is fraudulent;
3. Invalidates any other law;
4. Causes injury to a person or property; or
5. It is contrary to public policy or is considered immoral.
The insurance contract should be for lawful objects and not for unlawful
objects. Let us understand this with an example: a person taking life
insurance for himself or his family members is lawful. Still, if he takes the
life insurance policy for an unknown person, then it will be invalid and the
insurance contract will be void as it will amount to gambling. Similarly,
insurance on the stolen property would also be void.

Principles of insurance contracts

The following are the fundamental principles of an insurance contract:

Principle of Insurable Interest

The individual must have an insurable interest in the subject matter on

which insurance is taken. In other words, the individual must have a
monetary gain from the subject matter or suffer a loss if the subject matter
is damaged or destroyed.

Illustration: A father can purchase health insurance for his son because
the father will suffer a loss if his son gets sick.

Principle of utmost good faith

The parties to the insurance contract must act in good faith with each other,
and the parties must not hide any facts that are related to the insurance
policy. The insured must disclose each fact that affects the risk of the policy
to the insurer, and the insurer must also explain the terms and conditions
of the insurance policy clearly to the insured.

Illustration: Rahul purchased health insurance. But while taking the

insurance policy, he didn’t disclose that he was a habitual drinker, and later
on, he got cancer. The insurance company will not be liable to indemnify

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Rahul as Rahul didn’t act in good faith, and the policy can also be
cancelled.

Principle of indemnity

The main purpose of the principle of indemnity is to put the insured in the
same financial position as before the loss occurred. The insurer is liable to
pay the amount of loss suffered by the insured and not more than that
because the purpose of insurance is not to make a profit but only to
compensate for the loss that occurred. This principle does not apply to life
insurance contracts, as it is believed that a person’s life cannot be valued.

Illustration: Rahul purchased an insurance policy that covers accidental

damage to his car up to Rs. 1,00,000, and later on he met with an accident
and his car was damaged. The expense for repairing his car is Rs. 60,000;
the insurance company will be liable to pay only Rs. 60,000 and not Rs.
1,00,000.

Principle of proximate cause

Proximate cause is also known as the “Principle of Causa Proxima,” which

means the nearest cause. This principle will apply only if the loss is caused
by more than one reason. The insurer will be liable to indemnify the insured
only if the nearest cause of the loss is insured.

Illustration: A ship was first punctured by rats, due to which sea water
entered the ship and the ship was damaged. In this case, the ship was
damaged for two reasons: firstly, rats punctured the ship, and secondly,
seawater entered the ship. In the insurance policy, risk due to seawater was
covered, and not for the first reason that the insurance company will be
liable to indemnify the insured as seawater is the nearest cause of the ship’s
damage.

Principle of subrogation

The term subrogation means substituting one person in place of another for
obtaining rights, claims, remedies, and securities.

This principle is applicable if the loss is caused by a third party.

In an insurance contract, if the insured incurs loss on the insured property

due to a mistake of the third party, then the insurer, after compensating the
insured for the loss incurred by him, gets the right to recover the loss from
the third party.

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The principle of subrogation doesn’t apply in the case of a life insurance
contract.

Illustration: Rahul’s goods were carried from Mumbai to Delhi by XYZ

transport services, but due to the negligence of the driver, the goods got
damaged and incurred a loss of Rs. 5,000. The insurance company pays Rs.
5,000 to Rahul. The insurance company can collect Rs. 5,000 from XYZ
transport services.

Principle of loss minimization

The insured must take all necessary steps to minimise the loss of the
insured subject matter when it occurs. The insured must take all
precautions to avoid the loss, even after the subject matter is insured. This
principle doesn’t allow the insured to be negligent about the insured subject
matter.

Illustration: Rahul has an insurance policy on his car that also covers fire
damage. Later on, his car caught fire. At that time, Rahul cannot sit idle and
see his car burning; he must take the necessary steps to stop the fire.

Principle of contribution

There is a corollary relationship between the principle of contribution and

indemnity. This principle applies when the insured has taken out more than
one insurance policy on the same subject matter from different insurers.
According to this principle, the insured can claim compensation only for the
extent of the loss incurred, either from all the insurers or any one insurer.

In the event that the insured claims full compensation from one insurer and
that insurer pays full compensation to the insured, then that insurer can
claim proportionate claims from other insurers.

Illustration: Rahul has a car worth Rs. 3,00,000. He took insurance from
Company ABC worth Rs. 3,00,000 and from Company XYZ worth Rs.
50,000.

Illustration 2: Rahul incurred a loss of Rs. 3,00,000 on the car. Rahul can
claim Rs. 3,00,000 from ABC, but after that, he can’t make a profit by
claiming compensation from Company XYZ. Now Company ABC can make a
claim from Company XYZ for proportional loss claim value.

Process of settlement of insurance claim

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The general procedure for the settlement of an insurance claim with an
insurance company is as follows:

1. File a claim with your insurance company as soon as the loss occurs
or within the permissible time prescribed in the insurance policy.
2. The insurance company, after receiving your claim, may appoint a
surveyor to do an investigation and determine the loss or damage that
occurred to the insured property and the reason for the loss. the
surveyor shall be appointed within 72 hours of receipt of the
information.
3. An insured must provide complete information to the surveyor; non-
cooperation may lead to a delay in the evaluation of a claim
4. After evaluating the claim, the surveyor has to submit a survey report
to the insurer.
5. Upon receiving the survey report, if the insurance company accepts
the claim, then the insurance company has to make an offer of
settlement of the claim within 30 days of the receipt of the survey
report to the insured, and if the insurance company rejects the claim,
then they should inform the insured within 30 days of the receipt of
the survey report.
6. If the insured accepts the offer of settlement, then the insurer shall
reimburse the accepted amount within 7 days of receipt of the
acceptance of the offer.

Reasons for rejection of insurance claim

The following are the main reasons for the rejection of the insurance
claim:

Inadequate disclosure

It is the responsibility of the policyholder to provide accurate and correct

information to the insurer about the insured property or individual. One of
the important principles of an insurance contract is the utmost good faith.
Where an insured believes that the insurer will indemnify him in time of
need, whereas the insurer believes that all the information provided by the
insured is true and correct. If the insurer finds that the insured withheld or
misrepresented material information, he may reject the claim that the
insured generally doesn’t disclose material information to reduce the
premium. The lack of information includes the non-disclosure of past
medical conditions, previous accidents, or other relevant information.

Delay in filing an insurance claim

Unless the insured files the claim within the time limit specified in the
insurance contract, the insurer may reject the claim. A time limit is set to

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file the insurance claim so that the insurer can properly investigate the
cause of the loss and come to an accurate conclusion about the loss. In Om
Prakash vs. Reliance General Insurance (2017), the Supreme Court held that
if there is reasonable ground for the delay in filing the claim, then the delay
can be excused.

Delay in paying a premium

One of the most common reasons for rejecting an insurance claim is a delay
in paying the premium. The insurer indemnifies the insured only for the
active policy. Imagine that the insured filed the claim when the policy was
inactive due to non-payment. In that case, an insurer may reject the claim
because the contract between the insurer and the insured was not in force
at the time of the claim and coverage was not provided during that period. If
you fail to pay the premium on the due date or within the grace period
provided, the insurer may consider your policy lapsed or inactive.

Pre-existing condition

This is mostly applicable in cases of health or medical insurance. According

to this rule, a person must inform the insurer of any pre-existing medical
condition that he may be suffering from. Concealment of such information
may lead to the termination of the insurance, and it would also amount to
fraud.

Concealment of information

This is one of the most common grounds for rejecting claims. A person who’s
insuring himself or something else must give all the information about such
a thing or person to the insurance company and should not conceal
anything from them. Concealment or hiding of information may lead to the
rejection of the claim. In the case of Benarasi Debi vs. New India Assurance
Co. Ltd. (1959), the Patna High Court held that “misstatement or
suppression of material facts is in a sense necessary in order to deprive him
of the benefit that accrues in his favour under the contract.”

Conclusion
It is important to carefully understand your insurance contract to ensure
proper coverage and avoid rejection of a claim. Taking time to review the
insurance contract helps you make smart choices and safeguard your
assets. Since these are standardised contracts, these policies are commonly
non-negotiable and people have a vast array of policies and insurance
providers to choose from that best suit their needs.

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