Insurance Law

Insurance Law and Insurance Claims- India

In layman term, Insurance is a mechanism of risk transfer wherein a person’s risk shifts to the insurance company and he receives a cover for financial losses that may arise due to inevitable events. In legal term, Insurance is a legal contract between the insurer (insurance company) and the insured (individual person) wherein the insured is compensated for the financial losses arising out of the unforeseeable events, for which premiums were paid by the insured person.

Types of Insurance

In India, the insurance is classified into:-

  • Life Insurance
  • General Insurance

Life Insurance covers the insured person against the risk of death and health insurance claims. There are various variants under a life insurance policy including whole life insurance plans, unit-linked investment plans, term plans, money back plans, endowment plans, etc.

General Insurance covers the financial losses which are caused by various risks other than the death of a person, such as travel insurance, marine insurance, health insurance, liability insurance, motor insurance, commercial insurance, etc.

Laws governing Insurance

  1. The Insurance Act, 1938
  2. Life Insurance Corporation Act, 1956
  3. Marine Insurance Act, 1963
  4. General Insurance Business (Nationalization) Act, 1972

Insurance Regulatory and Development Authority (IRDA)

IRDA was established under Insurance Regulatory and Development Authority (IRDA) Act, 1999 as an autonomous statutory and apex body in order to regulate and promote insurance sector in the country. IRDA was created upon the recommendations by the report submitted by Malhotra Committee in 1994. IRDA is empowered to frame provisions related to their registration/renewal of licenses & for the smooth working of insurance sector, it reviews its functioning. IRDA is further entrusted with the responsibility to protect the interest of various stakeholders including policyholders in whose name the intermediary & insurance company issues insurance policies. IRDA remains answerable to the appropriate government for its activities even after having empowered to regulate and promote the insurance industry.           

Principles governing Insurance

Principle of Utmost Good Faith

The underlying principle in an insurance contract is that both the parties must act in good faith, i.e. clear and concise information relating to the contract must be furnished by the parties. In the case of LIC vs. Smt. G.M. Channabasamma, the Court has held that an insurance contract casts duty on the insured to disclose all relevant material facts so that the insurer could decide whether to accept or reject the proposal.

Principle of Proximate Cause

This principle also known as the principle of nearest cause or ‘Causa Proxima’. The principle is applicable when two or more causes result in loss and out of the two causes, the insurance company will consider the nearest cause resulting in loss and will accordingly compensate the insured person. In the case of New India Assurance Company Ltd vs. M/S Zuari Indsustries Ltd. & Ors., the Supreme Court opined that insurance claim against damages caused by fire accident is maintainable, even if the fire was only for fraction of seconds.

Principle of Indemnity

Insurance is done for the coverage of losses only; and therefore insured person must not make any gain from the contract of insurance. Hence, insured person is eligible to be compensated only for the amount equal to the actual loss & not beyond that.

Principle of Subrogation

According to the principle, the rights of ownership of the property shifts back to the company (insurer) after the insured person is compensated the amount of actual loss incurred to him w.r.t the property. 

Benefits of Insurance

  1. The most obvious benefit is that it makes good the losses by promoting risk control activity.
  2. By covering various uncertainties in human life, insurance assures peace of mind by providing a sense of security.
  3. Insurance provides various tax benefits and also helps in inculcating saving habits.
  4. Insurance contributes to economic growth of the nation by investing in various projects such as power and water supply, roads etc.     

Insurance Law and Insurance claims in India

Insurance law claims in India refers to a request made to an insurance company by the policyholder for compensation of loss. In course of insurance claim process, the insurance company either accepts or denies the claim. On approval or insurance claim settlement, the insured or any interested party on his behalf shall be issued payment by the insurance company. There are certain conditions under which an insurance claim are rejected such as delay in filing insurance law claim, drugs overdose, death by accident under intoxication, suicide, etc. In the case of Om Prakash vs. Reliance General Insurance, the Supreme Court in relation to a vehicle insurance policy held that mere failure on part of the vehicle owner to immediately inform the insurer about theft of vehicle would not qualify for rejection of a genuine claim.   

The whole purpose of entering into an Insurance Policy or Contract with the Insurer/ Insurance Company is claim of Insurance by the insured on the happening of the unforeseen event or contingency or in simpler term insurance law claims. Hence, the pivotal point of insurance is insurance claim. However, several times, a claim of insurance made by the insured on the happening of the unforeseen event is rejected by the Insurance companies.

Rejection of Insurance claim- Grounds

Some of the most common grounds on which an Insurance company rejects an insurance claim in India are:

  • Lack of Information in the Proposal Form: This is one of the most common grounds on which insurance companies reject a claim. Hence, it should be the primary duty of the insured to disclose all the material facts pertaining to the subject of insurance.
  • Concealment of Information: Whenever, the insured conceals any material information that would otherwise be important for the decision making of the insurer then it would give the insurance company or the insurer, a ground to reject the claim. The foundation of Insurance policies is based on the principle of “uberima fides” i.e. utmost good faith. It literally means that the parties to the insurance contract shall deal in good faith and shall disclose all material facts with reference to the insurance policy in question. The material facts in a policy were defined by the Hon’ble Court in the case of Banarasi Devi v. New India Assurance[1], wherein the Court enumerated that “misstatement or suppression of material facts is in a sense necessary in order to deprive him of the benefit that accrues in his favor under the contract.”
  • Pre-existing Condition: This is especially prevalent in the health insurance or life insurance claims. If there seems to be an existence of any condition present before signing the insurance policy then the same could lead to the rejection of the claim. Moreover, it would also constitute as fraud or deceit. The same was reiterated by the Hon’ble Court in the case of New India Assurance Co. Ltd. vs Shiv Kumar Rupramka.[2]. It is in consonance with Section 45 of Insurance Act, 1938.
  • Delay in Filing the Insurance Claim: It should also be noted that the insurance claims should be filed within the limitation period otherwise it could lead to the rejection of the insurance claim. However, if there is a reasonable ground to believe that there was a justifiable reason for delay then the time period could be waived off. A similar point was upheld by the Hon’ble Court in the case of Om Prakash v. Reliance General Insurance.[3]
  • Negligence in paying premium for the Policy: Lapse in payment of premium amount of the Policy to the insurer is also a ground for rejection of insurance claims. The Supreme Court while emphasizing on the duty of the insured of paying premium in the case of Life Insurance Corporation of India & Anr. v. Dharam Vir Anand[4], laid down the guideline regarding the payment of premium to the insurance company.

[1] AIR 1959 Pat 540.

[2] Appeal No.700/2002.

[3] Civil Appeal no.: 15611 of 2017.

[4] C.A. No. 5063 of 1998 (Arising out of S.L.P. (c) No. 10830 of 1998).

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