This article has been written by Shivani Chopra pursuing a Diploma in International Contract Negotiation, Drafting and Enforcement from LawSikho.

 This article has been edited and published by Shashwat Kaushik.

Introduction

This article deep dives into the need for insurance in indemnity in India. The focus is on the need for comprehensive coverage while examining the relevant legal regulations, including those specified in the Indian Contract Act, 1872, that govern the insurance industry.

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What is insurance

Insurance shields individuals from unexpected circumstances, thereby achieving financial stability.

In common parlance,

  • Insurance is a contract named a “policy” under which the insurance company, namely the “insurer,” indemnifies another, namely the “insured,” against losses from specific contingencies or perils.
  • The most common forms of insurance policies are life, medical or health, homeowners, vehicle/ auto, and liability.
  • The main components of most insurance policies are: premium, deductible, and policy limits

Insurance is a way to protect you against unexpected financial losses by managing your risks in the event of an unforeseen, damaging event. The insurance company pays you or someone you choose when the said event occurs. In the absence of insurance, if there is a harmful accident, the entire cost will have to be borne by you, leading to an inadvertent impact on your finances. 

Given the high potential exposure to risks, the concept of indemnity in insurance has significant importance in a growing economy like India. Indemnity in Insurance helps as it provides financial coverage to individuals or legal entities, acting as a means to make good and reduce the impact of financial damage. 

A contract of insurance is more general and secured where the liability covered is broader to provide for an extensive array of causes of action, compared to indemnity contracts where liability is limited to only pre-agreed causes of action. The Insurance Regulatory and Development Authority of India (IRDAI) has emphasised the need for transparent communication in insurance. Simplifying policy documentation and enhancing communication can contribute to better understanding and trust among policyholders.

Types of insurance policies in India

There are various types of insurance policies available in India to cater for different needs and risks. Some of the most common types of insurance policies include:

Life insurance

  • Term  insurance: Provides coverage for a specified term, and pays out a death benefit if the policyholder passes away during the term.
  • Whole life insurance: Offers coverage for the entire life of the insured and includes a cash value component.

Health insurance

  • Mediclaim: Covers medical expenses incurred due to illness, accidents, or hospitalisation.
  • Critical Illness Insurance: Pays a lump sum if the insured is diagnosed with a critical illness specified in the policy.

Motor insurance:

  • Third-party insurance: Mandatory by law, it covers liability for injury or damage caused to a third party.
  • Comprehensive insurance: Provides coverage for damages to the insured vehicle and third-party liability.

Home insurance

  • Property insurance: Covers damage or loss to the structure of the insured property.
  • Contents insurance: Protects the contents of the insured property against theft or damage.

Travel insurance:

  • Domestic travel insurance: Covers unexpected events during domestic travel.
  • International travel insurance: Provides coverage for medical emergencies, trip cancellations, and other unforeseen events during international travel.

Business insurance

  • Commercial property insurance: Protects business properties from damage.
  • Liability insurance: Covers legal liabilities arising from business activities.

Crop insurance

  • Provides coverage to farmers against the loss of crops due to natural disasters, pests, or diseases.

Personal accident insurance

  • Offers coverage for accidental injuries, disability, or death.

Professional indemnity insurance

  • Protects professionals (like doctors, lawyers, and architects) against legal liabilities arising from professional services.

Marine insurance:

  • Covers goods in transit against risks such as damage, theft, or loss during transportation.
  • While the above are a few examples, the insurance landscape in India continues to evolve with new products catering to diverse needs. This allows individuals and businesses to choose policies based on their specific requirements and risk profiles.

Need for transparent communication in insurance

To ensure there is a better understanding and trust among policyholders, it is essential to have transparent communication in insurance. This can be achieved in several ways:

  • Clear policy terms: Transparent communication ensures that policy documents and terms are presented clearly and understandably. This helps policyholders comprehend the coverage, exclusions, and limitations of their insurance policies.
  • Disclosure of information: Insurance companies should transparently communicate the information required from policyholders during the application process. This includes providing accurate details about the insured property, health condition, or any other relevant information.
  • Claim process explanation: Clearly outlining the claims process and requirements helps policyholders understand what to do in the event of a loss. Transparent communication about the documentation needed for claim processing can avoid misunderstandings and delays.
  • Premium structure: Policyholders should have a clear understanding of how premiums are calculated. Transparent communication about the factors influencing premium rates, such as coverage amount, risk factors, and deductibles, helps in building trust. 
  • Updates on changes: Informing policyholders about any changes in policy terms, coverage, or premium rates promptly is crucial. Transparent communication about such changes helps policyholders make informed decisions about their coverage. 
  • Risk education: Providing educational materials on potential risks and preventive measures can enhance policyholders’ understanding of the risks they are insured against. This proactive communication fosters a sense of security and trust. 
  • Customer service communication: Responsive and transparent communication from customer service representatives can address policyholders’ queries and concerns promptly. This builds confidence and trust in the insurer’s commitment to customer satisfaction. 
  • Regulatory compliance: Transparent communication about compliance with regulatory requirements ensures that policyholders are aware of the legal framework governing insurance practices. This transparency builds credibility for the insurer.
  • Feedback mechanism: Establishing a feedback mechanism where policyholders can express their opinions and concerns promotes transparency. Insurers can use this feedback to enhance their services and address any issues that may arise. 
  • Digital platforms and tools: Utilising digital platforms for policy management, updates, and communication can enhance transparency. Providing policyholders with easy access to their policy information contributes to a better understanding of their coverage.

Overall, transparent communication builds a foundation of trust between insurers and policyholders, fostering a positive relationship that is essential for the long-term success of the insurance industry.

Indian legal framework

The Insurance Act, 1938, primarily focuses on the regulation and conduct of insurance business in India. However, force majeure conditions, which typically refer to unforeseen circumstances that prevent the fulfilment of a contract, may not be explicitly addressed in the Insurance Act itself.

It’s important to note that force majeure clauses and their application are often contract-specific and may be explicitly mentioned in insurance policies or contracts between the insurer and the insured. These clauses can vary based on the terms negotiated between the parties.

The Indian Contract Act, 1872 (‘Act’) provides for the legal landscape that governs insurance contracts in India. It is important to understand and note the relevant sections and abstract provisions of the Indian Contract Act, 1872, to the insurance policy given below, as they establish the validity and enforceability of contracts in India.

Section 10 – Valid contract: As per this Section, a contract is valid when it has the free consent of the parties, lawful consideration, lawful object, and capacity to contract. Insurance contracts, being agreements between two parties, must adhere to these essential elements. 

Section 12 – Who can contract:  As per this Section, the parties entering into a contract should be any individual who has attained the age of majority, possesses a sound mind, and is not disqualified from entering into a contract as per any law governing such individual. This Section is significant in the context of individuals entering into insurance contracts.

Section 23 – Consideration an essential element: As per this Section, for an agreement to be enforceable by law, the object and consideration must be lawful. In insurance contracts, the premium paid by the insured is the consideration for the promise of indemnity by the insurer. 

Section 32 – Contingent Contracts: As per this Section, parties to a contract are allowed to stipulate that a contract will become void or voidable on the happening or non-happening of a specified event. In insurance, where coverage is contingent on specific events, this Section becomes relevant.

Section 56 – Agreement to do impossible acts: As per this Section, the agreements to do impossible acts are rendered void. In insurance, policies must have feasible and legal objectives and any clause that renders the insurance contract impossible or unlawful may be rendered void under this Section.

Section 124 – defines the contract of indemnity: As per this Section, a narrow interpretation is given to insurance contracts. As per the definition, a contract of indemnity arises only out of any loss suffered by the indemnified due to any fault either caused by the indemnifier himself or due to the act of a third party. Any other form of loss caused by human conduct is not recognized. 

Force majeure events such as natural calamities, fire, earthquakes, etc. are therefore excluded from the indemnity clauses as per the Indian Contract Act, 1872, as this kind of loss is not due to human misconduct. The Insurance Act, 1938, has laid down separate provisions for the rights and duties of the parties under force majeure conditions.

Indian Courts have stated that insurance contracts should be addressed through separate legislation rather than being covered under indemnity. Hence, insurance contracts are not categorised under indemnity contracts and, therefore, are not governed by the Indian Contract Act. Especially marine accidents which are considered incidents caused by non-human entities and therefore are treated separately under marine insurance rather than indemnity.

Case laws

A few important case laws: where courts have established that remedy for a non-human act is as per the terms and conditions of the insurance contract and not by way of the indemnity clause in the Indian Contract Act, 1872.

United India Insurance Co. vs. M/s. Aman Singh Munshilal – Act of fire

In this case, the goods were destroyed due to a fire in the godown where they were stored on the way to the destination. The insurance cover note stipulated delivery to the consignor. It was held that the goods were destroyed during transit, and the insurer company was liable to make up the loss as per the insurance contract. The damage to goods was due to a non-human act via the fire in the godown and not to the plaintiff’s acts. Hence for a non-human act, the remedy was the insurance contract under which the goods were insured, not the indemnity clause in the Indian Contract Act, 1872.

Gajanan Moreshwar Parelkar vs. Moreshwar Madan Mantri

In this case, the Bombay High Court has confirmed that – The definition covers indemnification for losses attributable solely to human actions. It does not cover scenarios where indemnity arises from losses resulting from events or accidents independent of the conduct of the indemnifier or any other individual, or due to liability incurred by actions carried out by the indemnified at the request of the indemnifier. 

Under Section 124 of the Indian Contract Act, 1872, indemnity is only for any losses that occur for an act of the insurance provider or any other third party. The indemnifier cannot be held liable for any act that falls outside the scope of this provision. In such cases, where the cause of damage is non-human, the court shall order the insurance provider to pay such an amount as agreed in the policy contract. The Courts shall only approve the claims that are as per agreed instances in the contract; thereby, the indemnity-holder cannot extract an indemnity sum to make a profit but is limited only to acts that are agreed in the contract. To make it a valid indemnity claim, the act of the indemnifier or the third party must have a nexus with the loss suffered. In the event that the act is in no way connected to the damage, the concept of the remoteness of damages shall not hold the indemnifier responsible.

Section 125: defines the rights of the indemnity-holder when sued: As per this Section, when acting within the scope of his authority as per the contract of indemnity, the promisor agrees to indemnify the promisee for:

  • for any damages as required to pay in any legal proceeding related to any matter that is covered by the indemnity promise;
  • for all costs that may be required under any such legal action if, in initiating or defending the action, the promisee did not violate the promisor’s orders and acted as it would have been prudent in the absence of any indemnity agreement, including the case where the promisor expressly authorised the promisee to initiate or defend the legal action.
  • any amounts paid by the promisee under the terms of a settlement in any such legal action, if the compromise was as per the orders and aligned with the promisor’s directives, and it was a reasonable decision for the promisee to make in the absence of any indemnity agreement or if the promisor has expressly authorized the promise to settle the lawsuit.

The liability for the indemnifier, whether implied or express, will be limited to the extent as stated and agreed in the contract. The essence of prior knowledge is crucial in a contract of indemnity, relating to the potential repercussions and losses that the promisee might encounter in a specific indemnity agreement. The promisor willingly accepts responsibility for the losses with this awareness. Therefore, this clause stipulates that the indemnity holder can seek damages from the indemnifier only up to the extent defined in the indemnity contract as mutually agreed upon by the parties.

In the case of insurance, at the time of entering into the policy contract, it is very difficult to estimate the quantum of any loss that occurs to the insured property, the events under which such loss will be indemnified, etc. The loss may depend on numerous internal and external factors/circumstances which can make the insurer liable. However, the insurance company investigates to determine whether the accident occurred due to a legitimate cause or if it was fabricated solely to extort money from the insurance company. The insurance value is paid for any sort of accident, which may include human conduct such as fire or any force majeure such as an earthquake affecting the insured property, if and only once the survey is found satisfactory. The insurer has to pay, even though prior knowledge is absent for any possible damage. The policyholder and the insurer may be unaware of the potential damages that could come to the insured property. The loss might have a distant connection to the case, and there was no foreseeable way for either the insurance company or the policyholder to anticipate such a misfortune. Nevertheless, the insurance company is obligated to make the payment.

The amount of indemnity increases manifold when it arises from natural causes, as these are more severe as compared to acts of human misconduct. Instead of restricting insurance contract conditions to align with the requirements of indemnity under the Indian Contract Act, it is suggested that the indemnity clause itself should be broadened. This expansion should encompass a wide range of accidents, including those caused by non-human conduct, such as natural disasters. Further, under Section 125(1), the scope of liability should not solely be confined to pre-agreed conditions but should extend to any conceivable form of accident or loss to the promisee. The inclusion of remote, natural causes of accidents within the indemnity framework would entail the indemnifier paying substantial amounts to compensate for losses that prudently could not have been foreseen. While it may seem unjust to impose such substantial payments for remote accidents, it is worth noting that insurance companies regularly collect premiums from all their clients and possess substantial resources to compensate a policyholder who has incurred significant losses. Thus, an insurance company can compensate for the substantial losses suffered by a policyholder.

Insurance laws in India

Insurance laws in India are a complex and ever-evolving landscape. The Insurance Regulatory and Development Authority of India (IRDAI) is the apex body responsible for regulating the insurance sector in India. The IRDAI is responsible for issuing licences to insurance companies, regulating their operations, and protecting the interests of policyholders. The Insurance Act, 1938, is the primary legislation governing insurance in India. The Act provides for the establishment of the IRDAI, and it also sets out the powers and functions of the IRDAI. The IRDAI has issued a number of regulations and circulars under the Insurance Act that provide further guidance on the conduct of insurance business in India.

The insurance sector in India is divided into two main segments: life insurance and general insurance. Life insurance companies provide policies that cover the risk of death or disability. General insurance companies provide policies that cover a variety of risks, such as fire, theft, and motor accidents.

The insurance sector in India has grown rapidly in recent years. The total premium income of the insurance sector increased from Rs. 3.3 trillion in 2009-10 to Rs. 13.2 trillion in 2019-20. The life insurance segment accounted for 70% of the total premium income in 2019-20, while the general insurance segment accounted for the remaining 30%.

The insurance sector in India is expected to continue to grow in the coming years. The growing middle class and increasing awareness of insurance are expected to drive the growth of the insurance sector. The IRDAI is also taking steps to promote the growth of the insurance sector, such as by launching new products and services and simplifying the insurance regulations.

Here are some key features of the insurance laws in India:

  • The Insurance Act, 1938: The Insurance Act, 1938, is the primary legislation governing insurance in India. The Act provides for the establishment of the IRDAI, and it also sets out the powers and functions of the IRDAI.
  • The IRDAI: The IRDAI is the apex body responsible for regulating the insurance sector in India. The IRDAI is responsible for issuing licences to insurance companies, regulating their operations, and protecting the interests of policyholders.
  • Life insurance: Life insurance companies provide policies that cover the risk of death or disability.
  • General insurance: General insurance companies provide policies that cover a variety of risks, such as fire, theft, and motor accidents.
  • The growing insurance sector: The insurance sector in India has grown rapidly in recent years. The total premium income of the insurance sector increased from Rs. 3.3 trillion in 2009-10 to Rs. 13.2 trillion in 2019-20.
  • The future of insurance in India: The insurance sector in India is expected to continue to grow in the coming years. The growing middle class and the increasing awareness of insurance are expected to drive the growth of the insurance sector. The IRDAI is also taking steps to promote the growth of the insurance sector, such as by launching new products and services and simplifying the insurance regulations.

Important sections of the Insurance Act of 1938

The Insurance Act of 1938 was a landmark piece of legislation in the history of insurance in India. It was enacted by the British colonial government and aimed to regulate the insurance industry and protect the interests of policyholders. The act has undergone several amendments over the years, but its core principles remain the same.

One of the most important sections of the Insurance Act of 1938 is Section 4, which deals with the registration of insurance companies. This section requires all insurance companies operating in India to be registered with the Insurance Regulatory and Development Authority of India (IRDAI). The IRDAI is the regulatory body for the insurance industry in India and is responsible for ensuring that insurance companies comply with the provisions of the Insurance Act.

Another important section of the Insurance Act of 1938 is Section 18, which deals with the solvency margin of insurance companies. This section requires insurance companies to maintain a certain level of solvency, which is a measure of their financial strength. The solvency margin is calculated as a percentage of the insurance company’s liabilities and is used to ensure that insurance companies have sufficient financial resources to meet their obligations to policyholders.

Section 28 of the Insurance Act of 1938 deals with the investment of insurance funds. This section restricts the investment of insurance funds in certain types of assets, such as real estate and equity shares. The purpose of this section is to protect the interests of policyholders by ensuring that their funds are invested in safe and secure assets.

Section 41 of the Insurance Act of 1938 deals with the settlement of insurance claims. This section requires insurance companies to settle insurance claims within a reasonable period of time. It also provides for the appointment of an ombudsman to resolve disputes between insurance companies and policyholders.

The Insurance Act of 1938 has played a vital role in the development of the insurance industry in India. It has helped to protect the interests of policyholders and has ensured that insurance companies are financially sound. The act has also been instrumental in promoting the growth of the insurance industry in India, which has become one of the largest insurance markets in the world.

Types of indemnity in insurance

There are mainly three forms of indemnities:

Sr. NoType of indemnityDetails
1.Express The indemnity terms and conditions are expressly stated and written in a contract that provides protection. As this follows the fundamentals of a contract, this is the most commonly used form of indemnity.
2.Implied-in-factThis type of contract is based on the parties’ relationship, conduct, and intent to establish an indemnitor/indemnitee dynamic within the binding agreement.
3.Implied-in-lawThis is based on equitable principles of law and is claimed in cases of tort, such as negligence, and cannot be sought for breach of contract.The indemnitee must have imputed or derivative liability for the tortious conduct for which indemnity is sought. In cases where there is an express written contract, this indemnity cannot be invoked.If a court determines there to be indemnity implied-in-law, a passive tortfeasor will be required to pay the judgement owed by an active tortfeasor, to the injured party.

Suggestions

In its 13th report on the Indian Contract Act, 1872, the Law Commission of India has recommended expanding the understanding of indemnity to include within its horizon insurance contracts as any other contracts; given both have the same essence, i.e., to make good the loss. The recommendation is to include insurance contracts within the purview of indemnity, considering that both types of contracts share the fundamental purpose of compensating for losses suffered by another party. The commission argues that holding the indemnifier liable for unforeseen damages would be unjust, and it suggests that any modifications to the indemnity clause under the Indian Contract Act, 1872 should take this into account. There will be a large number of cases of non-payment by the indemnifiers leading to an increase in lawsuits in the Court. There will be more harm to the aggrieved as he will face hindrances in obtaining payment. In contracts, the indemnifier is typically an individual who can only be held responsible for the liability explicitly or implicitly promised or agreed upon. It is argued that indemnifiers should not be held accountable for accidents stemming from natural causes or remote acts. However, the perspective shifts when dealing with insurance companies, which, due to their greater financial capacity, can be made liable for a broader range of losses. This aligns with the goal of social welfare legislation, aiming to provide swift and effective remedies to those who have suffered harm. Insurance companies operate based on receiving premiums equivalent to the liability they undertake. As a result, their liability is limited to the premiums deposited and the scope of the insurance policy. The company assumes liability only in proportion to the premiums paid by the policyholder, ensuring that their consideration is adequately protected. Unlike an individual, an insurance company is not unjustly burdened with paying for remote damages without proper consideration. The argument therefore suggests that expecting an individual to bear such remote losses would be an unjust imposition, while an insurance company, operating within its defined liability and consideration, does not face such unjust payments. To align with the requirements of the Indian Contract Act, 1872, the scope of liability should be narrowed down. Hence it is suggested to govern insurance contracts through separate legislations rather than incorporating them within the framework of indemnity. The concern raised is that if insurance is treated like to indemnity, the policyholder may lack protection against unforeseen and remote accidents that were not foreseeable at the time of contract formation. The proposal emphasizes the importance of maintaining a broader scope to cover such unexpected events in insurance contracts for the safeguard of policyholders. Hence, considering the nature of Indian laws that are based on equality and welfare, to preserve the interests of the public and to ensure a wider scope, the insurance legislation should only govern such contracts.

Conclusion

The law in India has always taken a wider interpretation when it comes to fundamental rights and social benefits. In India, it has been upright and balanced, with no prejudice, to issue a harsher verdict upon the defaulters only to appease the aggrieved. The Indian Judiciary has always punished only to the extent of wrongs committed. The foundational principles of Indian legislation are rooted in laws that uphold the morals and integrity of society. Particularly, social welfare legislation has emerged to enhance the quality of life for the people of India since the colonial era. These laws are designed with the primary aim of benefiting society as a whole, reflecting a commitment to the well-being and progress of the community.

References

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