This article is written by Adv. Priscilla Rodrigues who is pursuing a Certificate Course in Advanced Civil Litigation: Practice, Procedure and Drafting from LawSikho.

Insurance

Insurance is a means of protection from financial loss. It is a form of risk management, primarily used to hedge against the risk of a contingent or uncertain loss. An entity which provides insurance is known as an insurer, insurance company, insurance carrier.

An individual or company that purchases insurance is known as an insured person or a policyholder. The insurance agreement entails the insured accepting a relatively small guaranteed and documented loss in the form of payment to the insurer in return for the insurer’s promise to compensate the insured in the event of a covered loss. The loss may or may not be material, but it must be reducible to financial terms, and usually involves something in which the insured has an insurable interest held by property, possession, or pre-existing relationship. 

The insured person receives a document, called the insurance policy, detailing the terms and situations under which the insurer must pay the insured. The amount of money paid to the policyholder by the insurer for the coverage provided for in the insurance policy is called the premium. If the insured suffers a loss theoretically covered by the insurance policy, the insured submits a claim by a claims adjuster to the insurer for processing. Through taking out reinsurance, the insurer may hedge its own risk, whereby another insurance company decides to cover some of the risk, particularly if the primary insurer finds the risk too big for it to bear.

Life Insurance

Life insurance is a scheme that allows man to schedule income continuity if death, injury, or old age threatens his ability to earn a living. Life insurance in its general sense is used to cover all forms of insurance designed to protect against income loss resulting from incapacity to work, whether this is caused by suicide, accidental injury, disability or old age. Life insurance in its specific meaning means compensation only in the event of death.

To move through life without deprivation, every person has to have a constant flow of income from cradle to grave.

Life insurance deals with the ideals of human life. Far too many people tend to think only in terms of measurable economic values: real estate, machinery, inventories. We don’t consider the immense value of human life’s earning power. The life insurance premium is calculated according to the monetary value of the life.

Man represents great value within himself that creates all usefulness in tangible property. Everything we have in this world comes from man. But life-value is the fundamental value. Human life has so much of a financial value. Ideas and resources in our lives make money and both come from man himself. Man is endowed with highly intellectual capacity and makes unceasing and untiring efforts to improve and advance his life, which guarantees him the highest happiness, comfort and benefits.

Although life has a very definite meaning, it is important for a man’s long-term financial success that either he survives long enough to earn more, or that life insurance will cover it. Earnings reflect the power, behaviours and character of the past to predict the future. 

However, the value of that future cannot be reduced, although it can be offset by using insurance in the case of premature death or lifelong incapacity. Life insurance is the only way to maximize the value of life first and then compensate for the replacement interest throughout one’s lifetime.

In most cases the family depends on the current earnings of the head of the family, who, in other words, is the family’s bread-winner for their survival. The family members have the right to seek appropriate maintenance from him and it is his responsibility to provide the best possible maintenance for them. If that source of income ends with death, it would be important for the family to make economic and social changes, which could lead to serious physical and psychological harm.

Two main functions of Life insurance

1. To contribute towards human life conservation, and
2.  To protect against financial losses resulting from the destruction of human life.   

The basic idea of life insurance is simply to distribute the few losses of life values evenly over a large number of people, so that some of the unlucky ones who actually suffer the loss may not feel the burden of their loss. This sharing is achieved by an agreement whereby a number of people agree to contribute a small amount to a common fund out of which the deceased’s members are paid this sum as had been agreed in advance. 

Modern man, whose joy lies in financial independence, is able to recover the otherwise irrecoverable value of human life by the device of life insurance theory. The theory of insurance protects the interests of all those who have a financial risk in the life of a particular individual or entity.

How Insurance evolved in India 

The insurance company Life, as it is known today, is an English legacy. The industrial revolution has increased the pace and the nations of Europe, America and Canada have adopted the same and have formed their own individual structures in the course of time. The first proposal was formulated at the government level to create some kind of insurance organisation. The Court of Directors of the East India Company instructed Sir John Child (Governor of Bombay between 1861-1890) to establish an insurance office on the Island of Bombay.

Early insurance companies in India provided sterling policies for the lives of Europeans who served the East India Company and then the lives of those in India. 

Around the year 1870, the collapse of two major English firms, the European and the Albert, affected a large number of people in this country who had reposed their trust in them. Consequently, an attempt was made to float companies in India to support Indian lives as well.

The “Bombay Mutual” was thus formed in 1871. It was closely followed by the “Oriental” in 1874. Similarly, in 1870, the Colonial Life Assurance Company established an extension of its business to Indian life and it was from that year that the modern Indian insurance was formed.

Life Insurance Contract

Definition u/s Section 2(11) in the Insurance Act, 1938

“Life Insurance Business” means the business of effecting contracts of insurance on human life, including any contract whereby the payment is assured on death (except death by accident only) and the happening of any contingency dependent on human life, and any contract which is subject to payment of premiums for a term dependent on human life and shall be deemed to include –

(a) the granting of disability and double or triple indemnity accident benefits, if so provided in the contract of insurance; 

(b) the granting of annuities upon human life; and

(c) the granting of superannuation allowances and annuities payable out of any fund applicable solely to the relief and maintenance of persons engaged or who have been engaged in any particular profession, trade or employment or of the dependents of such persons.

There is no formal definition of ‘ life insurance, ‘ but it may be defined as ‘ a contract in which the insurer, taking into account a certain premium, offers in return, either in a lump sum or in regular payments, to pay to the insured, or to the person for whose benefit the policy is made, a given sum of money on the occurrence of a particular event dependent on the term of the policy.

Features of Life Insurance

Thus, we can see the features of life insurance as under:

• It is a contract concerning human life.
• There must be no clear assurance that the payment is due upon the person’s death.
• The contract provides for payment of lump sum money.
• The sum shall be paid at the expiry of a certain term or upon the person’s death.

How is Life insurance contract formed

Like any other contract, an insurance contract must meet the necessities laid down in the Indian Contract Act, 1872 and in compliance with Section 10 of that Act, which states:

“All agreements are contracts if it is made by the free consent of the parties competent to contract, for a lawful consideration and with a lawful object, and are not hereby expressly declared to be void”.

Nevertheless, an insurance contract is a special arrangement, certain specific requirements apply to ensuring the agreement’s validity. The additional provisions include the existence of an insurable interest and the duty of utmost good faith.

In Inderpreet Singh v. Bajaj Allianz Life Insurance Company we see that this appeal was preferred by the appellants under section 5 of the Consumer Protection Act, 1986 against the order dated 04.01.2013 in C.C. No. 286 of 11.11.2011 passed by the District First Appeal No.292 of 2013 2 Consumer Disputes Redressal Forum, Hoshiarpur vide which the complaint filed by the complainants was dismissed.

DLA was the father of complainant No. 1 and husband of complainant No. 2. The complainants were entitled to sum assured of Rs.1,20,000/-. The complainant filed the claim with OPs and submitted all the documents as demanded by OPs.

The rejection of the claim was wrong as OPs had investigated all the facts with regard to the health of the DLA before issuing the policy act of OPs amounted to deficiency in services on the part of OPs.

The complainants were not the consumer as there was no deficiency in service on the part of OPs. The complainants tendered into evidence their affidavits Ex. Aggrieved with the order passed by the learned District Forum, the appellants/complainants have filed the present appeal.

Even the statement of Dr. A.S. Soin supports the case of the OPs that DLA was fully knowing that he was suffering from various diseases which were quite serious in nature and without disclosing these facts, he got revived his insurance policy.

He has violated the basic principle of utmost good faith Uberrima Fides.

In giving this decision the court cited the judgements from the Supreme Court in life insurance Corporation of India & amp; Ors. v. Asha Goel (Smt.) & Anr, having held that insurance contracts, including life insurance contracts, are Uberrimae fidei contracts which imply contracts based on the utmost good faith, therefore all the latter material facts must be disclosed and the camouflage of any material data or the disclosure of any false or erroneous data in the insurance contract is an infringement. Disguise of any material certainty entitles the insurer to deny the benefits of the agreement to the insured.

Essential elements of a Life Insurance Contract

We can see that like every contract Life Insurance contract must also contain the following essential elements:

• An Agreement

Section 2(h) of the Indian Contract Act, 1872 defines a Contract as “an agreement enforceable by law”. Therefore, all contracts are agreements but all agreements are not contracts. 

Section 2(e) of the Indian Contract Act, 1872 defines “an agreement as “every promise and every set of promises, forming the consideration for each other”. 

Section 2(b) defines a promise as “a proposal when accepted becomes Promise”. Thus, the proposal and acceptance are the two essentials of an agreement.

The proposal is generally made in the ‘Life Insurance Contract’ by the insured in the written version of the proposal provided by the insurer. The proposal is found in four sections of the ‘Life Insurance contract,’ namely-

1. Proposal form;
2. Medical report consisting of family history and medical examination report;
3. Agent’s report;
4. Friend’s report.

The acceptance is to be made by the insurer These are scrutinized by the insurer upon receipt of the papers containing the application and, when they are considered in order, by a letter he signals his agreement to it and the letter is called as the letter of approval which is also in printed form.

• Competency of Parties

All persons who are competent to enter a contract as per Section 11 of the Indian Contract Act, 1872, are also competent to enter into a Life Insurance contract.

In India, on completion of the age of 18, a person is said to have obtained a majority, and if a guardian has been appointed or his estate is under the control of wards, at the end of 21 years. Therefore, in the rates tables issued by Life Insurance Company, the rates start from 18 years in some cases and 19 years in other cases with 20 years in most cases. 

The proof of the proposer’s age is important in insurance contracts for two purposes i.e. for determining the contract’s validity, and for determining the premium rate.

• Free consent

Section 13 of the Indian Contract Act, 1872 defines Consent as “two or more persons are said to consent when they agree upon the same thing in the same sense” and 

Section 14 of the same Act defines Free Consent as “a consent is said to be not free when it is obtained by:

1. coercion;
2. undue influence;
3. fraud;
4. misrepresentation; or 
5. mistake.

• Consideration

The payment of the first premium is the consideration for the insurer and the insurer’s promise to indemnify the assured from the stipulated risk in the policy is the consideration to the assured. The second and third premiums cannot be solely applied to as part of calculation since the insurer cannot force the insured to pay them.  If there is a default in the payment of subsequent premiums, the insurer may be freed from the promise to pay the guaranteed amount but remains bound in the policy by the various subsidiary guarantees such as the surrender value.

• Lawful object

The law gained significance in its applicability to Life Insurance contracts with respect to the provision and policies on suicide without insurable benefit. Wager’ is one of the known artifacts against public policy, and an insurance contract without insurable benefit is a wagering deal and is void.

As life insurance is a specialized type of contract, apart from the above essentials of a valid contract, insurance contracts are subject to two additional principles i.e. Principle of utmost good faith & Principle of insurable interest.

• Principle of utmost good faith

Commercial contracts are typically subject to the caveat emptor principle i.e. let the buyer be patient. Which party to the contract is believed to be able to examine the item or service which is the subject of the contract. Nevertheless, this principle does not apply in the case of insurance contracts. The majority of the information relating to fitness, behaviors, personal history, family history, etc. that form the basis of the life insurance policy are known to the proposer.

The insurer cannot recognize them, unless they are reported by the insured. The underwriter is allowed to request a medical report. But there may be other things that may not be brought out, even though the best medical test. 

Therefore, it is the proposer’s most important duty to reveal the true facts to the insurer and is referred to as the’ Principle of Utmost Good Faith ‘ The assumption is that, in the event of failure to disclose material facts, the contract may be considered invalid from the outset. 

• Principle of insurable interest

The insurable interest means the interest which may or may be covered by an insurance contract. Both liabilities are not insurable; otherwise, there would be no distinction between an insurance contract and a wagering contract that is unlawful under Section 30 of the Indian Policy Act, 1872.

What distinguishes an insurance contract from a wagering contract is that the insured must have an insurable interest in the subject matter of the insurance, i.e. the promoter must have an interest in the continuation of the insured subject and could suffer a loss if the continuance is impeded. In insurance contracts the financial or pecuniary interest in the topic of insurance is protected. The insured must have a relationship with the insurance subject in which he profits from his health and well-being and is prejudiced by his loss or damage.

The Insurance Act 1938 makes no definition of insurable interest. However, rulings of the Court have determined the conditions in which insurable interest is allowed to exist. A person has been held to have unlimited insurable interest in his/her own life.

Let us look at some more examples of insurable interest

• A husband has an insurable interest in the life of his wife and vice versa.
• An employer has an insurable interest in his employee to the extent of value of his service.
• A creditor has an insurable interest in the life of the debtor, to the extent of the debt.
• Partners have an insurable interest in the lives of each other to the extent of the financial stakes.
• A company has an insurable interest in the life of an employee.
• Parents have an insurable interest in the life of a child so long as he is a child. Hence, the policies on the lives of the children incorporate a clause, whereby the policy vests in the child on the attainment of his majority.

Thus, from the above we can see that a contract will be considered as true and binding when these essential elements are present and an insurance contract is no exception. When a legal contract is signed, a written version of the contract is issued by the insurers and that document is considered an “insurance policy”. The Life Insurance Corporation of India Act, 1956 empowers the government to regulate the form and manner in which policies can be issued and contracts binding on insurance companies can be executed.

Rights under life insurance policy contract

There are various rights available of the insured on his/her life insurance policy and they can exercise these rights in the following manner:

Right of assignment  

The term ‘assignment’ ordinarily means a transfer of property by writing as distinguished from one by ‘delivery’. The’ Assignment of a Life Insurance policy’ implies the act of transferring property rights from one person to another in the contract. The person who moved his or her right is called the’ assignor’ and the person who transferred the right is called the ‘assignor’.

There are two types of assignments.

• Conditional assignment: This is done when the insured wishes to pass benefits of the policy to a relative in case of early death or certain conditions. The rights of the policyholder are restored once the conditions are fulfilled.
• Absolute assignment: This is done as a part of consideration for a loan in favour of the lender/bank/lending institution. In such an assignment, the insured loses his rights in the policy and the absolute assignee can deal with it independently.

Right of nomination

The proposer is the person with whom the contract of insurance is made and in most of the cases the proposer is also the life assured. While proposing for insurance, the proposer would normally designate himself as the person to whom the proceeds of the resulting policy shall be payable and in accordance with the wishes of the proposer, the amount secured by the policy shall be payable to the proposer or his estate. 

The life assured, when he himself is the policy holder, is competent during his lifetime to transfer the policy to any person in accordance with the procedure prescribed by law. But in the absence of any law, he may not be competent to designate a person to receive the policy money on his death. Section 39 of the Insurance Act, 1938 enables him either at the time of effecting the insurance or any time subsequent thereto to nominate any person to receive the policy money in the event of his death. A nomination may be changed or cancelled by an endorsement or by a will.

Loss of policies

If the policy is lost or destroyed, a suit may be instituted to recover the money gained thereby if secondary proof of its terms can be adduced. Ordinarily, the insurer must issue a replacement policy where the original is irreparably lost, damaged or mutilated. A duplicate policy confers the same rights and privileges upon its holders as the original policy.

Functioning of Life Insurance Corporation

Life Insurance Business in India was nationalized with effect from January 19, 1956. This was done by a merger of 16 insurance companies and 75 provident societies on that day. Around 245 insurance companies and provident societies were merged to create the LIC. LIC is the largest insurance company in India with an estimated asset value of Rs. 3111847 crores ($450 billion) as of 2019.It is the largest Indian insurance and investment company in India. 

The Life Insurance Corporation of India, Act was passed by Parliament on June 18, 1956 and came into force as of July 1, 1956. Life Insurance Corporation of India began operating as a corporate body as of 1 September 1956. The operations are regulated by the LIC Act. The LIC is a corporation with perpetual succession and a common seal with the right to gain possession and dispose of the land, and can sue and be sued by its name.

Investment is one of the core functions of LIC. Its main function is to collect the people’s money and invest it in the various securities and financial markets in India and abroad.

As a rule, LIC is required to invest at least 75% of the funds in Central and State Government securities. Thus, LIC is the largest investment institution in India as on date.

It collects people’s funds by selling insurance policies, and invests those funds in India’s financial markets. It also provides term loans and bonds to raise investor funds.

Not only that, as regards a number of policies released, the LIC has become the world’s largest insurance company. As of 2019, total policy coverage including citizen, party, and other social schemes has gone beyond 13 crores.

Objectives of LIC

The main objectives of LIC are as follows:

1. Spread life insurance widely and in particular to the rural areas, to the socially and economically backward classes with a view to reach all insurable persons in the country and provide them adequate financial cover against death at a reasonable cost.
2. Maximisation of people’s savings for nation-building initiatives.
3. Provide complete security and facilitate efficient service at economic premium rates to policy-holders.
4. Conduct business with the utmost competitiveness, and fully realize that the money belongs to the policyholders.
5. Act as trustees in their individual and collective capacity to the insured public.
6. Involve all people working within the Company to the best of their ability to advance the interests of the insured public by courtesy in delivering efficient service.
7. Promote a sense of engagement, pride and job satisfaction among all of the Corporation’s agents and employees by discharging their duties with commitment to achieving Corporate Objective.
8. Meet the various life insurance needs of the community that would arise in the changing social and economic environment.

Functions of LIC

Some of the main functions of Life Insurance corporation can be seen as under:

1. The main function of LIC is to collect the savings of the people through a life insurance policy and invest that money in various financial markets.
2. Investing fund in government securities to secure the wealth of individuals who have given their money to LIC.
3. To issue an insurance policy at affordable rates to people.
4. To provide direct loans to industries at lower interest rates. The rate of interest is as low as 12% for the entire tenure.
5. It provides refinancing activities through SFCs in different states and other industrial loan giving institutions.
6. It has provided indirect support to industry through subscriptions to shares and bonds of financial institutions such as IDBI, IFCI, ICICI, SFCs etc. at the time when they required initial capital. It also directly subscribed to the shares of Agricultural Refinance Corporation and SBI.
7. It lends loans to projects that are important to national economic welfare. The LIC prioritizes socially-oriented programs like electrification, sanitation, and water channelling.
8. It nominates directors on the boards of companies in which it makes its investments.
9. It gives housing loans at reasonable rates of interest.
10. It acts as a bridge between the process of saving and of investing. Through several schemes it generates the savings of the small savers, middle income community and the wealth.

Conclusion

We can see that the Insurance Industry in India has changed rapidly in the world’s demanding economic environment. Indian insurance companies have become innovative in nature in the current scenario and are offering appropriate distribution channels to get the maximum benefit and serve customers in many different ways.

Given the large population and untapped potential, the Indian Insurance industry has a tremendous opportunity to expand. India’s insurance market has undergone competitive changes including a variety of global insurers joining. Many private insurance undertakings are joint ventures with recognised international entities worldwide. Market saturation in many developed economies has made the Indian market even more appealing to global insurance majors.

Life Insurance Corporation, set out with clear objectives, grew steadily and spread the message of insurance to the farthest corners of the nation. The vast premium income mobilized by Life Insurance Corporation helped the nation in economic development, especially in building up infrastructure. Life Insurance Corporation has made notable contributions to the development of the equity market. It has participated in the establishment of institutions lie NSC, IDBI, UTI and NIA. LIC has taken advantage of information and Technology and initiated measures for the convenience of the policyholders.

With long term liability, they get a good asset-liability match by investing their funds in such projects. IRDA regulations require insurance companies to invest not less than 15 percent of their funds in infrastructure and social sectors.

International Insurance companies also invest their funds in such projects. The Life Insurance Corporation of India has been a nation builder since its formation in 1956. True to the objectives of nationalization, the LIC has mobilised the funds invested by the people in life insurance for the benefit of the community at large. The LIC has, over the years, been investing a major part of its funds primarily in the socially oriented sector.

Thus, we can see that Life Insurance Corporation has contributed immensely towards the development of the country.

References

1. https://en.wikipedia.org/wiki/Life
2. https://philosophynow.org/issues/101/What_Is_Life
3. Dr. G. Gopalakrishna, “Life insurance and Human life values” available at https://www.insuranceinstituteofindia.com/…/LifeInsuranceHumanValues.pdf
4. https://www.loma.org/Posts/Spotlight/A_brief_history_of_life_insurance.aspx
5. https://economictimes.indiatimes.com/wealth/insure/life-insurance/all-you-need-to-know-about-assigning-life-insurance-policy/articleshow/71232027.cms?from=mdr
6. https://www.exidelife.in/knowledge-centre/blogs-and-articles/all-about-nominee-in-a-life-insurance
7. https://www.wealthpedia.in/functions-of-lic/
8. Life Insurance Corporation Of … vs  Smt.Asha Goel & Anr on 13 December, 2000
9. Inderpreet Singh v. Bajaj Allianz Life Insurance Company.
10. The Insurance Act, 1938
11. Indian Contract Act, 1872
12. Life Insurance Corporation Act, 1956

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