PRINCIPLES AND PRACTICE OF INSURANCE

1. Offer (Proposal) And Acceptance
2. Consideration (Premium)
3. Insurable Interest –
4. Sales literature
5. Proposal Form cum KFD
6. Renewal Notice
7. Utmost Good Faith
8. Premium payment Options
9. Sec.64 VB of Insurance Act
10. Policy Terms and Condtions

A contract of insurance is an agreement whereby one party, called the insurer, undertakes, in return for an agreed consideration, called the premium, to pay the other party, namely the insured, a sum of money or its equivalent in kind, upon the occurrence of a specified event resulting in a loss to him. The policy is a document which is an evidence of the contract of insurance.

As per Anson, a contract is an agreement enforceable at law made between two or more persons by which rights are acquired by one more persons to certain acts or forbearance on the part of other or others. The Indian Contract Act, 1872, sets forth the basic requirements of a Contract. As per Section 10 of the Act: “All agreements are contracts if they are made by the free consent of parties competent to contract, for a lawful consideration and with a lawful object, and are not hereby expressly declared to be void…..”. An Insurance policy is also a contract entered into between two parties, viz., the Insurance Company and the Policyholder and fulfills the requirements enshrined in the Indian Contract Act.

1. Proposal: When one person signifies to another his willingness to do or to abstain from doing anything, with a view to obtaining the assent of that other to such act or abstinence, he is said to make a proposal (“Promisor”). In Insurance parlance, a Proposal form (also called application for insurance) is filled in by the person who wants to avail insurance cover giving the information required by the insurance company to assess the risk and arrive at a price to be charged for covering the risk (called “premium). When a proposal form is submitted, the Customer does not make a proposal, but it is only “invitation to offer”. The insurance company, based on the information furnished in the proposal form, assesses the risk (also called underwriting), and conveys the decision – if accepted, at what premium and on what terms and conditions. This is also called “counter offer” in insurance terminology by the insurance company to the Customer. A medical examination is also conducted, where necessary, before making the counter offer. Where the insurance company cannot accept the risk, the proposal is declined. Where the insurance company conveys its decision to accept the risk quoting a premium, a proposal is made.
2. Acceptance: When a person to whom the proposal is made, signifies his assent thereto, the proposal is said to be accepted (“Promisee”). A proposal, when a accepted, becomes a promise; When the Customer accepts the terms of the offer and signifies his assent by paying the First Premium (the amount payable as the consideration), the proposal is accepted by the Customer. A proposal of the insurance company (terms of offer), when accepted by the Customer, becomes a promise.

When, at the desire of the promisor, the promisee or any other person has done or abstained from doing, or does or abstains from doing, or promises to do or to abstain from doing, something, such act or abstinence or promise is called a consideration for the promise; As can be seen from the above, amount equal to First Premium paid by the Customer becomes the consideration for the contract. This first premium would be the first installment premium (either first annual, quarterly, half yearly or monthly premium. In the case of monthly premiums normally 2 monthly premiums are collected along with the Proposal form. In the case of single premium, one lump sum is paid along with the Proposal. Every promise and every set of promises, forming the consideration for each other, is an agreement;

Competency to contract: Every person is competent to contract who is of the age of majority according to the law to which he is subject, and who is sound mind and is not disqualified from contracting by any law to which he is subject. In the case of Insurance the person with whom the Contract is entered into is called “Policyholder” or “Policy Owner” who could be different from the subject matter which is insured. In Life insurance contracts, for example, the person whose life is insured could be different. For example, the Policyholder could be the Father and the Life assured could be the son. In the case of Fire insurance, the Policy owner could be the Owner of a building and the subject matter of insurance would be the building itself.

The Policyholder must have attained the age of majority at the time of signing the proposal and should be of sound mind and not disqualified under any law. However, the life assured could suffer from the above infirmities.

Consensus ad idem: Two or more person are said to consent when they agree upon the same thing in the same sense. Both the insurance company and the Policyholder must agree on the same thing in the same sense. The Policy document issued to the Policyholder (“Customer”) clearly defines the obligations of the insurer and the terms and conditions upon which the Insurance contract is issued.

Free consent: Consent is said to be free when it is not caused by –

1. Coercion, or
2. Undue influence or
3. Fraud, or
4. Misrepresentation, or
5. Mistake

The third and fourth grounds which vitiate consent are more relevant in insurance. Insurance contracts are based on the principles of ‘utmost good faith’. The Policyholder is expected to disclose about the status of his health, family history, income, occupation or about the subject matter insured truthfully without concealing any material fact to enable the underwriter to assess the risk properly. In case it is established by the insurance company that the Policyholder did not truthfully disclose any fact in the Proposal form which had a material impact on the decision of the underwriter, the insurance company has a right to cancel the contract. When consent to an agreement is caused by coercion, fraud or misrepresentation, the agreement is a contract voidable at the option of the party whose consent was so caused.

Lawful object: The consideration or object of an agreement must be lawful, The consideration or object of an agreement is unlawful under the following circumstances:

1. Where a contract is forbidden by law or
2. Where the contract is of such nature that, if permitted, it would defeat the provisions of any law or is fraudulent;
3. Where the contract involves or implies, injury to the person or property of another; or
4. Where the Court regards it as immoral, or opposed to public policy.

Every agreement of which the object or consideration is unlawful is void. The object of an insurance contract, i.e. to cover the risk by taking out an insurance policy, is a lawful object.

Agreement must not be in restraint of trade or legal proceedings: Every agreement by which anyone is restrained from exercising a lawful profession, trade or business of any kind, is to that extent void. Every agreement, by which any party thereto is restricted absolutely from enforcing his rights under or in respect of any contract, by the usual legal proceedings in the ordinary tribunals, or which limits the time within which he may thus enforce his rights, is void to the extent

Agreement must be certain and not be a wagering contract: Agreements, the meaning of which is not certain, or capable of being made certain, are void. Agreements by way of wager are void; and no suit shall be brought for recovering anything alleged to be won on any wager, or entrusted to any person to abide the result of any game or other uncertain event on which may wager is made. Anson defined wager as “a promise to give money or money’s worth upon the determination or ascertainment of an uncertain event”. For example, if A agrees to pay B `1,000, if it rains tomorrow, it becomes a gambling, since there is no certainty that it will rain tomorrow. A wagering contract is void, it is not illegal. Further a contingent contract is defined under Section 31 of the Act as “a contract to do or not to do something, if some event collateral to such contract, does or does not happen”. For example, A contracts to pay B `10,000 if B’s house is burnt. This is a contingent contract. An insurance contract is a contingent contract and the example given above is nothing but Fire insurance. While all Wagering contracts are Contingent contracts, Section 30 of the Act has declared all Wagering contracts to be void.

The business of insurance aims to protect the economic value of assets or life of a person. Through a contract of insurance the insurer agrees to make good any loss on the insured property or loss of life (as the case may be) that may occur in course of time in consideration for a small premium to be paid by the insured.

Apart from the above essentials of a valid contract, insurance contracts are subject to additional principles. These are:

1. Principle of Utmost good faith
2. Principle of Insurable interest
3. Principle of Indemnity
4. Principle of Subrogation
5. Principle of Contribution
6. Principle of Proximate cause
7. Principle of Loss of Minimization

These distinctive features are based on the basic principles of law and are applicable to all types of insurance contracts. These principles provide guidelines based upon which insurance agreements are undertaken. A proper understanding of these principles is therefore necessary for a clear interpretation of insurance contracts and helps in proper termination of contracts, settlement of claims, enforcement of rules and smooth award of verdicts in case of disputes.

As per IRDAI, specific disclosures have to be made in sales literature, especially features like there are two insurers involved, that each risk is distinct from the other, who will settle claims, matters relating to renewability of both or only one of the covers at the option of the insured, servicing facilities etc.

Insurers have also to clearly draw the attention of the policyholder in the policy contract and sales literature that:

1. All health insurance policies are portable;
2. Policyholder should initiate action to approach another insurer, to take advantage of portability, well before the renewal date to avoid any break in the policy coverage due to delays in acceptance of the proposal by the other insurer.

IRDAI has cautioned members of the public not to get carried away by unapproved sales presentations being circulated in the market. They may take an informed decision while purchasing a policy, on the basis of proper disclosures by the licensed representatives of the insurer.

Renewal Notice: Most of the non-life insurance policies are issued on annual basis. There is no legal obligation on the part of insurers to advise the insured that his policy is due to expire on a particular date. However, as a matter of courtesy and healthy business practice, insurers issue a renewal notice in advance of the date of expiry, inviting renewal of the policy. It is also the practice to include a note advising the insured that he should intimate any material alterations in the risk.

The Insurance policy is a legal contract between the Insurer and the Policyholder. As is required for any contract there is a proposal and an acceptance. The application document that is used for making the proposal is commonly known as the ‘Proposal Form’. All the facts stated in the Proposal form becomes binding on both the parties and failure to appreciate its contents can lead to adverse consequences in the event of claim settlement. The Proposal form has been defined under IRDA (Protection of Policyholders’ Interests) Regulations, 2002 as “it means a form to be filled in by the proposer for insurance for furnishing all material information required by the insurer in respect of a risk, in order to enable the insurer to decide whether to accept or decline, to undertake the risk, and in the event of acceptance of the risk, to determine the rates, terms and conditions of a cover to be granted.

Explanation: “Material” for the purpose of these regulations shall mean and include all important, essential and relevant information in the context of underwriting the risk to be covered by the insurer.”

While the IRDA had defined the Proposal form, the design and content was left open to the discretion of the Insurance Company. However based on the feedback received from policyholders, intermediaries, Ombudsmen and Insurance companies, the IRDA felt it necessary to standardise the form and content of the Proposal Form. Thus the IRDA has issued the IRDA (Standard Proposal form for Life Insurance) Regulations, 2013. While the IRDA has prescribed the design and content, it has provided the flexibility to the Insurance companies for seeking additional information. The Proposal form carries detailed instructions not only for the Proposer and the Proposed Life Insured but also to the Intermediary who solicits the policy and assists in filling up the form.

It also requires the Proposer and the Proposed Insured to declare the correctness and authenticity of the information provided in the form. In addition, the Intermediary is required to certify that he has explained the features of the policy, including terms and conditions, premium requirements, exclusions and applicable charges to the Proposer.

It is pertinent to mention here that the Proposal form gains utmost importance in any insurance contract, as the insurance company offers a cover on the basis of information provided in the Proposal form. Through the Proposal form, the Insurer seeks to elicit all material information of the Proposer and the Proposed Insured, which includes name, age, address, education, income and employment details of the Proposer, medical history of the Proposed Insured and his family members, income details, any existing life insurance cover on the Proposer as well as Proposed Insured. The Information sought in the Proposal form is important for an insurance company to assess the risk that can be underwritten and also to comply with other regulatory requirements such as the ‘Know Your Customer’ norms.

The IRDA regulations divide the Proposal form into the following broad sections:

Section A – contains details of the Proposer; Section B – contains specialised/additional information which may vary based on the product; Section C – contains suitability analysis which is highly recommended; Section D – contains details of the product proposed.

Some of the Insurers also have online versions of the Proposal form, through which an Insurance policy can be proposed online by the Proposer on the website of the Insurance Company. The Intermediary plays a very vital role in executing the Proposal form. It is the responsibility of the intermediary to not only explain the features and benefits of the product but also explain the significance of the information sought in the Proposal form and thus help the Proposer appreciate the essence of material information.

This is where the doctrine of “Uberrima fides” becomes very important. The Insurance Company relies on the information provided in the Proposal form for taking a decision on acceptance of the risk and issuing the Insurance policy. In the event it is discovered later that the information provided was incorrect or any material fact was concealed in the Proposal form, the Insurance Company may deny paying benefits under the Policy. Insurance litigations in the country are predominantly on the premise of rejection of claim due to nondisclosure of material facts and there are numerous cases which have reinforced the principle of “Uberrima fides”

Key Feature Document (KFD) cum Proposal Form

As per IRDA posp guidelines, Point Of Sales Persons can sell life insurance products means the simple plain vanilla type of product wherein each and every benefit is predefined and disclosed upfront clearly at the time of sales itself and is very simple to understand. The product should be prefixed with the words “POS” (Pos Product Name)

There would be two parts of the “Key Features Document cum Proposal Form” where the first part would be the KFD and second part would be Proposal Form. Both the parts are joined by perforation so that the first part(KFD) can be easily separated and given to the proposer/Life Assured for his/her record and the second part (Proposal Form) is to be preserved by the insurer/representative for necessary processing

Key Feature Document (KFD) must contain all the key benefits under the plan including (a) Sum assured on Death (b) Maturity Benefit (c) Surrender Value (d) Paid Up Value, if any (e) Exclusions (f) Registered name and address of the insurer with logo etc.

Every “Key Features Document cum Proposal Form” should contain unique reference number on both parts.

The TAT for issuance of policy/Acceptance of Risk and communication of Acceptance or otherwise message to the customer of such policy would not be more than two working days (excluding holidays) from the date of collection of proposal at the point of sale.

If the proposal is not accepted for any reason whatsoever, the refund of payment be done to the proposer/Life assured with in 7 days from the date of decision.

Renewal Notice is a letter /sms/phone call given by an insurance company to remind the policy holder to renew the policy.

Most general insurance policies run for 12 months, though some policies allow policyholders to choose a semi-annual (six monthly) policy if they wish, and others – such as travel insurance – cover specific dates.

The renewal date for your insurance policy is based on the date you agreed with the insurer that the policy would take effect when you first signed up. This means renewal dates can fall on a weekend or public holiday.

Insurer has to give you notice that your policy is going to expire. This is usually 14 days, for half yearly/quarterly mode and 30 days for yearly mode

Insurance policy might allow for certain changes during the term of the policy, but the renewal notice might prompt you to take another look at your insurance policy and decide if you want to make any changes.

When you are renewing your policy, it is important to check that all of the information you originally supplied to the insurer is correct. You must let your insurer know if anything has changed.

Renewing your insurance policy is usually quite straightforward. By paying your premium, you let your insurance company know that you agree to continue the policy. Your insurer will tell you how much you have to pay and how much time you have to make a payment on your insurance schedule.

It is important to meet the payment deadline.

If your insurer does not offer a grace period and you do not make your premium payment on time, then you may find yourself without any insurance cover.

If you decide that you are not going to continue the policy, you should make sure that you tell the insurance company before the renewal date. Depending on the terms and conditions in your policy, you may get charged for the time that the insurer extends as a grace period for payment.

Though the annual policy renewal notice is a good prompt to look over your insurance policy and make changes, there are other times when your circumstances change and when you should notify your insurer because it may affect your cover.

These include:

• Change in relationship status: If you get married or enter a de-facto relationship, you should check how this affects your insurance policy. You would normally take out a combined home and contents policy, and you might find that you get a discount on other insurance, such as car insurance, if you and your partner both choose policies with the same insurer
• Change of address: Moving house is a good time to review your insurance policy. You may find that if you move to a different suburb, your risk will change accordingly and this may affect your insurance premium
• Renovations: Improvements to your property could affect your risk or your sum insured. Insurers will assess whether changes to a property, such as installing window and door locks and changing to hail-resilient roofing, could change your premium
• Change in how you use your vehicle: For instance, if you start using your car for business it may affect your policy. If another person starts using your car more often, you may need to list that driver on your policy.
• End of financial year: This is a good time for owners of small or medium enterprises to make sure their insurance policies are still relevant. Though it’s often a hectic time for small business owners, having the business’s paperwork in front of you means you can see how your business has

At the time you are renewing your policy, it is important to check that all of the information you originally supplied to the insurer is correct. If there have been any changes to your circumstances, you should advise the insurer of this.

For example, if you are renewing a motor vehicle insurance policy and you have since fitted special high-performance modifications to your car, you have a duty of disclosure, meaning you are obliged to tell your insurer about it.

Before you renew your policy, check whether you need to change the level of cover. Take the time to work out if your possessions have grown in value over the last year. If you have made any significant purchases during the year, such as jewellery or perhaps an expensive camera, check to see if you need to list that item separately under the policy.

Both the parties i.e. the insured and the insurer should have a good faith towards each other. The insurer must provide the insured complete, correct and clear information of subject matter. The insurer must provide the insured complete, correct and clear information regarding terms and conditions of the contract.

This principle is applicable to all contracts of insurance i.e. life, fire and marine insurance.

Principle of Uberrimae fidei (a Latin phrase), or in simple English words, the Principle of Utmost Good Faith, is a very basic and first primary principle of insurance. According to this principle, the insurance contract must be signed by both parties (i.e. insurer and insured) in an absolute good faith or belief or trust. The person getting insured must willingly disclose and surrender to the insurer his complete true information regarding the subject matter of insurance. The insurer's liability gets void (i.e legally revoked or cancelled) if any facts, about the subject matter of insurance are either omitted, hidden, falsified or presented in a wrong manner by the insured. The principle of Uberrimae fidei applies to all types of insurance contracts.

1. The insured must have insurable interest n the subject matter of insurance.
2. In life insurance it refers to the life insured.
3. In marine insurance it is enough if the insurable interest exists only at the time of occurrence of the loss.
4. In fire and general insurance it must be present at the time of taking policy and also at the time of the occurrence of loss.
5. The owner of the party is said to have insurable interest as long as he is the owner of it.
6. It is applicable to all contracts of insurance.

The principle of insurable interest states that the person getting insured must have insurable interest in the object of insurance. A person has an insurable interest when the physical existence of the insured object gives him some gain but its non-existence will give him a loss. In simple words, the insured person must suffer some financial loss by the damage of the insured object.

For example: The owner of a taxicab has insurable interest in the taxicab because he is getting income from it. But, if he sells it, he will not have an insurable interest left in that taxicab. From above example, we can conclude that, ownership plays a very crucial role in evaluating insurable interest. Every person has an insurable interest in his own life. A merchant has insurable interest in his business of trading. Similarly, a creditor has insurable interest in his debtor.

Life policies are generally issued for monthly/quarterly/yearly mode and full premium for the period is to be paid in advance before commencement of risk. Premium payment to an insurer by a person seeking insurance or by the policyholder may be made in any one or more of the following methods –

1. Cash
2. Any recognised banking negotiable instrument such as cheques, demand drafts, pay order, banker’s cheques drawn on any schedule bank in India;
3. Postal money order;
4. 4. Credit or debit cards;
5. Net Banking / E-transfer
6. Direct credits via standing instruction of proposer or the policyholder or the insured through bank transfers;

As per IRDAI Regulations, in case the proposer / policyholder opts for premium payment through net banking or credit / debit card, the payment must be made only through net banking account or credit / debit card issued in the name of such proposer /policyholder.

Section 64VB prohibits insurance companies accepting a risk on an insurance policy without receiving the consideration (Premium) in advance. A risk can also be assumed based on a guaranteed provided e.g. Bank Guarantee, in accordance with the provisions of Insurance Rules. However, in terms of sub-section (2) of Section 64VB, in respect of risks where the premium can be ascertained in advance, the risk cannot be assumed earlier than the date on which the premium has been paid in cash or cheque to the insurer. Any refund of premium on account of a cancellation of a policy shall be paid by the insurance company directly to the life insured by a crossed account payee cheque or by postal money order and a proper receipt shall be obtained from the insured. In any case, refund to the account of the Agent is strictly prohibited. Further, where an insurance agent collects a premium on behalf of an insurer, the Agent is required to deposit the premium collected without deduction of his commission, within 24 hours of collection excluding bank and postal holidays.

A condition is a provision in an insurance contract which forms the basis of the agreement. Breach of a condition makes the policy voidable at the option of the insurer.

For example –

One of the standard conditions in most insurance policies states –

If the claim be in any respect fraudulent, or if any false declaration be made or used in support thereof or if any fraudulent means or devices are used by the Insured or any one acting on his behalf to obtain any benefit under the policy or if the loss or damage be occasioned by the Willful Act, or with the connivance of the Insured, all benefits under this policy shall be forfeited.

The Claim Intimation condition in a Health policy may state –

Claim must be filed within certain days from date of discharge from the Hospital. However, waiver of this Condition may be considered in extreme cases of hardship where it is proved to the satisfaction of the Company that under the circumstances in which the insured was placed it was not possible for him or any other person to give such notice or file claim within the prescribed time-limit.

‘Warranty’ is a condition expressly stated in the policy which has to be literally complied with for validity of the contract. Warranty is not a separate document. It is part of the policy document. It is a condition precedent to (which operates prior to other terms of) the contract. It must be observed and complied with strictly and literally, whether or not it is material to the risk. With a warranty, the insured undertakes certain obligations that need to be complied within a certain period of time and also during the policy period. Liability of the insurer depends on the insured’s compliance with these obligations. Warranties play an essential role in managing and improving the risk. Warranties are meant to limit the liability of the insurer under certain circumstances. Insurers also include warranties in a policy to reduce the hazard.

Endorsements are meant to effect amendments / changes in policy document. If certain terms and conditions of the policy need to be changed at the time of issuance, it is done by way of endorsement. It is attached to the policy and forms a part of it. The policy and the endorsement together make up the contract. Endorsements may also be issued during the currency of the policy to record changes / amendments.

41. Prohibition of rebates.—

(1) No person shall allow or offer to allow, either directly or indirectly, as an inducement to any person to 1[take out or renew or continue] an insurance in respect of any kind of risk relating to lives or property in India, any rebate of the whole or part of the commission payable or any rebate of the premium shown on the policy, nor shall any person taking out or renewing 2[or continuing] a policy accept any rebate, except such rebate as may be allowed in accordance with the published prospectuses or tables of the insurer: 2[Provided that acceptance by an insurance agent of commission in connection with a policy of life insurance taken out by himself on his own life shall not be deemed to be acceptance of a rebate of premium within the meaning of this sub‑section if at the time of such acceptance the insurance agent satisfies the prescribed conditions establishing that he is a bona fide insurance agent employed by the insurer.]

(2) Any person making default in complying with the provisions of this section shall be punishable with fine which may extend to 3[five hundred rupees].