Insurance Law
Descriptive Notes
Unit 2
Question 1: What do you understand by theory of Cooperation? Explain in detail.
Answer: The idea of cooperation is a primitive one, existence of humas living a society has its
very basis in the theory of cooperation. Us as individuals in a society do not have access to all
the resources, so due to this lack of resources we depend on each other. Human have been
pooling their limited resources for the purpose of achieving some kind of common goal since
ages. This is essentially the idea of the theory of cooperation. This theory was suggested by an
early anthropologist Edward B. Taylor and later Claude Lvi- Strauss and Leslie A. worked on
expanding it.
Just like in case mutual funds a pool money is created where several individuals put money with
a common goal earning the dividends and profits, in insurance the common goal is willingly
sharing the losses of an individual. If only one person is bearing the loss without others sharing it
with him then it cannot be strictly recognized as insurance because Insurance is cooperative in
nature and its basis lies solely on the concept of cooperation, where a group of individuals is able
and willing to share losses of one of the members of the group and are willing to co-operate.
Ever since humans started existing a society till the beginning of the Christian era, every
household in a society used to contribute in a common fund that would be used to pay to persons
facing property losses or to pay for livelihood of people who were dependent on person who has
died. So, they were willing to share the loss of a member of the group or community.
This concept developed and has become the basis of cooperative societies, mutual funds and
insurances in the modern times. Today while paying for a society membership or insurance we
just willingly agree to serve a common goal of a group of individuals by paying a certain amount
in advance so that we are accepted as a member of the group.
When time of loss comes to one particular member in the society the group guarantees payment
of some amount from the pool of funds. This job of collecting the amount from the individuals
became job of the insurers and the basis of insurance or the driving force behind this industry is
the basic concept of mutual cooperation.
Today insurer bears the accountability and responsibility of obtaining adequate funds from
people in a society so as to cover the risks individuals carry and so that the members of society
pay for the member bearing losses at the occurrence of the insured event or insured risk.
Incentives like premium are in place to make people join the scheme of insurance and cooperate
to share the losses of each other by paying premium in advance.
Theory of Cooperation in Insurance
The foundational motto of the “all for one and one for all” theory of cooperation reflects a
mutual agreement between the insurer and society, emphasizing collective responsibility and
support. This theory in insurance is centered on the concept that individuals and entities pool
their resources to mitigate the financial impact of risks. By distributing the risk among a large
group of policyholders, insurance companies can offer financial protection and stability to their
clients, ensuring that no single individual bears the full brunt of a loss. This collaborative
approach is built on the principles of mutual aid, where each member contributes to a common
pool; risk sharing, where the burden of loss is distributed across all members; and trust, which is
essential for the transparent and effective functioning of the insurance system. This mutual
agreement not only provides security to individuals but also strengthens the social fabric by
fostering a sense of community and collective well-being.
It is often presumed that an insurance contract like any other contract has two active participants
and does not require any third-party assistance. Although the insurer and insured are the key
parties in an insurance contract, their interdependence to perform the contract is not entirely
limited to them. As described earlier, the theory of cooperation essentially binds an individual's
insurance contract with the society at large.
With the base motto of "All for one and one for all", theory of cooperation in its current
application can be described as a mutual agreement between the insurer and the society, the
insurer has to obtain adequate funds from the members of the society and pay them back from
the collected funds at the occurrence of the insured risk. Insurance being a cooperative device
requires all insurance contracts to be based on an interdependent model. Practical applications of
this theory can be found in any insurance contract.
Now, if we shift the onus from society at large to just an individual policyholder, the theory of
cooperation between the insured and the insurer can be found in the cooperation clause of the
insurance contract.
Cooperation clause
The Cooperation clause or the 'Assistance and Cooperation Provision' refers to a passage in an
insurance contract that requires the policy-holder to assist the insurer in case there is a claim. In
case the insured risk takes place, the insurer makes sure that the hazard that has taken place is
aligned with the insured risk and is covered under the policy.
The cooperation clause is a critical component of an insurance contract, which outlines the
policyholder's duties and responsibilities in the event of a claim. This clause typically includes
provisions that require the policyholder to:
Provide accurate and complete information about the claim
Cooperate with the insurer's investigation
Provide access to relevant documents and evidence
Assist in the appraisal process, if necessary
Failure to comply with the cooperation clause can result in the denial of a claim or even legal
action against the policyholder.
The steps for doing that includes investigation and assessing information of the incident. In case
the incident is prima facie unclear and the claim's validity is uncertain, policyholders tend to skip
out on a lot of details to avoid missing out on a chance to make a profit. In other cases, if the
policy-holder is at default, they might hide actual details of the incident. In order to avoid these
scenarios, the cooperation clause acts as a legal asset that compels a policy holder to disclose
detailed information about the incident and mandates that the information is correct.
Breach of Cooperation clause
In case the insured policy-holder does not disclose correct information the insurer that will help
to validate the claim, the insurer may not grant the compensation claimed by the policyholder. In
addition to that, if a court finds out that the policyholder is not complying with the cooperation
clause, it may permit the insurance company to file a case against the policyholder for breach of
contract. Additional Court-related costs can also be imposed on the policy-holder for the lack of
transparency.
Theory of cooperation and the principle of Indemnity
The theory of cooperation is closely linked to the principle of indemnity, which is a fundamental
principle in insurance law. The principle of indemnity states that the insurer should restore the
policyholder to their original financial position before the loss occurred. The cooperation clause
helps to uphold this principle by ensuring that the policyholder provides accurate and complete
information about the claim, which enables the insurer to determine the extent of the loss and
provide fair compensation.
The cooperation clause also helps in upholding the legal principle of indemnity in contract in
insurance. The principle lays down that in order for a claim to be upheld, there must be an actual
loss, the loss should have occurred through the risk insured, and the loss must be capable of
calculation in terms of money. Furthermore, the principles lay down the following purposes,
The first purpose is to prevent the insured from profiting from a loss.
The second purpose is to reduce moral hazard.
Therefore, by ensuring that the policy-holder is transparent with the details of the incident, the
policy-holder fulfils objectives laid down by the theory of cooperation and the legal principle of
indemnity.
Question 2: Explain “Theory of Probability” in detail.
Answer: Concept of Theory of Probability
A statistical strategy for predicting the possibility of a future occurrence is the theory of
probability (also known as probability theory or theoretical probability). Insurance firms utilise
this strategy to create policies and determine premium rates. The goal of probability theory is to
use mathematical or statistical approaches to identify patterns for the occurrence of different
sorts of events. Data scientists frequently use probability to explain scenarios where experiments
conducted under similar conditions generate diverse outcomes (as in the case of throwing dice or
a coin).
One of the major applications of probability is in clinical trials, which are used to find novel
illness therapies, medications, or surgical treatments. The clinical study tries to evaluate whether
the new treatment is more successful than the current treatment standard in determining whether
a treatment is regarded a success or failure.
Testing the efficacy of a novel vaccination, such as the poliomyelitis testing for the Salk vaccine
in 1954, which involved nearly two million children, is an example. The vaccine, which was
developed by the United States Public Health Service, almost eliminated polio as a public health
issue in the industrialized world.
It also has a wide range of applications in the commercial world. Take the insurance sector, for
example, where actuarial data track the life expectancy of people of a specific age. Rather than
predicting what will happen to a single person, the goal is to capture a collective outcome
involving a huge number of people. In order to develop and price policies, insurance companies
employ this method. When it comes to health insurance, for example, a smoker's coverage will
almost certainly cost more than a non-smoker. Smokers who are habitual or have a history of
smoking have a stronger link to a variety of health concerns, according to statistical data.
As a result, ensuring a smoker is a larger financial risk due to their increased likelihood of
serious disease and, as a result, of filing a claim. So, in insurance Actuaries, who are frequently
employed in this sector, use probability, statistics, and other data science methods to calculate the
likelihood of uncertain future occurrences occurring over time. They then use additional data
concepts to calculate how much money should be set aside to cover potential losses.
Theory Of Probability in Insurance
The theory of probability is a statistical method used to predict the likelihood of a future outcome
as discussed earlier. This method is used by insurance companies to study statistics to calculate
and manage risk as a basis for crafting a policy or arriving at a premium rate.
Statistics and Probability Theory
Probability theory is an area of mathematics that involves examining enormous amounts of prior
similar events in order to anticipate random events. Probabilities are the mathematical
probability that an event will occur in statistics. The number of favorable results in a set is
divided by the total number of possible results in the set to get a probability ratio. The probability
ratio expresses the probability of an event occurring. For insurance companies, this ratio is
critical.
Health Insurance
When reviewing policy applications, insurance underwriters apply probability theory.
Policyholders who smoke cigarettes, for example, are more likely to suffer major health
problems. According to statistics, this frequently leads to a rise in health insurance claims. The
underwriter can also forecast future claims based on the applicant's age and geographic area.
Pensions and life Insurance
When calculating mortality rates, the insurer considers the policyholder lives as well as the
socioeconomic aspects that influence his or her current age and health. Using probability theory
to anticipate the number of years a policyholder will live; this analysis assists the insurer in
determining rates and options for life insurance policies and annuities.
Liability and Property
Property and liability insurance companies utilize probability to analyses risks. According to
statistics, the driver's age and gender play a factor in the chance of an auto collision. When
determining premium rates based on likelihood, the insurer examines the type of vehicle insured,
the driver's geographic location, and the number of miles travelled on a regular basis.
For example, the more miles a policyholder drives, the more likely he is to be involved in an
accident. Homeowners insurance rates are also based on likelihood. The type of heating system
in the home, the location and age of the property, and any additional security features are all
taken into account.
Question 3: Explain Doctrine of Utmost Good Faith in detail. Also mention its relevance in
Insurance Laws.
Answer: The doctrine of utmost good faith, also known as "uberrima fides," is a cornerstone of
insurance law. It establishes a legal obligation for both the insurer and the insured to act with the
highest level of honesty and transparency when entering into and maintaining an insurance
contract. This doctrine is crucial because insurance contracts are fundamentally based on trust,
with the insurer relying on the information provided by the insured to assess risk and determine
the policy's terms. Let's delve deeper into the elements, applications, legal implications, and
contemporary relevance of this doctrine.
Foundations of the Doctrine
The doctrine of utmost good faith is rooted in the principle that insurance contracts are inherently
different from other types of contracts. In a typical contract, both parties are expected to exercise
reasonable care and due diligence. However, in an insurance contract, the insurer depends almost
entirely on the accuracy and completeness of the information provided by the insured. This is
because the insurer does not have firsthand knowledge of the risk being covered. Therefore, the
law imposes a higher duty of good faith on both parties.
Duty of Disclosure
The most significant aspect of the doctrine is the duty of disclosure, which primarily falls on the
insured. This duty requires the insured to reveal all material facts that could influence the
insurer's decision to accept or decline the risk, or to set the premium and other terms of the
policy.
Material Facts
Material facts are any facts that would affect the judgment of a prudent insurer in determining
whether to accept the risk and, if so, on what terms. These facts may include, but are not limited
to, the insured's health status, previous claims history, the nature and condition of the insured
property, and any other information that might affect the risk being insured. The insured must
disclose these facts even if the insurer does not ask about them explicitly.
For example, in life insurance, material facts would include the insured's age, occupation,
lifestyle habits (such as smoking or drinking), and medical history. In marine insurance, material
facts could include the condition of the ship, the nature of the cargo, and the route to be taken.
Consequences of Non-Disclosure or Misrepresentation
If the insured fails to disclose material facts or misrepresents them, the insurer may have the
right to void the contract. This means that the contract is treated as if it never existed, and the
insurer is not obligated to pay any claims that arise. The logic behind this is that the insurer
entered into the contract based on false or incomplete information, which undermines the very
foundation of the agreement.
For instance, in London Assurance v. Mansel (1879), the insured had failed to disclose that he
had been previously declined life insurance coverage by another company. This fact was
considered material because it indicated a higher risk, and the insurer was entitled to void the
contract upon discovering this non-disclosure.
Insurer's Duty of Good Faith
While the duty of utmost good faith is often discussed in the context of the insured's obligations,
it is important to note that the insurer also bears responsibilities under this doctrine. The insurer
must:
1. Disclose All Relevant Information: The insurer is obligated to provide the insured with
clear and complete information about the terms and conditions of the policy. This
includes any exclusions, limitations, or special conditions that could affect coverage. The
insurer must not withhold any information that could mislead the insured or cause them
to misunderstand the policy's scope.
2. Act Fairly and Reasonably: The insurer must process claims fairly and in a timely
manner. If an insurer unjustifiably denies a valid claim or unduly delays the claims
process, it can be considered a breach of the duty of good faith. In such cases, the insured
may have grounds to sue for damages.
Legal Implications and Remedies
The legal consequences of breaching the doctrine of utmost good faith can be severe for both the
insurer and the insured.
For the Insured
If the insured breaches their duty of utmost good faith, the insurer may void the policy from
inception. This remedy is particularly harsh because it means that the insured loses all benefits of
the insurance coverage, and any premiums paid may not be refunded. However, the insurer must
demonstrate that the non-disclosure or misrepresentation was material to their decision to
provide coverage.
For the Insurer
If the insurer breaches its duty of good faith, the insured may be entitled to remedies, including:
Damages: The insured can claim damages if they suffer a loss due to the insurer's failure
to act in good faith. For example, if an insurer unreasonably delays or denies a valid
claim, the insured may recover not only the claim amount but also additional damages for
any financial losses or distress caused by the insurer's actions.
Policy Enforcement: Courts may compel the insurer to honor the policy and pay the
claim if the insurer is found to have acted in bad faith.
Case Law and Judicial Interpretations
Over the years, courts have provided substantial guidance on the application of the doctrine of
utmost good faith, shaping its contours and limitations.
Carter v. Boehm (1766)
This case is one of the earliest and most influential in the development of the doctrine. It
involved a marine insurance contract where the insured, Mr. Carter, failed to disclose the fact that
the fort he was insuring had little defence against an attack. The insurer, Mr. Boehm, voided the
policy upon discovering this fact, leading to a legal dispute. Lord Mansfield, in his judgment,
articulated the principle that insurance contracts require utmost good faith and that the insured
must disclose all material facts. This case set a precedent that has been followed in many
subsequent decisions.
Pan Atlantic Insurance Co. Ltd. v. Pine Top Insurance Co. Ltd. (1995)
This more recent case refined the doctrine by introducing the concept of "inducement." The
House of Lords held that a breach of the duty of utmost good faith would only allow the insurer
to avoid the policy if the non-disclosure or misrepresentation induced the insurer to enter into the
contract. In other words, the insurer must prove that they would not have entered into the
contract on the same terms if they had known the true facts.
Contemporary Relevance and Consumer Protection
In modern times, the strict application of the doctrine of utmost good faith has been moderated
by consumer protection laws. Many jurisdictions have recognized the need to protect consumers
from the harsh consequences of inadvertent non-disclosure, especially in cases where the
insured's failure to disclose was not intentional or material to the risk.
Question: What do you understand by Insurable Interest in a insurance contract?
Answer: The term “insurable interest” refers to a sort of investment that protects against
financial loss. When the damage or loss of an item, event, or action will result in financial loss or
other problem, a person or entity has an insurable interest in it. A person or entity with an
insurable interest would purchase an insurance policy to cover the person, thing, or event in the
issue. If something occurs to the asset, such as it being destroyed or lost, the insurance coverage
would reduce the risk of losses.
Insurable interest is a condition for providing an insurance policy since it makes the entity or
event legitimate, valid, and protected against malicious activities. People who are not at risk of
losing money do not have an insurable interest. As a result, a person or corporation cannot buy
insurance to protect themselves if they are not truly at risk of financial loss.
Understanding insurable interest
Insurance is a kind of risk pooling that protects policyholders against financial losses. Insurers
have devised a variety of instruments to cover losses resulting from a variety of reasons,
including automotive expenditures, health-care expenditures, lost income due to disability, death,
and property damage.
Insurable interest refers to persons or institutions with a reasonable expectation of longevity or
sustainability, assuming no unanticipated negative occurrences. This individual or entity’s
insurable interest protects them against the possibility of a loss.
As an instance, homeowners and mortgage lenders both have an insurable interest in their
properties. You can’t insure anything if you don’t have an insurable interest in it. Renters only
have an insurable interest in their belongings, not in the building they live in. If you own
something or would suffer financially if it was damaged or destroyed, you have an insurable
interest in it.
Working principle of insurable interest
In this context, insurable interest has nothing to do with earning interest on a bank account or a
fixed-income investment. Consider if you would lose money if someone or something in your
life died, or whether you would lose money if a piece of property was destroyed. If you do, you
may have an insurable interest in that person’s, group’s, or thing’s survival. And life and/or
disability insurance, as well as property insurance, can safeguard that interest.
A typical requirement
Before providing a policy, all life insurance firms need the potential owner to demonstrate
insurable interest.
Insurance contracts must include insurable interest to prevent people from profiting from the loss
of something to which they have no connection. For example, if you see that your neighbour is a
dangerous driver, you will not be able to purchase automobile insurance for their vehicle. You
also can’t get life insurance for someone you don’t know.
Need of insurable interest in an insurance contract
It is not only essential for the insurance contract to be legitimate that the parties be competent to
contract, that it is done with free consent, and that the transaction is legitimate, but it is also
essential that the insured has an insurable interest in the subject matter of the insurance. If there
is no insurable interest, the contract will be considered as a wager. Insurable interest, in basic
terms, indicates that the insured or the policyholder must have a specific relationship with the
subject matter of the insurance, whether it be life or property insurance. In marine and life
insurance, the idea of insurable interest is particularly important.
The definition of insurable interest is evolving all the time. The most generally
mentioned definition of insurable interest is that of Lawrence J, in Lucena v. Craufurd (1806), in
which it was claimed that “A man is interested in a thing to whom advantage may arise or
prejudice may happen, from the circumstances which may attend it…to be interested in the
preservation of a thing is to be so circumstanced with respect to it as to have benefit from its
existence, prejudice from its destruction”.
In general, a person has an insurable interest in anything if its loss or damage would cause him or
her to incur a financial loss or some other form of harm. For example, if your automobile is
involved in an accident, you’ll either have to pay to fix it before you can drive it again, or you’ll
have to sell it for scrap and settle for a low price to replace it. Here, you have a good motive to
insure your automobile since you have suffered a financial loss. If the event occurs while driving
a car that you do not own, you are not liable for any financial losses. You do not need to insure
such a vehicle. You are considered to have an insurable interest in the topic of insurance if you
have a “reason.”
The interest must be enforced, according to the guiding principle. The mere prospect of obtaining
it is insufficient. It has been claimed that a party has an interest in an event if he stands to benefit
if it occurs and loses if it does not. However, the benefit or loss must be based on some legal
right, whether contractual, proprietary, legal, or equitable, that may be enforced in a court of law.
Although the insurable interest must be legally enforceable, it is not the only condition, no matter
how important it is.
A husband who lives with his wife has an insurable interest in her property because he is entitled
by law to share her bliss in it, and she, no doubt, has an insurable interest in his property because
their rights and responsibilities are substantially reciprocal. A shareholder, on the same basis, has
no insurable interest in the company’s assets. While the sole shareholder in a one-man company
will suffer some loss if the company’s property is lost, he has no insurable interest in it even if he
is in possession of it, because his possession is not coupled with any legal right to enjoy the use
of property, and he is merely an unsecured creditor of the company in his capacity as a creditor.
The mere possibility of harm is insufficient, and one cannot insure something only because there
is a potential of a secondary benefit if it is not lost. A shareholder, on the other hand, can insure
his ‘individual’ share, in which he has an insurable interest, against loss incurred as a result of the
company’s failure to complete an undertaking.
Thus, the assurance against the loss that he may incur as a result of an accident to a third party
may affect personal accident insurance. To make such insurance legal, the assured must have an
insurable interest in the safety of the individual in question, and this interest must be monetary.
As a result, a son whose father is a pauper and reliant on him does not have a sufficient insurable
interest to justify a personal accident insurance policy on his father.
Types of insurable interest
Insurable interest can be divided into two categories. There are two types of insurable interest:
contractual and statutory. Contractual insurable interest refers to an insurable interest that is
required by an insurance contract in order to affect the policy, whereas statutory insurable
interest refers to an insurable interest that is prescribed by specific laws dealing with insurance.
The term “insurable interest” is not defined in either the British Life Assurance Act of 1774 or
the Indian Insurance Act of 1938 . As seen in certain circumstances, interest in the subject matter
of insurance is needed by law for the policy’s legality, whether by specific statutory law, such as
the Marine Insurance Act, 1906 of UK or by Section 30 of the Indian Contract Act, 1872 which
simply proclaims that all wagering contracts are void. This is the statutory shareholder or the
interest required by law. If this agent is not present, the insurance is unlawful or unenforceable,
and no agreement between the parties may be successful in removing this need. If the insurer
does not raise the plea of interest in a contract action, the court may decline to enforce the
contract at its own discretion.
Let’s look at a case law that explains the distinction between these two types of insurable
interests. In Macaura v. Northern Assurance Company (1925), one Macaura insured the timber
on his land against fire. He sold timber to a business in which he held the sole substantial shares.
After the majority of the timber was destroyed by fire, he requested that he be compensated. The
insurer was able to avoid complying with the requirement. The insured had no statutory interest
in the firm’s assets, despite the fact that he would suffer loss if the firm lost its property, nor did
he have any contractual interest under the policy because he couldn’t show interest at the time of
the loss. Despite the fact that the insured had no statutory interest in the property, the policy was
found to be not a wagering contract since, as the only shareholder, he had an interest or, to put it
another way, an insurable interest in it.
Insurable interest and India
There is no clause in India’s Insurance Act of 1938 that clarifies what insurable interest is. In the
lack of any formal explanation, courts look to English and American judgements that are
consistent with the society’s prevalent social, economic, and religious currents. Thus, in India, in
addition to a spouse, wife, or other inclose family, any individual having a legal right to maintain
a person can purchase a life insurance policy on the latter’s life without proving insurable
interest.
Relationships arising from contractual transactions are another type of tie that gain insurable
interest for the purpose of obtaining life insurance. As a result, a creditor has an insurable interest
in the debtor’s life to the extent of his interest, and if the debt is guaranteed by a surety, the
guarantor’s life as well. In one of the cases in North Carolina, it was held that “it was decided
that a business partner has no insurable interest in the life of the other partner except when the
latter is personally owed to him and only to the amount of that indebtedness”, in the case
of Powell v. Dewy (1998).
