Vol. 3 :: No. 12 December, 2001 (Mangsir-Poush)

Corporate Law

Insurance Law in a Nutshell (II)

By Gandhi Pandit
Attorney at law

The capacity to enter into insurance contract is similar to that of other normal contract. It means a person must reach certain age, he must be in sound mind while entering into contract. A minor or a person of unsound mind cannot enter into insurance contract, as they may not have ability to determine their own legal or other interest.

Acceptance of the Proposal and Insurance Policy:

An acceptance of proposal may be express or implied. If insurer issues a policy, it is considered that insurer accepts a proposal expressly. However, if no insurance policy is issued, but premium is accepted, it is presumed that the proposal is accepted. Upon acceptance by the insurer, a valid contract of insurance come into force and both parties are bound by the terms of the contract. No one can vary the terms of contract unilaterally. If any one wants to alter the terms of the policy, both insurer and insured must agree on such changes suggested.

The policy issued by the insurer is an evidence of contract of insurance. Usually there is no specific set form of policy prescribed by or used by the insurer. But it is a document, which contains an undertaking by the insurer to pay a certain sum of money. It usually contains the provision such as details of assured, subject matter of insurance, the interest assured against, premium, exception and condition of the contract and so on. The policy is very important document as it is the yardstick of solving dispute if any arises between insurer and insured in future.

Duration and Renewal

A policy is issued for a stipulated period of time and it remains valid to that time until it is renewed. But policy may be terminated before the stipulated time period for various reasons. It is automatically terminated when an event insured against occurs and insurer makes full payment of a fixed sum. It can also be terminated by mutual consent. One party can terminate the contract of insurance unilaterally if other party breaches its terms. Or a policy may be terminated in case of death of the assured and it is the terms of the policy that the assured be alive.

Usually a policy remains valid for the stipulated time until these events mentioned above occur before the policy is expired. Once a policy is expired, it can be renewed. The policy shall provide the method of renewing it. Usually assured shall be given some time to renew. If a policy is not renewed in time, it shall be automatically terminated. But a policy may have the provision of automatic renewal in which case payment of premium would make the insurance contract valid. The renewal of policy may be of three types:

(a) that the policy will be renewable with the consent of both parties.

(b) that the policy will be renewable at the assured’s option.

(c) that the policy will be automatically renewed if one or other parties give the notice of termination.

The Premium

A contract without consideration cannot be valid. The same rule applies to the contract of insurance. In insurance contract, the premium is the consideration, which supports the insurer’s promise to pay the sum insured. The insurance contract cannot be valid if the premium is not agreed upon between the parties. Though exact amount may not be agreed upon, they must consent on the payment of premium determinable later. The amount of premium can be reduced or a provision of reduction can be contained in the agreement.

Payment of the premium may be made to insurer or its agent. But it must be paid before policy lapses. The acceptance of the premium by the insurer is prima facie evidence of existence of valid contract.

Exception and Conditions

Exception and condition are the important part of insurance contract, which shall determine the liability of the insurer. It is not uncommon to include exclusion clause and condition in the insurance policies. An exclusion clause helps to exclude certain peril outside the preview of insurance contract. Losses occurred due to act of god or act of foreign enemy, civil commotion, military power and war are not covered by the insurance policy. In other words, the insurer may refuse to pay money for the loss occurred due to these activities. Usually such clauses negate the liability of the insurer on an otherwise effective policy.

The other ground in which the insurer may avoid a contract of insurance is where the condition is breached by the insured. A condition is a term of the contract the breach of which entitles the insured to avoid the contract or escape the liability. The condition may be of two types: express and implied. The express condition is specifically provided in the contract whereas implied condition are understood by implication of law. Following are the implied conditions in contract of insurance:

(a) That party will act in good faith

(b) The subject matter of insurance in existence at the time of policy issued

(c) That the assured has insurable interest

The responsibility of meeting the condition of the policy remains with the insured himself. The breach of condition also discharges the insurer from contract and it also renders contract invalid. But the insurer must prove such breach.

The breach of condition precedent makes a contact void, whereas a breach condition subsequent entitles the insurer either to avoid the contract or escape the liability on contract. So the exclusion clause and condition of the insurance contract is very vital in determining or imposing the liability upon insurer.

Settlement of Claim

The provision of settlement of claim clause in policy is also one of the important issues that the law must look into. Such provision must be very clear and effective so that the insured would not have to face hassles while making claim against insured when event insured against occurs. Usually a policy may require an insured to give proper notice of loss to the insurer within a specified period. If policy fails to provide such time, it is implied into the contract that such notice must be given within reasonable time. What is a reasonable time is a question of fact depending on the circumstances.

Once the loss occurs, the insured must promptly give notice of such incident to the insurer. Detail description of loss with necessary proof must be provided to insured within time prescribed. It is the duty of insured to make genuine claim with insurance company. Making fraudulent claims is a breach of duty of good faith. If the claim is found to be fraudulent, the assured will forfeit all benefit under the policy. This is one of the issues always arising insurance claim dispute whether there is a term to that effect or not in the policy. If a claim is made with false evidence, it is also a fraudulent act, which will forfeit the benefit of assured under the policy document. In insurance claim, the insured usually raises the defense of fraud on the part of insured. It is very complicated matter that only competent judiciary would be able to settle.

The claim could either be settled between parties amicably or if there is provision of arbitration, the parties must go to arbitration before they can make recourse to courts. But most of the time, the claim is amicably settled between the parties. Some time insurer may as a gesture of good faith make an ex gratia payment in respect of losses not covered by the policy. As such payment are not the right of insured, but maintain cordial relation, the insurer makes such payment at their discretion.

The law of insurance is distinct set of law, which has grown through the aged experience. The concept of insurance is developing and growing rapidly. This is one of the laws where law practitioner must put much effort to specialize in the field in order to fully comprehend the issue. The law is vast and sophisticated. I have attempted to explain basic concept prevailing in insurance with intent to educate those who are not familiar with this law.

( Mr. Pandit is a Columbia University law graduate who is currently practicing law in the field of banking, corporation, insurance and international business transaction including Letter of Credit and Int. Goods of sales Contract )

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