Vii Semester Seminar 2015

ARMY INSTITUTE OF LAW
PRINCIPLES OF LIFE INSUARANCE
A RESEARCH PAPER SUBMITTED TO ARMY INSTITUTE OF

LAW IN PARTIAL FULFILLMENT OF THE REQUIREMENT
FOR THE DEGREE OF
B.A.L.L.B
SUBMITTED TO:
BY:
SUBMITTED
Dr PR THULASI DHASS
KUMAR
ASHUTOSH
(Seminar Coordinator, VII Sem. Section-B)

No.- 450
Roll
Introduction
The Life Insurance is a way to replace the loss of Income that occurs when the earning member of family
dies. It is a contract between insured phases and the company that is providing the Insurance. If insured
pus on dies while the contract is in force, the insurance company pays a specified sum of money to the
person on persons you name as beneficiaries. The paper covers the various principles applicable to life
insurance contract. In case any of these principle is missing the insurance contract will become void.
Utmost Good Faith

The commercial contracts are normally subject to the principle of Caveat Emptor i.e. let the buyer beware.
In most of these contracts each party to the contract can examine the item or services which is the subject
matter of contract. For eg. If you go to the market to buy vegetables then you have to be careful yourselves
about quality while buying the vegetables and after buying you cannot question the vendor.
Each party believes in the statement of the other party. So long as there is no attempt to mislead & the
answers are given truthfully, the question of avoiding the contract would not arise. In the Insurance contract
the product sold is intangible. It cannot be seen or felt. Most of the facts relating to health, habits, personal
history and family history are known to one party only, the proposer. The insurer can know most of these
facts only if the proposer decides to disclose these facts. It is true that the underwriter can have the
assistance of medical report for life Insurance proposal. Sometimes, these aspects are not detected by the
medical examination. e.g., a person suffering from high B.P. or diabetes can manage to hide these facts
from the examining doctor. The history of past serious sickness, operations and injuries can be suppressed.
These aspects may affect the life expectancy of the proposer. Hence, these constitute material information
from the underwriters point of view. Non-disclosure of such facts would put the insurer as well as the
community of policyholders at a disadvantage. It is for these reasons that the law imposes a greater duty
on the parties to an Insurance contract than in case of other commercial contracts. This duty is one of
utmost good faith (uberrima fides). It is the duty of the assured to make a full disclosure to the underwriter
without being asked. In a contract of Insurance, there is an implied condition that each party must disclose
every material fact known to him. This type of contract is called uberrima fides i.e. contract of utmost good
faith. Hence utmost good faith can be defined as a positive duty to disclose accurately & fully all facts
material to the risk being proposed whether requested or not. The material fact is the material, which would
influence the judgement of a prudent insurer in fixing the premium or determining whether he will cover the
risk. Therefore, facts regarding age, height, weight, previous medical history, smoking/ drinking habits,
operations, details of earlier Insurances and hazardous occupation must be disclosed. There are certain
circumstances, which need not be disclosed e.g.:
Facts which every one is supposed to know in general (b) Facts of common knowledge (c) Facts which
lessen the risk (d) Facts which could be reasonably discovered by reference to previous policies records of
which are available with the insurer In Insurance contract, the level of good faith above the level of what is
in the usual commercial transaction is required. Therefore, Insurance contracts are based on the principles
of warranty, representation and concealment. We must understand the nature of warranty, representation
and concealment.
Warranty:
A warranty in Insurance is a statement or condition which is incorporated in the contract relating to risk,
which the applicant presents as true & upon which it is presumed that the insurer relied in issuing the
contract. In fact, Marine Insurance developed the doctrine of warranty because the marine underwriter was
rarely called upon or got a chance to inspect the ship as it might be lying thousands of miles away at ports
or in voyage. Therefore, he had to depend entirely upon the word of the person seeking the Insurance.
Hence, all information in the application for the Insurance was warranted to be absolutely exact and true. If
it turned out to be untrue, the Insurance was voidable whether the misstatement was intentional or
unintentional, material to the loss or immaterial.
Insurable Interest
The Insurance Act 1938 doesnt define the insurable interest but it has been defined as follows by MacGillivray Where the assured is so situated that the happening of the event on which the Insurance money
is to become payable would as a proximity cause, involve the assured in the loss or diminution of any right
recognised by law or in any legal liability there is an insurable interest in the happening of that event to the
extent of the possible loss or liability. The object of Insurance should be lawful for this purpose, the person
proposing for Insurance must have interest in the continued life of the insured & would suffer pecuniary loss
if the insured dies. If there is no insurable interest, the contract becomes wagering (gambling) contract. All
wagering contracts are illegal & therefore null & void.
Own Life Policy

So long as the Insurance is on ones own life, the Insurance Interest presents no difficulty. A person has
insurable interest in his own life to an unlimited extent. The absence of a limit in this case is reasonable.
When a person insures his life he obtains protection against loss to his estate; for in the event of his
untimely death the estate would not benefit by the future accumulation he hopes to make during the normal
span of life. It is not easy to compute with any degree of certainty what the future earnings of a person
would be. Hence no limit may be fixed in respect of life Insurance he may effect. Where, however, insurer
rejects a proposal for an amount of assurance, which is disproportionate to the means of the proposer, it is
not normally for lack of Insurable interest but on considerations of moral hazard. Indeed it may also be
presumed in a case where a person proposes for a policy for a large amount, which he may not be able to
maintain having regard to his income, that it will be financed by some other person and that there is no
insurable interest.
Insurance On The Life Of Spouse
As a wife is normally supported by her husband, she can validly effect an insurance on her life for adequate
amount. The service and help rendered by the wife used to be thought of as the basis of insurable interest
which supports any policy which a man takes on the life of his wife. In Griffiths v. Elemming 1 the Court of
Appeal in England stated that it was difficult to uphold such interest on the basis of pecuniary interest but
thought that such interest could be presumed on broader grounds. Parent and Child Following the practice
in U.K. in India also a parent is not considered to have insurable interest in the life of the child. The same is
the case with a child in respect of his parents life. Whether this position requires to be reviewed now
appears to be engaging the attention of people here.
A Hindu is under a legal obligation to maintain his parents. Even as per traditional law Sec.20 of the Hindu
Adoption and Maintenance Act has given statutory form to the legal obligation. The parents have, therefore,
a right to maintenance subject to their being aged or infirm. An order for maintenance of parents may also
be passed under Sec. 125 of the Code of Criminal Procedure, 1973. It may be stated, therefore, that a
parent has pecuniary interest in the life of the child, and an assurance effected on that basis cannot be hit
1 [1909] 1 KB 805
by Sec.30 of the Contract Act as a wagering contract. However, it may be noted that the pecuniary interest
is not a present interest unless the parent is unable to maintain himself or herself at the time when the
Insurance is effected. It may therefore, be argued that a parent cannot have insurable interest in the life of
the child until the right to maintenance arises; but when a person is not able to maintain oneself how can he
be expected to have the means to insure the life of his children? As a matter of fact in India, even today a
child is a potential breadwinner for the parents in their old age.
The present affluent circumstances of a parent do not alter that situation. Under the traditional law a right to
maintenance could be claimed only against the sons; the statute has now extended the obligation to the
daughters as well. Having regard to the social and economic set up of the people in the country a review of
the question seems to be appropriate. On the life of other relations In the case of other relations, insurable
interest cannot be presumed from the mere existence of their relationship. Moral obligations or duties are
not sufficient to sustain an insurable interest.
In every other case,

the insurable interest must be a pecuniary interest and must be founded on a right or obligation capable of
being enforced by Courts of law. The following are illustrations of such cases of insurable interest:
(a) Employer Employee:
An employer has insurable interest in the life of his employee, and the employee in the life of the employer;
An employer can create insurable interest in the lives of his employees by undertaking to provide monetary
benefit to the family or estate of the employees in the event of death. Group Insurances effected by
companies on the lives of their employees are on the basis of such insurable interest.
(b) Creditor debtor:
A creditor has insurable interest in the life of his debtor upto the amount of the debt; This is not a
satisfactory basis; for in the event of death of the debtor after the debt has been repaid, the creditor would
still be entitled to the policy moneys and thus can be in a position to gain by the death of the debtor once
the loan is repaid. The better arrangement would be for the debtor to take out a policy for the required
amount and mortgage the policy to the creditor. The creditor then cannot take benefits under the policy in
excess of his dues.
(c) Partner:
A partner has insurable interest in the life of his co-partner to the extent of the capital to be brought in by
the latter. (d) Surety and principal debtor-Co-surety: A surety has insurable interest in the life of his cosurety to the extent of the proportion of his debt and also in the life of his principal debtor. Effect on
Contract when Insurable interest is not present: Where, therefore, the proposal is on the life of another,
unless the proposer has insurable interest in the life to be assured, the contract shall be void. Lack of
insurable interest is a defence, which the insurer may plead in resisting a claim. There may be also cases
where Insurance on ones own life is surreptitiously financed and held by another for his benefit, which if
detected by the insurer, may be declared void. As a life Insurance contract is not one of indemnity, the
existence of insurable interest and the amount thereof will have to be considered at the time of effecting
the contract since lack of such interest would render the contract void. If insurable interest existed at the
inception of the policy, the contract would be enforceable though such interest might cease later.
Conclusion :
Insurance contracts are influenced by number of legal principles i.e. commercial as well as insurance. As the insurer
does not any thing about the proposer therefore, the duty of disclosing the material facts has been imposed on the
proposer. The decision of the insurer will depend upon the material facts disclosed by the proposer. The insurable
interest should also be present at the time of taking the policy. No one can take the policy in the name of third party
with which the proposer is not having any legal relationship and financial loss in case of any mishap with the
proposer.

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ARMY INSTITUTE OF LAW

PRINCIPLES OF LIFE INSUARANCE

A RESEARCH PAPER SUBMITTED TO ARMY INSTITUTE OF

(Seminar Coordinator, VII Sem. Section-B)

Utmost Good Faith

Own Life Policy

In every other case,

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