LEGAL ISSUES RELATING TO INSURANCE

BUSINESS IN INDIA

From the preceding chapters it is observed that insurance is the vehicle of

economic progress. It is only acts of economic progress. It not only acts as an element
of social security but also an instrument of scientific and industrial growth. Keeping
in view of the importance of insurance both in the social as well as in economic
sectors al countries starting from most democratic to authoritarian one have included
insurance as an act of the priority area. In order to promote, regulate and ensure
orderly growth of insurance business, these countries have put in place efficient legal
regime. The origin and development of insurance business law in India dates back to
18th century. From 18th century to till today many laws were enacted and some of
them were repealed also. A summary of laws existed in India is being discussed in 2 nd
chapter of this work. This chapter is an attempt to examine the law relating to
insurance in India. Basically these issues are raised in this chapter which is concerned
with the interest of the insured. Attempt is also made in this chapter to analyses
various court decisions pertaining to these issues.

6.1 INSURANCE LAW AND PROTECTION OF POLICY HOLDER

Policy holder is the centre of gravity if insurance business. The success of

insurance business in a country is measured from the happiness of a policy holder. So,
there is a need to protect interest of policy holder through an efficient legal regime.

6.1.1 Protection of Policy Holder under the Constitution of India

Every policy holder1 is a consumer. Therefore, he is entitled for all safeguards

that are available for the consumers. Part IV of Indian Constitution deals with

1
Section 2 (2) of Insurance Act, 1938 define the term ―Policyholder‖ which includes a person to
whom the whole of the interest of the policy-holder in the policy is assigned once and for all, but does
not include an assignee thereof whose interest in the policy is defensible or is for the time being subject
to any condition.
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Directive Principles of our State Policy (DPSP). The provisions contained in this Part
cannot be enforced by any court, but these principles are fundamental in the
governance of the country and it shall be the duty of the State to apply these principles
in making laws.

The Indian Constitution provide that (1) The State shall strive to promote the
welfare of the people by securing and protecting as effectively as it may a social order
in which justice, social, economic and political, shall inform all the institutions of the
national life. (2) The State shall, in particular, strive to minimize the inequalities in
income, and endeavour to eliminate inequalities in status, facilities and opportunities,
not only amongst individuals but also amongst groups of people residing in different
areas or engaged in different vocations.2

The Indian Constitution provide that the State shall, in particular, direct its
policy towards securing –(a) that the ownership and control of the material resources
of the community are so distributed as best to sub serve the common good; (b) that the
operation of the economic system does not result in the concentration of wealth and
means of production to the common detriment. 3 The Indian Constitution provide that
Equal justice and free legal aid which means The State shall secure that the operation
of the legal system promotes justice, on a basis of equal opportunity, and shall, in
particular, provide free legal aid, by suitable legislation or schemes or in any other
way, to ensure that opportunities for securing justice are not denied to any citizen by
reason of economic or other disabilities.4

6.1.2 Protection of Policy holders under the Consumer Protection Act, 1986

In one or other sense everyone is a consumer5 therefore, the Parliament has

enacted the Consumer Protection Act 1986, which was made more powerful by the
Consumer Protection (Amendment) Act 1993 to arm each & every consumer or

2
The Constitution of India, Article 38.
3
Ibid., Article 39.
4
Ibid., Article 39A.
5
John F Kennedy was a president of U.S.A. in 1961-1963. He gave a Statement to the Congress on
Protecting the Consumer Interest. Consumers, by definition, include us all. They are the largest
economic group in the economy, affecting and affected by almost every public and private economic
decision. Two-thirds of all spending in the economy is by consumers.

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consumer associations with rights to seek speedy & cheap remedies in such manner
which is proving to be very popular & effective as well, leaving behind a trail of
rulings & findings where under so many of us have benefited. 6 The statute has been
enacted to provide cheap, simple and speedy redressal to the consumer and to provide
better protection of the interests of consumers and for that purpose to make provisions
for the establishment of consumer councils and other authorities for the settlement of
consumer‘s disputes and for matters connected therewith. This is Act applies to all the
goods and services. It covers private, public and cooperative sectors.

The Consumer Protection Act, 1986 extends protection to a consumer of

goods and services.7 ―Service‖ has been defined under Consumer Protection Act,
which means service of any description which is made available to potential users and
includes, but not limited to, the provision of facilities in connection with banking,
financing insurance, transport, processing, supply of electrical or other energy, board
or lodging or both, housing construction, entertainment, amusement or the purveying
of news or other information, but does not include the rendering of any service free of
charge or under a contract of personal service. 8―Contract for Service implies a
contract where by one party undertakes to render service, e.g., professional or

6
In Secretary, Thrumurgan Co-op. Credit Society v. M. Latitha, AIR 2004 SCC 448, the Supreme
Court held that the Supreme Court ―From the statement of objects and reasons and Scheme of
Consumer Protection Act, it is apparent that the main object of the Act is to provide for better
protection of the interest of the consumer and for that purpose to provide a better redressal mechanism
through which cheaper, easier, expeditious and effective redressal is made available to consumers. Here
it is also relevant to mention that the consumer protection Act is a social welfare legislation and the
purpose of this legislation is to provide a better, efficient and cheaper remedy to the consumer.
Consumers must be free from the complicated judicial proceedings and complicated obligations. Thus,
the manner of getting remedy is quite informal, simple and free from the shackle and trappings of the
Civil Courts. On the other hand, one has to wait for years for judgment and cost of litigation is also
very high.‖
7
As per section 2 (d) of the Consumer Protection Act, Consumer may be defined in two ways: (i)
Consumer of Goods and (ii) Consumer of Service. (i) buys any goods for a consideration which has
been paid or promised or partly paid and partly promised, or under any system of deferred payment and
includes any user of such goods other than the person who buys such goods for consideration paid or
promised or partly paid or partly promised, or under any system of deferred payment when such use is
made with the approval of such person, but does not include a person who obtains such goods for resale
or for any commercial purpose; or (ii) hires or avails of any services for a consideration which has been
paid or promised or partly paid and partly promised, or under any system of deferred payment and
includes any beneficiary of such services other than the person who 1[hires or avails of] the services for
consideration paid or promised, or partly paid and partly promised, or under any system of deferred
payments, when such services are availed of with the approval of the first-mentioned person but does
not include a person who avails of such services for any commercial purpose.
8
Consumer Protection Act, 1986, Section 2(1)(o).

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technical services to or for another in the performance of which he is not subject to
detailed direction and contract but exercises professional or technical skill and uses
his own knowledge and decision.‖ Contract of service comes within the domain of
Consumer Protection Act. Contract of relationship implies a relationship of a master
and servant and involves the order to obey in the works to be performed and as to its
mode and manner of performance. Contract of service is out of the purview of this
Act. Contract of insurance does not create a relation of master and servant between
their insurer and the insured. It is purely contract of service. Thus, contract of
insurance is very well within the domain of the Consumer Protection Act, 1986.It may
be of life or general which may be respectively conducted by L.I.C. and GIC. Since
their business is service, so they are amenable before Consumer Fora. Policyholders
and beneficiaries under the policy are consumers within the meaning of the Consumer
Protection Act, 1986.

Various decided cases also corroborates this fact In R.M., L,I.C. v. B.S.
Reddy,9 it has been held that Insurance Services are ‗service‘ within the provisions of
Section 2 (1) (o) of the Act and consequently within the jurisdiction of Consumer
Court Probation Act. Thus, delay in payment of insurance amount or delay in
settlement of claims or faulty determination of claims or non-payment or
unreasonable grounds or any other deficiency on the part of company may amount to
deficiency in service within the meaning of the Act. In VikasVerkhedkar v. Narmada
Electronics (P) Ltd.,10 the complainant was one of the employee of the Narmada
Electronics P. Ltd. The employees of this concern were covered by the Group
Insurance Scheme of the opposite party/respondent. He met with an accident and
lodged a claim but was not paid in full. He filed a complaint under the CPA Act to
recover the amount. It was held that the complainant was a beneficiary under the
policy of insurance of the group scheme, he was covered by the definition of
‗consumer‘ in Section 2(1) (d) of the CPA and the complaint was to be disposed of
accordingly. Again, in Hotel Southern Put. Ltd. v. National Insurance Co. Ltd.,11 the
appellants paid insurance premium by cheque for insurance of a car. The cheque was

9
1991 (2) CPJ 144.
10
(1996) II CPJ 469 (AD, SCDRC).
11
(1995) III CPJ 54 (NC).

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dishonored for insufficiency of funds. The insurance policy was held to be void ab
initio. Non-payment of claim by the insurer did not amount to deficiency in service.
The Supreme Court in United India Insurance Co. Ltd. v. Manubhai D. Gajera,12 has
observed:

―Keeping in view the role played by the Insurance Companies, it is

essential that the Regulatory Authority must lay down clear guidelines
by way of regulations or otherwise. No doubt the regulations would be
applicable to all the players in the field the duties and functions of the
Regulatory Authority, however to see that the service provider must
render their services keeping in view the nature thereof. It will be
appropriate for the Central Government or the General Insurance
Companies also issue requisite circular.‖

The above study reveals that insurance is a ―service‖ and policyholder is a

consumer under the Consumer Protection Act, 1986. Therefore, the aggrieved party
(complainant) has to establish deficiency of service, beyond all doubt in order to
succeed in his contention. Where proper steps are not taken and the insured makes a
delay in payment it is a deficiency of services. 13 Where the insured suppressed
material facts and on the ground that the insurance company refused the claim it held
that it is not a deficiency in service. 14 In these cases the burden lies on the insurer to
establish that the policy holder has made a statement fraudulently knowing that the
statement is false.15 Failure to pay money to the nominee or insistence of production
of succession certificate by the widow when her name already appears in the policy as
assignee constituted deficiency of service.16

The term "Deficiency" means any fault, imperfection, shortcoming or inade-

quacy in the quality, nature and manner of performance which is required to be
12
AIR 2009 SC 446.
13
Premjibhai Ranchodbhai Hodar v. National Insurance Co Ltd. (1994) 1 CPR 197 (Guj);
14
Life Insurance Corpn of India v. Chandrawati Devi (1992) CJJ 255 (NC); Divisional Manager, LIC
of India v. (Smt) Sunita Sharma (1941) 1 CPJ 3 (NC); Padma Rani v. LIC (1994) 1 CPR 477 (Punj).
15
Life Insurance Corpn of India v. S. Hymawati(1996) I CPJ 13 (NC); Draupadi Devi v. United India
Insurance Co Ltd (1993) CCJ 402.
16
Life Insurance Corpn of India v. ChaturBehariLal(1991) 1 CPR 156 (Raj); SulochanaThorav.
Oriental Insurance Co (1993) 1 CPR 297 (Bihar).

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maintained by or under any law for the time being in force or has been undertaken to
be performed by a person in pursuance of a contract or otherwise in relation to any
service. The following are exceptions; Service rendered free of charge; Service
rendered under a contract of personal service; Service of Government official; Service
rendered under sovereign functions.17

In order to redress the grievance of policyholders under deficiency of

service,18 the Consumer Protection Act, 1986 provides for the establishment of
consumer councils and consumer fora at District, State and National level.

Section 9 provides for establishment of Consumer Disputes Redressal

Agencies – There shall be established for the purposes of this Act, the following
agencies, namely:(a)a Consumer Disputes Redressal Forum to be known as the
―District Forum‖ established by the State Government in each district. More than one
District Forum may also be appointed in a district; (b) a Consumer Disputes Redressal
Commission to be known as the ―State Commission‖ established by the State
Government in the State; and (c) a ―National Consumer Disputes Redressal
Commission‖ established by the Central Government by notification.19

Thus, there are three tier remedial agencies, i.e., at District, State and National
level have been appointed. These forums are headed by a person who is or has been a
District Judge in case of District Forum, is has been a Judge of High Court in case of
State Commission and is or has been a Judge of the Supreme Court in case of
National Commission. There are also provisions as to specified members of whom

17
Ibid., Section 2 (1) (g).
18
Tamil Nadu Industrial Investment Corporation v. IR David III(1995) CPJ37 (NC), The deficiency in
service must be alleged specifically in the complaint and if it is not done but the same allegations are
raised in rejoinder, the same does not amountto an allegation in deficiency of service. In Manager,
North Eastern Carrying Corp v. Gitane Exports I (1996) CPJ 166 (Pun), A fact mentioned in the
complaint that has not been controverted in the written statement was held to be deficiency in service
and the complainant was entitled to the relief. See also, Kisan Cold Storage v. National Insurance Co
Ltd 1993 CCJ 2(g) (Har).
19
The National Consumer Disputes Redressal Commission (NCDRC), India is a quasi-judicial
commission in India which was set up in 1988 under the Consumer Protection Act of 1986. Its head
office is in New Delhi. The commission is headed by a sitting or retired judge of the Supreme Court of
India. Section 23 of Consumer Protection Act, 1986, provides that any person aggrieved by an order of
NCDRC, may prefer an Appeal against such order to Supreme Court of India within a period of 30
days.

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one must be a woman and not less than half of the members must be of judicial
background. In case where President is unable to work or absent the senior member of
judicial background will act as President. Salaries, honorarium and other allowances
of the President and members and term of office also provided in the rules.

Each District Forum shall have jurisdiction to entertain complaints where the
value of the goods or services and the compensation, claimed does not exceed
rupees20 lakhs; State Commission shall have jurisdiction to entertain complaints
which the value of the goods, or services and the compensation exceeds rupees twenty
lakhs but does not exceed rupees one crore,20 and the National Commission shall have
jurisdiction above one crore.21The complaint to District Forum shall be instituted:(i)
Where the opposite party or each of the opposite party actually and voluntarily
resides or carries on business or has a branch office or personally works for gain, or
(ii) Where cause of action wholly, or in part arises, the same is also with the State
Commission.

It should also be remembered that every order of the Consumer Fora is

appealable i.e. from the order of the District Forum to State Commission and from
State Commission to National Commission and from National Commission to the
Supreme Court. But where order for compensation has been made the appeal can be
made only when 25% or fifty thousand, 35% or fifty thousand and 50% of fifty
thousand whichever is less is deposited i.e., from District Forum to State Commission,
from State Commission to National Commission and from National Commission to
the Supreme Court respectively.22

The proceeding of these courts are summary so that dispute may be decided
within specified period i.e., within three months from the date of receipt of notice by
opposite party where the complaint does not require analysis or testing of
commodities and within five months, if it requires analysis or testing of

20
Ibid., Section 17.
21
Ibid., Section 21.
22
Ibid., Section 23.

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commodities23 and appeal at every stage must be decided within a period of 90 days
from the date of its admission.24

A complaint in relation to any goods sold or delivered or any service provided

may be filed with District Forum, State Commission and National Commission within
two years from the date of cause of action arises in person or by registered post. There
is no need of advocates but there services may also be obtained. The complaint must
be accompanies with such fees as prescribed with all documents i.e., cash receipt and
vouchers etc. From 2005 a very nominal fees has been provided.25

The study reveals the fact that the Consumer Protection Act, 1986 is the only
legislation which settles dispute between insurer and insured in case, the insurer
commits deficiency of service. As far as amendments to Consumer Protection Act, is
concern, the Consumer Protection Bill 2018 is in pipeline which show to overcome
most of lacunae which are existing in the enforcement of this Act. The consumer fora
are quasi-judicial tribunal so it should be ensure that the proceeding are simple and
quick to achieve the objective of this Act. In order to enable consumer fora to
discharge their function continuously and effectively it is necessary that their
provided with the basic minimum infrastructure such as photocopy machine, required
staff, computer, telephone, and library etc. it has been noticed that many District
Forum are willfully understaffed and lack minimum infrastructure facility. Further the
Budgetary provision allocated towards this should also need a thorough review. This
is also an urgent need to tackle the problem of arrears of cases, fraudulent
adjournment, nonappearance of party, lawyers strike and tendency of lawyers to
prolong the proceeding are responsible of backlog of cases. The main concern in this
regard is the vacancy of judicial officers in district forum. There is an urgent need not
only to fill up these vacancies but also to continue Additional District Forum and
benches of the State Commission where necessary.

23
Ibid., Section 13 (3A).
24
Ibid., Section 19A.
25
Such as fee of Rs. 100 up to one lakh rupees claimed compensation.

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6.1.3 Protection of policyholder under the Insurance Act, 1938

In exercise of the powers conferred under sub-section (1) of Section 114 of the
Insurance Act, 1938, the Central Government hereby framed the Redressal of Public
Grievances Rules, 1998. This rules provide for ―Ombudsman‖. The main objective
of these rules is to provide for a speedy redressed of certain grievances specific to
Insurance sector. This is an alternative dispute resolution mechanism which is
managed by insurance companies to solve the disputes arising within the industry.

Ombudsman

Rule 6 provides that:(1)The governing body 26 shall appoint one or more

persons as Ombudsman for the purpose of these rules.(2) The Ombudsman selected
may be drawn from a wider circle including those who have experience or have been
exposed to the industry; civil services, administrative service, etc., in addition to those
drawn form judicial service.(3) An Ombudsman shall be appointed by the governing
body from a panel prepared by the committee consisting of: (a)Chairman of Insurance
Regulatory Authority-Chairman; (b)Two representatives of Insurance Council
including one each from the Life Insurance Business and from General Insurance
Business respectively-Member; and (c) One representative of the Central
Government-Member.

An Ombudsman shall serve for a term of three years and shall be eligible for
reappointment. However, an Ombudsman shall not hold office after he or she attains
the age of 65.27The Ombudsman shall be paid a salary which is equal to the salary of
the Judge of a High Court. The other allowances and perquisites of the Ombudsman
shall be such as may be specified by the Central Government.28

26
Redressal of Public Grievances Rule, 1998, Rule 5, explain Governing body of Insurance Council:(1)
There shall be a governing body of the Insurance Council which shall consist of one representative
from each of the insurance companies. 2) The representatives of an insurance company shall ordinarily
he Chairman or Managing Director or any one of the Directors of such company.(3) The governing
body shall formulate its own procedure for conducting its business including the election of the
Chairman: Provided that the Chairman of the Life Insurance Corporation of India shall act as the first
Chairman of the governing body.
27
Ibid., Rule 7.
28
Ibid., Rule 9.

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An Ombudsman is empower to entertain the following disputes:(a) A
complaint as specified under Rule 13; (b) Partial or total repudiation of claims by an
insurer; (c) Dispute with regard to the premium paid or payable in terms of the policy;
(d) Dispute on the legal construction of policies with regard to claims; (e) Delay in
settlement of claims; and (f) Non-issuance of any insurance document to customers
after receipt of premium.

Any person who has a grievance against the insurer may himself or through
the legal heirs make a complaint in writing to the Ombudsman within whose
jurisdiction the branch or office of the insurer complained against is located. The
complaint shall be in writing duly signed by the complainant or through his legal heirs
and shall state clearly the name and address of the complainant, the name of the
branch or office of the insurer against which the complaint is made, the fact giving
rise to the complaint, supported by the documents, if any, relied on by the
complainant, the nature and extent of the loss caused to the complainant and the relief
sought from the Ombudsman.29

In order that a complaint is entertained before the Ombudsman, the following

conditions must be satisfied:(a)The complainant must have first exhausted the
remedies available within the insurance company for setting the grievance and
approach the Ombudsman only if either the insurance company rejects the grievance
or complainant not satisfied with the reply or the insurer fails to respond within one
month of submission of the grievance; (b)No complaint can be preferred before the
Ombudsman after one year from the date of rejection or final letter from the insurance
company on the representation made by the complainant; and (c)If the complainant
has not preferred alternative legal remedies and the proceedings are not pending
before any Court or Consumer Forum.30

After hearing both the parties and the submissions made, the Ombudsman can
make his recommendations on the case. Copies of recommendations shall be sent to
the complainant and the insurance company concerned. Such recommendation shall

29
Ibid., Rule 13.
30
Ibid.

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be made not later than one month from the date of receipt of the complaint. If the
complainant accepts the recommendation, a copy of the acceptance is communicated
to the insurance company concerned. The insurer shall comply with the terms of
recommendation not later than 15 days of receipt of the recommendation. 31Where the
complaint is not settled by agreement, the Ombudsman shall pass an Award which
shall be in writing shall state the amount awarded to the complainant. The amount of
compensation shall not grant an award exceeding Rs. 20 lakhs (including ex-gratia
and other expenses).All Awards shall be passed within 3 months of receipt of the
complaint and issue a copy of the Award to both the insurer and complainant. The
complainant shall furnish to the insurer within a period of one month of date of
receipt of the award, a letter of acceptance that the award is in full and final settlement
of the claim. Thereafter, the insurer shall comply with the award within 15 days of
receipt of the acceptance letter and shall intimate the compliance 32 to the
Ombudsman. In K.K. Sarala v. LIC,33 held that M.C. is the instrumentality of the
State and the writ petition challenging the decision of the Ombudsman is
maintainable. In the instant case, the death was on 31st day. The grace period for
payment of premium has to be taken on the 31st day i.e., up to 29-7-2003 in which
event the insurance policy was valid and subsisting at the time of death of the assured.
In that view of the matter, the impugned order of the Ombudsman is liable to be set
aside.

The study pertaining to insurance Ombudsman reveals that this system

needless to say ‗aims to protect the interest of insurance policyholders, but it is
suffering from some loopholes, firstly, the system of ombudsman could not gain
popularity due to want of proper publicity, as a result of which in may cases the
consumer of insurance are being derived from this remedy; secondly, a complaint can
only be filed before ombudsman after the exhaustion of all remedies against insurer.
Further no remedies are available from this system, where the aggrieved insured
sought any other legal remedy; and thirdly, weak enforcement mechanism of
Ombudsman‘s order.

31
Ibid., Rule 15.
32
Ibid., Rule 16.
33
AIR 2013 Ker. 117.

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6.1.4 Protection of Policyholder under the Marine Insurance Act, 1963

The legal system of all jurisdiction recognized quasi contractual obligations

which is based on the principle of unjust enrichment i.e. no one is allowed to be
benefitted at the cost of other. Indian Marine Insurance Act, 1963 adopts the principle
and return the premium to the insured on the group of excess payment or when the
insurer avoids its liability.

Where the premium, or a proportionate part thereof, is, by this Act, declared to
be returnable; (a) if already paid, it may be recovered by the assured from the insurer,
and, (b) if unpaid, it may be retained by the assured or his agent. 34 Similarly, where
the policy contains a stipulation for the return of the premium, or a proportionate part
thereof, on the happening of a certain event, and that event happens, the premium, or,
as the case may be, the proportionate part thereof, is thereupon returnable to the
assured.35 Where the consideration for the payment of the premium totally fails, and
there has been no fraud or illegality on the part of the assured or his agents, the
premium is thereupon returnable to the assured or Where the consideration for the
payment of the premium is apportionable and there is a total failure of any
apportionable part of the consideration, a proportionate part of the premium is, under
the like conditions, thereupon returnable to the assured or In particular:(a) where the
policy is void, or is avoided by the insurer as from the commencement of the risk, the
premium is returnable, provided there has been no fraud or illegality on the part of the
assured; but if the risk is not apportionable, and has once attached, the premium is not
returnable; (b) where the subject-matter insured, or part thereof, has never been in
perilled the premium, or, as the case may be, a proportionate part thereof, is
returnable: Provided that where the subject-matter has been insured ―lost or not lost‖,
and has arrived in safety at the time when the contract is concluded, the premium is
not returnable unless, at such time, the insurer knew of the safe arrival; (c) where the
assured has no insurable interest throughout the currency of the risk the premium is
returnable, provided that the rule does not apply to a policy effected by way of
wagering; (d) where the assured has a defeasible interest which is terminated during
34
Marine Insurance Act, 1963, Section 82.
35
Ibid., Section 83.

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the currency of the risk, the premium is not returnable; (e) where the assured has over-
insured under an unvalued policy, a proportionate part of the premium is returnable;
(f) subject to the foregoing provisions, where the assured has over-insured by double
insurance, a proportionate part of the several premiums is returnable: Provided that, if
the policies are effected at different times, and any earlier policy has at any time borne
the entire risk, or if a claim has been paid on the policy in respect of the full sum
insured thereby, no premium is returnable in respect of that policy, and when the
double insurance is effected knowingly by the assured no premium is returnable.36

6.1.5 Protection of Policyholders under the IRDAI (Protection of Policyholders’

Interests) Regulations, 2017

These Regulations are complementary to any other regulations made by the

Authority, which, inter alia, provide for protection of the interests of policyholders.
These Regulations apply to all insurers, distribution channels, intermediaries,
insurance intermediaries, other regulated entities and policyholders. 37 The objectives
of this regulation are:(i) to ensure that interests of insurance policyholders‘ are
protected; (ii) To ensure that insurers, distribution channels and other regulated
entities fulfil their obligations towards policyholders and have in place standard
procedures and best practices in sale and service of insurance policies: (iii) To ensure
policyholder-centric governance by insurers with emphasis on grievance redressal.38

Every insurer shall have in place a board approved policy for protection of
policyholders‘ interests which shall at the minimum, include: (i) steps to be taken for
enhancing Insurance Awareness so as to educate prospects and policyholders about
insurance products, benefits and their rights and responsibilities; (ii) service
parameters including turnaround times for various services rendered; (iii) procedure
for expeditious resolution of complaints; (iv) steps to be taken to prevent mis-selling
and unfair business practices at point of sale and service; (v) steps to be taken to
ensure that during policy solicitation and sale stages, the prospects are fully informed
and made aware of the benefits of the product being sold vis-a-vis the product features

36
Ibid., Section 84.
37
IRDAI (Protection of Policyholder‘s Interests) Regulations, 2017, Regulation 2.
38
Ibid., Regulation 3.

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attached thereto and the terms and conditions of the product so that the benefits /
returns of the product are not mis-stated / mis-represented. Again, every insurer shall
display the service parameters and turnaround times as approved by the Board in its
website and keep the same updated as and when the service parameters are revised by
the Board.39

A prospectus of any insurance product shall clearly state (i) (a) the Unique
Identification Number (UIN) allotted by the Authority for the concerned insurance
product (b) the scope of benefits; (c) the extent of insurance cover; (d) warranties,
exclusions/exceptions and conditions of the insurance cover along with
explanations.40

(ii)(a) a description of the contingency or contingencies to be covered by insurance;

(b) the class or classes of lives or property eligible for insurance under the terms
of such prospectus; (c) a full statement of the circumstances, if any, in which
rebates of the premiums quoted in the prospectus or table shall be allowed on
the effecting or renewal of a policy, together with the rates of rebate applicable
to each case; and (d) a copy of Sec. 41 of the Act but not including the proviso
to sub-section (1) thereof.41

(iii) the allowable riders or add-on covers on the insurance products shall be
clearly spelt out with regard to their scope of benefits.42

(iv) the premium pertaining to health related or critical illness riders shall not
exceed 100% of premium under the basic product, the premiums under all
other life insurance riders put together shall not exceed 30% of premiums
under the basic product and any benefit arising under each of the above
mentioned riders shall not exceed the sum assured under the basic product.43

39
Ibid., Regulation 5.
40
Ibid., Regulation 6 (1) (i).
41
Ibid.
42
Ibid.
43
Ibid.

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(v) in case of life insurance, whether the product is participating (with-profits) or
nonparticipating (without-profits). Provided that the benefit amount under
riders in a life insurance policy shall be subject to section 2(11) of the
Insurance Act, 1938. Explanation: The rider or riders attached to a life
insurance policy shall bear the nature and character of the main policy, viz.
participating or non-participating and accordingly the life insurer shall make
provisions, etc., in its books.44

An insurer or its agent or other intermediary shall provide all material

information in respect of a proposed cover to the prospect to enable the prospect to
decide on the best cover that would be in his or her interest. 45 Where the prospect
depends upon the advice of the insurer or his agent or an insurance intermediary, such
a person must advise the prospect dispassionately.46

Where for any reason, the proposal and other connected papers are not filled in
by the prospect, the insurer or the distribution channel shall explain the contents of the
form, and a certificate shall be incorporated at the end of the proposal form from the
prospect that the contents of the proposal form and connected documents have been
fully explained to him and he has fully understood the significance of the proposed
contract.47

The Insurers shall ensure, that a sale executed over distance-marketing modes
such as Internet, SMS, Tele Marketing, interactive electronic medium etc., shall be
undertaken by authorized and qualified sales persons who are specified in this behalf
by the Authority. It is mandatory that the consent of the prospect be obtained before
canvassing. Care should be exercised to ensure that the prospect contacted has clarity
as to the identity of the insurer, the distribution channel, the product, benefits and
conditions of offer etc. The canvassing so made shall not involve compulsion,
inconvenience or nuisance of any kind to the prospect.

44
Ibid.
45
Ibid.
46
Ibid.
47
Ibid.

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Further, every insurer shall place in its website the terms and conditions of
every insurance product that is offered for sale by the insurer as it was approved by
the Authority under File and Use procedure or filed with the Authority under Use and
File procedure, including products modified or products withdrawn. The UIN allotted
by the Authority to every insurance product shall also be mentioned against each
product. The insurer shall keep the list updated at all times.48

Except in case of a marine insurance cover, or such other covers approved by

the Authority exempting usage of proposal form, a proposal for grant of insurance
cover, either for life insurance business or for general insurance business or for health
insurance business, must be evidenced by a document in written or electronic or any
other format as approved by the Authority. It is the duty of the insurer to furnish to the
insured, free of charge, within 30 days of the acceptance of a proposal, a copy of the
proposal submitted by the Insured.49 In case of marine insurance cover or other
insurance covers where a proposal form is not used, the insurer shall record the
information obtained orally or in writing or electronically, and confirm it within a
period of 15 days thereof with the prospect and incorporate the information in its
cover note or policy. Where the insurer claims that the prospect suppressed any
material information or provided misleading or false information on any matter
material to the grant of a cover, then the onus of proof rests with the insurer only in
respect of any information not so recorded. Any proposal form seeking information
for grant of life cover shall prominently state therein the requirements of Section 45 of
the Act. While answering the questions in the proposal form for obtaining life
insurance cover, the prospect is to be guided by the provisions of Section 45 of the
Act. Wherever the benefit of nomination is available to the proposer, in terms of the
Act or the conditions of policy, the insurer or the distribution channel shall draw the
attention of the proposer to it and encourage the proposer to avail the facility and
inform him of the provisions of section 39 of the Act. Insurer shall process the
proposals with speed and efficiency and the decision on the proposal thereof, shall be
communicated in writing to the proposer within a reasonable period but not exceeding

48
Ibid., Regulation 7.
49
Ibid., Regulation 8.

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15 days from the date of receipt of proposals or any requirements called for by the
insurer. Where a proposal deposit is refundable to a prospect under any
circumstances, the same shall be refunded within 15 days from the date of
underwriting decision on the proposal.50

The regulation ensures the following matter to be stated in life insurance

policy: A life insurance policy shall clearly state: (i) the name and UIN allotted by the
Authority for the product governing the policy, its terms and conditions; name, code
number, contact details of the person involved in sales process; (ii) whether it is
participating in profits or not, whether it is linked or non-linked; (iii) the manner of
vesting or payment of profits such as cash bonus, deferred bonus, simple or
compound reversionary bonus; (iv) the benefits payable and the contingencies upon
which these are payable and the other terms and conditions of the insurance contract;
(v) the name of Nominee (s) age of nominee (s) and their relationship and name of
guardian in case of minor nominees. (vi) the details of the riders being attached to the
main policy; (vii) the date of commencement of risk, the date of maturity and the
date(s) on which survival benefits, if any, are payable; (viii) the premiums payable,
periodicity of payment, grace period allowed for payment of the premium, the date of
last installment of premium, the implication of discontinuing the payment of an
installment(s) of premium and also the provisions of guaranteed surrender value; (ix)
the details of revival schemes provided for reviving a lapsed policy and requirements
to be submitted for revival there under. The insurers shall use term ―revival‖ which is
in vogue for renewing a lapsed insurance policy. (x) Name, Address, Date of birth and
age of the insured as at the date of commencement of the policy. (xi) the policy
conditions for (a) conversion of the policy into paid up policy, (b) surrender, (c)
foreclosure, (d) non-forfeiture, (e) discontinuance provisions in case of Linked
Policies (xii) contingencies excluded from the scope of the cover, both in respect of
the main policy and the riders; (xiii) the provisions for nomination, assignment, loans
on security of the policy and a statement that the rate of interest payable on such loan
shall be as prescribed by the insurer at the time of taking the loan; (xiv) any special
clauses, exclusions or conditions imposed on the policy; (xv) the address, email id of

50
Ibid.

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the insurer to which all communications in respect of the policy shall be sent; (xvi)
the notes to policyholder highlighting the significance of notifying timely the change
of his/her address; (xvii) details of insurer‘s Internal Grievance Redressal Mechanism
along with address and contact details of Insurance Ombudsman within whose
territorial jurisdiction the branch or office of the insurer or the residential address or
place of residence of the policyholder is located; (xviii) the list of documents that are
normally required to be submitted by a claimant in case of a claim under the policy. 51

In life insurance policy, the insurer shall inform clearly by the letter
forwarding the policy to the policyholder that he has a free look period of 15 days
from the date of receipt of the policy document and period of 30 days in case of
electronic policies and policies obtained through distance mode, to review the terms
and conditions of the policy and where the policyholder disagrees to any of those
terms or conditions, he has the option to return the policy to the insurer for
cancellation, stating the reasons for his objection, then he shall be entitled to a refund
of the premium paid subject only to a deduction of a proportionate risk premium for
the period of cover and the expenses incurred by the insurer on medical examination
of the proposer and stamp duty charges. In respect of a linked insurance product, in
addition to the deductions under sub-regulation above, the insurer shall also be
entitled to repurchase the units at the price of the units on the date of cancellation. A
request received by insurer for free look cancellation of the policy shall be processed
and premium refunded within 15 days of receipt of the request.52

A general insurance policy shall clearly state: (i) the name(s) and address(s) of
the insured and of any bank(s) or any other person having financial interest in the
subject matter of insurance, UIN of the product, name, code number, contact details
of the person involved in sales process; (ii) full description of the property or interest
insured; (iii) the location or locations of the property or interest insured under the
policy and, where appropriate, with respective insured values; (iv) period of
Insurance; (v) sums insured; (vi) perils covered and not covered; (vii) any franchise or
deductible applicable; (viii) premium payable and where the premium is provisional
51
Ibid., Regulation 9.
52
Ibid., Regulation 10.

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subject to adjustment, the basis of adjustment of premium be stated; (ix) policy terms,
conditions and warranties, Exclusions, if any. (x) action to be taken by the insured
upon occurrence of a contingency likely to give rise to a claim under the policy; (xi)
the obligations of the insured in relation to the subject matter of insurance upon
occurrence of an event giving rise to a claim and the rights of the insurer in the
circumstances; (xii) any special conditions attaching to the policy; (xiii) the grounds
for cancellation of the policy which in the case of a retail policy, for the insurer, can
be only on the grounds of misrepresentation, non-disclosure of material facts, fraud or
non co-operation of the insured Explanation: Products approved as retail policies
under File and Use guidelines notified by the Authority from time to time fall within
the purview of retail policy referred above. Provided that in the case of Commercial
policies alone, other circumstances under which the policy may be cancelled be given,
along with the manner of calculation of refund and notice period for cancellation.
(xiv) the address of the insurer to which all communications in respect of the
insurance contract should be sent; (xv) the details of the endorsements, add-on covers
attaching to the main policy; (xvi) that, on renewal, the benefits provided under the
policy and/or terms and conditions of the policy including premium rate may be
subject to change; and (xvii) details of insurer‘s internal grievance redressal
mechanism along with address and contact details of Insurance Ombudsman within
whose territorial jurisdiction the branch or office of the insurer or the residential
address or place of residence of the policyholder is located.53

Similarly, a health insurance policy shall clearly state: (i) The name of the
policyholder and the names of each beneficiary covered, UIN of the product, name,
code number, contact details of the person involved in sales process; (ii) Date of birth
of the insured and corresponding age in completed years; (iii) The address of the
insured; (iv) The period of insurance and the date from which the policyholder has
been continuously obtaining health insurance cover in India from any of the insurers
without break; (v) The sums Insured; (vi) The sub-limits, Proportionate Deductions
and the existence of Package rates if any, with crossreference to the concerned policy
section; (vii) Co-pay limits if any; (viii) The pre-existing disease (PED) waiting

53
Ibid., Regulation 11.

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period, if applicable; (ix) Specific waiting periods as applicable; (x) Deductible as
applicable – general and specific, if any; (xi) Cumulative Bonus, if any; (xii).
Periodicity of payment of premium instalment; (xiii) Policy period; (xiv) Policy
terms, conditions, exclusions, warranties; (xv) Action to be taken on the occurrence of
a claim for cashless and reimbursement options separately; (xvi) Details of TPA, if
any engaged, their address, toll free number, website details; (xvii) Details of
Grievance Redressal mechanism of insurer; (xviii) Free look period facility and
portability conditions; (xix) Policy migration facility and conditions where applicable;
(xx) that, on renewal, the policy could be subject to certain changes in terms and
conditions including change in premium rate; (xxi) Provision for cancellation of the
policy; and (xxii) Address and other contact details of Ombudsman within whose
territorial jurisdiction the branch or office of the insurer or the residential address or
place of residence of the policyholder is located.54

Claim settlement is another area which requires much concern. This is an

issue, which has a direct nexus with interest of policy holders. Failure to perform duty
imposed by law or under contract amounts to deficiency. Under law an insurer may
pay the amount due under the policy within a reasonable time and so unexplained
inordinate delay in settlement of insurance claims was held to constitute deficiency in
service.55 Where the insurance company is negligent in setting the claim it amounts to
deficiency in service and the claimant is entitled to compensation not only for
financial loss but also mental stress. 56 When an insurance claim is repudiated by the
insurance company after proper investigation on reasonable grounds there is no
deficiency in service.57 Where the insurance company erroneously repudiated the
claim it was held that it amounted to deficiency of service. 58 In Praveen Kumar v.
New India Assurance Co Ltd.59 where the vehicle was insured for Rs 2 lakhs and due
to accident and fire, the vehicle was destroyed, the rejection of complaint was
arbitrary and clearly a deficiency of service. The insurance company was directed to

54
Ibid., Regulation 12.
55
National Insurance Co. Ltd. v. Lalchand Jain and Sons 1997(1) CPR 108 (NC).
56
Birendra Mohan Pol Sinha v. New India Assurance Co (1993) 1 CPR 297.
57
VellithodyRamakrishanVazikkadelluv. Divisional Manager New Delhi Assurance Co Ltd. (1993).
58
S. Vijayav. Marketing Manager, Divisional Office, LIC of India (1994) CPR 316 (Kant).
59
(1994) 1 CPR 341 (Har).

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pay Rs 1,74,500 with interest at 18 per cent and further observed that that order in no
way precludes the complainant from claiming the balance of Rs 25,500 in a civil
court. When the insurance company in insurance for theft of goods tendered the
amount assessed by its surveyors it was held that there is no deficiency of service. 60
Refusal to cay a claim on a lapsed policy does not constitute deficiency of service. 61

A life insurer, upon receiving a death claim, shall process the claim without
delay. Any queries or requirement of additional documents, shall be raised all together
and not in a piece-meal manner, within a period of 15 days of the receipt of the claim.
A death claim under a life insurance policy shall be paid or be rejected or repudiated
giving all the relevant reasons, within 30 days from the date of receipt of all relevant
papers and required clarifications. However, where the circumstances of a claim
warrant an investigation in the opinion of the insurer, it shall initiate the same at the
earliest and complete such investigation expeditiously, in any case not later than 90
days from the date of receipt of claim intimation and the claim shall be settled within
30 days thereafter. If there is delay on the part of Insurer beyond the timelines
mentioned in sub regulation above, the insurer shall pay interest at a rate, which is 2%
above bank rate from the date of receipt of last necessary document, Except in the
case of claims where an application is made under section 47 of the Act to the court, if
a claim is ready for payment but the payment cannot be made due to any reasons of
proper identification of the payee, the life insurer shall pay interest on the claim
amount at the bank rate from the date on which claim is ready for payment. In respect
of Maturity, Survival Benefit claims and Annuities, the Life Insurer shall initiate the
claim process by sending intimation sufficiently in advance or send post-dated cheque
or give direct credit to the bank account of claimant through any electronic mode
approved by RBI, so as to pay the claim on or before the due date. In case of any
delay on the part of the Insurer in settling the claim on due date, the life insurer shall
pay interest at a rate, which is 2% above bank rate from the due date of payment or
date of receipt of last necessary document from the insured/claimant, whichever is
later. In respect of free look cancellation, surrender, withdrawal, request for refund of

60
New India Assurance Co Ltd v. New Gulmarg Restaurant (1996) CCJ 1311 (Har).
61
LIC of India v. Sushma Singh (1994) 1 CPJ 143 (NC).

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proposal deposit, refund of outstanding proposal deposit if any, shall be processed and
paid within 15 days of receipt of request or last necessary document, failing which the
insurer shall pay penal interest at a rate, which is 2% above bank rate from the date of
request or receipt of last necessary document if any whichever is later, from the
insured/claimant. Explanation: Administration of Health Insurance Policies issued by
Life Insurers shall also be governed by Chapter IV of IRDAI (Health Insurance)
Regulations, 2016. The interest payments referred above in sub regulations (ii), (iii),
(iv), (v) shall be paid by the Life Insurer suo moto without waiting for specific
demand from the insured/claimant.62

In settlement of claim in general insurance policy, an insured or the claimant

shall give notice to the insurer of any loss arising under contract of insurance at the
earliest or within such extended time as may be allowed by the insurer.63 On receipt of
such a communication, a general insurer shall respond immediately and give clear
information to the insured on the procedures that he should follow. In cases where a
surveyor has to be appointed for assessing a loss/claim, it shall do so immediately, in
any case within 72 hours of the receipt of intimation from the insured. Insurer shall
communicate the details of the appointment of surveyor, including the role, duties and
responsibilities of the surveyor to the insured by letter, email or any other electronic
form immediately after the appointment of the surveyor. Thereafter the insurer /
surveyor shall within 7 days of the claim intimation, inform the insured / claimant of
the essential documents and other requirements that the claimant should submit in
support of the claim. Where documents are available in public domain or with a
public authority, the surveyor/insurer shall obtain them. The surveyor shall start the
survey immediately unless there is a contingency that delays immediate survey, in any
case within 48 hours of his appointment. Interim report of the physical details of the
loss shall be recorded and uploaded/forwarded to the insurer within the shortest time
but not later than 15 days from the date of first visit of the surveyor. A copy of the
interim report shall be furnished by the insurer to the insured/claimant, if he so
desires. Where the insured is unable to furnish all the particulars required by the

62
Ibid., Regulation 14.
63
Ibid., Regulation 15.

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surveyor or where the surveyor does not receive the full cooperation of the insured,
the insurer or the surveyor, as the case may be, shall inform in writing to the insured
under information to the insurer about the consequent delay that may result in the
assessment of the claim. It shall be the duty equally of the insurer and the surveyor to
follow up with the insured for pending information/documents guiding the insured
with regard to submissions to be made.64 The insurer and/or surveyor shall not call for
any information/document that is not relevant for the claim. The surveyor shall submit
his final report to the insurer within 30 days of his appointment. A copy of the
surveyor‘s report shall be furnished by the insurer to the insured/claimant, if he so
desires. Notwithstanding anything mentioned herein, in case of claims made in
respect of commercial and large risks the surveyor shall submit the final report to the
insurer within 90 days of his appointment. However, such claims shall be settled by
the insurer within 30 days of receipt of final survey report and/or the last relevant and
necessary document as the case may be. Where special circumstances exist in respect
of a claim either due to its special / complicated nature, or due to difficulties
associated with replacement/reinstatement, the surveyor shall, seek an extension from
insurer for submission of his report. In such an event, the insurer shall give the status
to the insured/claimant fortnightly wherever warranted. The insurer may make
provisional/ on account payment based on the admitted claim liability. 65 If an insurer,
on the receipt of a survey report, finds that it is incomplete in any respect, he shall
require the surveyor, under intimation to the insured/claimant; to furnish an additional
report on certain specific issues as may be required by the insurer. Such a request may
be made by the insurer within 15 days of the receipt of the final survey report.
Provided that the facility of calling for an additional report by the insurer shall not be
resorted to more than once in the case of a claim. The surveyor, on receipt of this
communication, shall furnish an additional report within three weeks from the date of
receipt of communication from the insurer. On receipt of the final survey report or the
additional survey report, as the case may be, and on receipt of all required
information/documents that are relevant and necessary for the claim, an insurer shall,
with in a period of 30 days offer a settlement of the claim to the insured/claimant. If

64
Ibid.
65
Ibid.

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the insurer, for any reasons to be recorded in writing and communicated to the
insured/claimant, decides to reject a claim under the policy, it shall do so within a
period of 30 days from the receipt of the final survey report and/or additional
information/documents or the additional survey report, as the case may be. In case,
the amount admitted is less than the amount claimed, then the insurer shall inform the
insured/claimant in writing about the basis of settlement in particular, where the claim
is rejected, the insurer shall give the reasons for the same in writing drawing reference
to the specific terms and conditions of the policy document. In the event the claim is
not settled within 30 days as stipulated above, the insurer shall be liable to pay interest
at a rate, which is 2% above the bank rate from the date of receipt of last relevant and
necessary document from the insured/claimant by insurer till the date of actual
payment.66

In settlement of claim in a health insurance policy every insurer shall adhere to

the procedure laid down under Insurance Regulatory and Development Authority of
India (Health Insurance) Regulations, 2016 for settlement of health insurance claims.
An Insurer shall settle the claim within 30 days from the date of receipt of last
necessary document in accordance with the provisions of Regulation 27 of IRDAI
(Health Insurance) Regulations, 2016.67 In the case of delay in the payment of a
claim, the insurer shall be liable to pay interest from the date of receipt of last
necessary document to the date of payment of claim at a rate 2% above the bank rate.
However, where the circumstances of a claim warrant an investigation in the opinion

66
Ibid.
67
Regulation 27 of IRDAI (Health Insurance) Regulations, 2016 said that Settlement/Rejection of claim
by insurer: i. An insurer shall settle or reject a claim, as may be the case, within thirty days of the
receipt of the last ‗necessary‘ document. ii. Except in cases where a fraud is suspected, ordinarily no
document not listed in the policy terms and conditions shall be deemed ‗necessary‘. The insurer shall
ensure that all the documents required for claims processing are called for at one time and that the
documents are not called for in a piece-meal manner. iii. The information that the insurer has captured
in the proposal form at the time of accepting the proposal, the terms & conditions offered under the
policy, the medical history as revealed by earlier claims, if any, and the prior claims experience shall all
be maintained by the insurer as an electronic record and shall not be called for again from the
policyholder/insured at the time of subsequent claim settlements. iv. Insurer may stipulate a period
within which all necessary claim documents should be furnished by the policyholder/insured to make a
claim. However, claims filed even beyond such period should be considered if there are valid reasons
for any delay. v. Every Insurance Claim shall be disposed of in accordance to the Terms and
Conditions of the policy contract and the extant Regulations governing the settlement of Claims. No
Claim shall be closed in the books of the Insurers.

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of the insurer, it shall initiate and complete such investigation at the earliest, in any
case not later than 30 days from the date of receipt of last necessary document. In
such cases, Insurer shall settle the claim within 45 days from the date of receipt of last
necessary document. In case of delay beyond stipulated 45 days the Insurer shall be
liable to pay interest at a rate 2% above the bank rate from the date of receipt of last
necessary document to the date of payment of claim. Return of premium on
cancellation during Free Look Period shall be processed in accordance with the
provisions of Regulation 14 of IRDAI (Health Insurance) Regulations, 2016. Any
refund shall be processed with speed and shall be refunded within 15 days from the
date of receipt of request for free look cancellation. Explanation: Health Insurance
claims for the purpose of this Regulation shall be claims arising under all insurance
policies issued by Life, General and Health Insurers in respect of Health Insurance
Business as defined in Section 2 (6C) of the Act.68

Every insurer shall have in place proper procedures and effective mechanism
to resolve complaints and grievances of policyholders, claimants efficiently and with
speed.69 Apart from these every life insurer shall inform policyholders whose
participating policies are in force, at least once in a year, the bonus accrued to their
policies or the value of their ULIP policies as the case may be, through a
letter/email/any other electronic mode. The requirements of ―disclosure of material
information‖ regarding a proposal or policy apply, under these regulations, both to the
insurer and the insured. As far as the insured is concerned, wherever required, he shall
co-operate with the distribution channels to ensure this. The policyholder shall assist
the insurer, if the insurer so requires, in any prosecution, proceeding or in the matter
of recovery of claims by the insurer against third parties. The policyholder shall
furnish all information that is sought from him by the insurer, either directly or
through the distribution channels, which the insurer considers as having a bearing on
the risk to enable the insurer to assess properly the risk covered under a proposal for
insurance. Insurers shall at all times maintain total confidentiality of policyholder
information, unless it becomes necessary to disclose the information to statutory

68
Ibid., Regulation 16.
69
Ibid., Regulation 17.

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authorities due to operation of any law. 70 Any breach of the obligations cast on an
insurer or distribution channels or surveyors in terms of these regulations may enable
the Authority to initiate action against each or all of them, jointly or severally, under
the Act and/or the Insurance Regulatory and Development Authority Act, 1999.

The IRDA of India (Protection of Policyholders Interest) Regulation, 2017 is

the only measure which directly aims to protect the interest of policy holders.
However, this is not free from loopholes though the regulation ensures formulation of
board approved policy for protection of policy holders interest by all insurers, but in
reality either no such policy is formulated or if formulated lacks proper enforcement
mechanism; secondly, this regulation provides standards to be adopted in a prospectus
of any insurance product, but in many cases it is observed that these standards are not
followed; thirdly, this regulation provides for ―free look period‖ of 15 days for
cancellation of life insurance policy, this important provision has lost its relevance as
this provision is not popular amongst the insured, and lastly, this regulation provides
for minimum time period for settlement of claim in life, general and health insurance
policies, but it has been noticed that the insurers do not adhere to this time frame.

6.2 COMPETITION IN INSURANCE SECTOR

Amongst various market forces, which are responsible for growth of the
market, competition plays a vital role. Competition kills monopoly and enhances the
quality of nature the cost of commodities and services. Hence, competition has direct
nexus with consumer welfare. However, it is equally true that the benefit of
competition will only be available it is fair and impartial. In order to achieve fair,
impartial and healthy competition. The parliament passed the Competition Act, 2002.
The Competition Commission of India established under the Act acts as a watchdog
to ensure fair competition amongst various players.

At the end of March 2017, there are 62 insurers operating in India; of which
24 are life insurers, 23 are general insurers, 6 are health insurers exclusively doing
health insurance business and 9 are re-insurers including foreign reinsurers branches

70
Ibid., Regulation 19.

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and Lloyd‘s India. Of the 62 insurers presently in operation, eight are in the public
sector and the remaining fifty four are in the private sector. Two specialized insurers,
namely ECGC and AIC, one life insurer namely LIC of India (LIC), four in general
insurance and one in reinsurance namely GIC are in public sector. 23 life insurers, 17
general insurers, 6 standalone health insurers and 8 reinsurers including foreign
reinsurers branches and Lloyd‘s India are in private sector.71

6.2.1 Life Insurance Premium72

Life insurance industry recorded a premium income of `418476.62 crore

during 2016-17 as against `366943.23 crore in the previous financial year, registering
a growth of 14.04 percent (11.84 percent growth in previous year). While private
sector insurers posted 17.40 percent growth (13.64 percent growth in previous year) in
their premium income, LIC recorded 12.78 percent growth (11.17 percent growth in
previous year).While renewal premium accounted for 58.13 percent (62.18 percent in
2015-16) of the total premium received by the life insurers, first year premium
contributed the remaining 41.87 percent (37.82 percent in 2015-16). During 2016-17,
the growth in renewal premium was 6.62 percent (6.24 percent in 2015-16). First Year
premium registered a growth of 26.26 percent in comparison to a growth of 22.44
percent during 2015-16.

Further bifurcation of the first year premium indicates that single premium
income received by the life insurers recorded growth of 31.82 percent during 2016-17
(32.52 percent growth in 2015-16). Single premium products continue to play a major
role for LIC as they contributed 32.71 percent of LIC‘s total premium income (27.80
percent in 2015-16). In comparison, the contribution of single premium income in
total premium income during 2016-17 was 14.89 percent for private insurance
companies (13.75 percent in 2015-16). The regular premium registered 16.64 percent
growth in 2016-17, as against 8.23 percent growth in 2015-16. The private insurers
registered a growth of 22.17 percent (13.18 percent growth in 2015-16); while LIC
registered a growth of 10.37 percent in the regular premium (3.10 percent growth in

71
IRDAI annual report 2016-17, available at: www.irda.gov.in (Visited on August 20, 2017).
72
Ibid.

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2015- 16). Unit-linked insurance products (ULIPs) registered a growth of 12.70
percent premium from `46889.58 crore in 2015-16 to `52845.26 crore in 2016-17. On
the other hand, the growth in premium from traditional products was at 14.24 percent,
with premium of ` 365631.36 crore as against `320053.65 crore in 2015-16.
Accordingly, the share of unit-linked products in total premium decreased to 12.63
percent in 2016-17 as against 12.78 percent in 2015-16.

6.2.2 Market Share73

On the basis of total premium income, the market share of LIC decreased from
72.61 percent in 2015-16 to 71.81 percent in 2016-17. The market share of private
insurers has increased from 27.39 percent in 2015-16 to 28.19 percent in 2016-17.
The market share of private insurers in first year premium was 28.89 percent in 2016-
17 (29.46 percent in 2015-16). The same for LIC was 71.11 percent (70.54 percent in
2015-16). Similarly, in renewal premium, LIC continued to have a higher share at
72.31 percent (73.87 percent in 2015-16) when compared to 27.69 percent (26.13
percent in 2015-16) share of private insurers. During 2016-17, life insurers issued
264.56 lakh new policies, out of which LIC issued 201.32 lakh policies (76.1 percent
of total new policies issued) and the private life insurers issued 63.24 lakh policies
(23.9 percent of total new policies issued). While the private sector registered a
growth.74

The data both in the life and the non-life insurance sector shows that public
sector insurance companies both in life and non-life insurance section are far ahead in
comparison to private sector insurance companies in terms collection of premium,
number of the policies issued, net profit earned, a the number of offices. These data
reveals thatthere is no competition between public and private sector insurance
companies both in thelife and non- insurance sector. It is pertinent to note here that
the objective of privatization of insurance business was to facilitate the competition
between the put and the private insurers. It is again worthy to mention here that the
role the IRDAI is to ensure the orderly growth of insurance business in India a the

73
Ibid.
74
Ibid.

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orderly growth of the insurance business is not possible without ensure healthy
competition in the sector.

6.3 SET ASIDING INSURANCE CONTRACT IN THE GUISE OF

INSURANCE FRAUD

Contract of insurance is a contract of Uberrima fide that is of utmost good

faith. Sections 19-22 of the Marine Insurance Act, 1963 deals with this aspect. Both
the parties to contract of insurance must disclose to each other every material fact
before the contract is concluded. Failing of which, the aggrieved party can set aside
the contract of insurance. Taking this advantage the unscrupulous insurer avoids the
insurance on flimsy grounds.

Non-disclosure of a conviction in a criminal case of the assured was ground

for invalidating the policy.75 The test generally applied by the court is whether it is a
fact which has rejected to give policy on those terms if the fact had been disclosed. 76
In Rohini Nandan v. Ocean Accident and Guarantee Corp77 the plaintiff insured
against fire and burglary in respect of furniture, house-hold goods, personal effects
and jewels on his house in the first floor of a building from 1 July 1954. On 5 August
1974 there was a burglary, and he claimed indemnity. The insurer refused the claim
on the ground that he suppressed the fact that there was a burglary in the ground floor
of the premises in 1949 in his brother‘s house. The court held that the earlier burglary
in the ground floor of the premises was not material fact as it has no bearing on the
risk undertaken by the insurer. From the case analysis presented above it is clear that
insurer avoided the policy on flimsy grounds. In order to protect the insurer or his
claimant.

Explanation to Section 17 provides that mere silence is not fraud unless there
is duty to speak. As contract of insurance is a contract of utmost good faith. Hence
silence by any of the party to a material fact is fraud. Section 19 of the Indian
Contract Act, 1872 provides that where the consent of any party to a contract is

75
March Carbaret Clum v. London Assurance Co. 1 Lioyed Reh 169.
76
Banarasi Devi v. New India Assurance Co. AIR 159 Pat 540.
77
AIR 1960 Cal 696.

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caused by fraud, the contract is voidable at the option of the party whose consent so
caused. Further, law of torts enables the aggrieved party to claim damages from the
defaulter.

In Life Insurance Corporation of India v. Asha Goel,78 The apex court

explained: The contracts of insurance including the contract of life insurance
uberrima fide and every fact of material must be disclosed, otherwise, there is good
ground for rescission of the contract. The duty to disclose material facts continues
right up to the conclusion of the contract and also implies any material alteration in
the character of risk which may take place between the proposal and acceptance. If
there are any misstatements or suppression of material facts, the policy can be called
into question. For determination of the question whether the suppression relates to a
fact which is in the exclusive knowledge of the person intending to take the policy
and it could not be ascertained by a reasonable inquiry by a prudent person.79

78
AIR, 1986 Bom 412.
79
See also, LIC v. GM Channabasamma, (1991)15CC 357: AIR 1991 SC 392: (1991)70 Comp
Cas635: 1991 ACJ 303: 1991 ALR 118. LIC v. Shastri Setbi, AIR 2008 HP 67, post-mortem report
disclosed that the death of the policy holder was the result of injuries suffered in an accident and there
was no abnormality in the internal organs of the deceased. The general manager of the Corporation
admitted that the medical report at the time of insurance found him to be in a healthy state of body.
Hence, there was no suppression of facts. The corporation was liable to pay. Saurabh Basu v. Union of
India, AIR 2007 SCC Online All 918:(2008) 2 All U 596. All, the insured was not found suffering
from cancer or any other disease at the time of policy, doctors of the Corporation also found her to be
fit, she died three years after because of cancer, hold, rejection of the claim was not proper. LIC v. Anil
Kutnar, AIR 2008 (NOC) 1826 (Pat), repudiation of claim because of material misrepresentation, the
operation undergone was not for curing any disease rather it was for family planning, it did not amount
to suppression of facts, death was due to other factors, though it chanced to occur after the operation,
PC Chacko v. LIC, (2008) 1 SCC 321:AIR 2008 SC 424, deliberate wrong answers by the insured on a
point which had a great bearing on the contract of insurance, policy may be repudiated. LIC v.
Gayathri, (2007) 3 AIR Bom R (NOC 505) 180, policy was issued after medical checkup by LIC,
heath of the assured was described well by all means, no certificate of any hospitalisation of the assured
was produced by the LIC, suppression not proved, claimant entitled to payment of the assured amount,
Kamala v. LIC, (2006) 5 AIR Kar R 647,confidential medical report at the time of policy showed that
there was not disease at that date, the assured died of lumbar spondylitis. UIC produced no evidence to
show that there was any such disease or any hospitalisation for that reason, no suppression, LIC liable
interest reduced from 12 to 9 per cent. NilkantaMondal v. Union of India, 2006 All-iC (NOC) 351
(Cal), deceased was not a Government servant, demand by UIC of form ―E‖ was wrong, LIC directed
to pay. LIC v. Paid Gamah Bhat RamjiBLat, AIR 2007 (NOC) 1622 (NCC), fitness certificate during
pre-medical examination from panel doctor whose affidavit was also on record, claim could not be
rejected on the basis of certificate of hospital authorities where the treatment was taken. If the deceased
had TB it would have been detected in X-ray done by the panel doctor.

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Section 45 of the Insurance Act, 1938 provides no policy of life insurance
shall be called in question on any ground whatsoever after the expiry of three years
from the date of the policy, i.e., from the date of issuance of the policy or the date of
commencement of risk or the date of revival of the policy or the date of the rider to
the policy, whichever is later. Further, a policy of life insurance may be called in
question at any time within three years from the date of issuance of the policy or the
date of commencement of risk or the date of revival of the policy or the date of the
rider to the policy, whichever is later, on the ground of fraud: Provided that the
insurer shall have to communicate in writing to the insured or the legal representatives
or nominees or assignees of the insured the grounds and materials on which such
decision is based. Notwithstanding anything contained in sub-section (2), no insurer
shall repudiate a life insurance policy on the ground of fraud if the insured can prove
that the misstatement of or suppression of a material fact was true to the best of his
knowledge and belief or that there was no deliberate intention to suppress the fact or
that such misstatement of or suppression of a material fact are within the knowledge
of the insurer: Provided that in case of fraud, the onus of disproving lies upon the
beneficiaries, in case the policyholder is not alive.80

It is revealed from the above study that the insurer can only avoid the contract
after proving fraud on the part of the insured beyond all doubts. In Srinivasa Pillai v.

80
Explanation.—A person who solicits and negotiates a contract of insurance shall be deemed for the
purpose of the formation of the contract, to be the agent of the insurer. Again, a policy of life insurance
may be called in question at any time within three years from the date of issuance of the policy or the
date of commencement of risk or the date of revival of the policy or the date of the rider to the policy,
whichever is later, on the ground that any statement of or suppression of a fact material to the
expectancy of the life of the insured was incorrectly made in the proposal or other document on the
basis of which the policy was issued or revived or rider issued: Provided that the insurer shall have to
communicate in writing to the insured or the legal representatives or nominees or assignees of the
insured the grounds and materials on which such decision to repudiate the policy of life insurance is
based: Provided further that in case of repudiation of the policy on the ground of misstatement or
suppression of a material fact, and not on the ground of fraud, the premiums collected on the policy till
the date of repudiation shall be paid to the insured or the legal representatives or nominees or assignees
of the insured within a period of ninety days from the date of such repudiation. Explanation.—For the
purposes of this sub-section, the misstatement of or suppression of fact shall not be considered material
unless it has a direct bearing on the risk undertaken by the insurer, the onus is on the insurer to show
that had the insurer been aware of the said fact no life insurance policy would have been issued to the
insured. Nothing in this section shall prevent the insurer from calling for proof of age at any time if he
is entitled to do so, and no policy shall be deemed to be called in question merely because the terms of
the policy are adjusted on subsequent proof that the age of the life insured was incorrectly stated in the
proposal.'

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LIC of India,81 Srinivasa Pillai and his wife Ranganayagi took out a joint life
endowment policy for Rs. 25,000 commencing on 31 st December 1959 at
Pondicherry. They gave the usual statements and joint declarations. In answer to the
question in column 12(8) relating to the date of last delivery Ranganayagi stated that
she had delivered a female child on 18 May 1959 when in fact she delivered on 31
August 1959. It is the declared policy of the LIC not to issue a policy on a female
when she is pregnant or within six months after delivery. After taking the policy the
wife fell ill and was admitted in a hospital on 10 January 1960 and died on 17 January
1960. The husband preferred to claim. The LIC repudiated the claim as it was found
that she delivered her last child within 6 months before the policy and that she was
also suffering from tuberculosis. In the suit filed by the claimant, the LIC failed to
prove that she had TB, but the other ground was established which meant that the
insured had knowingly falsely stated the date of her last delivery in order to obtain the
policy and therefore upheld the repudiation and dismissed the claim. The court also
observed:

Contracts of insurance are based on the rocky foundation of utmost

good faith. Such good faith is not a matter of art but has to be really
and sincerely appreciated by the insured who proposes their lives for
insurance with the Corporation.

The rules of utmost good faith have been relaxed to some extent by the Insurance Act
1938 and now with reference to ‗Life Insurance Contracts‘ on the expiry of two years
if the premium has been paid regularly, the insurance policy cannot be set aside on the
ground that a fact has not been disclosed, unless there is a deliberate concealment,
amounting to fraud on the insurance company. The next part of the study discusses
insurance fraud.

Insurers have identified at least 80 districts across the country which has
excelled in fraudulent claims over the past decade. They have identified rings that
operate with the efficiency of a corporation with well-trained men and women who
collect data with the efficiency of a 21st century start-up. A combination of poor due
diligence in writing policies by insurance companies and the organisational
efficiencies of criminals in identifying those who are on deathbed and in enlisting
81
AIR 1977 Mad 381.

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doctors to produce fake certificates led to frauds which are estimated to have cost
over Rs 10,000 crore annually to the industry. Lessons of the past decade are leading
the industry to come together to form a data centre of fraudsters and their methods,
which would function like the credit bureau which is tapped into by banks to know
the customer‘s financial history. Insurers are also investing money and human
resources to enhance their abilities to detect fraud.

The Indian Insurance Act does not contain definition for ‗insurance fraud‘.
Neither have any specific laws connected to insurance fraud been spelled out in the
Indian Penal Code, 1860(IPC). The Indian Contract Act, 1872 (ICA) also doesn‘t
have any specific laws pertaining to insurance fraud. Even though sections related to
forgery82 or fraudulent83 acts can be applied in the IPC, it does not succeed to deter
the commission of the fraud. Insurance fraud84 occurs when people deceive an
insurance company in order to collect money to which they are not entitled.

The Insurance Regulatory and Development Authority of India (IRDAI) has

on several occasions taken up the International Association of Insurance Supervisors‘
(IAIS) definition, ―an act or omission intended to gain dishonest or unlawful
advantage for a party committing the fraud or for other related parties.‖

Insurance fraud refers to any duplicitous act performed with the intent to
obtain an improper payment from an insurer. Insurance fraud is committed by
individuals from all walks of life. Law enforcement officials have prosecuted doctors,
lawyers, chiropractors, car salesmen, insurance agents and people in positions of trust.
Anyone who seeks to benefit from insurance through making inflated or false claims
of loss or injury can be prosecuted.‘‘

82
Section 463 of Indian Penal Code said that Whoever makes any false documents or part of a
document with intent to cause damage or injury, to the public or to any person, or to support any claim
or title, or to cause any person to part with property, or to enter into any express or implied contract, or
with intent to commit fraud or that fraud may be committed, commits forgery.
83
Section 25 of IPC talk about fraudulent which means, a person is said to do a thing fraudulently if he
does that thing with intent to defraud but not otherwise
84
The Federation of Indian Chambers of Commerce & Industry define insurance fraud as, ―The act of
making a statement known to be false and used to induce another party to issue a contract or pay a
claim. This act must be wilful and deliberate, involve financial gain, done under false pretenses and is
illegal.‖

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6.3.1 Types of Insurance Fraud

The Insurance Regulatory and Development Authority of India which is the

apex body and overseeing the business of Insurance in India sets out these three broad
categories of fraud: (i) Policyholder Fraud and/or Claims Fraud – Fraud against the
company in the purchase and/or execution of an insurance product, including fraud at
the time of making a claim; (ii) Intermediary 85 Fraud – Fraud perpetuated by an
insurance agent/Corporate Agent/intermediary/Third Party Administrators (TPAs)
against the company and/or policyholders; and (iii) Internal Fraud – Fraud/
misappropriation against the company by its Director, Manager and/or any other
officer or staff member (by whatever name called).

Where the misrepresentation or the breach of the warranty is caused by the

mistake or fraud of the company‘s agent in misleading the assured or inserting false
particulars in the proposal the policy is avoided under certain circumstances, and if
the assured himself has been innocent the insurers must apart from any special
condition return the premium. This rule does not apply in the case of the collusion of
the agent with the assured. If the assured has been merely negligent he is entitled to a
return of the premium if the insurers cancel the policy. But he is not entitled to rescind
it on his own motion.86

Policy holders may generally commit these kinds of frauds: Firstly, Hiding a
pre-existing condition: most individual health policies give a definite waiting period
for a pre-existing condition/disease. The policyholder by falsifying the report of a pre-
policy health check up, conceal this fact; Secondly, Fabricated documents to meet
terms and conditions of the Insurance: Youthful and Healthy people are an obvious
choice for insurance by the companies. Any person with a different attribute, for
example, a person aged, may not necessarily face rejection of his application but may
be charged more premium. In this case people try to conceal age or chronic diseases.
Faking disability also comes under this; Thirdly, Duplicate bills of
85
Section 2 (f) of IRDAI define the term ―intermediary‖ or ―insurance intermediary‖ includes
insurance brokers, re-insurance brokers, insurance consultants, corporate agents, third party
administrator, surveyors and loss assessors and such other entities, as may be notified by the Authority
from time to time.
86
Kettlewellv. Refuge Insurance Society, (1909) A.C. 243.

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exchange: Submission of forged or inflated bills is also fraud, especially when no
expenses have been undertaken. The objective of health insurance, to cover the
medical expenses incurred when one has diseases or requires surgery, is defeated
then. An insurance policy is not supposed to be profitable; Fourthly, Withholding
information of multiple policies: It is the responsibility of the insured to inform all the
other insurers of the existing policies whether group, individual to prevent the making
of multiple claims on an issue and make a profit out of it; Fifthly, Participating in
fraud rings: A person might collude with another like an agent or doctor or providers
to make a false claim, for example, alter information at their bequest to make a claim
and Lastly, Orchestrated accident: A person might stage an accident so that they can
call for compensation for their medical and hospital expenses.

As far as the law relating to fraud is concerned Section 17 of the Indian

Contract Act, 1872 defines ―FRAUD‖ which means and includes any of the
following acts committed by a party to a contract, or by his agent, with intent to
deceive another party thereto or his agent, or to induce him to enter into the contract:
The suggestion, as a fact, of that which is not true, by one who does not believe it to
be true; The active concealment of a fact by one having knowledge or belief of the
fact; A promise made without any intention of performing it; Any other act fitted to
deceive; Any such act or omission as the law specially declares to be fraudulent. Mere
silence as to facts likely to affect the willingness of a person to enter into a contract is
not fraud, unless the circumstances of the case are such that, regard being had to them,
it is the duty of the person keeping silence to speak, or unless his silence is, in itself,
equivalent to speech.

As far as the criminal law relating to fraud is concerned section 420 of the
Indian Penal Code, 1860 deals with cheating and dishonestly inducing delivery of
property,87 Section 464 deals with making a false document 88 and Section 405 deals
with criminal breach of trust.89

87
Whoever cheats and thereby dishonestly induces the person deceived to deliver any property to any
person, or to make, alter or destroy the whole or any part of a valuable security, or anything which is
signed or sealed, and which is capable of being converted into a valuable security, shall be punished
with imprisonment of either description for a term which may extend to seven years, and shall also be
liable to fine.

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Fraud on the part of the insurers creates a valid claim for the return of the
premium.90 In such a case, the assured may repudiate the contract and ask for
recission and return of premium. Where the assured is the injured party, the right to
recover and receive back the premium is not effected by the fact that the insurers are
at risk, and consequently liable on the policy in the event of a loss taking place before
he has elected to rescind.91 If on the other hand, fraud is alleged or proved against the
insured, the question of the return of premium is not free from doubt, and it has been
held in some cases that the premium may be returned; as for instance, in Prince of
Wales Insurance Co. v. Palmer,92 the insurers were not allowed to retain the premium
for their own use when the policy was set aside on the ground of fraud and lack of
insurable interest. On the other hand in British Equitable Insurance Co. v.
Musgrave,93 the premiums in similar cases were not refunded. Though on account of
the forfeiture clause in the policy the premium in Duckett v. William,94 was not
refunded, one of the Judges, (Lord Lyndhurst) expressed the opinion that in the
absence of such a clause the assured would have been entitled to a refund even if the
contract was set aside on the ground of fraud. Similarly in Biggar v. Rock Life

88
A person is said to make a false document or false electronic record—
First-Who dishonestly or fraudulently:
(a) makes, signs, seals or executes a document or part of a document; (b) makes or transmits any
electronic record or part of any electronic record; (c) affixes any [electronic signature] on any
electronic record; (d) makes any mark denoting the execution of a document or the authenticity of
the [electronic signature],with the intention of causing it to be believed that such document or part of
document, electronic record or [electronic signature] was made, signed, sealed, executed, transmitted
or affixed by or by the authority of a person by whom or by whose authority he knows that it was not
made, signed, sealed, executed or affixed;
Secondly- Who, without lawful authority, dishonestly or fraudulently, by cancellation or otherwise,
alters a document or an electronic record in any material part thereof, after it has been made, executed
or affixed with [electronic signature] either by himself or by any other person, whether such person be
living or dead at the time of such alteration; or Thirdly-Who dishonestly or fraudulently causes any
person to sign, seal, execute or alter a document or an electronic record or to affix his [electronic
signature] on any electronic record knowing that such person by reason of unsoundness of mind or
intoxication cannot, or that by reason of deception practised upon him, he does not know the contents
of the document or electronic record or the nature of the alteration.
89
Whoever, being in any manner entrusted with property, or with any dominion over property,
dishonestly misappropriates or converts to his own use that property, or dishonestly uses or disposes of
that property in violation of any direction of law prescribing the mode in which such trust is to be
discharged, or of any legal contract, express or implied, which he has made touching the discharge of
such trust, or wilfully suffers any other person so to do, commits ―criminal breach of trust‘‘.
90
Kettlewellv. Refuge Insurance Co., (1909) AC 243-78, LJQB 519.
91
Ibid.
92
Prince of Wales Insurance Co. v. Plamer, (1858) 25 Beav.605-63 ER 768.
93
British Equitable Insurance Co. v. Musgrave, (1887) 3 TLR 630.
94
(1834) 3 LJ Ex. 141.

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Assurance Co.,95 Wright, J., observed: ―If the plaintiff is entitled to anything, I think
the most he could have asked for would be that the court should say that the contract
is void on the ground of either fraud or mistake, with the consequence perhaps he may
be entitled to a return of premium paid.‖

The duty of good faith applies to the insurers and their agents as well as to the
insured, and the insurers must not only disclose all the facts material to risk within
their knowledge but must also disclose them accurately and fully. 96 For practical
purposes, intricate questions do not arise in the case of application of the duty of good
faith by the insurers. Where a policy is effected in consequence of the assured being
misled by the fraud of the insurance agent, the contract may be set aside and the
assured can recover the premium paid.97 Accuracy of the statement is equally required
from the insurers in the discharge of the duty of good faith towards the assured..
Therefore, any statement made by the company which is false in any material respect
will vitiate the contract. There is a misrepresentation of the effect of a written
document when a statement is made, with knowledge of its oral meaning, that it bears
a different meaning.98 Similarly any false statement as to the nature and scope of the
insurance entered into amounts to misrepresentation.99

Law enables the insurer to avoid the insurance on non-disclosure of material

fact. Through these provisions the legislature conferred a shield to the insurer against
fraudulent insured. However, the above study reveals the fact that insurer uses this
shield as a sword against the innocent insured. In many cases, such act of insurer
remained un complained either due to ignorance of insured or unwillingness of the
insured to wage a legal war against the insurer, who had already equipped with a
panel of lawyers. We endorse the objective of Section 45 of the Insurance Act, 1938,
which protects insured against non-disclosure after expiry of three years from the date
of policy except on the ground of fraud. We however, humbly suggest reducing three
years to two years. At the same time we suggest that the cases of fraud by either of
party should be strictly dealt with.

95
(1902) 1 KB 516.
96
Carter v. Boehm, (1766) 97 ER 1162.
97
Refuge Etc. v. Kettlewell, (1908) 1 KB 545.
98
Molloy v. Mutual Reserve Life Assurance Co., (1906) 22 TLR 525.
99
Re: Bradley and Essex and Suffolk Accident Indemnity Society (1912) 1 KB 415.

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6.4 INSURANCE PENETRATION AND INSURANCE DENSITY

6.4.1 Indian Insurance in the global scenario

Globally, the share of life insurance business in total premium was 55.3
percent. However, the share of life insurance business for India was very high at
77.95 percent while the share of non-life insurance business was small at 22.05
percent.100

In life insurance business, India is ranked 10among the 88 countries, for which
data is published by Swiss Re. India‘s share in global life insurance market was 2.36
percent during 2016. However, during 2016, the life insurance premium in India
increased by 8 percent (inflation adjusted) when global life insurance premium
increased by 2.5percent.101

Chart I

Insurance Penetration in Select Countries - 2016

100
IRDAI annual report 2016-17, available at: www.irda.gov.in (Visited on October 25, 2017).
101
Ibid.

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Chart II

Insurance Density in Select Countries – 2016

The measure of insurance penetration and density reflects the level of

development of insurance sector in a country. While insurance penetration is
measured as the percentage of insurance premium to GDP, insurance density is
calculated as the ratio of premium to population (per capita premium).102

During the first decade of insurance sector liberalization, the sector has
reported consistent increase in insurance penetration from 2.71 percent in 2001 to
5.20 percent in 2009. Since then the level of penetration was declining. However,
there was a slight increase in the years 2015 (3.44 percent) and in 2016 (3.49 percent).
The level of insurance density reached the maximum of USD 64.4 in the year
2010from the level of USD 11.5 in 2001. During the year2016, the insurance density
was USD 59.7 (USD54.7 in 2015).103

102
Ibid.
103
Ibid.

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The insurance density of life insurance sector had gone up from USD 9.1 in
2001 to reach the peak at USD 55.7 in 2010. Since then it has exhibited declining
trend up to the year 2013. During the year 2016, the level of life insurance density
was USD 46.5 (USD 44 in 2014 and USD 43.2 in 2015).104

The life insurance penetration had gone up from 2.15percent in 2001 to 4.60
percent in 2009. Since then, it has exhibited a declining trend up to the year
2014.There was a slight increase in 2015 reaching 2.72percent and remained
unchanged in 2016.105

Over the last 10 years, the penetration of nonlife insurance sector in the
country remained steady in the range of 0.5-0.8 percent. However, its density has
gone up from USD 2.4 in 2001 to USD 13.2 in 2016.106

Insurance Penetration in India Insurance Density in India

Source: IRDAI Annual Report 2016-17

The above study reveals the fact that India is ranked 10 th among the 86
countries in Life Insurance business and 15th in Non life insurance sector. The study
also reveals the poor states of insurance also reveals the poor states of insurance
penetration of insurance density. Many factors and responsible for this the prime
factor if the unexploredness of insurance in rural areas.

104
Ibid.
105
Ibid.
106
Ibid.

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6.4.2 Provision of Rural Insurance under the Insurance Act, 1938

Section 32B of the Act says that every insurer shall, after the commencement
of the Insurance Regulatory and Development Authority Act, 1999, undertake such
percentages of life insurance business and general insurance business in the rural 107 or
social sector108, as may by specified, in the Official Gazette by the Authority, in this
behalf. Further, section 32C says that every insurer shall, after the commencement of
the Insurance Regulatory and Development Authority Act, 1999, discharge the
obligations specified under section 32B to provide life insurance or general insurance
policies to the persons residing in the rural sector, workers in the unorganised 109 or
informal sector or for economically vulnerable or backward classes of the society and
other categories of persons as may specified by regulations made by the Authority and
such insurance policies shall include insurance for crops. Section 105B provides for
penalty for failure to comply with section 32B, 32C and 32D. It says it an insurer fails
to comply with the provisions of section 32B, 32C and 32D, he shall be liable to a
penalty not exceeding twenty-five crore rupees.

6.4.3 Provisions under the IRDAI (Obligations of Insurers to Rural and Social
Sectors) Regulations, 2015

In exercise of the powers conferred by Section 114A (2) (id) read with
Sections 32B and 32C of the Insurance Act, 1938 and Section 14(2)(p) read with
Section 26 of the Insurance Regulatory and Development Authority Act, 1999, the

107
The "rural sector" means any place as per the "latest census 2011, which meets the following
criteria: A population of less than 5,000;Density of population less than 400 per sq km. and more than
"25 per cent of the male working population" is engaged in agricultural pursuits.
108
Social sector is an important sector for India‘s economy and includes several important component
such as education, health and medical care, water supply and sanitation, poverty alleviation, housing
conditions etc. that play a vital contribution in human development.
109
The term unorganised sector when used in the Indian contexts defined by National Commission for
Enterprises in the Unorganised Sector, in their Report on Conditions of Work and Promotion of
Livelihoods in the Unorganised Sector as consisting of all unincorporated private enterprises owned by
individuals or households engaged in the sale or production of goods and services operated on a
proprietary or partnership basis and with less than ten total workers. Amongst the characteristic
features of this sector are ease of entry, smaller scale of operation, local ownership, uncertain legal
status, labour-intensive and operating using lower technology based methods, flexible pricing, less
sophisticated packing, absence of a brand name, unavailability of good storage facilities and an
effective distribution network, inadequate access to government schemes, finance and government aid,
lower entry barriers for employees, a higher proportion of migrants with a lower rate of
compensation. Employees of enterprises belonging to the unorganised sector have lower job security
and poorer chances of growth, and no leave or paid holidays, they have lower protection against
employers indulging in unfair or illegal practices.

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Insurance Regulatory and Development Authority of India, in consultation with the
Insurance Advisory Committee, framed this Regulation. The obligations stated in this
regulation came into effect from financial year 2016-17. Up to Financial year 2015-16
the obligations as per Insurance Regulatory and Development Authority (Obligations
of Insurers to Rural or Social Sectors) Regulations, 2002 as amended from time to
time shall apply.

Obligations of this regulation ensures that every insurer, who begins to carry
on insurance business after the commencement of the Insurance Regulatory and
Development Authority Act, 1999, for the purposes of Sections 32B and 32C of the
Insurance Act, 1938 as amended from time to time, shall ensure that it undertakes the
following obligations, during the financial years indicated herein, pertaining to the
persons in–

6.4.3.1 Rural Sector

(a) In respect of a Life Insurer the following percentages of the total number of
policies written in the respective years shown below: (i) First year 7% (ii)
Second year 9% (iii) Third year 12% (iv) Fourth year 14% (v) Fifth year 16%
(vi) Sixth and seventh year 18% (vii) Eighth and ninth year 19% (viii) Tenth
year and every year thereafter 20%.

(b) In respect of a General Insurer, the percentage of gross premium income

written direct in the respective years shown below: (i) First year 2% (ii)
Second year 3% (iii) Third year to Seventh year 5% (iv) Eighth year 6% (v)
Ninth year and every year thereafter 7% ( c) In respect of Standalone Health
Insurers (i) 50% of the obligations prescribed for General Insurers

6.4.3.2 Social Sector

In respect of all Insurers (Life, Non-Life, Standalone Health) computed on the

total business procured in the preceding financial year,110 first year 0.5%, second year

110
The year in which you earn your income is termed as Financial Year for tax purposes. It is also the
year in which you pay tax on your income. A Financial year lasts from 1st April to 31st March.
Assessment Year is the year which immediately follows Financial Year. It is also the year in which
you file your Income Tax Return for the taxes paid in the relevant Financial Year. It also lasts from 1st
April to 31st March.

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1%, third year 1.5%, fourth year 2%, fifth year 2.5%, sixth year 3%, seventh year
3.5%, eighth year 4%, ninth year 4.5% and tenth year and above 5% .

Total business for the purpose of these regulations is the total number of
policies issued in case of individual insurance and number of lives covered in case of
Group Insurance. In case of individual health insurance policies covering the lives of
family members, the lives covered under such policy may be taken into account both
in determination of target as well as actual performance) Provided that in cases where
an Insurer commences operations in the second half of the financial year and is in
operations for less than six months as at 31st March of the relevant financial year, (i)
no rural and social sector Obligations shall be applicable for the said period, and (ii)
the annual obligations as indicated in the Regulations shall be reckoned from the next
financial year which shall be considered as the first year of operations for the purpose
of compliance to this regulations. However, in cases where an Insurer commences
operations in the first half of the financial year, that financial year shall be treated as
the first year of operations and the applicable obligations for the first year shall be
2500 lives for Social Sector. Similarly the obligations for Rural Sector shall be half of
the percentage prescribed for the first year.

From the Annual Report of IRDAI 2016-17, it is clear that, all the twenty-
three private sector life insurance companies had fulfilled their rural sector
obligations. The number of policies underwritten by them in the rural sector as a
percentage of the total policies underwritten in the year 2016-17 was as per the
obligations applicable to them. The lone public sector insurer, Life Insurance
Corporation of India was also compliant with its obligations in the rural sector for
2016-17.The life insurers underwrote 60.45 lakh policies in the rural sector, viz., 22.9
percent of the new individual policies (264.20 lakh policies) underwritten by them in
2016-17. LIC underwrote 22.44 percent of the new policies and private insurers
underwrote 24.3 percent of their new individual policies in the rural sector.111

All the 23 private life insurers had fulfilled their social sector obligations
during 2016-17. The number of lives covered by them in the Social Sector was above

111
Ibid.

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stipulations in the IRDAI (Obligations of Insurers to Rural or Social Sectors)
Regulations 2015. LIC was compliant with its social sector obligations in 2016-17.112

All the Public and Private sector insurers (other than standalone health
Insurers) complied with Rural and Social Sector obligations for the year 2016-
17.Rural and Social Sector Obligations of Stand-alone health Insurers There are six
standalone health insurance companies as on 31st March, 2017. As Aditya Birla
Health insurance company has started its operations in October 2016, according to the
Regulations, targets are not applicable to this company. All other five stand alone
health insurance companies were compliant with their rural and social sector
obligations during the financial year 2016-17.

Table 1
Compliance of General Insurers (Except Standalone and Specialized Insurers)
With Rural And Social Obligations 2016-17

* The reason for having high percentage in number of persons covered in Social Sector is
implementation of PMFBY and RSBY schemes in the FY 2016-17.

Source: IRDAI Annual Report 2016-17, Available at www.irdai.gov.in (visited on August 12, 2018).

112
Ibid.

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Table 2

Compliance of Stand-Alone Health Insurers With Respect To Rural

Sector Obligations 2016-17

Source: IRDAI Annual Report 2016-17, Available at www.irdai.gov.in (visited on August 12, 2018).

Table 3

Compliance of Stand-Alone Health Insurers With Respect To Social

Sector Obligations 2016-17

Source: IRDAI Annual Report 2016-17, Available at www.irdai.gov.in (visited on August 12, 2018).

From the above study a serious doubt is raised i.e. who India is lagging behind
in insurance penetration and insurance density despite of the fact that all the life and
health have achieved their goal in the rural and social sector. The fact of the fact of
that as per the recent census near about 80% of our population resides in rural areas
and the target which provided under this Regulation is sufficient. Therefore, it is
humbly submitted that the target should be raised.

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6.4.4 Bancassurance

Bancassurance is the combination of two words i.e., banc and assurance,

which refers to banks selling the insurance products. The term ―Bancassurance‖ first
appeared in France in 1980, to define the sale of insurance products through banks
distribution channels.113Banks in European countries sale insurance products under
the name of stand-alone insurance products114 or ‗add-ons to the bank products115 by
way of combining the insurance with typical banking products/services.116

Bancassurance encompasses terms such as Allfinanz117 (in German),

‗Integrated Financial Services‘118 and ‗Assure banking‘119. The term ‗bancassurance‘
is defined to mean banks dealing in insurance products of both life and non-life type
in any forms. Banks in Europe though predominantly deal with life insurance
products, they are also channeling the non-life insurance products.

According to section 2(1) (iv) of the Insurance Regulatory and Development

Authority (Licensing of Bancassurance Entities) Regulations, 2012, ―Bancassurance‖
means any insurance business conducted through the channel of any institution
including non- banking finance companies licensed under banking Regulation Act,
1949 to accept deposit from the public. The World Bank in its Policy Research Paper
on bancassurance defines ‗bancassurance‘ as ―the process of using a bank‘s
branches,

113
M.k. Padhy, ―Bancaassurance in India: Need for a new Legal Regime‖ 1 IJLSC 1 (2014).
114
Stand-alone insurance refers to an insurance product that a business or individual purchases to cover
a specific risk or cost. It is the opposite of an insurance policy with broad coverage that applies to a
number of risks in different scenarios.
115
Add-on products include ―debt protection, identity theft protection, credit score tracking, and other
products that are supplementary to the credit provided by the card itself.
116
A. Karunagaran, ―Bancassurance: A Feasible Strategy for Banks in India‖, Reserve bank of India
Occasional papers, vol. 27, No.3, Winter 2006.
117
The process of combining of banking and insurance activities in one organization is called Allfinanz.
118
The most familiar definition of financial services integration is that it occurs whenever production or
distribution of a financial service traditionally associated with one of the three major financial sectors is
by actors from another sector. Terms such as bancassurance, allfinanz, universal banking, and financial
conglomerates are all used to convey some notion of integration. Terminology, however, is not yet
standard, so these terms carry different meanings for different people; for more details see Harold D.
skipper, Jr., Thomas p. Bowles chair of actuarial Science, C.V. Starr of International Insurance,
Georgia state University, Atlanta, GA/USA, available at http://wwzo.oecd.org/finance/
insurance/1915462.pdf visited on August 25, 2016.
119
The term ‗bancassurance‘ may be differentiated from ‗assure banking‘ which refers to the provision
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and distribution of financial and banking services by insurance companies.

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sales network, and customer relationships to develop sales of insurance products‖. 120
The World Bank asserts that bancassurance is not simply a sales technique. More than
that, it is a development channel. A broader definition of bancassurance was provided
by Swiss Re (1992):

―Bancassurance can be described as a strategy adopted by banks or

insurance companies aiming to operate the financial services market in
a more or less integrated manner‖.121

In practice, the term ‗bancassurance‘ is consistently used to describe a new

strategic orientation of financial institutions in private customer business‖. Simply
put, the concept of bancassurance refers to collaboration between banks and insurance
companies whereby banks may manufacture distribute or market insurance products
offered by partner insurance companies in one form of construct or other, which
ranges in complexity on a continuum depending on the degree of collaboration
between the bank and its partner insurance provider 122. Essentially, bancassurance
bridges the product offerings of insurance companies and banks. Both, in their
individual roles, play a cardinal part in promoting economic growth both at a micro
and macroeconomic level. Benefits from a synergistic collaboration between banks
and insurers are immense. Consumers123 of both players benefit from thehigher capital
and less risk mix, while the economy burgeons from the resultant increase in
enterprise.

Reserve Bank of India (RBI) has recognized "bancassurance" wherein banks

are allowed to provide physical infrastructure within their select branch premises to
insurance companies for selling their insurance products to the banks‘ customers with
adequate disclosure and transparency, and in turn earn referral fees on the basis of
premia collected. This would utilize the resources in the banking sector in a more
profitable manner. Further, Government of India Notification dated August 3, 2000,
120
S.O. Gonulal, N Goulder and R Lester, ―Bancassurance A Valuable Tool forDeveloping Insurance
in Emerging Markets.‖ The World Bank, Financial andPrivate Sector Development, Non-Bank
Financial Institutions; Policy Research WorkingPaper 6196 (September 2012), 8.
121
For more details visit http://www.swissre.com/library.
122
Munich Re Group, ―Bancassurance in Practice,‖ Munchener RuckversicherungsGesellschaft
Munchen (2001): 2
123
17 Gonulal, N Goulder and R Lester, ―Bancassurance A Valuable Tool for Developing Insurance in
Emerging Markets.‖, 7.

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specified ‗Insurance‘ as a permissible form of business that could be undertaken by
banks under Section 6(1)(o) of the Banking Regulation Act, 1949. Then onwards,
banks are allowed to enter the insurance business as per the guidelines and after
obtaining prior approval of Reserve Bank of India.

6.4.4.1 Bancassurance Law in India

Till the emergence of bankassurance, banks had worked strictly on a

‗traditional banking style‘ with highly compartmentalized manner. Insurance
companies also never used the corporate agents to sell their policies. The new role of
banks and insurer required a new legal regime. Therefore, the regulator of Banking
sector, the Reserve Bank of India and the regulator of the insurance sector, the
Insurance Regulatory and Development Authority formulated fresh regulations under
which permission were granted to bankers and insurers for bancassurance.

6.4.4.2 Banking Regulation Act, 1949 and Regional Rural Banks Act, 1976

The Banking Regulation Act, 1949 allows the banks to undertake insurance
business. Under section 6 (1) (o) of the Banking Regulation Act, 1949, ―Insurance‖
has been notified as a permissible form of business that could be undertaken by banks.
Similarly, under section 18 of the Regional Rural Banks Act, 1976, a Regional Rural
Bank(RRB) may engage iii one or more forms of business specified in sub-section (1)
of Section 6 of the Banking Regulation Act, 1949, which includes insurance business.

6.4.4.3 Reserve Bank of India’s Guidelines on Bancassurance

6.4.4.3.1 RBI’s Guidelines to All Scheduled Commercial Banks (except RBs),

dated 9th August, 2000

Under this guideline the RBI has made it clear that insurance business will not
be permitted to be undertaken departmentally by the banks. Any bank intending to
undertake insurance business will be required to obtain prior approval of the Reserve
Bank of India. The Reserve Bank empowered to give permission to banks on case to
case basis keeping in view all relevant factors including the position in regard to the
level of non-performing assets of the applicant bank so as to ensure that non-

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performing assets do not pose any future threat to the bank in its present or the
proposed line of activity, viz., insurance business. The guide lines further made it
clear that risks involved in insurance business do not get transferred to the bank and
that the banking business does not get contaminated by any risks which may arise
from insurance business. There should be ‗arms-length ‗relationship between the
bank and the insurance outfit. The subsidiaries of banks will also be allowed to
undertake distribution of insurance product on agency basis.

6.4.4.3.2 RBI’s Guidelines to All Scheduled Commercial Banks (except RRBs),

dated 22nd September, 2003

While making a change in its earlier guideline, the RBI has made it clear that
banks need not to obtain prior approval of the RBI for engaging in insurance agency
business or referral arrangement without any risk participation, subject to the
following conditions:124(i) The bank should comply with the IRDA regulations for
acting as ‗composite corporate agent‘ or referral arrangement with insurance
companies; (ii) The hank should not adopt any restrictive practice of forcing its
customers to go in only for a particular insurance company in respect of assets
financed by the bank. The customers should be allowed to exercise their own choice;
(iii) The bank desirous of entering into referral arrangement, besides complying with
IRDA regulations, should also enter into an agreement125 with the insurance company
concerned for allowing use of its premises and making use of the existing
infrastructure of the bank; (iv) As the participation by a bank‘s customer in insurance
products is purely on a voluntary basis, it should be stated in all publicity material
distributed by the bank in a prominent way126 and (v) The risks, if any, involved in

124
However, banks satisfying the eligibility criteria laid down in our circular DBOD.
No.FSC.BC/16/24.01.018/2000-2001 dated August 9, 2000 referred to above and intending to set up
insurance joint ventures with equity contribution o risk participation basis or making investments in the
insurance companies for providing infrastructure and services support, would continue to obtain the
prior approval of the Reserve Bank.
125
The agreement should be for a period not exceeding three years at the first instance and the bank
should have the discretion to renegotiate the terms depending on its satisfaction with the service or
replace it by another agreement after the initial period. Thereafter, the bank will be free to sign a longer
term contract with the approval of its Board in the case of a private sector bank and with the approval
of Government of India in respect of a public sector bank.
126
There should be no ‗linkage‘ either direct or indirect between the provisions of banking services
offered by the bank to its customers and use of the insurance products.

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insurance agency/referral arrangement should not get transferred to the business of the
bank.

6.4.4.3.3 RBI’s Guidelines to all Regional Rural Banks (RRBs)/All Sponsor

Banks, dated October 27, 2004

Keeping in view of the importance of bancassurance in spreading insurance

business in rural sector, this guidelines of RBI, which permits RRBs to undertake
insurance business, is quite significant. Under these guidelines, the RBI has permitted
all RRBs to undertake insurance business on non-risk participation subject to their
obtaining necessary authorization/license from IRDA. Such permission will be
normally valid for two years su1ect to review before expiry of the said period.
However, no RRB should undertake insurance business without obtaining prior
permission of the Reserve Bank of India. However, this permission is subject to some
terms and conditions.127

6.4.4.3.4 RBI’s Guidelines to all State Cooperative Banks/District Central

Cooperative Banks, dated 18th November, 2004

Under these guidelines the RBI has permitted all State Cooperative
Banks/District Central Cooperative Banks to undertake insurance business as
corporate agent on non-risk participation subject to their obtaining necessary
authorization/license from IRDA as well as subject to their fulfilling prescribed term
and conditions.128 Permission granted to State Cooperative Banks/District Central

127
The terms and conditions are (i) The RRB should have positive net worth; (ii) The bank should have
complied with the prudential norms on income recognition, asset classification, provisioning,
investment norms, exposure norms; (iii) The bank should not have violated any directive in last two
years; (iv) The Gross NPAs of the RRB should not be more than 10%; (v) The bank should be in net
profit during last three years and should not have any accumulated losses; (vi)The bank should comply
with the IRDA regulations for acting as a corporate agent; (vii) The bank should not adopt any
restrictive practice of forcing its customers to go in only for a particular insurance company in respect
of assets financed by the bank. The customers should be allowed to exercise their own choice; (viii)
The risk, if any, involved in insurance agency should not get transferred to the business of the bank;
and (ix) The RRB should obtain prior permission from the concerned Regional Office of RBI before
taking up the insurance agency business. The application should be recommended by the sponsor bank
and routed through NABARD for their recommendation.
128
The term and conditions are (i) The bank should be having a minimum positive net worth real or
exchangeable value of paid-up capital and reserves as defined in Section 11 of the Banking Regulation
Act,1949(AACS)] of Rs. 100 crore as per the latest NABARD Inspection Report; (ii) The bank should
have earned net profit for the last three years and should not have any accumulated losses; (iii)The
Gross NPA of the bank should not be more than 10 per cent; (iv) The bank should not have violated

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Cooperative Banks for taking up insurance agency business as indicated above, will
be normally valid for two years subject to review before expiry of the said period. No
State Cooperative Banks/District Central Cooperative Banks should undertake
insurance business without obtaining prior permission of the Reserve Bank of India.

6.4.4.3.5 IRDAI’s Regulations on Bancassurance

The IRDAI has framed several Regulations to control Bancassurance in India.

These regulations supplements RBI‘s guidelines and allow banks to enter into
insurance business.

6.4.4.3.6 IRDAI (Licensing of Bancassurance Entities) Regulations, 2012

Regulation 4 provides that an applicant 129 desiring to obtain a license to act as

a bancassurance130 agent131 in one or more States/Union territories in the country,
shall make an application to the IRDAI in such Form(s) as may be specified along
with the fee of Rs. 500/- (Rs. Five Hundred only). However, no bancassurance agent
shall tie up with more than one life, non-life or standalone health insurance company.

6.4.4.3.7 IRDA (Licensing of Banks as Insurance Brokers) Regulations, 2013

A Schedule bank listed in the second schedule to the Reserve Bank of India
Act, 1934 may file an application to the IRDA for grant of a license to act as an
insurance broker.132 The applicant shall have to obtain the prior approval of the RBI

prudential norms including individual and group exposure norms fixed by RBI / NABARD; (v) The
bank should have complied with the instructions issued by RBI/NABARD on loans and advances to
directors/relatives, firms etc.; (vi) No premium collection accounts will be allowed to be opened with
the bank and hence, premium collected should be directly paid to the insurance companies; (vii) The
bank should comply with regulations of Insurance Regulatory and Development Authority (IRDAI) for
acting as corporate agent; and (viii) The bank should submit an undertaking to the effect that banking
business will not in any way get contaminated/affected on account of acting as agent of insurance
companies.
129
Regulation 2(1)(iii) – ―Applicant‖ means any institution including Non-Banking Finance
Companies licensed under Banking Regulation Act, 1949 to accept deposit from public.
130
Regulation 2(1)(iv) – ―Bancassurance‖ means any Insurance business conducted through the
channel of the Institution specified at 2(iii) above.
131
Regulation 2(1)(v) – ―Bancassurance Agent‖ means an applicant specified in clause (iii) and
licensed to act as agent to an Insurer (s) under Regulation 4 of these regulations.
132
―Insurance Broker‖ means a person for the time being licensed by the authority under regulation 9,
who forremuneration arranges insurance contracts with insurance companies on behalf of his clients-
Regulation 2(1) (k).

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before applying for license to act as an insurance broker. The authority shall grant a
license on being made by the banker applicant 133 on being satisfied that the applicant
fulfills all the conditions specified for the grant of license and send intimation thereof
to the applicant mentioning the category for which the authority has granted the
license.134 The business of the insurance broker shall be carried in such a manner that,
not more than 50% of the premium shall emanate from any one client. 135Every
insurance broker shall before the commencement of his business, deposit and keep
deposited with any scheduled ban a sum of Rs. 50 lakhs and such deposit shall have a
lien with IRDAI.136

The 1iberalizatin, privatization and globalization of banking and insurance

sector in India have drawn these sectors closer together. The success of insurance
depends on bancassurance and the success of bancassurance greatly depends on
banks; therefore, banks need to strive towards that direction. At present the
bancassurance law in India is fragmented or fractured. Either they are RBI Guidelines
or IRDAI Regulations. There is a lack of coordination between these two entities.
IRDAI Regulations seem to be more exhaustive in comparison to RBI Guidelines.
The former contains provisions mostly in the form of ethical norms lacking sanction.
In its policy research on bancassurance undertaken globally, the World Bank 137
determined that bancassurance has had important success in some economies and
markedly limited success in others. The principal factor identified to have made the
difference in the economies where bancassurance has excelled is the regulatory
situation, in particular the presence of legislation governing bancassurance. Therefore,
it is humbly submitted that the Parliament should enact a specific and holistic
legislation on bancassurance by taking the RBI Guidelines and IRDAI Regulations
together. Provisions should be made under this Act to coordinate the functioning of
RBI and IRDAI in this respect. The responsibilities of the bank and insurance partner
should be clearly delineated, so that the consumer of insurance is protected. Further,

133
Regulation 4.
134
Regulation 9.
135
Regulation 18(1).
136
Regulation 20.
137
Gonulal, N Goulder and R Lester, ―Bancassurance A Valuable Tool for Developing Insurance in
Emerging Markets‖, 22.

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the nature of the possible products, the premium payment and claims processes should
be clearly outlined. The Act should also fix a target to be achieved by every bank
either private or public for selling insurance products and the last but not the least
stringent sanctions should be imposed for violating norms prescribed under the said
Act.

6.4.5 Postal Insurance

Postal insurance on Insurance through the postal department is another way to

penetrate insurance in the rural areas. Postal insurance is regulated under the Post
Office Life Insurance Rules, 2011. For more than 150 years, the Department of Post
(DoP) has been backbone of the country‘s communication and played a crucial role in
the country‘s socio-economic development. It touches the lives of Indian citizens in
many ways: delivering mails, accepting deposits under Small Saving Schemes,
providing life insurance cover under Postal Life Insurance 138 (PLI) and Rural Postal
Life Insurance (RPLI). The administration of the Post Office Life Insurance Fund and
Rural Post Office Life Insurance Fund under Post Office Life Insurance Rules, 2011

138
Rule 6, talk about Eligibility conditions for Postal Life Insurance. The following persons are eligible
to the benefits of the Post Office Life Insurance fund provided their age is not less than 19 years and
not more than 55 years on the next birth day on the date of proposal, except in case of Anticipated
Endowment Assurance, Joint Life and Children policy for which the minimum and maximum age
limits are prescribed separately:-
(1) All permanent and temporary employees of Central/State Governments, Universities
established by Governments (Centre/State), Gramin Dak Sewaks, Government Aided
educational institutions, Nationalized Banks, State Bank of India, Subsidiary Banks of State
Bank of India, Financial Institutions notified by Government, Defence personnel (Army,
Navy, Air Force), Personnel of para military force including Assam Rifles, ITBPF, CISF, BSF
and CRPF etc., Regular employees of Public Sector Undertakings (Centre and State),
Regional Rural Banks, Permanent & temporary servants of local bodies paid from ―Local
Funds‖ as defined in Fundamental Rule 9 (14).
(2) All permanent and temporary employees of the Council of Scientific and Industrial Research,
The Medical Council of India, The Dental Council of India, The Nursing council of India, and
The Pharmacy Council of India.
(3) Industrial and Work-charged employees in the Department of Posts and Department of
Telecommunications whose pay is regulated under the ―Fundamental Rules‖.
(4) All permanent and temporary employees of autonomous body established by stipulated rules
of Centre/State governments.
(5) Members of the Defence Services including those holding short service commission, extended
service commission and other kinds of non-permanent commissions are also eligible to join
the fund. Note 1: If a member of the Defence Service is transferred to Reserve then his policy
shall be converted into cash policy for payment of premium in cash at the post office of his
choice on or before last day of the month to which the premium relates. If the last day happens
to be a Sunday or a Postal holiday, the amount should be paid on the previous business day.

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is vested in the Director General of Posts who is authorized to issue from time to time such
subsidiary regulations and orders as may be deemed necessary provided that no such
regulation or order shall be inconsistent with any provision of these rules or any rules
that may hereinafter be made by the President. The Post Office Life Insurance Rules,
2011 shall apply to the Postal Life Insurance and Rural Postal Life Insurance of the
Department of Posts.

Rule 7 provides for the limits of sum assured in postal life insurance. 139 Rule
9(a) provides for the Rural Postal Life Insurance which was introduced w.e.f. 24-03-
1995―Rural Postal Life Insurance scheme-1995‖ called ‗Rural scheme‘ is envisaged
to provide insurance cover to the rural public in general and benefit weaker sections
and women workers of rural areas in particular. Post Office Life Insurance Rules,
2011, as amended from time to time shall be applicable to the ―Rural Scheme‖
mutatis-mutandis except where special provisions have been made and notified under
this scheme. The scheme shall cover all persons, male or female, who permanently
reside in rural areas and ordinarily residents in India to the exclusion of Foreigners
and Non-Resident Indians. Persons fulfilling such eligibility conditions should be
between 19 years and 55 years of age on next birth day, except for Ten Year Rural
PLI and Anticipated Endowment Assurance plan for which upper age limit is
prescribed separately. A policy holder who subsequently shifts his/her residence
outside India shall make arrangements to make payments of due premia within India
in the specified Post Office in Indian currency. The claims in respect of policies of
such persons shall be settled in Indian currency in accordance with Post Office Life
Insurance Rules 2011.

Rule 10 provides for the Ten Year Rural Postal Life Insurance Plan which was
introduced in 24-03-1995.

139
Any person who is eligible to the benefit of the Post Office Life Insurance Fund under Rule 6, may effect an
insurance- Whole Life Assurance, Endowment Assurance, Convertible Whole Assurance, Anticipated
Endowment Assurance and Yoga Suraksha Policy or all of them on his life for a sum not less than Rs.
20,000 in each class but not more than an aggregate of Rs. Ten lack (Rs 10,00,000/) in respect of one
class/all classes of insurance policy(s) taken together. The value of policy shall be taken in multiples of
Rs 10,000/-, after minimum limit of Rs 20,000/- i.e. Rs. 20,000/-, Rs 30,000/-, Rs 40,000/-, Rs 50,000/-
and so on.

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(a) A policy under this plan shall be available for ten years only 26. The minimum
sum assured under this plan shall be Rs 10,000/- (Rs ten thousand only) and
the maximum limit taking total sum assured together under all plans shall not
exceed Rs 3, 00,000/- (Rs three lakh only), while the maximum limit in
respect of non-medical scheme, taking total sum assured together under all
plans shall not exceed Rs 25,000/- (Rs twenty five thousands only). A person
who is not less than 19 years and not more than 45 years of age on his/her next
birth day shall be eligible for this plan.

(b) Loan facility shall be available under this plan. No conversion to/ from this
plan is permissible. In the event of cessation of premium before maturity age,
the reduced paid up assurance will be granted, provided premiums have been
paid for not less than three years, only at the date of maturity, that is at the end
of stipulated plan term or on death of life assured, and no further periodical
payment on account of survival benefit will be paid.

Rule 12 provides Children Policy for Children which was introduced w.e.f.
20-01-2006. The scheme is envisaged to provide insurance cover to maximum two
children of a policy holder of Postal Life Insurance and Rural Postal Life Insurance,
provided that only one such policy will be allowed for a child against one policy of
the father/mother. This is a separate policy. If the father/mother (called insured) of
the child has already taken policy(s) or is proposing to take policy(s) on their life
either as Whole life or Endowment Assurance (called Main Policy) for a sum assured
not less than the sum assured of Children Policy, then Children Policy in respect of
their own child/children shall be issued to such insured. The age of child should be
between 5 years and 20 years. The maximum age of main policy holder should be
below 45 years.

Though Postal insurance has a tendency to penetrate into the rural areas. But
this failed miserably due to following reasons. Firstly, the insurance spreads through
its agent network. However, the postal insurance does not have such a network;
Secondly, postal insurance is not much popular unlike other products of postal
department; Thirdly, lack of coordination between IRDAI and Indian post; Lastly, the
work culture of Indian post is yet to raise up to Banking system.

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6.5 HEALTH INSURANCE

Despite the importance attributed to health at the national and international,

the health sector is the most neglected sector in India. Even seven decades of
independence the effective medical care is still a distant dream for majority of our
population. The cost of the treatment is too high to exclude most citizens from
receiving an effective treatment. The cost of treatment for the most predominant and
life-threatening diseases like cancer which kills around 700,000 people annually
requires Rs. 2 to 8 lakes. Other most frequently occurring diseases like diabetes
mellitus affect around 40 million Indians and cardiovascular and heart related
ailments cause about 2.4 million deaths annually. Both these require costly and
prolonged medication and surgery. The expenditures for open heart surgery in private
hospitals range between Rs. 1.25 lakhs to Rs. 2 lakhs, while angioplasty and other
cardiac treatments require a minimum of Rs. 2.5 lakhs to Rs. 2.75 lakhs. Renal
diseases like kidney failure also require long and expensive treatments. It has been
estimated that the cost of getting haemodialysis (i.e: 12 dialysis / month) is around Rs.
12-15,000/- per month whereas for peritoneal dialysis it is around Rs. 18-20,000/- per
month.

In a country like India, where 29.5 percent of people reside below the poverty
line140 of earning and a per capita income of Rs 78 per day, these treatments are out
of reach of many citizens. Approximately 75% of Indian families belong to the middle
class. Most of these people depend on government hospitals for their medical needs.
Although, the medical expenditure of government hospitals‘ is somewhat lower than
that of private hospitals and clinics, still it not easily accessible to all for many
reasons. To mention few of them: lack of proper infrastructure, doctor and staff
absenteeism; indulgence in private practice by most doctors, high charges imposed by

140
According to Rangarajan Committee, New poverty line: Rs 32 in rural areas and Rs 47 in urban
areas , The Expert Group under the Chairmanship of Dr. C. Rangarajan to Review the Methodology for
Measurement of Poverty in the country constituted by the Planning Commission in June 2012 has
submitted its report on 30th June 2014. In a written reply to a question in the Rajya Sabha today, the
Minister of State (Independent Charge) for Planning, Statistics and Programme Implementation and
Defence Shri Rao Inderjit Singh has said that as per the report, poverty line is estimated as Monthly Per
Capita Expenditure of Rs. 1407 in urban areas and Rs. 972 in rural areas. available at:
pib.nic.in/newsite/PrintRelease.aspx?relid=108291 (Visited on 24th July, 2018).

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diagnostic and pathological centers, involvement of intermediary between doctor and
medicine business or diagnostic centers and proliferation of medical subject into
specialization and super specialization etc.

In this situation, health insurance can be one such alternate to ensure an

effective treatment for all and even for a citizen living below poverty line. By
provision of tailored plans, different health insurance companies can ensure that
health care becomes easy and affordable for the common man. Things can be easily
understand a single earning households and primary earner is the one requiring
treatment. Health insurance emerges as the best alternative to provide health facility
to individuals and ensure that it becomes ingrained as tool for provision of social
security. So India being a welfare state the functions of the law should be to regulate,
promote and ensure the orderly growth of health insurance in India.

Though not expressly mentioned anywhere in the constitution, the Right to

health is an essential aspect and integral component of the right to life. In Bandhua
Mukti Morcha v. Union of India,141 the Hon‘ble Supreme Court has held that the right
to life with human dignity, enshrined in Article 21, derives from the Directive
Principles of State Policy and there for includes the protection of health. Similarly In
Kirloskar Brother Ltd. v. ESI Corporation,142 the Supreme Court said that ―Article
21 has been interpreted to include right to health; it is also a fundamental right 143 of
workmen‖. Apart from this, Article 24 prohibits the employment of child below the
age of 14 year in any factory, mines or in any other hazardous employment. Similarly,
Article 39(e) aims to protect the health of workers. Article 41 cast a duty on State to
public assistance basically for those who are sick and disable. Where, Article 42
makes provision to protect the health of infant and mother by maternity benefit,
Article 47 imposes a duty on the State to raise the level of nutrition and the standard
of living and to improve public health. Article 48A ensures that state shall endeavor to
protect and impose the pollution free environment for good health. Health care related
items do not directly appear at all in the Union List. In the State List, the major health
141
AIR 1984 SC 802.
142
AIR 1996 SC 3261.
143
See also Mullin v. Union Territory of Delhi, (1981) 1 SCC 608.

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care related item is No.6: Public Health Sanitation, hospitals and dispensaries, In the
Concurrent List three health care related items are given: 19: Drug and Poison, 26:
Legal, Medical and Other Professions, and 29: Prevention of the extension from one
state to another of infectious or contagious disease or pests affecting men, animal or
plants.

Apart from the provisions of the Indian Constitution, the Indian Judiciary has
from time to time attempted to build a health Jurisprudence. In Parmanand Katara v.
Union of India,144 the Supreme Court said that whether the patient was innocent or a
criminal, it is an obligation of those in charge of community health to preserve the life
of the patient. Every doctor has a professional obligation to extend his services with
due expertise and care for protecting life. In Consumer Education and Resource
Centre v. Union of India,145 and State of Punjab and Others v. Mohinder Singh,146 the
Apex Court held that the right to health is essential for human existence and is,
therefore an integral part of the right to life.

The issue of adequacy of medical health services was also addressed in

Paschim Bangal Mazdoor Samiti v. State of West Bengal.147 The question before the
Court was whether the non-availability of services in the government health centres
amount to a violation of Article 21? It was held:

―Article 21 imposes an obligation on the State to safeguard the right

to life of every person. Preservation of human life is thus of paramount
importance. The government hospitals run by the State and the medical
officers employed therein are duty-bound to extend medical assistance
for preserving human life. Failure on the part of a government hospital
to provide timely medical treatment to a person in need of such
treatment results in violation of his right to life guaranteed under
Article 21. ‖

Further, the Court ordered that primary health care centres should be equipped
to deal with medical emergencies. It was also held that the lack of financial resources
cannot be a reason for the State to shy away from its Constitutional obligation.

144
AIR 1989 SCC 286.
145
AIR 1995 SCC 42.
146
AIR 1997 SC 1225.
147
AIR 1996 SC 2426.

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In Mahendra Pratap Singh v. State of Orissa,148a case pertaining to the failure
of the government in opening a primary health care centre in a village, the court held:

―In a country like ours, it may not be possible to have sophisticated

hospitals but definitely villagers within their limitations can aspire to
have a Primary Health Centre. The Government is required to assist
people get treatment and lead a healthy life. Healthy society is a
collective gain and no Government should make any effort to smother
it. Primary concern should be the primary health centre and technical
fetters cannot be introduced as subterfuges to cause hindrances in the
establishment of health centre.‖

It also stated:

―great achievements and accomplishments in life are possible if one

is permitted to lead an acceptably healthy life‖. Thereby, there is an
implication that the enforcing of the right to life is a duty of the State
and that this duty covers providing of right to primary health care. This
would then imply that the right to life includes the right to primary
health care‖.149

In Municipal Council, Ratlam v. Shri Vardichan,150 where the Court was

called upon to decide whether municipalities are obligated to maintain certain
conditions to ensure public health. It was held that a public body constituted for the
principal statutory duty of ensuring sanitation and health is not entitled immunity on
breach of this duty. Further, ―pollutants being discharged by big factories… are a
challenge to the social justice component of the rule of law151‖.

In Santosh Kumar Gupta v. Secretary, Ministry of Environment, New Delhi,152

it contended that the policy, controls/regulations and their implementations are

148
AIR 1997 Ori 37.
149
World Health Organization. Declaration of Alma-Ata.adopted at the International Conference on
Primary Health Care, Alma-Ata, USSR, 6–12 September 1978. Primary health care (PHC) refers to
"essential health care" that is based on scientifically sound and socially acceptable methods and
technology, which make universal health care universally accessible to individuals and families in a
community. It is through their full participation and at a cost that the community and the country can
afford to maintain at every stage of their development in the spirit of self-reliance and self-
determination".
150
1980 (4) SCC 162.
151
The Oxford English Dictionary has defined "rule of law" this way.The authority and influence of
law in society, esp. when viewed as a constraint on individual and institutional behaviour; (hence) the
principle whereby all members of a society (including those in government) are considered equally
subject to publicly disclosed legal codes and processes.
152
AIR 1998 MP 43.

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inadequate thereby causing health hazards. In its judgments, the High Court of
Madhya Pradesh has laid down that pollution from cars poses health hazard to people
and that the State must ensure that emission standards are implemented and
maintained. Protection of the right to health has an inextricable link with clean
environment. In Jaya N.D. case it was held that theclean and healthy, environment
itself is a fundamental right.153In the land mark MC Mehta v. Union of India,154 the
Supreme Court has held that environmental pollution causes several health hazards,
and therefore violates right to life. Specifically, the case dealt with the pollution
discharged by industries into the Ganges. It was held that victims, affected by the
pollution caused, were liable to be compensated.

Article 23155 is also indirectly related to health, Traffic in human beings and
beggar and other similar forms of forced labour are prohibited and any contravention
of this provision shall be an offence punishable in accordance with law. It is well
known that traffic in women leads to prostitution, immoral traffic of child, and these
all things are against the concept of social security. Article 24156aims to prohibit child
labour it say ―No child below the age of fourteen year shall be employed to work in
any factory or mine or engage in any other hazardous employment.‖ Thus, this article
is direct relevance to child health.

There is sufficient case laws on the issue of health in State run institutions
such as remand homes for children and ―care homes‖. In Sheela Barse v. Union of
India and Another,157a case pertaining to the admitting of non-criminal mentally ill
persons to prisons in West Bengal, the Supreme Court held:

―Admission of non-criminal mentally ill persons to jails is illegal and

unconstitutional…. The Judicial Magistrate will, upon a mentally ill
person being produced, have him or her examined by a Mental Health
Professional/Psychiatrist and if advised by such MHP/Psychiatrist send
the mentally ill person to the nearest place of treatment and care.‖

153
Jyal N.D. v. Union of India, AIR 2004 SC 867: See also M.C. Mehta v. Union of India, AIR 2002
SC 1955.
154
AIR 1987 SC 1086.
155
Art. 23(1) prohibits traffic in human beings.
156
Art. 24 prohibits the child labour.
157
1986 (03) SCC 596.

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It has further directed the state to improve mental health institutions and
integrate mental health into primary health care, among others.

It is pertinent to note that the right to health has not yet been recognised as a
legal right unlike the other aspects of social security like right to education and right
to information. Although an attempt was made in the National Health Bill 2009 to
give health a status legal right, it failed to gain ground due to the absence of political
will. The said Bill is yet to take the shape of an Act. According to the latest reports,
one of the key proposal in the Draft National Health Policy 2015, the Union Ministry
of Health and Family Welfare has suggested for making health a fundamental right,
similar to education.

The Insurance Act, 1938 was the first attempt to consolidate and amend the
law relating to the insurance business in India. This Act mandates that the Authority
(IRDA) shall give preference to register the applicant and grant him a certificate of
registration if such applicant agrees, in the form and manner as may be specified by
the regulations made by the Authority, to carry on the life insurance business or
general insurance business for providing health cover to individuals or group of
individuals.158 Further, where the Authority refuses registration; he shall record the
reasons for such decision and shall furnish a copy thereof to the applicant. 159 It is
interesting to note that, apart from this provision, the Act is silent about health
insurance.

IRDAI from time to time has framed many regulations to regulate and to
ensure orderly growth of insurance business. The Third Party Administrator (TPA)
was introduced through the Insurance Regulatory and Development Authority (Third
Party Administrators - Health Services) Regulations, 2016. The basic role of TPA 160
is to function as an intermediary between insurer and the insured and to facilitate the
cash-less service of insurance. For this service they are paid a fixed percent of
insurance premium as commission. They are introduced as intermediaries to facilitate
claim settlement between the insurer and the insured. It is worthy to note that only
small percentages of the policy holders have knowledge about existence of TPAs.
158
Insurance Act, 1938, Section 2AA.
159
Ibid., Section 2B.
160
The IRDAI annual report 2016-17, As at 1st April, 2016 there were 28 TPAs registered by IRDAI.
While as at 31st March, 2017 there were 27 TPAs.

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Policy holders relies more on insurance agents than TPAs as they are between the
insurer and the insured. The TPAs are in a position to educate the policy holders about
health insurance. But hardly are they doing their job. Further, there is no mechanism
in place to evaluate the performance of TPAs. The IRDA‘s present evaluation method
is based on their financial performance rather than consumer satisfaction.

The only direct Regulation IRDA framed to regulate the health insurance in
India is the Insurance Regulatory and Development Authority (Health Insurance)
Regulations, 2013. It deals with the registration and procedure of issuance of health
insurance by the health insurance Companies. The Regulation ensures adequate
dissemination of product information on all health insurance products on the websites
of insurer. There is also a provision of free look period and portability of any policy.
The insurers may provide coverage to non-allopathic treatments provided the
treatment has been undergone in a government hospital or in any institute recognized
by government and/or accredited by Quality Council of India/National Accreditation
Board on Health or any other suitable institutions. Though the Regulation provides 30
days for settlement of claims, it is still a problem area even as insurers advertise quick
turn around time. Claims settlement ratio is a very important indicator for any
insurance company. But the way this number is reported right now is not user-
friendly. Insurers point out that pre-existing diseases, which is a standard exclusion
for the first four years, are a prominent problem area. This exposes the gap between
the customers‘ perception of a health insurance and what insurers actually offer.

The Government of India has launched some health insurance schemes for the
vulnerable groups. The Universal Health Insurance Scheme (UHIS) was launched in
2003 by the Government of India. It was initially launched to provide an affordable
health insurance cover for all, especially the underprivileged. The Ministry of Labour,
Government of India launched the National Health Insurance Scheme (Rashtriya
Swasthya Bima Yojna) in October 2007 aimed to cover the informal sector,161 and all

161
ILO defines ―informal sector‖ as consisting of units engaged in the production of goods or
services with the primary objective of generating employment and incomes to the persons
concerned. The units operate at low level of organisation, with little or no division between labour
and capital as factors of production and on a small scale. Labour relations– are based mostly on
casual employment, kinship or personal and social relations rather than contractual arrangements
with formal guarantees. In India, the National Commission for Enterprises in the Unorganised
Sector (NCEUS) made an important distinction between organised or formal and unorganised or
informal employment - ―Unorganised workers consist of those working in the unorganised

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BPL162 families (as per Government of India guidelines). Despite so many
advantages, it is very surprising that the enrolment rate and utilization of RSBY are
still very low. The identified factors causing the low enrolment rate are a high
enrolment cost, the low claims ratio, a large number of people migrating to other
places and the state government‘s delay of premium payment etc.

6.6 INSURANCE INTERMEDIARIES

Insurance spreads through the network of agents. It is the only financial

service which is entirely dependent on agent‘s network barring a few exceptions.
Hence, agents play a vital role in insurance penetration and insurance density.
Therefore, an efficient legal regime is necessary to control the behaviour of agents in
order to protect the interest of policyholders. Towards this end different countries
have put in place various measures to regulate the behavior of agents.

6.6.1 Legal Provisions under the Insurance Act, 1938

Section 42 of the Insurance Act, 1938, deals with appointment of Insurance

Agents.163 It says that an insurer may appoint any person to act as insurance agent for
the purpose of soliciting and procuring insurance business: Provided that such person
does not suffer from any of the disqualifications mentioned in sub-section (3) of
Section 42.164 Further, no person shall act as an insurance agent for more than one life

enterprises or households, excluding regular workers with social security benefits, and the workers
in the formal sector without any employment/ social security benefits provided by the employers.‖
162
Below Poverty Line is an economic benchmark used by the government of India to indicate
economic disadvantage and to identify individuals and households in need of government assistance
and aid. It is determined using various parameters which vary from state to state and within states. The
poverty line is calculated every 5 years. Hence the new estimation was done few days back taking into
account the inflation. This resulted into Rs 962 a month for urban areas and Rs 768 a month in rural
areas. If you take daily requirement, it is Rs 32 a day in urban area and Rs 26 a day in rural area.
163
Substituted of new Section by The Insurance Laws (Amendment) Act, 2015, w.e.f. 26.12.2014.
164
The disqualifications referred to in the proviso to sub-section (1) shall be the following:— (a) that
the person is a minor; (b) that he is found to be of unsound mind by a court of competent jurisdiction;
(c) that he has been found guilty of criminal misappropriation or criminal breach of trust or cheating or
forgery or an abetment of or attempt to commit any such offence by a court of competent jurisdiction:
Provided that where at least five years have elapsed since the completion of the sentence imposed on
any person in respect of any such offence, the Authority shall ordinarily declare in respect of such
person that his conviction shall cease to operate as a disqualification under this clause; (d) that in the
course of any judicial proceeding relating to any policy of insurance or the winding up of an insurer or
in the course of an investigation of the affairs of an insurer it has been found that he has been guilty of
or has knowingly participated in or connived at any fraud, dishonesty or misrepresentation against an
insurer or insured; (e) that in the case of an individual, who does not possess the requisite qualifications
or practical training or passed the examination, as may be specified by the regulations; (f) that in the

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insurer, one general insurer, one health insurer and one of each of the other mono-line
insurers: Provided that the Authority shall, while framing regulations, ensure that no
conflict of interest is allowed to arise for any agent in representing two or more
insurers for whom he may be an agent. 165 Again any person who acts as an insurance
agent in contravention of the provision of this Act, shall be liable to a penalty which
may extend to ten thousand rupees and any insurer or any person acting on behalf of
an insurer, who appoints any person as an insurance agent not permitted to act as such
or transacts any insurance business in India through any such person shall be liable to
penalty which may extend to one crore rupees. 166The insurer shall be responsible for
all the acts and omissions of its agents including violation of code of conduct
specified under clause (h) of sub-section (3) and liable to a penalty which may extend
to one crore rupees.167According to Section 42A168 no insurer shall, on or after the
commencement of the Insurance Laws (Amendment) Act, 2015, appoint any principal
agent, chief agent,169 and special agent170 and transact any insurance business in India
through them. No person shall allow or offer to allow, either directly or indirectly, as
an inducement to any person to take out or renew or continue an insurance policy
through multilevel marketing scheme. The Authority may, through an officer
authorised in this behalf, make a complaint to the appropriate police authorities
against the entity or persons involved in the multilevel marketing scheme.171

case of a company or firm making, a director or a partner or one or more of its officers or other
employees so designated by it and in the case of any other person 164 the chief executive, by whatever
name called, or one or more of his employees designated by him, do not possess the requisite
qualifications or practical training and have not passed such an examination as required under clauses
(e) and (g); (g) that he has not passed such examination as may be specified by the regulations; (h) that
he has violated the code of conduct as may be specified by the regulations.
165
Ibid.
166
Ibid.
167
Ibid.
168
Section 42A substituted for Section 42A, 42B, 42C by The Insurance Laws (Amendment) Act, 2015,
w.e.f. 26.12.2014.
169
"Chief agent" means a person who, not being a salaried employee of an insurer, in consideration of
any commission-
170
Special agent" means a person who, not being a salaried employee of an insurer, in consideration of
any commission, procures life insurance business for the insurer whether wholly or in part by
employing or causing to be employed insurance agents on behalf of the insurer, but does not include a
chief agent.
171
Multilevel marketing scheme" means any scheme or programme or arrangement or plan (by
whatever name called) for the purpose of soliciting and procuring insurance business through persons
not authorised for the said purpose with or without consideration of whole or part of commission or
remuneration earned through such solicitation and procurement and includes enrolment of persons into
a multilevel chain for the said purpose either directly or indirectly.

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Section 42D of the Act deals with issue of registration 172 to intermediary or
insurance intermediary. It says the Authority or an officer authorized by it in this
behalf shall, in the manner determined by the regulations made by the Authority and
on payment of the fees determined by the regulations made by the Authority, issue to
any person making an application in the manner determined by the regulations, and
not suffering from any of the disqualifications herein mentioned, a registration 173 to
act as an intermediary or an insurance intermediary under this Act. 174A registration175
issued under this section shall entitle the holder thereof to act as an intermediary or
insurance intermediary. A registration176 issued under this section shall remain in
force for a period of three years only from the date of issue, but shall, if the applicant,
being an individual does not, or being a company or firm any of its directors or
partners does not suffer from any of the disqualifications mentioned in clauses (b),
(c), (d), (e) and (f) of sub-section (4) of section 42 and the application for renewal of
registration177 reaches the issuing authority at least thirty days before the date on
which the registration178 ceases to remain in force, be renewed for a period of three
years at any one time on payment of the fee, determined by the regulations made by
the Authority and additional fee for an amount determined by the regulations, not
exceeding one hundred rupees by way of penalty, if the application for renewal of the
registration179 does not reach the issuing authority at least thirty days before the date
on which the registration180 ceases to remain in force.No application for the renewal
of a registration under this section shall be entertained if the application does not
reach the issuing authority before the registration ceases to remain in force: Provided
that the Authority may, if satisfied that undue hardship would be caused otherwise,
accept any application in contravention of this sub-section on payment by the
application of the penalty of seven hundred and fifty rupees.

172
Substituted for ‗licence‘by The Insurance Laws (Amendment) Act, 2015, W.E.F. 26.12.2014.
173
Ibid.
174
Provided that,- (a) in the case of an individual, he does not suffer from any of the disqualifications
mentioned in subsection (4) of section 42, or (b) in the case of a company or firm, any of its directors
or partners does not suffer from any of the said disqualifications.
175
Ibid.
176
Ibid.
177
Ibid.
178
Ibid.
179
Ibid.
180
Ibid.

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The disqualifications above referred to shall be the following: - (a) that the
person is a minor; (b) that he is found to be a unsound mind by a court of competent
jurisdiction; (c) that he has been found guilty of criminal misappropriation or criminal
breach of trust or cheating or forgery or an abetment of or attempt to commit any such
offence by a court of competent jurisdiction: Provided that, where at least five years
have elapsed since the completion of the sentence imposed on any person in respect of
any such offence, the Authority shall ordinarily declare in respect of such person that
his conviction shall cease to operate as a disqualification under this clause; (d) that in
the course of any judicial proceedings relating to any policy of insurance of the
winding up of an insurance company or in the course of an investigation of the affairs
of an insurer it has been found that he has been guilty of or has knowingly
participated in or connived at any fraud dishonestly or misrepresentation against an
insurer or an insured; (e) that he does not possess the requisite qualifications and
practical training for a period not exceeding twelve months, as may be specified by
the regulations made by the Authority in this behalf; (f) that he has not passed such
examinations as may be specified by the regulations made by the Authority in this
behalf; (g) that he violates the code of conduct as may be specified by the regulations
made by the Authority. If it be found that an intermediary or an insurance
intermediary suffers from any of the foregoing disqualifications, without prejudice to
any other penalty to which he may be liable, the Authority shall, and if the
intermediary or an insurance intermediary has knowingly contravened any provisions
of this Act may cancel the registration issued to the intermediary or insurance
intermediary under this section.

Any person who acts as an intermediary or an insurance intermediary without

being registered under this section to act as such, shall be liable to a penalty which
may extend to ten lakh rupees and any person who appoints as an intermediary or an
insurance intermediary or any person not registered to act as such or transacts any
insurance business in India through any such person, shall be liable to a penalty which
may extend to one crore rupees.181 Where the person contravening sub-section (8) is a
company or a firm, then, without prejudice to any other proceedings which may be

181
Ibid.

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taken against the company or firm, every director, manager, secretary or other officer
of the company, and every partner of the firm who is knowingly a party to such
contravention shall be liable to a penalty which may extend to ten lakh rupees.182

6.6.2 Legal Provisions under the IRDAI Act, 1999

Subject to the provisions of this Act and any other law for the time being in
force, the Authority shall have the duty to specifying requisite qualifications, code of
conduct and practical training for intermediary or insurance intermediaries and
agents.183

6.6.3 Insurance Regulatory and Development Authority of India (Appointment

of Insurance Agents) Regulations, 2016

IRDAI (Appointment of Insurance Agents) Regulation, 2016, describes the

process of granting the appointment of insurance agents for a life and genera
Insurance. IRDA (Licensing of Insurance Agents)(amendment) Regulation, 2002. Is
also is related to granting of license of health insurance. The Authority in consultation
with the Insurance Advisory Committee, hereby makes the following regulations,
namely: (i) Appointment of Insurance Agent by the Insurer; (ii) Appointment of
Composite Insurance Agent by the insurer; (iii) Insurance Agency Examination;
(iv)Disqualification to act as an Insurance Agent; (v) Code of Conduct; (vi)
Authority‘s right to inspect; (vii) Suspension of Appointment of an Agent; (viii)
Manner of holding enquiry before/after suspension of appointment of the Insurance
Agent; (ix) Procedure for Cancellation of Agency; (x) Publication of order of
suspension/ Cancellation; (xi) Effect of suspension/cancellation of Agency
appointment; (xii)Appeal Provision (xiii) Procedure to be followed in respect of
resignation/surrender of appointment by an insurance agent; (xiv) General conditions
for appointment of Agents by the insurer; (xv)Existing Agents licensed by Authority;
(xvi) Power to remove difficulties.

182
Ibid.
183
IRDAI Act, 1999, Section14(C).

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6.6.4 Code of Conduct for Insurance Agent

IRDAI has laid down the code of conduct of insurance agents under the
Guidelines on Appointment Insurance Agents, 2015‖ According to Guidelines No.
VIII. Every agent, shall adhere to the code of conduct specified below:

a) Every insurance agent shall,---

i) identify himself and the insurer of whom he is aninsurance agent;

ii) show the agency identity card to the prospect, andalso disclose the
agency appointment letter to the prospect ondemand;

iii) disseminate the requisite information in respect ofinsurance products

offered for sale by his insurer and takeinto account the needs of the
prospect while recommending aspecific insurance plan;

iv) where the Insurance agent represents more than oneinsurer offering
same line of products, he should dispassionatelyadvice the
policyholder on the products of all Insurers whom he isrepresenting
and the product best suited to the specific needs ofthe prospect.

v) disclose the scales of commission in respect of theinsurance product

offered for sale, if asked by the prospect;

v) indicate the premium to be charged by the insurer forthe insurance

product offered for sale;

vi) explain to the prospect the nature of informationrequired in the

proposal form by the insurer, and also theimportance of disclosure of
material information in thepurchase of an insurance contract;

vii) bring to the notice of the insurer every fact about theprospect relevant
to insurance underwriting, including anyadverse habits or income
inconsistency of the prospect, withinthe knowledge of the agent, in the
form of a report called―Insurance Agent‘s Confidential Report‖ along
with everyproposal submitted to the insurer wherever applicable,
andany material fact that may adversely affect the

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underwritingdecision of the insurer as regards acceptance of the proposal,by
making all reasonable enquiries about the prospect;

viii) obtain the requisite documents at the time of filing theproposal form
with the insurer; and other documentssubsequently asked for by the
insurer for completion of theproposal;

ix) advise every prospect to effect nomination under thepolicy;

x) inform promptly the prospect about the acceptance orrejection of the

proposal by the insurer;

xi) render necessary assistance and advice to everypolicyholder on all

policy servicing matters includingassignment of policy, change of
address or exercise of optionsunder the policy or any other policy
service, wherevernecessary;

xii) render necessary assistance to the policyholders orclaimants or

beneficiaries in complying with the requirements for settlement of
claims by the insurer;

b) No insurance agent shall,

a) solicit or procure insurance business without being appointedto act as

such by the insurer

b) induce the prospect to omit any material information in theproposal

form;

c) induce the prospect to submit wrong information in theproposal form

or documents submitted to the insurer for acceptanceof the proposal;

d) resort to multilevel marketing for soliciting and procuringinsurance

policies and/or induct any prospect/policyholder to join amultilevel
level marketing scheme.

e) behave in a discourteous manner with the prospect;

f) interfere with any proposal introduced by any other insuranceagent;

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g) offer different rates, advantages, terms and conditions otherthan those
offered by his insurer;

h) demand or receive a share of proceeds from the beneficiaryunder an

insurance contract;

i) force a policyholder to terminate the existing policy and toeffect a new

policy from him within three years from the date ofsuch termination of
the earlier policy;

j) apply for fresh agency appointment to act as an insuranceagent, if his

agency appointment was earlier cancelled by thedesignated official,
and a period of five years has elapsed from thedate of such
cancellation;

k) become or remain a director of any insurer;

3) Every insurance agent shall, with a view to conserve theinsurance business

already procured through him, make every attempt toensure remittance of the
premiums by the policyholders within thestipulated time, by giving notice to
the policyholder orally and in writing;

4) Any person who acts as an insurance agent in contravention of theprovisions

of this Act shall be liable to a penalty which may extend to tenthousand rupees
and any insurer or any person acting on behalf of aninsurer, who appoints any
person as an insurance agent not permitted toact as such or transact any
insurance business in India through any suchperson shall be liable to penalty
which may extend to one crore rupees.

5) The insurer shall be responsible for all acts and omissions of itsagents
including violation of code of conduct specified under theseguidelines, and
shall be liable to a penalty which may extend to one crorerupees.

From the above discuss it is clear that the law imposes a crucial responsibility
on the agent to promote and ensure regular growth of insurance business in India.
Despite this it is observed that are involved in unfair and unethical and immoral

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dealings. Same agents are seen soliciting or offering their services without being
appointed to act as by the insurer. In many cases it is seen that the son or father or
husband offering their services, even though working in government department;
Secondly, it is observed that the agents do not encourage the prospects to fill the
material information in the proposed form. In turn they are found inducing the
prospect to submit wrong information in the proposal form; thirdly, agents in same
cases be have in a discourteous manner with the prospectus; Fourthly, in some cases it
is found that affects offer different rates advantage and terms and condition other
from those offered by his insurer; Fifthly, some agents receive share of proceeds from
the benefiting under an insurance contract; lastly, some induce or force policy holder
to terminate the existing policy an effect a new policy.

6.7 MOTOR VEHICLE INSURANCE

6.7.1 Legal Provisions under the Motor Vehicle Act, 1988

In view of the fast and constantly increasing volume of traffic, the motor
vehicles upon roads may be regarded to some extent as coming within the principle of
liability defined in Rylands v.Fletcher.184 From the point of view of the pedestrian the
roads of this country have been rendered by the use of motor vehicles highly
dangerous.

The motor vehicle in a public place has become a lethal weapon on the road
covering unmitigated dangers to the public. The unending erosion of population and
ever increasing number of motor vehicles emerged an ultramodern age which has led
to strides of progress in all spheres of life, and we have switched from fast to faster
vehicular traffic witnessing the incidence of death toll per 1000 vehicles in India 10-5
times more than that of UK or USA according to a WHO report published even in
October 1975 and now it must have increased beyond believable limits. So the
legislature rightly thought to provide an immediate remedy without any discussion

184
(1868) LR 3 HL 330.

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about fault of the owners of the motor vehicle and so provided this absolute
liability.185

Law does not compel any person to insure either his life or property. However,
if any person insures his life or property, law come forward and protects the interest
of this person. There are however, two exceptions to this one the Public Liability
Insurance and the other is Motor Vehicle Insurance. A policy of motor vehicle is in
the ordinary course, a combined insurance. It insures the damage to the motor vehicle.
A policy of motor vehicle is in the ordinary course, combined insurance. It insures the
damage to the motor vehicle and its accessories, liability for damage to property the
motor vehicle and its accessories, liability for damage to property, death of, or injury
to the assured himself or spouse and it also insures the motor vehicle against the risk
of liability for injury to or the death of third parties caused by driver‘s negligence. The
last type of motor policies concerning third party liability or compulsory insurance.

The law relating to Motor Vehicle Insurance is contained in the Motor Vehicle
Act, 1988.186 Section 146 Stipulates that no person187 shall use, except as a passenger,

185
See also: Pontifex v. Bignold, (1841) 10 LJCP 259; Towle v. National Guardian Assurance Society,
(1861) 30 LJ Ch. 900; K Nandakumar v. ThanthalPeriyar Transport Corpn, (1996) 2 SCC 736; (1868)
LR 3 HL 330; National Insurance Co. Ltd v. Sinitha, (2012) 2 SCC 356; A Sridhar v. United India
Insurance Co Ltd., (2011) 14 SCC 719: (2011) 89 ALR 246; National Insurance Co. Ltd v. Nitan
Singh, AIR 2014 (NOC) 105 (J&K); Mano Devi v.Chander Singh, (1993) 2 ACC 574 (Pand H);
Mashila Ram Devi v. Nanda Kumar, AIR 1988 MP 98; Vimala S. v. ChikkaHanumanthiah, AIR 1999
Kant. 150; Askok v. Ashok Singh, AIR 1995 MP 201.
186
A Summary of the Motor Vehicles (Amendment) Bill 2016, Recently, the Lok Sabha, on April 10,
2017 passed the Motor Vehicles (Amendment) Bill, 2016. The Bill was introduced in the Lok Sabha on
August 9, 2016, aiming to amend the Motor Vehicles Act, 1988, and resolve issues around third party
insurance, regulation of taxi aggregators, and road safety. The Cabinet had then approved various
changes in the Bill last month. These include 16 amendments and rejection of three suggestions made
by the Parliament Standing Committee. The Bill will now go to the Rajya Sabha for its nod, and then
the President of India for assent.
Major aspects of the Bill
 It links driving license and vehicle registration with Aadhaar Card. This is essential for de-
duplication of licenses and registration of stolen vehicles.
 A penalty of Rs. 10, thousand for ‗not providing way for emergency vehicles‘. (Section 194E of
the Act)
 Oversizing of the vehicle is now punishable with Rs. 5, thousand. Any alteration prohibited by
chapter VII of the Act is punishable with fine of Rs. 1 Lakh or imprisonment of up to 1 year
(Section 182A of the Act)
 It removes the limit on liability for third party insurance. The 2016 Bill had limited the maximum
liability for third party insurance in case of a motor accident at Rs 10 lakh in case of death and at
five lakh rupees in case of grievous injury. This limit has been removed by the 2017 Bill.
 It proposes alterations in vehicles, in order to make them suitable for specially-abled people.

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or cause or allow any other person to use, a motor vehicle in a public place, unless there is in
force in relation to the use of the vehicle by that person or that other person, as the
case may be, a policy of insurance complying with the requirements of this Chapter:
[Provided that in the case of a vehicle carrying, or meant to carry, dangerous or
hazardous goods, there shall also be a policy of insurance under the Public Liability
Insurance Act, 1991 (6 of 1991). The provision, however, shall not apply to any
vehicle owned by the Central Government or a State Government and used for
Government purposes unconnected with any commercial enterprise. Further, the
appropriate Government may, by order, exempt from the operation of sub-section (1)
any vehicle owned by any of the following authorities, namely:— (a) the Central
Government or a State Government, if the vehicle is used for Government purposes
connected with any commercial enterprise; (b) any local authority; (c) any State
transport undertaking: Provided that no such order shall be made in relation to any
such authority unless a fund has been established and is maintained by that authority
in accordance with the rules made in that behalf under this Act for meeting any
liability arising out of the use of any vehicle of that authority which that authority or
any person in its employment may incur to third parties.

The breach of this provision attracts criminal liability. Thus whoever drives a
motor vehicle or causes or allows a motor vehicle to be driven in contravention of the

 It provides for a Motor Vehicle Accident Fund, which would provide compulsory insurance cover
to all road users in India for certain types of accidents.
 It proposes a National Road Safety Board (NRSB), to be created by the Central Government
through a notification. The Board will provide advice to the Central and State Governments on all
aspects of road safety and traffic management.
 It empowers the State Governments to specify a multiplier, between 1 to 10, to be applied to each
fine under this Act.
 Contractors, consultants, and civic agencies will be accountable for faulty design, construction or
poor maintenance of roads leading to accidents. Those found guilty would be penalized up to Rs 1
lakh. (Section 198A of the Act)
 Now, any case of accident done by a minor, the guardian of the minor will be deemed guilty and
will be punished with 3 years of imprisonment and fine of Rs. 25,000. The same minor will be
eligible for driving license after he attains the age of 25 years. (Section 199A of the Act)
187
In SubhashChandar v.State of Haryana, and Choice Insurance Co. v. Joginder Singh, that an act policy
covering only third party risk does not ipso facto make the insurer liable for the injury suffered by
passenger travelling in a private car neither for hire nor for reward. The cour theld in K Gopala
krishnan v. Narayanan, that the owner of a scooter is notobliged to take a policy for a third party risk
carried gratuitously as a pillion rider and the insurer has no liability for injuries to the pillion rider
unless the policy taken by the owner covers the risk.

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provisions of section 146 shall be punishable with imprisonment which may extend to
three months, or with fine which may extend to one thousand rupees, or with both.188

6.7.1.1 Various aspect of Motor Vehicle Insurance189

Firstly, a policy of insurance must be a policy which— (a) is issued by a

person who is an authorised insurer; and (b) insures the person or classes of persons
specified in the policy to the extent specified in sub-section (2)— (i) against any
liability which may be incurred by him in respect of the death of or bodily injury to
any person, including owner of the goods or his authorized representative carried in
the vehicle or damage to any property of a third party caused by or arising out of the
use of the vehicle in a public place; (ii) against the death of or bodily injury to any
passenger of a public service vehicle caused by or arising out of the use of the vehicle
in a public place: Provided that a policy shall not be required— (i) to cover liability in
respect of the death, arising out of and in the course of his employment, of the
employee of a person insured by the policy or in respect of bodily injury sustained by
such an employee arising out of and in the course of his employment other than a
liability arising under the Workmen‘s Compensation Act, 1923 (8 of 1923), in respect
of the death of, or bodily injury to, any such employee— (a) engaged in driving the
vehicle, or (b) if it is a public service vehicle engaged as a conductor of the vehicle or
in examining tickets on the vehicle, or (c) if it is a goods carriage, being carried in the
vehicle, or (ii) to cover any contractual liability.190

Secondly, Subject to the proviso to sub-section (1), a policy of insurance

referred to in sub-section (1), shall cover any liability incurred in respect of any
accident, up to the following limits, namely:— (a) save as provided in clause (b), the
amount of liability incurred; (b) in respect of damage to any property of a third party,
a limit of rupees six thousand: Provided that any policy of insurance issued with any

188
Motor Vehicle Act, 1988, Section 196.
189
Ibid., Section 147.
190
For the removal of doubts, it is hereby declared that the death of or bodily injury to any person or
damage to any property of a third party shall be deemed to have been caused by or to have arisen out
of, the use of a vehicle in a public place notwithstanding that the person who is dead or injured or the
property which is damaged was not in a public place at the time of the accident, if the act or omission
which led to the accident occurred in a public place.

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limited liability and in force, immediately before the commencement of this Act, shall
continue to be effective for a period of four months after such commencement or till
the date of expiry of such policy whichever is earlier.

Thirdly, A policy shall be of no effect for the purposes of this Chapter unless
and until there is issued by the insurer in favour of the person by whom the policy is
effected a certificate of insurance in the prescribed form and containing the prescribed
particulars of any condition subject to which the policy is issued and of any other
prescribed matters; and different forms, particulars and matters may be prescribed in
different cases.

Fourthly, where a cover note issued by the insurer under the provisions of this
Chapter or the rules made there under is not followed by a policy of insurance within
the prescribed time, the insurer shall, within seven days of the expiry of the period of
the validity of the cover note, notify the fact to the registering authority in whose
records the vehicle to which the cover note relates has been registered or to such other
authority as the State Government may prescribe.

Fifthly, notwithstanding anything contained in any law for the time being in
force, an insurer issuing a policy of insurance under this section shall be liable to
indemnify the person or classes of persons specified in the policy in respect of any
liability which the policy purports to cover in the case of that person or those classes
of persons.

Digby v. General Accident, Fire and Assurance Corporation Ltd is in point. In

that case Miss Marley Oberon took out a policy with extensions. She was injured
when driven negligently in her own car, and obtained judgment against her driver and
the question arose whether the driver was entitled to recover under the owner‘s policy.
The policy holder, the owner, was considered as a third person in respect of the cover
granted to the authorized driver under the policyholder‘s policy In Lord Porter‘s
words; ‗Miss Marley Oberon was a third party in reference to her authorized driver.191
This case also settled that the effect of the clause extending cover to the permitted

191
(1943) AC 121.

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driver was to bring into existence a second contract of insurance between the insurer
and the permitted driver. This is the second statutory contract which runs subsidiary to
the main contract and it stands or falls with the main contract. If the owner sells away
his vehicle, his contract comes to an end and along with it the second contract also
disappears.192

The recent decision of the Kerala High Court in New India Assurance Co. v.
EK Muhummad is also to the similar effect. In this case there was transfer of a motor
vehicle from one person to another without information to the insurer. It was held that
on such transfer, the insurance company cannot be made liable, only the driver and
the transfers were held liable.193Assignment or mere handing over the policy is not
sufficient. The transfer of policy must be made with the consent of the insurer. This
consent may be express or implied.194 Further when the permitted driver is covered by
two or more policies issued by two or more insurers both the insurers will be liable to
contribute ratably towards the loss notwithstanding a restriction in the policies
restricting the extension to persons who are not protected against liability by any other
insurance.

6.7.1.2 Duty of Insurers to Satisfy Judgments and Awards against Persons

Insured in normal Respect of Third Party Risks195

It provides that if, after a certificate of insurance has been issued under sub-
section (3) of section 147 in favour of the person by whom a policy has been effected,
judgment or award in respect of any such liability as is required to be covered by a
policy under clause (b) of sub-section (1) of section 147 (being a liability covered by
the terms of the policy) or under the provisions of section 163A is obtained against
any person insured by the policy, then, notwithstanding that the insurer may be
entitled to avoid or cancel or may have avoided or cancelled the policy, the insurer
shall, subject to the provisions of this section, pay to the person entitled to the benefit
of the decree any sum not exceeding the sum assured payable there under, as if he
were the judgment debtor, in respect of the liability, together with any amount
192
See also Shantilal v.AlerBharadwaj AIR 1985 Guj 164 (FB); Kondaiah v.Yaseam Fatima AIR 1986
AP 62 (FB); BP Venkatappa v. BL Lakshmayya AIR 1973 Mys 350.
193
1985 ACJ 109 (Ker).
194
AIR 1963 MP 164.
195
Ibid., Section 149.

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payable in respect of costs and any sum payable in respect of interest on that sum by
virtue of any enactment relating to interest on judgments. Further, no sum shall be
payable by an insurer under sub-section (1) in respect of any judgment or award
unless, before the commencement of the proceedings in which the judgment or award
is given the insurer had notice through the Court or, as the case may be, the Claims
Tribunal of the bringing of the proceedings, or in respect of such judgment or award
so long as execution is stayed thereon pending an appeal and an insurer to whom
notice of the bringing of any such proceedings is so given shall be entitled to be made
a party thereto and to defend the action on any of the following grounds, namely:—
(a) that there has been a breach of a specified condition of the policy, being one of the
following conditions, namely:— (i) a condition excluding the use of the vehicle— (a)
for hire or reward, where the vehicle is on the date of the contract of insurance a
vehicle not covered by a permit to ply for hire or reward, or (b) for organised racing
and speed testing, or (c) for a purpose not allowed by the permit under which the
vehicle is used, where the vehicle is a transport vehicle, or (d) without side-car being
attached where the vehicle is a motor cycle; or (ii) a condition excluding driving by a
named person or persons or by any person who is not duly licensed, or by any person
who has been disqualified for holding or obtaining a driving licence during the period
of disqualification; or (iii) a condition excluding liability for injury caused or
contributed to by conditions of war, civil war, riot or civil commotion; or (b) that the
policy is void on the ground that it was obtained by the non-disclosure of a material
fact196 or by a representation of fact which was false in some material particular.
Further, where a certificate of insurance has been issued under sub-section (3) of
section 147 to the person by whom a policy has been effected, so much of the policy
as purports to restrict the insurance of the persons insured thereby by reference to any
conditions other than those in clause (b) of sub-section (2) shall, as respects such
liabilities as are required to be covered by a policy under clause (b) of sub-section (1)
of section 147, be of no effect: Provided that any sum paid by the insurer in or
towards the discharge of any liability of any person which is covered by the policy by

196
In this section the expressions ―material fact‖ and ―material particular‖ means, respectively a fact
or particular of such a nature as to influence the judgment of a prudent insurer in determining whether
he will take the risk and, if so at what premium and on what conditions and the expression ―liability
covered by the terms of the policy‖ means a liability which is covered by the policy or which would be
so covered but for the fact that the insurer is entitled to avoid or cancel or has avoided or cancelled the
policy.

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virtue only of this sub-section shall be recoverable by the insurer from that person.
Again if the amount which an insurer becomes liable under this section to pay in
respect of a liability incurred by a person insured by a policy exceeds the amount for
which the insurer would apart from the provisions of this section be liable under the
policy in respect of that liability, the insurer shall be entitled to recover the excess
from that person. No insurer to whom the notice referred to in sub-section (2) or sub-
section (3) has been given shall be entitled to avoid his liability to any person entitled
to the benefit of any such judgment or award as is referred to in sub-section (1) or in
such judgment as is referred to in sub-section (3) otherwise than in the manner
provided for in sub-section (2) or in the corresponding law of the reciprocating
country, as the case may be.

6.7.1.3 Any dispute relating to the claim shall be disposed of by the Claims
Tribunal established under Section 165 of the Act.

A State Government may, by notification in the Official Gazette, constitute

one or more Motor Accidents Claims Tribunals (hereafter in this Chapter referred to
as Claims Tribunal) for such area as may be specified in the notification for the
purpose of adjudicating upon claims for compensation in respect of accidents
involving the death of, or bodily injury to, persons arising out of the use of motor
vehicles, or damages to any property of a third party so arising, or both. 197 A Claims
Tribunal shall consist of such number of members as the State Government may think
fit to appoint and where it consists of two or more members, one of them shall be
appointed as the Chairman thereof. A person shall not be qualified for appointment as
a member of a Claims Tribunal unless he— (a) is, or has been, a Judge of a High
Court, or (b) is, or has been, a District Judge, or (c) is qualified for appointment as a
Judge of a High Court 1 [or as a District Judge]. Where two or more Claims Tribunals
are constituted for any area, the State Government, may by general or special order,
regulate the distribution of business among them.

197
For the removal of doubts, it is hereby declared that the expression ―claims for compensation in
respect of accidents involving the death of or bodily injury to persons arising out of the use of motor
vehicles‖ includes claims for compensation under section 140 and section 163A.

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The Claims Tribunal has jurisdiction to entertain a claim even if the accident
to a motor vehicles is caused by anything other than a motor vehicle.198 The court said
that ―The jurisdiction of the Tribunal to entertain an application for claim of
compensation in respect of an accident arising out of the use of a motor vehicle
depends essentially on the fact whether there had been any use of a motor vehicle and
once that is established the Tribunal‘s jurisdiction cannot be held to be ousted on a
finding being arrived at a later point of time that it is the negligence of the other joint
tortfeasor and not the negligence of the motor vehicle in question.‖

The following further observations about jurisdiction are to be seen in

Kaushnuma Begum v. New India Assurance Co Ltd,199 ―The jurisdiction of the
Tribunal is not restricted to deciding claims arising out of negligence in the use of
motor vehicles. Negligence is only one of the species of the causes of action for,
making a claim for compensation in respect of accidents arising out of the use of
motor vehicles. There are other premises for such cause of action, Like any other
common law principle, which is acceptable to Indian jurisprudence.

An application for compensation arising out of an accident of the nature

specified in sub-section (1) of section 165 may be made— (a) by the person who has
sustained the injury; or (b) by the owner of the property; or (c) where death has
resulted from the accident, by all or any of the legal representatives of the deceased;
or (d) by any agent duly authorised by the person injured or all or any of the legal
representatives of the deceased, as the case may be: Provided that where all the legal
representatives of the deceased have not joined in any such application for
compensation, the application shall be made on behalf of or for the benefit of all the
legal representatives of the deceased and the legal representatives who have not so
joined, shall be impleaded as respondents to the application.200

Every application under sub-section (1) shall be made, at the option of the
claimant, either to the Claims Tribunal having jurisdiction over the area in which the
accident occurred or to the Claims Tribunal within the local limits of whose

198
Union of India v. Bhagwati Prasad, AIR (2002) 3 SCC 661.
199
AIR (2001) 2 SCC 9.
200
Ibid., Section 166.

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jurisdiction the claimant resides or carries on business or within the local limits of
whose jurisdiction the defendant resides, and shall be in such form and contain such
particulars as may be prescribed: Provided that where no claim for compensation
under section 140 is made in such application, the application shall contain a separate
statement to that effect immediately before the signature of the applicant. 201

Any person aggrieved by an award of a Claims Tribunal may, within ninety

days from the date of the award, prefer an appeal to the High Court: Provided that no
appeal by the person who is required to pay any amount in terms of such award shall
be entertained by the High Court unless he has deposited with it twenty-five thousand
rupees or fifty per cent. of the amount so awarded, whichever is less, in the manner
directed by the High Court: Provided further that the High Court may entertain the
appeal after the expiry of the said period of ninety days, if it is satisfied that the
appellant was prevented by sufficient cause from preferring the appeal in time. No
appeal shall lie against any award of a Claims Tribunal if the amount in dispute in the
appeal is less than ten thousand rupees.202

Apart from the Motor Vehicle Act 1988, the Motor Vehicle Insurance also
covered under the Insurance Regulatory and Development Authority of India
(Obligation of Insurer in respect of Motor Third Party Insurance Business)
Regulations, 2015. According to Regulation 2(d), ―Motor Third Party Insurance
Business‖ consists of the motor third party insurance business in respect of both, the
liability only policies as well as the package policies issued in motor portfolio.
According to Regulation 2(e), ―New Insurer‖ means an insurer which has started its
business operations during the immediate preceding financial year of the financial
year for which obligations in respect of motor third party insurance business are to be
fixed.

The Obligation of an Insurer in respect to Motor Third Party insurance

business for a Financial Year(X) should be arrived as below:

201
Ibid.
202
Ibid., Section 173.

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Total ‗Gross Direct Premium Income(GDPI)‘ under all lines of business of all
insurers in the immediate preceding financial year = A

Total GDPI under motor insurance business of all insurers in the immediate preceding
financial year = B

Insurer‘s GDPI under all lines of business in the immediate preceding financial year =
C

Insurer‘s GDPI under motor insurance business in the immediate preceding financial
year = D

Total GDPI under motor third party insurance business of all insurers during the
immediate preceding financial year = E

Obligation of the Insurer to be met in a financial year X = C A +D B x E x 90 2 100

The Motor Vehicle insurance though sounds like a single insurance, but in
reality it is a bundle of insurances. It is not only beneficiary to the owner of the
vehicle but also beneficiary to the third party whose person or property injured due to
the conduct of the vehicle owner. Further, it is a compulsory insurance violation of
which carries a criminal liability.

Despite these, the state of Motor Vehicle Insurance in India is not satisfactory.
It has been seen that the owners insures the vehicle for some preliminary years from
the date of purchase of the vehicle, then they do not insure. This may be due to the
fact that Firstly, they do not feel its need, particularly when the risk does not occur.
They feel it as a simple wastage of money; Secondly, the implementation agency is
either non-functional or mal-functional; Thirdly, penalty for violation is not enough;
and Lastly, lack of awareness.

6.8 SUICIDE AND LIFE INSURANCE

One of the controversial area in insurance is the avoidance of life insurance

policy by the insurer on the ground of suicide being committed by the insured.

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Suicide is intentional taking of one‘s own life and it is a part of human behaviour
since prehistory. It is a global problem. The WHO‘s Report, World Report on
Violence and Health noted that more people die by suicide than by any other form of
violent death including homicide and terrorist attack. It is among the top ten causes of
death for all ages groups in most countries of the world.

In India, the attempt to suicide is a crime under Section 309 of the Indian
Penal Code. Article 21 of the Indian Constitution mandates that no person shall be
deprived of his life and personal liberty except according to the procedure established
of his life and personal liberty except according to the procedure established by law.
In a number of cases the High Court and Supreme Court of India examined the
constitutional validity of section 309 of IPC. In P. Rathinam v. Union of India,203 a
Division Bench of the Supreme Court held that ‗right to live‘ under Article 21
includes ‗right not to live‘, consequently, Section 309, IPC violates Article 21. In
Gian Kaur v. State of Punjab,204 a Constitution Bench of the Supreme Court while
overruling the aforesaid decision held that ‗right to life‘ under Article 21 does not
include ‗right not to live‘ or ‗right to die‘, consequently, section 309, IPC does not
violate Article 21 of the Indian Constitution. It is humbly submitted that the Hon‘ble
Supreme Court in the later case only examined that constitutional validity of the
section 309 IPC without emphasizing on the justification of retaining Section 309 in
IPC. In the mean time, World Health Organization International Association for
suicide Prevention, France and Indian psychiatric society advocated for the
decriminalization of attempt to suicide. Almost all developed countries including
England and most part of America already decriminalized attempt to suicide. Indian
Law Commission has also recommended deleting section 309 from the statute book.
Above all a recent research has shown that suicide is not a voluntary act but it is a
brain linked or involuntary act.

We would like to urge that firstly, suicide is permitted under different

religions, there is an international efforts to decriminalize the attempt to suicide. As a
result most civilized countries have done away with the concept of attempted suicide
203
AIR 1994 SCC 1844.
204
AIR 1996 SCC 946.

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as an offence, thirdly, criminalizing attempt to suicide does not meet the ends of
justice; and lastly, suicide is an involuntary act.

Law Commission of India from time to time had undertaken revision of the
Indian Penal Code as apart from its function of revising Central Acts of general
application and importance. In its 42 nd report submitted in 1971, the Commission of
recommended, inter alia, repeal of Section 309. The Indian Penal Code (Amendment)
Bill, 1978 as passed by the Rajya Sabha, accordingly provided for omission of section
309. Unfortunately, before it could be passed by the Lok Sabha, the Lok Sabha was
dissolved and the Bill was lapsed. The Commission submitted its 156th Report in 1997
after pronounce of the judgment in Gian Kaur,205 recommending retention of Section
309, IPC. However, subsequently the Law Commission felt the need for
decriminalizing the attempt to suicide. Consequently the Commission in its 210 th
report in October 2008 recommended the Government of India to decriminalize the
attempt to suicide.206

Section 115 of the Mental Healthcare Act, 2017 provides that notwithstanding
anything contained in section 309 of the Indian Penal Code any person who attempts
to commit suicide shall be presumed, unless proved otherwise, to have severe stress
and shall not be tried and punished under the said Code. The appropriate Government
shall have a duty to provide care, treatment and rehabilitation to a person, having
severe stress and who attempted to commit suicide, to reduce the risk of recurrence of
attempt to commit suicide.

Therefore the continuance of the section 309, IPC is anachronism unworthy of

a human society like ours. There is a need for humane, civilized and socially oriented
outlook penology. When it has been proved that suicide is not a voluntary act, rather
an act linked with brain changes, it is against the criminal law to punish the suicidal
individual. Again, it is cruel and irrational provision, as it may result in punishing a
person again who has suffered agony and would be undergoing ignominy because of
his failure to commit suicide. At the same time an act of suicide cannot be said to be

205
AIR 1996 SC 946.
206
Recommendations of the law commission of India.

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against religion, morality or public policy, and an act of attempted suicide has no
baneful effect on the society. Further suicide and attempt to commits suicide cause no
harm to the others because of which state‘s interference with the personal liberty of
the concerned persons is not called for. So, avoiding the insurance policy on the
ground of suicide is not only unfair but also against the norms of civilized society and
against global wavelength in this regard.

6.9 INSURANCE LAW IN INDIA IS SEGMENTED

The globalization of the insurance industry is urging people to have ‗more

value, more transparency and more accountability‘ from the insurance companies and
the regulators of the industry. Synchronization of globalization and liberalization with
the insurance industry is challenging the organizations to realize the changing
scenario of the insurance business concepts, legalities and formulate clear guidelines
for different classes of businesses with a strong and well-defined organizational
structure. Regulators are under a continuous duty to monitor the organizations to
ensure the achievements and performance vis-a-vis their objectives and
responsibilities. Effective and efficient monitoring and regulations shall offer
challenges to the business houses, healthy growth of the insurance industry, ensure
strict compliance of laws and avoid misuse of public money, which otherwise used
properly, can steer economic growth.

The insurance industry is now governed by a number of sections of the

insurance law. Some of them deal with the basic and fundamental law of insurance,
which includes the Insurance Act, 1938, the Insurance Regulatory and Development
Authority Act, 1999 and others are specific laws such as the Marine Insurance Act,
1963 arid Public Liability Insurance Act, 1991. The purpose and objective of the
fundamental law is to define insurance and its concepts, formulate policies ad rules
relating to the general insurance business, its regulation and control. The other class
of law is made to define and formulate contracts of insurance business of specific
class such as marine insurance business, miscellaneous insurance and public liability
insurance. The existing insl1raflce law can also be divided into two classes, based
upon its structure and objectives the pure or fundamental insurance law which

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includes the Life Insurance Corporation Act, 1956, The Marine Insurance Act, 1963,
The Insurance Act, 1938. Other class of law that is supplementary or secondary
insurance law includes the Motor Vehicle Act, 1988, the Factories Act and the
Employees State Insurance Act. The fundamental Acts deal entirely with the
insurance business and law, whereas the other Acts contain some provisions relating
to the insurance business and law. The purpose of the Act is not insurance. The
present articled aims to study the pure and fundamental law and Acts relating to the
insurance business and arrive at some conclusions thereupon.

The important existing laws exclusively relating to the insurance business are:
The Insurance Act, 1938; Life Insurance Corporation of India Act, 1956; General
Insurance Business (Nationalization) Act, 1972; Marine Insurance Act, 1963; Motor
Vehicle Act, 1988; Public Liability insurance Act, 1991; Insurance Regulatory and
Development Authority of India Act, 1999; Regulations made by the IRDAI and
Insurance Law (amendment) Act, 2015.

Among the above said law and legislation of the Marine Insurance Act,
1963and the Public Liability Insurance Act, 1991 are the specific legislations that deal
with the specific nature of the insurance business whereas all the others deal with the
basics and fundamentals and regulations. And among all the Acts, the Insurance Act,
1938 is a charter of the insurance business and enough attention has to be given to the
same while refurbishing the insurance law or making the insurance law a
comprehensive one.

Because of the presence of the above said repetitions, replications,

contradictions, confusions, multiple legislations for the purpose of simplifying and
making things easier to all classes of society, there is every need to revise and
redesign the existing legislation and come out with a specific and comprehensive
single piece of legislation equal to that of the Companies Act, 1956.

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