Government of India Volume I: Analysis and Recommendations

FOUNDATIONS OF CONTRACTS AND PROPERTY
As they do not fit within the standard system of consumer protection and prudential
regulation, the Commission has decided to consolidate its recommendations with
respect to these issues in this chapter.
13.2. Principles relating to certain contracts
The financial sector requires modification of general principles of laws. These pertain
mainly to:
13.2.1. Insurance
1. Insurance laws where certain legal principles presently used are required to be legislated to provide
greater clarity.
2. Securities laws where legal enforceability and contractual obligations are required to be protected.
Insurance principles are governed by various principles of case law along with statute.
The Commission examined these positions as a part of its comprehensive review of India’s
financial law. The Commission recommends legislative clarifications in the following
areas to ensure the smooth functioning of insurance contracts.
1. The term ‘contract of insurance’ has been used in the Insurance Act, 1938 in the definitions of
life insurance, general insurance, fire insurance, marine insurance and miscellaneous insurance
businesses but the term ‘contract of insurance’ is not defined in any legislation.
2. Insurance contracts are governed by the principle of uberrimae fidei, where all parties to an insurance
contract must deal in good faith, making a full declaration of all material facts in a given
insurance proposal. In addition to the insurer’s obligation to the insured consumer under the
consumer protection laws, the Commission recommends that the law must require the insured
to disclose all material facts to the insurer.
3. There is no specific statutory requirement to have an insurable interest to enforce insurance contracts
(other than marine insurance contracts) though courts have always treated the presence
of such an interest as a prerequisite for enforcing the same. The Commission recommends that
primary law should not require an insurable interest at the time of entering into an insurance contract
though the regulator should have the authority to require an insurable interest for certain
types of insurance contracts through regulations.
4. Currently, Section 38 of the Insurance Act of 1938 does not allow insurers the option to refuse an
assignment of life insurance policies. The Insurance (Amendment) Bill, 2000 proposes that an
insurer may refuse an assignment if it finds that such an assignment is not bona fide and not in
the interest of the policy holder or the public interest. The Commission recommends that the
regulator should have the power to specify the types of permitted assignments and restricted
assignments of insurance policies, though insurers should not have the discretion to refuse any
assignment.
5. Currently, if an insurance policy mentions the options available to a policyholder upon the lapse
of a policy, no further notice needs to be given to the policyholder. The Commission recommends
that insurers should serve notice to the policyholders in the event a policy lapses for nonpayment
of premium. Policyholders should be informed of the consequences of a lapse in the
policy and the options available to them in the event of such lapse.
6. In indemnity insurance contracts, the law of subrogation, where an insurance company tries to
recoup payments for claims made which another party should have been responsible for paying,
is governed by case law. The Commission recommends that the law of subrogation be clearly
defined in statute, drawing from directions provided by the Supreme Court in relevant case law.
Table 13.1 offers a brief summary of the specific recommendations of the Commission
pertaining to the principles of insurance contracts.
120 FINANCIAL SECTOR LEGISLATIVE REFORMS COMMISSION