UNIT-V LEGAL FRAMEWORK

Ms. Vibha

40

STRUCTURE
5.0 Introduction 5.1 Objective 5.2 Lesson1- General Contract Act 1872, LIC Act 1956 & GIC Act 1972 5.2.1. Features Of General Contract Act 1872 5.2.2. Features Of Insurance Contract 5.2.3. Features LIC Act 1956

5.2.4. Features GIC Act 1972

5.3 Lesson 2- Insurance Act, 1938 5.4 Lesson 3 - IRDA Act 1999 5.5 Lesson 4- Agency Law 5.6 Lesson 5- Consumer Protection Act, 1986 5.7 Summary 5.8 Keywords 5.7 Glossary 5.8 Self Assessment Questions 5.9 Sources & Further Readings

41

5.0 INTRODUCTION
Insurance is a tool used to help manage financial risk. Financial risk can take many forms. There are risks to our investments, liabilities for our actions, and risks to our ability to earn income. There is insurance to manage all these risks. Insurance is a financial agreement entered by two people to protect one against a certain risk. The contract that binds the two parties to certain obligations is known as Policy. The one who buys the insurance is known as policyholder or insured while the party that sells insurance is known as the insurer. From the time the insured signs the policy he/she has an obligation to pay a certain amount of money known as premium. . In this lesson, we will discuss the various laws governing insurance in India. The Insurance sector in India is governed by Insurance Act, 1938, the Life Insurance Corporation Act, 1956 and General Insurance Business (Nationalization) Act, 1972, Insurance Regulatory and Development Authority (IRDA) Act, 1999 and other related acts.

5.1 OBJECTIVES
After going through this lesson you should be able to: Define the term contract. Describe essential features of valid contract. Understand meaning of lawful Consideration. Define the term Consumer. Know the difference between agent and servant. Define Complaint Procedure. Know redressal of consumers grievances Understand Features of IRDA Act. Understand main functions of LIC Act. Understand main functions of GIC Act

42

LESSON 1- GENERAL CONTRACT ACT 1872, LIC ACT 1956 & GIC ACT 1972.
5.2.1. ESSENTIALS OF GENERAL CONTRACT (SECTION 10) OF INDIAN CONTRACT ACT 1872.
A contract is an agreement made between two or more parties, which the law will enforce. To be enforceable by law, an agreement must possess the essential elements of a valid contract as contained in Sections 10. Essential of a valid contract: The contract of insurance, like any other contract must fulfill the following essential requirements of a valid contract as laid down in the Indian contracts act. A contract is an agreement made between two or more parties, which the law will enforce. The essential requirements of a valid contract as laid down in the Indian contract act are: 1. Agreement: This involves, one party making the offer and the other party accepting it. The acceptance of the offer must be in the writing or given verbally and must be absolute and unconditional and must be communicated to the proposer. Legal Relationship: when the two parties enter into an agreement their intention must be create legal relationship between them. With many informal and social agreements, such as, an agreement to give a friend a lift in one's car, there is never any intention of legal consequences so the agreement for same reason should not be carried out Lawful Consideration: The, agreement is legally enforceable, only when the contract is supported by consideration, i.e., 'when both the parties give something in return. In insurance both parties provide consideration. Consideration from the insured to the insurer is the premium while from the insurer to the insured is a promise to compensate the insured or to make certain payment in the event of certain happening s taking place. Capacity of Parties: The parties to the agreement must be competent or capable of entering into a valid contract. A person is competent to contract if he is of the age of majority, is sound mind, and is not disqualified from contracting by any law to which he is subject Free and Genuine Consent: There must also be a free and genuine consent of the parties to the agreement. If the agreement is induced by

2.

3.

4.

5.

43

6.

7.

8.

9.

coercion, undue influence, fraud misrepresentation etc., there is absence of free consent. Lawful Object: The object of the contract must be lawful. Thus, the object of the agreement must not be illegal, immoral, or opposed to public policy. If an agreement suffers from any legal flaw, it would not be enforceable by law. For example a landlord knowingly lets a house to terrorist to carry out his activities, and he cannot recover the rent through the court of law. Agreement Not Declared Void: The agreement, though it might possess all the essential elements, must not have been expressly declared void by any law in force in country. Any contract which is contrary to the law of this country is void, such as insurance on goods being traded with an enemy national in times of war. Certainty and Possibility or Performance: It is essential the creation of every contract that the terms of agreement must be certain and not vague, indefinite, or ambiguous. An agreement to do an act impossible in itself cannot be enforced. For example Q agrees with P, to increase his height by magic. This agreement is not enforceable by law. Legal Formalities: The agreement maybe either oral or in writing. But if it is in writing, it must comply with the necessary legal formalities as to writing, registration, attestation, and stamp and must be issued under seal.

CONTRACTS WHICH ARE DEFECTIVE Void agreement: An agreement not enforceable by law is said to be void [sec2 (g)]. A void agreement does not create any legal rights or obligations. It is void ab initio, i.e. from very beginning, for example an agreement with minor. Void contracts: A contracts which legally does not exist is known as void contract. In other words, a contract, which ceases to be enforceable, is void when it ceases to be enforceable. It is valid when it is entered into, but something, which happens subsequently to the formation of the contract makes it void. Example: a contract to import goods from foreign country. It may subsequently become void. Voidable contract: An agreement which is enforceable by law at the option of one or more of the parties thereto, but not at the option of the other or others, is voidable contract. In other words when either party is in breach of the essential terms of the contract, the other party has a right to consider the contract void. If the aggrieved party may decide to overlook the breach or to waive the breach, the contract on this case is unaffected and remains in full force. Example: Anu promises to sell his watch for Rs. 500. Her consent is obtained by use of force. The contract is voidable at the option of Anu. She may accept it or reject it. Unenforceable contracts: Unenforceable contracts are those which are neither 44

void nor voidable but which cannot be enforced through the courts. For example, an insurance policy without proper stamp duty cannot be produced as evidence of a contract in court. Unenforceable contracts are fully valid contracts but the parties cannot enforce them through the courts. Illegal Agreements: Illegal agreements are those agreements, which involve the breaking of some rule of basic public policy and .are criminal in nature. An illegal agreement is not only void as between immediate parties but also taints the collateral transactions with illegality. Check Your Progress Quest 1. Describe the essentials of a valid contract. When does an agreement become void? Quest 2. Distinguish between Void and Voidable contract?

5.2.2. ESSENTIAL CONTRACTS

FEATURE

OF

INSURANCE

The purchasers of Insurance have to enter into a contract, where by one party (insured) agrees to pay to other party (insurer) a certain sum of money, determined on the happening of a certain event in consideration of a certain sum of money caned Premium. Such a contract is known as "Insurance Contract. Like any other contract, Insurance contract are also governed by the provisions of the law of contract as laid down in The Indian Contract Act, 1872. Therefore they have to fulfill the essential features of a valid contract. The essentials of a valid contract have been discussed earlier. Check Your Progress Q.1 What is the contract of insurance? What is its nature? Q 2. What are the chief features of an insurance contract?

45

5.2.3. LIFE INSURANCE CORPORATION ACT, 1956.

An Act to provide for the nationalization of life insurance business in India by transferring all such business to a Corporation established for the purpose and to provide for the regulation and control of the business of the Corporation and for matters connected there with or incidental thereto. Some of the important provisions are as follows: 1. Short title and commencement. (1) This Act maybe called the Life Insurance Corporation Act, 1956 (2) It shall come into force on such date as the Central Government may, by Notifications in the Official Gazette, appoint. Definitions: In this Act, unless the context otherwise requires, (1) "Appointed day, means the date on which the Corporation is established under Section 3; (2) "Composite insurer "means an insurer carrying on in addition to controlled business any other kind of insurance business; (3) "Controlled business" means (i) In the case of any insurer specified in sub-clause (a) or sub-clause (b) of clause (9) of section 2 of the Insurance Act and carrying on life insurance business (a) all his business, if he carries on no other class of insurance business; (b) all the business appertaining to his life insurance business, if he carries on any other class of insurance business also; (c) all his business if his certificate of registration under the Insurance Act in respect of general insurance business stands wholly cancelled for a period of more than six months on the 19th day of January, 1956. (ii) in the case of any other insurer specified in clause (9) ofsection2 of the Insurance Act and carrying on life insurance business (a) all his business in India, if he carries on no other class of insurance business in India; (b) all the business appertaining to his life insurance business in India, if he carries on any other class of insurance business also in India; (c) all his business in India if he certificate of registration under the Insurance Act in respect of general insurance business in India stands wholly cancelled for a period of more than six months on the 19th day of January, 1956.

46

Explanation. An insurer is said to carry on no class of insurance business other than life insurance business ,if in addition to life insurance business, he carries on only capital redemption business or annuity certain business or both ;and the expression" business appertaining to his life insurance business" in sub-clause (i) and (ii) shall be construed accordingly; (iii) in the case of a provident society, as defined in section 65 of the Insurance; Act, all its business; (iv) in the case of the Central Government or a State Government, all life insurance business carried on by it, subject to the exceptions specified in section44; (4) "Corporation" means the Life Insurance Corporation of India established under section 3; (5) "Insurance Act means the Insurance Act, 1938(4of1938); (6) "Insurer" means an insurer as defined in the Insurance Act who carries on life insurance business in India and includes the Government and a provident society as defined in section65 of the Insurance Act; (7) "Member" means a member of the Corporation; (8) "Prescribed" means prescribed by rules made under this Act; (9) "Tribunal" means a Tribunal constituted under section17 and having jurisdiction in respect of any matter under the rules made under this Act; (10) All other words and expressions used herein but not defined and defined in the Insurance Act shall have the meanings respectively assigned to them in that Act. Establishment and incorporation of Life Insurance Corporation of India. (1) With effect from such date as the Central Government may, by notification in the Official Gazette, appoint, there shall be established a Corporation called the Life Insurance Corporation of India. (2) The Corporation shall be a body corporate having perpetual succession and a common seal with power subject to the provisions of this Act, to acquire, hold and dispose of property, and may by its name sue and be sued. Constitution of the Corporation. (1) The Corporation shall consist of such number of persons not exceeding 2 as the Central Government may think fit to appoint thereto and one of them shall be appointed by the Central Government to be the Chairman there of. (2) Before appointing a person to be a member, the Central Government shall satisfy itself that person will have no such financial or other interest as is likely to affect prejudicially the exercise or performance by him of his functions as a member, and the Central Government shall also satisfy itself from time to time with respect to every member that he has no such interest; and any person who is, or whom the Central Government proposes to appoint and who has consented to be, a member shall, whenever required by the Central Government so to do,

47

furnish to it such information as the Central Government considers necessary for the performance of its duties under this sub-section. (3) A member who is in anyway directly or indirectly interested in a contract made or proposed to be made by the Corporation shall as soon as possible after the relevant circumstances have come to his knowledge, disclose the nature of his interest to the Corporation and the member shall not take part in any deliberation or discussion of the Corporation with respect to that contact. Capital of the Corporation. (1) The original capital of the Corporation shall be five crores of rupees provided by the Central Government after due appropriation made by Parliament bylaw for the purpose, and the terms and conditions relating to the provision of such capital shall be such as maybe determined by the Central Government. (2) The Central Government may, on the recommendation of the Corporation, reduce the capital of the Corporation to such extent and in such manner as the Central Government may determine. Functions of the Corporation. 1) Subject, to the rules, if any, made by the Central Government in this behalf, it shall be the general duty of the Corporation to carry on life insurance business, whether in or outside India, and the Corporation shall so exercise its powers under this Act as to secure that life insurance business is developed to the best advantage of the community. 2) Without prejudice to the generality of the provisions contained in sub-section (1) but subject to the other provisions contained in this Act, the Corporation shall have power (a) To carryon capital redemption business, annuity certain business or reinsurance business in so far as such re insurance business appertains to life insurance business; (b) Subject to the rules, if any, made by the Central Government in this behalf, to invest the funds of the Corporation in such manner as the Corporation may think fit and to take all such steps as may be necessary or expedient for the protection or realization of any investment; including the taking over of and administering any property offered as security for the investment until a suitable opportunity arises for its disposal; (c) To acquire, hold and dispose of any property for the purpose of its business; (d) To transfer the whole or any part of the life insurance business carried on outside India to any other person or persons, if in the interest of the Corporation it is expedient so to do; (e) To advance or lend money upon the security of any movable property or otherwise; (f) To borrow or raise any money in such manner and upon such security as the Corporation may think fit;

48

(g) To carry on either by itself or through any subsidiary any other business in any case where such other business was being carried on by a subsidiary of an insurer whose controlled business has been transferred to and invested in the Corporation under this Act; (h) to carry on any other business which may seen to the Corporation to be capable of being conveniently carried on in connection with its business and calculated directly or indirectly to render profitable the business of the corporation; (i) to do all such things as maybe incidental or conducive to the proper exercise of any of the powers of the Corporation. In the discharge of any of its functions the Corporation shall act so far as maybe on business principles. Power to impose conditions, etc. (1) In entering into any arrangement, under section 6, with any concern, the Corporation may impose such conditions as it may think necessary or expedient for protecting the interest of the Corporation and for securing that the accommodation granted by it is put to the best use by the concern. (2) Where any arrangement entered into by the Corporation under section 6 with any concern provides for the appointment by the Corporation of one or more directors of such concern, such provision and any appointment of directors made in pursuance there of shall be valid and effective notwithstanding anything to the contrary contained in the Companies Act, 1956 (1 of1956),or in any other law for the time being in force or in the memorandum, articles of association or any other instrument relating to the concern, and any provision regarding share, qualification, age limit, number of directorships, removal from office of Directors and such like conditions contained in any such law or instrument aforesaid, shall not apply to any director appointed by the Corporation in pursuance of the arrangement as aforesaid. (3) Any director appointed as aforesaid shall(a) Hold office during the pleasure o f the Corporation any maybe removed or substituted by any person by order in writing by the Corporation; (b) Not incur any obligation or liability by reason only of his being a director or for anything done or omitted to be done in good faith in the discharge of his duties as a director or anything in relation thereto; (c) Not be liable to retirement by rotation and shall not be taken into account for computing the number of directors liable to such retirement. Offices, branches and agencies.-(1) The central office of the Corporation shall be at such place as the Central Government may, by notification in he Official Gazette, specify. (2) The Corporation shall establish a zonal office at each of the following places, namely, Bombay, Calcutta, Delhi, Kanpur and Madras, and, subject to the

49

previous approval of the Central Government, may establish such other zonal offices as it thinks fit. (3)The territorial limits of each zone shall be such as may be specified by the Corporation. (4) There may be established as many divisional offices and branches in each zone as the Zonal Manager thinks fit. Committees of the Corporation.-(1) The Corporation may entrust the general superintendence and direction of its affairs and business to an Executive Committee consisting of not more than five of its members and the Executive Committee may exercise all powers and do all such acts and things as may be delegated to it by the Corporation. (2) The Corporation may also constitute an Investment Committee for the purpose of advising it in matters relating to the investment of its funds, and the Investment Committee shall consist of not more than eight members of whom not less than four shall be members of the Corporation and the remaining members shall be persons (whether members of the Corporation or not) who have special knowledge and experience in financial matters, particularly, matters relating to investment of funds. (3) The Corporation may constitute such other Committees as it may thin fit for the purpose of discharging such of its functions as maybe delegated to them. Funds of the Corporation.-The Corporation shall have its own fund and all receipts of the Corporation shall be credited thereto and all payments of the Corporation shall be made there from. Audit. (1) The accounts of the Corporation shall be audited by auditors duly qualified to act as auditors of companies under the law for the time being in force relating to companies, and the auditors shall be appointed by the Corporation with the previous approval of the Central Government and shall receive such remuneration from the Corporation as the Central Government may fix. (2) Every auditor in the performance of his duties shall have at all reasonable times access to the books, accounts and other documents of the Corporation. (3) The auditors shall submit their report to the Corporation and shall also forward a copy of their report to the Central Government. Annual report of activities of Corporation. The Corporation shall, as soon as may be, after the end of each financial year, prepare and submit to the Central Government in such form as maybe prescribed a report giving an account of its activities during the previous financial year, and the report shall also give an account of the activities, if any, which are likely to be undertaken by the Corporation in the next financial year. Q.1 Discuss the main functions of Life Insurance Corporation of India.

50

 Q2. Discuss the provision relating to Finance, Accounts and Audit as laid down in LICAct1956. .

5.2.4. GENERAL INSURANCE CONTRACT, 1972

Although Life Insurance was nationalized as early as 1956, general insurance business continued to be in the private sector right up to 1969. In that year the Government imposed strict social control on General Insurance Companies. This was a prelude to nationalization of General of General Insurance Business. With effect from 13th May, 1971 under the provisions of General Insurance (Emergency Provisions) Act, 1971 the Government of India took over the management of all General Insurance Companies operating in India whether they belonged to Indian or non-Indian shareholders. Subsequently, the General Insurance (Emergency Provisions) Amendment Act, 1971 was passed withdrawing certain rights of the Directors and Members of the Companies, which they were enjoying under the Companies Act. General Insurance (Nationalization) Act, 1972 shortly followed and with effect from 2nf January, 1973 the provisions of the Act became effective. The functions of the Corporation are enumerated in Section18 of the Act, some of are as follows: Functions of Corporation (1) The functions of the Corporation shall include:(a) The carrying on of any part of the general insurance business, if it thinks it desirable to do so; (b) Aiding, assisting and advising the acquiring companies in the matter of setting up of standards of conduct and sound practice in general insurance business and in the matter of rendering efficient services to holders of policies of general insurance; (c) Advising the acquiring companies in the matter of the controlling their expenses including the payment of commission and other expenses. (d) Advising the acquiring companies in the matter of the investment of their funds;

51

(e) Issuing directions to acquiring companies in relation to the conduct of general insurance business. (2) In issuing any directions under sub-section (1), the Cooperation shall keep in mind the desirability of encouraging composition amongst the acquiring companies as far as possible in order to render their services more efficient. Functions of acquiring companies:(1) Subject to the rules, if any, made by the Central Government in this behalf and to its memorandum and articles of association, it shall be the duty of every acquiring company to carry on general insurance business. (2) Each acquiring company shall so function under this Act as to secure that general insurance business is developed to the best of the community. (3) In the discharge of any of its functions, each acquiring company shall act so far as may be on business principles and where any directions have been issued by the Corporation shall be guided by such directions. (4) For the removal of doubts it is hereby declared that the Corporations and any acquiring company may, subject to the rules, if any, made by the Central Government in this behalf, enter into such contracts of reinsurance treaties as it may think fit for the protection of its interests. Under Sec. 35, The Central Government may by notification specify the application of the provision of the Insurance Act with such modifications as is deemed necessary to the Corporation and the acquiring companies. The Central Government is also empowered to make rules to carry out the provisions of the Act and such rules may provide for: (a) Manner in which the profits and other moneys received by the Corporation may be dealt with (b) The conditions subject to which the Corporation and the acquiring companies shall carry on general insurance business; (c) The terms and conditions subject to which any re-insurance contract or treaties may be entered into; (d) Form and manner in which any notice or application may be made to the Central Government; (e) The reports which may be called for by the Central Government from the Corporation and acquiring companies; and (f) Any other matter which is required to be or may be prescribed.

52

Q.1 Explain the important provision s of GIC Act, 1972. Q2. Discuss the functions of GIC Act, 1972. .

LESSON-2
5.3 THE INSURANCE ACT, 1938
Earlier to the Insurance Act, 1938, the insurance business was carried by the insurance companies in accordance with the principles of the Company Law, 1913. When the business started growing, the need for an independent law to regulate the insurance business was noticed and a separate Act, the Insurance Act, 1938 was legislated. The Act was used for all purposes relating to both life and general insurance businesses and their regulations. With regards to general insurance, this Act is being used to regulate the marine insurance, fire insurance and other insurances. Further growth of business has made it complex and more legal provisions were required to regulate it. The Marine Insurance Act, 1963, Public Liability Insurance Act, 1991, Insurance Regulatory and Development Authority Act, 1999 and regulations made by the IRDA are some of the legislations that govern the insurance business. Short title, extent and commencement. 1. (1)) This Act may be called Insurance Act, 1938. (2) It extends to the whole of India. (3) It shall come into force on such date3 as the Central Government may, by Notification in the Official Gazette, appoint in this behalf.

Definitions. 2. In this Act, unless there is anything repugnant in the subject or context, (1) Authority means the Insurance Regulatory and Development Authority established under sub-section (1) of section 3 of the Insurance Regulatory and Development Authority Act, 1999; (2) Policy-holder includes a person to whom the whole of the interest of the

53

policy-holder in the policy is assigned once and for all, but does not include an assignee thereof whose interest in the policy is infeasible or is for the time being subject to any condition; (3) Approved securities, means(i) Government securities and other securities charged on the revenue of the Central Government or of the Government of a State or guaranteed fully as regards principal and interest by the Central Government or the Government of any State; (ii) debentures or other securities for money issued under the authority of any Central Act or Act of a State Legislature by or on behalf of a port trust or municipal corporation or city improvement trust in any Presidency-town; (iii) shares of a corporation established by law and guaranteed fully by the Central Government or the Government of a State as to the repayment of the principal and the payment of the divided; (iv) securities issued or guaranteed fully as regards principal and interest by the Government of any Part B State and specified as approved securities for the purposes of this Act by the Central Government by notification in the Official Gazette; and (4)"Auditor" means a person qualified under the Chartered Accountants Act, 1949 (38 of 1949), to act as an auditor of companies; (4A)"Banking company" and "company" shall have the meanings respectively assigned in them in clauses (c) and (d) of sub-section (1) of Section 5 of the Banking Companies Act, 1949 (10 of 1949); (5) "Certified" in relation to any copy or translation of a document required to be furnished by or on behalf of an insurer or a provident society as defined in Part III means certified by a principal officer of 6Esuch insurer or provident society to be a true copy or a correct translation, as the case may be; (5A) "Chief agent" means a person who, not being a salaried employee of an insurer, in consideration of any commission(i) Performs any administrative and organizing functions for the insurer, and (ii) Procures life insurance business for the insurer by employing or causing to be employed insurance agents on behalf of the insurer; [(5-B) "Controller of Insurance" means the officer appointed by the Central Government under section 2B to exercise all the powers, discharge the functions and performs the duties of the Authority under this Act or the Life

54

Insurance Corporation Act, 1956 (31 of 1956) or the General Insurance Business (Nationalization) Act, 1972 (57 of 1972) or the Insurance Regulatory and Development Authority Act, 1999;] (6) "Court" means the principal Civil Court of original jurisdiction in a district and includes the High Court in exercise of its ordinary original civil jurisdiction; (6A)"Fire insurance business" means the business of effecting, otherwise than incidentally to some other class of insurance business, contracts of insurance against loss by or incidental to fire or other occurrence customarily included among the risks insured against in fire insurance Policies; (6B)"General insurance business" means fire, marine or miscellaneous insurance business, whether carried on singly or in combination with one or more of them; (7)"Government security" means a Government security as defined in the Public Debt Act, 1944 (18 of 1944);
2

[(7A) Indian insurance company means any insurer being a company-

(a) which is formed and registered under the Companies Act, 1956 (1 of 1956); (b)in which the aggregate holdings of equity shares by a foreign company, either by itself or through its subsidiary companies or its nominees, do not exceed twenty-six percent paid-up equity capital of such Indian insurance company; (c) whose sole purpose is to carry on life insurance business or general insurance business or re-insurance business.

(8) "Insurance company" means any insurer being a company, association or partnership which may be wound up under the Indian Companies Act, 1913 (7 of 1913), or to which the Indian Partnership Act, 1932 (9 of 1932), applies; (9) "Insurer" means(a) any individual or unincorporated body of individuals or body corporate incorporated under the law of any country other than India, carrying on insurance business not being a person specified in sub-clause (c) of this clause which(i) carries on that business in India, or (ii) has his or its principal place of business or is domiciled in India, or (iii) with the object of obtaining insurance business, employs a representative, or maintains a place of business, in India;

55

(b) any body corporate [not being a person specified in sub-clause (c) of this clause] carrying on the business of insurance, which is a body corporate incorporated under any law for the time being in force in India; or stands to any such body corporate in the relation of a subsidiary company within the meaning of the Indian Companies Act, 1913 (7 of 1913), as defined by sub-section (2) of section 2 of that Act, and (c) any person who in India has a standing contract with underwriters who are members of the Society of Lloyd's whereby such person is authorized within the terms of such contract to issue protection notes, cover notes, or other documents granting insurance cover to others on behalf of the underwriters. But does not include a principal agent' chief agent, special agent' or an insurance agent or a provident society as defined in Part III; (10) "Insurance agent" means an insurance agent licensed under Sec. 42 who receives agrees to receive payment by way of commission or other remuneration in consideration of his soliciting or procuring insurance business including business relating to the continuance, renewal or revival of policies of insurance; (10A)"investment company" means a company whose principal business is the acquisition of shares, stocks debentures or other securities; (10B) Intermediary or insurance intermediary shall have the meaning assigned to it in clause (f) of sub-section 2 of the Insurance Regulatory and Development Authority Act, 1999 (41 of 1999) (11) Life insurance business" means the business of effecting contracts of insurance upon human life, including any contract whereby the payment of money is assured on death (except death by accident only) or the happening of any (12) "Manager" and "officer" have the meanings assigned to those expressions in clauses (9) and (11), respectively of Section 2 of the Indian Companies Act, 1913 (7 of 1913); (13) "Managing agent" means a person, firm or company entitled to the management of the whole affairs of a company by virtue of an agreement with the company, and under the control and direction of the directors except to the extent, if any, otherwise provided for in the agreement, and includes any person, firm or company occupying such position by whatever name called. Explanation. If a person occupying the position of managing agent calls himself manager or managing director, he shall nevertheless be regarded as managing agent for the purposes of Sec. 32 of this Act; (13A)"marine insurance business" means the business of effecting contracts of

56

insurance upon vessels of any description, including cargoes, freights and other interests which may be legally insured, in or in relation to such vessels, cargoes and freights, goods, wares, merchandise and property of whatever description insured for any transit, by land or water, or both, and whether or not including warehouse risks or similar risks in addition or as incidental to such transit, and includes any other risks customarily included among the risks insured against in marine insurance policies; (13B)"miscellaneous insurance business" means the business of effecting contracts of insurance which is not principally or wholly of any kind or kinds included in clause (6A), (11) and (13A); (14) "Prescribed" means prescribed by rules made under this Act; and (15) "Principal agent" means a person who, not being a salaried employee of an insurer, in consideration of any commission, (i) Performs any administrative and organizing functions for the insurer; and (ii) Procures general insurance business whether wholly or in part by employing or causing to be employed insurance agents on behalf of the (16) "Private company" and "public company" have the meanings respectively assigned to them in Clauses (13) and (13-A) of Sec. 2 of the Indian Companies Act, 1913 (7 of 1913); (17) "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.

Appointment of Authority of Insurance. (1) If at any time, the Authority is superseded under sub-section (1) of section19 of the Insurance Regulatory and Development Authority Act, 1999, the Central Government may, by notification in the Official Gazette, appoint a person to be the Controller of Insurance till such time the Authority is reconstituted under subsection (3) of section 19 of that Act. (2) In making any appointment under this section, the Central Government shall have due regard to the following considerations, namely, whether the person to be appointed has had experience in industrial, commercial or insurance matter and whether such person has actuarial qualifications. Requirements as to capital No insurer carrying on the business of life insurance, general insurance or re-

57

insurance in India on or after the commencement of the Insurance Regulatory and Development authority Act, 199, shall be registered unless he has,(i) a paid-up equity capital of rupees one hundred crores, in case of a person carrying on the business of life insurance or general insurance; or a paid-up equity capital of rupees two hundred crores, in case of a person carrying on exclusively the business as a reinsurer:

(ii)

Provided that in determining the paid-up equity capital specified under clause (i) or clause (ii), the deposit to be made under section 7 and any preliminary expenses incurred in the formation and registration of the company shall be excluded: Provided further that an insurer carrying on business of life insurance, general insurance or re-insurance in India before the commencement of the Insurance Regulatory and Development Authority Act, 1999 and who is required to be registered under this Act, shall have a paid-up equity capital in accordance with clause (i) and clause (ii), as the case may be, within sex months of the commencement of that Act. Deposits Every insurer shall, in respect of the insurance business carried on by him in India, deposit and keep deposited with the Reserve Bank of India in one of the offices in India of the Bank for and on behalf of the Central Government the amount hereafter specified, either in cash or in approved securities estimated at the market value of the securities on the day of deposit, or partly in cash and partly in approved securities so estimated:(a) in the case of life insurance business, a sum equivalent to one per cent of his total gross premium written direct in India in any financial year commencing after the 31st day of March, 2000, not exceeding rupees ten crores; (b) in the case of general insurance business, a sum equivalent to three per cent of his total gross premium written in India, in any financial year commencing after the 31st day of March, 2000, not exceeding rupees ten crores; (c) in the case of re-insurance business, a sum of rupees twenty crores Provided that, where the business done or to be done is marine insurance only and relates exclusively to country craft or its cargo or both, the amount to be deposited under this sub-section shall be one hundred thousand rupees only:

58

Provided further that in respect of an insurer not having a share capital and carrying on only such insurance business as in the opinion of the Central Government is not carried on ordinarily by insurers under separate policies, the Central Government may, by notification under Official Gazette, order that the provisions of this sub-section shall apply to such insurer with the modification that instead of sum of rupees twenty lakhs or rupees ten lakhs, as the case may be, the deposit to be made by such insurer shall be such amount, being not less than one hundred and fifty thousand rupees, as may be specified in the said order. Audit The balance-sheet, profit and loss account, revenue account and profit and loss appropriation account of every insurer, in the case of an insurer specified in sub-clause (a)(ii) or sub-clause (b) of clause (9) of section 2 in respect of all insurance business transacted by him, and in the case of any other insurer in respect of the insurance business transacted by him in India, shall, unless they are subject to audit under the Indian Companies Act, 1913 (7 of 1913), be audited annually by an auditor, and the auditor shall in the audit of all such accounts have the powers of, exercise the functions vested in, and discharge the duties and be subject to the liabilities and penalties imposed on, auditors of companies by section 145 of the Indian Companies Act, 1913. This Act not to apply to preparation of account, etc., for periods prior to this Act coming into force. Nothing in this Act shall apply to the preparation of accounts by an insurer and the audit and submission thereof in respect of any accounting year which has expired prior to the commencement of this Act, and notwithstanding the other provisions of this Act, such accounts shall be prepared, audited and submitted in accordance with the law in force immediately before the commencement of this Act. Investment of assets (1) Every insurer shall invest and at all times keep invested assets equivalent to not less than the sum of(a) the amount of his liabilities to holders of life insurance policies in India on account of matured claims, and (b) the amount required to meet the liability on policies of life insurance maturing for payment in India, less(i) the amount of premiums which have fallen due to the insurer on such policies but have not been paid and the days of grace for payment of which have not expired, and

59

(ii) any amount due to the insurer for loans granted on and within the surrender values of policies of life insurance maturing for payment in India issued by him or by an insurer whose business he has acquired and in respect of which he has assumed liability, in the manner following, namely, twenty-five per cent of the said sum in Government securities, a further sum equal to not less than twenty-five per cent of the said sum in Government securities or other approved securities and the balance in any of the approved investments specified in sub-section (1) of section 27A or, subject to the limitations, conditions and restrictions specified in sub-section (2) of that section, in any over investment. (2) For the purposes of subsection (1), (a) the amount of any deposit made under section 7 or section 98 by the insurer in respect of his life insurance business shall be deemed to be assets invested or kept invested Government securities; (b) The securities of, or guaranteed as to principal and interest by, the Government of the United Kingdom shall be regarded as approved securities other than Government securities for a period of four years from the commencement of the Insurance (Amendment) Act, 1950 (47 of 1950), in the manner and to the extent hereinafter specified, namely: (i) during the first year, to the extent of twenty-five per cent in value of the sum referred to in sub-section (1); (ii) during the second year, to the extent of eighteen and three fourths per cent in value of the said sum; (iii) during the third year, to the extent of twelve and a half per cent in value of the said sum; and (iv) during the fourth year, to the extent of six and a quarter per cent in value of the said sum: Provided that, if the Authority so directs in any case, the securities specified in clause (b) shall be regarded as approved securities other than Government securities for a longer period than four years, but not exceeding six years in all and the manner in which and the extent to which the securities shall be so regarded shall be as specified in the direction; (c) Any prescribed assets shall, subject to such conditions, if any, as may be prescribed, be deemed to be assets invested or kept invested in approved investments specified in sub-section (1) of section 27A. (3) In computing the assets referred to in subsection (1), (a) any investment made with reference to any currency other than the Indian rupee which is in excess of the amount required to meet the liabilities of the insurer in India with reference to that currency, to the

60

extent of such excess; and (b) any investment made in the purchase of any immoveable property outside India or on the security of any such property, shall not be taken into account: Provided that nothing contained in this sub-section shall affect the operation of sub-section (2): Provided further that the Authority may, either generally or in any particular case, direct that any investment, whether made before or after the commencement of the Insurance (Amendment) Act, 1950 (47 of 1950), and whether made in or outside India, shall, subject to such conditions as may be imposed, be taken into account, in such manner as may be specified in computing the assets referred to in sub-section (1) and where any direction has been issued under this proviso copies thereof shall be laid before Parliament as soon as may be after it is issued. (4) Where an insurer has accepted reassurance in respect of any policies of life insurance issued by another insurer and maturing for payment in India or has ceded reassurance to another insurer in respect of any such policies issued by himself, the sum referred to in subsection (1) shall be increased by the amount of the liability involved in such acceptance and decreased by the amount of the liability involved in such cession. (5) The Government securities and other approved securities in which assets are under sub-section (1) to be invested and kept invested shall be held by the insurer free of any encumbrance, charge, hypothecation or lien. (6) The assets required by this section to be held invested by an insurer incorporated or domiciled outside India shall, except to the extent of any part thereof which consists of foreign assets held outside India, be held in India and all such assets shall be held in trust for the discharge of the liabilities of the nature referred to in sub-section (1) and shall be vested in trustees resident in India and approved by the Authority, and the instrument of trust under this sub-section shall be executed by the insurer with the approval of the Authority and shall define the manner in which alone the subject-matter of the trust shall be dealt with. Explanation.This sub-section shall apply to an insurer-incorporated India whose share capital to the extent of one-third is owned by, or the members of whose governing body to the extent of one-third consists of, members domiciled elsewhere than in India. Power to appoint staff The Authority may appoint such staff, and at such places as it or he may consider necessary, for the scrutiny of the returns, statements and information furnished by insurers under this Act and generally to ensure the efficient performance of the functions of the Authority under this Act.

61

Registration of principal agents, chief agents and special agents (1) The Authority or an officer authorized by it in this behalf shall in the prescribed manner and on payment of the prescribed fee, which shall not be more than twenty-five rupees for a principal agent or a chief agent and ten rupees for a special agent, register any person who makes an application to him in the prescribed manner if, (a) in the case of an individual, he does not suffer from any of the disqualifications mentioned in sub-section (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, and a certificate to Act as a principal agent, chief agent or special agent, as the case may be, for the purpose of procuring insurance business shall be issued to him. (2) A certificate issued under this section shall entitle the holder thereof to act as a principal agent, chief agent, or special agent, as the case may be, for any insurer. (3) A certificate issued under this section shall remain in force for a period of twelve months only from the date of issue, but shall, on application made on this behalf, be renewed from year to year on production of a certificate from the insurer concerned that the provisions of clauses (2) and (3) of Part A of the Sixth Schedule in the case of a principal agent, the provisions of clauses (2) and (4) of Part B of the said Schedule in the case of a chief agent, and the provisions of clauses (2) and (3) of Part C of the said Schedule in the case of a special agent, have been complied with, and on payment of the prescribed fee, which shall not be more than twenty-five rupees, in the case of a principal agent or a chief agent, and ten rupees in the case of a special agent, and an additional fee of the prescribed amount not exceeding five rupees by way of penalty, in cases where the application for renewal of the certificate does not reach the issuing authority before the date on which the certificate ceases to remain in force: Provided that, where the applicant is an individual, he does not suffer from any of the disqualifications mentioned in clauses (b) to (d) of sub-section (4) of section 42 and where the applicant is a company or a firm, any of its directors or partners does not suffer from any of the said disqualifications. (4) Where it is found that the principal agent, chief agent or special agent being an individual is, or being a company or firm contains a director or partner who is suffering from any of the disqualifications mentioned in subsection (4) of section 42, without prejudice to any other penalty to which he may be liable, the Authority shall, and where a principal agent, chief agent or special agent has contravened any of the provisions of this Act may cancel the certificate issued under this section to such principal agent, chief agent or special agent.

62

(5) The authority which issued any certificate under this section may issue a duplicate certificate to replace a certificate lost, destroyed or mutilated on payment of the prescribed fee, which shall not be more than two rupees. (6) Any person who acts as a principal agent, chief agent or special agent, without holding a certificate issued under this section to act as such, shall be punishable with fine which may extend to five hundred rupees, and any insurer or any person acting on behalf of an insurer, who appoints as a principal agent, chief agent or special agent any person not entitled to act as such or transacts any insurance business in India through any such person, shall be punishable with fine which may extend to one thousand rupees. (7) Where the person contravening sub-section (6) is a company or a firm, then, without prejudice to any other proceedings which may be taken against the company or firm, every director, manager, secretary or any other officer of the company, and every partner of the firm who is knowingly a party to such contravention shall be punishable with fine which may extend to five hundred rupees. (8) The provisions of sub-sections (6) and (7) shall not take effect until the expiry of six months from the commencement of the Insurance (Amendment) Act, 1950. (9) No insurer shall, on or after the commencement of the Insurance (Amendment) Act, 2002, appointment or transacts any insurance business in India through any principal agent, chief agent or special agent. Regulation of employment of principal agents (1) No insurer shall, after the expiration of seven years from the commencement of the Insurance (Amendment) Act, 1950, appoint, or transact any insurance business in India, through a principal agent. (2) Every contract between an insurer and a principal agent shall be in writing and the terms contained in Part A of the Sixth Schedule shall be deemed to be incorporated in, and form part of, every such contract. (3) No insurer shall, after the commencement of the Insurance (Amendment) Act, 1950 (47 of 1950), appoint any person as a principal agent except in a presidency-town unless the appointment is by way of renewal of any contract subsisting at such commencement. (4) Within sixty days of the commencement of the Insurance (Amendment) Act, 1950 (47 of 1950), every principal agent shall file with the insurer concerned a full list of insurance agents employed by him indicating the terms of the contract between the principal agent and each of such insurance agents, and, if any principal agent fails to file such a list within the period specified, any commission

63

payable to such principal agent on premiums received from the date of expiry of the said period of sixty days until the date of the filing of the said list shall, notwithstanding anything in any contract to the contrary, cease to be so payable. (5) A certified copy of every contract as is referred to in sub-section (2) shall be furnished by the insurer to the Authority within thirty days of his entering into such contract, and intimation of any change in any such contract shall be furnished by the insurer with full particulars thereof to the Authority within thirty days of the making of any such change. (6) If the commission due to any insurance agent in respect of any general insurance business procured by such agent is not paid by the principal agent for any reason, the insurer may pay the insurance agent the commission so due and recover the amount so paid from the principal agent concerned. (7) Every contract as is referred to in sub-section (2), subsisting at the commencement of the Insurance (Amendment) Act, 1950 (47 of 1950), shall, with respect to terms regarding remuneration, be deemed to have been so altered as to be in accordance with the provisions of sub-section (4) of section 40A. (8) If any dispute arises as to whether a person is or was a principal agent the matter shall be referred to the Authority, whose decision shall be final. (9) Every insurer shall maintain a register in which the name and address of every principal agent appointed by him, the date of such appointment and the date, if any, on which the appointment ceased shall be entered. Commission, brokerage or fee payable to intermediary or insurance intermediary (1) No intermediary or insurance intermediary shall be paid or contract to be paid by way of commission, fee or as remuneration in any form, an amount exceeding thirty per cent of the premium payable as may be specified by the regulations made by the Authority, in respect of any policy or policies effected through him: Provided that the Authority may specify different amounts payable by way of commission, fee or as remuneration to an intermediary or insurance intermediary or different classes of business of insurance. (2) Without prejudice to the provisions contained in this Act, the Authority may, by the regulations made in this behalf, specify the requirements of capital, form of business and other conditions to act as an intermediary or insurance intermediary. Register of insurance agents Every insurer and every person who acting on behalf of an insurer employs insurance agents shall maintain a register showing the name and address of every

64

insurance agent appointed by him and the date on which his appointment began and the date, if any, on which his appointment ceased.

Check Your Progress Q.1 Insurance Act 1938 can be called as the pioneer in insurance business. Explain. Q2. Discuss the important features of Insurance Act 1938.

65

LESSON-3
5.4 IRDA ACT 1999
The Insurance Act, 1938 had provided for setting up of the Controller of Insurance to act as a strong and powerful supervisory and regulatory authority for insurance. Post nationalization, the role of Controller of Insurance diminished considerably in significance since the insurance companies were owned by the Government. With the opening up of the insurance industry to the private sector, the need for a strong, independent and autonomous Insurance Regulatory Authority was felt. As the enacting of legislation would have taken time, the then Government constituted through a Government resolution an Interim Insurance Regulatory Authority pending the enactment of a comprehensive legislation. The Insurance Regulatory and Development Authority Act, 1999 is an act to provide for the establishment of an Authority to protect the interests of holders of insurance policies, to regulate, promote and ensure orderly growth of the insurance industry and for matters connected therewith or incidental thereto and further to amend the Insurance Act, 1938, the Life Insurance Corporation Act, 1956 and the General insurance Business (Nationalization) Act, 1972 to end the monopoly of the Life Insurance Corporation of India (for life insurance business) and General Insurance Corporation and its subsidiaries (for general insurance business). Extent and Commencement This Act may be called the Insurance Regulatory and Development Authority Act, 1999. The act extends to the whole of India and will come into force on such date as the Central Government may, by notification in the Official Gazette specify. Different dates may be appointed for different provisions of this Act. The Act has defined certain terms, some of the most important ones are as follows: Appointed day means the date on which the Authority is established under the act. Authority means the established under this Act.

66

With effect from such date as the Central Government may, by notification, appoint the Insurance Regulatory and Develop is to be constituted. The Authority shall be a body corporate, having perpetual succession and a common seal with power, subject to the provisions of this Act, to acquire, hold and dispose of property, and to contract and can be sue or be sued in its own name. The head office of the Authority shall be at such place as the Central Government may decide from time to time and it may establish offices at other places in India. Composition of Authority The Authority shall consist of the following members, namely (a) a Chairperson; (b) not more than five whole-time members; (c) not more than four part-time members, to be appointed by the Central Government from amongst persons of ability, integrity and standing who have knowledge or experience in life insurance, general insurance, actuarial science, finance, economics, law, accountancy, administration or any other discipline which would, in the opinion of the Central Government, be useful to the Authority: The Central Government while appointing the Chairperson and the whole-time members must ensure that at least one person each is a person having knowledge or experience in life insurance, general insurance or actuarial science respectively. Tenure of office of Chairperson and other members The Chairperson and every other whole-time member shall hold office for a term of five years from the date on which he enters upon his office and shall be eligible for reappointment: However, no person shall hold office as such Chairperson after he has attained the age of sixty-five years and no person shall hold office as such whole-time member after he has attained the age of sixty-two years. A part-time member shall hold office for a term not exceeding five years from the date on which he enters upon his office. A member may: (a) relinquish his office by giving in writing to the Central Government notice of not less than three months; or be removed from his office in accordance with the following provisions. Removal from office The Central Government may remove from office any member who: (a) is, or at any time has been, adjudged as insolvent; (b) has become physically or mentally incapable of acting as a member;

67

(c) has been convicted of any offence which, in the opinion of the Central Government, involves moral turpitude; (d) has acquired such financial or other interest as is likely to affect prejudicially his functions as a member; (e) has so abused his position as to render his continuation in office detrimental to the public interest. No such member shall be removed under clause (d) or clause (e) unless he has been given a reasonable opportunity of being heard in the matter. Salary and allowances of Chairperson and members The salary and allowances payable to, and other terms and conditions of service of, the members other than part-time members shall be such as may be prescribed. The part-time members shall receive such allowances as may be prescribed. The salary, allowances and other conditions of service of a member shall not be varied to his disadvantage after appointment. Bar on future employment of members The Chairperson and the whole-time members shall not, for a period of two years from the date on which they cease to hold office as such, except with the previous approval of the Central Government, accept: (a) any employment either under the Central Government or under any State Government; or (b) any appointment in any company in the Insurance sector. Administrative powers of Chairperson The Chairperson shall have the powers of general superintendence and direction in respect of all administrative matters of the Authority. Meeting of Authority The Authority shall meet at such times and places, and shall observe such rules and procedures in regard to transaction of business at its meetings (including quorum at such meetings) as may be determined by regulations. The Chairperson, or if for any reason he is unable to attend a meeting of the Authority, any other member chosen by the members present from amongst themselves at the meeting shall preside at the meeting. All questions which come up before any meeting of the Authority shall be decided by a majority vote of the members present and voting, and in the event of equality of votes, the Chairperson, or in his absence, the person presiding shall have a second or casting vote. The Authority may make regulations for the transaction of business at its meetings.

68

Vacancies,

etc.,

not

to

invalidate

proceedings

of

Authority

No Act or proceeding of the Authority shall be invalid merely by reason of: (a) any vacancy in, or any defect in the constitution of, the Authority; (b) any defect in the appointment of a person acting as a member of the Authority; (c) any irregularity in the procedure of the Authority not affecting the merits of the case. Officers and employees of Authority The Authority may appoint officers and such other employees, as it considers necessary for the efficient discharge of its functions under this Act. The terms and other conditions of service of officers and other employees of the Authority shall be governed by regulations made under this Act. Transfer of assets, liabilities, etc, of the Interim Insurance Regulatory Authority will be transferred to the Authority on the appointed day. All suits and other legal proceedings instituted or which could have been instituted by or against the Interim Insurance Regulatory Authority immediately before that day may be continued or may be instituted by or against the Authority. Duties, powers and functions of Authority Subject to the provisions of this Act and any other law for the time being in force, the Authority has the duty to regulate, promote and ensure orderly growth of the insurance business and re-insurance business. The powers and functions of the Authority include:(a) to issue to the applicant a certificate of registration, to renew, modify, withdraw, suspend or cancel such registration b) protection of the interests of the policy-holders in matters concerning assigning of policy, nomination by policy-holders, insurable interest, settlement of insurance claim, surrender value of policy, and other terms and conditions of contracts of insurance (c) specifying requisite qualifications code of conduct and practical training for intermediary or insurance intermediaries and agents (d) specifying the code of conduct for surveyors and loss assessors (e) promoting efficiency in the conduct of insurance business (f) promoting and regulating professional organizations connected with the insurance and reinsurance business (g) levying fees and other charges for carrying out the purposes of this Act (h) calling for information from, undertaking inspection of, conducting enquiries and investigations including audit of the insurers, intermediaries, insurance intermediaries and other organizations connected with the insurance business (i) control and regulation of the rates, advantages, terms and conditions that may be offered by insurers in respect of general insurance business not so controlled

69

and regulated by the Tariff Advisory Committee under section 64U of the Insurance Act, 1938 (j) prescribing the form and manner in which books of account shall be maintained and statement of accounts will be rendered by insurers and other insurance intermediaries (k) Regulating investment of funds by insurance companies (l) regulating maintenance of margin of solvency (m) adjudication of disputes between insurers and intermediaries or insurance intermediaries (n) supervising the functioning of the Tariff Advisory Committee (o) specifying the percentage of premium income of the insurer to finance schemes for promoting and regulating professional organizations (p) specifying the percentage of life insurance business and general insurance business to be undertaken by the insurer in the rural or social sector (q) exercising such other powers as may be prescribed

Finance, accounts and audit

Grants by Central Government The Central Government may, after due appropriation made by the Parliament by law in this behalf, make to the Authority grants of such sums of money as the Government may think fit for being utilized for the purposes of this Act. Fund A Fund to be called "The Insurance Regulatory and Development Authority Fund" is to be established and the following sums will be credited thereto: (a) all Government grants, fees and charges received by the Authority (b) all sums received by the Authority from such other source as may be decided upon by the Central Government (c) the percentage of prescribed income received from the insurer. The Fund shall be applied for meeting the following expenses: (a) the salaries, allowances and other remuneration of the members, officers and other employees of the Authority (b) the other expenses of the Authority in connection with the discharge of its functions and for the purposes of this Act. Accounts and audit The Authority shall maintain proper accounts and other relevant records and prepare an annual statement of accounts in such form as may be prescribed by the Central Government in consultation with the Comptroller and Auditor General of India. The accounts of the Authority shall be audited by the Comptroller and Auditor General of India at such intervals as may be specified by him and any expenditure incurred in connection with such audit shall be payable by the Authority to the Comptroller and Auditor General of India. The Comptroller and Auditor-General of India and other person appointed by him in connection with

70

the audit of the accounts of the Authority shall have the same rights and privileges and authority in connection with such audit as the Comptroller and Auditor General generally has in connection with the audit of the Government accounts and, in particular, shall have the right to demand the production of books, accounts, connected vouchers and other documents and papers and to inspect any of the officers of the Authority. The accounts of the Authority as certified by the Comptroller and Auditor General of India or any other person appointed by him in this behalf together with the audit report thereon shall be forwarded annually to the Central Government and that Government shall cause the same to be laid before each House of Parliament.

Powers of Central Government

The Authority shall, in exercise of its powers or the performance of its functions under this Act, be bound by such directions on questions of policy, other than those relating to technical and administrative matters, as the Central Government may give in writing to it from time to time However, Authority must, as far as practicable, be given an opportunity to express its views before any such direction is given. The decision of the Central Government, whether a question is one of policy or not, shall be final. Power of Central Government to supersede Authority If at any time the Central Government is of the opinion :(a) that, on account of circumstances beyond the control of the Authority, it is unable to discharge the functions or perform the duties imposed on it by or under the provisions of this Act: or (b) that the Authority has persistently defaulted in complying with any direction given by the Central Government under this Act or in the discharge of the functions or performance of the duties imposed on it by or under the provisions of this Act and as a result of such default the financial position of the Authority or the administration of the Authority has suffered; or (c) that circumstances exist which render in necessary in the public interest so to do, the Central Government may, by notification and for reasons to be specified therein, supersede the Authority for such period, not exceeding six months, as may be specified in the notification and appoint a person to be the Controller of Insurance. However, before issuing any such notification, the Central Government shall give a reasonable opportunity to the Authority to make representations against the proposed supersession and shall consider the representations, if any, of the Authority. Upon the publication of such notification superseding the Authority :(a) the Chairperson and other members shall, as from the date of supersession, vacate their offices as such; (b) all the powers, functions and duties which may, by or under the provisions of

71

this Act, be exercised or discharged by or on behalf of the Authority shall, until the Authority is reconstituted, be exercised and discharged by the Controller of Insurance; and (c) all properties owned or controlled by the Authority shall, until the Authority is reconstituted vest in the Central Government. On or before the expiration of the period of supersession specified in such a notification, the Central Government shall reconstitute the Authority by a fresh appointment of its Chairperson and other members and in such case any person who had vacated his office under the notification shall not be deemed disqualified for reappointment. The Central Government shall cause a copy of the notification issued and a full report of any action taken under this section and the circumstances leading to such action to be laid before each House of Parliament at the earliest. Furnishing of returns, etc., to the Central Government The Authority must furnish to the Central Government at such time and in such form and manner as may be prescribed, or as the Central Government may direct, such returns and statements and such particulars in regard to any proposed or existing programme for the promotion and development of the insurance industry as the Central Government may, from time to time, require. The Authority must, within nine months after the close of each financial year, submit to the Central Government a report giving a true and full account of its activities including the activities for promotion and development of the insurance business during the previous financial year. Copies of the reports must be laid, as soon as may be after they are received, before each House of Parliament. Chairperson, members, officers and employees of Authority to be public servants The Chairperson, members, officers and other employees of the Authority shall be deemed, when acting or purporting to act in pursuance of any of the provisions of this Act, to be public servants within the meaning of section 21 of the Indian Penal Code. Protection of action taken in good faith No suit, prosecution or other legal proceedings shall lie against the Central Government or any officer of the Central Government or any member, officer or other employee of the Authority for anything which is in good faith done or intended to be done under this Act or the rules or regulations made there under. However, nothing in this Act exempts any person from any suit or other proceedings which might, apart from this Act, be brought against him.

72

Delegation of powers The Authority may, by general or special order in writing, delegate to the Chairperson or any other member or officer of the Authority, subject to such conditions, if any, as may be specified in the order such of its powers and functions under this Act as it may deem necessary. The Authority may, by a general or special order in writing, also form Committees of the members and delegate to them the powers and functions of the Authority as may be specified by the regulations. Power to make rules The Central Government may, by notification, make rules for carrying out the purposes of this Act. Such rules may provide for all or any of the following matters, namely:(a) the salary and allowances payable to and other conditions of service of the members other than part-time members (b) the allowances to be paid to the part-time members (c) such other powers that may be performed by the Authority (d) the form of annual statement of accounts to be prepared by the Authority (e) the time at, the form and the manner in which returns and statements and particulars are to be furnished to the Central Government (f) the matters on which the Insurance Advisory Committee shall advise the authority (g) any other matter which is to be, or may be, prescribed, or in respect of which provision is to be or may be made by rules. Establishment of Insurance Advisory Committee The Authority may, by notification, establish with effect from such date as it may specify in such notification, a Committee to be known as the Insurance Advisory Committee. The Insurance Advisory Committee shall consist of not more than twenty-five members excluding ex officio members to represent the interests of commerce, industry, transport, agriculture, consumer fora, surveyors, agents, intermediaries, organizations engaged in safety and loss prevention, research bodies and employees' association in the insurance sector. The Chairperson and the members of the Authority shall be the ex officio Chairperson and ex officio members of the Insurance Advisory Committee. The objects of the Insurance Advisory committee shall be to advise the Authority on matters relating to the making of the regulations. The Insurance Advisory Committee may advise the Authority on such other matters as may be prescribed.

Capital Requirements
Requirement as to capital No insurer carrying on the business of life insurance, general insurance, or reinsurance in India on or after the commencement of the Insurance Regulatory and Development Authority Act, 1999, shall be registered unless he has: -

73

1. a paid-up equity capital of rupees one hundred crores, in case of a person carrying on the business of life insurance or general insurance; or 2. a paid-up equity capital of rupees two hundred crores, in case of a person carrying on exclusively the business as a reinsurer: In determining the paid-up equity capital specified under clause (i) or clause (ii), the deposit to be made under section 7 and any preliminary expenses incurred in the formation and registration of the company shall be excluded: An insurer carrying on business of life insurance, general insurance or reinsurance in India before the commencement of the Insurance Regulatory and Development Authority Act, 1999 and who is required to be registered under this Act, shall have a paid-up equity capital in accordance with clause (i) and clause (ii), as the case may be, within six months of the commencement of that Act. 5. Where, the nominal value of the shares intended to be transferred by any individual, firm, group, constituents of a group, or body corporate under the same management, jointly or severally exceeds one per cent. Of paid up capital of the insurer, previous approval of the Authority must be obtained for the transfer. Explanation.-For the purpose of this sub-clause, the expressions "group" and "same management", shall have the same meanings respectively assigned to them in the Monopolies and Restrictive Trade Practices Act, 1969. 6. The following sections have been inserted: Provisions of investment of funds outside India No insurer shall directly or indirectly invest outside India, the funds of the policyholders. Manner and conditions of investment The Authority may, in the interests of the policyholders, specify by regulations made by the Authority, the time, manner and other conditions of investment of assets to be held by an insurer for the purposes of this Act. The Authority may, after taking into account the nature of business and to protect the interests of the policyholders, issue to an insurer the directions relating to the time, manner, and other conditions of investment of assets to be held by him. However, no directions shall be issued unless the insurer concerned has been given a reasonable opportunity of being heard. Insurance business in rural or social sector Every insurer shall, after the commencement of the Insurance Regulatory and

74

Development Authority Act, 1999, undertake such percentages of life insurance business and general insurance business in the rural or social sector, as may be specified, in the Official Gazette by the Authority, in this behalf. Miscellaneous Provisions Penalty for default in complying with, or act in contravention of, this Act. lf any person, who is required under this Act, or rules or regulations made there under,(a) to furnish any document, statement, account, return or report to the Authority, fail to furnish the same; or (b) to comply with the directions, fails to comply with such directions; (c) to maintain solvency margin, fails to maintain such solvency margin; (d) to comply with the directions on the insurance treaties, fails to comply with sue directions on the insurance treaties, he shall be liable to a penalty not exceeding five lakhs rupees for each such failure and punishable with fine. lf a person makes a statement, or furnishes any document, statement, account, return or report which is false and which he either knows or believes to be false or does not believe to be true,-( (a) he shall be liable to a penalty not exceeding five lakhs rupees for each such failure; and (b) he shall be punishable with imprisonment which may extend to three years or with fine for each such failure. If any director, managing director, manager or to~ officer or employees of an insurer wrongfully obtains possession of any property or wrongfully applies to any purpose of the Act, he shall be liable to a penalty not exceeding two lakhs rupees for each such failure. Offences by companies, Where any offence under this Act has been committed by a company, every person who, at the time the offence was committed, was in charge of, and was responsible to, the Company for the conduct of the business of the company as well as the company shall be deemed to be guilty of the offence and shall be liable to be proceeded against and punished accordingly: Nothing contained in this sub-section shall render any such person liable to any punishment, if he proves that the offence was committed without his knowledge or that he had exercised all due diligence to prevent the commission of such offence. Where any offence under this Act has been committed by a company and it is proved that the offence has been committed with the consent or connivance of, or is attributable to any neglect on the part of, any director, manager, secretary or other officer of the company, such director, manager, secretary or other officer

75

shall be deemed to be guilty of that offence and shall be liable to be proceeded against and punished accordingly. Explanation.-For the purposes of this section,- (a)"company" means any body corporate, and includes a firm, an association of person or a body of individuals whether incorporated or not; and (b) "director", in relation to(i) a firm means a partner in the firm; (ii) an association of persons or a body of individuals, means any-member controlling the affairs thereof. Power of Authority to make regulations. The Authority may, by notification in the Official Gazette, make regulations consistent with this Act and the rules made there under, to carry out the provisions of this Act. Check Your Progress Q.1. Briefly discuss the powers and duties of IRDA.

Q 2: Write short note on Finance, Accounts and Audit of IRDA.

76

LESSON-4
5.5 AGENCY LAW
At times all of us act as principals and agents. If I my friend ask me to deposit his water bill, then he is acting as principal and I am as agent. Agency Law is contained in Chapter X {Secs182 to 238} of the Indian Contact Act 1872. Agent" and "principal: An "agent" is a person employed to do any act for another, or to represent another in dealings with third persons. The person for whom such act is done, or represented, is called the "principal". {sec182}. Who may employ agent: Any person who is of the age of majority according to the law to which he is subject, and who is of sound mind, may employ an agent. Who may be an agent: As between the principal and third persons, any person may become an agent, but no person who is not of the age of majority and sound mind can become an agent, so as to be responsible to the principal according to the provisions in that behalf herein contained. Consideration not necessary: No consideration is necessary to create an agency. Agent's authority may be express or implied: The authority of an agent may be express or implied. Definitions of express and implied authority: An authority is said to be express when it is given by words spoken or written. An authority is said to be implied when it is to be inferred from the circumstances of the case; and things spoken or written, or the ordinary course of dealing, may be accounted circumstances of the case. Illustration Aman owns a shop in Serampur, living himself in Calcutta, and visiting the shop occasionally. Bharat manages the shop, and he is in the habit of ordering goods from Chaman in the name of Aman for the purposes of the shop, and of paying for them out of Aman's funds with Aman's knowledge. Bharat has an implied authority from Aman to order goods from Chaman in the name of Aman for the purpose of the shop. Extent of agent's authority: An agent, having an authority to do an act, has authority to do every lawful thing, which is necessary in order to do such act. An agent having an authority to carry on a business has authority to do every lawful thing necessary for the purpose, or usually done in the course, of conducting such business. Illustrations 77

(a) A is employed by B, residing in London, to recover at Bombay a debt due to B. A may adopt any legal process necessary for the purpose of recovering the debt, and may give a valid discharge for the same. (b) A constitutes B his agent to carry on his business of a shipbuilder. B may purchase timber and other materials, and hire workmen, for the purpose of carrying on the business. Agent's authority in an emergency: An agent has authority, in an emergency, to do all such acts for the purpose of protecting his principal from loss and would be done by a person or ordinary prudence, in his own case, under similar circumstances. SUB AGENT When agent cannot delegate An agent cannot lawfully employ another to perform acts, which he has expressly, or impliedly undertaken to perform personally, unless by the ordinary custom of trade a sub-agent may, or, from the nature of agency, a sub-agent must, be employed. "Sub-agent" defined A "sub-agent" is a person employed by, and acting under the control of, the original agent in the business of the agency. Representation of principal by sub-agent properly appointed Where a sub-agent is properly appointed, the principal is, so far as regards third persons, represented by the sub-agent, and is bound by and responsible for his acts, as if he were an agent originally appointed by the principal. Agent's responsibility for sub-agents: The agent is responsible to the principal for the acts of the sub-agent. Sub-agent's responsibility: The sub-agent is responsible for his acts to the agent, but not to the principal, except in case of fraud or willful wrong. Agent's responsibility for sub-agent appointed without authority Where an agent, without having authority to do so, has appointed a person to act as a sub-agent, the agent stands towards such person in the relation of a principal to an agent, and is responsible for his acts both to the principal and to third person; the principal is not represented, by or responsible for the acts of the person so employed, nor is that person responsible to the principal.

78

Relation between principal and person duly appointed by agent to act in business of agency When an agent, holding an express or implied authority to name another person to act for the principal in the business of the agency, has named another person accordingly, such person is not a sub-agent, but an agent of the principal for such part of the business of the agency as is entrusted to him. Agent's duty in naming such person In selecting such agent for his principal, an agent is bound to exercise the same amount of discretion as a man of ordinary prudence would exercise in his own case; and, if he does this, he is not responsible to the principal for the acts of negligence of the agent so selected. Illustrations A instructs B, a merchant, to buy a ship for him. B employs a ship-surveyor of good reputation to choose a ship for A. The surveyor makes the choice negligently and the ship turns out to be unseaworthy and is lost. B is not, but the surveyor is, responsible to A. Right of person as to acts done for him without his authority-effect of ratification Where acts are done by one person on behalf of another, but without his knowledge or authority, he may elect to ratify or to disown such acts. If he ratifies them, the same effects will follow as if they had been performed by his authority. Ratification may be expressed or implied Ratification may be expressed or may be implied in the conduct of the person on whose behalf the acts are done. Illustrations (a) A, without authority, buys goods, for B. Afterwards B sells them to C on his own account; B's conduct implies a ratification of the purchase made for him by A. (b) A, without B's authority, lends B's money to C. Afterwards B accepts interest on the money from C. B's conduct implies a ratification of the loan. Knowledge requisite for valid ratification No valid ratification can be made by a person whose knowledge of the facts of the case is materially defective. Effect of ratifying unauthorized act forming part of a transaction

79

A person ratifying any unauthorized act done on his behalf ratifies the whole of the transaction of which such act formed a part. Ratification of unauthorized act cannot injure third person An act done by one person on behalf of another, without such other person's authority, which, if done with authority would have the effect of subjecting a third person to damages, or of terminating any right to interest of a third person cannot, by ratification, be made to have such effect.

REVOCATION OF AUTHORITY
Termination of agency An agency is terminated by the principal revoking his authority, or by the agent renouncing the business of the agency; or by the business of the agency being completed; or by either the principal or agent dying or becoming of unsound mind; or by the principal being adjudicated an insolvent under the provisions of any Act for the time being in force for the relief of insolvent debtors. Termination of agency, where agent has an interest in subject-matter Where the agent has himself an interest in the property, which forms the subject matter of the agency, the agency cannot, in the absence of an express contract, be terminated to the prejudice of such interest. Illustration A, gives authority to B to sell A's land, and to pay himself, out of the proceeds, the debts due to him from A.A cannot revoke this authority, nor can it be terminated by his insanity or death. When principal may revoke agent's authority The principal may, save as is otherwise provided by the last preceding section, revoke the authority given to his agent at any time before the authority has been exercised, so as to bind the principal. Revocation where authority has been partly exercised The principal cannot revoke the authority given to his agent after the authority has been partly exercised; so far as regards such acts and obligations as arise from acts already done in the agency. Compensation for revocation by principal, or renunciation by agent Where there is an express or implied contract that the agency should be continued for any period of time, the principal must make compensation to the agent, or the

80

agent to the principal, as the case may be, for any previous revocation or renunciation of the agency without sufficient cause. Notice of revocation or renunciation Reasonable notice must be given of such revocation or renunciation, otherwise the damage thereby resulting to the principal or the agent, as the case may be, must be made good to the one by the other. Revocation and renunciation may be expressed or implied Revocation or renunciation may be expressed or may be implied in the conduct of that principal or agent respectively. Illustration A empowers B to let A's house. Afterwards A lets it himself. This is an implied revocation of B's authority. When termination of agent's authority takes effect as to agent, and as to third persons The termination of the authority of an agent does not, so far as regards the agent, take effect before it becomes known to him, or, so far as regards third persons, before it becomes known to them. Agent's duty on termination of agency by principal's death or insanity When an agency is terminated by the principal dying or becoming of unsound mind, the agent is bound to take on behalf of the representative, of his late principal, all reasonable steps for the protection and reservation of the interests entrusted to him. Termination of sub-agent's authority The termination of the authority of an agent causes the termination (subject to the rules herein contained regarding the termination of an agent's authority) of the authority of all sub-agents appointed by him.

AGENT'S DUTY TO PRINCIPAL

Agent's duty in conducting principal's business An agent is bound to conduct the business of his principal according to the directions given by the principal, or in the absence of any such directions according to the customs, which prevails in doing business of the same kind at the place where the agent conducts such business. When the agent acts otherwise, if

81

any loss be sustained, he must make it good to his principal and if any profit accrues, he must account for it. Skill and diligence required from agent An agent is bound to conduct the business of the agency with as much skill as is generally possessed by person engaged in similar business unless the principal has notice of his want of skill. The agent is always bound to act with reasonable diligence, and to use such skill as he possesses; and to make compensation to his principal in respect of the direct consequences of his own neglect, want of skill, or misconduct, but not in respect of loss or damage which are indirectly or remotely caused by such neglect, want of skill, or misconduct. Agent's accounts An agent is bound to render proper accounts to his principal on demand. Agent's, duty to communicate with principal It is the duty of an agent in case of difficulty, to use all reasonable diligence in communicating with his principal, and in seeking to obtain his instructions. Right of principal when agent deals, on his own account, in business of agency without principal's consent If an agent deals on his own account in the business of the agency, without first obtaining the consent of his principal and acquainting him with all material circumstances, which have come to his own knowledge on the subject, the principal may Repudiate the transaction, if the case shows, either that any material fact has been dishonestly concealed from him by the agent, or that the dealings of the agent have been disadvantageous to him. Illustrations (a) A direct B to sell A's estate. B buys the estate for himself in the name of C. A, on discovering that B has bought the estate for himself, may repudiate the sale, if he can show that B has dishonestly concealed any material fact, or that the seals has been disadvantageous to him. (b) A directs B to sell A's estate. B, on looking over the estate before selling it, finds a mine on the estate which is unknown to A. B informs A that he wished to buy the estate for himself but conceals the discovery of the mine. A allows B to buy, in ignorance of the existence of the mine. A, on discovering that B knew of the mine at the time he bought the estate, may either repudiate or adopt the sale at his option. Principal's right to benefit gained by agent dealing on his own account in business of agency

82

If an agent, without the knowledge of his principal, deals in the business of the agency on his own account instead of on account to his principal, the principal is entitled to claim from the agent any benefit which may have resulted to him from the transaction. Agent's right of retainer out of sums received on principal's account An agent may retain, out of any sums received on account of the principal in the business of the agency, all moneys due to himself in respect of advances made or expenses properly incurred by him in conducting such business, and also such remuneration as may be payable to him for acting as agent. Agent's duty to pay sums received for principal Subject to such deductions, the agent is bound to pay to his principal all sums received on his account. When agent's remuneration becomes due In the absence of any special contract, payment for the performance of any act is not due to the agent until the completion of such act; but an agent may detain moneys received by him on account of goods sold, although the whole of the goods consigned to him for sale may not have been sold, or although the sale may not be actually complete. Agent not entitled to remuneration for business misconduct An agent, who is guilty of misconduct in the business of the agency, is not entitled to any remuneration in respect of that part of the business, which he has misconducted. Illustrations A employs B to recover 1,000 rupees from C. Through B's misconduct the money is not recovered. B is entitled to no remuneration for his services and must make good the loss. Agent's lien on principal's property In the absence of any contract to the contrary, an agent is entitled to retain goods, papers, and other property, whether movable or immovable of the principal received by him, until the amount due to himself for commission, disbursements and services in respect of the same has been paid or accounted for to him.

PRINCIPAL'S DUTY TO AGENT

Agent to be indemnified against consequences of lawful acts

83

The employer of an agent is bound to indemnify him against the consequences of all lawful acts done by such agent in exercise of the authority conferred upon him. Agent to be indemnified against consequences of acts done in good faith Where one person employs another to do an act, and the agent does the act in good faith, the employer is liable to indemnify the agent against the consequences of that act, though it may cause an injury to the rights of third persons. Non-liability of employer of agent to do a criminal act Where one person employees another to do an act which is criminal, the employer is not liable to the agent, either upon an express or an implied promise to indemnify him against the consequences of that Act. Illustrations A employs B to beat C, and agrees to indemnify him against all consequences of the act. B thereupon beats C, and has to pay damages to C for so doing. A is not liable to indemnify B for those damages. Compensation to agent for injury caused by principal's neglect The principal must make compensation to his agent in respect of injury caused to such agent by the principal's neglect or want of skill. Illustration A employs B as a bricklayer in building a house, and put up the scaffolding himself. The scaffolding is unskillfully put up, and B is in consequence hurt. A must make compensation to B.

EFFECT OF AGENCY ON CONTRACTS WITH THIRD PERSONS

Enforcement and consequences of agent's contract Contracts entered into through an agent, and obligations arising from acts done by an agent, may be enforced in the same manner, and will have the same legal consequences as if the contracts had been entered into the acts done by the principal in person. Illustrations (a) A buys goods from B, knowing that he is an agent for their sale, but not knowing who the principal is. B's principal is the person entitled to claim from A the price of the goods, and A cannot, in a suit by the principal, set-off against that claim a debt due to himself from B. (b) A, being B's agent; with authority to receive money on his behalf, receives from C a sum of money due to B. C is discharged of his obligation to pay the sum in question to B.

84

Principal how far bound, when agent exceeds authority When an agent does more than he is authorized to do, and when the part of what he does, which is within his authority, can be separated from the part, which is beyond his authority, so much only of what he does as is within his authority is binding as between him and his principal. Principal not bound when excess of agent's authority is not separable Where an agent does more than he is authorized to do, and what he does beyond the scope of his authority cannot be separated from what is within it, the principal is not bound to recognize the transaction. Illustration A authorizes B to buy 500 sheep for him. B buys 500 sheep and 200 lambs for a sum of 6,000 rupees. A may repudiate the whole transaction. Consequences of notice given to agent Any notice given to or information obtained by the agent, provided it be given or obtained in the course of the business transacted by him for the principal, shall, as between the principal and third parties, have the same legal consequences as if it had been given to or obtained by the principal. Illustrations A is employed by B to buy from C goods of which C is the apparent owner. A was, before he was so employed a servant of C, and then learnt that the goods really belonged to D, but B is ignorant of that fact. In spite of the knowledge of his agent, B may set-off against the price of the goods a debt owing to him from C. Agent cannot personally enforce, nor be bound by, contracts on behalf of principal In the absence of any contract to that effect an agent cannot personally enforce contracts entered into by him on behalf of his principal, nor is he personally bound by them. Presumption of contract to the contrary: Such a contract shall be presumed to exit in the following cases(1) Where the contract is made by an agent for the sale or purchase of goods for a merchant resident abroad; (2) Where agent does not disclose the name of his principal; (3) Where the principal, though disclosed, cannot be sued. Right of parties to a contract made by agent not disclosed If an agent makes a contract with a person who neither, knows nor has reason to suspect, that he is an agent, his principal may require the performance of the

85

contract; but the other contracting party has, as against the principal, the same right as he would have had as against if the agent had been the principal. If the principal discloses himself before the contract is completed, the other contracting party may refuse to fulfill the contract, if he can show that, if he had known who was the principal in the contract, or if he had known that the agent was not a principal, he would not have entered into the contract. Performance of contract with agent supposed to be principal Where one man makes a contract with another, neither knowing nor having reasonable ground to suspect that the other is an agent, the principal, if he requires the performance of the contract, can only obtain such performance subject to the right and obligations subsisting between the agent and the other party of the contract. Liability of principal inducing belief that agent's unauthorized acts were authorized When an agent has, without authority, done acts or incurred obligations to third person on behalf of his principal, the principal is bound by such acts or obligations, if he has by his word or conduct induced such third person to believe that such acts and obligations were within the scope of the agent's authority. Illustrations (a) A consigns goods to B for sale, and gives him instructions not to sell under a fixed price. C, being ignorant of B's instruction, enters into a contract with B to buy the goods at a price lower than the reserved price. A is bound by the contract (b) A entrusts B with negotiable instruments endorsed in blank. B sells them to C in violation of private order from A. The sale is good. Effect, on agreement, of misrepresentation or fraud by agent Misrepresentation made or fraud committed, by agent acting in the course of their business for their principals, have the same effect on agreements made by such agents as if such misrepresentations of frauds had been made or committed by the principals; but misrepresentations made, or frauds committed, by agents, in matters which do not affect their authority, do not affect their principals Illustrations (a) A, being B's agent for the sale of goods, induces C to buy them by a misrepresentation, which he was not authorized by B to make. The contract is voidable, as between B and C, at the option of C. (c) A, the captain of B's ship, signs bills of lading without having received on board the goods mentioned therein. The bills of lading are void as between B and the pretended consignor.

86

Check Your Progress Q. 1.Define the terms agent and principal. Q.2 Briefly explains the duties of an agent towards his principal.

87

LESSON-5
5.6 CONSUMER PROTECTION ACT, 1986
The Consumer Protection Act was passed by the Parliament in 1986 and it came into force from 1987. Its purposes to protect consumers against defective goods, unsatisfactory services, unfair trade practices, etc. The Act provides for three-tier machinery consisting of District Forum, State Commission and National Commission. It also provides for the formation protection councils in every state. The consumers can file their complaints at the appropriate forum for quick redressal. The complaint may relate to defective refrigerator or TV set, nonfunctional telephone, lack of due cares in medical treatment and so on. Any service or product given free of charge is not covered by the Act. Definitions of Important Terms Before studying the provisions of the CPA, it is necessary to understand the terms used in the Act. Let us understand some of the more important definitions. Complainant means: 1. A consumer; or 2. Any voluntary consumer association registered under the Companies Act, 1956 or under any other law for the time being in force; or 3. The Central Government or any State Government, who or which makes a complaint; or 4. One or more consumers where there are numerous consumers having the same interest Complaint means any allegation in writing made by a complainant that: 1. an unfair trade practice or a restricted trade practice has been adopted by any trader 2. the goods bought by him or agreed to be bought by him suffer from one more defects 3. the services hired or availed of or agreed to be hired or availed of by him suffer from deficiency in any respect

88

4. the trader has charged for the goods mentioned in the complaint a price excess of the price fixed by or under any law for the time being in force or displayed on the goods or any package containing such goods. 5. goods which will be hazardous to life and safety when used, are being offered for sale to the public in contravention of the provisions of any law for the time being in force, requiring traders to display information in regard to the contents, manner and effect of use of such goods; with a view to obtaining any relief provided by law under the CPA. Consumer means any person who: 1. 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 (for example hire purchase or installment sales) and includes any other user of such goods when such use is made with the approval of the buyer, but does not include a person who obtains such goods for resale or for any commercial purpose; or 2. 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 when such services are availed of with the approval of the first mentioned person For the purposes of this definition "commercial purpose" does not include use by a consumer of goods bought and used by him exclusively for the purpose of earning his livelihood by means of self-employment. Goods mean goods as defined in the Sale of Goods Act, 1930. Under that act, goods means every kind of movable property other than actionable claims and money and includes stocks and shares, growing crops, grass and things attached to or forming part of the land which are agreed to be severed before sale or under the contract of sale. Service is defined to mean service of any description which is made available to potential users and includes 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. Consumer dispute means dispute where the person against whom a complaint has been made, denies or disputes the allegation contained in the complaint. Restrictive Trade Practice means any trade practice which requires a consumer to buy, hire, or avail of any good or as the case may be, services as a condition precedent for buying, hiring or availing of any other goods or services.

89

Unfair Trade Practice means unfair trade practice as defined under the Monopolies and Restrictive Trade Practices Act. The MRPT act has defined certain practices to be unfair trade practices. Defect means any fault, imperfection or shortcoming in the quality, quantity, potency, purity or standard which is required to be maintained by or under any law for the time being in force or under any contract, express or implied, or as is claimed by the trade in any manner whatsoever in relation to any goods. Deficiency means any fault, imperfection or shortcoming or inadequacy in the quality, nature and manner of performance which is required to be 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. A consumer is a user of goods and services. Any person paying for goods and services, which he uses, is entitled to expect that the goods and services be of a nature and quality promised to him by the seller. The earlier principle of "Caveat Emptor" or "let the buyer beware" which was prevalent has given way to the principle of "Consumer is King". The origins of this principle lie in the fact that in today's mass production economy where there is little contact between the producer and consumer, often sellers make exaggerated claims and advertisements, which they do not intend to fulfill. This leaves the consumer in a difficult position with very few avenues for redressal. The onset on intense competition also made producers aware of the benefits of customer satisfaction and hence by and large, the principle of consumer is king" is now accepted. Objects of the Consumer Protection Act, 1986 The preamble to the Act states that the Act is legislated to provide for better protection of the interests of consumers and for that purpose to make provision for the establishment of consumer councils and other authorities for the settlement of consumer's disputes and for matters connected therewith. The CPA extends to the whole of India except the State of Jammu and Kashmir and applies to all goods and services unless otherwise notified by the Central Government. The basic rights of consumers as per the Consumer Protection Act (CPA) are: 1. 2. 3. 4. 5. 6. Right to safety. Right to be informed. Right to choose. Right to representation (or to be heard). Right to seek redressal. Right to consumer education.

1. Right to Safety It is the consumer right to be protected against goods and services which is hazardous to health or life.

90

2. Right to be Informed The consumer has the right to be informed about the quality, quantity, purity, standard and price of goods he intends to purchase. Therefore, the manufacture must mention complete information about the product, its ingredients, date of manufacture, price, precaution of use, etc. on the label and package of the product. 3. Right to Choose The consumer should be assured of freedom to choose from a variety of products at competitive prices. Every consumer wants to buy a product on his free will. There should be free competition in the market so that the consumer may make the right choice in satisfying his needs. 4. Right to Representation (or to be Heard) The consumer has a right to register dissatisfaction with any product and get his complaint heard. Most of the reputed firms have set up consumer service cells to listen to the consumers complaint and take appropriate steps to redress their grievances. 5. Right to Seek Redressal. It is the right to seek redressal against any defect in goods or unfair trade suffered by the consumer. If the quality and performance of a product falls short of sellers claims, the consumer has a right to certain remedies. The Consumer Protection Act requires that the product must be repaired, replaced or taken back by the seller as provided under the contract between the buyer and the seller. 6. Right to Consumer Education. It means right of acquiring knowledge and being a well-informed consumer throughout his life. He should also be made aware of his rights and the remedies available through publicity in the mass media. Consumer Responsibilities (i) To provide adequate information to the seller The consumer has the responsibility to provide adequate information about his needs and expectation to the sellers. To exercise caution in purchasing The consumer must try to get full information on the quality, design, utility, quantity, price, etc. of the product before purchasing it. To insist on cash memo or receipt The consumer must get a cash memo or receipt as a proof of purchase of goods from the seller. This would help him in making a complaint to the seller in case of any defect in the goods. To file complaint against genuine grievance The consumer must file a complaint with the seller or manufacturer about any defects or shortcoming in the products and services. To be quality conscious The consumer should never compromise on the quality of goods. While making purchases, the consumers must

(ii)

(iii)

(iv)

(v)

91

look for standard quality certification marks such as ISI, Agmark, Woolmark, FPO, etc. For example, electric iron must carry ISI mark.

Redressal Machinery under the Act

Consumer Protection Councils The interests of consumers are enforced through various authorities set up under the CPA. The CPA provides for the setting up of the Central Consumer Protection Council, the State Consumer Protection Council and the District Forum. Central Consumer Protection Council The Central Government has set up the Central Consumer Protection Council, which consists of the following members: (a) The Minister in charge of Consumer Affairs in the Central Government who is its Chairman, and (b) Other official and non-official members representing varied interests The Central council consists of 150 members and its term is 3 years. The Council meets as and when necessary but at least one meeting is held in a year. State Consumer Protection Council The State Council consists of: (a) The Minister in charge of Consumer Affairs in the State Government who is its Chairman, and (b) Other official and non-official members representing varied interests The State Council meets as and when necessary but not less than two meetings must be held every year. Redressal Machinery under the Act The CPA provides for a 3-tier approach in resolving consumer disputes. The District Forum has jurisdiction to entertain complaints where the value of goods / services complained against and the compensation claimed is less than Rs. 20 lakhs, the State Commission for claims exceeding Rs. 20 lakhs but not exceeding Rs. 1crore and the National Commission for claims exceeding Rs.1 crore.

92

District Forum Under the CPA, the State Government has to set up a district Forum in each district of the State. The government may establish more than one District Forum in a district if it deems fit. Each District Forum consists of: (a) A person who is, or who has been, or is qualified to be, a District Judge who shall be its President (b) Two other members who shall be persons of ability, integrity and standing and have adequate knowledge or experience of or have shown capacity in dealing with problems relating to economics, law, commerce, accountancy, industry, public affairs or administration, one of whom shall be a woman. Appointments to the State Commission shall be made by the State Government on the recommendation of a Selection Committee consisting of the President of the State Committee, the Secretary - Law Department of the State and the secretary in charge of Consumer Affairs Every member of the District Forum holds office for 5 years or up to the age of 65 years, whichever is earlier and is not eligible for re-appointment. A member may resign by giving notice in writing to the State Government whereupon the vacancy will be filled up by the State Government. The District Forum can entertain complaints where the value of goods or services and the compensation, if any, claimed is less than rupees twenty lakhs. However, in addition to jurisdiction over consumer goods services valued upto Rs.20 lakhs, the District Forum also may pass orders against traders indulging in unfair trade practices, sale of defective goods or render deficient services provided the turnover of goods or value of services does not exceed rupees twenty lakhs. A complaint shall be instituted in the District Forum within the local limits of whose jurisdiction (a) The opposite party or the defendant actually and voluntarily resides or carries on business or has a branch office or personally works for gain at the time of institution of the complaint; or (b) Any one of the opposite parties (where there are more than one) actually and voluntarily resides or carries on business or has a branch office or personally works for gain, at the time of institution of the complaint provided that the other opposite party/parties acquiescence in such institution or the permission of the Forum is obtained in respect of such opposite parties; or (c) The cause of action arises, wholly or in part.

93

State Commission The Act provides for the establishment of the State Consumer Disputes Redressal Commission by the State Government in the State by notification. Each State Commission shall consist of: (a) A person who is or has been a judge of a High Court appointed by State Government (in consultation with the Chief Justice of the High Court ) who shall be its President; (b) Two other members who shall be persons of ability, integrity, and standing and have adequate knowledge or experience of, or have shown capacity in dealing with, problems relating to economics, law, commerce, accountancy, industry, public affairs or administration, one of whom must be a woman. Every appointment made under this is made by the State Government on the recommendation of a Selection Committee consisting of the President of the State Commission, Secretary -Law Department of the State and Secretary in charge of Consumer Affairs in the State. Every member of the District Forum holds office for 5 years or upto the age of 65 years, whichever is earlier and is not eligible for re-appointment. A member may resign by giving notice in writing to the State Government whereupon the vacancy will be filled up by the State Government. The State Commission can entertain complaints where the value of goods or services and the compensation, if any, exceeds Rs. 20 lakhs but does not exceed Rs. 1crore. The State Commission also has the jurisdiction to entertain appeal against the orders of any District Forum within the State The State Commission also has the power to call for the records and appropriate orders in any consumer dispute which is pending before or has been decided by any District Forum within the State if it appears that such District Forum has exercised any power not vested in it by law or has failed to exercise a power rightfully vested in it by law or has acted illegally or with material irregularity. National Commission The Central Government provides for the establishment of the National Consumer Disputes Redressal Commission The National Commission shall consist of:(a) A person who is or has been a judge of the Supreme Court, to be appoint by the Central Government (in consultation with the Chief Justice of India ) who be its President;

94

(b) Four other members who shall be persons of ability, integrity and standing and have adequate knowledge or experience of, or have shown capacity in dealing with, problems relating to economics, law, commerce, accountancy, industry, public affairs or administration, one of whom shall be a woman Appointments shall be by the Central Government on the recommendation of a Selection Committee consisting of a Judge of the Supreme Court to be nominated by the Chief Justice of India, the Secretary in the Department of Legal Affairs and the Secretary in charge of Consumer Affairs in the Government of India. Every member of the National Commission shall hold office for a term of five years or upto seventy years of age, whichever is earlier and shall not be eligible for reappointment. The National Commission shall have jurisdiction: a. to entertain complaints where the value of the goods or services and the compensation, if any, claimed exceeds rupees one crores: b. to entertain appeals against the orders of any State Commission; and (c) to call for the records and pass appropriate orders in any consumer dispute which is pending before, or has been decided by any State Commission where it appears to the National Commission that such Commission has exercised a jurisdiction not vested in it by law, or has failed to exercise a jurisdiction so vested, or has acted in the exercise of its jurisdiction illegally or with material irregularity. Complaints may be filed with the District Forum by: 1. The consumer to whom such goods are sold or delivered or agreed to be sold or delivered or such service provided or agreed to be provided 2. Any recognized consumer association, whether the consumer to whom goods sold or delivered or agreed to be sold or delivered or service provided or agreed to be provided, is a member of such association or not 3. One or more consumers, where there are numerous consumers having the same interest with the permission of the District Forum, on behalf of or for the benefit of, all consumers so interested 4. The Central or the State Government. On receipt of a complaint, a copy of the complaint is to be referred to the opposite party, directing him to give his version of the case within 30 days. This period may be extended by another 15 days. If the opposite party admits the allegations contained in the complaint, the complaint will be decided on the basis of materials on the record. Where the opposite party denies or disputes the allegations or omits or fails to take any action to represent his case within the time provided, the dispute will be settled in the following manner: I. In case of dispute relating to any goods: Where the complaint alleges a defect in the goods which cannot be determined without proper analysis or test of the goods, a sample of the goods shall be obtained from the complainant, sealed and

95

authenticated in the manner prescribed for referring to the appropriate laboratory for the purpose of any analysis or test whichever may be necessary, so as to find out whether such goods suffer from any other defect. The appropriate laboratory' would be required to report its finding to the referring authority, i.e. the District Forum or the State Commission within a period of forty- five days from the receipt of the reference or within such extended period as may be granted by these agencies. Limitation period for filing of complaint The District Forum, the State Commission, or the National Commission shall not admit a complaint unless it is filed within two years from the date on which the cause of action has arisen. However, where the complainant satisfies the District Forum / State Commission, that he had sufficient cause for not filing the complaint within two years, such complaint may be entertained by it after recording the reasons for condoning the delay. Powers of the Redressal Agencies The District Forum, State Commission and the National Commission are vested with the powers of a civil court under the Code of Civil Procedure while trying a suit in respect of the following matters:1. The summoning and enforcing attendance of any defendant or witness examining the witness on oath; 2. The discovery and production of any document or other material producible as evidence; 3. The reception of evidence on affidavits: 4. The requisitioning of the report of the concerned analysis or test from the appropriate laboratory or from any other relevant source; 5. Issuing of any commission for the examination of any witness; and 6. Any other matter which may be prescribed. Under the Consumer Protection Rules, 1987, the District Forum, Commission and the National Commission have the power to require any person: (i) To produce before, and allow to be examined by an officer of any authorities, such books of accounts, documents or commodities as may be required and to keep such book, documents etc. under its custody for the purposes of the Act; (ii) To furnish such information which may be required for the purposes to any officer so specified. They have the power to: (i) To pass written orders authorizing any officer to exercise power of entry and search of any premises where these books, papers, commodities, or documents are kept if there is any ground to believe that these may be destroyed, altered, falsified or secreted. Such authorized officer may also seize books, papers, documents or commodities if they are required for the purposes of the Act, provided the seizure is communicated to the District Forum / State Commission / National commission within 72 hours. On examination of such documents or commodities, the agency concerned may order the retention thereof or may return it to the party concerned. (ii) to issue remedial orders to the opposite party.

96

(iii) to dismiss frivolous and vexatious complaints and to order the complainant to make payment of costs, not exceeding Rs. 10,000 to the opposite party. Remedies Granted under the Act The District Forum / State Commission / National Commission may pass one or more of the following orders to grant relief to the aggrieved consumer: 1. To remove the defects pointed out by the appropriate laboratory from goods in question; 2. To replace the goods with new goods of similar description, which shall be free from any defect; 3. To return to the complainant the price, or, as the case may be, the charges paid by the complainant; 4. To pay such amount as may be awarded by it as compensation to the consumer for any loss or injury suffered by the consumer due to negligence of the opposite party; 5. To remove the defects or deficiencies in the services in question; 6. To discontinue the unfair trade practice or the restrictive trade practice or not to repeat them; 7. Not to offer the hazardous goods for sale: 8. To withdraw the hazardous goods from being offered for sale: 9. To provide for adequate costs to parties. Appeals Any person aggrieved by an order made by the Forum may prefer an appeal to the State Commission in the prescribed form and manner. Similarly, any person aggrieved by any original order of the State Commission may prefer an appeal to the National Commission in the prescribed form and manner. Any person aggrieved by any original order of the National Commission may prefer an appeal to the Supreme Court. All such appeals are to be made within thirty days from the date of the order provided that the concerned Appellate authority may entertain an appeal after the said period of thirty days if it is satisfied that there was sufficient cause for not filling it within that period. The period of 30 days is to be computed from the date of receipt of the order by the appellant. Where no appeal has been preferred against any of the orders of the authorities, such orders would be final. The District Forum, State Commission or National Commission may enforce respective orders as if it was a decree or order made by a Court and in the event of their inability to execute the same; they may send the order to the Court for execution by it as if it were a Court decree or order. Penalties Failure or omission by a trader or other person against whom a complaint is made or the complainant to comply with any order of the State Commission or the National Commission shall be punishable with imprisonment for a term which shall not be less than one month but which may extend to 3 years, or with fine of not less than Rs. 2,000 but which may to Rs. 10000 or with both.

97

However, if it is satisfied that the circumstances of any case so requires, then the District Forum or the State Commission or the National Commission may impose a lower fine or a shorter term of imprisonment. Check Your Progress Q. 1. Briefly explain any two rights of consumers? Q.2 Briefly explains the machinery for the redressal of consumers grievances?

5.7 SUMMARY
During the mushrooming of insurance companies many financially unsound concerns were also floated which failed miserably. The Insurance Act 1938 was the first legislation governing not only life insurance but also non-life insurance to provide strict state control over insurance business. The demand for nationalization of life insurance industry was made repeatedly in the past but it gathered momentum in 1944 when a bill to amend the Life Insurance Act 1938 was introduced in the Legislative Assembly. However, it was much later on the 19th of January, 1956, that life insurance in India was nationalized. About 154 Indian insurance companies, 16 non-Indian companies and 75 provident were operating in India at the time of nationalization. Nationalization was accomplished in two stages; initially the management of the companies was taken over by means of an Ordinance, and later, the ownership too by means of a comprehensive bill. The Parliament of India passed the Life Insurance Corporation Act on the 19th of June 1956, and the Life Insurance Corporation of India was created on 1st September, 1956, with the objective of spreading life insurance much more widely and in particular to the rural areas with a view to reach all insurable persons in the country, providing them adequate financial cover at a reasonable cost. The IRDA Bill provides for the establishment of an authority to protect the interests of the holders of insurance policies, to regulate, promote and insure orderly growth of the insurance industry and amend the Insurance Act, 1938, the Life Insurance Act, 1956 and the General Insurance Business (Nationalization) Act, 1972. The bill allows foreign equity stake in domestic private insurance companies to a maximum of 26 per cent of the total paid-up capital and seeks to provide statutory status to the insurance regulator. The insurance business in India

98

is pegged at $ 6.6 Billion whereas industry leaders feel privatization will increase it to $ 40 Billion within next 3-5 years.

5.6 KEY WORDS

Tribunal Redressal Machinery Right to Safety Lawful Object Caveat Emptor Consumer dispute Complainant Termination of agency Sub-agent Agent Principal General insurance business Corporation Audit Principal agent Life insurance business Insurance agent Authority Void contracts Illegal Agreements Capacity of Parties Free and Genuine Consent Contract National Commission

5.8 GLOSSARY
Annuity It is a scheme where under certain amount is paid at yearly/half yearly/quarterly/monthly intervals. Grace Period A specified period after a premium payment is due, in which the policyholder may make such payment, and during which the protection of the policy continues Insurable Interest A condition in which the person applying for insurance and the person who is to receive the policy benefit will suffer an emotional or financial loss, if any untouched event occurs. Without insurable interest, an insurance contract is invalid. Insured The person whose life is covered by a policy of insurance. Policy Is the legal document that has the conditions of the insurance contract Premium Notice: Notice of a premium due, sent out by the company or one of its agencies to an insured. Synonym for Renewal Notice". Surrender Value Surrender value is the amount payable to the policy holder on his surrendering his right under a policy and terminating the contract of insurance.

99

Term Life Insurance A form of life insurance, which provides coverage for a specified period of time and does not build cash value. Term: Term is the period for which insurance coverage is given. Void Contract A contract obtained by fraud is a void contract. It is not a contract at all. Under this there cannot be any action as no rights or obligations are cast on the parties to the contract. Voidable Contract A contract, which is valid until it is treated as void by the aggrieved party, is a voidable contract. Obviously in such an event the insurer would be the aggrieved party and has the option to repudiate liability. Underwriting The process of selecting risks for insurance and determining in what amounts and on what terms the insurance company will accept the risk. Balance Sheet Provides a snapshot of a companys financial condition at one point in time. It shows assets, including investments and reinsurance, and liabilities, such as loss reserves to pay claims in the future, as of a certain date. It also states a companys equity, known as policyholder surplus. Changes in that surplus are one indicator of an insurers financial standing. Bond A security that obligates the issuer to pay interest at specified intervals and to repay the principal amount of the loan at maturity. In insurance, a form of surety ship. Bonds of various types guarantee a payment or a reimbursement for financial losses resulting from dishonesty, failure to perform and other acts Indemnify Provide financial compensation for losses. Capital Markets The markets in which equities and debt are traded. Insolvency Insurers inability to pay debts. Capital Shareholders equity (for publicly-traded insurance companies) and retained earnings (for mutual insurance companies).

5.9 SELF ASSESSMENT QUESTIONS

Ques1. Define Insurance. Ques2. What are essentials of a valid contract? Ques3. What was the need of IRDA act1999? Ques4. What are the powers of the Central Government to make rules in the IRDA act? Ques.5 Briefly explains rights of consumers.

100

Ques6 Review the legislation in India regulating the conduct of insurance business. Ques7 Write short notes on: (a) Finance, Accounts and Audit of IRDA. (b) Investment Provisions of Insurance Act, 1938. Ques8. Discuss the main functions of LIC of India. Ques9 What do you mean by consumer Protection Council? Ques10 Explain the functions of State Consumer Protection Council. Ques. 11 Enumerate any four consumer responsibility. Ques12 State the remedies available to a consumer. Ques13 Discuss the extent of principals liability to third parties for the act of agent. Ques14 Describe briefly the various modes by which an agency may be terminated.

5.10 SOURCES & FURTHER READINGS

1) Chhabra T.N., (2005), Business organization and Management, Arya publisher, New Delhi 2) Chhabra T.N., (2005), Business Studies for Class XII, Arya publisher, New Delhi 3) Gupta C. B., (2005), Business Organization and Management, Sultan, Chand & Sons, New Delhi 4) Gupta P. K., (2005), Insurance and Risk Management, Himalaya Publisher, New Delhi 5) Material from Insurance Institute of India, Mumbai. 6) Kuchhal M.C. (2005), Mercantile Law, Vikas publishing house ltd. 7) Kapoor, N.D. (2005), Business Law, Sultan Chand & Sons. Internet www.bimaonlie.com www.vakilno1.com http://www.indialawinfo.com/bareacts/contract.html#_Toc502044078 www.licindia.com www.irda.org www.gicoi.com

101