INSURANCE

Nature of Insurance

The aim of all insurance is to protect the owner from a variety of risks which he anticipates. A
contract of insurance may be defined as a contract whereby one person, called the “insurer”,
undertakes, in return for the agreed consideration, called the “premium”, to pay to another
person, called “assured”, a sum of money or its equivalent on the happening of a specified event.
The happening of the specified event must involve some loss to the assured or at least should
expose him to adversity which is in the law of insurance commonly called the “risk”. An element
of uncertainty must be present in the course of the happening of the event insured against.

The fundamental function of insurance is to shift the loss suffered by a sole individual to a
willing and capable professional risk-bearer in consideration of a comparatively small
contribution called the premium. Insurance is a method of spreading over a large number of
persons a possible financial loss too serious to be conveniently borne by an individual.1.

Thus it serves the social purpose; it is a social device whereby uncertain risks of individuals may
be combined in a group and thus made more certain; small periodic contribution by the
individuals providing a fund out of which those who suffer losses may be reimbursed.2.

Thus, the institution of insurance serves a two-fold purpose, the immediate, short-range and
proximate purpose and the far-sighted long-range and remote purpose. Insurance thus reduces
the fears of future risk to the individual insured and by capital formation it helps the growth of
industry, accelerates production, lubricates the machinery of production and distribution and
improves the economy of the nation. It mobilises the resources, accelerates and stabilises growth
and helps in the establishment of a welfare state.

Era of Privatisation- The insurance sector is open to participation by private insurance entities
on the recommendation of the Malhotra Committee. This does not mean that the public sector
entities do not continue their activities in the insurance sector. After this privatisation, both
public and private sector entities play their roles simultaneously. In this context, financial
institutions play a key role in the growth process of insurance. More competitive environment
and rapid expansion in insurance sector is expected to emerge with new private participants. The
nature and scope of the insurance sector is fast changing with the passing of the IRDA Act, 1999.

Definition- A contract of insurance is a contract either to indemnify a person against a loss

which may arise on the happening of an event or to pay a sum of money on the happening of
some or any event for an agreed consideration. It follows that every contract of insurance must
have the following essential elements:

 (a)There must be a contract between parties who are called the “insurer” and the “insured”.
 (b)The contract must be that the insurer undertakes to protect the insured from any loss or
damage to be insured on the happening of the event.
 (c)In consideration for the above, the assured undertakes to make the insurer a periodical
payment of a sum of money called premium.
 (d)The contract must be in writing and the document is called the insurance policy.

In Department of Trade v Chrispheres, [1974] 1 Ch D 395. the defendant company formed an

association for providing facilities for motorists and owners of motor vehicles. In the event of a
member becoming unable to drive his own car because of an accident he would be entitled to a
“chauffeur service” where the association would provide him with a driver for his car or if
necessary a car and a driver. All fully licensed drivers above 25 years of age were eligible for
membership of the association. The Department of Trade and Industry sought a declaration that
the association was carrying on insurance business within the Insurance Companies Act, 1958. It
was held that the arrangement made by the defendant amounted to an insurance business as
contracts of insurance are not confined to contracts for the payment of money but may provide
for some corresponding benefit.

Speaking about the nature of the contract and the event involved, Channel J observed in
Prudential Insurance Co v Inland Revenue Commissioner: It must be a contract whereby, from
some consideration, usually, but not necessarily, for periodical payments called a premium, you
secure to yourself some benefit, usually, but not necessarily the payment of a sum of money
upon the happening of some event... Then the next thing that is necessary is that the event should
be one which involves some element of uncertainty. There must be either some uncertainty
whether the event will ever happen or not, or if the event is one which must happen at some time
or another there must be uncertainty as to the time at which it will happen.

Nature of insurance contract-

Contract is aleatory- It is commonly said that an insurance contract is an “aleatory contract”.
Lord Mansfield said that there is no doubt, and in reality, the insurance contract, whatever may
be the type is a “contract of speculation”. Webster’s New International Dictionary says that
contracts of insurance are aleatory contracts “depending on an uncertain event or contingency as
to both profit and loss”. Thus it is apparently a gamble in which if the event happens in a certain
way, the insured will have a small loss, the loss of premium and if the event happens in another
way the insurer loses heavily in that, he has to pay the huge sum, the value of the house. Thus,
there is speculation and so it is called an “Aleatory Contract”.

Warranty and representation- Warranty here may be defined as a stipulation or engagement

by a party insured that certain matters relating to the subject matter affecting risk exist or shall
exist or have been done or shall be done. In Thompson v Weems, Lord Blackburn observed that
in all policies of marine insurance any statement of fact bearing upon the risk introduced into the
policy is construed as a warranty and compliance with that warranty is a condition precedent to
the attaching of the risk.

Contract of Utmost Good Faith- In England till the passing of the Misrepresentation Act,
1967, it is a cardinal principle of commercial law that he who buys should beware, caveat
emptor.  But even before 1967, contracts of insurance stood and now also they stand on a
different footing and form an exception to this rule because the parties do not stand on equal
footing either with regard to the knowledge of the subject matter or with regard to the economic
aspect of the obligation. With regard to the knowledge about the subject matter of insurance the
one party, say the insured, has better or all the means of knowledge than the other party, the
insurer.

For these reasons of economic inequality in the status of the contracting parties and of the
superior knowledge of one party about the subject matter of the insurance, a contract of
insurance, is justly made an uberrima fides transaction and an exception to the commonly
accepted commercial rule of caveat emptor.

Scope of Duty of Disclosure

The rule of good faith imposes the duty to make disclosure of all material facts, known or
imputed, but it must be noted that a non-disclosure is not the same thing as concealment.
Concealment involves a positive breach of a negative duty while non-disclosure is a negative
omission of a positive duty.

1.The duty to disclose extends only to material facts. So every material fact must be disclosed
which he knows or ought to know. Failure to disclose may be willful or inadvertent or even may
be due to the party’s erroneous belief that the fact not disclosed is not material. Whether or not a
fact is material, is a question of fact. This question does not depend upon what the particular
insured thinks nor even what the insurers think but whether a prudent and experienced insurer
would be influenced in his judgment if he knew it. In LIC v Sakunthalabai the assured did not
disclose that he had suffered from indigestion for a few days; the court held that it is not a
material fact and non-disclosure did not affect the validity of the policy.

2.The duty extends only to those material facts about which he knows or ought to know. It may
be noted here that ignorance of the fact is an excuse but ignorance of the materiality of the fact is
not. There is no breach of good faith, if the party to the contract is not aware of the fact.

3.The duty to disclose extends to the authorised agents of the insured; but this duty of the agent
is limited to facts within the knowledge of the principal which are presumed to have been
communicated in due course to the agent or to facts which the agent must have come to know
during the course of his agency.

4.As utmost good faith is required not only from the insured but also from the insurer,22. the
duty to disclose all relevant facts is a mutual duty of the insured as well as the insurer.

5.The duty of disclosure applies only to negotiations preceding the formation of the contract.
When a relevant fact comes to the knowledge of either party after the completion of the contract,
there is no duty to disclose and as such non-disclosure of such facts does not again offend the
rule of good faith, e.g., the assured finds on a subsequent medical check-up after the policy is
issued, that he is suffering from a serious complaint. The policy in such circumstances is not
affected due to the non-disclosure of a fact, though material as it came to his notice after the
policy is issued. Thus, in Ratanlal v Metropolitan Insurance Co, AIR 1959 Pat 413, the insured
Pyarelal made a proposal on 23 January 1946 along with the first premium for the insurance.
After consideration of the medical report etc, the insurer accepted the proposal on 26 March and
communicated the acceptance to the insured on 27 March. As money was in deposit the insurer
took the risk on 28 March and informed the insured about it. On the 27th evening the insured
complained of exhaustion to his doctor which was a simple ordinary disorder and the doctor
came on 28 March but did not prescribe any medicine. However, the insured died a few weeks
later on 19 April. The insurer repudiated his liability on the ground of non-disclosure. The court
rejected the contention on the ground that the complaint was subsequent to acceptance on 26
March.

6.The duty of disclosure is deemed to have been cast on the insured when the insurer specifically
asks a question. Generally, the negotiations for insurance an contract commence with a printed
proposal form supplied by the insurer to the insured. The proposal form contains questions
seeking answers from the insured. Whether the question asked therein is logically relevant or not,
it will be deemed to be a material fact and so either a false answer or a dubious answer to such a
question may amount to a breach of duty of disclosure.

7.The duty does not extend to certain types of facts though they are material. In other words, the
assured is not bound to disclose the following facts unless the insurer expressly questions him
about them. The facts that need not be disclosed may be noted as:

(a)Facts which he is not aware of:30. A person is said to know or be aware of a fact when
he actually knows or but for his wilful abstention from making an inquiry by which he
could have known it. In spite of his due diligence, if he does not know, there can be no
breach of duty of disclosure as he can disclose only what he knows. When once he knows
the fact, the fact that he did not know about its materiality does not absolve him from his
duty of disclosure.

(b)Facts within the knowledge of the insurers: The Marine Insurance Act in this regard
says that an assured need not disclose “any circumstance which is known or presumed to
be known to the insurer. The insurer is presumed to know matters of common, notoriety
of knowledge and matters which an insurer in the ordinary course of business, as such
ought to know.”

(c)Facts of which information is waived by the insurer: Where the insured communicates
certain facts to the insurers and the facts are such that they are put on inquiry which they
fail to make, the insurer is deemed to have notice of all the facts which such inquiry
 would have revealed. Thus, constructive knowledge applies both to the insurer and the
insured.35.

(d)Facts which tend to diminish the risk: The Marine Insurance Act also says that “in the
absence of inquiry any circumstance which diminishes the risk need not be disclosed.”36.

(e)Any circumstance, which it is superfluous to disclose by reason of any express or

implied warranty.

The duty of disclosure is on both sides39. though it is more onerous on the insured because most
of the facts relating to the subject matter of the contract are within his exclusive knowledge and
they may be such that an insurer cannot find them out on reasonable inquiry. In Srinivas Pillai v
LIC, AIR 1977 Mad 381, Srinivas Pillai and his wife Ranganayagi took out a joint life
endowment policy for Rs 25,000—commencing on 31 December 1959 at Pondicherry. They
gave the usual statements and joint declarations. In answer to the question in column 12(8)
relating to the date of last delivery Ranganayagi stated that she had delivered a female child on
18 May 1959 when in fact she delivered on 31 August 1959. It is the declared policy of the LIC
not to issue a policy on a female when she is pregnant or within six months after delivery. After
taking the policy the wife fell ill and was admitted in a hospital on 10 January 1960 and died on
17 January 1960. The husband preferred to claim. The LIC repudiated the claim as it was found
that she delivered her last child within 6 months before the policy and that she was also suffering
from tuberculosis. In the suit filed by the claimant, the LIC failed to prove that she had TB, but
the other ground was established which meant that the insured had knowingly falsely stated the
date of her last delivery in order to obtain the policy and therefore upheld the repudiation and
dismissed the claim. The court also observed: Contracts of insurance are based on the rocky
foundation of utmost good faith. Such good faith is not a matter of art but has to be really and
sincerely appreciated by the insured who proposes their lives for insurance with the Corporation.

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

Effect of Non-Disclosure

A contract of insurance is made a contract of utmost good faith for the reasons stated supra. The
insurer believes all that is stated by the insured and the insured, being in a better position to
know about the subject matter of the contract is cast with a duty to disclose all material facts.

In the explanation to section 17 of the Indian Contract Act it has been said that mere silence does
not amount to fraud unless there is a duty to speak or silence amounts to speech. So, where he
knows a material fact and suppresses it knowing that it is material to the contract it amounts to
fraud; but where he does not know about the materiality of the fact, it may have the same effect
as misrepresentation. Therefore, the effect of mere non-disclosure does not amount to fraud. In
case of fraud, the party defrauded can not only avoid the contract but can also claim damages. In
the case of all non-disclosures the insurer can avoid the contract50. and whether he would be
entitled to damages is a different question depending upon his knowledge of materiality.

The provisions under section 45 of the Insurance Act, 1938 provided that facts submitted in
support of a policy cannot be questioned after the expiry of 2 years from the commencement of
the policy. However, it empowered insurers with a right to repudiate the claim, in case they had
evidences that policy was taken by misrepresenting or suppression of facts. However, the
Amendment Act, 2015 lays downs that facts or documents may be questioned by the insurer
within 3 years from the date of commencement of risk or date of issue, or date of rider of the
policy or date of revival of the policy, whichever is later. Provision to repudiate the claim even
after completion of two years on account of misrepresentation has been dropped. This means that
from now on a policy cannot be questioned or repudiated after completion of 3 years even if
some facts were suppressed or provided incorrectly. A policy can be called in question within 3
years even if no claim has arisen during that period. Once this period of 3 years is over, the
policy cannot be called in question.

Contract of Indemnity

According to Porter, indemnity is the controlling principle of insurance law and it is by reference
to this principle that all problems in insurance can be solved. However, all contracts of insurance
cannot be strictly called contracts of indemnity. The principle of indemnity is an important
element in non-life insurance policies. The word “indemnity” means a promise to save another
person from harm or from the loss caused as a result of a transaction entered into at the instance
of the promisor. Therefore, the liability of the promisor in a contract of insurance is the
contingency itself.

This principle of indemnity is associated in contract law with the principle of guarantee where
there are three parties, the creditor, the principal debtor and the surety or the favoured debtor.
Insurance law does not have the element of guarantee. This is clear from the fact that there are
only two parties to the insurance contract. On the other hand, indemnity is coupled with the
principle of subrogation or substitution of the rights of the assured by those of the insurer.
Further, indemnity is based upon the occurrence of the contingency which itself is really the risk
insured against.

In Castellain v Preston, The very foundation, in my opinion, of every rule which has been
applied to insurance law is this, namely, that the contract of insurance contained in a marine or
fire policy is a contract of indemnity, and of indemnity only, and that this contract means that the
insured, in case of a loss against which the policy has been made, shall be fully indemnified; but
shall never be more than fully indemnified. That is a fundamental principle of insurance and if
ever a proposition is brought forward which is at variance with it that is to say, which either will
prevent the insured from obtaining a full indemnity, or which will give the assured more than a
full indemnity, that proposition must certainly be wrong.

Again, it was observed in Dalby v India and London Life Assurance Company, (1854) 15 CB
365, that policies of insurance against fire and marine insurance risks, are contracts of indemnity
and the insurer agrees to compensate the loss sustained by the insured. If we analyse the
principles applicable to marine and fire insurance we come to the conclusion that they are strictly
contracts of indemnity. To illustrate a few:

(i) the insured will not be permitted to make a profit in the transaction. For example, if he
recovers anything by selling the damaged goods, he has to account for it to the insurance
company;

(ii) in marine and fire insurance the insurer will pay only compensation, that is the actual loss or
damage;

(iii) the principle of subrogation is applied, for example, if the insured suffers damage by the
negligence of a third party, the insured may have two claims, one against the insurance company
under the policy and the second, against the third party who caused by his negligence, the
damage.

(iv) The principle of contribution is applied to marine and fire insurance contracts. If the insured
takes out a number of policies from different companies and if the loss occurs, the insurer who so
pays can call upon the other insurers to contribute equally or rateably the payment made by him
and they will be liable to contribute according to their respective assurances.

(v) Again, in fire insurance the principle of reinstatement is applied and the insurance company
has an option to reinstate the building or repair the damaged property.

Though a contract of insurance is said to be a contract of indemnity, this is not completely true
for the following reasons:

(a)The principle that the assured should not recover more than the loss suffered by him, may be
modified by the express terms of the policy. The insured, a co-sharer of a building, insured the
whole building by paying the premium for the whole building. When the building was damaged
completely, the insured’s claim for loss for the whole building was repudiated by the insurer. It
was held that, having accepted the premium for the whole building, the insurer was liable to pay
the loss for the whole building.57.

(b)The parties may estimate the loss and value the policy. If there is no gross over valuation, the
contract is enforceable though the amount recovered is slightly more than the actual loss suffered
by him. Valued policies are common in the case of insurances on ships and profits.
(c)Again, in every contract of insurance there will be a “sum insured” and though the contract of
insurance is described as a contract of indemnity, on the happening of the event the insured can
recover no more than the sum insured though it does not completely indemnify the assured. It is
only upon the proof of the actual loss, that the assured can claim reimbursement of loss to the
extent it is established, not exceeding the amount stipulated in the contract of insurance which
signifies the outer limit of the insurance company’s liability.

It was laid down in Dalby v The Indian and London Assurance Co,60. that a life insurance
contract is not a contract of indemnity. If we analyse a life insurance contract we find that the
amount mentioned in the policy is not the estimation of the value of life because human life
cannot be estimated in value correctly, that is, the loss or damage that may be caused by the
death of a human being is incapable of exact estimation. A person takes out a life insurance
policy for a value usually based upon his capacity to pay premium. Therefore, a life insurance
contract is not a contract of indemnity.

In conclusion, it may be said that though there is a doubt whether a contract of life insurance is a
contract of indemnity or not, it is well settled and without doubt it may be said that contracts of
fire and marine insurance are all contracts of indemnity.

Contract of wager

According to Sir William Anson all insurance contracts are wagering contracts. He points out
that there is not much distinction between the insurance on cargo and the wager in a horse race. 
It is not a contract of wager for the following reasons:

(i)In the case of an insurance contract, the risk of loss or damage is existing whether there is
insurance or not; while in the case of wager the risk is created by the agreement between the
parties.

(ii)In a contract of insurance there is an insurable interest, that is, the insured has some interest in
the subject matter but in the case of a wager parties have no interest whatever.

(iii)A fine distinction is drawn between a contract of insurance and one of wager. It is essential in
a wagering contract that one party must win and the other party must lose; but in the case of an
insurance contract the insurance company only may lose. It can never win because if the loss
takes place it has to pay and premium cannot be called a profit. The insured neither wins nor
loses because if the loss happens he is paid only the compensation.

In Tyrie v Fletcher, it was observed that a contract of insurance is not a wagering contract
although the risk is the essence of the contract. In Wilson v Jones Willis J observed:

A policy is properly speaking a contract to indemnify the insured in respect of some interest
which he has against the perils which he contemplates it will be liable to. The distinction
between a wagering contract and one which is not depends upon whether a person making it has
or has not an interest in the subject matter of the contract. In Lucena v Craufurd it was observed
that:

There is a material distinction between a contract of wager and a contract of insurance. The
wager may have any speculative chance or expectation as the subject matter; but in an insurance
contract a chance or expectation cannot be subject matter as it definitely pre-supposes loss of
some right of property either in possession or ownership.

Insurable interest

Insurable interest means an interest which can be or is protected by a contract of insurance. This
interest is considered as a form of property in the contemplation of law. The two meanings of the
term insurable interest in insurance law are, firstly in indemnity insurances, unless there is some
proprietary interest which is sought to be covered by the policy there is no loss suffered and in
such types therefore the contract by its very nature requires some interest to be involved in the
subject matter and this is called “contractual insurable interest” and in other cases of insurance
where loss is not necessary to be proved this is not necessary. So the interest required by these
Acts to support an insurance is called “statutory insurable interest” and this is the second
meaning.

A contract of insurance being primarily a contract of indemnity, insurable interest, contractual or

statutory, is a necessary element in every contract of insurance. It is only the presence of
insurable interest that distinguishes a contract of insurance from a wagering contract and hence it
is a sine qua non for the validity of the contract of insurance.

According to Patterson, insurable interest is, A relation between the insured and the event
insured against, such that the occurrence of the event will cause substantial loss or injury of some
kind to the insured.4.

Rodda says: Insurable interest may be defined as an interest of such a nature that the occurrence
of the event insured against would cause financial loss to the insured.5.

In Lucena v Craufurd, (1806) 2 B&P 269, 301 (NR), Lawrence J defined insurable interest as:
The having some relation to, or concern in, the subject of the insurance, which relation or
concern, by the happening of the perils insured against may be so affected as to produce a
damage, detriment or prejudice, to the person insuring and where a man is so circumstanced with
respect to matters exposed to certain risks or dangers, he may be said to be ‘interested in’ the
safety of the thing with respect to it as to have benefit from its existence—prejudice from its
destruction.

Even in India it is strange that the Insurance Act, 1938 does not contain a definition of insurable
interest. The only section, namely section 68 which makes a passing reference to the words
“insurable interest” stands repeated by section 48 of the Insurance Amendment Act, 1950.
Briefly stated, there is no legislative guidance in Indian Law on the subject. The definition
in section 7 of the Marine Insurance Act, 1963 is not exhaustive.

Nature of Insurable Interest

In Lucena v Craufurd it has been pointed out that the interest must be enforceable at law. Mere
hope, however strong it may be, is not sufficient. Lord Eldon observed that expectation though
founded on highest probabilities is not interest and it is equally not interest whatever might have
been the chances in favour of expectation.

A vested or proprietary interest is not essential, but such interest may be merely possessory,
inchoate, contingent, defeasible, equitable or expectant. In respect of expectant interests, there
must be a subsisting right or title in the insured at the time of the loss with respect to the subject
out of which the expectancy arises; but a mere expectation of profit without any interest in the
goods will not however be sufficient to constitute insurable interest.

The following points may be gathered from the modern cases:

(i)The interest should not be a mere sentimental right or interest, for example, love and affection
alone cannot constitute insurable interest.

(ii)It should be a right in property or a right arising out of a contract in relation to the property.

(iii)The interest must be pecuniary, that is, capable of estimation in terms of money. In other
words, the peril must be such that its happening may bring upon the insured an actual or deemed
pecuniary loss. Mere disadvantage or inconvenience or mental distress cannot be regarded as an
insurable interest. Claim for damages for mental agony and inconvenience is not maintainable.
(Mushtaq Ahmad Sumji v Divisional Manager)

(iv)The interest must be lawful, that is, it should not be illegal, unlawful, immoral or opposed to
public policy.

The insurable interest requirement

The insurable interest requirement is in fact based upon a series of independent principles, which
apply differently to the various classes of insurance contract.

(i)Interest required by statute.—An assignment of the policy permitted by amendment to s 38 of

the Insurance Act, if the insurer is satisfied by the bona fides of transfer and accepts the
assignment after notice to the transferor will make eligible the transferee or assignee as the case
may be to the benefits of the policy.3 If the assignee colludes with the life assured in suppressing
serious illness at the time of commencement of policy, the assignee will get no right.4 Apart
from s 38 of Insurance Act, s 157 of the Motor Vehicles Act constitutes the transferee of a motor
vehicle from the owner/insured a deemed transferee of the insurance for the benefit of a third
party. This fiction of deemed transfer of policy extends only to the benefit of third party and not
to the owner himself for any damage to goods, unless the policy is also transferred.5

(ii)Interest required by the policy.—The policy will generally require the assured to have
insurable interest, either directly, or indirectly by providing that the assured must prove that he
has suffered a loss. Policies of this nature are indemnity policies.

(iii)Anti-wagering provision.—Section 6 of Marine Insurance Act declares that every contract of

marine insurance by way of wagering is void. Wagering contract is void in terms of s 30 of the
Indian Contract Act. Consequently, there cannot be any insurance on any wagering contract.

Time or Duration of Interest

The time when the insurable interest must be present varies with the nature of the insurance
contracts. The question is whether insurable interest should exist at the time when the contract is
formed or should it also continue to exist until it is discharged. In life insurance the presence of
insurable interest is necessary at the commencement of the policy although it is not necessary
afterwards, not even at the time of occurrence of the risk. So it should be there in life policies at
the time of taking the policy. It need not exist at the time when the loss takes place or even when
the claim is made under the policy.

In Dalby v India and London Life Assurance Co where it was held that the insurable interest
need be proved to have existed at the time of taking the policy and at that date only.13. In fire
insurance it is required both at the commencement of the policy and at the time when the risk
occurs. In a marine insurance contract, the presence of insurable interest is necessary only at the
time of the loss. It is immaterial whether he has or has not an insurable interest at the time when
the policy was taken.

Insurable interest and life insurance

The doctrine of insurable interest was recognised in English law only in the latter half of the 18th
century by this statute requiring insurable interest as a condition for the validity of the policy.
This Act laid down three rules:

(i)In every contract of insurance, the insured or the person for whose benefit the insurance was
effected must have an interest in the subject matter.

(ii)The person for whose benefit the policy was effected shall not recover more than the value of
such insurable interest.

(iii)Every policy shall have inserted in the policy, the name of the person interested or for whose
benefit the policy was taken.
In life policies, the following persons have been recognised as having insurable interest and they
may conveniently be considered under three main headings, namely: (a) by relationship by
marriage, blood or adoption, (b) by contractual relationship and (c) by statutory duty.

Blood Relationship- This may be discussed under the following heads:

On One’s Own Life

Every person is presumed to have insurable interest in his own life without any limitation. Every
person is entitled to recover the sum insured whether it is for full life or for any time short of it.
If he dies, his nominee or dependents are entitled to receive the amounts.

By Husband or Wife

With the due development of the life insurance business, just as a person is presumed to have an
insurable interest in his own life, it is now well settled in England and America that a wife has an
insurable interest in the life of the husband and vice versa. It forms an exception to the general
rule that interest necessary to support the insurance of another person’s life must be capable of
expression in terms of money or pecuniary interest.  in Reed v Royal Exchange Assurance Co,
(1795) Peake 70 (Add Cases). In this case a policy was effected by the husband on the life of his
wife with the intention to defraud the creditors. The premium was paid by the husband. It was
held that the policy was valid and the creditors were entitled to receive from the policy amount a
sum equal to the premium paid.

Parent and Child

In England it has been laid down that a parent has no insurable interest in the life of the child
because mere love and affection is not sufficient to constitute an insurable interest. If the person
has any pecuniary interest in the life of the child, whether natural or adopted, he can take out an
insurance policy on the life of such child. A child, whether natural or adopted, is presumed to
have an insurable interest in the life of the parent because it depends on the life of the parent for
support. Even if such interest is proved, if a person affects a life insurance on a boy whom he
intends to adopt, the insurance is not valid.

Other Relations

The relationship by itself may not create an insurable interest. When one relation effects an
insurance on the life of the other, there must be actual dependence on the person whose life is
assured, that is, there must be a reasonable expectation of benefit from the continued existence of
such person and in such a case, there will be an insurable interest.

Contractual Relationship- A wide variety of relations may acquire insurable interest by reason of
contractual relationship and some of the common instances may be noted hereunder:

Debtor and Creditor

A creditor has an insurable interest in the life of the debtor.21. The creditor’s interest is limited
to the extent of the values of the debt. It is immaterial whether the debt is secured or unsecured.
The creditor has insurable interest in the life of the debtor because the chance of obtaining
repayment materially depends upon the continuance of the life of the debtor. The creditor has
also an insurable interest in the life of the surety, as a surety is only a favoured debtor. On the
same principle the surety has an insurable interest in the life of the principal debtor.

 Partner and Co-partner

In Powell v Dewy, (1898) 123 Log NC, it has been held that one partner has no insurable interest
in another save where the latter is indebted to him personally or to the partnership, and to the
extent only of such indebtedness. Again, it has been held that a partner has an insurable interest
in the life of his co-partner to the extent of the amount of capital which the latter has contracted
to bring in.22.

Similarly, the following are also said to have insurable interest:

(i)Principal and Agent

(ii)Master and Servant23.

(iii)Trustee and Co-trustee

Insurable interest and marine insurance

Under a marine policy, we have already noted that the assured must be interested in the subject
matter at the time of loss and it need not subsist at the time when the insurance is effected.
The Marine Insurance Act, 1963 in India deals with insurable interest in sections 7–17. The
Indian Act of 1963 and English Marine Insurance Act, 1906 define insurable interest as follows:

In particular a person is interested in a marine adventure where he stands in any legal or

equitable relation to the adventure or to any insurable property at risk therein, in consequence of
which he may benefit by the safety or due arrival of insurable property, or he may be prejudiced
by its loss, or by damage thereto, or by detention thereof or may incur liability in respect thereof.
Subrogation

In insurance law, subrogation is the name given to the right of the insurer who has paid a loss to
be put in the place of the assured so that he can take advantage of any means available to the
assured to extinguish or diminish the loss for which the insurer has indemnified the assured. A
five member Bench of the Supreme Court explained in Economic Transport Organisation, Delhi
v Charan Spinning Mills Pvt Ltd,9 “Doctrine of Subrogation is based on principles of equity.
Where assured has obtained value of goods lost from insurer, the law of insurance recognises as
equitable corollary of principle of indemnity that rights and remedies of assured against wrong-
doer stand transferred to and vested in insurer implied in a contract of indemnity, known as
subrogation.

In Castellain v Preston,11 it was contended that this doctrine applied only where there is a
subsisting right of action against the third parties, as in that case the right against the third party
had already been exercised. But Brett LJ elucidated that : “—the underwriter is entitled to the
advantage of every right of the assured whether such right consists of contract, fulfilled, or
unfulfilled or in a remedy for tort capable of being insisted on or already insisted on, or in any
other right whether by way of condition or otherwise, legal or equitable, which can be or has
been exercised, or has accrued, and whether such a right could or could not be enforced by the
insurer in the name of the assured, by the exercise or acquiring of which right or condition the
loss against which the assured is insured can be or has been diminished.” 

Thus, the doctrine of subrogation confers two specific rights on the insurer, namely,—

(i)all rights and remedies of the assured against third parties incidental to the subject matter of
the loss, by the exercise of which the insurer may recoup his loss.14

(ii)The insurer can compel the insured to take proceedings against the third parties for the benefit
of the insurer.15

(ii)all benefits received by the assured from third parties with a view to compensate the assured
for the loss which the insurer has indemnified him. The insurer is entitled to get even the moneys
received by the assured ex-gratia except those that are given to benefit the assured exclusively.
 BANKING

BANKER-CUSTOMER RELATIONSHIP

Before examining the relationship between banker and customer, it appears necessary to explain,
as far as possible, the legal meaning of the two terms. The former, until the passing of the Indian
Companies Amendment Act, 1936, had no statutory definition in India, and the legal decisions
on its interpretations, were by no means satisfactory. In most cases, either the term “banker” has
been defined in the negative, or in a manner which lays itself open to the charge of petito
principii. For instance, section 3 of the Negotiable Instruments Act, 1881, is content with laying
down that the term “banker” includes any person acting as a “banker”.

The latter has never been defined in any statute and the Indian Judicial decisions on this point
also fail to give any satisfactory guidance.

The Banking Regulation Act, 1949, defines Banking Company: “as a company which transacts
the business of banking in India,” and the word “banking” has been defined as “accepting”, for
the purpose of lending or investment, of deposits of money from the public, “repayable on
demand or otherwise, and withdrawable by cheque, draft, order or otherwise,” videsections 5 (b)
and (c).

in order to constitute a customer of a bank, a person had to satisfy two conditions: Firstly, that
there was to be some recognisable course or habit of dealing between him and the bank and
secondly, that the transactions were to be in the nature of regular banking business. As regards
the first of the conditions, it was held in Mathews v Williams, Brown & Co,11. that, in order to
constitute a person a customer of a bank, he should have some sort of an account with the bank,
but that the initial transaction in opening an account did not set-up the relation of a banker and
customer, and there had to be some measure of continuity and custom.

In Central Bank of India Ltd v V. Gopinathan Nair,14. the Kerala High Court observed that the
term “customer” is not defined in the Negotiable Instruments Act. Broadly speaking, a customer
is a person who has the habit of resorting to the same place or person, to do the business.

The definition of the relationship between a banker and a customer is as elusive as the definition
of the term “customer” itself.

Debtor and Creditor

“The relation of banker and customer,” as Sir John Paget aptly remarks, is primarily that of
debtor and creditor, the respective positions being determined by the existing state of the
account. Instead of the money being set apart in a safe room, it is replaced by a debt due from the
banker. The money deposited with him becomes his property and is absolutely at his disposal,
and, save as regards the following of trust funds into his hands, the receipt of money by a banker
from or on account of his customer constitutes him merely the debtor of the customer with the
“superadded” obligation to honour his customer’s cheques drawn upon his balance, in so far as
the same is sufficient and available.

The generic relationship between a customer and his banker is that of a creditor and his debtor
but not necessarily in that order. For, when we think of a customer, the mindset is that he is a
depositor of money; that a customer may begin his relationship with the banker also as a
borrower does not usually occur to the thought.

In either event, i.e., whether it is viewed as debtor-creditor or creditor-debtor, the relationship is

contractual. The essence of relationship of banker and customer is the affording of the facility to
the customer to draw funds from the bank by issuing of cheques.

In Delhi Cloth & General Mills Co Ltd v Harnam Singh,43. it was held that the banker-customer
contract is an exception to the rule that a debtor should find his creditor. Here the creditor (the
customer) has to make a demand on the debtor (banker). The demand can be made only at that
branch of account where the customer’s account is kept.

The Delhi Cloth & General Mills, settled the following rules:

(i)The obligation of a bank to pay the cheques of a customer rests primarily on the branch at
which he keeps his account and the bank can refuse to cash a cheque at any other branch.

(ii)A customer must make a demand for payment at the branch where his current account is kept,
before he has cause of action against the bank.44.

When monies are deposited in the bank, the bank is entitled to use them without being called
upon to account for such use to the depositor. What is obligatory on the bank is only the liability
to return the deposit to the customer in accordance with the terms agreed upon with the
customer. This being so, the relationship that is constituted is one of debtor and creditor and not
of a trustee and a beneficiary.

Trustee and beneficiary

Where a banker pursuant to instructions, express or implied, has credited the proceeds of a bill or
other document entrusted to him for collection, the relationship of debtor and creditor arises from
the time of his doing so. Where the bank has suspended his business before receipt of such
amount, he holds the money as trustee for his customer, irrespective of whether or not the latter
has an account with him on the date of receipt of the money and whether or not the money has
been credited in that account.

in whatever form the money of the opposite party might have been kept by the bank, it did not
become the bank’s money but remains the money of the opposite party in the hands of the bank
as receiver. So if a bank receives money for a specific purpose or in a fiduciary capacity-as in the
present case as a receiver, he will be trustee for the amount.
Trusteeship arises only in course of business

It is not uncommon for a customer to pay money to an employee of the bank, known well to him,
with a request to deposit it into his or her account. The onus would be on the customer to show
that the amount was paid to the employee and that the employee received it in the course of his
employment with the bank. Any misappropriation of the amount by such employee cannot be
said to have been committed by him in the course of his employment with the bank.

Bailor-Bailee relationship-

Of the many services offered by a commercial bank is the safe custody facility. The legal
relationship that arises in case of safe deposit or safe custody is that of bailment. The customer
who deposits with the bank for safe custody is the bailor and the bank is the bailee. In cases
where the bank does not charge any fees for such safe custody, the bank can be termed as
a gratuitous bailee. In cases where fees are levied, the bank becomes a bailee for reward. Where
the bank accepted the customer’s securities for safe deposit with instructions to collect dividends
along with commission thereon for the service, it was held that the banker became a bailee for
the reward. Kel United Service Co v Johnson’s claim. Where the bank offers safe custody
facility to a customer, it takes charge of goods, articles or securities, belonging to the customer as
a bailee and not as a trustee or an agent. In United Commercial Bank v Hema Chandra
Sarkar,92. Jagannath Shetty J. explained:

Bailment is the delivery or transfer of possession of a chattel with a specific mandate that
requires the identical res either to be returned to the bailor or to be dealt with in a particular way
by the bailee according to the directions of the bailor. One important distinction between agency
and bailment is that the bailee does not represent the bailor. He merely exercises with leave of
the bailor, certain powers of the bailor in respect of his property. Secondly, a bailee has no power
to make contracts on behalf of the bailor. Nor can he make the bailor liable for any act that he by
himself in relation to the property bailed.

Lessor and Lessee-

Sec.105 of ‘Transfer of property Act 1882’ defines lease, Lessor, lessee, premium and rent.
Providing safe deposit lockers is as an ancillary service provided by banks to customers. While
providing Safe Deposit Vault/locker facility to their customers’ bank enters into an agreement
with the customer. The agreement is known as “Memorandum of letting” and attracts stamp
duty.

The relationship between the bank and the customer is that of lessor and lessee. Banks lease (hire
lockers to their customers) their immovable property to the customer and give them the right to
enjoy such property during the specified period i.e. during the office/ banking hours and charge
rentals. Bank has the right to break-open the locker in case the locker holder defaults in payment
of rent. Banks do not assume any liability or responsibility in case of any damage to the contents
kept in the locker. Banks do not insure the contents kept in the lockers by customers.

Agent and Principal-

Sec. 182 of ‘The Indian Contract Act, 1872’ defines “an agent” as 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 who is so represented is called “the Principal”.

Thus an agent is a person, who acts for and on behalf of the principal and under the latter’s
express or implied authority and the acts done within such authority are binding on his principal
and, the principal is liable to the party for the acts of the agent.

Banks collect cheques, bills, and makes payment to various authorities’ viz., rent, telephone bills,
insurance premium etc., on behalf of customers. . Banks also abides by the standing instructions
given by its customers. In all such cases bank acts as an agent of its customer, and charges for
these services. As per Indian contract Act agent is entitled to charges. No charges are levied in
collection of local cheques through clearing house. Charges are levied in only when the cheque is
returned in the clearinghouse.