HISTORY OF INSURANCE LEGISLATION IN INDIA

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This article was written by Vandana Singh, a student of Gujarat National Law University.

The roots of insurance laws are deeply rooted in the writings of Manu (Manusmrithi), Yagnavalkya( Dharmasastra ) and Kautilya ( Arthasastra ). In the ancient period the concept of insurance evolved as a calamity crisis strategy whereby community resources could be pooled in to be redistributed amongst the victims of natural calamities like fire, epidemic, floods etc.[1] the insurance laws have grown from its nascent stage retaining its original essence and at the same time drawing heavily from the common law system.

The contemporary insurance system developed in the 17^th century England which in due course of time carved out and institutionalised the insurance activities from the other trading activities. The first step towards the codification of insurance legislation took place in the form of the Lloyds Act in 1871 which extended marine insurance to corporate insurances and guarantees.

Rigveda refers to community insurance system prevalent around 1000 B.C as practised by the Aryans in the name of “YogakshemaBahamayam”. Life insurance was first set up in India through a British company called the Oriental Life Insurance company in 1818 followed by the Bombay Assurance company in 1823, the Madras Equitable Life Insurance Society in 1829, the Bombay Mutual Life Assurance Society 1871 and the Oriental Life Assurance Company in 1874. However, surprisingly they did not insure the lives of the Indians despite being operational in India.

Insurance companies were not governed by specific regulations but instead by the Indian Companies Act,1866. The swadeshi movement brought a new dawn to the insurance sector and many indigenous general insurance companies were set up, the first being the Indian Mercantile Insurance company Limited set up in Bombay in 1907. The Indian Life Assurance Companies Act and the Provident Insurance Societies Act codified the insurance practices in India after excluding general insurance from its ambit.

In 1937 the Government of India appointed Sen Committee whose comprehensive recommendations formed the foundation of the Insurance Act 1938. This was the first codified law compassing both life and general insurance at pan India level. The nationalisation of insurance sector in India came as an aftermath of the implementation of the Nehruvian socialism post- Independence. The government consolidated all categories of life insurances under the functioning of the Life Insurance Corporation of India in 1956.  In 1972 the government passed the General Insurance Business (Nationalisation) Act to nationalise the non- life insurance sector by setting up the General insurance Corporation to supervise , control and regulate general insurance in India. The RN Malhotra Committee (1993) recommendations have served a milestone in the opening up of the insurance sector in consonance with the overhauling of the finance sector post 1991. The committee proposed entry of the Indian private sector and a limited participation of the foreign companies on a joint venture basis. The report led to the birth of Insurance Regulatory and Development Authority as the central regulatory body of the insurance sector. The IRDA is responsible for framing guideline for registration regarding the incorporation of insurance companies in India and other allied issues concerning the insurance sector.

THE INSURANCE ACT, 1938

The indisputability clause under section 45 of the Insurance Act, 1938 reads as follows:

“No policy of life insurance effected before the commencement of this Act shall after the expiry of two years from the date of commencement of this Act and no policy of life insurance effected after the coming into force of this Act shall after the expiry of two years from the date on which it was effected, be called in question by an insurer on the ground that a statement made in the proposal for insurance or in any report of a medical officer, or referee, or friend of the insured, or in any other document leading to the issue of the policy, was inaccurate or false, unless the insurer shows that such statement 1[was on a material matter or suppressed facts which it was material to disclose and that it was fraudulently made] by the policy-holder and that the policy‑holder knew at the time of making it that the statement was false 2[or that it suppressed facts which it was material to disclose.”[2]

This section authorises the insurer to unilaterally repudiate a life insurance claim upto the expiry of two years from the effecting of the policy if it found the materials facts in the disclosure form to be inaccurate or false. However, after the two year lock in period lapses the insurer cannot repudiate the insurance contract merely due to inaccuracy of the facts disclosed in the insurance proposal form without conjointly satisfying the three grounds stipulated by the section namely:

1. The statement must be on a material matter, or it suppresses facts which it was material to disclose.
2. The suppression must have been fraudulently made by the policy-holder and

• The policy-holder must have known that it was false or itsuppressed facts which was material to disclose.

The principle of Uberrimaefidei : Rationale in the Common Law

In an insurance contract both the parties have a positive duty to disclose every material fact affecting the risk to other before the contract is concluded.[3] In the case of Carter v Boehm[4] , Lord Mansfield remarked that:

“Insurance is a contract upon speculation. The special facts, upon which the contingent chance is to be computed, lie most commonly in the knowledge of the insured only; the under writer trusts to his representation and proceeds upon the confidence that he does not back any circumstances in his knowledge, to mislead the under writer into a belief that the circumstances does not exist , and to induce him to estimate the risk as if it did not exist.The keeping back such circumstance is a fraud and, therefore, the policy is void”

It is self- evident that the deliberate failure to disclose the facts which misleads the insurer is a fraudulent concealment which renders the contract void for want of good faith. Therefore the proposers bear a very heavy burden of disclosure while filling up the proposal form and when subsequently renewing the insurance contract.[5]

The duty not to misrepresent requires that statements made by the proposer be of facts and not of opinion.  The task of distinguishing questions of facts from questions of opinions is very technical and difficult to have a broad classification.  An insurer can avoid an insurance contract if he was induced to enter into it by misrepresentation of material facts by the proposer irrespective of the fact whether the insured acted negligently or innocently. The burden of proof in this situation lies on the insurer to be discharged[6]. The question of misrepresentation is subsumed by the broad duty of disclosure of material particulars.

The fundamental legal question regarding interpretation of “misrepresentation” under this section that rose in the Indian courts pertain the nature of determination of material facts and basis of judging the materiality. The materiality of misrepresented facts has to be ascertained by the facts and circumstances in each by way of evidence.

[1]https://www.irda.gov.in/ADMINCMS/cms/NormalData_Layout.aspx?page=PageNo4&mid=2

[2]https://www.licindia.in/Health_protection_illustrations.htm

[3]BanqueFinanciere de la Cite SA v Westgate Insurance Co. Ltd. [1991] 2 AC 249 (HL)

[4] (1766) 3 Burr. 1905

[5] Insurance Law, Doctrines and Principles , J. Lowry , P. Rawlings, R. Merkin, 3^rd ed. Oxford and Portland, Oregon, pg. 83

[6] Sirius Internaional Insurance Corp v. Oiental Insurance Corp, 1999, Lloyds rep. I.R 343.