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Insurance Laws and Practices

Notes General Insurance comprises insurance of property against fire, burglary etc., personal insurance
such as Accident and Health Insurance, and liability insurance which covers legal liabilities.
Suitable general Insurance covers are necessary for every family. It is important to protect one’s
property, which one might have acquired from one’s hard earned income. Losses created to
catastrophes such as the tsunami, earthquakes, cyclones etc. have left many homeless and penniless.
Such losses can be devastating but insurance could help mitigate them. Property can be covered,
so also the people against Personal Accident. A Health Insurance policy can provide financial
relief to a person undergoing medical treatment whether due to a disease or an injury.
In the next unit, you will study about the Insurance Act, 1938 such as various definitions contained
in it and the main provisions of the Act. It will also deal with registration of principal agents,
chief agents and special agents, regulation of employment of principal agents as well as renewal
of registration and capital requirements.

5.1 Principles of Utmost Good Faith

You need to know that both the parties to a commercial contract are by law required to observe
good faith. Let us say that you go to a shop to buy an electrical appliance. You simply will not
enter, pay and pick up any sample piece but will check two, three or even more pieces. You may
be even ask the shopkeeper to give a demonstration to ensure that it is in working condition and
also ask several questions to satisfy yourself about what you are buying. Then when you go
home you find it does not work or is not what you were looking for exactly so you decide to
return the item but the shopkeeper may well refuse to take it back saying that before purchasing
you had satisfied yourself; and he is possibly right.
The common law principle “Caveat Emptor” or let the buyer beware is applicable to commercial
contracts and the buyer must satisfy himself that the contract is good because he has no legal
redress later on if he has made a bad bargain. The seller cannot misrepresent the item he has sold
or deceive the buyer by giving wrong or misleading information but he is under no obligation
to disclose all the information to the buyer and only selective information in reply to the buyers
queries is required to be given. But in Insurance contracts the principles of “Uberrima fides”,
i.e. of Utmost Good Faith is observed and simple good faith is not enough. Why this difference
in Insurance contracts?

Firstly, in Insurance contracts the seller is the insurer and he has no knowledge about the
property to be insured. The proposer on the other hand knows or is supposed to know everything
about the property. The condition is reverse of ordinary commercial contracts and the seller is
entirely dependent upon the buyer to provide the information about the property and hence the
need for Utmost Good Faith on the part of the proposer. It may be said here that the insurer has
the option of getting the subject matter of Insurance examined before covering the risk. This is
true that he can conduct an examination in the case of a property being insured for fire risk or of
getting a medical examination done in the case of a health policy. But even then there will be
facts which only the insured can know e.g., the history of Insurance of the property whether it
has been refused earlier for Insurance by another company or whether it is also already insured
with another company and the previous claim experience. Similarly, a medical examination
may not reveal the previous history i.e. details of past illness, accidents etc. Therefore Insurance
contracts insist on the practice of Utmost Good Faith on the part of the Insured.
Secondly, Insurance is an intangible product. It cannot be seen or felt. It is simply a promise on
the part of Insurer to make good the loss incurred by the Insured if and when it occurs. Thus, the
Insurer is also obliged to practice Utmost Good Faith in his dealings with the Insured. He cannot
and should not make false promises during negotiations. He should not withhold information
from the Insured such as the discounts available for good features e.g., fire extinguishing.

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