Standard Forms Of Life Insurance Contracts In India
Author: LawSphereX
Category: Banking & Finance
Published:
Updated:
STANDARD FORMS OF LIFE INSURANCE CONTRACTS IN
INDIA
R Dhanalakshmi, School of Excellence in Law, The Tamil Nadu Dr. Ambedkar Law
University Dhivyaa R, School of Excellence in Law, The Tamil Nadu Dr. Ambedkar Law University
1. INTRODUCTION
One of the essentials in pursuance to a valid Contract is the element of ‘free consent’. This is embodied in Section 14 of the Indian Contract Act, 1872, which elucidates that consent is free when not obtained by fraud, misrepresentation, undue influence, coercion or mistake. 1 Such consent in action is pertaining to the conditions, terms or obligations laid down in the Contract or Agreement, viz. , in laymen terms, all parties entering into the Contract or Agreement shall consensually accede to its terms and conditions that is drawn at the persistence of wants and needs of and by the parties concerned. It is a paradigm of the concept “meeting of minds” which forms the foundation of contractual law. And any action in contrary manifests unfairness, detrimental to the party that has no say in drawing the conditions that shall bind both.
Notwithstanding, there exists certain species under the common genus of Contracts, in which the conditions or terms of the Agreement or Contract is independently decided by one of the parties for which the other party/ parties accede to consensually. This branch of Contracts encompasses within itself Insurance Contracts, Loan/Mortgage Deeds, and Electronic- Contracts etcetera. They are termed as Standard form of Contracts or Adhesion Contracts.
This paper shall delve into the world of Standard form of Life Insurance Contracts, focusing on different research questions all categorised into several chapters (1) Conceptual Analysis of Standard form of Insurance Contract, (2) Inspection of the Legislative Instruments governing Life Insurance Contracts (3) Vinculum of Standard form of Insurance Contracts and Rights of Consumers (4) Recommendations and (5) Comparative analysis of Standard form of Contract in potential jurisdictions.
1 S.14, Indian Contract Act, 1872, No. 09, Acts of Parliament, 1872 (India).
2. AIM OF THE STUDY
To analyse the insurance industry across nations, to compare it with the practice in India and infer on the potential implementations to be made to combat the disputes that arises predominantly out of violation of consumer rights by the act of life insurance companies in rejecting to hold their side of the bargain by rejecting to pay the certained amount to the nominees.
3. REVIEW OF LITERATURE
In the light of this significant study the author has reviewed the following books and journals which provided for better understanding of the subject matter and to cull out the research gap present herein:
1. Avatar Singh (2018)2 offers a detailed discussion of insurance contracts which
converges to focusing on provisions relating to adhesion contracts and protection of consumers from unfair terms incorporated in standard form of contracts.
2. B Fuller (2019)3 provides an overview of contracts, touching upon the fundamentals of
contractual obligations and a bird eye view of the Specific Relief Act, 1963.
3. Dr R K Bangia (2019)4 delves into the basics of standard form of contracts extending
to providing an insight of the legislative and judicial interventions forming a paradigm of contracts.
4. Pollock and Mulla (2019)5 dives into the general principles and canons of Contract Law
which provides for a wider understanding on its inception, evolution and contemporary position all directing towards its scope.
5. E Hondius (1994)6, provides a basic view on the implications of European Directives
on Unfair Terms in Consumer Contracts.
2 AVATAR SINGH, LAW OF CONTRACT AND SPECIFIC RELIEF, (Eastern Book Company 11th ed. 2018).
3 B FULLER, BASIC CONTRACT LAW, (Alliance Publications 5th ed. 2019).
4 DR R K BANGIA, PRINCIPLES OF MERCANTILE LAW, (7th ed. 2019).
5 POLLOCK & MULLA, THE INDIAN CONTRACT ACT, 1872, (LexisNexis 16th ed. 2021).
6 E. Hondius, EC Directive of Unfair Terms in Consumer Contract Towards European Law of Contract, JCL, 1994.
6. H Hoffins (1994)7, elucidates on the pivotal role assumed by the Doctrine of Good Faith
in formulation and execution of Consumer Contracts.
7. P Nabbia (2017)8, signifies on the interrelationship between Consumer Law and
Commercial Law, limiting itself to Standard Form of Contracts.
8. Kalani, Salunkha and Ahirrao (2018)9, examines the cases of fraud in insurance claims
in India.
9. M N Mishra (2018)10, discusses on the basic and fundamental principles of insurance
contracts.
10. Dr. VU Gujrain (2020)11, provides a comprehensive look into the structure of standard
form of insurance contracts.
4. OBJECTIVES OF STUDY
1. Trace out and compare the historical background and evolution of the standard form of
insurance contract in various potent countries.
2. Critically examine the practices that aim to regulate standard form of life insurance
contracts in tandem to protecting the rights of the consumers.
3. Study on the steps taken by authorities to combat the problems that arise out of
exclusionary clauses and unfair terms in contract. Further, to analyse the scope and implications of exclusionary clauses and its effect on consumers.
5. SIGNIFICANCE OF THE STUDY
This study shall serve as an aid in understanding the scope of insurance law across the world specifically the field of life insurance by redirecting to the inception of the industry, its evolution, and lastly the contemporary position it holds. Additionally, an in depth dive into the
7 H Hoffins, Good Faith in Consumer Law, OJLS, 1994.
8 P Nabbia, Standard Form of Contracts Between Unfair Terms Control and Competition Law, ELR, 2017.
9 5 Kalani, Salunkha & Ahirrao, Comparative Study of Claim Settlement Ratio of LIC with other Insurance Companies in India, IJAR, 2011.
10 M.N. MISHRA, INSURANCE: PRINCIPLES AND PRACTICES, (Central Law Publications 22nd ed. 2018).
11 DR. VU. GUJRAIN, INSURANCE LAW, (Butterworths Publication 2020).
disputes that arose and predominantly arising in the present era is analysed to bring cognizance to the area of issues. This methodology of study further attributes to analysing if the present instruments of law are serving the purpose and consequentially, suggest steps and solutions that might help in combating the aforementioned disputes.
6. RESEARCH METHODOLOGY
The research adopted doctrinal methodology. Assistance was derived from primary, secondary and tertiary data. Primary data includes Legislations/ Statutes, Enactments, Amendments etcetera. Secondary data includes Governmental Publications, books, newspapers, journals, dictionaries and dissertations.
7. RESEARCH PROBLEM
1. Whether the rights of consumer stands violated by standard form of insurance contracts
or not?
2. Whether there is a need for a specific legislation to regulate the operation of standard
form of life insurance contracts in India or not?
3. Whether the steps taken by the authorities in regulating standard insurance contracts
are efficient and fulfilling its aim or not?
8. RESEARCH GAP
By reading through catena of cases, secondary sources in access, the author has narrowed down that the gap to analysing the present rules and regulations governing the insurance industry and the disputes that arises out of it, to conceive new solutions pragmatic to the contemporary affairs.
9. LIMITATIONS OF RESEARCH
This research is confined to doctrinal mode. The resources relied upon by the author splits to secondary and tertiary. Lacking primary resources, the author is not in a position to collate opinionated data. Owing to the uncharted nature of and limited research sources available on, the subject matter, the author has exercised analytical methodology giving birth to novel but assailable suggestions and ideas.
10. CONCEPTUAL ANALYSIS OF STANDARD FORM OF LIFE INSURANCE
CONTRACT
SFCs, an abbreviation to Standard Form of Contract appertains to the type of Contract that is prepared by one of the parties entering into the Contract using a template model or standard format of terms and conditions in which the other party has little or no scope of negotiation or amendment. Looking at this from the view point of Insurance Contracts, insurers have their own standard format concerning with the categories within, which they extend to the consumer. The latter has no or very little choice to negotiate or amend the terms of the contract. The only choices given are at the front of wholly accepting or wholly rejecting the insurance contract. At the event of accepting, they are simply made to sign on the dotted lines.
And at the event of rejecting, it becomes an eternal turmoil for the consumer to find an insurer who extends the most acceptable terms, which is more or less unattainable. Thus, the freedom of contract loses some significance in a contract of insurance. To understand the fabrication of insurances and the paradigm of insurance law, it is of utmost necessity to learn the history behind the advent of these contracts and its evolution through millennia. Although, there is a lack in a concrete definition for insurance law, the Court at times have tried to give meaning to it, never in an exhaustive nature. One such interpretation and analyzation of scope was given in the case, Prudential Insurance Co v. Commissioners of Inland Revenue12, in which Channell J, iterated that
insurance must be against something. A contract which would otherwise be a mere wager may become insurance by reason of the assured having interest in the subject-matter that is to say, the uncertain event which is necessary to make the contract amount to an insurance must be an event which is prima facie adverse to the interest of the assured. The insurance is to provide for the payment of a sum of money to meet the loss or detriment which will or may be referred upon the happening of the event. By statute it is necessary that at the time of the making of the contract, there should be an insurable interest in the assured. It is true that in the case of life insurance it is not necessary that the interest should continue, and the interest is not the measure of the amount recoverable as in the case of a fire or marine policy.
Still, the necessity of there being an insurable interest at the time of making of the contract shows that it is essential to the idea of a contract of insurance that the event upon which the money is to be paid shall prima facie be an adverse event. ”
10.1. HISTORY OF INSURANCE LAW
10.1.1. Insurance around the World:
Insurance Law owes its existence to businessmen and merchants who strengthened their markets as early as 4000-3000 BCE. Parallel can be drawn between the then existed Bottomry Contracts to the now in existence, Insurance Contracts. Bottomry contracts were loans granted to merchants with the provision that if the shipment was lost at sea, the load did not have to be repaid. One could say that it is insurance in the negative sense i. e, the merchant shall be relieved of his liability, when the source of payment is destroyed, rather than in the case of insurance in which the insured is insured in terms of monetary compensation for any loss experienced as a repercussion to the subject hereto destroyed. In the former, no monetary transaction is made by the insurer in event of shipment wreckage or theft. Rather, only the already present liability is withered bearing in mind the circumstances.
While in the latter, monetary transaction occurs in way of compensating the damage endured by the insurer. Ancient Roman Law recognised the Bottomry Contracts in which an Article of Agreement was drawn up and funds were deposited with a money changer13. Hints of its existence can be culled from Hindu Scriptures and history of Ancient Greece.
13 Id at 2.
Thus, the conceptualisation of Insurance Contracts began with burgeoning in the field of Marine Insurances. With the growth of marine insurances many insurance companies budded, out of which one of the most significant ones Llyod’s, pioneered by Edward Llyod which became the dominant insurer of marine risks in London. In furtherance to its success, it saw expansion into new additions such as fire, property risk and liability insurance. Nonetheless, the history of life insurance, the focal point of this paper could pique the interest of any reader. Its origins can be traced back to Ancient Rome, in which Caius Marius, a Roman Military leader created a burial club among his troops, so in the event of the unexpected death of a club member, other members would pay for the funeral expenses14.
This arrangement albeit not having a definite body or rubric, its soul familiarises with the practice of life insurance. In America, around 1759, the growth of insurances saw its pinnacle at introduction of life insurances by The Presbyterian Synod of Philadelphia for the benefit of Presbyterian Ministers and their dependants. Albeit its limited coverage, it stood as a stepping stone to expand life insurances amongst common men. The first insurance company was formed in Charleston, S. C. , in 1735 and added Life Insurance as one of its services around 1760. Life insurance at its advent was met with a dichotomy of responses. Many religious institutions and preachers viewed it as “gambling” while the rest viewed it as a necessity and a step towards securing life as it is.
Many legal and cultural shifts through years invoked the voluntary acceptance of life insurance by majority of the crowd.
10.1.2. Insurance in India:
Insurance can be traced back to the Ancient Literature such as Manu-Smriti, Artha-Shastra and Dharma-Sasthra, in which many instances directs to the distribution of resources at times of perils, likely natural calamities, war, persistent famine so on and so forth. The aim was ultimately to secure the life of the people. Despite, the lack of contractual nature of such acts, they were rendered by the State, in the capacity of one, to ensure good being of the people after the natural act of peril. This in its essence is similar to the aim and programming of Insurances. Early 1800’s witnessed the development of insurance companies in India. The first life 14 COREY DAHL, A Brief History of Life Insurance, Sep. 9th 2013, https://www.thinkadvisor.com/2013/09/09/abrief-history-of-life-insurance/
insurance company was Oriental Life Insurance Company which was established in Calcutta,
1818. However, it failed to succeed in its operations, which resulted in closure of the Company
in 1834. Further, in the Madras Presidency, Madras equitable started the life insurance business in 1829. 15 With the emergence of Insurance in India, there was a dire necessity to fill the ensuing legislative vacuum to handle matters of insurance. Thus, British Insurance Act (BIC) was enacted in Pre-Independent India. This facilitated many foreign companies such as Royal Insurance, Albert Life Insurance, Liverpool etc. , to establish themselves in India. However, this resulted in developing Indian Companies to face hardships in flourishing. To combat this, The Indian Life Assurance Companies Act, 1912 was enacted which furthered life insurance businesses in India. In later years, the Indian Government took matters into its own hands and nationalised Life Insurance by instituting Life Insurance Corporation of India (LIC).
However in 1990s, the process of re-opening the sector for private companies to enter the field of insurance began. This was in leverage to attain the same success achieved in the financial sector. Malhotra Committee Report16 in 1999 served as impetus to setting up of Insurance Regulatory and Development Authority (IRDA), an autonomous statutory body in April 2000. The aim of this body is to promote competition so as to enhance customer satisfaction through increased consumer choice and lower premiums, while ensuring the financial security of the insurance market17. As the name suggests, it regulated the insurance field which otherwise owing to its developed but neoteric nature, necessitated regulation to the stakeholders.
10.2. PREFACE: WHAT IS LIFE INSURANCE?
Life Insurance is a contract between the policyholder and the insurer, which promises to pay compensation to the third party beneficiary opted by the policyholder at the death of the former. The policyholder pays certain amount of money every periodic interval as mentioned in the contract termed as “premium”. At the death of the policy holder, contingent to the beneficiary surviving the policyholder, he/she is paid the insurance amount as promised by the insurer
15 Insurance Regulatory and Development Authority of India (IRDAI), Evolution of Insurance in India,
https://irdai.gov.in/evolution-of-insurance
16 Malhotra Committee Report, Report No.190 (India).
17 Id at 5.
through the contract. In Gould v. Curtis18, the Court observed that though in the case of fire and marine insurance the event must be of a character more or less adverse to the interest of the insured, it is not necessarily so in the life insurance, for instance, in the case of endowment insurance policies, because life insurance has an investment aspect as well, such as one of providing for the uncertainty of life. Life Insurance Contract as every contract is mandated to satiate the conditions for a valid contract as embodied in different provisions of Indian Contract Act, 1872. To ascertain the validity of Life Insurance Contracts, every element of validity will be compared and analysed in the following order:
10.2.1. Parties of the Contract:
Life Insurance Contracts conventionally constitutes of 3 parties, (1) Policyholder, (2) Insurer/ Insurance Company and (3) Nominee/Beneficiary/ Third Party opted by Policyholder.
10.2.2. Consideration:
Life Insurance Companies offer the beneficiary opted by the Insured, at the happening of the contingent event, certain amount of money, in return of premium paid by the policyholder as the terms and conditions of the Contract requires. The consideration of the Companies is the premium they receive, while the consideration of the policyholder concerns to the amount provided to the beneficiary that he personally nominates. It is pertinent to notice the deviation from the conventional meaning of consideration, ie., the consideration of the policyholder is simply the benefit provided to a third party he nominates and offers no direct benefit to himself. In knowledge of such arrangement, the question that arises in one’s mind is whether the beneficiary can enforce this contract at the event of death of the policyholder?
18 Gould v. Curtis, [1913] 3 K.B.84.
10.2.2.1. Privity of Contract
Insurance industry stands as a reasonable deviation from the Doctrine of Privity. This is being mindful of the fact that excluding the beneficiaries nominated from the insurance contract will cause severe prejudice. Ensuing consequences are that the beneficiaries at the happening of contingent event, when approach the insurer for the amount of money as certained in the contract if not given under any pretences, then the beneficiaries should be in the position to enforce the contract in court as in contrary, the injured will be the nominees and no one else. Any contradictory actions will foister the already injured further.
10.2.3. Insurable Interest:
The significance of this element can be gauged by viewing the fact that it exists as the sole determining factor as whether the contract is ultra vires of the Constitution or not, by ascertaining whether the Contract at hand would amount to wagering or insurance contract. While the former is against public policy and therefore void in the eyes of law, the latter has built its place rightfully in the sphere. In Carlill v. Carbolic Smoke Ball Co19, the Court held that “In a wagering contract, the risk is created by the agreement for without it the contracting party would have suffered no loss, whereas in an insurance contract, the risk exists whether or not there is such a contract.”
has to be communicated to the offeror through means as mentioned in the contract and in events of no such mention, it has to be communicated directly to the offeror in unambiguous, certain manner. In LIC v. Raja Vasireddy Komalavalli Kamba20, the Court adjudged on what construes as ‘final acceptance’ by opining the following: “Whether the final acceptance is that of the assured or insurers, however, depends on the way in which negotiation for insurances have progressed. ” One of the most disputed question of law, whether mere receipt or retention of premia deemed to be acceptance? The interest of insured is put on a pedestal, and utmost significance is given to it while ascertaining circumstances that are brought forth to the court to be adjudged. Thus, every case has to be determined by taking into considerations the specific facts and circumstances.
This was beautifully opined in Santosh Kumar Gupta v. LIC21, “the very purpose or object of the assured in taking policies from the LIC is to safeguard the interest of his dependents as the case maybe in the event of premature death of the assured as a result of the happening in any contingency the assignees or nominees and the dependants of the assured cannot be deprived of the dues payable under the policy. (Otherwise the very legislative and beneficial object for taking such policies would stand lost and defeated. ). ”
It lacks the element of promise to do something unequivocally. Another prong of this argument would be that indemnity is based on the principle of compensating an individual for his loss and try to reinstate him in the position he was before the occurring of the loss. This is not practically feasible or morally right to do. The life of a person cannot be equated to a certain amount of money and the notion of the injured to be revived to the initial position as though the loss had not occurred is unethical. Thus, to recapitulate, while general insurances are contracts of indemnity or a mix between contract of indemnity and contingency; life insurances are homogenously contracts of contingency. Though Contract Law applies to insurance as a general practice, Insurance Laws are more specific to their governance.
10.2.6. Maturation of Life Insurance Contract:
Maturation of contract refers to the time or event at which the contractual duties are to be performed, rendering the contract as ‘completed’. This maturation when specific to life insurance contracts differs upon the condition as given in the very contract itself. Upon maturation, the insurer (Insurance Company) is made to pay the nominee, amount as mentioned in the contract. For Life Insurances, maturation happens upon the death of the policy holder. This is elucidated further in s.39 of the Insurance Amendment Act, 201522.
10.3. STANDARD FORM OF LIFE INSURANCE CONTRACT
Life Insurance Contract is drawn upon good faith. Its foundational principle is Uberrima Fides which translates to “utmost good faith”, governing insurance law. In application, it means all the parties of such transaction should deal with their as well as their counterpart’s interest with utmost good faith. This mandate may includes the parties to make full disclosure (principle of disclosure) of the material facts, a declaration to the same, understanding and analysing the intricacies of policies so on and so forth. In Carter v. Boehm23, Lord Mansfield referred to insurance as a Contract of Speculation.
22 S. 39, Insurance Laws (Amendment) Act, 2015, No.5, Acts of Parliament, 2015 (India).
23 Carter v. Boehm, (1766) 97 ER 1162, 1164.
“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 confidence that he does not keep back any circumstances in his knowledge, to mislead the under-writer into a brief that the circumstance does not exist... Good faith forbids either party by concealing what he privately knows, to draw the other into a bargain from his ignorance of that fact, and his believing the contrary. ”24 The rationale behind giving utmost priority to good faith can be understood in 2 ways; (1) in relation to imposing such necessity on the insured and (2) in relation to the insurer.
Appertaining to (1), the life insurance contract is drawn upon the life of the policyholder and any material facts based on the contingent event of death of the policyholder is probable to be fabricated by the beneficiary. To counteract such actions, the contract is said to be idealistically spearheaded by good faith. Thus, when entering into the contract, the insured promises to act in consonance with good faith and any action in contrary shall attract consequences such as the contract losing its validity and enforceability. Concerning to (2), being the focal point of this chapter, the insurance company undertakes to act in good faith by holding up to its side of bargain. Ensuing mayhem concerns with the contract itself. As iterated, the life insurance contract has a standard format which is mandatorily followed by every insurance company within the justified territorial jurisdiction.
And owing to its nature of adhesion, the policy holder has no scope in negotiating or altering the contract, if he/she is unsatisfied with certain terms. In-fact, it works in an absolute fashion making it either wholly acceptable or to be rejected by the policy holder. When such ‘take it or leave it’ fashion of transaction takes place, it becomes an utmost necessity for the person on the other side of the dominating party to take cognizance of the contents of the contract with fullest knowledge and understanding. Only then shall the action of acceptance be valid. This is where the good faith of the insurance company comes to play a critical and cardinal role. The insurance company impelled to elucidate on the terms of the conditions inclusive of the exclusionary clauses to the policy holder, without hiding any conditions for which the latter will by default be agreeing.
The aforementioned action pertains to principle of disclosure. This
24 Id at 13.
act of transparency is premised on good faith. Insurance policies are designed by boilerplate language which is similar across a wide variety of different types of insurance policies.25 Therefore, good faith is relied upon by the law makers and ascertained to be an inevitable yet befitting principle to govern the operation of life insurance contract.
11. INSPECTION OF THE LEGISLATIVE INSTRUMENTS GOVERNING LIFE
INSURANCE CONTRACTS
Insurance industry is governed by an amalgamative effect arising out of The Insurance Act, 193826, The Insurance Regulatory and Development Authority Act, 199927, Insurance Regulatory and Development Authority of India (Non-Linked Insurance Products) Regulations,
201928 and The Indian Contract Act, 187229 etcetera. Further, specifying on Life Insurance
Contracts it is primarily governed by The Life Insurance Corporation Act, 195630 and generally when need arises by the aforementioned assemble. This chapter shall delve into the legal provisions that provide for protection of rights of insured and further discuss on the lacunae, if any in the same.
11.1. INSURANCE LAWS
s.4631 of The Insurance Act, 1938, which states the “Application of the law in force in India to policies issued in India”, elucidates that the policyholder of the insurance contract irrespective of anything given in contrary in the contract or agreement shall receive the sum secured (based on equity) and can sue for any relief in any Court of competent jurisdiction addressing the issue or any question of law in connection with such policy under the aegis of s.46. This section stands as a testament to the fact that India lays priority on the rights of the policyholder and the nominees and ensures in non-infringement or at the least redress of damage experienced by
25 MOWBRAY ALBERT H, BLANCHARD RALPH H, Insurance: Its Theory and Practice in the United States,
pp.48,51,71 (5th ed.).
26 The Insurance Act, 1938, No.4, Acts of Parliament, 1938 (India).
27 The Insurance Regulatory and Development Authority Act, 1999, No. 41, Acts of Parliament, 1999 (India). 28 The Insurance Regulatory and Development Authority of India (Non-Linked Insurance Products) Regulation, 2019, IRDAI (India).
29 Indian Contract Act, 1872, No. 09, Acts of Parliament, 1872 (India).
30 The Life Insurance Corporation Act, 1956, No. 31, Acts of Parliament, 1956 (India).
31 S.46, Id at 16.
them by reinstating time and again such beneficial provisions.
11.1.1. Methods of Redress as laid out by Legislations:
At the outset, when a dispute arises in the insurance industry either at the action or inaction of the insurer, insured or any other factors, the aggrieved shall file a petition in Civil Court or the Consumer Forum32. To state the obvious, if the action is brought by the insurer at the action of the consumer, and then it shall be tried only by the Civil Court. The fora decided based on the pecuniary and territorial jurisdiction laid to each respective forum. This provides for a comprehensive mechanism for the injured to seek for redress from the competent forum.
11.2. LIFE INSURANCE LAWS
The Life Insurance Corporation Act, 1956 predominantly deals with governing life insurance policies in India. Understanding, s. 39(5) of Insurance Laws (Amendment) Act, 201533, it lays down that upon the event of nominee’s death, the amount secured upon the happening of the contingent event shall be payable to the policyholder or his heirs or legal representatives or the holder of a succession certificate, as the case may be. This provision denotes the ‘insured-friendly’ nature of the policies wherein even if the policy does not mention on this explicitly, the Amendment was brought in to protect the rights of the insured and the ones experiencing the loss at his death, which is the ultimate objective of life insurances. s.
5234 stands as yet another testament to the fact that insurance companies shall not view this industry merely as a profit earning game but rather reasonably fettered to uphold and further the rights of insured. An addition to the aforementioned Section, this very Amendment introduced s. 52A which advocates for the rights of the policyholders by stating
insurance policies, it may, after giving such opportunity to the insurer to be heard appoint an Administrator to manage the affairs of the insurer under the direction and control of the Authority. ”35 S. 105D of the Insurance Laws (Amendment) Act, 2015 is considered to be the underscore part of the entire legislation owing to the fact that it lays down the principles to be followed and factors to be taken into consideration to adjudicate on disputes arising out of this industry. The factors namely: i. The amount of disproportionate gain or unfair advantage, wherever quantifiable, made as a result of the default; ii. The amount of loss caused to the policyholders as a result of the default; and iii. The repetitive nature of default These factors specifically orients to safeguarding the rights of the insured.
However, the commonality between all the aforementioned provisions is that they denote modes of redress. They collectively stay silent on matters of regulation of the contract and the provisions formulated within. The majority of disputes arisen can be mapped back to a single point i. e, irregular or lack of regulation in formulation of insurance/life insurance contracts. It is the opinion of the author that the very inception of the contracts paves way for the disputes to arise later.
11.2.1. Regulating the formulation of Life Insurance Contracts:
The Insurance Regulatory and Development Authority of India (IRDAI) came up with a draft regulation to govern the formulation of life insurance contracts in such way that it ensures transparency and furthers bonafide intention actions amongst the parties. Before we delve into the draft, the author poses emphasis on several other aids introduced by IRDAI through time to propel awareness amongst the policyholders in order for them to take reasoned decision to enter into a contract.
35 S.52A, Id at 23.
The handbook36 that was released by IRDAI on Life Insurance serves as an embodiment of knowledge in relation to life insurance, educating the laymen by delving into subjects namely: (1) Availability of guarantee return, (2) Principle of Disclosure, (3) Paid-Up Value, (4) Surrender Value, (5) Maturity Claims, (6) Settlement Options; (7) Grievance Redress Mechanism so on and so forth. Not limited to the aforementioned, on the outset delves into the generics of insurance, types of insurance, authorities and parties involved in this industry etcetera.
11.2.1.1. Draft Regulation
According to the IRDAI circular37 dated February 14, 2024 took to consolidate all (8) the Insurance Regulatory and Development Authority Regulations through years into one being. They suggested to extend the free-look period to 30 days a standard for all the life insurance policies for the customers. They take to this, as it shall provide the customers with ample time to be thorough in their understanding. Along with this, they suggest for a helpline which connects to an expert panel provided by insurance companies during the 30 day period through which customers can call and clarify their doubts. This shall help the customers in understanding the policy dynamics directly from the insurers and clarify with arising necessity.
However, from a thorough inspection of the present legislative instruments, it is apparent that certain significant concepts such as exclusionary clauses inserted by the insured to protect themselves, which has the potential to be misused and spawn anticipated misguidance. There is a lack in standard format or a regulating body to oversee and supervise the contracts drawn up by the insurance companies, which has no scope of negotiation at the hands of the insured. This can potentially give rise to many instances and pave way creating an unsecure environment for the insured to continue with their participation. This creates a deep and alarming lacuna that needs to be filled in order to suppress the unwelcomed rise of disputes in this industry.
36 IRDAI, Handbook on Life Insurance, https://irdai.gov.in.
37 IRDAI Circular, https://irdai.gov.in/circulars
12. VINCULUM OF STANDARD FORM OF LIFE INSURANCE CONTRACTS AND
RIGHTS OF CONSUMERS
The Courts of India have witnessed catena of cases push through its doors day in and day out, disputes concerning with the rights of consumers threatened and desecrated at the hands of insurance companies. The question of fact or law or both is predominantly concerned with the terms of the contract itself and at times concomitant with the actions or inactions of the insurance company. Insurance companies holding a position of dominance in such transactions (hereon referred to as dominating parties) on its own accord violates the rights of the consumers (policyholders and the beneficiary (s)) by refraining from enforcing the contract at happening of the contingent event and despite the scrupulous obedience of the insured to the terms of the contract.
It is found to be trite, the reasoning provided by the insurance companies for any such course of action(s), that is taking shelter under the pretence of ‘exclusionary clauses’.
12.1. EXCLUSIONARY CLAUSES
The endeavour of the Court has always been to interpret the words, sentences and terms laid down in the policy in its strictest nature. When the insurer undertakes to indemnify the beneficiary at the event of death of the policyholder, the terms direct to the extent of liability of the insurer. Such provisions are given paramount importance within the entire policy. In General Assurance Society Ltd v. Chandumull Jain38, the Constitution Bench of the Supreme Court of India held that
such importance is being shed on the terms and conditions, it is of utmost necessity for the policyholders to have awareness on the scope of deficiency and exclusionary clauses which enables proper gauging of liability of the insurer. Exclusionary clauses true to its name denotes, the circumstances of exclusion ensuing the insurer to not indemnify the counterparty. An exclusionary clause in a contract is a contractual agreement between the parties entering into the contract that restricts, limits, or excludes the liability of one of the parties against the other, in anticipation of the contingencies arising out of the breach of contract. 39 The rationale behind adopting such clause is two folded.
(1) to combat any foreseeable40 and anticipated hardships that stakes as undesirable to the parties, before entering into the contract; (2) to mitigate any risk that shall arise from the transaction. However, these clauses function on the foundation that there was a consensus-ad-idem amongst the contractual parties. Thus, the legality and familiarity of exclusionary clauses triggered an urgency to balance the rights of the consumers with the protection provided to the insurer under the clauses. The existence of this clause is not premised on the sole reasoning of protecting the insurer but to only address the bare foresee-ability of certain risks. However, the core of such clauses shall not be in deviance or in contradiction to the main purpose of the contract. In occurrence of that, the former shall be held void ensuing being severed from the untainted part of the contract.
41 This practice is embodied in the Doctrine of Blue Pencil as laid down in the case of Beed District Central Coop. Bank Ltd v. State of Maharashtra42, where the Court held that
insurer. The exclusion clause is not leverage or a safeguard for the insurer, but is meant to be used in case of a contingency.43
12.2. ACHIEVEMENT OF BALANCE BETWEEN RIGHT OF CONSUMERS AND PROTECTION TO
INSURERS UNDER EXCLUSIONARY CLAUSE
12.2.1. Good faith/ Uberrimae Fidei:
As reiterated through the paper, insurance contracts including life insurance contracts are built on the notion of utmost good faith. All parties of the contract undertake to act in consonance with good faith and any action in contrary shall attract the needful consequences.44
12.2.2. Doctrine of Fairness:
Fairness plays a significant role in life insurance contracts. In view of fact, that a standard format of contract is introduced and is unilaterally formulated by one of the party (insurer/ insurance company), it is of utmost necessity that the respective party follow the principle of fairness. It can be manifested through series of actions such as doing equity by keeping terms fair, implementing full disclosure of terms, specifically the exclusionary clauses, exclusionary clauses shall not be drafted in such way that it deviates from the main purpose of the contract, inlay provisions to provide for damages to the injured so on and so forth. In George Mitchell (Chesterhall) Ltd v. Finney Lock Seeds Ltd45, Lord Denning opined that “little man would never read the exemption clauses or understand them”.
Thus, it confers on the insurer the duty to explain the terms, its ambit, scope, limitations and consequences to the laymen parties of the contract. Acceptance taken after following the aforementioned can only be deemed to be valid, and any action or inaction in contrary ensuing violation of rights attracts the strictest actions towards the liable.
12.2.3. Equal bargaining power/ Balancing the scales of convenience and equity:
Insurance Contracts (including life insurance contracts) are premised on a procedure that 43 Nihit Nagpal & Devika Mehra, Standard Form of Insurance Contracts and Consumer Rights, (India) Apr. 4, 2023. 44 V Srinivasa Pillai v. LIC of India, AIR 1977 SC 381(India); Contship Container Lines v. D K Lall, (2010) 4 SCC 256 (India); Gokal Chand (Deceased) Thr. Lrs v. Axis Bank Ltd, Civil Appeal No._ of 2022 (India).
45 George Mitchell (Chesterhall) Ltd v. Finney Lock Seeds Ltd, [1983] 2 AC 803.
fosters unequal bargaining power amongst the parties.46 The vulnerability of the policy holders and any individual in correspondence arises from unequal bargaining power. At the outset, though such arrangement seems unconscionable and unreasonable, this practice is subject to many counterchecks to ensure that justice is upheld.
12.2.4. Doctrine of Contra Proferentem:
Although a contract must always be construed according to the intention of the parties, that intention can only be ascertained from the instrument itself and all other evidence of intention is exclsuded because, when an agreement is reduced to writing, the parties thereto are bound by the terms and conditions of it.47 Thus, when by giving a bare read to the contract, it presents itself to be unambiguous, plain and direct, then there is no need to implement tools of interpretation and the provisions shall be read barely confining to its literal meaning. In, United India Insurance Company Limited v. M/s Orient Treasurers Private Limited48, the Supreme Court observed that “when the terms of the policy are clear, plain or unambiguous, and reasonably susceptible to one meaning, the Courts are bound to give effect to that meaning irrespective of the consequences.”
Scheme will be eligible to pension under Pension Regulations, 1995, and, therefore, they bear the risk of lack of clarity, if any. It is a well-known principle of construction of contract that if the terms applied by one party are unclear, an interpretation against the party is preferred.”
13. COMPARATIVE ANALYSIS OF STANDARD FORM OF CONTRACT IN
POTENTIAL JURISDICTIONS
Insurance Law exist universally transcending territories. Nonetheless, when such practices across territories are put under microscope for keen scrutiny, the minute variations in them becomes apparent to the eye. Such variations could be reasoned to stem from the history of inception, the needs of the population, policy making strategies of the concerned Government, history of disputes arisen so on and so forth. Despite, the variations that subsist, the foundational principles of insurance law universally remains the same. This chapter shall delve into 4 such countries that has over the last few millennia been a testament to the growth in Insurance Law and has been a contributor to its development.
13.1. UNITED STATES OF AMERICA
United States of America hails as one of the countries that viewed Insurance Law as an attribute of Welfare State. In Continental Life & Accident Co v. Songer50, the Arizona Court held that
Australian Mutual51, where the Court opined that “American decisions are in some matters more favourable to the insured than English decisions”. The nature of English laws governing the insurance industry will be handled in the upcoming sections of this chapter. As it is well-known, United States of America is a federal constitute i. e, the States have their own Governments and is in no way subservient or subject to the governance of the Centre. In such an arrangement, it is imperative to understand and analyse the practices fostered in every State in matters of Insurance Law and the reasoning behind any differences if arises thereupon. National Association of Insurance Commissioners (NIAC), is an organisation that standardises the regulation of insurance among the states and facilities the sharing of best practices among them. This is an instrument of the Centre.
The States comparatively possess a modest regulation albeit the Mc-Carran-Ferguson Act,
194552 which assured that states would have the primary role in regulating insurance.
13.1.1. Stowers Doctrine (Texas Law):
This doctrine was laid down in the case of G A Stowers Furniture Co v. American Indem53, also known as Texas Case. This doctrine strictly imposes the duty on the insurance companies when determining the amount of settlement, to act fairly and equitable ensuring the protection of insured against the malefic intentions and actions of the former. This doctrine states that if an insurance company rejects a reasonable offer within the limits of the policy, subsequent to which the jury declares a verdict in excess of the policy limits, then the insurance company can take no resort through the contention that the settlement offer is beyond the limits of the policy, i.e, the insurance company is liable to pay the amount despite
51 Dalgety v. Australian Mutual, (1908) Vict. L.R. 481.
52 Mc-Carran –Ferguson Act, 1945, 15 U.S.C. 101 (1945).
53 G A Stowers Furniture Co v. American Indem Co., 15 S.W. 2d 544.
the limits of the policy. The rationale behind directs back to the foundational universal principle of insurance law, Uberrima Fides. When the insurance company performs an action that is in nature of being a threat to the interests of the insured, by application of such judge-made principles, the effect can be diluted or neutralised. Such disadvantage is imposed on the insurance company in lieu of penalty or direct compensation. Albeit the limitations of policy, the insurance company loses its bargain the moment it acted in deviance to what any reasonable man would’ve done with such an offer and the action thereof is a manifest violation of principles of good faith. The principle of Stowers shall be invoked when there is lack in “ordinary care” when evaluating the claim. Ordinary care appertains to the degree of care that a prudent man would exert.
In the birth case, the jury had awarded the injured party with more than twice the amount of the policy, which the insurance company was mandated to pay. This decision overturned the High Court’s holdings, which took a narrow approach in adjudging that the insurance company was not liable and not indemnity responsibility beyond the limits of the policy. The former decision came as a remarkable change to the out-look of insurance policies and its practices till then. Further, the Doctrine of Reasonable Expectation54 is a significant part in this paradigm. This principle dictates that the policyholder’s expectation should be honoured “as long as they are objectively reasonable from the layman’s point of view, in spite of the fact that he made a painstaking study of the contract, he would have understood the limitation that defeats the expectation at issue. ”55
13.2. UNITED KINGDOM
United Kingdom predominantly views insurance as a private contractual relationship conversely to other countries that view it as an act of welfare state. They considered insurance contracts to be purely in the nature of being private contractual-ship. They opposed to viewing it as a social policy consideration. This difference arises from the notion of the English which splits itself into 2 prongs: Firstly,
54 Robert Keeton & Rahdert MC, Reasonable Expectations Revisited, Conn. Ins. Law Journal, 1998.
55 Keeton, Insurance Law Rights At Variance with Policy Provisions, 83 Harv. L. Rev. 961, 967 1970.
the insurance industry established itself as the most financial sound industry at that time, contributing to the economy of the State to the fullest and facilitating foreign investments. This cultivated hesitance in the Government to interfere and impose fetters on its functioning, fearing the risk in fall of economy. Secondly, they expressed reluctance due to the financial strain that shall ensue on the Government. Insurance law as reiterated earlier is a subject evolved through judicial precedents. However, the English Courts showed reluctance in interfering with the insurance laws. 56 Thus, under English Law the parties were free to choose the content of their contracts and such contracts were less sensitive to the potential exploitation of the insured or the survivors in matters of their bargaining strength.
57 From the aforementioned fact, it can be inferred that this law lacked regulations or was in absentia of standard set of rules that governs the drawing up of the contract. It is in fact pertinent to note that the Financial Services Authority only limited to laying down the principles of disclosure rather than the principles that govern the making of the contract itself. 58 However, following this as a fresh breath of air as security for the insured came in the form of a legislative enactment, The Unfair Terms in Consumer Contracts Legislations, 199959, an EU directive, which addressed some aspects of the imbalance in bargaining strength in consumer contracts. Later, with the fierce burgeoning in 2000, The General Insurance Standards Council (GISC)60 was established on 3rd July 2000. The aim of this council was to promote fair dealing with consumers through codes of practice.
Nonetheless, one of the laudable actions taken by the Industry is to set up Ombudsman Bureau in 1981, which heard complaints and made awards up to 1000000 pounds. If the insured was unsatisfied with the decision of the Ombudsman Bureau, he had the mechanism laid down to approach the Courts in preferring an appeal. The chief canon of the Ombudsmen is “Fair and 56 Law Commission, Insurance Law: Non-Disclosure and Breach of Warranty, Report 104, Com 8064 (1908). 57 R. Hasson, The Special Nature of the Insurance Contract, A Comparison of American and English Law of Insurance, (1984) 47 MLR 505.
58 Id at 39.
59 Unfair Terms in Consumer Contracts Regulations, 1999, 93 13 EEC (Eng.).
60 GISC, Scrutiny & Consumer Affairs Committee, Report on GISC Performance against Objectives; J Burhing, “The Impact of GISC” (2000) JBL646-53.
reasonable” dealing i. e, they were instructed to adjudged not solely on basis of the contract but also being greatly mindful of fairness that manifests in the judgment so given. Thus, even though the English Courts turned a blind eye towards governing the contract when being made and executed, the Ombudsmen ensured justice by viewing and upholding fairness in its declaration. With the enactment of Financial Services and Markets Act, 200061, this voluntary scheme was supplanted; nevertheless the financial Ombudsmen Services continued to exists and serve as a redress mechanism for the injured insured. 13. 2. 1. History of Life Insurance in United Kingdom: Life Insurance was viewed as a combination of assurance and investment which amounts to endowment title.
English law referred to life insurance as assurance in view of the fact that the insurer assures the insurer in compensating for the loss experienced by the injured. The first legislation specifically governing life insurance was Life Assurance Companies Act, 1870. The validity of the insurance companies was gauged by following certain judicial precedents. In In Re North & South Insurance Corp. Ltd62, the Court held that
The disputes arising because of violation of consumer rights creates an impression that failure in regulation rather than as an acceptable risk of investing in a free market. Thus to recapitulate, United Kingdom bases on ‘Caveat Emptor’, let the buyer beware. This is in direct contradiction to the principle of ‘Uberrima Fides’. Modern Welfare State during the 20th Century and the Welfare State come under pressure the role of both compulsory and voluntary private insurances becomes more significant as an instrument of social policy.
13.3. CANADA
In Moore v. Sweet64, the Supreme Court of Canada affirmed on the principles of equity by holding that the concept of conferring the status of irrevocable beneficiary to any individual at the unbeknownst act of ebbing in the status of another beneficiary who has more equitable interest over the insurance amount will ensue unjust. Myriad of decisions taken across the jurisdictions, it can be inferred that every decision taken is varied hinged on the facts and circumstances of each case. Albeit, principle of equity governing the paradigm and process of judgment by the Courts, it is not definitively embodied in any of the legal provisions. It is simply a factor to be mindful about while delivering judgments in such way that it gloriously and indispensably administers justice. Strict interpretation of the contracts cannot preclude justice from being administered.
This directs towards the paramountcy of equity. Any practice ensued through the insurance contract that ostensibly or directly supports unfair enrichment advantageous to the insurance company is a condemnable practice.
14. RECOMMENDATIONS
The author after analysing the present practices and regulations across the world, has enumerated the following recommendations:
1. The implementation and enforcement of present regulations should be scrupulously
supervised.
2. Awareness and sensitisation shall be furthered in all sectors and people from all walks
64 Moore v. Sweet, 2018 SCC 52 (CanLII), [2018] 3 SCR 303.
of life.
3. Strict compliance with the procedures and principles of insurance law should be
maintained by the insurers.
4. Insurance industry governed by judge-made laws should be implemented based on
dynamism.
5. Boilerplate language shall be infused while drafting clauses in the insurance contracts.
6. All the exclusionary clauses should mandatorily be explained to the consumers in
layman terms and legal provisions should be introduced for the same.
7. Enumeration of mandatory clauses in the insurance contracts should be ascertained and
clear explanation of such clauses to the consumers should be mandated.
8. Uniformity in the Standard form of Insurance Contracts should be observed and strictly
supervised by an appropriate authority as deemed fit.
15. CONCLUSION
This marks the last destination of the research, which serves as a recapitulation of all the abovediscussed canon and points. Insurance Law has experienced consistent burgeoning for the past couple of decades, across the world. Every country implemented its own system to govern, consciously or unconsciously adhering to certain universal principles which are followed by the countries almost diligently as though it is a customary practice laid down globally. With the variations in systems, the efficiency and adversity it realises also varies. Thus, every issue has to be introspected individually and a specific solution has to be orchestrated and designed to combat the same.
Limiting the research to Life Insurance Contracts, the adhesive nature of such contract has grown into something undesirable, deviating or at times alarmingly contradicting the very reason of its inception, to facilitate the protection of the injured (nominees). Awareness to the parties on the malpractices by the insurers in these industries should transition from being latent to dominant, as such practices shall further reasoned decisions at the part of the former when accepting to the conditions laid down in the contract. The tools of
interpretation used by the Courts in ascertaining the terms of the Contract that are unilaterally made stands to be fettering and hindering the very purpose of achievement. Thus, through evolution the utilisation tools and aids in interpretation, has broadened its operation to accommodate for the rights of the subservient parties and achieve the unfiltered purpose of these contracts. Every paradigm of law is under constant change owing to the dynamic nature of the society. With every new rise in dispute, the law has to accommodate for its solution, in contrary paving way to mass chaos. In similarity, the industry of insurance is no alien to this and therefore, an urgency to combat the above-discussed disputes is needed, not just as a judge-made law but also to be laid down by legislative authorities or specified delegated authorities.
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