Insurance Act and Its Function


Insurance is a contract between two parties, the insurer and the insured, in which the insurer agrees to compensate the insured for financial losses in the event of certain specified circumstances. Consideration in the form of a premium is collected by the insurance company to provide security for the purpose. Loss is paid out of the premium collected from insuring the public and the insurance company acts as a trustee to the amount so collected.


Insurance is a cooperative device where the risk of one person bear by another person in a common fund. It is a contract in the form of a financial protection policy. Monetary policy risk is the cover of an individual due to unpredictable contingency. The insurance company is the Insurer, and the policyholder is called an Insured person.


A contract wherein one party (the insurer) agrees to pay the other party (the insured) or his beneficiary a specific amount of money upon the occurrence of a specific contingency for which insurance is necessary may be used to describe insurance.

According to Disnadle- “Insurance serves as a tool for dispersing losses among numerous people.


  1. Risk sharing and risk transfer
  2. Co-operative device
  3. Risk assessment in advance
  4. Compensation at the occurrence of contingency
  5. Amount of payment
  6. Huge number of insured persons


  1. Certainty of payment for the risk of loss
  2. Protection against the probable chances of loss
  3. Risk sharing
  4. Capital to the society
  5. Encourages saving and is an investment tool

Evolution of life insurance

The first time life insurance policy was issued on 18th June 1583, on the life of William Gibbons for 12 months. After life insurance policy formed societies began to issue life insurance. Among such societies are-

  1. The Amicable Society (1705)
  2. The Equitable Life Assurance Society (1762)
  3. The Westminster Society (1792)

Life insurance in India

Life Insurance came to India from the UK. The first Life insurance Company in India was Oriental Life Insurance Company in 1818. In 1823 it was followed by Bombay Life Assurance Company.

Nationalization of Life Insurance business-

To spread insurance in rural areas and to achieve the objectives of the socialistic pattern of Society, the Government of India decided to nationalize the life insurance business.

Evolution or Historical Development:

The earliest type of insurance is marine insurance, which is followed by fire and life insurance. The origins of insurance can be found in prehistoric times. First, the Aryans conducted loss of profit insurance through their village cooperatives. According to the Code of Manu, Indian traders with Sri Lanka, Egypt, and Greece engaged in the practice of marine insurance. By 1907, the Indian Mercantile the first non-life Insurance Company was established with Indian capital. In 1919 five offices, the New India, Vulcan Jupiter, British India general, and Universal were established for the transaction of general insurance business. In 1950, the Planning Commission was set up to formulate plans for successive five years. India required capital so the Planning Commission encouraged people to take Insurance. The Insurance Amendment Act, of 1950 was passed in the year 1950.  In 1972, the General Insurance Business (Nationalization) Act was passed with its four-subsidiary namely- National Insurance Company Ltd. with its head office at Calcutta.

Marine Insurance in India:

In earlier days travelers by sea and land were exposed to the risk of losing their vessels because of piracy on the open sea. To cover such types of dangers in the sea the first company known as the Sun Insurance Office Ltd. was set up in Calcutta in 1710. It was followed by different insurance companies in several parts of the world in the field of marine insurance.

Fire Insurance in India:

Fire Insurance was established at the beginning of the 16th Century and it gained momentum after the great fire in England in 1666. About 85% of houses were destroyed. Property worth Rs. 10 Crore was destroyed. In India, the oldest Fire Insurance companies were Sun Insurance Office Calcutta (1710), London Assurance, and Royal Exchange Assurance (1720). At present, the Fire insurance business is in the hands of subsidiaries of General Insurance Corporation of India.

Classification from a risk point of view –

Personal Insurance (Risk of death or disability)

Property Insurance (Housebreaking, theft)

Liability Insurance (Risk of litigation)

Fidelity Insurance (Risk of theft committed by servant or fraud committed by employees)

  1. Life insurance-

The contract between an insurer and insured in which the insurer on payment of consideration agrees to share the risk of the insured person on the happening of some uncertain event.

Fundamental principles of Life insurance contract-

Essentials of valid contract under section 10 of Indian Contract Act 1872

Principles of utmost good faith or uberrima fide

Principle of insurable interest

Fire Insurance –

It is a contract in which the insurer in consideration agrees to indemnify the insured against the losses suffered by fire.

Fundamental principles of fire insurance- Same as of Life Insurance.

  1. Marine Insurance-

It is a contract in which the insurer in consideration agrees to indemnify the insured against losses arising due to perils of sea.

Fundamental principles of marine insurance –same as of life insurance

Social Insurance –

Social insurance provides protection to the weaker section of society.

For Example- Pension plans, Disability benefits Unemployment benefits, Sickness insurance, Industrial insurance.

Miscellaneous Insurance-

Motor vehicle Insurance

Burglary Insurance

Theft Insurance

Fidelity Insurance


Premium is a consideration which is important in the contract of Insurance.

According to Justice Lawrence- A price paid adequate to the risk is called a Premium.

Modes of payment of premium- Premium is to be paid in cash. The burden is on the insured that he has paid the premium

Case- London & Lancashire LIC v. Flaming

Held- It was held that the burden of proving that the premium has been paid in cash lies on the insured. The premium can be made in the form of cash or cheque a promissory note or any other valuable thing.

Days of Grace: The grace period is the period that if any person forgets to pay the premium then the insurance company will give the next date to pay the premium. This period is given to prevent a lapse of policy.

Importance of grace period – If payment is made during the grace period, that payment is considered to be paid on the due date. The grace period is mentioned in the renewal notice issued by the insurance company.

Forfeiture- If still on the grace period the premium is not paid then the policy will be forfeited to the insurance company the insurance company will be discharged of its liability and no refund will be made

Relief against Forfeiture-

  • o Days of grace given by the insurance company again even after already given grace period.
  • o Non-forfeiture clause inserted. It will be treated as a paid-up policy.
  • o Renewal of policy on payment of fine and remaining installments

Case-            LIC v. Bharathi (AIR 1989 AP 39)

Held- That for the revival of a lapsed policy if sorting requirements are prescribed the insurer cannot impose new conditions.

The return of Premium- Over insurance (buy fault more premium is paid ) Express term (where insurance company expressly mentions that premium is to be returned) Liquidation of company.

Section 84 of the Marine Insurance Act 1963 lays down certain conditions in which premiums may be returned-

  • o No fraud or illegality on the part of the insured
  • o When the consideration is apportionable (divisible into parts) means where premium is to be paid in installments
  • o When the contract is void or avoided by the Insurance Company.
  • o Where the subject matter which is insured is not imperiled (not in danger of being lost)

Fraud on the insurer’s part- The Insurance Company wrongfully entered into a contract that is not enforceable by law.

Remedy- In case of fraud by the insurer the insured person can refuse to pay further premium

Under section 65 of the Indian Contract Act 1872 – the insured person can claim a refund of the premium which he has already paid.

Fraud on the part of the insured-

  • o C may refuse to accept further premium and initiate for repudiation of the contract.
  • o Apply to Court for cancellation of the contract.
  • o If the policy has matured in the case of life insurance the sum assured is to be claimed by the insured and if the sum assured is not given by the insurance company and if the insured approaches the court then the insurance company can take the defense of fraud
  • o Declaratory decree to declare that fraud has been committed by the insured.

You can read more articles on our website-

2 thoughts on “Insurance Act and Its Function”

  1. Pingback: Special Protection to Prisoners Under Human Rights

  2. Pingback: Maintenance for women, child and parents under criminal

Leave a Comment

Your email address will not be published. Required fields are marked *

Scroll to Top