INTERPRETATION OF RELEVANT CASE LAWS

Reliance Life Insurance v. Rekhaben Nareshbhai Rathod is a very important case as regards life
insurance is concerned. This case relates to one of the basic principle as regards insurance law is
concerned. The facts of this case states that Mr Rathod, had bought a life insurance from
Reliance Life Insurance in the month of Septeember in the year 2009. Simultaneously, he had
also taken a life insurance policy from Max New York Life Insurance Co. Ltd. in the month of
July,2009. After his death, her spouse had made a claim under the policy in the month of
February 2010. Reliance was informed about the previous policy while it was still viewing its
decision regarding the claim. Reliance rejected the claim in the end because the insured had not
informed about its previous policy. The case did went up to the Supreme Court in appeal. From
the judgment given in this case, it can be interpreted that as regards during formation of a life
insurance contract, giving an incorrect answer or non-revelation of important facts in the
proposal form leads to cancellation of policy since it goes against the principle of “good faith.”

In Branch Manager,Bajaj Allianz Life Insurance Company Ltd. and Ors. v Dalbir Kaur, it was
noted in this case anyone who wants life insurance must disclose all important facts. The
Supreme Court said that proposal form do specifically mention about pre-existing conditions that
help a insurer in the evaluation of the risk. In this case, proposer had not revealed that he was
having a pre-existing illness. The court in this case has set aside NCDRC judement as it had not
laid down the correct principle of law.

In the case of LIC v Brazinha, the LIC had received a proposal for doing an insurance along with
the required documents as well as the premium amount.The amount therein was acknowledged
and was kept in suspense for the completion of the inspection of the papers before making a
decision to accept the proposal.In the meantime, the proposer passed away and his spouse made
a claim for the sum assured. From the judgement given by the court in this case , it could be
interpreted that the mere acceptance of the amount and insurance receipt does not amount to
acceptance of the proposal.

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In the case of LIC v Kamalamma, the proposal along with the first premium amount was paid
and a receipt for the same was also issued by the authorized person on 30 th of December,1976,
The proposer died on the 1st of January,1977. The court stated that the contract had taken place
and decreed the claim holding that the Standing order of 1960 could not have any effect on the
efficiency of the contract. However, the judgement given in this case cannot be complied with in
the formation of Life Insurance contracts. The same is also not in consonance with the rulings
given by the Supreme Court.

In LIC v Komalavalli, a proposal was sent for life insurance of Rs.50,000 on 27.12.1960 as well
as the report of the medical examiner and also two cheques was advanced towards the issue of
first premium.The cheques were also encashed by the LIC.The proposer died on the very next
month after the encashment and the spouse of the proposer claimed the required sum assured by
the policy. The D.M. said that the proposal was not yet accepted as the terms of acceptance was
still not fixed as well sas the premium amount was not calculated.According to the Standing
order 1960, the D.M was the competent authority to underwrite this proposal and the DM had
still not accepted the proposal. The Supreme court reversing the decision of the High court stated
that mere receipt and retention of premium until after the death of the applicant or the mere
preparation of the policy document is not acceptance. It must be signified by some act or acts
agreed on by the parties or from which the law raises a presumption of acceptance. The life
insurance contract can be formed only when the party to whom an offer is made accepts the same
unconditionally and communicates his acceptance to the person making the offer. The final
acceptance is that of the assured or insurer however depends simply on the way on the way in
which negotiations for an insurance have progressed.

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 GENERAL PROCEDURE FOR LIFE INSURANCE

A Life Insurance Contract is like a special arrangement where certain specific requirements are
to be made to ensure the validity of the document. It is a kind of Contract where a person is
basically making an investment in the form of insurance For doing so, in the first place a
proposal form is filled up.

It is a kind of first step in the formation of a life insurance contract. The proposal form contains
such questions which are asked so as to determine what is the amount of risk involved in the
event that is to be insured. It is the duty of the insured to answer all the questions correctly, any
deviance regarding which may lead to rejection of the proposal. Name, address, nationality,
occupation etc. are among the few details that are asked for. The statements made by the
applicant in the proposal form forms the basis of the insurance contract.

As regards the submission of documents are concerned, Age proof is very essential in an
insurance contract as it validates the that the applicant is a major and it also helps in determining
the premium rates. The general principle is that the more is the age, the more will be the
premium concerned.

A medical test of the applicant is also generally conducted. However, there are certain situations
where it may not be necessary for the applicant to get the medical examination done. Such
circumstances may arise in the case of where the proposer is a commissioned officer of Indian
Army and is below the age of 45, in case of reassurance, etc.

There-after all the documents are duly verified. Then basically a premium notice is issued to the
proposer. Once the proponent pays the premium the insurer company proceeds with the further
formalities.Once the premium is paid the proposal is registered and there-after registration a
registration number is also issued.

It is important to note that if the proposal is accepted, a letter of acceptance is sent to the
proponent, who now becomes the insured.And if the proposal is rejected, a regret letter is also to
be forwarded to the applicant.

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All those applicants whose proposals are accepted and to whom the acceptance is set-forth, a leaf
of policy, containing all the terms and conditions of the policy, bearing seal and signature of
competent authority is duly issued to the Insured.

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ESSENTIAL ELEMENTS IN THE FORMATION OF A LIFE INSURANCE
CONTRACT

The formation of a Life Insurance contract requires the compliance of certain essential elements.
There are several principles that have to be kept in mind regarding the same. Section 2(h) and
section 10 of the Indian contract act,1872 are the basic general principles that have to be
followed. Section 2(h) states that the contract is an agreement enforceable by law whereas
section 10 states what agreements are contacts, in which there are several elements stated which
the researcher will discuss in further detail. It is also important to note that there should be an
insurable interest present in a Life Insurance Contract as well as the principle of Uberimma Fides
has to be taken care of.

Now as regards competency of the insured is concerned, every person eligible under Section 11
of the Indian Contract Act, 1872, are also eligible to enter into a Life Insurance contract.
However a minor cannot enter into a life insurance contract. The proof of the proposer’s age is
very essential in life insurance contracts for two basic reasons i.e. for determining the validity of
the contract and also for determining the premium rate.

Free Consent is yet another important essential.Section 13 and Section 14 of the contract act
supports the element of Free Consent. In the case of Kulta Ammal v Oriental Government
Security Life Assurance Co. Ltd., it is essential to prove the fact that the proposer had knowledge
so as to what was stated in the proposal form.

There should also be a lawful consideration.The payment of the first premium is the
consideration for the insurer company and it is the insurer’s duty to reimburse the assured from
the specified risk in the policy, this is the consideration to the assured. The second and third
premiums cannot be alone said to be a part of calculation since the insurer cannot force the
insured to pay them. In case of default of payment of subsequent premiums, the insured will be
freed of the liability of paying the guaranteed amount but still remains bound in the policy due to
various subsidiary guarantees such as that of the the surrender value.

Lawful object is also one of the essentials An insurance contract that is without an insurable
benefit is just a wagering deal and the same is void.

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Insurable Interest is another essential element that must be present. That what distinguishes an
insurance contract from that of a wagering contract is that the insured must have an insurable
interest in the subject matter of the insurance, meaning the proposer must have an interest in the
carrying on of the insured subject and could suffer a loss if the continuance is hindered. In
insurance contracts the financial or pecuniary interest is that which is basically protected. The
insured must have a relationship with the insurance subject in which he profits from his health
and well-being and is detrimented by its loss or damage. However, The Insurance Act 1938 gives
no definition of insurable interest. However, judgements made by of various courts have
determined the conditions in which insurable interest is allowed to exist. A person however is
held to have an unlimited insurable interest in his/her own life.

The principle of utmost good faith is another essential element.The assured knows about all his
personal information and the insurer cannot recognize them, unless they are revealed by the
insured.Therefore, it is the proposer’s most important duty to reveal the true facts to the insurer
and is referred to as the‟ Principle of Utmost Good Faith.” The assumption is that, in the event of
failure to disclose material facts, the contract may be considered invalid from the initial itself. In
Inderpreet Singh v. Bajaj Allianz Life Insurance Company, the appeal was preferred by the
appellants under section 5 of the Consumer Protection Act, 1986 against the order passed by the
District First Appeal No.292 of 2013 Consumer Disputes Redressal Forum, Hoshiarpur vide
which the complaint filed by the complainants was dismissed. The complainants were entitled to
sum assured of Rs.1,20,000/-. The complainant filed the claim and submitted all the documents
as demanded. Since the complaint of the complainants were dismissed, they had filed the present
appeal. However, the rejection was upheld as the assured very well knew that that he was
suffering from such diseases which were quite serious in nature and without disclosing these
facts, he got his life insurance policy. He had violated the basic principle of utmost good faith or
Uberrima Fides.

In giving this decision the court cited the judgements from the Supreme Court in Life insurance
Corporation of India & amp; Ors. v. Asha Goel (Smt.) & Anr, having held that insurance
contracts, including life insurance contracts, are Uberrima fides contracts which imply contracts
based on the utmost good faith, therefore all the latter material facts must be disclosed and the
concealment of any material data or the disclosure of any false or erroneous data in the life

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insurance contract is an infringement. Disguise of any material certainty entitles the insurer to
deny the benefits of the agreement to the insured.

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INTRODUCTION

Life insurance as such has not been defined in any of the statutes. However, it may be said to be
a contract wherein the insurer which has to be a registered insurance company, may in return for
the consideration of certain sum of money that is premium, which may be in lump-sum or in any
other payments which are periodical in nature, in return of such consideration agrees to pay to
the assured, or to the person for whose benefit the policy is taken, a pre-determined sum of
money on the happening of a particular event that is contingent on the duration of human life. In
the case Dalby v London and India Life Assurance Company, it was stated that life insurance is
a kind of a contract to pay a certain sum of money on the demise of a person in consideration of
the due payment of a certain annuity for his life calculated according to the probable duration of
life.
Life insurance contract has various kinds of advantages. Life Insurance protects the potential
estate of the policy holder as distinguished from the acquired estate. For the purposes of
formation of a Life Insurance Contract, there are various essential elements that have to be kept
in mind that has been discussed by the researcher in the following chapter.As well as for the
purposes of insurance,a insured he has to be medically examined as well. The researcher has also
mentioned the general procedure that is generally undertaken in the formation of a Life Insurance
Contract. There is yet another person who takes interest in the maintenance of the health of the
assured.By life insurance, if a person prematurely dies, his family need not depend on the charity
of relatives or of the government.It was said by Huebner that “A life insurance policy is a
callable sinking-fund bond, issued upon the life of the policy holder. It will be paid promptly
if providence sees it fit to call away the policy holder. In case there is no call the bond will be
paid through the accumulation of its sinking-fund provision, or reserve at the time of
maturity.” The researcher has also interpreted the formation of Life Insurace contracts with
certain case laws.

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Aims and Objectives

1. To find out the important essentials in the formation of a Life Insurance Contract.

2.To find out the main objective of the formation of life insurance contract.

Hypotheses

1. Existence of Insurable Interest and duty of utmost good faith are important essentials in the
formation of life insurance contract.

2. The main objective of formation of Life Insurance Contract is to protect against financial
losses resulting from loss of Human life.

Research Methodology

The researcher will follow doctrinal method of research for the completion of this project at
hand.

Sources of data Collection

The researcher has used both secondary sources of data for the completion of the project.

Limitation Of Study

The researcher is having limited resources and time for the project.

Scope of Study

This project will help in having a clear understanding of the formation of life insurance contracts.

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 CONCLUSION AND RECOMMENDATIONS

Life insurance sector in India has witnessed massive changes including the entry of a number of
life insurance companies that has led to an increase in the competition in the Indian Life
insurance sector. Such increased competition has led the life insurance industry to improve its
underwriting as well as risk management abilities that has greatly provided benefit to the
policyholders. Moreover, customers today have also become more vigilant in their need of risk
mitigation and also greater security for future purpose such as that of retirement plans.

The Life Insurance Corporation of India (LIC) is the only public sector player in the life
insurance sector. ICICI Prudential, Bajaj Allianz and SBI Life etc are the private players in the
insurance sector. Some banks have also started entering alliances with insurance companies to
develop or underwrite insurance products rather than merely distribute them. The new liberal
policies permitting the entry of private players and the reform initiatives undertaken by the
Insurance Regulatory and Development Authority (IRDA) have helped the industry to evolve at
a faster pace and emerge as one of the fastest growing industries in the country. People's
perception of insurance has also changed from an instrument of saving to a risk-hedging tool.
This change has been facilitated by the emergence of a range of new insurance products suiting
diverse needs of consumers. The initial years of liberalization continued to see the Life Insurance
Corporation of India (LIC) retaining a dominant position in the market. However, as time went
by, private companies like ICICI Prudential Life and Birla Sun Life, which were among the first
batch of entrants, witnessed great success as well.The researcher in this project has duly revealed
so as to how a contract of insurance is formed between an insurer and insured as well.

However, researcher would like give recommendations regarding the same. The terms and
conditions in the formation of a life insurance contract should be made negotiable so that the
insured also have a say and is benefitted from it. And, secondly the researcher would like to say
that the rule of contra proferentum should be done away with as ambiguity should not always
turn against the offeror but should differ on case to case basis.

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