1. Insurance and Risk Management Insurance Contracts Insurance is a business of effecting contracts. What is a contract? As per Indian Contract Act 1872, a contract is an “agreement enforceable at law”. The following are essential to make it enforceable: There must be 1. at least two parties 2. an offer and acceptance 3. consideration 4. free consent 5. competency to contract 6. lawful objective Please compare insurance contract to the above features

2. Insurance and Risk Management Insurance Contracts Insurance contract is a special contract– why? An insurance contract is 1.technical 2.conditional 3.unilateral 4.aleatory 5.indemnity subject to certain conditions 6.utmost good faith

3. Insurance and Risk Management Insurance Contracts Proposal is the basis of insurance contract It is the format in which the insurer seeks the desired in formation form the person seeking insurance cover. The proposal ends with a “declaration” by the applicant for insurance. It contains the following salient elements: 1. Contents of the proposal are true in every particular 2. If they are not true, the contract becomes null and void and premiums paid may be forfeited Policy is issued subject to the contents of the proposal

4. Insurance and Risk Management Insurance Contracts Representation, warranties and condition and their effects Representation is a statement made during negotiations. Actually representation makes the other party to enter in to the contract. It must be true. Otherwise the contract becomes voidable at the option of the other party. When a condition is incorporated in the statement that the details furnished there in are true in every aspect it becomes a “warranty” A representation needs to be only substantially correct. It need not be strictly and literally true. But in a warranty it should be strictly and literally true. A mere misrepresentation can make the contract invalid

5. Insurance and Risk Management Insurance Contracts Indisputability Clause Section 45 of the Insurance Act states that no policy of life insurance, shall, after the expiry of two years from the date on which it was effected, be called in question by the insurer on the grounds of misrepresentation, unless the insurer can prove that 1. such a statement was on a material factor 2. the policy holder knew that it was a false statement and 3. he suppressed facts which were material to disclose This is called as “indisputability clause” and is applicable only for life insurance. Why it is not applicable for other insurances? General insurance policies are normally renewable every year and hence do not come under the purview of this section. Therefore it is clear that a life policy can be repudiated within two years. If it is after two years, the above three conditions to be satisfied.

6. Insurance and Risk Management Insurance Contracts Effected date The date from which the proposal is accepted and risk commences. Insurance and a wager– compared What is a wager? Wager is a contract between two parties, each of whom stands to win or lose something of value according to the result of some future event. As per section 30 of Indian Contract Act, such contracts are void. Can you compare the two types of contracts? What is common and what are the differences? Certain terms to be understood in insurance contracts Insurable interest Subject matter The event Ownership, possession, contractual relationship Time for insurable interest (when it should be exist)

7. Insurance and Risk Management Insurance Contracts Legal and contractual provisions The operative clause printed in any insurance policy will be generally worded as under: “Now this policy witnesseth that in consideration of the promises and on consideration that the premiums be duly paid to the company as stipulated for in the schedule, the company will pay or provide the benefits specified in the schedule in the event and circumstances therein described, but subject to the terms and conditions stipulated in the policy”. Life policies are therefore called as conditional contracts The conditions are drafted by the companies. The insured does not have a say in this. IRDA therefore says that the conditions should be simple worded and Jargons to be avoided.

8. Insurance and Risk Management Insurance Contracts Legal and contractual provisions Premiums payable– days of grace Normal time allowed is one calendar month or 30 days from due date. If the mode of payment is monthly, 15 days are allowed. If death occurs during the grace period, but before payment of premium, the claim, if otherwise ok will be allowed. Lapse of a policy due to non payment of premium If the premium is not paid even before the grace period is over, the policy will lapse from the due date and thereafter the contract will not be binding on the company. As per section 50 of the Insurance Act, the insurance companies have an obligation to incorporate the options available to the policy holders in case of lapse of policies for revival. The range of options may differ between companies, but should be clearly incorporated in the policy document. Insurance and Risk Management Insurance Contracts Legal and contractual provisions

9. Insurance and Risk Management Insurance Contracts Legal and contractual provisions Non-forfeiture options—surrender value What is meant by forfeiture? Life insurance is working on the principle of averages. The Insurance Act recognises the difficulties of insurance companies, when the premiums are stopped by policy holders. At the same time to protect the interests of policy holders, under section 113, stipulates that a minimum surrender value should beprovided for in the terms and conditions, if the premiums have been paid for at least three years. The surrender value can be calculated each year and informed to the policy holder or the formula for calculating the same can be incorporated in the terms and conditions. To-day’s trend is that companies provide surrender value even from the end of the second year.

10. Insurance and Risk Management Insurance Contracts Legal and contractual provisions Paid up values Some times, the policy holder may not be in a position to continue to pay further premiums on a policy, but at the same time may not like to surrender it. Section 113 of the Act permits the policy to be kept as “paid up” up to the amount of premiums so far paid. That amount will be the reduced sum assured which will be paid on the happening of the event assured. The formula for calculation of paid up value is: No of premiums paid X sum assured No of premiums payable If the policy is with profit policy, further bonuses will not be added. A minimum limit can be fixed by the insurer for such paid up value. If the paid up value falls below this, it will qualify only for surrender.

11. Insurance and Risk Management Insurance Contracts Legal and contractual provisions Other options 1.Automatic Premium Loan 2.Extended Term Assurance What ever the option is made available, as per IRDA, the options should be properly explained to the policy holders to enable them make informed decisions. Loans and foreclosure Normally insurers provide loans up to 90% of the surrender value to policy holders subject to certain conditions. What is foreclosure? When a loan is given and if the principal and interest is not repaid and if the outstanding in the loan account becomes equal to the surrender value, the insurer informs the policy holder and closes the loan and the policy with the surrender value and pays whatever balance is available to the policy holder.

12. Insurance and Risk Management Insurance Contracts Legal and contractual provisions Suicide Suicide implies “ a will full and intentional act on the part of self destroyer”. In the early days risk of suicide was totally excluded by the insurers. Now, in India it is excluded only during the first year. Accident benefit Offered as a rider offering additional amount of insurance in case of death due to accident. Conditions to be satisfied are: 1.Accident should be direct cause of death 2.Death takes place within 180 days of the accident 3.The benefit ceases after a certain age. Disability benefits are also awarded as rider.

13. Insurance and Risk Management Insurance Contracts Legal and contractual provisions Age admission Alterations in the policy, after issue Duplicate of policies Insurance called as “unbundled contract” Cool-off period

14. Insurance and Risk Management Insurance Contracts Legal and contractual provisions Life insurance is recognised as economic protection and an Investment. It is an actionable claim. It is treated as a property. Transfer of interest in a property is governed by Transfer of Property Act 1882. Transfer of interest in Life policies was also governed by the same Act, until the enactment of Insurance Act in 1938. Now section 38 governs transfer of interest in Life policies, which is called as “assignment”. An assignment is defined as “a transfer of right, title and interest on the policy.

15. Insurance and Risk Management Insurance Contracts Legal and contractual provisions Assignment -- to be signed by the transferor or his duly appointed agent -- can be made by an endorsement on the policy or be a separate deed -- If it is by a separate deed, needs to be stamped -- the wordings should indicate assignment -- to be attested at least by one witness -- may be with or without consideration Other important aspects of assignment Who can make assignment? Notice of assignment Rights of assignee Assignment to several persons Absolute assignment and conditional assignment Right to surrender, raise a loan Minor assignee Effect of assignment on nomination

16. Insurance and Risk Management Insurance Contracts Legal and contractual provisions Nomination Married Women’s property Act 1874.