LEGAL ASPECTS OF INSURANCE CONTRACT

ESSENTIALS OF GENERAL CONTRACT (SECTION 10) OF INDIAN CONTRACT

ACT 1872

The law of contract in India is contained in the Indian Contract Act

1872, According to section 2(h) of the Indian Contract Act 1872, “An
agreement enforceable by law is a contract”
A contract, therefore, is an agreement the object of which is to create legal
obligation i.e. a duty enforceable by law.
Thus there are two main elements
I        An agreement
II      Legal obligation i.e a duty enforceable by law
An agreement comes into existence when one party makes a proposal
or offer to the other party and that other party signifies his ascent (i.e.
gives his acceptance)
An agreement to become a contract must give rise to a legal obligation i.e. ,
a duty enforceable by law.
To be enforceable by law, an agreement must possess the essential
elements of a valid contract as contained in section 10.
Essentials of a valid contract
In order to become a valid contract, an agreement must have the
following essentials elements:
1.   Offer and Acceptance
There must be a ‘lawful offer’ and a ;lawful acceptance’ of the offer.
There must be two parties to an agreement, one making the offer and the
other accepting it. The offer must be definite, unambiguous and certain. It
must be communicated. Acceptance must be absolute and unqualified i.e it
should not be conditional. It must be communicated to the offeror.
2.   Intention to create legal relationship
There must be an intention among the parties that the agreement should
be attached by legal consequences and create legal obligations. Agreement
of a social or domestic nature does not involve any legal obligations so they
are not a contract.
3.   Lawful consideration
Consideration means something in return. An agreement is enforceable
only when each of the parties to it gives  something and get something
consideration must be ‘something  of value’. It may be past, present or
future.
4.   Capacity of parties
The parties to an agreement must be competent to contract. Parties
must be of the age of majority and of sound mind and must not be
disqualified form contracting by any law to which they are subject (Section
11).  If any of the parties to the agreement suffers a from minority, lunacy,
idiocy, drunkenness, etc., the agreement is not enforceable     
5.   Free consent
One of the essentials of the valid contract is that there should be
consensus ad idem, i.e. they agree upon the same thing in the same sense at
the same time and that their consent is free and real.
Coercion is said to be free whom it is not caused by :-
(i)      Coercion
(ii)     Under influence
(iii)    Misrepresentation
(iv)    Fraud
(v)     Mistake
When there is no consent, there is no contract.
6.   Lawful object
The object of the contract must be lawful. It should not be illegal,
immoral or opposed to public policy. If the object of the agreement is
performance of unlawful act, the agreement is unenforceable, for example,
An agreement to commit an assault or to beat a man has been held unlawful
and void.
7.   Writing and registration
According to the Indian Contract Act, a contract may be oral or in
writing. But in certain special cases, it lays down that the agreement, to be
valid, must be in writing or/and registered. For example, it requires that an
agreement to pay a time barred debt must be in writing and an agreement
to make a gift for natural love and affection must be in writing and
registered.
8.   Certainty
The terms of agreement must be certain and not vague, indefinite or
ambiguous. For example, A, agree to sell B” a hundred tons of oil.” There is
nothing whatever to show what kind of oil was intended, the agreement is
void for uncertainty.
9.   Possibility of performance
A contract must be capable of performance. An agreement to do an act
impossible is itself is void.
10. Agreement not declared void
The agreement must not be have been expressly declared void by any law
in force in the country. (Section 24-30 and Section 56).
Kind of Contracts
Contract may be classified on the following basis.
Classification according to enforceability:
From the point of view of enforceability, a contract may be
1    Valid Contract
2    Voidable Contract
3    Void Contract
4    Unforceable contract
5    Illegal or unlawful contract
1.   Valid contract : An agreement that fulfills all the essentials
requisites as per the requirement of law is a valid contract.
2.   Voidable contract : An agreement which is enforceable by law at
the option of one or more of the parties thereto, but not at the option
of the option of the other or others, is voidable contract. When a
element of free consent is absent, a contract is said to be voidable
contract. For example, “C’ threatens to shoot ‘B’, if he does not let
out his house to him. ‘B” agree to let out his house to ‘C’. The consent
of ‘B’ is not free, so it is voidable at the option of ‘B’.
 3.   Void contract: Void contract means which is not enforceable by
law. A contract is not void from its beginning and it is valid and
binding on the parties when originally entered but may later on
become void. For example, A agrees to sell B 100 bags of wheat at Rs.
650 per bag. Before delivery, the government bans private trading in
wheat, the contract becomes void.
4.   Unenforceable contract: Contracts, which cannot be enforced
in a court of law because of some technical defects such as absence of
writing or because the remedy has become time barred are called
unenforceable contracts.
5.   Illegal or unlawful contract: An agreement is illegal   and void
it object or consideration: -
(i)   is forbidden by law; or
(ii)  is of such a nature that, if permitted, it would defect the
provisions of any law; or
(iii) is fraudulent; or
(iv) involves or implies injury to the person or property of another; or
(v)  the court regards it as a immoral, or opposed to public policy.
Classification according to the mode of creation
It can be divided into
1.   Express contract
2.   Implied contract
3.   Constructive or quasi contract
1.   Express contract : Where both the offer and acceptance are
made in words spoken or written, it is an express contract.
2.   Implied contract : Where both the offer and acceptance are
made by acts and conduct of the parties and not by words, it is an
implied contract. For example, ‘P’ a coolie in uniform takes up the
luggage of ‘Q’ to be carried out of the railway station without being
asked by ‘Q’ and ‘Q’ allows him to do so , then the law implies that
‘Q’ agree to pay for the services of ‘P’ and there is an implied
contract.
 3.   Constructive or quasi contracts : It is based on the principle
of justice that “a person shall not be allowed to enrich himself un
justify at the expenses of another”. For example, if ‘A’ a salesman,
leaves goods at ‘B’ house by mistake and ‘B’ treat the goods as his
own, then he is bound to pay for the goods.
Classification on the basis of extent of execution
From the point of view if the extent of execution a contract may be
executed or executory.
1.   Executed contract : An executed contract is one in which both
the parties have executed /discharge their respective obligation, i.e.,
completely performed their share of obligation. For example, ‘A’
agrees to sell his house to’B’ for Rs. 15 Lacs and accordingly transfer
the house to ‘B’ on getting the agreed amount from ’B’. The contract
is a duly executed contract.
2.   Executory contract : Executory contract is a contract in which
both the parties are yet to execute their respective obligations.
Executory contracts are also known as Bilateral contracts.
ESSENTIAL FEATURES OF INSURANCE CONTRACTS
Like any other contract, insurance contract are also governed by the
provisions of the law of contract as laid down in The Indian Contract Act,
1872. Therefore, they have to fulfill the essential features of a valid
contract
The essentials of a valid contract have been discussed earlier. 
LIFE INSURANCE CORPORATION ACT, 1956
The life  insurance corporation Act, 1956 is an act
(I)  to provide for the nationalisation of life insurance business in India
(II) to provide for the regulation and control of the business of the
Corporation.
As per the act, 245 private insurance companies, provident societies,
etc., were amalgamated and the life insurance corporation of India was
formed and has since then grown up to be the largest insurance company in
India.
Some of the important provisions are as follows —
Short title and commencement —
 (1)     This Act maybe called the Life Insurance Corporation Act, 1956
(2)     It shall come into force on such date as the Central Government
may, by Notifications in the Official Gazette, appoint.
            Important Definitions: Sec 2 of the act contains the
definitions adopted under the act. Some of the important definitions in this
act, unless the context otherwise requires are:
(1)     "Appointed day,” means the date on which the Corporation is
established
          under Section 3;
(2)     "Composite insurer "means an insurer carrying on in addition
to       controlled business any other kind of insurance business;
(3)     "Controlled business" means—
(i) In the case of any insurer specified in sub-clause (a) or sub-clause (b)
of clause (9) of section 2 of the Insurance Act and carrying on life
insurance business
(a)        all his business, if he carries on no other class of insurance
business;
(b)        all the business appertaining to his life insurance business, if
he carries on any other class of insurance business also;
(c)        all his business if his certificate of registration under the
Insurance Act in respect of general insurance business stands
wholly cancelled for a period of more than six months on the
19th day of January, 1956.
(ii)  in the case of any other insurer specified in clause (9) ofsection2 of
the Insurance Act and carrying on life insurance business—
(a)        all his business in India, if he carries on no other class of
insurance business in India;
(b)        all the business appertaining to his life insurance business in
India, if he carries on any other class of insurance business also
in India;
(c)        all his business in India if he certificate of registration under
the Insurance Act in  respect of general insurance business in
India stands wholly cancelled for a period of more than six
months on the 19th day of January, 1956.
 (4)   "Corporation" means the Life Insurance Corporation of India
established under section 3;
(5) "Insurance Act” means the Insurance Act, 1938(4of1938);
 
(6)  "Insurer" means an insurer as defined in the Insurance Act who
carries on life insurance business in India and includes the Government
and a provident society as defined in section65 of the Insurance Act;
(7)  "Member" means a member of the Corporation;
(8) "Prescribed" means prescribed by rules made under this Act;
(9) "Tribunal" means a Tribunal constituted under section17 and having
jurisdiction in respect of any matter under the rules made under this
Act;
(10)   All other words and expressions used herein but not defined and
defined in the Insurance Act shall have the meanings respectively
assigned to them in that Act.
Establishment and incorporation of Life Insurance
Corporation of India —
Sec 3 of the act provides that
(1)     With effect from such date as the Central Government may, by
notification in the Official Gazette, appoint, there shall be established
a Corporation called the Life Insurance Corporation of India.
(2)     The Corporation shall be a body corporate having perpetual
succession and a common seal with power subject to the provisions of
this Act, to acquire, hold and dispose of property, and may by its
name sue and be sued.
Constitution of the Corporation—
According to sec 4 of the Act:
(1)     The Corporation shall consist of such number of persons not
exceeding 2 as the Central Government may think fit to appoint
thereto and one of them shall be appointed by the Central
Government to be the Chairman there of.
(2)     Before appointing a person to be a member, the Central Government
shall satisfy itself that person will have no such financial or other
 interest as is likely to affect prejudicially the exercise or performance
by him of his functions as a member, and the Central Government
shall also satisfy itself from time to time with respect to every
member that he has no such interest; and any person who is, or whom
the Central Government proposes to appoint and who has consented
to be, a member shall, whenever required by the Central Government
so to do, furnish to it such information as the Central Government
considers necessary for the performance of its duties under this sub-
section.
(3)     A member who is in anyway directly or indirectly interested in a
contract made or proposed to be made by the Corporation shall as
soon as possible after the relevant circumstances have come to his
knowledge, disclose the nature of his interest to the Corporation and
the member shall not take part in any deliberation or discussion of the
Corporation with respect to that contact.
Capital of the Corporation—
(1)     The original capital of the Corporation shall be five crores of rupees
provided by the Central Government after due appropriation made by
Parliament bylaw for the purpose, and the terms and conditions
relating to the provision of such capital shall be such as maybe
determined by the Central Government.
(2)     The Central Government may, on the recommendation of the
Corporation, reduce the capital of the Corporation to such extent and
in such manner as the Central Government may determine
 
Functions of the Corporation—
These are as follows:
1)      Subject, to the rules, if any, made by the Central Government in this
behalf, it shall be the general duty of the Corporation to carry on life
insurance business, whether in or outside India, and the Corporation
shall so exercise its powers under this Act as to secure that life
insurance business is developed to the best advantage of the
community.
2)      Without prejudice to the generality of the provisions contained in
sub-section (1) but subject to the other provisions contained in this
Act, the Corporation shall have power —
 
(a)        To carryon capital redemption business, annuity certain
business or reinsurance business in so far as such re insurance
business appertains to life insurance business;
(b)        Subject to the rules, if any, made by the Central Government
in this behalf, to invest the funds of the Corporation in such
manner as the Corporation may think fit and to take all such
steps as may be necessary or expedient for the protection or
realization of any investment; including the taking over of and
administering any property offered as security for the
investment until a suitable opportunity arises for its disposal;
(c)        To acquire, hold and dispose of any property for the purpose
of its business;
(d)       To transfer the whole or any part of the life insurance business
carries on outside India to any other person or persons, if in the
interest of the Corporation it is expedient so to do;
(e)        To advance or lend money upon the security of any movable
property or otherwise;
(f)        To borrow or raise any money in such manner and upon such
security as the Corporation may think fit;
(g)        To carry on either by itself or through any subsidiary any other
business in any case where such other business was being carried
on by a subsidiary of an insurer whose controlled business has
been transferred to and invested in the Corporation under this
Act;
(h)        to carry on any other business which may seen to the
Corporation to be capable of being conveniently carried on in
connection with its business and calculated directly or indirectly
to render profitable the business of the corporation;
(i)         to do all such things as maybe incidental or conducive to the
proper exercise of any of the powers of the Corporation. In the
discharge of any of its functions the Corporation shall act so far
as maybe on business principles.
Power of Corporation to impose conditions, etc—
(1)     In entering into any arrangement, under section 6, with any concern,
the Corporation may impose such conditions as it may think necessary
 or expedient for protecting the interest of the Corporation and for
securing that the accommodation granted by it is put to the best use
by the concern.
(2)     Where any arrangement entered into by the Corporation under
section 6 with any concern provides for the appointment by the
Corporation of one or more directors of such concern, such provision
and any appointment of directors made in pursuance there of shall be
valid and effective notwithstanding anything to the contrary contained
in the Companies Act, 1956 (1 of1956),or in any other law for the time
being in force or in the memorandum, articles of association or any
other instrument relating to the concern, and any provision regarding
share, qualification, age limit, number of directorships, removal from
office of Directors and such like conditions contained in any such law
or instrument aforesaid, shall not apply to any director appointed by
the Corporation in pursuance of the arrangement as aforesaid.
(3)        Any director appointed as aforesaid shall-
(a) Hold office during the pleasure o f the Corporation any maybe removed
or substituted by any person by order in writing by the Corporation;
(b) Not incur any obligation or liability by reason only of his being a
director or for anything done or omitted to be done in good faith in
the discharge of his duties as a director or anything in relation
thereto;
(c) Not be liable to retirement by rotation and shall not be taken into
account for computing the number of directors liable to such
retirement.
Management of the Corporation
The central office of the Corporation shall be at such place as the
Central Government may, by notification in he Official Gazette, specify.The
Corporation shall establish a zonal office at each of the following places,
namely, Bombay, Calcutta, Delhi, Kanpur and Madras, and, subject to the
previous approval of the Central Government, may establish such other
zonal offices as it thinks fit. The territorial limits of each zone shall be such
as may be specified by the Corporation.There may be established as many
divisional offices and branches in each zone as the Zonal Manager thinks fit.
Other Committees –
(1)     The Corporation may entrust the general superintendence and
direction of its affairs and business to an Executive Committee
 consisting of not more than five of its members and the Executive
Committee may exercise all powers and do all such acts and things as
may be delegated to it by the Corporation.
(2)     The Corporation may also constitute an Investment Committee for
the purpose of advising it in matters relating to the investment of its
funds, and the Investment Committee shall consist of not more than
eight members of whom not less than four shall be members of the
Corporation and the remaining members shall be persons (whether
members of the Corporation or not) who have special knowledge and
experience in financial matters, particularly, matters relating to
investment of funds.
            It may appoint one or more persons to be the managing director or
directors of the Corporation, and every managing director shall be a whole –
time officer of the Corporations, and shall exercise such powers and perform
such duties as may be entrusted or delegated to him by the executive
committee of the corporation.
Funds of the Corporation-
Corporation shall have its own fund and all receipts of the Corporation shall
be credited thereto and all payments of the Corporation shall be made there
from.
Audit—
(1)     The accounts of the Corporation shall be audited by auditors duly
qualified to act as auditors of companies under the law for the time
being in force relating to companies, and the auditors shall be
appointed by the Corporation with the previous approval of the
Central Government and shall receive such remuneration from the
Corporation as the Central Government may fix.
(2)     Every auditor in the performance of his duties shall have at all
reasonable times access to the books, accounts and other documents
of the Corporation.
(3)     The auditors shall submit their report to the Corporation and shall
also forward a copy of their report to the Central Government.
Annual report of activities of Corporation—
The Corporation shall, as soon as may be, after the end of each
financial year, prepare and submit to the Central Government in such form
as maybe prescribed a report giving an account of its activities during the
previous financial year, and the report shall also give an account of the
activities, if any, which are likely to be undertaken by the Corporation in
the next financial year.
Liquidation of the Corporation
No provision of the law, as provided in the Companies Act, relating to
the winding up of companies or corporations shall apply to the corporation
established under this act, and the corporation shall not be placed in
liquidation save by order of the central government and in such manner as
the central Government may direct.
THE GENERAL INSURANCE BUSINESS (NATIONALISATION)
ACT,1972
The Life Insurance business was nationalised in 1956. at this stage, the
General insurance business was allowed to be continued in private hands. In
1971, General Insurance (emergency provisions) ordinance was enacted.
The Government of India took over the management of all General
Insurance Companies operating in India whether they belonged to Indian or
non-Indian shareholders. Subsequently, the General Insurance (Emergency
Provisions) Amendment Act, 1971 was passed withdrawing certain rights of
the Directors and Members of the Companies, which they were enjoying
under the Companies Act. General Insurance (Nationalization) Act, 1972
shortly followed and with effect from 2  January,1973 the provisions of the
nd

Act became effective.

The most significant provisions of the Act are
Definitions:
In this act, unless the context otherwise requires, acquiring
companies: means any Indian insurance company and, where a scheme has
been  framed involving the merger of one Indian insurance company in
another or the amalgamation of two or more such companies,means the
Indian insurance company in which any other company has been merged or
the company which has been formed as a result of amalgamation;
Appointed day means such day, not being a day later than the 2  day
nd

of January,  1973, as the central government may , by notification, appoint;

Companies act means the companies act, 1956;
Corporation means the general insurance corporation of India formed
under section 9;
Existing insurer means every insurer the management of whose 
undertaking has vested in the central government under section 3 of he
general insurance (emergency provisions) act, 1971 an d includes the
undertaking of the life insurance corporation in so far as it relates to the
general insurance business carried on by it;
Foreign insurer means an existing insurer incorporated under the law of
any country outside India;
General insurance business means fire, marine or miscellaneous
insurance business, whether carried on singly or in combination with one or
more of them, but does not include capital redemption business and annuity
certain business;
Government company means a government company as defined in
section 617 of the companies act;
Indian insurance company means an existing insurer having a share
capital who is a company within the meaning of the companies act;
Insurance act means the insurance act, 1938;
life insurance corporation means the life insurance corporation of
India established under the life insurance corporation act, 1956;
Notification means a notification published in the official gazette;
Prescribed means prescribed by rules made under this act;
Schedule means the schedule to the act;
Scheme means the scheme framed under section 16;
Words and expressions used in this act but not defined herein or in the
insurance act and defined in the companies act, shall have the meanings
respectively assigned to them in the companies act.
Functions of Corporation
The functions of the Corporation are enumerated in Section18 of the
Act, some of are as follows:
The functions of the Corporation shall include:-
 
(a)     The carrying on of any part of the general insurance business, if it
thinks it desirable to do so;
 (b)     Aiding, assisting and advising the acquiring companies in the matter
of setting up of standards of conduct and sound practice in general
insurance business and in the matter of rendering efficient services to
holders of policies of general insurance;
(c)     Advising the acquiring companies in the matter of the controlling
their expenses including the payment of commission and other
expenses.
(d)    Advising the acquiring companies in the matter of the investment of
their funds;
(e)     Issuing directions to acquiring companies in relation to the conduct
of general insurance business.
Functions of acquiring companies
(1)     Subject to the rules, if any, made by the Central Government in this
behalf and to its memorandum and articles of association, it shall be
the duty of every acquiring company to carry on general insurance
business.
(2)     Each acquiring company shall so function under this Act as to secure
that general insurance business is developed to the best of the
community.
(3)     In the discharge of any of its functions, each acquiring company shall
act so far as may be on business principles and where any directions
have been issued by the Corporation shall be guided by such
directions.
(4)     For the removal of doubts it is hereby declared that the Corporations
and any acquiring company may, subject to the rules, if any, made by
the Central Government in this behalf, “enter into such contracts of
reinsurance treaties as it may think fit for the protection of its
interests”.
Power to make rules
According to section 39,
The Central Government is also empowered to make rules to carry out
the provisions of the Act and such rules may provide for:
(a)     Manner in which the profits and other moneys received by the
Corporation may be dealt with
 (b)     The conditions subject to which the Corporation and the acquiring
companies shall carry on general insurance business;
(c)     The terms and conditions subject to which any re-insurance contract
or treaties may be entered into;
(d)    Form and manner in which any notice or application may be made to
the Central Government;
(e)     The reports which may be called for by the Central Government
from the Corporation and acquiring companies; and
(f)     Any other matter which is required to be or may be prescribed.
Powers of the central government under the act
Power to transfer employees: under the provisions of sec 22 of the
act, the corporation may at any time transfer any officer or employee from
an acquiring company or the corporation to any other acquiring company or
the corporation, as the case may be, and the officer or employee so
transferred, shall continue to have the same terms and conditions of service
as were applicable  to him immediately before such transfer.
Power to issue directions: according to sec 23, the corporation and
every acquiring company shall, in the discharge of its functions, be guided
by such directions in regard to matters of policy involving public interest as
the central government may give.
Power to frame/ amend a scheme
According to section 17,
If the central government is of opinion that for the more efficient
carrying on of general insurance business it is necessary so to do, it may, by
notification, frame one or more schemes. The central government may, by
notification, add to, amend or vary any scheme framed under this section .
a copy of every scheme , and every amendment thereto, framed under this
section shall be laid, as soon as may be after it is made, before each House
of Parliament
Power to regulate the terms and conditions of service of
officers and other employees
According to section 17A, the central government may, by notification
in the official gazette, frame one or more schemes for regulating the pay
scales and other terms and conditions of service of officers and other
employees of the corporation or of any acquiring company.