Basic principles of Insurance in Motor Insurance Policies

Motor insurance contracts are subject to the basic principles applicable to property and liability insurance in general.

The practical applications of these principles in motor insurance are examined under the relevant topics in the course.

I.    Utmost Good faith: Contract of Insurance are governed by the doctrine of Utmost Good faith. The doctrine imposes legal obligations on the proposer to disclose material facts to the insurers.  The use of proposal forms is compulsory and the declaration clause in the form coverts the common law duty into a contractual duty of utmost good faith.

The effect of this is that the answers given in the proposal become warranties.  The answers are required to be literally true and correct.  Any wrong answers irrespective of its materiality will render the contract voidable by insurers. The burden of proving concealment or misrepresentation lies on the Insurance Company.

Some examples of material facts in motor insurance are-the type of vehicle, the geographical area of use, the physical condition of the driver, the driving history and traffic convictions of the driver, past loss experience, etc. It is important to note that compulsory third party insurance has introduced modifications of the doctrine. Section 149 of the Motor Vehicles Act 1988 is of relevance.  It provides that:

“If, after a certificate of Insurance complying with compulsory insurance provisions of  the Act has been issued, judgment in respect of compulsory third party liability is obtained against an insured person, then notwithstanding that the insurer  may be entitled to avoid or cancel or may have avoided or cancelled the policy, the insurer has to pay to the third party the amount decreed plus the costs and interest awarded, as if he were the judgment debtor, subject to the sum insured under the policy.”

The important point to be noted here is that the insurers have to pay the third parties even though they may be entitled to avoid or cancel the policy of may have avoided or cancelled the policy.

Their right to defend in this context is also restricted to specific conditions under this section. Since the Motor Vehicles Act is benevolent legislation as far as third parties are governed, the defenses available to the insurer with regard to third party are restricted under Section 149. But the principle of utmost good faith holds good as the contract is between the insurer and the insured.

II.  Insurable Interest: This is the legal right to insure.  The essentials of insurable interest are:

1. The existence of property exposed to loss, damage or a potential liability
2. Such property or liability must be the subject matter of insurance
3. The insured must bear a legal relationship to the subject matter whereby the stands to benefit by the safety of the property, right, interest or freedom from liability and stands to loss by any loss damage, injury or creation of liability.

In motor insurance, the vehicle is the property, which is exposed to loss or damage.  The insured also has a legal liability towards third parties; he may suffer financial loss if he incurs that liability under law through the use of the vehicle.  Therefore, the insured has insurable interest, which entitles him to insure the vehicle against damage and liability risk.

Further, under Section 146 of the M.V. Act 1988, no person shall allow any other person to use a vehicle in a public place unless the vehicle is covered by an insurance policy complying with the requirement of the Act.  The owner insured may authorize the persons to drive his vehicle.

In such cases, though the owner insured has, strictly speaking no insurable interest in any third party liability, he is deemed to act as an agent in arranging the indemnity on behalf of such other persons who may drive the vehicle and incur liability.  Otherwise, the injured third parties will have no recourse to recover damages.

If a vehicle is purchased under a hire purchase or lease agreement, the financiers are the Owners and insurance should be in their name.  Section 51 of the MV Act requires registration in the name of user with Owner right endorsed in the registration document.

In view of this the insurance is also issued in the name of the user with Financiers (owners) interest clause incorporated.  This clause provides that in respect of loss or damage to the motor vehicle the monies shall be payable to the owners, i. e. financiers.   In Hypothecation case the ownership is in the user only but financiers have insurable interest to the extent of the loan.

Motor traders, e.g. garage proprietors, have insurable interest as bailee in respect of loss or damage to customer’s cars which are in their custody for repair purposes. The Motor Trade policy covers this liability.

III. Indemnity: Insurance contracts are contracts of indemnity, that is to say, the insured is placed after loss, as far as possible, in the same position as he was immediately before the loss.  This principle ensures that the insured does not make a profit out of his loss.

In motor insurance principle of Indemnity is of two types: one for Total Loss and Constructive Total Loss (CTL) and theft claims and the other for repairs claims.

For TL/CTL/Theft claims the principle of insured’s Declared Value (IDV) is applied.  IDV does not take into consideration market value or depreciated price.  It is the sum insured agreed at the beginning of the policy between insurer and the insured.  It is based on price or new vehicle at the beginning of the policy period less depreciation at the agreed rates.  IDV remains constant during policy period.

In case of repair claims the Indemnity is cost of parts less depreciation taking into consideration the age of the vehicle.  The depreciation table for the repairs is stated in the policy which is different from the one for TL/CTL claims.

In respect of third party liability the actual damages awarded are indemnified subject to the limits of liability, if any, specified in the policy.  Indemnity is also available for legal costs.

Subrogation: Subrogation is the transfer of rights from the insured to the insurer when the loss or damage to the vehicle is caused by the negligence of another person.  Insurers exercise the right to cover the loss from the person responsible.  Under common law subrogation operates only after the claim is paid.

A policy condition, however, provides for subrogation before the payment of claim. Subrogation usually arises when there is a collision between two vehicles, one, which is responsible for the accident.  In practice, however, subrogation is modified by agreements between insurers, e g knock for knock agreement.

Contribution: Contribution arises when there is double insurance, that is, when the same vehicle is insured under two policies.  According to policy condition the loss is shared pro-rata between the two insurers.

IV. Proximate Cause: The doctrine of proximate cause applies to motor insurance as to other classes of insurance.  The loss or damage to the vehicle is indemnified only if it is proximately caused by any of the insured perils.  The doctrine also applies to third party claims.

The third party injury or damage must be proximately caused by the use of the vehicle by or on the instructions of the insured for which he is held legally liable to pay damages.

Extracts from “Guide for Motor Insurance (IC-72)” by Dr. Rakesh Agarwal. Copyright of Sashi Publications, kolkata www.sashipublications.com and www.bimabazaar.com