LLM Group 2 Business Law Law of Insurance 2015 Question Paper with Solutions

For full marks, cover: a working legal definition of insurance rather than a business one, and the case that supplies it; the economic function that explains why the law tolerates a contract that looks like a wager; the four or five distinct needs insurance answers, each with an Indian illustration; the statutory classification, which is the one the examiner wants, taken from the Insurance Act, 1938 and not from a textbook list; then the analytical classifications that cut across it, indemnity against contingency and first party against third party; and a closing section on where Indian insurance actually stands, with the penetration figures and the reforms of 2025 and 2026.

The fourth mark, added by the later cases, is the pooling of risk. In Department of Trade and Industry v. St. Christopher Motorists Association Ltd., [1974] 1 WLR 99, an association promised members a chauffeur if they were disqualified from driving. The benefit was in kind, not money, yet Templeman J. held it was insurance, because the essence is the assumption of a risk by a person who spreads it over many. In Medical Defence Union Ltd. v. Department of Trade, [1980] Ch 82, by contrast, the member had no right to anything, only to have his request for assistance considered, and it was held not to be insurance for want of an enforceable benefit on a defined event.

The third need is the protection of third parties, and it is the reason insurance became compulsory. A victim run down by a lorry cannot be left to the solvency of the driver. Chapter XI of the Motor Vehicles Act, 1988 therefore makes third party cover compulsory by section 146, and section 150 imposes on the insurer a direct statutory duty to satisfy judgments obtained against the insured. The same logic produced the Public Liability Insurance Act, 1991, enacted after the Bhopal disaster and after M.C. Mehta v. Union of India, (1987) 1 SCC 395, the oleum gas leak case, in which the Supreme Court laid down absolute liability for hazardous enterprise and observed that the measure of compensation must be correlated to the magnitude and capacity of the enterprise.

The fourth need is social security in a country without a comprehensive welfare state. Life insurance and annuities substitute for a State pension; health insurance substitutes for a free health service. This is why the Life Insurance Corporation Act, 1956 nationalised life business with the object of spreading it to rural areas and to the socially and economically backward classes, and why the Government today runs Pradhan Mantri Jeevan Jyoti Bima Yojana and Pradhan Mantri Suraksha Bima Yojana as mass low premium schemes.

Section 2(9) defines "insurer" and it is section 3 that requires registration. The scheme has always been that an insurer is registered class by class and that life and general business are kept apart, section 2C and the old section 3 preventing a composite. That segregation is now being dismantled. The Sabka Bima Sabki Raksha (Amendment of Insurance Laws) Act, 2025 (Act 40 of 2025), which received assent on 20 December 2025 and came into force on 5 February 2026, amended section 6A(1) of the Insurance Act to replace the words "life insurance business or general insurance business or health insurance business or re-insurance business" with the single expression "insurance business", which is the enabling change for composite registration.

Reinsurance is a fifth statutory head and is insurance of the insurer. Section 11 of the Marine Insurance Act, 1963 recognises that the insurer under a contract of marine insurance has an insurable interest in his risk and may reinsure it, and section 101A of the Insurance Act, 1938 requires an Indian insurer to reinsure a prescribed percentage with the national reinsurer. The 2025 Act rewrote section 2C so that a foreign body corporate, including Lloyd's established under the Lloyd's Act, 1871 and any of its Members, may establish a branch in India for re-insurance exclusively, section 6(2) requiring a net owned fund of not less than one thousand crore rupees.

The indemnity distinction is the one that decides cases, and Dalby v. India and London Life Assurance Co., (1854) 15 CB 365, is where it was settled. An office had insured the life of the Duke of Cambridge, and by the time he died the interest that had supported the policy had ceased. The Court of Exchequer Chamber held the full sum payable, overruling Godsall v. Boldero, (1807) 9 East 72, and laying down that a life policy is not a contract of indemnity but a contract to pay a fixed sum on a defined event, so that interest need exist only at inception. The consequence runs through the whole subject: there is no subrogation and no contribution on a life policy, and a man may insure his own life for any sum he can pay for.

The compulsory class is where the policy yields to the statute, and the point is sharpest in motor insurance. In National Insurance Co. Ltd. v. Swaran Singh, (2004) 3 SCC 297, a three judge Bench held that a breach of the licensing condition does not automatically absolve the insurer as against the third party: the insurer must prove a wilful breach amounting to a fundamental breach, and even when it succeeds it must ordinarily pay the victim and recover from the insured. That "pay and recover" direction is the clearest demonstration that in the compulsory class the contract has been subordinated to a statutory scheme for the protection of strangers to it.

Two fiscal and structural changes since 2025 bear directly on the need for insurance. The 56th GST Council on 3 September 2025 exempted all individual life and health insurance premiums from goods and services tax, in force from 22 September 2025, removing the eighteen per cent charge that was widely blamed for suppressing retail demand, though group policies remain taxable. And the new section 3AA of the Insurance Act, 1938, inserted by the 2025 Act, permits foreign holdings in an Indian insurance company to extend to one hundred per cent of paid up equity capital, the last step in a progression from twenty six per cent in 1999 to forty nine in 2015 and seventy four in 2021.

Conclusion.

Insurance is needed because loss is certain in the aggregate and unpredictable in the individual case, and the law's contribution is to make the transfer of that risk enforceable. The need is not one need but five, running from the transfer of an unbearable loss through credit, the protection of third parties, social security and the mobilisation of long term savings, and the statute answers each of them differently. That is why the classification that matters is the statutory one in sections 2(6A), 2(6B), 2(6C), 2(11), 2(13A) and 2(13B) of the Insurance Act, 1938, which decides who may write what, rather than the textbook list of products.