LLM Group 2 Business Law Law of Insurance 2019 Question Paper with Solutions

Risk, peril and hazard

Three terms must be kept apart. The peril is the cause of loss, fire, collision, theft, death. The hazard is the condition that raises the probability or severity of a peril, dividing into physical hazard, an attribute of the thing insured, and moral hazard, an attribute of the person insured, such as dishonesty, indifference, or a motive to bring the loss about. The risk is the resulting probability, and it is what the premium prices.

Five conditions make a risk insurable. The loss must be fortuitous, so certainties, wear and tear and inherent vice are excluded, which is why section 55(2)(c) of the Marine Insurance Act, 1963 puts them outside the cover. It must be measurable in money. There must be a large number of similar and independent exposures, so that the law of large numbers can make the aggregate predictable. It must not be catastrophic, in the sense of striking the whole pool at once, which is why earthquake and flood are reinsured. And it must not be speculative: the insured must stand only to lose by the event, never to gain, which is the doctrine of insurable interest and the line between insurance and a wager under section 30 of the Indian Contract Act, 1872 and section 6 of the Marine Insurance Act, 1963.

Third, risk is the limit of the cover, enforced through the description of the peril, the exclusions, the warranties and the rule of causation in section 55(1), under which the insurer is liable only for loss proximately caused by a peril insured against. Leyland Shipping Co. Ltd. v. Norwich Union Fire Insurance Society Ltd., [1918] AC 350, fixes "proximate" as dominant in efficiency rather than nearest in time: the Ikaria, torpedoed off Le Havre in January 1915, towed into port, then moved outside the breakwater where she grounded at each tide and broke her back, remained throughout in the grip of the war peril, so the war exclusion applied.

Those three roles produce one proposition, and it is the whole answer to the second half of the question: the insurer must be left running the risk it agreed to run.

Alteration in the nature of the risk

An alteration in nature substitutes a different risk for the one insured. The standard instances are a change of use, a dwelling converted to a factory or a godown to a store for inflammables; a change of trade or manufacture; a change of the location of the property; a change of the vessel named in a marine policy; and a change in the person bearing the interest.

The promissory warranty under section 35(3) of the Marine Insurance Act, 1963 is harsher: a warranty must be exactly complied with, whether it be material to the risk or not, and on breach the insurer is discharged from liability as from the date of the breach, without prejudice to liability already incurred. Section 36 excuses non compliance only where a change of circumstances makes the warranty inapplicable, or compliance becomes unlawful, and permits waiver. The important feature of this effect is that it is prospective: a loss before the alteration remains payable.

Effect three: the risk never attaches, so there was never any cover. This is peculiar to the marine statutory scheme and is regularly confused with discharge. Section 45: where the place of departure is specified and the ship sails from another place, the risk does not attach. Section 46: where the destination is specified and she sails for another, the risk does not attach. The consequence is a total failure of the consideration and a return of premium, not a discharge from a subsisting contract. Alongside them, section 44 implies a condition that the adventure be commenced within a reasonable time, breach of which entitles the insurer to avoid the contract, unless the delay was caused by circumstances known to the insurer before the contract or the condition was waived.

Alteration in the quantum of risk

An alteration in quantum is an increase in the degree of an unchanged risk: more stock in the same building, more of the same hazardous process, a higher value at risk. Three propositions govern it.

First, a mere increase in degree neither avoids nor discharges the policy. The insured does not guarantee that his risk will not worsen; he is bound only by the description, the warranties and the conditions. More goods in an insured godown, without a change of trade and without breach of a warranty, leaves the cover intact.

Second, what an increase in quantum usually engages is the condition of average. Where the value at risk has grown beyond the sum insured, the insured is treated as his own insurer for the difference and bears a rateable share of every partial loss; the rule is codified for marine insurance by section 81 of the Marine Insurance Act, 1963. So the consequence of under insurance through growth is a proportionate reduction rather than repudiation, and it is the commonest reason an Indian property claim is settled below the amount claimed.

National Insurance Co. Ltd. v. Nitin Khandelwal, (2008) 11 SCC 259: a vehicle insured for private use was being used as a taxi when it was stolen. The Supreme Court held the breach not germane, the manner of use having nothing to do with the theft, and directed settlement on a non standard basis at seventy five per cent. Amalendu Sahoo v. Oriental Insurance Co. Ltd., (2010) 4 SCC 536, applied the same reasoning and set out the schedule of non standard settlements.

In the compulsory third party field the alteration rules are displaced almost entirely. National Insurance Co. Ltd. v. Swaran Singh, (2004) 3 SCC 297, holds that even a proved breach of the licensing condition does not absolve the insurer as against the victim, that it must be wilful, and that the Tribunal may direct the insurer to pay and recover from the insured. Bajaj Alliance General Insurance Co. Ltd. v. Rambha Devi, 2024 INSC 840, decided 6 November 2024, a five judge Constitution Bench, held that a light motor vehicle licence authorises driving a transport vehicle of that class whose unladen weight does not exceed 7,500 kg, removing the most frequently alleged breach.

Conclusion.

Alteration in quantum is treated far more leniently: a mere increase in degree neither avoids nor discharges, and its usual consequence is the operation of average under section 81. To all of this the Indian courts have added a qualification of their own, in B.V. Nagaraju, Nitin Khandelwal and Amalendu Sahoo, that the breach relied on must be germane to the loss, failing which a non standard settlement rather than a repudiation is the proper outcome; and in the compulsory motor class Swaran Singh and Rambha Devi have removed the insurer's alteration defences against the victim almost entirely.