The legal frameworki Sources of insurance law and regulation
Insurers, reinsurers and insurance intermediaries in India are governed by the IRDAI. The primary legislation regulating the Indian insurance sector comprises the Insurance Act 1938 (the Insurance Act) and the Insurance Regulatory and Development Authority Act 1999 (the IRDA Act). Pursuant to the powers granted to it under both of these statutes, the IRDAI has issued various regulations governing the licensing and functioning of insurers, reinsurers and insurance intermediaries.
Appeals against orders issued and decisions made by the IRDAI may be referred to the Securities Appellate Tribunal in accordance with the procedural rules notified in this regard.
The year 2018 was significant for the insurance sector as several regulations and guidelines issued by the IRDAI were notified, including the following.
The IRDAI (Insurance Brokers) Regulations 2018 were issued to replace the previous IRDA (Insurance Brokers) Regulations 2013.
The IRDAI (Re-insurance) Regulations 2018 (the Reinsurance Regulations), which are applicable to life, general and health insurers, were issued to replace the IRDAI (General Insurance – Reinsurance) Regulations 2016 and IRDAI (Life Insurance – Reinsurance) Regulations 2013. They also amend to some extent the IRDAI (Registration and Operations of Branch Offices of Foreign Reinsurers Other than Lloyd’s) Regulations 2015 and the IRDAI (Lloyd’s India) Regulations 2016. The Reinsurance Regulations prescribe significant changes to the erstwhile order of preference Indian insurers were required to follow for placement of reinsurance business and also expressly govern engineering, aviation, crop, trade credit, liability, oil and energy lines of reinsurance business. Non-admitted insurers who are listed with the IRDAI as cross-border reinsurers can reinsure risks in India in accordance with the IRDAI’s regulations on the reinsurance of life and general insurance business and subject to compliance with the order of preference for cessions. Further, the Reinsurance Regulations also provide that Indian Insurers may now adopt alternative risk transfer solutions (also called ‘financial reinsurance’ in life reinsurance business) to fit their specific needs and profile, subject to obtaining the prior approval of the IRDAI.
The IRDAI (Unit Linked Insurance Products) Regulations 2019 and the IRDAI (Non-Linked Insurance Products) Regulations 2019 were issued to replace the erstwhile IRDA (Linked Insurance Products) Regulations 2013 and the IRDA (Non-Linked Insurance Products) Regulations 2013, respectively. The new regulations set out revised norms in relation to the design and issuance of linked and non-linked life insurance policies by life insurers in India.
In addition, and as mentioned above, The IRDAI’s recent exposure draft of the IRDAI (Regulatory Sandbox) Regulations 2019 proposes setting up a sandbox environment within the insurance sector to foster further innovation.ii Insurable risk
As is the case under English law, Indian law also requires a person entering into an insurance contract to have insurable interest in the subject matter of the contract. Insurable interest must be present in all types of insurance, failing which it would be a wagering contract, which is void.
Neither the Insurance Act nor the IRDAI regulations set out precisely what constitutes insurable interest or an exhaustive list of risks that can and cannot be insured. However, there is guidance provided by way of other statutes, court judgments and the IRDAI regulations.
‘Insurable interest’ has been defined under Section 7 of the Marine Insurance Act 1963 as follows:
Insurable interest defined – (1) Subject to the provisions of this Act, every person has an insurable interest who is interested in a marine adventure.
(2) In particular a person is interested in a marine adventure where he stands in any legal or equitable relation to the adventure or to any insurable property at risk therein, in consequence of which he may benefit by the safety or due arrival of insurable property, or may be prejudiced by its loss, or by damage thereto, or by the detention thereof, or may incur liability in respect thereof.
To have an insurable interest in anything, there must be subject matter to insure, the insured should have some legally recognised relationship with the subject matter and the loss of the property should cause pecuniary damage to the insured. If the insured suffers a loss or derives benefit, he or she has an insurable interest in the subject matter of the insurance contract. The courts have held that ‘[i]nsurable interest is not complete ownership. It need not necessarily even strictly be title and interest in the object insured.’
Further, Paragraph 6(b) of the Guidelines on Product Filing Procedures for General Insurance Products of 18 February 2016 states that ‘[t]he product should be a genuine insurance product covering an insurable risk with a real risk transfer. “Alternate risk transfer” or “financial guarantee” business in any form shall not be accepted including indirect insurance products such as insurance derivatives.’
There are specific requirements as far as trade credit policies are concerned, as for instance they cannot cover (1) factoring, reverse factoring and bill discounting; and (2) any receivable arising from a financial service or consultancy service.
Further, Indian law recognises the principle that the law will not help a criminal to recover any kind of benefit from or for his or her crime. Accordingly, the results of a criminal act will typically not fall for cover under an insurance policy and no benefits extended to the perpetrator.
Non-admitted insurers are not permitted to directly insure property situated in India or any ship or other vessel or aircraft registered in India. However, a person resident in India is permitted to take or continue to hold a health insurance policy issued by an insurer outside India provided the aggregate remittance does not exceed the limits prescribed by the Reserve Bank of India (RBI). In this regard, a person resident in India may take or continue to hold a life insurance policy issued by an insurer outside India, subject to certain foreign exchange requirements stipulated in the Master Direction – Insurance of 1 January 2016 (as amended) issued by the RBI. Similarly, a person resident in India may take or continue to hold a general insurance policy issued by an insurer outside India, provided that the policy is held subject to the conditions provided under the Foreign Exchange Management (Insurance) Regulations 2015.
In addition to the above, foreign reinsurers are now allowed to access the Indian market and are permitted to set up branch offices in India or operate through service companies set up in India under the IRDAI (Lloyd’s India) Regulations 2016. Non-admitted insurers who are listed with the IRDAI as cross-border reinsurers can reinsure risks in India in accordance with the IRDAI’s regulations on the reinsurance of life and general insurance business and subject to compliance with the order of preference for cessions. The restrictions on non-admitted insurers mean that cross-border insurance disputes involving insurers and insureds are scarce in this jurisdiction. Further, even in the case of policies obtained by Indian residents from insurers residing abroad, the Insurance Act 1938 gives policyholders a right to override contrary policy terms in favour of Indian law and jurisdiction as long as the insurance business is transacted in India.iii Fora and dispute resolution mechanisms
There are no exclusive procedures or judicial venues for resolution of insurance disputes. Insurance disputes, in the absence of an arbitration clause, can be litigated before the civil courts or consumer forums. The option to approach the consumer forums, however, lies only with the insured in the event of a dispute. The civil and consumer courts have territorial and pecuniary jurisdiction to adjudicate disputes. The civil courts or consumer forums that decide the matter will vary according to the value of the dispute and the geographical limits of the defendant insurance company within which the cause of action for the dispute arises.
India has a three-tier hierarchy of courts to hear civil disputes. There are approximately 600 district courts at the lowest level, 24 high courts in the middle and the Supreme Court of India at the top of the pyramid. The high courts of Delhi, Mumbai, Chennai and Kolkata have original jurisdiction to hear matters over a certain pecuniary value, so the civil courts and judges under them do not hear matters involving values higher than that limit. In all other cases, district courts and the competent courts of first instance have an unlimited pecuniary jurisdiction to hear any insurance dispute. There is no right to a hearing before a jury and cases are decided by judges.
The Indian legislature enacted in 2015 the Commercial Courts Act 2015 (the Commercial Courts Act) for fast-track resolution of commercial disputes. Special commercial courts were set up under the Commercial Courts Act for exclusive adjudication of commercial disputes. The Commercial Courts Act defines a commercial dispute to include insurance and reinsurance disputes over the value of approximately 300,000 rupees. Recent amendments to the Commercial Courts Act have proposed compulsory mediation for parties before filing a commercial suit. The authority responsible for conducting mediation has not been designated yet.
The insured also has the option to approach the consumer courts, set up under the Consumer Protection Act 1986 (the Consumer Protection Act). The Consumer Protection Act lists insurance as a service and provides for a three-tier hierarchy to hear consumer disputes. There are 626 district consumer disputes redressal commissions, which until recently could accept claims up to a value of approximately 2 million rupees. There are 36 state consumer disputes redressal commissions, accepting claims of up to approximately 10 million rupees and appeals against the decisions of the district commissions. At the apex is the National Consumer Disputes Redressal Commission (NCDRC), accepting matters with a value of over 10 million rupees and appeals against the decisions of the state commissions.
However, the central government recently introduced the Consumer Protection Act 2019, which has increased the aforementioned pecuniary jurisdiction of the consumer courts as follows: (1) the district consumer disputes redressal commissions can now accept claims up to a value of approximately 10 million rupees; (2) the state consumer disputes redressal commissions can accept claims of up to 100 million rupees; and (3) the NCDRC can now only accept matters valued at over 100 million rupees. However, the new Act is yet to come into force by way of a formal notification.
As a mechanism of alternative dispute redressal, the insured can also approach the Insurance Ombudsman for disputes that do not exceed 2 million rupees in value. The Insurance Ombudsman is not a judicial authority and does not have power to enforce its decisions against the insurer.