INDIA Law and Practice Contributed by: Neeraj Tuli, Celia Jenkins and Rajat Taimni, Tuli & Co
8. Interpreting an Insurance Contract 8.1 Interpretation of Insurance Contracts and Use of Extraneous Evidence When interpreting insurance contracts, Indian courts have held that, in construing the terms of an insurance contract, the words used therein must be given para- mount importance, and it is not permitted for the court to add, delete, or substitute any words. It has also been observed that the terms of an insurance policy have to be strictly construed in order to determine the extent of the liability of the insurer, given that, upon issuance of an insurance policy, the insurer under- takes to indemnify the loss suffered by the insured on account of risks covered by the policy. The general rule is that oral evidence cannot be sub- mitted to explain or vary the terms of a written con- tract. While contracts must be construed according to the parties’ intention, that intention can only be determined from the written instrument itself. All other evidence of intention is excluded because, when an agreement is reduced to writing, the parties thereto are bound by the terms and conditions of that agree- ment. In the event that any policy provision is ambiguous or there is uncertainty as to its meaning or intention, it must be construed contra proferentem – that is, against the maker of the document. 8.2 Warranties Warranties are the clauses that form the basis of the insurance contract. Usually, clauses intended to oper- ate as warranties are expressly stated to be so in the insurance policies. All warranties under an insurance policy must be strictly complied with, whether material to the risk or not. If a warranty is breached, an insurer is discharged from all liability under the policy. The Supreme Court of India has held that mere knowl- edge on the part of the insurer that the insured had breached a warranty would not, in the absence of an express representation by the insured, amount to a waiver. 8.3 Conditions Precedent Usually, an insurance policy will expressly state the provisions that are conditions precedent to liability.
6.6 Consumer Contracts or Reinsurance Contracts The Reinsurance Regulations issued by the IRDAI define a contract of reinsurance as a legally binding document for all parties that provides a complete, accurate, and definitive record of all terms and con- ditions and other provisions of the reinsurance con- tract. Reinsurance arrangements do not need to be pre-approved by the IRDAI. 7. Alternative Risk Transfer (ART) 7.1 ART Transactions ART is expressly recognised in India by way of the Reinsurance Regulations. The Reinsurance Regula- tions stipulate that an Indian insurer intending to adopt ART solutions must submit such proposals to the IRDAI, which may, after necessary examination and upon being satisfied with the type of ART solution, allow the ART proposal on a case-by-case basis. The Reinsurance Regulations do not expressly set out the benchmarks based on which the IRDAI will examine these proposals. 7.2 Foreign ART Transactions Per the directions of the IRDAI issued in 2004, any ART arrangement must be accounted for based on the principle of “substance over form”. If the agreement is in the form of reinsurance coupled with a financ- ing arrangement, and the components are capable of being separated, each element should be accounted for in accordance with Generally Accepted Account- ing Principles (GAAP). However, when the aforementioned components are inseparable, the entire arrangement should be treated as a financial transaction and accounted for accordingly. All non-life insurers must account for ART arrangements based on the “substance over form” principle in accordance with GAAP.
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