Return Of Premium Under A Contract Of Insurance

Insurance is playing a vital role in our life now days. After this COVID-19 pandemic, we have realised the importance of insurance and government has also provided various facilities to general public to secure their lives and properties from various types of risks. Through insurance we shall reduce the impact of risk insured. The risk may be on our lives such as accidental, due to diseases, injury etc., and on our property, business, profits etc. We enter into a contract with insurance companies, through policy of insurance by paying a consideration in the form of premium.

The contract of insurance is based on good faith, the insured /prospect have to disclose all relevant facts, required by the insurance company to underwrite risk and decide premium.

In some cases, there may be disagreement between insured/prospect and the insurance company. An insurance company shall provide a free look period of 30 days to the insured from the date of issue of insurance policy to check the terms and conditions of the policy and decide whether he/she wants to continue with the insurance policy or not. If insured wants to terminate or opts out of insurance policy or not agree on terms and conditions of the policy, he has to intimate to insurance company his/her decision. The insurance company will return the premium received within a period of 15 days from the date of receipt of intimation according to IRDAI (Protection of Policyholders) Regulations, 2017.

Premium, is the consideration for the risk run by the insurers, and if there is no risk there should be no premium. If risk is not run, consideration fails and it is inequitable for the insurer to keep premium paid, whether it is a fault on the part of insured.

The underwrites receives a premium for running risk of indemnifying the assured, and if for any cause the risk is not run, the consideration for which the premium or money put into its hands, fails therefore it out to return premium received.

The right to the return of the premium is enforceable by an action for money had and received and not by an action on the policy.

LETS' CONSIDER SOME PROVISIONS OF THE INDIAN CONTRACT ACT,1872

Section 64 in The Indian Contract Act, 1872

Consequences of rescission of a voidable contract. —When a person at whose option a contract is voidable rescinds it, the other party thereto need not perform any promise therein contained in which he is the promisor. The party rescinding avoidable contract shall, if he had received any benefit thereunder from another party to such contract, restore such benefit, so far as may be, to the person from whom it was received.

Section 65 in The Indian Contract Act, 1872

Obligation of person who has received advantage under void agreement, or contract that becomes void.—When an agreement is discovered to be void, or when a contract becomes void, any person who has received any advantage under such agreement or contract is bound to restore it, or to make compensation for it to the person from whom he received it.

Section 65 includes the case of an agreement which is void ab-initio, and thus risk is never run, and the suit for the recovery of the premium should be treated as a suit for money had and received.

The provisions of Sections 64 & 65 of Indian Contract Act, 1872 do not mean that the person rescinding a contract must restore all that he has received under, it irrespective of what he has given. He should be made to restore any balance of advantages received under the contract which can be clearly separated off from the advantage for which consideration has been given by him.

SOME CIRCUMSTANCES IN WHICH RISK IS NEVER RUN;

in below-mentioned circumstances it will be considered that risk never run and the insurer is required to return premium received;

1. Where before the policy comes into force the subject-matter of insurance ceases to be in existence;
2. Where subject-matter is wrongly described;
3. Where the insured had never any insurable interest in the subject-matter;
4. Where the policy issued is ultra vires the company;
5. Where the policy is void on account of some illegality;
6. Where the policy is void on account of some breach of a condition precedent.
7. Where the insurance is avoided by the insurers on the grounds of breach of warranty the premium can only be recovered back if it is shown that there was breach ab initio.

We can draw from above that under a valid policy the risk has once commenced to run, the whole of the premium for that risk is immediately deemed to have been earned, and even though the insurers should shortly afterwards be relieved of the risk for the reminder of the term, the assured is not entitled to a return of the premium.

Example: lets consider a condition Mr. A an assured and M/s. XY Ltd., an insurance company reside in same city, where war breaks out. In this case where an insurance is legal and binding in its inception, but afterwards becomes illegal. The insurer, XY Ltd., is not liable to the return of premium.

Section 56 of the Income Contract Act, 1872

Agreement to do impossible act:

An agreement to do an act impossible in itself is void.

Contract to do act afterwards becoming impossible or unlawful:

A contract to do an act which, after the contract is made, becomes impossible, or, by reason of some event which the promisor could not prevent, unlawful, becomes void when the act becomes impossible or unlawful.

Compensation for loss through non-performance of act known to be impossible or unlawful:

Where one person has promised to do something which he knew, or, with reasonable diligence, might have known, and which the promisee did not know, to be impossible or unlawful, such promisor must make compensation to such promisee for any loss which such promisee sustains through the non-performance of the promise.

Section 56 lays down a rule of positive law and does not leave the matter to be determined according to the intention of the parties. (Naithati Jute Mills Ltd. V. Khyaliram Jagannath, AIR 1968 SC 522) (Para 7).

THE DOCTRINE OF FRUSTRATION;

The principal of frustration of contract is contained in section 56 of the Indian Contract Act, 1882. The principal underlying the section is that performance of contract can be avoided if on account of happening of an event which is not the result of action of either party, the performance of contract may be avoided.

The Doctrine of Frustration as embodied in Section 56, of the Contract Act, may apply if below mentioned three conditions satisfied;

1. A valid and subsisting contract between parties;
2. There must be some part of the contract yet to be performed;
3. The contract after it is made, become impossible.

The Doctrine of frustration is applicable only where performance of contract become impossible.

Note: after discussion on provisions of Sections 56 and 65 of the Indian Contract Act, 1882 it would be seen that the premium or proportionate of it could be recovered or refunded even where risk has begun to run.

NOTE:

1. When insurer elect to set aside the contract on the ground of innocent misrepresentation, non-disclosure, concealment or mistake, the assured is entitled to the return of the premium, in absence of fraud on his part and of any express conditions to the contrary;
2. Fraud on the part of insurers create a valid claim for the return of the premium;
3. Prince of Wales Insurance Co. Vs. Palmer; it was held that the insurers were not allowed to retain premium for their own use, when policy was set aside on the ground of fraud and lack of insurable interest;
4. British Equitable Insurance Co. Vs. Musgrave; the premium in similar case was not refunded on the basis of cancellation clause in the policy;
5. Biggar Vs. Rock Life Insurance Co.: " if plaintiff is entitled to anything, I think the most he could have asked for would be that the court should say that the contract is void on the ground of either fraud or mistake, with the consequences perhaps he may entitled to return of premium".
6. When there is fraud or inducement by an insurance agent, to the insured to subscribed insurance policy.

LAWS IN INDIA GOVERNING REFUND OF PREMIUM;

A contract of insurance is like any other contract, is a contract between and insured and insurance company. The amount of premium paid will be treated as consideration paid to conclude the contract.

Section 64VB of the Insurance Act, 1938 provides that;

No risk to be assumed unless premium is received in advance.

(1)  No insurer shall assume any risk in India in respect of any insurance business on which premium is not ordinarily payable outside India unless and until the premium payable is received by him or is guaranteed to be paid by such person in such manner and within such time as may be prescribed or unless and until deposit of such amount as may be prescribed, is made in advance in the prescribed manner.

(2)  For the purposes of this section, in the case of risks for which premium can be ascertained in advance, the risk may be assumed not earlier than the date on which the premium has been paid in cash or by cheque to the insurer.

Explanation. Where the premium is tendered by postal money order or cheque sent by post, the risk may be assumed on the date on which the money order is booked or the cheque is posted, as the case may be.

Section 65 of the Indian Contract Act, 1882 provides that;

"When an agreement is discovered to be void, or when a contract becomes void, any person who has received any advantage under such agreement or contract is bound to restore it, or to make compensation for it to the person from whom he received it."

Note: the main object of Section 65 of the Indian Contract Act, 1882 is not to make a new contract between the parties, when the contract entered into by them has been discovered to be void but only to restore the advantage received by one party thereunder to the other.

Section 65, Contract Act codifies the rule of equity. Only two classes of contracts are mentioned in this section;

1. Contracts that are discovered to be void;
2. Contracts that become void;

Lets' consider one by one;

1. Contract that are discovered to be void; it means and includes contracts which are void as initio. The general rule of contract is that the parties entering into contract presumed to know the applicable laws and hence if the contracts are void ab initio to the knowledge of the parties, or if parties are presumed to have knowledge of such void transactions it is no contract at all and it cannot be said to be discovered to be void and hence provisions of Section 65 do not apply here.

Prabhumal Gulamal Vs. Baburam Bassesar Das;  it was held that "the agreements were void to the knowledge of both parties at the time they were made, and it cannot, therefore, be said that it was discovered to be void, or when a contract become void any person who has received any advantage under such agreement is bound to restore it."

Srinivas Ayyer Vs. Sesha Ayyer; Justice Blackwell "The words discovered to be void", are more opt to describe an agreement which was void ab initio, but not then known to the parties to be so than to an agreement of which illegally must be taken to have been always know to them". Where the contract void ab initio the consideration cannot be refunded.

2. Contracts that become void; it refers to those contracts which are perfectly valid and binding at the time when they are entered into, but subsequently become void on happening of certain events. In contract of Insurance, it is submitted, where a contract is binding and enforceable in its inception but subsequently on account of a breach of warranty or the happening of some event like, war or for any other cause, the contract become void the premium paid thereunder cannot be refunded.

Conclusion:  The IRDAI(PPHI) Regulations, 2017 and PPHI Guidelines provides that the premium should be refunded within a period of 15 days from the date of receipt of request from policyholder. We have discussed various aspects on refund of premium based on provisions of the Indian Contract Act, 1882 and the Insurance Act, 1938 and have drawn conclusion that the premium amount received by insurer should be returned to the insured on fulfilment of specified conditions.

Disclaimer: The entire contents of this document have been prepared on the basis of relevant provisions and as per the information existing at the time of the preparation. Although care has been taken to ensure the accuracy, completeness, and reliability of the information provided, author assume no responsibility, therefore. Users of this information are expected to refer to the relevant existing provisions of applicable Laws and take appropriate advice of consultants. The user of the information agrees that the information is not professional advice and is subject to change without notice. Author assume no responsibility for the consequences of the use of such information