The Supreme Court in the case of Deokar Exports Private Limited vs. New India Assurance Company Limited, (2008) 14 SCC 598 held that a policy of insurance is a contract based on an offer (proposal) and acceptance.
Repelling the contention that equitable view must be taken in favour of insured, it was held that in a contract of insurance, rights and obligations are strictly governed by the policy of insurance, and no exception or relaxation can be made on the ground of equity.
The Supreme Court in the case of United India Insurance Company Ltd. Vs. Kantika Colour Lab & Ors. 2010 (SCC) 449 held that contracts of insurance are generally in the nature of contract of indemnity.
Similarly, in the case of M/s. Suraj Mal Ram Niwas Oil Mills (P) Ltd. Vs. United India Insurance Co. Ltd. & Anr., 2010 (10) SCALE 640, the Supreme Court also held that in a contract of insurance, the rights and obligations are governed by the terms of contract. Therefore, the terms of a contract of an insurance have to be strictly construed, and no exception can be made on the ground of equity.
In the case of Vikram Greentech (I) Ltd. & Anr. Vs. New India Assurance Co. Ltd., AIR 2009 SC 2493, the Supreme Court described the features of insurance contract as under:
- An insurance contract, is a species of commercial transactions and must be construed like any other contract to its own terms and by itself.
- In a contract of insurance, there is requirement of uberimma fides i.e. good faith on the part of the insured. Except that, in other respects, there is no difference between a contract of insurance and any other contract.
- The four essentials of a contract of insurance are, (i) the definition of the risk, (ii) the duration of the risk, (iii) the premium and (iv) the amount of insurance.
- Since upon issuance of insurance policy, the insurer undertakes to indemnify the loss suffered by the insured on account of risks covered by the insurance policy, its terms have to be strictly construed to determine the extent of liability of the insurer.
- The endeavour of the court must always be to interpret the words in which the contract is expressed by the parties.
- The court while construing the terms of policy is not expected to venture into extra liberalism that may result in re-writing the contract or substituting the terms which were not intended by the parties.
- The insured cannot claim anything more than what is covered by the insurance policy.
- General Assurance Society Ltd. Vs. Chandumull Jain, 1966 (3) SCR 500
- Oriental Insurance Co. Ltd. Vs. Sony Cheriyan, (1999) 6 SCC 451
- United India Insurance Co. Ltd. Vs. Harchand Rai Chandan Lal, AIR 2004 SC 4794
From the above legal propositions of law, it would be seen that basic principles of law of contract, as enunciated in Sections 3, 4 and 7 of the Indian Contract Act, are applicable to the insurance contracts as well in the sense that for the formation of a contract, there has to be a proposal followed by an acceptance, and communication thereof to the proposer.