THE INSURANCE ACT, 1938:

THE INSURANCE ACT, 1938

Earlier to the Insurance Act, 1938, the insurance business was carried by the insurance companies in accordance with the principles of the Company Law,1913. When the business started growing, the need for an independent law to regulate the insurance business was noticed and a separate Act, the Insurance Act, 1938 was legislated. The Act was used for all purposes relating to both life and general insurance businesses and their regulations. With regards to general insurance, this Act is being used to regulate the marine insurance, fire insurance and other insurances. Further growth of business has made it complex and more legal provisions were required to regulate it. The Marine Insurance Act, 1963, Public Liability Insurance Act, 1991, Insurance Regulatory and Development Authority Act, 1999 and regulations made by the IRDA are some of the legislations that govern the insurance business.

Short title, extent and commencement

1.   (1) This Act may be called Insurance Act, 1938.

(2) It extends to the whole of India.

(3) It shall come into force on such date3 as the Central Government may, by Notification in the Official Gazette, appoint in this behalf.

Definitions

2.         In this Act, unless there is anything repugnant in the subject or context, -

(1) “Authority” means the Insurance Regulatory and Development Authority established under sub-section (1) of section 3 of the Insurance Regulatory and Development Authority Act, 1999;

(2) “Policy-holder” includes a person to whom the whole of the interest of the policy-holder in the policy is assigned once and for all, but does not include an assignee thereof whose interest in the policy is infeasible or is for the time being subject to any condition;

(3)  “Approved securities,” means-

(i)      Government securities and other securities charged on the revenue of the Central Government or of the Government of a State or guaranteed fully as regards principal and interest by the Central Government or the Government of any State;

(ii)     debentures or other securities for money issued under the authority of any Central Act or Act of a State Legislature by or on behalf of a port trust or municipal corporation or city improvement trust in any Presidency-town;

(iii)    shares of a corporation established by law and guaranteed fully by the Central  Government or the Government of a State as to the repayment of the principal and the payment of the divided;

(iv)    securities issued or guaranteed fully as regards principal and interest by the Government of any Part B State and specified as approved securities for the purposes of this Act by the Central Government by notification in the Official Gazette; and

(4)  "Auditor" means a person qualified under the Chartered Accountants Act, 1949 (38 of 1949), to act as an auditor of companies;

(5) "Chief agent" means a person who, not being a salaried employee of an insurer, in consideration of any commission-

(i)      Performs any administrative and organizing functions for the insurer, and

(ii)     Procures life insurance business for the insurer by employing or causing to be employed insurance agents on behalf of the insurer;

[(5-A) "Controller of Insurance" means the officer appointed by the Central Government under section 2B to exercise all the powers, discharge the functions and performs the duties of the Authority under this Act or the Life

Insurance Corporation Act, 1956 (31 of 1956) or the General Insurance Business (Nationalization) Act, 1972 (57 of 1972) or the Insurance Regulatory and Development Authority Act, 1999;]

(6) "Court" means the principal Civil Court of original jurisdiction in a district and includes he High Court in exercise of its ordinary original civil jurisdiction;

(7)  "Government security" means a Government security as defined in the Public Debt Act, 1944 (18 of 1944);

[(7A) “Indian insurance company” means any insurer being a company-

(a)     which is formed and registered under the Companies Act, 1956 (1 of 1956);

(b)     in which the aggregate holdings of equity shares by a foreign company, either by itself or through its subsidiary companies or its nominees, do not exceed twenty-six percent paid-up equity capital of such Indian insurance company;

(c)     whose sole purpose is to carry on life insurance business or general insurance business or re-insurance business.

(8) "Insurance company" means any insurer being a company, association or partnership which may be wound up under the Indian Companies Act, 1913 (7 of 1913), or to which the Indian Partnership Act, 1932 (9 of 1932), applies;

(9)  "Insurer" means-

(a) any individual or unincorporated body of individuals or body corporate incorporated under the law of any country other than India, carrying on insurance business not being a person specified in sub-clause (c) of this clause which-

(i)  carries on that business in India, or

(ii) has his or its principal place of business or is domiciled in India, or

(iii) with the object of obtaining insurance business, employs a representative, or maintains a place of business, in India;

(b) any body corporate [not being a person specified in sub-clause (c) of this clause] carrying on the business of insurance, which is a body corporate incorporated under any law for the time being in force in India; or stands to any such body corporate in the relation of a subsidiary company within the meaning of the Indian Companies Act, 1913 (7 of 1913), as defined by sub-section (2) of section 2 of that Act, and

(c) any person who in India has a standing contract with underwriters who are members of the Society of Lloyd's whereby such person is authorized within the terms of such contract to issue protection notes, cover notes, or other documents granting insurance cover to others on behalf of the underwriters.But does not include a principal agent' chief agent, special agent' or an insurance agent or a provident society as defined in Part III;

(10)   "Insurance agent" means an insurance agent licensed under Sec. 42 who receives agrees to receive payment by way of commission or other remunerationin consideration of his soliciting or procuring insurance business including business relating to the continuance, renewal or revival of policies of insurance;

 (11)  "Managing agent" means a person, firm or company entitled to the management of the whole affairs of a company by virtue of an agreement with thecompany, and under the control and direction of the directors except to the extent, if any, otherwise provided for in the agreement, and includes any person, firm or\ company occupying such position by whatever name called.

(12)   "Prescribed" means prescribed by rules made under this Act; and

(13)   "Principal agent" means a person who, not being a salaried employee of an insurer, in consideration of any commission,—

(i)   Performs any administrative and organizing functions for the insurer; and

(ii) Procures general insurance business whether wholly or in part by employing or causing to be employed insurance agents on behalf of the

(14)   "Special agent" means a person who, not being a salaried employee of an insurer, in consideration of any commission, procures life insurance business for the insurer whether wholly or in part by employing or causing to be employed insurance agents on behalf of the insurer, but does not include a chief agent.

(15)   Insurance cooperative society means any insurer being a cooperative society, which is registered on or after the commencement of the insurance (amendment) act, 2002, as a cooperative society under the cooperative societies act, 1912, or under any other law for the time being in force in any state relating to cooperative societies or under the multi-state cooperative societies act, 1984, having a minimum paid up capital (excluding the deposits required to be made under section 7), of rupees one hundred crores , in which no body corporate, whether incorporated or not, formed or registered outside India, either by itself or through its subsidiaries or nominees, any time, holds more than 26 percent of the capital of such cooperative society, and whose sole purpose is to carry on life insurance business or general insurance business in India.

Requirements as to capital

No insurer carrying on the business of life insurance, general insurance or re insurance in India on or after the commencement of the Insurance Regulatory and Development authority Act, 199, shall be registered unless he has,-

(i)   paid-up equity capital of rupees one hundred crores, in case of a person carrying on the business of life insurance or general insurance; or

(ii) a paid-up equity capital of rupees two hundred crores, in case of a person carrying on the reinsurance business.

Further, no public company limited by shares having its registered office in India, shall carry on life insurance business, unless the capital of the company consists only of ordinary shares each of which have a single face value, and the same paid up amount for all shares, whether existing or new, except during any period not exceeding one year allowed by the company for payment of calls on shares.

The act also provides that no prompter shall any time hold more than 26 percent or such other percentage as may be prescribed. Of the paid up capital in an Indian insurance company, and if he does, the promoters shall divest in a phased manner the share capital in excess of the 26 percent of the paid up equity capital or such excess paid up equity capital as may be prescribed, and within such period as may be prescribed by the central government.

Deposits

Every insurer shall, in respect of the insurance business carried on by him in India, deposit and keep deposited with the Reserve Bank of India in one of the offices in India of the Bank for and on behalf of the Central Government the amount hereafter specified, either in cash or in approved securities estimated at the market value of the securities on the day of deposit, or partly in cash and partly in approved securities so estimated:-

(a)  in the case of life insurance business, a sum equivalent to one per cent of his total gross premium written direct in India in any financial year commencing after the 31st day of March, 2000, not exceeding rupees ten crores;

(b)  in the case of general insurance business, a sum equivalent to three per cent of his total gross premium written in India, in any financial year commencing after the 31st day of March, 2000, not exceeding rupees ten crores;

(c) in the case of re-insurance business, a sum of rupees twenty crores

(d)             in case the business done or to be done is marine insurance only and relates exclusively to country craft or its cargo or both, the amount shall be one hundred thousand rupees only.

An insurer shall not be registered for any class of insurance business in addition to the class or classes for which , he is already registered until the full deposit required has been made.

Audit

The balance-sheet, profit and loss account, revenue account and profit and loss appropriation account of every insurer, in respect of his insurance business, shall, unless subject to audit under the Indian Companies Act, 1913 (7 of 1913), be audited annually by an auditor who shall in have the powers of, exercise the functions vested in, and discharge the duties and be subject to the liabilities and penalties imposed on, auditors of companies by section 145 of the Indian Companies Act, 1913.

Investment of assets

Every insurer shall invest and at all times keep invested assets equivalent to not less than the sum of-

(a) the amount of his liabilities to holders of life insurance policies in India on account of matured claims, and

(b)  the amount required to meet the liability on policies of life insurance maturing for payment in India, less-

(i)         the amount of premiums which have fallen due to the insurer on such policies but have not been paid and the days of grace for payment of which have not expired, and

(ii)        any amount due to the insurer for loans granted on and within the surrender values of policies of life insurance maturing for payment in India issued by him or by an insurer whose business he has acquired and in respect of which he has assumed liability, in the manner following, namely,

(a)        twenty-five per cent of the said sum in Government securities,

(b)        further sum equal to not less than twenty-five per cent of the said sum in Government securities or other approved securities and

(c)       the balance in any of the approved investments specified in any over investment.

Every insurer carrying on the business of life insurance, shall every year, within thirty-one days from the beginning of the year submit to the authority a return showing as at 31^st day of December of the preceding year the assets held invested in accordance with section 27 and 27A and all other particulars necessary to establish that the requirements of that section have been complied with, and such return shall be certified by a principal officer of the insurer. Every such insurer shall also furnish, within fifteen days from the last day of March , June and September , a return certified as aforesaid showing as at the end of each of the said months the assets held invested in accordance with section 27.

Power to appoint staff

The Authority may appoint such staff, and at such places as it or he may consider necessary, for the scrutiny of the returns, statements and information furnished by insurers under this Act and generally to ensure the efficient performance of the functions of the Authority under this Act.

Registration of principal agents, chief agents and special agents

(1)     The Authority or an officer authorized by it in this behalf shall in the prescribed manner and on payment of the prescribed fee, which shall not be more than twenty-five rupees for a principal agent or a chief agent and ten rupees for a special agent, register any person who makes an application to him in the prescribed manner if,—

(a)        in the case of an individual, he does not suffer from any of the disqualifications mentioned in sub-section (4) of Section 42, or

(b)        in the case of a company or firm, any of its directors or partners does not

suffer from any of the said disqualifications, and a certificate to Act as a principal agent, chief agent or special agent, as the case may be, for the purpose of procuring insurance business shall be issued to him.

(2)     A certificate issued under this section shall entitle the holder thereof to act as a principal agent, chief agent, or special agent, as the case may be, for any insurer.

(3)     A certificate issued under this section shall remain in force for a period of twelve months only from the date of issue, but shall, on application made on this behalf, be renewed from year to year on production of a certificate from the insurer concerned that the provisions of clauses (2) and (3) of Part A of the Sixth Schedule in the case of a principal agent, the provisions of clauses (2) and (4) of Part B of the said Schedule in the case of a chief agent, and the provisions of clauses (2) and (3) of Part C of the said Schedule in the case of a special agent, have been complied with, and on payment of the prescribed fee, which shall not be more than twenty-five rupees, in the case of a principal agent or a chief agent, and ten rupees in the case of a special agent, and an additional fee of the prescribed amount not exceeding five rupees by way of penalty, in cases where the application for renewal of the certificate does not reach the issuing authority before the date on which the certificate ceases to remain in force:

Provided that, where the applicant is an individual, he does not suffer from any of the disqualifications mentioned in clauses (b) to (d) of sub-section (4) of section 42 and where the applicant is a company or a firm, any of its directors or partners does not suffer from any of the said disqualifications.

(4)     Where it is found that the principal agent, chief agent or special agent being an individual is, or being a company or firm contains a director or partner who is suffering from any of the disqualifications mentioned in subsection (4) of section 42, without prejudice to any other penalty to which he may be liable, the Authority shall, and where a principal agent, chief agent or special agent has contravened any of the provisions of this Act may cancel the certificate issued under this section to such principal agent, chief agent or special agent.

(5)     The authority which issued any certificate under this section may issue a duplicate certificate to replace a certificate lost, destroyed or mutilated on payment of the prescribed fee, which shall not be more than two rupees.

(6)     Any person who acts as a principal agent, chief agent or special agent, without holding a certificate issued under this section to act as such, shall be punishable with fine which may extend to five hundred rupees, and any insurer or any person acting on behalf of an insurer, who appoints as a principal agent, chief agent or special agent any person not entitled to act as such or transacts any insurance business in India through any such person, shall be punishable with fine which may extend to one thousand rupees.

(7)     Where the person contravening sub-section (6) is a company or a firm, then, without prejudice to any other proceedings which may be taken against the company or firm, every director, manager, secretary or any other officer of the company, and every partner of the firm who is knowingly a party to such contravention shall be punishable with fine which may extend to five hundred rupees.

(8)     The provisions of sub-sections (6) and (7) shall not take effect until the expiry of six months from the commencement of the Insurance (Amendment) Act, 1950.

(9)     No insurer shall, on or after the commencement of the Insurance (Amendment) Act, 2002, appointment or transacts any insurance business in India through any principal agent, chief agent or special agent.

Regulation of employment of principal agents

(1)     No insurer shall, after the expiration of seven years from the commencement of the Insurance (Amendment) Act, 1950, appoint, or transact any insurance business in India, through a principal agent.

(2)     Every contract between an insurer and a principal agent shall be in writing and the terms contained in Part A of the Sixth Schedule shall be deemed to be incorporated in, and form part of, every such contract.

(3)     No insurer shall, after the commencement of the Insurance (Amendment) Act, 1950 (47 of 1950), appoint any person as a principal agent except in a presidency-town unless the appointment is by way of renewal of any contract subsisting at such commencement.

(4)     Within sixty days of the commencement of the Insurance (Amendment) Act, 1950 (47 of 1950), every principal agent shall file with the insurer concerned a full list of insurance agents employed by him indicating the terms of the contract between the principal agent and each of such insurance agents, and, if any principal agent fails to file such a list within the period specified, any commission payable to such principal agent on premiums received from the date of expiry of the said period of sixty days until the date of the filing of the said list shall, notwithstanding anything in any contract to the contrary, cease to be so payable.

(5)     A certified copy of every contract as is referred to in sub-section (2) shall be furnished by the insurer to the Authority within thirty days of his entering into such contract, and intimation of any change in any such contract shall be furnished by the insurer with full particulars thereof to the Authority within thirty days of the making of any such change.

(6)     If the commission due to any insurance agent in respect of any general insurance business procured by such agent is not paid by the principal agent for any reason, the insurer may pay the insurance agent the commission so due and recover the amount so paid from the principal agent concerned.

(7)     Every contract as is referred to in sub-section (2), subsisting at the commencement of the Insurance (Amendment) Act, 1950 (47 of 1950), shall, with respect to terms regarding remuneration, be deemed to have been so altered as to be in accordance with the provisions of sub-section (4) of section 40A.

(8)     If any dispute arises as to whether a person is or was a principal agent the matter shall be referred to the Authority, whose decision shall be final.

(9)     Every insurer shall maintain a register in which the name and address of every principal agent appointed by him, the date of such appointment and the date, if any, on which the appointment ceased shall be entered.

Commission, brokerage or fee payable to intermediary or insurance intermediary

(1)     No intermediary or insurance intermediary shall be paid or contract to be paid by way of commission, fee or as remuneration in any form, an amount exceeding thirty per cent of the premium payable as may be specified by the regulations made by the Authority, in respect of any policy or policies effected through him:

Provided that the Authority may specify different amounts payable by way of commission, fee or as remuneration to an intermediary or insurance intermediary or different classes of business of insurance.

(2)     Without prejudice to the provisions contained in this Act, the Authority may, by the regulations made in this behalf, specify the requirements of capital, form of business and other conditions to act as an intermediary or insurance intermediary.

Register of insurance agents

Every insurer and every person who acting on behalf of an insurer employs insurance agents shall maintain a register showing the name and address of every insurance agent appointed by him and the date on which his appointment began and the date, if any, on which his appointment ceased.