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Letters Patent Appeal No. 43 of 1960, decided on 15th June 1964.
‑Ambiguities can be removed by consulting history of legislation.
, Ss. 3, 2 (8) & 2 (9)‑Insurance business‑Bare essentials of re‑assurance business ‑ A type of insurance business Provisions of Act not inherently inapplicable to business of re‑insurance‑Certificate of registration under S. 3 Necessary for re‑insurance company as, well Expressions "Insurance"; "re‑insurance" ; "insurance business" and "re‑insur ance business"‑Not capable of exact definition‑Words and phrases‑"Re" and "re‑insurance"‑Meaning.
In a declaratory suit the plaintiff, a company carrying on business of re‑insurance, prayed for a declaration that its regist ration under section 13 of the Insurance Act, 1938, was not necessary. In support of the plea it was urged that the object of company's incorporation was to under‑write and re‑insure insurance business, and not to carry on she business of insurance or to deal with originally assured person or with the originally insured property in any instance and as such the company did not fall within purview of the definition of 'insurer' given in section 2, subsection (9) of the Insurance Act, 1938 and its registration, therefore, under section 3 of the Act was not necessary.
Held: The expressions: "insurance," "re‑1tlsutattcc," "insu rance business" and "re‑insurance business" are not capable of any exact definition.
It is, therefore, not possible with the help of a few fragmentary provisions which have no pretence of containing all the fragments of the idea, to argue as to what is insurance business and how it may be defined as a whole. The absence of any definition of "insurance" clearly indicates the difficulty that must have been felt in the performance of that task. The difficulty in evolving a logical or comprehensive and good definition arises from (i) the numerous types of insurance business, (ii) the multifarious shapes that have been given by the businessmen to the original insurance business and re‑insurance business, (iii) the secondary but important differences that exist between marine insurance which is the oldest business of insu rance and other insurances, (iv) the continuity or the growth of ideas and practices, (v) as well as some close resemblances that insurance has with other transactions. The idea of insurance is the creation of trade and commerce and has continued in its growth to remain ahead of the power of crystallizing ideas that is exercisable by legislative draftsmen. The meaning of insurance, as such, therefore, cannot‑be gathered and made into a complete whole without taking a general view of the essentials of insurance, and without pressing into use in a disproportionate manner the fragments of the essentials that may be round scattered in the statutes. If the draftsmen could cryptically capture the whole concept without the fear of omitting some of its important exteriorities and lagging behind its development, they would have done so long ago.
The essence of insurance business can be said to be the undertaking, for consideration, by a person to compensate another in respect of the loss which the latter apprehends that he may sustain.
The essentials of the business can thus be said to be four:
(a) An undertaking to compensate,
(b) in lieu of consideration,
(c) the loss which the insured contemplates in respect of some of his interest,
(d) that he is liable to sustain.
The above essentials do not effectively distinguish insurance from wagering, guarantee and suretyship ; therefore, they are not enough to constitute a good definition, but it is necessary to dilate on such aspects. It is enough that they : hare essen tials, they are present in one form or another in life insurance, accident insurance fire insurance, liability insurance, guarantee insurance, marine insurance and the insurance of carriage by land and air. They are also present in re‑insurance, double insurance, co‑insurance and pool or syndicate re‑insurance. They are equally present in the insurance of the re‑insurer or, using technical language, in retrocession. Re‑insurance is, therefore, a type of insurance. The expression insurer' includes the original insurer, the re‑insurer and the insurer of the re‑insurer.
Further "re" means again and "re‑insurance" means insuring again. Re‑insurance is merely another insurance with reference to the original insurance. It is not so only etymologically but in fact too.
The Insurance Act 1938 itself contains clear indications that it should be applied to both the types. For instance, section 3 (1) makes certificate of registration a condition precedent of doing insurance business and section 3 (4) makes deposits in accordance with section 7 or section 98 compulsory, but the proviso to subsections (2) and (3) of section 103 makes an exception with regard to the deposits in favour of some re‑insurers only. If all re‑insurers were exempt from making deposits, no exception could be made in favour of some of them.
Re‑insurance business is essentially the business of insurance and the dissimilarities which exist between the two types are the necessary consequence of their superficialities, because after all they are not exactly the same. This means that all provisions of the Insurance Act, (IV of 1938), may not be applicable to the business of re‑insurance, but section 3 of the Act which marks the beginning of the application of the Act does apply to the re‑insurers.
Wilson v. Jones (1867) L R 2 Ex. 139 ; Law of Re‑insurance by Kenneth Thomson ; Law of Insurance by Preston and Cohinvaux ; Encyclopaedia Britannica ; Ballentine's Law Dic tionary ; Imperial Marine Insurance Company, v. Fire Insurance Corporation Ltd. (1879) 4 C P D 166 and In re : London County Commercial Re‑insurance Office (1922) 2 Ch. D 67 ref.
J. H. Rahimtoola for Appellant.
Z. C. Valiant for Respondent.
Dates of hearing : 9th and 10th January 1964.
---This Letters Patent Appeal arises from the judgment of our learned brother Wahiduddin Ahmed, J., dated the 29th of February, 1960, by which he dismissed the suit of the present appellant. In that suit the appellant had asked for a declaration that the registration of the appellant company under section 3 of the Insurance Act (IV of 1938), was not necessary. It was instituted because the Controller of Insurance had called upon the appellant‑company to obtain a certificate of registration before doing any re‑insurance business in Pakistan. The stand of the appellant‑company was that the object of its incorporation, was to under‑write and re‑insure insurance business, and not to carry on the business of insurance or to deal with the originally assured persons or with the origi nally insured property in any instance. The Controller did not agree with this contention and lodged a complaint under sec tions 102 and 103 of the Insurance Act against a Director of the appellant‑company. The appellant thereafter served a notice under section 80 of the Civil Procedure Code on the Secretary, Ministry of Commerce, Government of Pakistan and brought the above‑mentioned suit for declaration.
2. The contentions of the appellant‑company are set out clearly in paragraphs 3 (b) and 4 of the above‑mentioned notice. They are as follow:
"(b) . . . . . the company is not an Insurance Company under the Insurance Act,, 1938, and the question of its registra tion under section 3 of the Insurance Act, 1938, therefore does not arise.
* * * * * * *
(4) The Company contends that it does not come within the purview of the definition of insurer' given in section 2, sub section (9) of the Insurance Act, 1938, as it does not propose to carry on any class of insurance business in the Province and the Capital of the Federation and its business is expressly confined to re‑insurance business only."
3. The only question for decision in this appeal is, as to whe ther the business of re‑insurance is insurance business or not. Counsel have argued on the assumption that the appellant is not doing and does not intend to carry on the business of "the original or primitive insurer or direct insurer as the direct writing company is called from time to time" but to insure the whole or a part of the risk of the original insurer transferred or, to use the technical language, ceded' to the appellant. We have carefully listened to the distinctions drawn by counsel for the appellant and tried to grasp the implications of his contentions, but confess our inabi lity to appreciate as to why the appellant is not satisfied with the judgment of the learned Single Judge. There is hardly any new aspect which was brought to light by counsel for the appellant, and there was little criticism that he had to make with respect to the observations which are contained in the judgment under appeal. We feel that in reality he merely insisted that the arguments advanced by him be considered from the same angle from which they were advanced, for his better satisfaction. We shall attempt to do so, because the implications of the stand taken by the appellant are far reaching in so far as: the statutory control of the appellant's business is concerned. The most important implications are
Firstly, that if section 3 of Act IV of 1938 applies to the appellant then it is necessary for the appellant to deposit a fairly large amount of money in terms of section 7 or section 98 of the Act, and to regulate its business within the availability of that amount;
Secondly, that if the section does not apply to the appellant, then Act IV of 1938 will not be applicable to it at all and it will be entitled to carry on the business of a re‑insurer as an ordinary company under the Companies Act of 1913.
4. Counsel had an uphill task to perform because the English and American judicial precedents as well as text‑books unanimously contradict his views in this respect. He tried to get round this obstacle by contending that Insurance Act (IV of 1938), which is in force in this country, has a statutory history which is different from that of the English law; therefore, its concepts should be analyzed and understood with the help of the provisions contained in the Indian Life Assurance Act, (VI of 1912), and the Indian Insurance Companies Act, (XX of 1928), which enactments were repealed by section 123, of the Insurance Act, (IV of 1938). He supported this point of view by referring to the preamble of Act IV of 1938, which is as follows :‑
"Whereas it is expedient to consolidate and amend the law relating to the business of insurance ; It is hereby enacted as follows :"
He emphasised the words "consolidate and amend" with the object of pressing his argument that the provisions contained in Act IV of 1938 being not merely amending but also consolidating, its ambiguities, if any, were to be clarified with the help of the provisions contained in the previous law. Counsel did not compare the history of the English law to point out any difference in it from the history of our law; but his argument has certain merit in it, and we agree to the proposition that the history of a law can be consulted to remove its ambiguities But the first difficulty which arises compelling solution by counsel is that he has relied on the repealed provisions as if they were still in force, and has made no attempt, in spite of our effort to call his attention to it, to ascertain and apply the general principles of insurance. We propose to refer to the provisions of the Indian Life Assurance Act (VI of 1912), and the Indian Insurance Act (XX of 1928), on which counsel has relied, examine the inferences drawn by him from them and then refer to the general principles of insurance, at the same time taking into consideration some relevant observations made by a few of the learned Judges and writers of England and America.
5. Counsel has referred to the following clauses of section 2 of Act VI of 1912:‑
"2. In this Act, unless there is anything repugnant in the subject or context‑
* * * *
(5) life assurance business' means the issue of, or the under taking of liability under, policies of assurance upon human life, or the granting of annuities upon human life:
(6) policy of assurance on human life' means any instrument by which the payment of money is assured on death (except death by accident only) or the happening of any contingency dependent on human life, or any instrument evidencing a con tract which is subject to payment of premises for a term de pendent on human life;"
He has also referred to clause (b) of section ‑6 and section 19 of t S Act XX of 1928, which are as follows:‑
"6. In this Part (i.e. Part III) unless there is anything repug nant in the subject or context,‑
* * * * * *
(b) insurance company' means any person who transacts in British India the business of effecting contracts of insurance against any risk ;
1. * * * * *
19. A person transacting the business of reinsuring contracts of insurance effected by any other person in the course of any class of business other than life assurance business shall not, by reason only of that fact, be deemed to be transacting insurance business of that class."
He pointed out that, in terms of section 2 (5) of Act VI of 1912, insurance of a policy of assurance on human life was an essential ingredient and that a policy of assurance on human life was defined in section 2 (6) of that Act. This ingredient is missing in re‑insurance business because such policies are not issued even when a risk of life assurance is ceded by the assuring company to its re‑insurer. He further pointed out that, in terms of section 6 (b) of Act XX of 1928 an insurance com pany is the body which transacts the business of effecting contracts of insurance against every risk ; but no separate con tracts are executed by re‑insurers for each re‑insurance and only blanket treaties are made; therefore, re‑insurers fall outside the scope of the definitions of an insurance company. Moreover, in terms of section 19 of Act (XX of 1928), all business of reinsu rance other than life assurance business, had been expressly exclud ed from the category of insurance business. These two provisions of Act (XX of 1928) taking together indicated, according to counsel, that the contracts of re‑insurance could not be categorised as contracts of insurance. When these express exceptions con tained in Act XX of 1928 are considered along with the pro visions of subsections (5) and (6) of section 2 of Act VI of 1912, no insurance business can be classed as the business of re‑insurance.
6. We need not criticize the above arguments of counsel in detail because it omits to take into consideration the crux of the matter which is that the inapplicability to re‑insure of the above‑mentioned provisions which directly applied to original insurance can only lead to the conclusion that those provisions were to be left out of consideration in so far as re‑insurance business was concerned, but cannot lead to the conclusion that there is nothing essentially common between insurance and re‑insurance, and no provision of any Insurance Act can apply to the business of re‑insurance. For instance, in the life assurance business, issuance of policies of assurance as defined in subsection (6) of section 2 of Act VI of 1912 was a necessary ingredient in terms of subsection (5) of section 2 of Act VI of 1912, but the inference can be only that the issuance of such policies was not necessary for the business of re‑insuring the risk of a life assurer. Similarly, the provisions of Part III of Act XX of 1928 were not applicable in terms of section 19 of the Act to the business of re‑insurance excepting in the case of life assurance but it does not follow from this restricted exception that there was nothing in the Act which was applicable to the business of re‑insurance. The essential unity of insurance business and the business of re‑insurance is to be ascertained. If we are right in taking this view, then the general concept of insurance should be assigned an importance which is distinct and apart from the applicability or inapplicability of certain specific statutory provisions to the business, of re‑insurance. We think that we are right in emphasizing the importance of the central meaning of insurance, because if it was not so, then no argument was necessary merely to point out that the word "insurance" is different from the expression "re insurance". No arguments were addressed to us to show to us any provision of the Insurance Act (IV of 1938), which is now in force that may be inherently inapplicable to the business of re‑insurance. The burden of the argument of counsel was that the business of re‑insurance cannot be said to be the busi ness of insurance for purposes of section 3 of Act IV of 1938, because some of the provisions of the two previous Act were in applicable to re‑insurance business. It was left out of the scope of the arguments that were addressed to us that even if Act IV of 1938 applies to the business of re‑insurance there may be some provisions in it which do not apply to that business. Therefore, we would leave the question open as to whether some provisions of Act IV of 1938 are inapplicable to re‑insurance business or not and concentrate our attention on the examination of the direct question that is before us, namely, whether it is necessary for a re‑insurance company to obtain a certificate of registration under section 3 of that Act or not.
7. Before proceeding to examine this question, in view of the essentials of the business of insurance, we may mention that counsel for the appellant‑company made no attempt to connect the exceptions which he pointed out in the provisions of Act VI of 1912 and Act XX of 1928 with the provisions of Act IV of 1938, or to clinch his argument by showing as to why on the ground of those exceptions section 3 was inapplicable to the busi ness of re‑insurance. It is further to be kept in mind that the expressions : "insurance", "re‑insurance", "insurance business" and "re‑insurance business" are not defined in any of these three' enactments. If counsel was right in contending that the definition of "life assurance business" contained in subsection (5 of section 2 of Act VI of 1912 and the definition of "insurance company" contained in section 6 (b) of Act XX of 1928 dealt with particularized concepts then they could neither be meant to set out the essence of the business of insurance as a whole, nor will it be right to draw inferences from them to construct the complete concept of that business. Counsel did not contend that the definition of "insurance company" contained in Act XX of 1928 was comprehensive, and we need not attempt to show that it was so, because the definition of that expression has been considerably enlarged in section 2 (8) of Act IV of 1938 as follows:
"2 (8) insurance company' means any insurer being a company, association or partnership which may be wound up under the Companies Act, 1913, or to which the Partnership Act, 1932, applies;"
In view of the above definition the appellant is an "insurance company" if it is an "insurer" and a "company" which may be wound up under the Companies Act, 1913.
8. The appellant‑"company" is registered under the Com panies Act, 1913. But is it an "insurer" Subsection (9) of section 2 of Act IV of 1938 defines an "insurer" but it does not go further than referring to "insurance business" without defin ing that expression. Subsection (11) of section 2 of the Act defines "life insurance business", but it does not go further than referring to the business of effecting contracts of insurance "for the granting of annuities on human life" and, in certain circum stance, granting disability and indemnity accident benefits. Subsection (1) of section 3 of the Act speaks of "any class of insurance business," and "classes of insurance business", but makes no attempt to define the essence of that business. In these circumstances, we do not see how it is possible with the help of a few fragmentary provisions which have no pretence of contain ing all the fragments of the idea, to argue as to what is insurance business and how it may be defined as a whole. The absence of any definition of "insurance" clearly indicates the diffi culty that must have been felt in the performance of that task. As lay men to the art of drafting, we felt that the difficulty in evolv ing a logical or comprehensive and good definition arise, from (i) the numerous types of insurance business (ii) the multifarious shapes that have been given by the businessmen to the original insurance business and re‑insurance business, (iii) the secondary but important differences that exist between marine insurance which is the oldest business of insurance and other insurances, (iv) the continuity, of the growth of ideas and practices, (v) as well as some close resemblances that insurance has with other transactions. The idea of insurance is the creation of trade and commerce and has continued in its growth to remain ahead of the power of crystallizing ideas that is exercisable by legislative draftsmen. The meaning of insurance as such, therefore, cannot be gathered and made into a complete whole without taking a general view of the essentials of insurance, and without pressing into use in a disproportionate manner the fragments of the essentials that may be found scattered in the statutes. If the draftsmen could crypti cally capture the whole concept without the fear of omitting some of its important exteriorities and lagging behind its development, they would have done so long ago.
9. The attempt to find an answer to the question, therefore, to our minds, cannot be successful unless we first make an attempt to understand the essentials of insurance without defining it. The idea has grown over a long number of years. Its essence can be said to the undertaking, for consideration, by a person to compensate another in respect of the loss which the latter apprehends that he may sustain. Blackburn, J. has attempted to define insurance in Wilson v. Jones ((1867) L R 2 Ex. 139) by pointing out that it is a contract to indemnify the insured, in respect of some interest which he has, against the perils which he contemp lates that his interest will be liable to. The essentials of the business can thus be said to be four:
(a) An undertaking to compensate,
(b) in lieu of consideration,
(c) the loss which the insured contemplates in respect of some of his interest,
(d) that he is liable to sustain.
The above essentials do not effectively distinguish insurance from waggering, guarantee and suretyship; therefore, they are no enough to constitute a good definition, but it is unnecessary r for us to dilate on such aspects here. It is enough that they are the bare essentials, They are present in one form or, another in life insurance, accident insurance, fire insurance, liability insurance, guarantee insurance, marine insurance and the insurance of carriage by land and air. They are also present in re‑insurance, double insurance, co‑insurance and pool or syndicate re‑insurance. They are equally present in the insurance of the re‑insurer or, using technical language, in retrocession. Re‑insurance is there fore, a type, of insurance. The expression insurer' includes the original insurer, the re‑insurer and the insurer of the re‑insurer.
10. There is a simpler answer than the above one to the ques tion which is before us. It is that "re" means again and "re‑insu rance" means insuring again. Re‑insurance is merely another insurance with reference to the original insurance. It is not so only etymologically but in fact too. Kenneth Thomson says in his book on Re‑insurance that
"The re‑insurance contract presupposes an original or head policy and the re‑insurance is new insurance."
Preston and Cohinvaux have said in their book on the Law of Insurance that:‑
Re‑insurance, in fact, consists of a new insurance, effected by a new policy, on the same risk which was before insured, to indemnify the insurer, in whole or part, from his previous liability."
The Encyclopaedia Britannica explains that:
Re‑insurance is the term used to denote the transaction where by a person who has insured a risk insures against a part or the whole of that risk with another person."
The purpose of re‑insurance is explained by the above‑named two joint authors to be that‑
"Insurers rely on the principle that by the operation of the laws of chance the premiums received for a number of risks will, in any given period of time, be more than enough to meet the liability incurred. The acceptance of an insurance for an unduly large sum against one event, though desirable in the course of business, endangers this principle, and in such a case it is usual for insurers to re‑insure at least a part of the risk with another company."
The re‑insurers often insure their own risks. The idea of protecting the risks of insurers and re‑insurers by new insurances have been explained by the appellant itself by using the expressions "re‑insurance" and "counter‑insurance" in sub‑clause (g) of clause (3) of its Memorandum of Association, Exh. 5/1, as follows:‑
"3. The objects for which the company is established are ;
* * * *
(g) to re‑insure or counter‑insure any of the risks underwritten or re‑insured by the Company."
As the appellant claims to be a re‑insurance company only, the above provisions indicates that, according to itself, retrocession is a type of re‑insurance. The expression "counter‑insurance" suggests itself to the mind if we think of "hedging" which is a common practice with those who deal in "futures" or, in other words, to the transactions in which agreements are made "for the sale and future delivery of stocks or commodities". Ballentine's Law Dictionary says
"Those who deal in futures' are divided into three classes
First, those who use them to hedge, i.e. to insure themselves against loss by unfavourable changes in price at the time of actual delivery of what they have to sell or buy in their business; second, legitimate capitalists, who exercising their judgment as to the conditions, purchase or sale for future delivery with a view to profit based on the law of supply and demand; and third, gamblers, or irresponsible speculators, who buy or sell as upon the turn of a card."
There is a close association in the kind of risk that is accepted in futures, waggering and insurance. A passage quoted by Ballen tine from an American judgment to explain the meaning of hedging' brings it out at the same time suggesting the purpose of safety that hedging and insurance serve. It is as follows :‑
"If we felt called upon by the necessities of this decision to give a definite opinion of hedging, the record might well lead us to find that hedging is a manufacturer's or merchants' insurance against price fluctuation of materials, and no more damantory than insurance of property and life, which in one sense are wagers that the property will not be destroyed during the term, and that the life will not fail in less than the expec tancy in the actuaries' tables."
The sub‑clause quoted above from the Memorandum of Associa tion of the appellant connects the same safety with re‑insurance and retrocession.
11. The above elucidations have been given because counsel for the appellant objected to placing reliance on English and American rulings, but enough has been said to explain the underlying common principles, and now we refer to two English judgments in Imperial Marine Insurance Company v. Fire Insu rance Corporation Ltd. ((1879) 4 C P D 166) and In re: London County Commercial Re‑Insurance Office ((1922) 2 Ch. D 67). In the first case the usage which governs Marine Insurance was considered applicable to marine re‑insurance, and in the second case re‑insurance contracts were treated as insurance contracts.
12. Counsel for the appellant laid emphasis on the difference that exist between insurance contracts and re‑insurance contracts. There is no doubt that there are dissimilarities of form between the two, and there are similarities also, but the deciding factor for applying the Insurance Act (IV of .1938), to re‑insurance business is the essentially common nature of the two types of transactions. The Act itself contains clear indications that it should be applied to both the types. For instance, section 3 (1) makes certificate of registration a condition precedent of doing insurance business and section 3 (4) makes deposits in accordance with section 7 or section 98 compulsory, but the proviso to f subsections (2) and (3) of section 103 makes an exception with regard to the deposits in favour of some re‑insurers only. If all re‑insurers were exempt from making deposits, no exception could be made in favour of some of them.
13. We conclude from all that has been said above that re insurance business is essentially the business of insurance and the dissimilarities which exist between the two types are the necessary consequence of their superficialities. because after all they are not exactly the same This means that all provisions of the Insurance 1 Act (IV of 1938). may not be applicable to the business of reinsurance, but section 3 of the Act which marks the beginning of the application of the Act does apply to the reinsurers. The appeal is accordingly dismissed with costs.
K. B. A. Appeal dismissed.
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