corporate law
A "Cover Note" or "Interim Receipt" is a document issued by insurance companies during the negotiation phase of an insurance policy. It serves to acknowledge receipt of the premium payment while providing temporary coverage to the proposer until their proposal is either accepted or rejected by the insurer.
A Cover Note indicates that the insurance proposal is under consideration; from the date of issuance until the policy is finalized, coverage is provided under this document. Generally, when a prospective policyholder submits an insurance proposal, the insurance company evaluates the associated risks based on the declarations and documents presented. If they decide to approve the proposal, they will issue a Cover Note, confirming receipt of the premium and providing coverage until the formal policy is issued.
The objective of the Cover Note is to offer interim protection to the insured while awaiting the final decision from the insurer.
According to Investopedia, a Cover Note is a temporary document provided by an insurance company as proof of insurance coverage until a complete insurance policy is issued. It differs from a certificate of insurance or an insurance policy, and it includes details such as the name of the insured, insurer, and specific coverages.
Insurance companies utilize Cover Notes to provide proof of insurance while processing the required paperwork. The coverage provided is generally equivalent to that of the full insurance policy, although some restrictions may apply during this evaluation period.
Typically, a Cover Note is valid for 15 to 30 days from the date of issuance, depending on the insurance coverage type and company policy. Notably, Section 147(4) of the Motor Vehicle Act, 1988 mandates that insurers provide a Cover Note to motor vehicle owners, ensuring guarantees for any claims arising during this period.
It is essential for the Cover Note to be properly stamped in accordance with the Indian Stamp Act, 1899. Failure to do so may render it inadmissible as evidence under Section 35 of the Stamp Act, although it may be allowed with payment of a penalty.
The Supreme Court, in General Assurance Society v. Chandmull, stated that a contract of insurance is a commercial transaction, recognizing the customary issuance of Cover Notes before finalizing proposals. This temporary agreement can either stand alone or refer to future policy terms.
In essence, a Cover Note does not constitute a final engagement but offers proactive protection. However, as highlighted in various cases, including Murfitt v. Royal Insurance Co. Ltd., the defining terms and conditions must be adhered to, and the insured must be notified regarding the cancellation of coverage or any changes in status.
Judicial decisions reinforce that a Cover Note issued by an insurance company acts as a binding agreement between the insurer and the insured, confirming coverage against stated risks until a formal policy is issued. It is also essential for the Cover Note to be appropriately stamped to hold up in court. Any claims arising during this period will be settled as long as the terms specified within the Cover Note are adhered to. When delays occur in issuing policy documents, the Cover Note's duration may be extended unless otherwise communicated.
This understanding of Cover Notes is crucial for both insurers and insured parties, ensuring clarity on coverage and obligations during the interim period prior to official policy issuance.