Cover note in the Contract of Insurance

A Cover note is an interim receipt issued by the insurer. It is temporary in nature. in practice on making the proposal, the insured company on payment of premium gives a deposit receipt called Cover note. It is also called an Interim Protection Note. It contains the same terms and conditions as that of the future policy to be issued in favour of the insured. It is issued in non-marine and non-life insurances. Generally it is in regular practice in fire, burglary and motor insurances. It is purely for temporary period, viz. 15 days or 30 days. It is a well established commercial practice.

Object of Cover note is to give interim protection to the assured pending decision of the Board of Directors of the Insurance Company. Insurers of non-life policies normally empower their agents to grant cover notes valid at the most for a short period of 15 or 30 days, after satisfying themselves about the the acceptability of the proposal. Cover note has not been defined in the Insurance Act. But Section 145 (b) of the Motor Vehicle Act, defines a certificate of insurance which includes a cover note complying with such requirements as prescribed.

According to Honorable Hidayatulla J.  observation in General Assurance Society v. Chandmull, "a contract of insurance is a species of commercial transactions and there is a well established commercial practice to send cover note even prior to the completion of a proper proposal or while the proposal is being considered or policy is in preparation of delivery. It is a temporary and limited agreement. It may be self contained or it may incorporate by reference to the terms and conditions of the future policy."

Cover note is similar to a Slip in Marine Insurance. The effect of cover note is that if fire takes place between the date of the receipt of receipt of cover note and the date of intimation by the insurance company regarding the acceptance or refusal of the policy, the insurance company will be responsible. Cover note contains a contract of insurance but it is not a policy of insurance. It is only a protection for the interim period between the date of proposal and the date of issue of policy; and therefore the cover note is the protection for a temporary period.

Section 147 (4) of the Motor Vehicle Act, 1988, imposes strict liability upon the insurance company to issue cover note to a motor vehicle owner who in turn doesn't receive his policy within the specified time of cover note. Cover note is effective until the date on which it expires. Any claims arises during this period, the insurer is to pay compensation, and such claims shall be determined according to the terms and conditions of the cover note. The terms and conditions of the cover note may vary.

The cover note should properly be stamped, according to the Indian Stamp Act, 1899. Now the question is whether it can be admitted as evidence, when it is not stamped? The answer is, it is like an insurance policy and so under Section 35 of the Stamp Act, it is inadmissible in evidence, but it can be received in evidence on payment of penalty. However, the interim protection doesn't amount to policy or an engagement to issue the policy and can't be issued for any other purpose or any other claim. Section 35 contemplates that the letter of cover note must have the necessary stamp at the time of execution and therefore subsequent stamping will not make it a valid document, which can be used for claiming the amount.

Generally, the terms and conditions of the cover note are similar to that of the terms and conditions of the policy. The cover note is not a complete and final contract between contract between the insurer and insured. But it binds both the parties concerning the rights and liabilities of them if any event of a loss occurs during its period. Cover note comes to an end on the issue of "Certificate of Insurance/policy". It also comes to an end when the insured receives a cancellation notice of cover note from the insurer.