Abstract
Of late, the Supreme Court of India in a couple of judgments has re-affirmed the sublime importance of the principle of “utmost goodfaith” and reinforces the viewpoint that amongst all the basic principles of insurance the principle of utmost goodfaith stands on the highest footing.
The underlying philosophy is that it is only the insured who has exclusive knowledge of this information and if he conceals some information or discloses inaccurate or incomplete information the insurer interest will be seriously prejudiced and the risk underwritten would be different from the risk intended to be covered.
The Apex Court in Oriental Insurance Company Limited v/s Mahendra Construction, Civil Appeal No.3359 of 2019 (Arising out of SLP(C) No.3381 of 2019) delivered on 01.04.2019, has made it crystal clear that the duty of accurate and complete disclosure by the proposer is unqualified and mere disclosure of the previous policy does not discharge the burden. It is further clarified that insurer cannot be burdened to enquire with the previous insurer on claims made, if any.
Whereas in Reliance Life Insurance Co Ltd & Anr. V Rekhaben Nareshbhai Rathod, Civil Appeal No. 4261 of 2019 (Arising out of SLP (C) No 14312 of 2015), delivered on 24.04.2019 Court rejected the contention of the insured that agent filled in the proposal form and he did not read or understood the proposal form, by holding that in doing so the agent acted as agent of the insured and not the insurer.
These judgments will surely have wide implication and its tremors will be felt never like before and will radically shift the claim handling process.
“All men are equal but some men are more equal than others”
George Orwell
Amongst all the basic principles of insurance i.e. Uberrima fides, Insurable Interest, Indemnity, Contribution, Subrogation and Proximate Cause, the principle of “uberrima fides” also called “utmost goodfaith” stands on the highest footing. Uberrima fides in its genitive form uberrimae fidei is a Latin phrase meaning “utmost good faith”. It requires the prospect to disclose all material information about the subject matter of insurance. Such disclosure must in complete and accurate. Material information is normally collected by the insurer in proposal form which contains the very basic information for assessment of risk.
The underlying philosophy is that it is only the insured who has exclusive knowledge of this information and if he conceals some information or discloses inaccurate or incomplete information the insurer interest will be seriously prejudiced and the risk underwritten would be different from the risk intended to be covered.
What are Material Facts?
The term “Material Fact” is not defined in the Insurance Act, 1938, and, therefore it has been understood and explained by the courts in general terms to mean any fact that would influence the judgment of insurer in fixing the premium or determining whether he would like to accept the risk. Any fact that goes to the root of the contract of insurance and had a bearing on the risk involved would be “Material”.
It is stated in Pollock and Mulla’s Indian Contract and Specific Relief Acts that “any fact the knowledge or ignorance of which would materially influence an insurer in estimating the degree and character of risks in fixing the rate of premium is material fact.”
Protection of Policyholders’ Interests Regulations, 2017, Section 4 Sub-Section (8) defines the proposal form in the following term: “Proposal form” means a form to be filled in by the prospect in written or electronic or any other format as approved by the Authority, for furnishing all material information as required by the insurer in respect of a risk, in order to enable the insurer to take informed decision in the context of underwriting the risk, and in the event of acceptance of the risk, to determine the rates, advantages, terms and conditions of the cover to be granted;
Explanation: “Material Information” for the purpose of these regulations shall mean all important, essential and relevant information sought by insurer in the proposal form and other connected documents to enable him to take informed decision in the context of underwriting the risk.
Now comes the real question. Are all disclosures required to be furnished in a proposal forms or questionnaire(s) preceding an insurance contract are material information per se or it is an open question to be determined by judiciary in a given case?
We will discuss this issue in later part of the article with the help a few recent Supreme Court judgments.
Utmost Goodfaith: Duty cast on Proposer
Insurance contracts are based on the principle of utmost good faith because one party to the contract alone, namely the proposer knows or ought to know all about the risk proposed for insurance and the other party, that is the insurer has only to rely largely on the representations made by the proposer. In other words, the information supplied by the proposer in the proposal form or questionnaire as well as the other correspondence between the proposer and the insurer will have a bearing on the proposed contract of insurance to be effected.
Utmost Goodfaith: Duty cast on Insurer
The insurer is also under obligation to disclose all material information to the prospects which influences prospect’s decision to take the insurance or not and at what premium. The insurer is under unbounded duty to make full and complete disclosure about the coverage, exclusion, terms and conditions etc. dispassionately, else it will be held liable for mis-selling the product.
Insurance contracts are generally considered contracts of adhesion because the insurer draws up the contract and the insured has little or no ability to make any changes to it. Insurance policies are sold without the policyholder even seeing a copy of the contract. If any ambiguity is found in the policy document, it is interpreted against the insurer by applying the principle of Contra Proferrentum.
Judicial Interpretations: Evolving Case Laws
In many cases courts have held that the information furnished was incomplete and/or incorrect and deliberately concealed. The insurers were able to prove that such concealment was deliberate before the court and they got the decree in their favor for breach of principle of utmost good faith on the part of insured. The decision of insurer to repudiate the claim in those cases has been upheld by the courts.
It has been held many times that nobody knows better than the prospect about the subject matter of insurance; hence, it is prime duty of the prospect to disclose all material facts known to him at the time of proposal. Concealment or non disclosure of material fact renders the policy voidable, and insurers cannot be held liable for the claim arising out of such concealment or non-disclosure of material fact.
The proposer must disclose all information required by the insurer without forming opinion that information required to be furnished is not material. Certain material facts in isolation may not be material but may be guiding factor to other material facts.
MacGillivray on Insurance Law (12th edition) elucidates on materiality thus:
“The opinion of the particular assured as to the materiality of a fact will not as a rule be considered, because it follows from the accepted test of materiality that the question is whether a prudent insurer would have considered that any particular circumstance was a material fact and not whether the assured believed it so …”
In Mithoolal Nayak v LIC, 1962 AIR 814, the Supreme Court of India upheld the repudiation of death claim by insurance company on the ground of suppression of material facts.
The Supreme Court held that deceased not only did not disclose the information of getting treated by the doctor but he also made false statement that he has not been treated by any doctor. This shows that there was intention of suppressing the material fact and the concealment was deliberate.
The Apex Court extended the principle of uberrime fides to health insurance in Satwant Kaur Sandhu Vs New India Assurance Company, 2009 (8) SCC 316, holding that though health insurance is not life insurance but basic principle of utmost goodfaith applies and upheld the repudiation of claim.
The question was whether Section 45 of Insurance Act, 1938, which places restrictions on right of insurer to call in question a life Insurance policy on ground of misstatement and suppression of material facts apply to mediclaim policy as well.
Court held that a mediclaim policy is no doubt a non life insurance policy. Nonetheless, it is a contract of insurance falling under the “uberrima fides” meaning a contract of utmost good faith on part of the assured, and the insured was under solemn obligation to make true and full disclosure of the information on the subject which is within his knowledge.
Court went on to add:
”It would be ignorant to say that the insured was not aware of his health and the fact that he was suffering from diabetes and chronic renal failure, more so when he was stated to be on regular haemodialysis. There is hardly any scope of doubt that the questions asked in the proposal form were material facts the answer to which would have influenced the insurer.”
In a recent Supreme Court decision Oriental Insurance Company Limited v/s Mahendra Construction, Civil Appeal No.3359 of 2019 (Arising out of SLP(C) No.3381 of 2019) delivered on 01.04.2019, principle of utmost goodfaith on the part of insured was re-emphasized in the following words:
“The burden cannot be cast upon the insurer to follow up on an inadequate disclosure by conducting a line of enquiry with the previous insurer in regard to the nature of the claims, if any, that were made under the earlier insurance policy. On the contrary, it was the plain duty of the respondent while making the proposal to make a clear and specific disclosure.”
It was further added:
“The mere disclosure of a previous insurance policy did not discharge the obligation which was cast on the respondent, as the proposer, to make a full, true and complete disclosure of the claims which were lodged under the previous policy in the preceding three years.”
In Reliance Life Insurance Co Ltd & Anr. V Rekhaben Nareshbhai Rathod, Civil Appeal No. 4261 of 2019 (Arising out of SLP (C) No 14312 of 2015), delivered on 24.04.2019, among the questions that the proposer was required to answer in the proposal form was whether he was currently insured or had previously applied for life insurance cover, critical illness cover or accident benefit cover. This query was answered in the negative.
The Apex Court while upholding the repudiation of the claim by the insurance company held that the expression “material” in the context of an insurance policy can be defined as any contingency or event that may have an impact upon the risk appetite or willingness of the insurer to provide insurance cover.
The Apex Court has cited with approval Privy Council’s ruling in Condogianis v Guardian Assurance Company Ltd, AIR 1921 PC 195, where it was held that even a partial non-disclosure or ambiguous disclosure regarding the previous policies in the proposal form vitiates the policy, which is thus, liable to be rescinded. In that case, the Privy Council dealt with an appeal by Special Leave from a judgment of the High Court of Australia. The appellant had claimed a declaration under a policy of insurance that the insurer was liable to pay him for a loss sustained as a consequence of a fire. In response to the requirement of disclosing whether the proponent had ever been a claimant of a fire insurance company in respect of the property proposed or any other property, the insurer had disclosed one claim which had been made in the past but omitted to disclose another, in respect of the burning of a motor car.Finally, negating the contention that insured had not read and understood the proposal form and it was filled in by the agent, Court came down heavily: “ A person who affixes his signature to a proposal which contains a statement which is not true, cannot ordinarily escape from the consequence arising therefrom by pleading that he chose to sign the proposal containing such statement without either reading or understanding it. That is because, in filling up the proposal form, the agent normally, ceases to act as agent of the insurer but becomes the agent of the insured and no agent can be assumed to have authority from the insurer to write the answers in the proposal form. If an agent nevertheless does that, he becomes merely the amanuensis of the insured, and his knowledge of the untruth or inaccuracy of any statement contained in the form of proposal does not become the knowledge of the insurer.”
Conclusion
The contracts of insurance is contracts uberrima fides that means contract based on “utmost good faith” that means contract based on “utmost good faith” hence, each and every material facts must be disclosed and the concealment of any material information or providing any false or incorrect information renders the contract voidable at the option of the insurer. This emanates from the right of every person to know about every material fact associated with the subject matter of the contract and there is no escape to this. Concealment of any material fact will entitle the insurer to deprive the assureds’ benefits of the contract.
There is no clear distinction between material or immaterial facts. It is still very easy for an insurer to repudiate the contract on the slightest point of non-disclosure by treating them as warranties, thereby putting the assured in an even more difficult position.
While both parties are under a duty of utmost goodfaith, it is unclear what this entails to the insurer. The violation of this duty by the insurer is often overlooked and not taken seriously by the law enforcement agencies including insurance regulator. There should be strict law to deal with violation of this duty by the insurer as well, to prevent the mis-selling, as it is common knowledge that selling agents do not provide the full and complete disclosure dispassionately as required by regulator, so that the prospect chooses the product best suited to his needs.
