Generally all insurance contracts are contract of indemnity except contract of personal line insurance covering human life e.g. personal accident insurance policies, health related policies and life insurance policies.
By indemnity, as the principle of insurance, we mean that ideally the insured should be placed in the same financial position, as far as possible, neither better nor inferior way, after happening of a loss, as he occupied the financial position immediately before the occurrence of that loss, i.e. the insured will neither gain or loss in case of any claim under any of these types of affected policies.
In other words, the insured will not be allowed to make profit out of the contract of insurance affected between him / her (as proposer / insured) and the insurer. The basic purpose of insurance is to ensure that the insured is no way allowed to make money out of any loss under any of the affected policy.
All basic principles of insurance e.g. proposal and acceptance, Uberrimae fidei, indemnity, proximate cause, consideration, contribution and subrogation are equally important and applicable to the insurance contracts. However, for personal line insurance related to human life – the contract principle of “indemnity” is not at all applicable for the simple reason that here the sum assured or capital sum insured as fixed under such policy is only directed towards the applicable intrinsic value of human life – but simply the exact monitory value of the human life cannot be possibly assessed.
Therefore, it is imperative on the part of the proposer to provide all material information related to insured person in correct, comprehensive and complete form to enable the insurer to issue the policy most accurate manner. The sum insured of any person is fixed based on his / her age, income, occupation, profession and financial background of the insured person and the type of insurance preferred.
A material fact is a fact which will affect the judgement of a prudent underwriter in considering whether to accept or to reject a risk and if accepted, at what rate of premium and under what terms and conditions.
Material facts include the following:
- Facts which tend to render a risk proposed involving risk greater than normal.
- Facts necessary to explain the exceptional nature of risk proposed for insurance say, a person smoking more than 30 cigarettes per day, where without that, the insurer would justifiably believe the risk to be normal.
- Facts which appear to suggest some special motive for insurance say, having a heart problem where the doctor had already suggested for by-pass surgery or where there is gross over-insurance – say for a domestic help the policy is taken for Rs. 5 lakhs as sum assured.
- Facts which show that the proposer himself in some way not normal, e.g. he may have made many claims on previous insurer, thereby had been identified as claim prone client and declined renewal.
Principle of utmost good faith must be observed in all legal contracts, that is to say, that both the parties must not act fraudulently with the intention to deceive the other. While, however, the parties to any commercial contract must not be dishonest in their dealings, this does not mean that they are bound to reveal all they know or ought to know about the transaction.
Basically in a contract for sale of goods, the seller may place the goods before the prospective buyer for his inspection and if the goods are found to be suitable to the buyer, he / she may purchase the goods.
But once the goods are purchased, if the purchaser, finds subsequently some defects in the goods, he cannot come back to return the goods and he / she has no right of action at common law against the seller, unless the latter made representations or gave away a warranty as to the non-existence of those defects.
This rule is known as caveat emptor i.e. “let the buyer be aware”. But the insurance contracts are absolutely based on a different rule.
They 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 as well as the correspondence between the proposer and the insurer will have a bearing on the proposed contract of insurance to be effected.
This principle is all the more important for the purpose of assessment of the risk by the insurer. It will be appreciated that without the information supplied by the proposer the insurer will be in complete darkness about the risk proposed for insurance.
For this reason, the insurance contracts are made as contract of utmost good faith i.e. Uberrimae fidei. So it is the unconditional responsibility of the proposer, to disclose clearly and accurately all material facts relating to the proposed Health or PA Policy Life Insurance. It is positive and not a negative duty. It is confined to matters of fact. It does not include matters of any opinion.
Health Policies which are currently the main prospect of General Insurance Companies in the Indian Insurance Market Scenario come under the purview of personal line of insurance business covering. Material fact in personal line of policies is the information related to the insured person provided in the proposal form.
It comprised of age, income, occupation, medical history, previous major medical treatment details, disability, if any, existing and previous insurance details / denial of insurer in form of exclusion and related information which is directly & absolutely linked with the physical, mental health along with physical impairments, life style and addiction to cigarette / alcohol, etc.
Under health insurance policies most of the information is directly material to the rating of the policy and possibility to explore the competitive pricing in this de-tariff market (wherein subsidy in form of cross-sailing to the miscellaneous policies is totally prohibited). Certain material facts – although may not be directly linked with the rating factors and / or acceptance or rejection of the risk, but are certainly guiding factor to other material facts. In other words, all information may not be material, but all material facts are linked with the pricing and rating factor of these policies.
Pricing of these policies is decided based on the material facts available (& as given / disclosed by the proposer) in the Proposal Form. A proposal form is the document which provides all the material information related to the insured / assured (as the case may be) to the Underwriter to accept / write, restrict the cover or reject the proposal.
Therefore, thorough scrutiny of the proposal is a must before making any decision on the proposal. Important aspects of material facts related to personal line insurance policies may be age and occupation to work out the loss and mortality & morbidity probability for particular class of the policy. Income of proposer indicates the financial standing of the prospect to decide the sum insured to be fixed under the policy.
Health details e.g. information regarding accidental injury, hereditary sickness suffered by insured person, disability to the insured person in past and existing unrecoverable disability details are the components, which may be practically the main guiding factor to accept or reject the proposal.
Another major & common ailment known as diabetes though insured person may not be aware / know, yet he / she may be suffering from the disease at the time of proposal. Writer working as a Divisional Manager rejected a claim – even after the due recommendation made the concerned
Branch Office under the control of the D.O. – wherein nothing was mentioned in the proposal form submitted by the proposer during taking the policy for the first time in 1999 but the medical report / summary submitted by the concerned hospital showed that the patient has suffered heart problem during 1997 and got treated in the same hospital.
But now-a-days insurance policies having tie-up arrangements for claim settlement with release of float money by the insurers on regular basis have tremendous possibility of giving rise to various types of moral hazard due to professional awareness of the service providers (the black-listing of TPAs & Hospitals by Indian Insurers are witnessed that probability).
Some of the Indian Insurance Companies have started to collect additional questionnaire with regard to the diabetes filled in by the insured person. The prospect is obliged to give the correct, comprehensive and complete information as asked by the insurer in the main proposal form as well as featuring in that additional questionnaire.
If the information is incomplete or in correct, and the claim lodged is directly linked with the material fact not disclosed or incompletely furnished in the Proposal Form that is submitted before the commencement of the cover, the insurer may deny the liability in terms of Uberima Fides i.e. Utmost Good Faith.
The insurer may invoke defense of ‘Concealment’, ‘Nondisclosure’ and ‘wrong-disclosure / misdescription’ of material fact jointly or severally. Thus the duty of prospect is definitely to disclose all material information known to him / her as on the date of proposal. The most common reason for the disputes between insured and insurer is non-disclosure of material information and the insurers are straightway taking defense to protect their decision to absolutely deny the liability, if the case is placed before any redressal forum.
Persons above 35 years, the questionnaire regarding diabetes and heart related problems should be filled in all respect complete, correct and as far as possible comprehensive to let the insurer decide the rating of the proposal. On the other hand insurer is obligated to study the proposal thoroughly and take the decision based on information given in the proposal.
However, if the policy was drafted wrongly by the underwriter despite the information was given by prospect in the proposal form; the benefit of such wrong drafting shall go to the customer, i.e. the policy holder.
Existing ‘Physical Deformity’ of the insured person, if any must be furnished in the proposal. Any major surgery done in the past e.g. Renal transplant, knee replacement, CABG, or any other kind of major surgery must be disclosed in the questionnaire.
If such types sickness existed , but not disclosed at the time of filling up the proposal and the insured person suffers from same disease subsequently, the insurer may deny the claim or pretext of “PRE-EXISTING DISEASE” with the exclusion clause of the policy in fine print. Previous insurance including “No-claim Bonus” or “Cumulative Bonus” details as per expiring policy, if existed, and such past claims history must be incorporated in the proposal to let the underwriter charge the rate appropriately on the merit of the risk itself.
There as many cases decided by various high courts, State commissions for consumer disputes and Hon’ble Apex Court of the Country where the Court held that the information furnished was incomplete and/or incorrect and deliberate concealment of the fact. The insurers were able to prove such intentional concealment before the court and they got the decree in their favour in violation of principle of utmost good faith. The decision of insurer to repudiate the claim was upheld by the Court.
The court held that nobody knows better than the prospect about the insured person which is subject matter of insurance; hence the information furnished by the prospect was basis of contract. It was prime duty of the prospect to disclose all material facts known to him/her at the time of proposal. Concealment or non disclosure of material fact leads to policy become void and insurers cannot be held responsible for the liability arising out of such concealment or non-disclosure of material fact.
On the other side the courts decided against the insurers also, where the information was given by customers in the proposal form, but it was either overlooked or not taken into consideration or misinterpreted by the Underwriter while drafting the policy. The court held that since the technical implication of the terms, questions and their answers furnished by the customers, were better known to insurers, they are obliged to scrutinize the information thoroughly and draft the policy accordingly.
Though the prospect is obliged to furnish correct and complete information, the insurers are duty bound to interpret the information furnished logically and correctly to issue the policy. Acceptance and rejection or acceptance with restricted cover etc. lies with the insurers. At the same time claims overpaid always will impact on bottom line (i.e. profitability). As a construct to that claims handled fairly & efficiently will eventually give the insurer a solid, dependable reputation.
Wherever the dispute arises regarding non-disclosure of material fact and it is proved by the customer that he furnished information to insurer, but the insurer did not interpret correctly, the benefit of doubt always goes to insured. Hence the role of underwriter or the authority to accept or reject the risk becomes not only crucial, but very important also.
It is the most important aspect as the insurance deal with physical sale / purchase and true facts of the risk are always better known to the proposer than to the insurer, the insurer is absolutely relying on the proposer to disclose all material facts about the proposed risk.
The insurers should analyze the information correctly to avoid litigation. It is the time, when insurance sector has opened up for private and foreign players, very tough competition has emerged amongst the insurers. The information is basis of data bank of insurers, hence the insurers are obliged to generate data base on the information available with them with regard to the policies to cope up with the competitive scenario of the insurance sector.
As an insurance company promises to pay the insured or other beneficiary (as stated in the policy) as the holder of the policy, certain sum of money (sum assured / capital sum insured – as the case may be), if a loss occurs, to ensure continuance of the financial benefits so the as to the value of the human being must be adequate & properly justified.
As per law, the presence of pecuniary interest is not mandatory in case of life insurance / PA / Health insurance. Though one may not suffer any financial loss due to the death or disability of the concerned person still one can buy insurance on the life of the person. Again while purchasing insurance on one’s own life, insurable interest, another principle of General Insurance, is presumed to be present to an unlimited extent.
However, the amount of the policy is determined by the insurer depending upon the earning capacity of the person and other relevant factors such as age, health, etc. When purchasing personal line insurance covering the life of other person by any proposer in any policy, the presence of natural love and affection between the contracting parties, in that instant case, is well enough to create the insurable interest.
In the following case of life insurance contracts insurable interest need not be proved:
- Own life (up to the limit acceptable to insurers);
- Spouse’s life;
- Life of dependent children;
- Life of dependent parents.
Instances of life insurance contracts where the extent of insurable interest / monetary interest has to be proved:
- Employer and employee;
- Creditor and debtor;
- Partners;
- Guarantors
Insurable interest (presence of mutual love & affection) has to be present at the inception in case of life insurance policies and need not be present at the time of death or disability. The life of a person is different from a material or property. The principle of valuing material property like replacement cost less depreciation and discounted cash flows cannot be applied to determine the monitory value of life of the person.
The value of life is broadly determined by certain qualitative factors and is subject to one’s opinion. The most important factor here is the earning capacity of the person and the insurable value of the policy taken up by the person. A life insurance policy is not subject to the principle of indemnity but purely a valued policy wherein the agreed upon amount in full is paid to the beneficiary in case of loss of life.
References :Various Sources
By: Anabil Bhattacharya, Chief Manager & CPIO, National Insurance Cc. Ltd., Head Office, Kolkata, Published in “The Insurance Times” February, 2013
