SC: Life insurer can reject claim if prior policies not disclosed in proposal form

On 24th April 2019, The Hon’ble Supreme Court, in the matter of Reliance Life Insurance Co Ltd & Anr v.Rekhaben Nareshbhai Rathod, the Hon’ble Supreme Court pronounced that the failure of the insured to disclose a policy of insurance obtained earlier in the proposal form entitles the insurer to repudiate the claim under the policy.

The Hon’ble Supreme Court observed that:

(Para 13) Section 45 of the Insurance Act 1932 stipulates restrictions upon the insurer calling into question a policy of life insurance after the expiry of two years from the date on which it was effected. After two years have elapsed the insurer cannot call it into question on the ground that:

  • a statement made in the proposal; or
  • a statement made in any report of a medical officer, referee or friend of the insured; or
  • a statement made in any other document leading to the issuance of the policy

was inaccurate or false, unless certain conditions are fulfilled.

Those conditions are that :

  • such a statement was on a material matter; or
  • the statement suppressed facts which were material to disclose and that

(i) they were fraudulently made by the policy holder; and

(ii) the policy holder knew at the time of making it that the statements were false or suppressed facts which were material to disclose.

The cumulative effect of Section 45 of the Insurance Act 1932 is to restrict the right of the insurer to repudiate a policy of life insurance after a period of two years of the date on which the policy was effected. (Para 13)

Beyond two years, the burden lies on the life insurance policy’s insurer to establish the inaccuracy or falsity of a statement on a material matter or the suppression of material facts. Moreover, in addition to this requirement, such insurer has to establish that this non-disclosure or, as the case may be, the submission of inaccurate or false information was fraudulently made and that the policy holder while making it knew of the falsity of the statement or of the suppression of facts which were material to disclose. (Para 13)

Section 45 of the Insurance Act 1932 curtails the common law rights of the insurer after two years have elapsed since the cover for life insurance was effected. (Para 14)

Insurance is governed by the doctrine of uberrima fidei. This postulates that there must be complete good faith on the part of the insured. (Para 15)

The relationship between an insurer and the insured is recognized as one where mutual obligations of trust and good faith are paramount. (Para 15)

Materiality from the insured’s perspective is a relevant factor in determining whether the insurance company should be able to cancel the policy arising out of the fault of the insured. Whether a question concealed is or is it not material is a question of fact.(Para 25)

Materiality of a fact also depends on the surrounding circumstances and the nature of information sought by the insurer. It covers a failure to disclose vital information which the insurer requires in order to determine firstly, whether or not to assume the risk of insurance, and secondly, if it does accept the risk, upon what terms it should do so.(Para 25)

The insurer is better equipped to determine the limits of risk-taking as it deals with the exercise of assessments on a day-to-day basis. In a contract of insurance, any fact which would influence the mind of a prudent insurer in deciding whether to accept or not accept the risk is a material fact. If the proposer has knowledge of such fact, she or he is obliged to disclose it particularly while answering questions in the proposal form. An inaccurate answer will entitle the insurer to repudiate because there is a presumption that information sought in the proposal form is material for the purpose of entering into a contract of insurance.(Para 25)

Contracts of insurance are governed by the principle of utmost good faith. The duty of mutual fair dealing requires all parties to a contract to be fair and open with each other to create and maintain trust between them. In a contract of insurance, the insured can be expected to have information of which she/he has knowledge. This justifies a duty of good faith, leading to a positive duty of disclosure.(Para 26)

Proposal forms are a significant part of the disclosure procedure and warrant accuracy of statements. Utmost care must be exercised in filling the proposal form. In a proposal form the applicant declares that she/he warrants truth. The contractual duty so imposed is such that any suppression, untruth or inaccuracy in the statement in the proposal form will be considered as a breach of the duty of good faith and will render the policy voidable by the insurer.(Para 26)

The finding of a material misrepresentation or concealment in insurance has a significant effect upon both the insured and the insurer in the event of a dispute. The fact it would influence the decision of a prudent insurer in deciding as to whether or not to accept a risk is a material fact.(Para 26)

The failure of the insured to disclose a policy of insurance obtained earlier in the proposal form entitles the insurer to repudiate the claim under the policy.(Para 29)

Copy of judgement: Judgement_24-Apr-2019

-Tushar Kaushik

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