Insurance Law-Suppression of Material Fact in Proposal Form may lead to Repudiation of Claim-Supreme Court

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Closeup of doctor filling life insurance form

April 26, 2019

The Supreme Court in the present case has elucidated on the importance of disclosure in proposal form for Insurance Policy and also enumerated factor essential for determining material fact.

Case name: Reliance Life Insurance Co Ltd & Anr. v. Rekhaben Nareshbhai Rathod

The present appeal before the Supreme Court assails the order passed by the National Consumer Disputes Redressal Commission (NCDRC), whereby the Commission allowed the Insured’s claim on the ground that the omission of the insured to disclose a previous policy of insurance would not influence the mind of a prudent insurer. The facts of the case raised the issue whether suppression of fact in proposal form for Insurance Policy repudiates the claim of insurance?

Bench’s Verdict

In view of settled legal principles governing the Law of Insurance and precedents, the Two-Judge Bench of the Supreme Court allowed the appeal by the Insurance Company and made the following observations in the case:

In view of the facts and records in the case, the Supreme Court noted that There was evidently a non- disclosure of the earlier cover for life insurance held by the insured.

With respect to non-disclosure of a material fact on the part of the insured that he held a prior insurance cover, the Supreme Court made reference to the doctrine of uberrima fidei, which postulates that there must be complete good faith on the part of the insured. The Court also remarked that the relationship between an insurer and the insured is recognized as one where mutual obligations of trust and good faith are paramount.

The Court noted that the purpose of the disclosure is to enable the insurer to decide whether to accept or decline to undertake a risk. The disclosures are also intended to enable the insurer, in the event that the risk is accepted, to determine the rates, terms and conditions on which a cover is to be granted.

What is material fact- The Court was of the view 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. 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.

That 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.

That 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. The system of adequate disclosure helps buyers and sellers of insurance policies to meet at a common point and narrow down the gap of information asymmetries. This allows the parties to serve their interests better and understand the true extent of the contractual agreement.

In context of the facts of the present case and necessity of full disclosure in proposal for, the Supreme Court held that the information which was sought by the insurer was indeed material to its decision as to whether or not to undertake a risk. Hence, the Supreme Court allowed the Insurance Company’s decision of repudiation of claim of insurance.

The entire case can be accessed here.

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