I was watching Amir Khan’s advertisement for Phone Pe on TV. The actor’s Motor Cycle was being destructed in a domino effect. Realizing the disaster in advance, the actor does not run to save his motorcycle but fills up form for insurance and makes payment through Phone Pe. The payment was so easy and fast that his motorcycle got insured by using Phone Pe app even before his motorcycle was actually destructed. Through the said advertisement, Phone Pe wishes to canvass that payments using its app are simple & fast. But the million dollar question remains whether insurance claim in such circumstances is admissible? The message that insurance claim in anticipation of accident without disclosing the impending damage is legally fallacious and misconceived.
‘Utmost good faith’ is one of the first principles of an insurance contract. This means that both the parties have to be transparent with each other and material facts have to be disclosed both before the policy is issued and after. Withholding information by one party works against the interests of the other.
When one is buying vehicle/general insurance, health insurance or life insurance, he is mandated to disclose all relevant information about the material facts which will impact the terms and rates of insurance. If a proposer of medical insurance conceals an adverse health history, his claim could be rejected. Non-Disclosure of material facts in any insurance cover leads to rejection of claims as the contract becomes void.
The doctrine of utmost good faith, also known by its Latin name ‘uberrimae fidei’, is a minimum standard, legally obliging all parties entering a contract to act honestly and not mislead or withhold critical/material information from one another. It applies to everyday financial transactions and is one of the most fundamental doctrines in insurance law. This doctrine of utmost good faith is a principle used in insurance contracts, legally obliging all parties to act honestly and not mislead or withhold critical information from one another.
It is pertinent that there is a mandatory requirement of good faith on the part of the insured in any contract of insurance. It would be trite to refer to the Apex Court pronouncement in Vikram Greentech (I) Ltd. & Anr vs New India Assurance Co. Ltd (2009) 5 SCC 599 wherein it was held thus:
“15. An insurance contract, is a species of commercial transactions and must be construed like any other contract to its own terms and by itself. In a contract of insurance, there is requirement of uberimma fides i.e. good faith on the part of the insured. Except that, in other respects, there is no difference between a contract of insurance and any other contract….. “
The doctrine of utmost good faith provides general assurance that the parties involved in a transaction are truthful and acting ethically. Ethical transactions include assuring all relevant information is available to both parties during negotiations or when premiums are determined.
Depending on the nature of the transaction, violations of the doctrine of good faith can result in a variety of consequences. Most commonly, a contract created with inaccurate/false/intentional misinformation or fraudulent concealment may cause the contract to become voidable. The insurance companies seek information about the health and family history of the applicants. Based on the responses, the insurer decides whether & how to insure the applicants. It is therefore that the applicants are required to fill and sign a declaration at the end of the application form, stating that the given answers to the questions and other personal statements are true and complete. Therefore, concealing facts such as pre-existing disease or ailment is deemed a material misrepresentation that can lead the insurer to void the contract.
The Apex Court in P. C. Chacko vs Chairman, Life Insurance Corporation of India (2008) 1 SCC 321 categorically held that a policy of insurance is governed by the principles of utmost good faith.
The Apex Court in a catena of cases held that if knowledge of the proposer had not been disclosed, there would be enough ground for repudiation of the liability arising out of the insurance contract. In Life Insurance Corporation of India vs Asha Goel (2001) 2 SCC 160 this principle was formulated thus:
“12…The contracts of insurance including the contract of life assurance are contracts uberrima fides and every fact of material (sic material fact) must be disclosed, otherwise, there is good ground for rescission of the contract. The duty to disclose material facts continues right up to the conclusion of the contract and also implies any material alteration in the character of risk which may take place between the proposal and its acceptance. If there is any misstatements or suppression of material facts, the policy can be called into question. For determination of the question whether there has been suppression of any material facts it may be necessary to also examine whether the suppression relates to a fact which is in the exclusive knowledge of the person intending to take the policy and it could not be ascertained by reasonable enquiry by a prudent person.”
In Satwant Kaur Sandhu vs New India Assurance Company Ltd.(2009) 8 SCC 316, at the time of obtaining the Mediclaim policy, the insured suffered from chronic diabetes and renal failure, but failed to disclose the details of these illnesses in the policy proposal form. Upholding the repudiation of liability by the insurance company, the Apex Court held thus:
“25. The upshot of the entire discussion is that in a contract of insurance, any fact which would influence the mind of a prudent insurer in deciding whether to accept or not to accept the risk is a “material fact”. If the proposer has knowledge of such fact, he is obliged to disclose it particularly while answering questions in the proposal form.
Needless to emphasise that any inaccurate answer will entitle the insurer to repudiate his liability because there is clear presumption that any information sought for in the proposal form is material for the purpose of entering into a contract of insurance.”
Recently, the Apex Court in Reliance Life Insurance Co. Ltd. vs Rekhaben Nareshbhai Rathod (2019) 6 SCC 175, has set aside the judgment of the NCDRC, whereby the NCDRC had held that the failure of the insured to disclose a previous insurance policy as required under the policy proposal form would not influence the decision of a prudent insurer to issue the policy in question and therefore the insurer was disentitled from repudiating its liability. This Court, while allowing the repudiation of the insurance claim, held thus:
“30. It is standard practice for the insurer to set out in the application a series of specific questions regarding the applicant’s health history and other matters relevant to insurability. The object of the proposal form is to gather information about a potential client, allowing the insurer to get all information which is material to the insurer to know in order to assess the risk and fix the premium for each potential client. 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. 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.
31. 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. As this Court held in Satwant Kaur (supra) “there is a clear presumption that any information sought for in the proposal form is material for the purpose of entering into a contract of insurance”. Each representation or statement may be material to the risk. The insurance company may still offer insurance protection on altered terms.”
It would be apposite to refer to a recent judgment of the Apex Court in SLP (Civil) No. 13868 of 2019 – Life Insurance Corporation of India and Another vs. Sunita decided on 29-10-2021. The brief facts of the case are that the insured failed to pay the due premium in the stipulated time. He met with an accident and was in a serious condition. His wife paid the premium on 09.03.2012 without disclosing to the LIC the factum of the accident which had taken placed on 06.03.2012. The Court rejected the claim of the insured and held thus:
“The said conduct on the part of the complainant and her husband in not disclosing about the accident to the corporation not only amounted to suppression of material fact and lacked bona fides but smacked of their mala fide intention, and therefore, the Accident benefit claim of the complainant was liable to be rejected on the said ground alone. It is well settled legal position that in a contract of insurance there is a requirement of Uberrima fides i.e. good faith on the part of the assured…..
The said Accident benefit could have been claimed and availed of only if the accident had taken place subsequent to the renewal of the policy. The policy in the instant case was lying in a lapsed condition since 14th October, 2011 and therefore, was not in force as on 06.03.2012, resultantly, the claim over Accident benefit was not payable to the respondent as per the conditions of the contract of insurance.”
It is therefore in the interest of the insured to disclose all material facts truly & bonafidely in Good Faith so that his claim may not be repudiated by the Insurance Company. Therefore, the answer posed in the first paragraph is that Amir Khan’s claim shall stand repudiated as the insurance was not taken in ‘Good Faith’ and it was not disclosed at the time of taking the policy that the insured motorcycle is likely to meet disaster within seconds of taking the insurance coverage.
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