Repudiation of Insurance Contract

Anandita Singh has written the article “Repudiation of Insurance Contract: Analyzing Judicial Pronouncement”

Introduction

Insurance is an age-old concept. It has been referred to in texts as early as the Manusmriti, Arthashastra, and Dharmashastra. Thus it can be clearly deduced that the concept of insurance has been prevalent in Indian Society for a very long time. The Oriental Insurance Co. was the insurance company to be set up in the country in Kolkata in 1818 and it cardinally catered to the needs of the British community residing in India. Later, in 1870, Bombay Life Insurance Company was set up and became the first insurance company catering to the needs of the Indian people. The National Insurance Company, established in 1906, is the oldest existing insurance company in the country.[1]

The insurance sector in India is governed by the Insurance Regulatory and Development Authority of India (IRDAI) which was established in 1999 under the government legislation called the Insurance Regulatory and Development Authority Act, 1999.

Meaning of Repudiation of Insurance Contract:

The meaning of Repudiation is- The insurance company has refused to accept liability and as a result, the claim has been rejected.[2] Repudiation is a breach of a contract by the one-party that justifies cancellation.  Repudiation is conduct that exhibits the clear and unequivocal intention of the party concerned to no longer be bound to the contract.[3]

Section 45 and Need for Amendment:

There was a need for amendment in Section 45 pertaining to the repudiation of insurance contracts because, before the amendment, an insurance company could repudiate a contract if any claim was fraudulently made, even after 2 years. However, the Insurance companies often misused this provision and refused to pay for claims by stating ill-substantiated excuses.[4]

Section 45 of The Insurance Act, 1983 clearly states that the no policy of life insurance shall be called in question on any ground whatsoever, after the expiry of three years from the date of policy, including date of issuance of policy, or date of commencement of risk or date of revival of the policy, whichever is later.

In addition to this, the section also says that a policy may be called in question within three years, on the grounds of fraud. The section also explains the meaning of fraud for this purpose- “the expression “fraud” means any of the following acts committed by the insured or by his agent, with intent to deceive the insurer or to induce the insurer to issue a life insurance policy:—

(a) the suggestion, as a fact of that which is not true and which the insured does not believe to be true;

(b) the active concealment of a fact by the insured having knowledge or belief of the fact;

(c) any other act fitted to deceive; and

(d) any such act or omission as the law specially declares to be fraudulent.”[5]

Sub clause 2 to section 45 also says that mere silence does not mean fraud unless there was a duty on the insured or his agent to disclose such material facts.

Sub clause 3 clearly provides that the insurer cannot repudiate a life insurance policy on the ground of fraud of the insured person is able to prove that the misstatement or the suppression of material was true to the best of his knowledge.

Additionally, the proviso to sub clause 4 of section 45 states that when repudiation of policy is on the ground of mis-statement and suppression of material fact and not fraud, the premium collected on the policy till the date of repudiation shall be paid to the insured or his legal representatives or nominees.

In the case of Mitthulal Naik v. LIC[6], the court held that the Insurer needs to provide grounds of repudiation to the insured, nominee or legal representative.

Therefore, from the Section, it can be deduced that mere silence as to facts likely to affect the assessment of the risk by the insurer is not fraud unless the circumstances of the case are such that regard being had to them, it is the duty of the insured or his agent keeping silence, to speak, or unless his silence is, in itself, equivalent to speak.

A Life Insurance Policy cannot be repudiated on the ground of fraud if the insured can prove that the misstatement of or suppression of a material fact was true to the best of his knowledge and belief or that there was no deliberate intention to suppress the fact or that such misstatement of or suppression of a material fact are within the knowledge of the insurer and in such a case, the onus of disproving lies upon the beneficiaries, in case the policyholder is not alive.

Another ground for repudiation mentioned in the provision is that of mis-statement or suppression of material fact as to the expectancy of life. Therefore, according to the provision, in such a case, the unused premium (premium collected) shall be refunded within a period of ninety days from the date of such repudiation.

Mis-statement or suppression of material facts will be deemed material only if has direct bearing on the risk undertaken by the insurer. The onus is on the insurer to show that had insurer been aware of the said fact no life insurance policy would have been issued to the insured. Insurer may at any time call for age of the insured and adjust the terms accordingly as per the discrepancies and the same has been said in the case of P.J. Chacko v. Chairman, LIC[7]

Additionally, as per S. 25 of Halsbury’s Laws of England, even in the absence of specific questions the proposer must disclose voluntarily the following facts and circumstances because they are material:

• Facts that render or tend to show that the risk is greater than normal,
• Facts which suggest any special motive for taking the insurance,
• Facts that suggest the existence of moral hazards that relate to the moral integrity of the proposer or which suggest that the proposer is himself abnormal, that is which indicates his accident proneness, etc.

Examples of Material facts are:

• In the case of Life Assurance: A person suffering from lung infection or damaged kidney.
• In the case of Fire Insurance: The building has a thatched roof or is being used for manufacturing explosives.
• And lastly, in Marine Insurance: Ship has unrepaired damage affecting its handling.

Moreover, there are circumstances wherein when there is no inquiry regarding the circumstances, the same need not be disclosed. These include:

(a) any circumstance which diminishes the risk;

(b) any circumstance which is known or presumed to be known to the insurer. The insurer is presumed to know matters of common notoriety or knowledge, and matters which an insurer in the ordinary course of his business as such ought to know;

(c) any circumstance as to which information is waived by the insurer;

(d) any circumstance which it is superfluous to disclose by reason of any express or implied warranty.

It also includes facts like law of the land, public and professional knowledge.

The aforementioned points have also been reiterated in the cases of LIC v. Shakuntalabai[8] and Rohini Nandan v. Ocean Acciden and Guarantee Corporation.[9]

Uberrimae Fidei: Uberrimae Fidei is a Latin phrase meaning “utmost good faith” and is an important aspect of insurance contracts. The doctrine of uberrimae fidei is applicable on both the insurer as well as the insured and states that all material facts should be disclosed to the insurance contact by the contracting parties.

There have been varied judgments pertaining to the aforementioned maxim, disclosure of material facts, and repudiation of the insurance contract:

Justice Chandrachud in the case of Reliance Life Insurance Co. Ltd v. Rekhaben Nareshbhai Rathod[10], said that- “…it is a well settled that the contract of insurance is contract uberrima fides and there must be complete good faith on the part of the assured. The assured is thus under the solemn obligation to make full disclosure of material facts which may be relevant for the insurer to take into account while deciding whether the proposal should be accepted or not.”

In the same case, the interpretation of “material fact” was also made- “…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.”[11]

In another case of Bansari Devi v New India Assurance Corp.[12],  The material fact was one “…which increases the risk, and whether the insured would have rejected the policy on these terms if the fact had been disclosed.”

The court has held that in order to repudiate a claim, three things have to be proved, namely- first “that the statement was on a material matter or there was suppression of facts which it was material to disclose. Secondly, the suppression was fraudulently made by the policy-holder, and lastly, the policy-holder must have known at the time of the making of the statement that it was false or that it suppressed facts which it was material to disclose.”[13]

In another case of Sulbha Prakash Matalgaoker Vs. Life Insurance Corporation of India (Civil Appeal No. 8245 of 2015), wherein, the insured had suppressed the fact that he was suffering from lumbar spondylitis with PID with sciatica at the time of filling the Proposal Form. The insured subsequently passed away due to ischemic heart disease and myocardial infection. Since there was the suppression of pre-existing disease, the insurer repudiated the death claim. The Hon’ble Supreme Court, however, held that since the undisclosed disease had nothing to do with the cause of death, the alleged concealment was not of nature which would disentitle the deceased from getting his life insured, and hence, the repudiation of the claim was unjustified.

The same view was reiterated by the Supreme Court in Life Insurance Corporation of India Vs. Jyotsana Rawal

In another case of Neelam Chopra Vs. Life Insurance Corporation of India (Revision Petition No. 4461 of 2012), the Hon’ble National Commission held that, “it is clear that suppression of any information relating to pre-existing disease, if it has not resulted in death or has no direct relationship to the cause of death, would not completely disentitle the claimant for the claim”. It was further held that suppression of a disease having no relationship to the cause of death cannot be treated as material information and cannot be a ground for total denial of the claim.

In the case of Life Insurance Corporation of India & Anr. v. The Insurance Ombudsman & Ors., the court has held that “…It is not open to an insurance company to repudiate a contract of insurance on the basis of non-disclosure of material facts when such material fact is available to the insurer and the insurer is deemed to know of the same. An insured cannot be charged with suppression of material fact when such information is available with the insurer or the insurer is deemed to have it.”[14]

Overview:

Therefore, depending on the aforementioned cases and the take of various courts on the aspect of repudiation of the insurance contract, regardless of whether the claim has arisen or when it is intimated, once the three-year window closes, the policy must be honoured. IRDAI also reiterated the same and added that, even if the policyholder dies within the first three years and the claim is made after three years, the insurer has no recourse.

“If the policyholder dies in the first year itself, but the claim is made after three years, we will have to settle the claims,” said K.S. Gopalakrishnan, managing director and chief executive officer, Aegon Religare Life Insurance Co. Ltd. He also added that “One could argue that if once a policyholder dies, the premiums will stop and the policy might lapse giving us time to question the policy within the three years, but the lapasation rate in the country due to death or policy surrender is about 30% which makes it very difficult for us to investigate each instance of lapse,”

The insurers, however, have the right to inspect policies regardless of a death claim within these three years. “Within three years, if the insurers are able to establish fraud, then they can deny the death claim and also deny refunding the premiums paid so far. But in a case when the fraud is not proven, then the insurers can deny the claim on account of non-disclosure or misstatements but need to refund the entire premium to the claimant.

The rules under Section 45 of the Insurance Act, 1938 force insurers to exercise greater due diligence, but nevertheless, it is still a cause of worry for the companies because the cases of fraud may go up.

In my opinion, Section 45, should have been phrased in such a way that it said that the policy will not be denied to a policyholder if he survives for the three years mentioned in the provision and has also paid the premium for the same. The cardinal motive behind this is to safeguard the interest of the policyholders who have “outlived their ailments by surviving for a reasonable period even if there was a non-disclosure.”

IRDA took the view that even when the policy is revived, the insurer will have three years from the date of revival to question a policy, failing which it will have to honor the claim. And in case the policy is questioned within three years and claims rejected or policy contract terminated due to suppression of material fact not amounting to fraud, the insurer will have to refund the premium. In the circular of IRDA, it was said that “The revival of a policy is treated as a fresh contract and if the policy (revival) is called in question within 3 years of such revival, the premium collected from date of revival of the policy to the date of repudiation is to be refunded along with all the admissible benefits accrued as on the preceding day to the date of such revival,”

This in turn makes sure that insurers will have to exercise due diligence not only at the time of underwriting fresh policies but also at the time of reviving lapsed policies. Moreover, IRDAI has clarified that if insurers don’t obtain a declaration of good health, then a claim arising even within three years can’t be repudiated. “Since the policy is revived without taking any document or statement from the policyholder, there is no scope for repudiation within 3 years of such revival,” clarified the IRDAI circular.

Conclusion:

Section 45 of the Insurance Act, 1938 is a good provision because it not only helps mitigate fraud, but it also helps the insured by providing only three years to the insurer to inspect the policy, after which the claims should be paid to the insured. This, therefore, is a good measure because it ensures that the insurers exercise due diligence and strengthen the underwriting processes.

However, the view of insurers is that they want more clarity on instances of fraud. “There are pockets where insurance policies are taken in the name of deceased persons and a claim is made. Now, in such cases of fraud, insurers should ideally be able to reject a claim even after three years because the subject matter of insurance didn’t exist. A clarification on this would be helpful,” said, C.L. Baradhwaj, chief compliance officer and chief risk officer, Bharti AXA Life Insurance Co. Ltd. He also added that “ambiguity still persists on the applicability of the revised Section 45 of the Insurance Act to the policies issued before the passage of the Insurance Laws (Amendment) Act, 2015,”

[1] Sree Visakh, The Insurance Taws (Amendment) Bill: Analysis Time, The fortune stroke, (April 6, 2020) http://www.forlxinestroke.in/2015/03/the-insurance-laws-amendment-bill-2015.html

[2] Morgan Clark Definitions, (April 6, 2020) https://www.morganclark.co.uk/about-insurance-claims/insurance-terms-explained-2/

[3] Donald Dinnie, Reject or Repudiate?, The Insurance Getaway, (April 6, 2020), https://www.insurancegateway.co.za/ShorttermConsumers/PressRoom/ViewPress/Irn=6206&URL=Reject+or+repudiate#.Xo-A83LhXIU

[4] Donald Dinnie, Reject or Repudiate?, The Insurance Getaway, (April 6, 2020), https://www.insurancegateway.co.za/ShorttermConsumers/PressRoom/ViewPress/Irn=6206&URL=Reject+or+repudiate#.Xo-A83LhXIU

[5] Explination I, Section 45(2), The Insurance Act, 1938

[6] Mitthulal Naik v. LIC AIR 1962 SC 814

[7] P.J. Chacko v. Chairman, LIC AIR 2008 SC 424

[8] LIC v. Shakuntalabai AIR 1975 AP 68

[9] Rohini Nandan v. Ocean Acciden and Guarantee Corporation AIR 1960 Cal 696

[10] Reliance Life Insurance Co. Ltd v. Rekhaben Nareshbhai Rathod, p. 21, 29, (2019) 6 SCC 175

[11] Reliance Life Insurance Co. Ltd v. Rekhaben Nareshbhai Rathod, p. 23, (2019) 6 SCC 175

[12] Bansari Devi v New India Assurance Corp AIR 1959 Pat. 540

[13] Mithoolal Nayak v. Life Insurance Corporation of India, 1962 AIR 814, (2) 571

[14] Life Insurance Corporation of India & Anr. v. The Insurance Ombudsman & Ors, p.21, 2017 SCC OnLine Cal 1238

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