Introduction

Section 45 of the Insurance Act, 1938 provides that no policy of life insurance shall be called into question after expiry of three years from the date of commencement of risk, issuance of policy, revival of policy, or rider to policy, whichever date is later. However, the sub-section (2) of Section 45 provides that such policy may be called into question within 3 years on the ground of fraud, or misstatement or suppression of material fact. Section 45 comprises of two parts: one which restricts the scope of insurer to question the policy of life insurance after expiry of prescribed time, while the second part provides for certain pre-conditions for repudiation and questioning the policy within the prescribed period.

Section 45 of the Insurance Act, 1938 states that a life insurance policy can be avoided in certain circumstances such as fraud and by way of suppression or misstatement of material facts. The aspect of materiality plays a crucial role while determining a question of repudiation under Section 45 of the Act. A policy cannot be repudiated merely on a claim of fraud, or false statement, and it has to be shown that a misstatement or suppression of material facts is deliberate. The term “material” has nowhere been defined in the Act, but the explanation appended to Section 45 throws some light on the aspect of materiality. The explanation provides that a misstatement or suppression is to be considered material only when it has a direct bearing on the risk which has been undertaken by the insurer under the policy in question. It is further provided that onus of such materiality is on the insurer, and it is for the insurer to show that the fact was material to the risk undertaken, and had the insurer been aware of the said fact, no insurance would have been issued to the insured.

A policy of life insurance cannot be repudiated or avoided merely on the ground of misrepresentation, and it is necessary to establish that the facts/ information misstated or suppressed was material to the insurance policy, and that the insured was in full knowledge of the non-disclosure and such non-disclosure/ suppression was fraudulent. Only in such cases, the exception providing for challenge of life insurance policy can succeed. In case the insured can proved good faith, such ground does not hold good. The meaning of “material” varies on a case to case basis depending on the facts. In a general sense, material facts/ materiality would mean all such facts which would influence a reasonable man either to accept or decline the risk or would likely cause to stipulate a higher premium for undertaking such risk.[1] The distinction between material and non-material is quite blurry and faint-dim in a manner that there always remains a danger of one being taken for the other.[2] It is pertinent to mention here that an insurer challenging a contract of life insurance after a lapse of 3 years since it becomes effective, has to show that there has been a material fact suppression or non-disclosure or false statement concerning a material matter in relation to the insurance policy, knowing it, fraudulently.[3] It is only when the insured had deliberately made false statement(s) of material nature, the life insurance policy which has been effected can be repudiated/ avoided.[4]

Reliance Life Insurance Co. Ltd. & Anr. v. Rekhaben Nareshbhai[5] 

Facts of the case 

The spouse of the respondent took a life insurance policy from Max New York Life for Rs. 11 lakhs in July, 2009. After about two months, he submitted a proposal for a life insurance policy on 16-09-2009 for an insurance cover of Rs. 10 lakhs with the appellant. While submitting the proposal, the spouse of the respondent was required to answer question as to whether he was insured or had applied for life insurance, critical illness cover, or accident benefit cover. While answering, the spouse answered it in negative, and on 22-09-2009, the policy was issued to the spouse of the respondent. He subsequently died on 08-02-2010 due to sudden chest pain, and on 24-05-2011, the respondent being nominee under the policy submitted for a claim of Rs. 10 lakhs.

Thereafter, the first insurer, Max Life informed the appellant that the spouse of the respondent was insured for Rs. 11 lakhs with them, and the said claim was settled. The claim of the respondent was repudiated in lieu of Section 45 of the Insurance Act, 1938 on 30-08-2011 on the basis of suppression of material fact, omission to answer correctly question relating to pre- existing insurance cover. The respondent, feeling aggrieved, issued a legal notice to the appellant stating deficiency in service, and also filed a consumer complaint with the District Consumer Redressal Forum. The complaint was dismissed by the District Consumer Forum on the ground of non-disclosure but was allowed by the State and National Consumer Forums stating that non-disclosure of previous insurance would not influence mind of a reasonable and prudent insurer. Hence, the present appeal was preferred by the insurance company assailing the decision passed below.

Issues 

Whether the insurer can repudiate the claim of the respondent under the issued life insurance within 2 years under Section 45 of the Insurance Act in case the insured has suppressed/ not disclosed a pre-existing life insurance cover in the proposal form.

Contentions of the Appellant 

The purpose of the disclosure is to enable the insurer to decide whether to accept the cover or not. Apart from the risk to be undertaken, it enables the insurer to determine the rates and terms and conditions for undertaking such real risk. The proposal form formed the basic condition for the liability of the insurance company. The respondent’s deceased husband did not make a true disclosure of the fact as to whether he had previously taken an insurance cover, and he failed to perform his bounden duty to furnish full and complete details in the proposal. Now, such fact was crucial to the appellant to decide whether to undertake the risk and also on the premium, and other terms. This material fact was suppressed by the deceased husband of the respondent, and it was well within the knowledge of the husband of the respondent. The claim was repudiated within the prescribed period, and is also entitled so under Section 17 and 19 of the Indian Contract Act.[6] If the claim is repudiated within 2 years, then it is not to be shown that the non-disclosure was material, and it is only after expiry of 2 years that materiality is to be shown.[7] A repudiation within 2 years is not governed by Section 45 of Insurance Act.[8]

Contention of the Respondent 

It was contended that the signatures of the deceased husband of respondent were taken on the proposal form without explaining the details, and that the deceased was not well conversant with English language. A non-disclosure of previous policy cannot be a valid ground for repudiation, and there is no such prohibition on number of policies under law. The non- disclosure is not of any material consequence, and would not have influenced the mind of appellant while issuing policy nor would it affect rate of premium.

Decision: Rationale and Obiter

The Court discussed the cumulative effect of Section 45 of the Act which is to restrict the right of the insurer to repudiate the policy after a period of two years from the date on which the policy of life insurance was affected. After this period of two years, the insurer still can repudiate a policy but the burden lies on the insurer to establish that a material matter was inaccurately or falsely disclosed or material facts were suppressed, and the policy holder knew at the time of making the statement knowing of the falsity. Before the expiry of two years, the insurer can repudiate the claim showing that statement made in proposal, or in any report, or of friend, or referee, or in any other document leading to issue of policy was false/ inaccurate. Even a false statement or suppression of fact which may not be material would be adequate for the insurer to repudiate the claim within 2 years of effecting of such policy.

The Court also discussed the purpose of proposal form under the scheme of Insurance Act, 1938, and it was opined by the Hon’ble Apex Court that the purpose of disclosure in proposal form is to enable the insurer whether to undertake such risk and on what terms.[9] The insurer has stated that the disclosure was required in the proposal form, and then it would have evaluated the financial documents for the cover. It was further observed that where the representations, statements, and agreements made by the assured are the basic condition for the cover/ policy of life assurance, then apart from materiality, the same are also condition of liability of the insurer company.

It is for the assured to disclose to the insurer regarding the material facts he knows or is deemed to know, and which are not known by insurer, and in case of breach of this duty, it would entitle the insurer to avoid the contract of insurance by showing non-disclosure induced making of such contract.[10] In Mithoolal case, the repudiation was made after expiry of two years, hence, Section 45 was applicable, but herein, the repudiation was made within 2 years, and the question left in Mithoolal case was squarely arisen before the court.

While discussing the above, it was imperative to understand what constitutes as material fact. The Court referring to various judgements, observed that any fact which would influence the judgement of a prudent insurer in fixing the premium or whether at all he would accept the risk;[11] and any fact which would go to the roots of the contract of insurance and has bearing on the risk involved constitutes as material fact. The Court also reiterated that the contract of insurance is based on uberrima fides, and there must be complete good faith on the part of the insured/ assured, and he is under an obligation to make full and true disclosure of material facts which may be relevant for the insurer. While referring to another judgement, it was observed that in case of repudiation of claim, which requires evidence, the appropriate remedy would be a civil suit and not writ petition.[12]

The Court was of the opinion that a wrong answer/ disclosure, i.e., inaccurate answer, or concealment of material fact, in the proposal form for policy of life insurance would make the policy voidable at the hands of the insurer. This would go a long way to void the policy as this is not only against the sacrosanct principle of good faith applicable to policy of insurance, but also importance of materiality, and role of materiality in voiding a policy of insurance by the insurer. The Court ultimately held that the contentions raised by the respondent are not plausible and the same are devoid of merits. The appeal was allowed.

Conclusion 

The Hon’ble Supreme Court has yet once against reiterated the foundational and most relevant principle of insurance law, which is that non-disclosure of material information by an assured person at the time of entering into a contract of insurance would entitle a prudent insurer to repudiate a claim made under the such policy so taken, on ground of non-disclosure of material facts.[13] Apart from materiality, the Court also reaffirmed the importance of good faith principle that binds the parties to contract of insurance. Material can be defined as some circumstance or event that may have an impact on risk appetite or willingness of the insurer to provide insurance cover. In order for non-disclosure to be taken as a ground for repudiation, it would pertain to certain fact or circumstance which if disclosed would affect the decision of the insurance company to undertake the risk by granting cover. It is also pertinent to mention here that the three-year contestability rule is in favour of the consumers. In cases not covered under Section 45, i.e., where the repudiation was made within 2 years (or now, three years), then the court has applied the fundamental tenets of insurance law, namely utmost good faith. Materiality depends on the surrounding circumstances and the nature of the information sought by the insurer. In includes failure to disclose vital information, which insurer requires, firstly to determine whether to accept the risk and secondly, upon what terms. Any fact which would influence the mind of a prudent insurer with regard to undertaking of risk would be a material fact. Any suppression, untruth or inaccuracy in proposal form would be a breach of the positive duty of disclosure, and hence, would render the policy voidable by the insurer.

It is a fundamental principle of insurance law that utmost good faith must be observed by the parties, and this principle forbids non-disclosure of the facts which are in the knowledge of the insured. Contracts of insurance are uberrima fides, and the insured is under an obligation to disclose which he knows or ought to know. If a material fact is not disclosed, then the insurer can repudiate such contract of insurance. Law of insurance requires prospective insured not to merely refrain from actively misleading the insurer buy he must also disclose material circumstances.

[1] Sheoshankar v. LIC, (1973) 43 Com Cas 284 (Bom)

[2] LIC v. Canara Bank Ltd., (1973) 43 Com Cas 534 (Mys)

[3] Daulat Ram v. Bharat Insurance Co., (1974) 44 Com Cas 190

[4] Anupama Behara v. LIC, (2010) 89 AIC 694 (Ori)

[5] (2019) 6 Supreme Court Cases 175

[6] Mithoolal Nayak v. LIC

 [7] Satwant Kaur Sandhu v. New India Assurance Co. Ltd.

 [8] Sheoshankar Ratanlalji v. LIC

[9] Bose, Arjun “Reliance Life Insurance v. Rekhaben” Phoenix Legal, published on Mondaq on 26^th June, 2019, available at <https://www.mondaq.com/india/insurance-laws-and-products/818808/reliance-life-insurance-co- ltd-anr-v-rekhaben-nareshbhai-rathod> Accessed 10^th April, 2023

 [10] MacGillivray on Insurance Law, 12^th Ed. Sweet and Maxwell (2012)

 [11] LIC v. G.M. Channabasamma (1991) 1 SCC 357

[12] LIC v. Asha Goel (2001) 2 SCC 160

[13] Bose, Arjun “Reliance Life Insurance v. Rekhaben” Phoenix Legal, published on Mondaq on 26^th June, 2019, available at <https://www.mondaq.com/india/insurance-laws-and-products/818808/reliance-life-insurance-co- ltd-anr-v-rekhaben-nareshbhai-rathod> Accessed 11^th April, 2023