96 Principles of Insut 4.7.2 Good Faith “Good Faith lies at the root of the insurance contract.” ‘The cardinal principle of commercial law is the principle of caveat emptor, ie. let the buyer beware. According to this principle, it is the duty of the buyer to check the products and take care of his interest and the seller is under no duty to disclose any defect which an ordinar inquiry would reveal. But contracts of insurance are an exception to this principle and the parties do not stand on the same footing cither with regard to the knowledge of the subject matter o with regard to the economic aspect of the obligation. ‘Therefore, every contract of insurance is a contract of utmost good faith (uberrimac fide). isa condition of every insurance contract that both the parties should display the utmost good faith towards each other in regard to the contract. This implies that at the time of entering into an insurance contract both parties should disclose all the material facts and circumstances to each other which will affect the risk insured against. The insured should not make any misrepresentation and at the same time disclose all facts affecting the risk insured against. In London General Omnibus Co v Holloway," Kennedy, L held that: No class of case occurs, to my mind, in which our law regards mere non-disclosure as a ground for invalidating the contract, except in the case of insurance. That is an exception which the law has wisely made in deference the plain exigencies of this particular and most important class of transaction. The person secking to insure may fairly be presumed to now all the circumstances which materially affect the risk, and generally is, as to some of them, the only person who has the knowledge. The underwriter, whom he ask to take the risk, cannot as a rule know, and but rarely has either the time or the opportunity to learn by inquiry, circumstances which are or may be most material to the formation of his judgment as to the acceptance or rejection of the risk and as to the premium which he ‘ought to require. Lord Mansfield is said to be the father of the principle of good faith." The principle was laid down in the land mark case of Carter v Boehm," in which Lord Mansfield stated the principle of good faith as: Insurance is a contract upon speculation. The special facts upon which the contingent chance is to be computed lie more commonly in the knowledge of the insured only; the underwriter trusts to the insured’s representation and proceeds upon confidence that he does not keep back any circumstance in his knowledge to mislead the underwriter into a belief that the circumstance does not exist, and to induce him to estimate the risk as if it did not exist. The keeping back of such circumstance is a fraud and therefore, the policy is void. Although the suppression should happen through mistake without any fraudulent intention, yet the underwriter is deceived and the policy is void; because the risk run is really different from the risk understood and intended to be run at the time of the agreement. The other jurist who is greatly associated with this principle is Jessel, M.R. who held in London Assurances v Mansel that, good faith forbids either party, by concealing what he privately knows, to draw the other into a bargain from his ignorance of the face and his believing the contrary. He further observed: -»- Whether it is life or fie or marine assurance I take it good faith is required in all cases and though there may be certain circumstances from the peculiar nature of marine insurance which require to be disclosed and which do not apply to other contracts of 85. London General Omnibus Co v Holloway, (1911-13) All ER Rep. 518 at 524. 86. RN Chaudhary, General Principles of Insurance Law, 1st Edn, Central Law Publications, 87. Carter v Boehm, (1766) 3 Bure 1905. eee ee 88. London Assurances v Mansel, (1879) 11 Ch D 363, 367.Chapter 4—Insurance Contract and Principles ” insurance, that is rather, in my opinion, an illustration of the application of the principle, than a distinction in principle. The facts in the above case were that the proposal form for a life insurance policy asked the proposer, the following questions: “Has a proposal been made on your life at any other office or offices? Ifso, then where? Was it accepted at the ordinary premium or at an increased premium or declined?” The answer of the proposer was: “Insured now in two offices for £16,000 at ordinary rates. Policies effected last year.” This was wholly true. However, what was equally true and was not disclosed was that certain other proposals had been declined also. This was regarded as a failure to observe good faith giving liberty to the insurer to set aside the policy. In India, the same principle has been followed by the Supreme Court in Life Insurance Corp of India v Asha Goe?? where it was held that contracts of insurance are contracts uberrimae fidei and every material fact must be disclosed otherwise, there is a good ground for recession of the contract. The duty to disclose material facts continues right up to the conclusion of the contract. In Reliance Life Insurance Co Ltd v Rekbaben Nareshbhai Rathod,” it was observed that 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. The insurance contract requires the disclosure of all the material facts, which are likely to affect the judgement of the other party (insurer) so that the concerned party may correctly ascertain the true nature and extent of the liability before fixing any price for it. Utmost good faith requires each party to tell the other “the truth, the whole truth and nothing but the truth” about the proposed contract. The insurer may be in a position to make an accurate estimate of the risk he is undertaking. Bad faith or failure to reveal vital information, even if not asked about it, gives the aggrieved party the right to regard the contract as void. The duty of observing good faith lies equally on the insured as well as the insurer. But it rests more heavily on the prospective insured, since he alone knows, or should know, the great bulk of information vital to consideration of the contract.” In Rozanes v Bowen,’ Scrutton, LJ observed: ‘As the underwriter knows nothing and the man who comes to him to ask him to insure knows everything itis the duty of the assured, the man who desires to have a policy, to make 2 full disclosure to the underwriters without being asked ofall the material circumstances, because the underwriters know nothing and the assured knows everything. This is expressed by saying that it isa contract of utmost good faith-uberrimae fides. The insurer too cannot withhold information in his private possession to the detriment of the prospective insured although the occasions for such disclosure by the insurers are rare. The law did not define the duty of disclosure falling on the insurer as it did that of the insured. ‘The occasions where disclosure by the insurer is required may in practice be rare since the circumstances material to the insurance will ordinarily be known only to the proposed insured. Nevertheless, such occasions do arise. There is very little authority giving direct guidance on this point. In Re United India Insurance Co Led v MKJ Corp,” it was held that it is setled law that contract of insurance is based upon good faith. It is the duty of the insurers and ). Life Insurance Corp of India v Asha Goel, AIR 2001 SC 549 : (2001) 2 SCC 601. 50. Coie ees ted Rtbabn Nora: Rathod AIR 2019 SC 2039 : (2019) 6 SCC 175 : 2019 : LNIND 2019 SC 383. 91. tare — Thao nd Pie ‘of Insurance, Educational Book House, Aligarh, 1994, p 45. >. Rozanes v Bowen, (1928) 32 LL LR 98, 102 (CA). Fe eee merce Co Lid MK] Carp, (1996) 6 SCC 428 : (1997) 5 CT} 649 (CP)98 Principles of Insurance Law their agents to disclose all material facts within their knowledge since obligation of good faith applies to them equally with the assured. ‘The duty failing on the insurer must at least extend to disclosing alll facts known to him which are material either: (@)_ to the nature of the risk sought to be covered, oF (b)_ the recoverability of a claim under the policy, which a prudent insured would take into account in deciding whether or not to place the risk for which he seeks cover with the insurer.’ The insurer must also inform the insured about the terms and conditions of the policy that is going to be issued to him and must strictly conform to the statements in the prospectus, etc., if any, or made through his agents. He must issue the policy in conformity with the terms mutually agreed with the insured. The proposer is entitled to ask for the draft policy though in the proposal form he has agreed to accept the policy in the usual forms used by the insurer, for that class of insurance. But if he does not ask for it, he will be considered to have accepted the policy that is issued.* The key issue in Norwich Union Life Insurance Co Ltd v Qureshis® Aldrich v Norwich Union Life Insurance Co Ltd,” was the rarely considered a question of the scope and effects of the insurer's duty of utmost good faith towards the assured. The main question for the court of appeal was whether, assuming that the relevant knowledge had been in the insurers possession there was any legal basis for the assertion of a duty of disclosure. The court of appeal considered first the impact of the common law duty of utmost good faith, and held that it was of no assistance. In a case of Branch Manager, Bajaj Allianz Life Insurance Co Ltd v Dalbir Kaur, ic was held that a contract of insurance is one of utmost good faith. A proposer who seeks to obtain a policy of life insurance is duty bound to disclose all material facts bearing upon the issue as to whether the insurer would consider it appropriate to assume the risk which is proposed. It is with this principle in view that the proposal form requires a specific disclosure of pre- existing ailments, so as to enable the insurer to arrive at a considered decision based on the actuarial risk. In the present case, the proposer failed to disclose the vomiting of blood which had taken place barely a month prior to the issuance of the policy of insurance and of the hospitalization which had been occasioned as a consequence. The investigation by the insurer indicated that the assured was suffering from a pre-existing ailment, consequent upon alcohol abuse and that the facts which were in the knowledge of the proposer had not been disclosed. ‘The medical records which have been obtained during the course of the investigation clearly indicated that the deceased was suffering from a serious pre-existing medical condition which was not disclosed to the insurer. In fact, the deceased was hospitalized to undergo treatment for such condition in proximity to the date of his death, which was also not disclosed in spite of the specific queries relating to any ailment, hospitalization or treatment undergone by the proposer in Column 22 of the policy proposal form. Therefore, order of NCDRC affirming order of SCDRC allowing complaint and directing insurer to pay the full death claim togethet with interest and imposing costs of Rs 2 lakhs on insurer, was held to be set aside. However, having regard to the age of complainant, who is 70 years old and the death of the assured on whom she was likely to be dependent, it would be appropriate for the Supreme Court to utilise 94, Bangue Financier de la Cite v Westgate Insurance Co, (1990) 1 QB 665. 95. RN Chaudhary, General Principles of Insurance Law, 1st Edn, Central Law Publications, Allahabad, 2012, p 61 96. Norwich Union Life Insurance Co Led v Qureshi, (1999) 2 All ER 707. 97. Aldrich v Norwich Union Life Insurance Co Ltd, (2000) Lloyd's Rep 1. 98. Branch Manager, Bajaj Allianz Life Insurance Co Ltd v Dalbir Kaur, AIR 2020 SC 5210.Chapter 4—Insurance Contract and Principles 99 its jurisdiction under Article 142 of the Constitution, by directing that no recoveries of the amount which has been paid shall be made from him. The duty of disclosure is absolute. It is positive and not negative. Non-disclosure or misrepresentation of any material fact gives the insurer the option to avoid the contract. Uuinost good faith requires that there should be no concealment, misrepresentation, wrong statements, half-truths or any silence on a material fact. One should disclose every material fact which he may consider relevant along with those facts which are not relevant according to him but may prove material in future. In Bajaj Allianz Life Insurance Co Ltd, Raipur v Dr. Manisha Naresh Goyal,” the husband of the claimant died at the age of 37. The deceased husband was covered by an insurance policy, and during the entire term of the policy, no assessment was made regarding his health status. The insurer repudiated the claim on the ground of suppression of material facts in relation to the health condition of the insured. It was held that the insurer cannot raise this plea and was liable to compensate the claimant. The law relating to the requirement of good faith is contained in the Marine Insurance Act, 1963, and these rules mutatis mutandis apply to all classes of insurance. The relevant provisions are: 47.21 Insurance is uberrimae fidei A contract of marine insurance is a contract based upon the utmost good faith, and, if uemost good faith be not observed by either party, the contract may be avoided by the other party." 47.2.2 Disclosure by Assured The following points are necessary to be remembered: (Subject to the provisions of this section, the assured must disclose to the insurer, before the contract is concluded, every material circumstance which is known to the assured; and the assured is deemed to know every circumstance which, in the ordinary course of business, ought to be known by him. If the insured fails to make such disclosure, the insurer may avoid the contract. (ii) Every circumstance is material which would influence the judgement of a prudent insurer in fixing the premium, or determining whether he will take the risk. (iii) In the absence of inquiry, the following circumstances need not be disclosed, namely: (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 the matters of common notoriety or knowledge, and matters which an insurer in the ordinary course of his business, as such, ought to know. (©) Any circumstances as to which information is waived by the insurer. (d) Any circumstance which is superfluous to disclose by reason of any express oF implied warranty. (iv) Whether, any particular circumstance, which is not disclosed, be material or not is, in each case, a question of fact. 99. Bajaj Allianz Life Insurance Co Led, Raipur v Dr. Manisha Naresh Gayal, AIR 2018 (NOC) 490 (Chi). 100._ Section 19 of the Marine Insurance Act, 1963.100 Principles of Insurance Law (¥) The term “circumstance” includes any communication made to, or information received by, the assured." 47.23 Disclosure by Agent Effecting Insurance Subject to the provisions of the preceding section as to circumstances which need not be disclosed, where insurance is affected for the assured by an agent, the agent must disclose to the insurer: (a) Every material circumstance which is known to himself, and an agent to insure is deemed to know every circumstance which in the ordinary course of business ought to be known by, or to have been communicated to, him; and (b) Every material circumstance which the assured is bound to disclose, unless it comes 1 his knowledge too late to communicate it to the agent." Ie has been said that there is no class of documents to which the strictest good faith is more rightly required in courts of law than policies of insurance. !9 4.7.24 Materiality of Facts Utmost good faith requires the disclosure of material facts. The obvious question is what is a material fact? It is quite difficult to define as to what material information is and which is not. Ie all depends upon the circumstances of each case and has to be decided as such. A material {fact is one which goes to the root of the contract of insurance and has been defined as “a fict that would influence the mind of a prudent underwriter in assessing a risk”. The principle of good faith places each party to the contract under a duty to disclose all material facts to the other." 47.25 The Test of Materiality Every circumstance is material which would influence the judgement of a prudent insurer in fixing the premium, or determining whether he will take the risk. Accordingly, a material fact is one which would influence the judgement of a prudent insurer: (i) in fixing the premium, or (ii) determining whether he will take the risk. In Dawsons Bank Ltd v Vulean Insurance Co," the Privy Council explained material fact as ‘One which would affect the mind of a reasonable insurer either as to accepting the risk ‘or as to the premium he would place upon the risk. In Life Insurance Corporation v GM Channabasamma," it has been observed that: ‘The assured is under a 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. While making a disclosure of the relevant facts, the duty of the insured to state them correctly cannot be diluted. _ Again, in Benarasi Devi v New India Assurance Co," it was laid down that, a material fact is one: 101. Section 20(5) of the Marine Insurance Act, 1963, 102. Section 21 of the Marine Insurance Act, 1963, 103. Mackenzie v Coulson, (1869) LR 8 Eg 369. 104. M Arif Khan, Theory and Practice of Insurance, Educational Book House, Aligarh, 1994, p 46. 105. Dawsons Bank Lid v Vilean Insurance Co, AIR 1935 PC 1. 106, Life Insurance Corp v GM Channabasamma, AIR 1991 SC 392. 107. Benarasi Devi v New India Assurance Co, AIR 1959 Pat 540.Chapter 4—Insurance Contract and Principles 101 (i) which increases the (ii) whether the insurer would have rejected to give a policy on these terms if the fact had been disclosed. ‘What is material in the technical sense cannot be left entirely to the discretion of the party concerned, In every case it is a matter of fact, to be decided by the court, if necessary. Thus, broadly speaking, material facts are of two types: (a) those facts which affect the nature or incidence of risk, and, (b) those facts which affect the character of the insured. 47.2.6 Examples of Material Facts The following are certain examples of material facts: (a) Life Insurance: Suffering from lung infection or a damaged kidney. (b) Fire Insurance: Building having a thatched roof or being used for manufacturing explosives. (©. Marine Insurance: That the ship has unrepaired damage affecting its handling. Icshould, however, be remembered that a person cannot be penalised for not revealing facts which he does not know at all and which he cannot reasonably be expected to know. If, for instance, a person is unknowingly afflicted with a brain tumour or lung cancer, which kills him shortly after purchasing a policy, the insurance company cannot avoid liability on the grounds that the existence of the disease was not disclosed. 4.7.3 Scope of Duty of Disclosure (i) The duty to disclose extends only to material facts. So, every material fact must be disclosed. In Life Insurance Corp v Sakunthalabai,"® the assured did not disclose that he had suffered from indigestion for a few days; the coure held that it is not a material fact and non-disclosure did not affect the validity of the policy. (i) The duty extends only to those material facts about which he knows or ought to know. The duty extends not only to facts which the insured knows, but also to those facts which he, as a reasonable person, ought co have known and which are in fact material, whether he thinks them to be so or not.” The duty of making disclosure is not confined to such facts as are within the actual knowledge of the assured. Ie extends to all material facts which he ought in the ordinary course of business co have known and he cannot escape the consequences of not disclosing them on the sund that he did not know them,'"* It may be noted here that ignorance of the Becrisan excuse bur ignorance of the materiality ofthe fact is not. There is no breach of good faith if the party to the contract is not aware of the fact."' Suppression of illness not affecting the expectation of life cannot be a ground to repudiate the policy." In case of life insurance policy, the misstatement alleged must be one of material facts as regards health. It was held that the misstatement of the insured that she is a government servant is not a ground to repudiate the policy. 1. Life Insurance Corp v Sakunthalabai, AIR 1975 AP 68. 109, joa Chon nd Cm nae C1908) 2 KB 63 CA 110. “Avtar Singh, Law of Insurance, Eastern Book Company, Lucknow, 2008, p 16; se also, ERD Evamy, General Principles of Insurance Law, 133 (Ath Ed) 111, Serwant Kumar Sandhu v New India Assurance Co Lid, (2009) 8 SOC 316. 112. Gouri Seti v The Divisional Manager of Life Insurance Corp, AIR 2007 Ori 19.102 Principles of Insurance Law - (iii) ‘The duty to disclose extends to the authorised agents of the insured; but this duty of the agent is limited to facts within the knowledge of the principal which are presumed to have been communicated in due course to the agent or to faets which the agent must have come to know during the course of his agency: (iv) Even in the absence of specific questions, the proposer must disclose voluntarily the following facts or circumstances because they are material (1) Facts which render or tend to show that the risk is greater than normal. (2) Facts which suggest any special motive for ta (3) Facts which suggest the existence of moral hazards which relate to the moral integrity of the proposer or which suggest that the proposer is himself abnormal, that is which indicate his accident proneness, etc. Any fact is material which leads to the inference that the particular proposer is a person or one of a class of persons whose proposal for insurance ought to be subjected to special consideration before it can be decided whether it should be accepted at all or accepted at normal rate. This is usually referred to as the moral hazard.'"” ing the insurance; 4.7.3.1 Facts Which Need Not Be Disclosed The dury does not extend to certain types of facts though they are material, In other words, the assured is not bound to disclose the following facts unless the insurer expressly questions him about them. The facts that need not be disclosed may be noted as: (a) The facts which he is not aware of." “Insurers are in a highly favourable position that they are entitled not only to bona fide, but also to full disclosure of all knowledge possessed by the applicant that is material to the risk”. However, it has been pointed out in Joel v Law Union and Crown Insurance Co," that the duty to disclose does not extend to facts which the assured did not know or could not have known. A person is said to know or be aware of a fact when he actually knows or but for his wilful abstention from making an inquiry by which he could have known it. In spite of his due diligence, if he does not know, there can be no breach of duty of, disclosure as he can disclose only what he knows. The insured died of AIDS and he had no knowledge that he was having AIDS on the date of signing the declaration It was held thar the insurer was not entitled to avoid the payment particularly after two years from the date of taking the policy. When once he knows the fact, the fact that he did not know about its materiality does not absolve him from his duty of disclosure. (b) The facts which the insurer knows or is deemed to know. Any fact or circumstance known to the insurer need not be disclosed. There are certain facts which ic is no duty of the insured to bring to the notice of the insurer for example facts which the insurer knows or is deemed to know. The Marine Insurance Act, 1963, in this regard says that, an assured need not disclose “any circumstance which is known or presumed to be known to the insurer. The insurer is presumed to know mattets of common, notoriety or knowledge and matters which an insurer in the ordinary course of business, as such ought to know”."* This principle is not confined t 113. 114, us. 16. Section 25, Halsbury’s Laws of England, paras 368, 369. Section 20(1) of the Marine Insurance Act, 1963. Joel v Law Union and Crown Insurance Co, (1908) 2 KB 863. Section 20(3)(b), The Marine Insurance Act, 1963.Chapter 4—Insurance Contract and Principles 103 the branch of marine insurance alone. Thus, in Woodcote » Excess Insurance,” the assured, whose criminal record had been disclosed to the agent, though neither the assured nor the agent communicated the information to the insurer, could recover under his fire policy. In BAS Chopra v New Zealand Insurance," where the assured insured his car giving higher value on the advice of an Officer of the insurance, as it was held that insurer cannot plead misrepresentation by the insured as knowledge of the Officer is imputed to the insurer. (©) Any circumstance as to which information is waived by the insurer. Where the insured communicates certain facts to the insurers and the facts are such that they are put on inquiry which they fail to make, the insurer is deemed to have notice of all the facts which such inquiry would have revealed. Thus, constructive knowledge applies both to the insurer and the insured." (d)_ The facts which tend to diminish the risk. The Marine Insurance Act, 1963, also says that “in the absence of inquiry any circumstance which diminishes the risk need not be disclosed”.!*° (e) Any circumstance, which it is superfluous to disclose by reason of any express or implied warranty.” Declaration was given by the insured that after the date of submission of the proposal but before the issue of the premium receipt, in case there is any change in his general health, the same would be informed to the insurer. It was held that, the contract stood vitiated as information about accident was not given to the insurer before receipt of the first premium receipt." (f) Facts which relate to the law of the country, such as the contents of various Factories Acts, 1948, relevant to the employer’ liability insurance. (g)_ Facts of which the insurer himself is the source. (h) Facts of public, common or professional knowledge, such as the existence of a state of war or highly inflammable nature of petrol. (i) Facts which may be known to a prudent person by ordinary search or enquiry. (Facts which the insurer’ representatives fail to notice on a survey. 4.73.2 Time of Disclosure “The disclosure of material facts by the insured is required to be made at the time of making the proposal for insurance and he must continue to do so till the negotiations are completed. Thus, at the time of making a proposal for insurance, the insured must disclose those facts which he honestly thinks to be material and he must continue to do so up to the conclusion of the contract covering any material alteration in the nature or degree of risk which may take place between proposal and acceptance. However, the insured is under no legal obligation ro Kisclose any facts which may come to his knowledge after the contract of insurance has been concluded. Section 20 of the Marine Insurance Act, 1963, by using the words “must be” makes disclosure of every material fact mandatory. The insured must disclose to the insurer every iaterial circumstance which is known to the assured before the contract is concluded and the 117. Woadeos » Excess Insurance, (1979] | Loyd’ Rep 231 118. BAS Chopra v New Zealand Insurance, AIR 1967 Cal 35 119. Section 20(3)6) ofthe Marne Insurance Act, 1963. 120, Secon 20) of tbe Marine race A 96 Secto Sf the Marine Insurance Act, 1963. 1, ae Bev baurnce Ombudinan, AIR. 2009 A 71 123, ‘Ratan Lal» Metrpolizan Insurance Co, AIR 1959 Pat 413104 Principles of Insurance Law assured is deemed to know every circumstance which in the ordinary course of business, ‘ought to be known by him. Where the assured fails to make such disclosure, the insurer may avoid the contract. In other words, the insurer may repudiate the contract. ‘The duty of disclosure applies only to negotiations preceding the formation of the eae When a relevant fact comes to the knowledge of cither party after the completion of the contract, there is no duty to disclose and as such non-disclosure of such facts does nor again offend the rule of good faith, eg, the assured finds on a subsequent medical check-up after the policy is issued that he is suffering from a serious complaint. The policy in such circumstances is not affected due to the non-disclosure of a fact, though material as it came to his notice after the policy is issued. Thus, in Ratanlal v Metropolitan Insurance Co, the insured Pyarelal, made a proposal on 23 January 1946 along with the first premium for the insurance. After consideration of the medical report, etc, the insurer accepted the proposal on 26 March and communicated the acceptance to the insured on 27 March. As money was in deposit, the insurer took the risk on 28 March and informed the insured about it. On 27th evening, the insured complained of exhaustion to his doctor which was a simple ordinary disorder and the doctor came on 28 March but did not prescribe any medicine. However, the insured a few weeks later on 19 April. The insurer repudiated his liability on the ground of non- disclosure. The court rejected the contention on the ground that the complaint was subsequent to acceptance on 26 March. To put it in short, the duty to disclose is not a continuing duty; it must be observed throughout the negotiations and continues only until they are completed and the contract is concluded. Insured found suffering from T.B meningitis after commencement of the policy but before revival of lapsed policy would amount to fraud and the insurer was entitled to avoid the policy for non-disclosure of the same." The duty to disclose facts is not finally Fulfilled on the completion of the proposal form, but continues up to the final acceptance of the proposal. If, in the meantime, the facts disclosed change, the insurer should be informed. The policy would be void if this is not done. An interesting authority is Looker v Law Union and Rock Insurance Co Ltd,!* where a proposal for life insurance was accepted upon the condition that the risk would commence and the policy would be issued on payment of the first premium. The proposer then became ill. His illness was diagnosed as pneumonia and he died of it. Three days before his death he sent a cheque for the first premium and one day before his death the company sent its final acceptance. The cheque was, however, not met. The insurer was permitted to avoid the policy. When the company ultimately accepted the risk, the fact was that the assured was dying. A material change had taken place in the state of his health between the date of the proposal and the final acceptance, which should have been brought to the notice of the insurance company.” However, this duty to disclose revives when the policy ends and has to be renewed for a further period as in the case of fire and motor insurance where insurance is year to year ot periodical, chen disclosure must be made at the end of each period. It also revives in case of revival of a lapsed policy." 4.7.3.3 Breach of Utmost Good Faith’? The various circumstances under which the parties may be guilty of breach of utmost good faith may be classified into four categories: 124, Ratan Lal v Metropolitan Insurance Co, AIR 1959 Pat 413. 125. Om Prakash Moda v Life Insurance Corp of India, AIR 2006 Ori 167. 126. Looker v Law Union and Rock Insurance Co Lid, (1928) 1 KB 554. 127. Avtar Singh, Law of Insurance, Eastern Book Company, Lucknow, 2008, p 17. 128. RN Chaudhary, General Principles of Insurance Law, \st Edn, Central Law Publications, Allahabad, 2012, p 74 129. M Arif Khan, Theory and Practice of Insurance, Educational Book House, Aligath, 1994, p 438,Chapter 4—Insurance Contract and Principles 105 (a) Non-diselosure: Omission to disclose unintentionally or inadvertently or because the proposer did not recognize that the fact in question was material. Non-disclosure of earlier cover for life insurance by the insured amounted to suppression of material fact which would influence the decision of the prudent insurer to undertake risk and the insurer is entitled to repudiate claim under the policy." (b) Concealment: Intentional suppression of a fact which is material, eg, failure to disclose that his proposal with some other insurance company was not accepted. (©) Innocent Misrepresentation: A statement which is inaccurate but which is made without any fraudulent intention, (a) Fraudulent Misrepresentation: A statement made knowingly or without belief in its truth or recklessly without caring whether it be true or false. Where there is a breach of duty of utmost good faith, the contract may be either void or voidable, but if there is fraudulent misrepresentation, the contract is void for the simple reason that the law will not assist a party to a fraud. In case of innocent misrepresentation, the premium is returnable. Also, misrepresentation concerning a matter of expectation or belief as for example a vague statement that the assured “believes that he is in good health”, or that “he believes he is so many years old” or “he thinks that the building will not fall”, etc., does not affect the validity of the contract. So, where he knows a material fact and suppresses it knowing that it is material to the contract, it amounts to fraud; but where he does not know about the materiality of the fact, it may have the same effect as misrepresentation, Therefore, the effect of mere non-disclosure does not amount to fraud. In case of fraud, the party defrauded can not only avoid the contract bur can also claim damages. In the case of all non-disclosures, the insurer can avoid the contract. and whether he would be entitled to damages is a different question depending upon his knowledge of materiality.” In Lambert v Cooperative Insurance Society," a lady renewed a policy of insurance on jewellery owned partly by her and partly by her husband who had been convicted ewice for two crimes involving dishonesty in the year before. She did not disclose these convictions of her husband while seeking renewal. It was held that she had a duty to disclose this though her husband was not an insured. 47.3.3.1 Life Insurance and Good Faith For the purpose of taking out a life insurance policy, the assured is to fill in a proposal form supplied by the insurer. The assured must give correct answers 0 all the questions as contained in the proposal form. Facts relating to health condition or physical history of the applicant are considered to be material facts. In Bhartiya Jeevan Bima Nigam v Rampyari Badri Prasad,'*® the insurance claim was repudiated on the ground of suppression of material fact. The facts of the case were that the insured died within six months from the date of commencement of policy due to cancer. The insurer pleaded that the policy holder suppressed the fact about high BP. However, the insurer failed to prove that the insured was suffering from high BP or was taking any medicines or undergoing any treatment. Medical check-up was conducted on the day when policyholder was insured and i did not disclose any medical ailment. Ie was held ce Insurance Co Lid v Nareshbhai Rathod, AIR 2019 SC 2039 ; (2019) 6 SCC 175 ; 2019 (6) 130, ans are La Ren hn Corn AIR 019 S289, 2099 AC) 1388 2019 isn ALAS a, 2019 (137) y 8K VS Sama, Mader Law of nee ads Ei, LsNex Gurgaon, 204, 38 132. Lambert ive Insurance Society, [1975] 1 Lloyd's E 133, Bares Bima Mig ar Pi: AIR2020 Rj 136Wy 106 Principles of Insurance Law that there was no case of suppression of facts and the repudiation of claim was not proper. Life | Insurance Corporation was directed to deposit the amount with interest. | In Life Insurance Corp of India v Manish Gupta,’ it was held that concealment Hd Pre. existing illness amounts to suppression and the claim was repudiated. The facts were that the | proposer took a policy falling within Non-Medical General category where proposer is nor Subjected to medical examination. Ie was the obligation of the proposer to truchfully fill the details required by the insurer. The proposer was suffering from cardiovascular disease from childhood. The repudiation was held to be proper. 4.7.3.3.2 Fire Insurance and Good Faith In case of fire insurance, the risk is accepted usually by the insurer on the basis of propos form. However, if the risk involves complications, the insurer shall send their surveyors to assess the risk by examining the property. The material facts in a fire insurance contract are any other policy on the same property, refusal by other insurer to insure, uses to which building is put, etc. 4,7.3.3.3 Marine Insurance and Good Faith ‘A marine insurance policy also imposes a responsibility on the insured to make a true and fair disclosure of all the facts to the underwriter. Material facts may include the facts about the vessel, cargo, etc. 4.7.3.4 Illustrative Situations (Filling of Form by Agent’: Where the proposal form is completed by the agent, and the party only signs on the form and it contains a misrepresentation, will the insured have to suffer for it? This was one of the questions in Biggar v Rock Lift Assurance Co." A policy of insurance against accidental injury was affected with an insurance company through their local agents. The proposal form was filled up by the agent, many of the answers filled in by him being false in material respects. The false answers were inserted without the knowledge or authority of the applicant, who signed the proposal form without reading it. The proposal contained 2 declaration in which the applicant agreed that the statements in the proposal should form the basis of the contract. Shortly after payment of the premium, the assured was accidentally injured. The court pointed out that it was the duty of the applicant to read the answers in the proposal before signing it and he must be taken to have read and adopted them. This was so because in filling in the false answers in the proposal the agent was acting, not as agent of the insurance company, but as agent of the applicant and, therefore, the policy was void, (ii) Where Contents of Proposal Are Basis of Contract”: This principle will apply where the contents of the proposal are the basis of the contract. If this is so, the policy would be void whether the untrue statement is material or not or whether it was inserted by the agent with or without the authority of the proposer. Thus, in Dawsons Ltd v Bonnin, a motor lorry was insured against damage by fire and third-party risks. In reply to a question in the proposal form, “State full address at 134, Life Insurance Corp of India v Manish Gupta, AIR 2019 SC 2606 : 2019 AC} 1866 : 2019 (3) ALD (SC) 102. 135. Avtar Singh, Law of Insurance, Eastern Book Company, Lucknow, 2008, p 19. 136. Biggar v Rock Life Assurance Co., (1902) 1 KB 516. 137. Avtar Singh, Law of Insurance, Eastern Book Company, Lucknow, 2008, p 19. 138, Dawsons Lid v Bonnin, {1922} AC 413.Chapter 4—Insurance Contract and Principles 107 which the vehicle will usually be garaged”, the answer given was “Address above”, meaning thereby the firm’s ordinary place of business. This was not true, as the lorry was usually garaged at a farm on the outskirts of the town. The inaccuracy was due to inadvertence. The lorry having been destroyed by fire at the garage, the insured claimed payment under the policy. The court agreed that the misstatement was not material, but the recital in the policy that the proposal should be the basis of the contract made the truth of statements contained in the proposal, apart from the question of materiality, a condition of the liability of the insurers and, therefore, the claim failed. ‘Where there is no statement in the proposal that the contents would be the basis of the contract, then the question of materiality will definitely arise, and an inaccurate statement will be regarded as material so as to vitiate the policy if the matters concealed or misrepresented are such that had they been truly disclosed, they would have influenced a reasonable insurer to decline the risk, or to have stipulated for a higher premium. Gi) Inconsistent Statements": Where there are inconsistent statements in a proposal and even so the insurer accepts the proposal, he cannot afterwards say that one or the other of the inconsistent statements must have been false. In a proposal for life insurance according to the date of birth mentioned, the age should have been 49 but it was mentioned as 48. The proposal was accepted and when it became a claim, the insurer sought to avoid it. The court said that the insurance company had that proposal before them, and they saw, on the face of it, that there was a mistake somewhere about the age. Obviously, it must have hit them in the eye the moment they had the proposal form. Yet, notwithstanding that, they chose to issue a policy and if they chose to issue a policy on a proposal form which contained a mistake, there was no ground for vitiating the policy. (iv) Form Completed with Blanks": Where the proposer leaves blanks on the form, the obvious inference is that the answer is a negative one, and if the negative answer would have been false, there is misrepresentation. In a proposal for burglary insurance, to a question of whether the proposer had taken claims in respect of burglary from other insurers, he made no reply. From this, the court inferred that he had made no such claim, That being not true, the policy was vitiated. Ie was a deliberate suppression or concealment of a material fact. Barry J stated as follows: The inference to be drawn from leaving blank the two lines provided for the purpose of stating any exception can, to any reasonable applicant and to any reasonable insurer, have only one meaning, namely, that no exception exists. It seems to ime perfectly clear that any applicant for insurance, completing this form, would appreciate without any doubt or ambiguity thar the insurers required particulars of any previous loss in respect of contingencies specified to be set out on the two blank lines left for that purpose, with the date, amount and the name of the insurers who ‘were concerned in respect of each of those losses. 47.3.5 Burden of Proof It is the burden of the insurer to show that there was a misrepresentation or non-disclosure of a material fact. Where in burglary insurance policy, the insurer alleged that some of the ‘statements of the insured in a proposal form were untrue; it was held that the burden that 139, Avtar Singh, Law of Insurance, Eastern Book Company, Laicknow, 2008, p 19. 140. Amar Singh, Law of Insurance, Eastern Book Company, Lucknow, 2008, pp 22-23.VW noe Principles of Insurance Law the statements were untrue lay on the company. Lord Reading CJ said, Upon whom is the burden of proof of establishing that the statement or statements challenged is or are untrue: The answer to it clearly is: upon the company, and it is for them co establish, and if they have not satisfied the arbitrator that the statements are untrue, why then that defence fails. The test of it is the very simple proposition, which is an answer to so many of these questions which are raised, which may be expressed in these words: that the burden of proof lays at first on the party against whom judgment would be given if no evidence at all were adduced. 4.7.3.6 Section 45, Insurance Laws (Amendment) Act, 2015 Section 45 of the Insurance Laws (Amendment) Act, 2015, states that “no policy can be ‘questioned after the expiry of three (3) years from the date on which it was affected on the ground of any mis-statement of a material fact except where it was made wilfully fraudulently’, However, where, after discovering misrepresentation, the insurer, instead of avoiding the policy, continues to uphold it, for example, by accepting premium or otherwise, he cannot afterwards avoid it on that ground, but if the policy was void for some other reason, for example, lack of insurable interest, the waiver would not be operative as to that fact.'*! Section 45 of the Act permits the insurer to repudiate the claim within three years of commencement of policy. However, in Life Insurance Corp of India v Renu Devi,'** it was held that the limit of two years is not applicable in case of statement of material matter or suppression of a fact which the insured was bound to disclose and was fraudulently made. The effect of section 45 of the Insurance Act, 1938, is thus stated by $ K Das, J of the Supreme Court in Mithoolal Nayak v Life Insurance Corporation: The operating part of Section 45 states in effect that no policy of life insurance effected after coming into force of the Act shall, ater expiry of two years from the date on which i was effected, be called in question by an insurer on the ground that a statement made in the proposal for insurance or in any report of a medical officer, or referee, or friend of the insured, or in any other document leading to the issue of the policy was inaccurate or false; the sccond part of the section isin the nature of a proviso which creates an exception. Ie says in effect that if the insurer shows that such statement was on a material matter or suppressed facts which it was material to disclose and that it was fraudulently made by the policy holder and that he knew at the time of making it that the statement was false or that it suppressed facts which it was material to disclose, then the insurer can call in question the policy effected as a result of such inaccurate or false statement. It was held that the answer being obviously false, it could not be said that the assured did not know that he was making a false statement, The court further laid down that the period of two years would commence from the date of the policy and not from the date of its revival if it lapsed and would be computed up to the time that the insurer repudiated the policy and not the time when it became a claim. ‘The Gauhati High Court had occasion to discuss the applicability of section 45 of the Insurance Act, 1938, in Sakhitombi Devi v Zonal Manager, Life Insurance Corp of India. The facts of the case were that the petitioner's husband, namely L. Kom took a life policy and admittedly the date of commencement of the said policy was 15 March 1994, One of the conditions of the said insurance policy was that there shall be forfeiture of the sum assured 141. Avtar Singh, Law of Insurance, Eastern Book Company, Lucknow, 2008, p 25. 142. Life Insurance Corp of India v Renu Devi, 2017 (171) AIC 687 : 2017 (3) PLJR 89 : (2017) 3 BBC) 232 (Pa 143. Mithoolal Nayak v Life Insurance Corp, AIR 1962 SC 814. 144, Sabbitombi Devi v Zonal Manager, Life Insurance Corp of India, AIR. 2009 Gau 90.Chapter 4—Insurance Contract and Principles 109 under the said policy in case requirements mentioned in section 45 of the Insurance Act, 1938, are fulfilled. Admittedly the provisions of section 45 of Insurance Act, 1938, were applicable to the said policy. The said policy was lapsed after sometime but it was revived on 4 December 1995. Within some days of the revival of the policy, the insured died on 17 December 1995. After the death of the insured, the petitioner made a claim for the sum assured. Life Insurance Corporation of India by taking recourse to the conditions of the said policy and also section 45 of Insurance Act, 1938, had called in question of the said insurance policy on the grounds supported by material documents that the petitioner husband, i.e., the insured had suppressed material facts that during last five years from the date of opening the insurance policy, he had consulted medical practitioner for his ailment requiring treatment for more than a week and that he was suffering from stomach ailment and treated by the doctor for his stomach ailment. This fact was also affirmed by the Dr. L R Kom who treated the petitioner's husband, the insured. The claim for repudiation was justified. The Supreme Court in its decision in Life Insurance Corporation v Asha Goel, analysed the section in terms of its operative points: On a fair reading of Section 45 of the Insurance Act it is clear that it is restrictive in nature. It lays down three conditions for applicability of the second part of the section namely: (a) the statement must be on a material matter or must suppress facts which ic was material to disclose; (b) the suppression must be fraudulently made by the policy-holder; and (c) the policy-holder must have known at the time of making the statement chat it ‘was false or that it suppressed facts which it was material to disclose. Mere inaccuracy of falsity in respect of some recitals or items in the proposal is not sufficient. The burden of proof is on the insurer to establish these circumstances and unless the insurer is able to do so there is no question of the policy being avoided on ground of misstatement of facts. The contracts of insurance including the contract of life assurance are contracts uberrimae fidei and every material fact must be disclosed, otherwise, there is a good ground for rescission of the contract. Thus, it can be concluded that contracts of insurance are contracts of utmost good faich and both the parties to the contract should disclose all the material facts. The reason of the rule is to prevent fraud and to encourage good faith. Ic is adapted co such facts as the nature of the contract vary; which one privately knows, and the other is ignorant of, and has no reason to suspect. The question, therefore, must always be whether there was, under all che circumstances at the time the policy was underwritten, a fair representation; or concealment; fraudulent, if designed; or, though not designed, varying material the object of the policy and changing the risk understood to be run. 4.74 Indemnity The principle of indemnity is the regulating principle of insurance and is applicable in all contracts of insurance except life, personal accident and sickness insurances. According to “Porter”, indemnity is the controlling principle of insurance law and it is with reference to this principle that all problems in insurance can be solved. Under the insurance contract, the insurer undertakes to “indemnify” the insured against loss suffered by the latter. Indemnity literally means “security against damage or loss” or “compensation for loss” or “make good the loss”. Te means a promise to save another person from harm or from the loss caused asa result of 4 transaction entered into at the instance of the promisor. “Prof Hansell” defines it as “an exact {financial compensation’ .*® The Indian Contract Act, 1872 defines indemnity as “a contract 145. Life Insurance Corp v Asha Goel, AIR 2001 SC 549. 146. M Arif Khan, Teeny ‘and Practice of Insurance, Educational Book House, Aligath, 1994, p 52.