Insurance business and the need for insurance cover are growing with the growing complexity of life and commerce, and, consequently, there is now a bewildering variety of insurance covers. Whatever be the kind of insurance or the object insured there are certain principles of insurance law so fundamental that they impinge upon every variety. Every contract of insurance is a contract of absolute good faith and requires some insurable interest to support it, without which it will be a mere wager.
“Insurance is a contract by which the one party in consideration of a price (called the premium) paid to him adequate to the risk becomes security to the other that he shall not suffer loss, damage or prejudice by the happening of the perils specified to certain things which may be exposed to them.”
Insurance contracts belong to a class of contracts and are governed by principles which govern contracts in general. They are a special class of contracts having distinctive features, such as utmost good faith, insurable interest, indemnity subrogation, contribution and proximate cause, which are common to all kinds of insurance.
It is recognized that to satisfactorily define ‘contract of insurance’ is a matter of considerable difficulty. It may be defined as a contract whereby one party (the insurer) promises in return for a money consideration (the premium) to pay to the other party (the insured) money or money’s worth on the happening of an uncertain event more or less adverse to the interest of the insured.
INSURANCE CONTRACTS – APPLICABILITY OF LAW OF CONTRACT
Insurance is the process by which the insurance company pays compensation to the person who suffers loss on the happening of an event which is insured. It is a transaction of indemnity and also appears to be a transaction in which one party promises to the other party to pay compensation or otherwise stands as surety for the payment of compensation. However, in the strict sense, all insurance contracts are not the contracts of indemnity.
Insurance and Contract of Indemnity
Section 124 of the Indian Contract Act, 1872 defines the Contract of Indemnity as ‘a contract by which one party promises to save the other from the loss caused to him by the conduct of promisor himself or by the conduct of any person/persons’.
This section explains the loss to be compensated under the contract of indemnity. It is the loss caused to a party either by the action of the promisor or by any other person. The principle of indemnity is not effective if the loss is caused by any other natural agencies. This liability under a contract is based upon the principle laid down in the section and is governed by operation of law.
In an insurance business, the loss or damage is assessed and computed if the risk is covered under the terms of insurance contract. The financial help is available as compensation under the Indian Law of Indemnity for the loss, if the loss is a result of an act by either the promisor or any other person but not due to any natural agency like fire, floods etc.
The insurance business and the contract of indemnity under the Indian law are similar but not the same where as there is close resemblance between the two under the English law. But the principle of indemnity is applicable in most of general insurance business claim payments.
Presence of indemnity clause in a contract of tenancy or bailment, imposing a liability on the tenant or the bailer to make good the loss in fire does not change the real nature of such. contract.
The liability of the insurers, in an insurance business contract, is limited to the terms of the contract. It is a direct contract and not an accessory obligation and the contract is terminated by the payment of loss or damages suffered by the assured who purchases the policy or on the date of expiry of the policy, whichever is earlier.
The insurer has the option to select the method to make good the loss suffered by the insured such as paying compensation after assessing the loss in monetary terms, or replacing/repairing the asset that is damaged on happening of the incident whereas, in a contract of indemnity, the promisor has no option but to pay according to the directions of the promise. The principle of indemnity does not apply to a life insurance business.
Insurance and Bailment
Section 148 of the Indian Contract Act, 1872, defines baiment as ‘the delivery of goods by one person to another for some purpose upon a contract that they should, when the purpose is accomplished, be returned or otherwise disposed off according to the directions of the persons delivering them’.
Section 164 of the Act says that the bailor is responsible to the bailee for any loss, which the bailee may sustain by reason that the bailor was not entitled to make the bailment, or to receive back the goods or to give directions responding them.
Section 161 explains such responsibility of the bailee and payment of compensation to the bailor. But in the insurance business, the insured and insurer have their roles defined and cannot change. Under bailment, the bailee/bailor should take reasonable care as a prudent owner of the goods bailed. If they take reasonable care they need not pay any compensation for the damages suffered by the other party.
The bailee, in the absence of any special contract, is not responsible for the loss, destruction or deterioration of the thing bailed, if he has taken the amount of care of it described in Section 151 for the payment of compensation under special circumstances needs a special contract and the special contract is similar to that of insurance contract. As such, the bailment differs from an insurance contract
Insurance and Contract of Guarantee
Insurance business is not a contract of guarantee. There are three parties in contract of guarantee – the principle debtor, creditor and surety, whereas in insurance there are only two parties – the insurer and insured.
Section 126 of the Indian Contract Act, 1872, states ‘ a contract of guarantee is a contract to perform the promise, or discharge the liability, of a third person in case of his default.’ Thus, in the contract of guarantee/ surety, the surety will make a promise to the creditor to compensate him for the loss suffered by him due to the non-performance of the contract by the principle debtor.
The contract of guarantee has two individual contracts in itself. The first is between the creditor and the principle debtor and in the second contract between the surety and the creditor.
The important concept of the insurance is to transfer the risk and the loss arising from the risk, which might be incurred by the insured, to a financially sound professional risk bearer in consideration of a relatively small contribution, known as premium.
“The function of insurance is to spread the loss over a large number of persons through the mechanism of cooperation. The persons were exposed to a particular risk, and cooperate to share the loss caused by the risk whenever it takes place. Insurance not only equalizes losses and distributes heavy sudden losses over a period of time. Insurance is a cooperative device to spread the loss caused by a particular risk over a number of persons who have agreed to insure themselves against that risk.”
Uberrimae fidei is a Latin expression, which literally means ‘the utmost good faith’.
Mere non-disclosure of fact, material or not, does not ordinarily amount to misrepresentation, and the general rule is that in order to be actionable a representation must take an active form. But in certain cases a stricter rule is enforced.
The most important of these are the contracts uberrimae fidei, in which knowledge of the material facts generally lies with one party alone. That party is under a duty to make a full disclosure of these facts, and failure to do so makes the contract voidable. The duty varies in its extent from one type of contract to another.
Contracts of insurance of every kind form the main group of contracts uberrimae fidei. Other examples generally included, though these are probably not all uberrimae fidei in the strict sense, are contracts to subscribe for shares in a company, family settlements, contracts for the sale of land, contracts of suretyship, and partnerships. Contracts of service are not uberrimae fidei, nor are contracts of sale of goods.
In Jowitt’s 1977 Dictionary, the term was described as follows:
“A contract is said to be uberrimae fidei when the promisee is bound to communicate to the promisor every fact and circumstance which may influence him in deciding whether to enter into the contract or not. Contracts which require uberrimae fidei are those entered into between persons in a particular relationship, as guardian and ward, solicitor and client (and) insurer and insured.”
In the context of maritime law, Justice Mc Keown of the United States Court of Appeals, 9th Circuit, used these words in the February 2008 decision of Certain Underwriters at Lloyd’s v Inlet Fisheries Ltd.:
“This case involves the interplay between an ancient legal doctrine and contemporary vessel pollution insurance. Historically, all insurance policies were contracts uberrimae fidei, meaning that both parties were held to the highest standard of good faith in the transaction.
The doctrine of uberrimae fidei was grounded both in morality and efficiency; insurers were considered morally obligated to disclose all information material to the risk the insurer was asked to shoulder, but such a principle was also an economic necessity where insurers had no reasonable means of obtaining this information efficiently, without the ubiquity of telephones, email, digital photography, and air travel.
The reasons which brought into being the strict marine insurance law doctrine as to disclosure go far back into the early days of marine insurance, when sailing ships in faraway seas were insured in London by underwriters who could get no information except from the ship owners.
The contract of insurance is one of mutual good faith; and the principles which govern it, are those of an enlightened moral policy.”
UBERRIMAE FIDEI AS AN ESSENTIAL ELEMENT OF INSURANCE CONTRACTS
In England till the passing of the Misrepresentation Act, 1967, it was a cardinal principle of commercial law that he who buys should beware, caveat emptor and thereof in business transactions each party must take care of his interest when he buys the promise of the other and the other party is not bound to disclose any defect which an ordinary inquisition would reveal.
But even before 1967 contracts of insurance stood and now also they stand on a different footing and form an exception to this rule because the parties do not stand on an equal footing with regard to the knowledge of the subject matter or with regard to the economic aspect of the obligation.
Scrutton L.J. observed, “as the underwriter knows nothing and the man who comes to ask him to insure knows everything it is the duty of the assured, the man who desires a policy, to make a full disclosure to the underwriters without being asked of all the material circumstances, because the underwriters know nothing and the assured knows everything. This is expressed by saying that it is a contract of utmost good faith – uberrimae fides. 
The parties entering into a contract in general, owe no positive duty towards each other beyond showing ordinary good faith. Each is expected to inform himself of all relevant facts, by making such independent enquiries as he may think prudent, as by their nature, they are or might be equally accessible to both parties. In other words, the maxim ‘Caveat Emptor’ which means let the buyer beware applies.
The duty, if at all, is negative in nature, namely, not to induce the other party to enter into the contract by fraud or misrepresentation whether innocent or otherwise of any facts. Inaccurate information given innocently can be used to avoid the policy.
A person seeking insurance is bound to disclose all material facts relating to the risk involved. False answers to the questions in the proposal form given by the assured relating to the state of his health vitiate the contract of insurance. It is, however, necessary that the facts thereby suppressed should be material to the contract.
This above stated principle does not apply to contracts of insurance. Law demands a higher standard of good faith in these.
The uberrimae fides is the foundation on which the insurance policy is constituted. The insurer and insured are under obligations to deal with the contracts of insurance with good faith and with good intention. The product and subject matter, i.e. risks are tangible assets in the hands of the insurer and the insured. The insured, by knowing the quality and quantity of the risk, proposes for a contract and the insurer by knowing the quality and quantity of the risk, proposes for a contract and the insurer by knowing the facts and conditions laid down in the standard form of proposal and after considering the proposal sells the insurance product to the buyer. It is these reasons which impose greater duty on the parties to an insurance contract.
The principle of good faith plays an important role in the formation of a contract of insurance. The assured and insurer are under obligation to make the declaration in relation to the facts of the assured. A declaration made by the assured while filling up the proposal form, and a declaration of the insurer while accepting the proposal and issuing of policy forms a part of the contract. Any suppression of information regarding the assets which is assured amounts to not declaring the facts. If the assured, who is under an obligation to declare, is silent and does not declare the information, it amounts to non-disclosure of the facts. If the assured or the insurer has given some information which is not required and the other party acts on the information so supplied or given, it amounts to misrepresentation or fraud which is a ground to avoid the contracts. The assured, having been acquainted with the asset assured, is in a position to understand the risk available to the asset.
The duty to disclose facts is implied. The disclosure of information should be of material facts to the insurance contract. The scope of the word ‘material facts’ depends upon individual case and individual circumstance. The disclosure of facts should pertain to the present position, but if information given pertains to the future position of the subject matter, then deviation from the statement does not amount to disclosure. Facts disclosed by the party after the submission of proposal and before the issue of policy amounts to bonafide declaration.
The term “material fact” is not defined in the Act and, therefore, it has been understood and explained by the Courts in general terms to mean as any fact which would influence the judgment of a prudent insurer in fixing the premium or determining whether he would like to accept the risk. Any fact which goes to the root of the Contract of Insurance and has a bearing on the risk involved would be “material”.
As stated in Pollock and Mulla’s Indian Contract and Specific Relief Acts `any fact the knowledge or ignorance of which would materially influence an insurer in making the contract or in estimating the degree and character of risks in fixing the rate of premium is a material fact.’
In this regard, it would be apposite to make a reference to Regulation 2(1)(d) of the Insurance Regulatory and Development Authority (Protection of Policyholders’ Interests) Regulations, 2002, which explains the meaning of term “material”. The Regulation reads thus: “2. Definitions.—In these regulations, unless the context otherwise requires,–
(d) “Proposal Form” means a form to be filled in by the proposer for insurance, for furnishing all material information required by the insurer in respect of a risk, in order to enable the insurer to decide whether to accept or decline, to undertake the risk, and in the event of acceptance of the risk, to determine the rates, terms and conditions of a cover to be granted.
Explanation: “Material” for the purpose of these regulations shall mean and include all important, essential and relevant information in the context of underwriting the risk to be covered by the insurer.” Thus, the Regulation also defines the word “material” to mean and include all “important”, “essential” and “relevant” information in the context of guiding the insurer to decide whether to undertake the risk or not.
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.
A contract of insurance falling in the category of contract uberrimae fidei, meaning a contract of utmost good faith on the part of the assured. Thus, it needs little emphasis that when information on a specific aspect is asked for in the proposal form, an assured is under a solemn obligation to make a true and full disclosure of the information on the subject which is within his knowledge. It is not for the proposer to determine whether the information sought for is material for the purpose of the policy or not. Of course, obligation to disclose extends only to facts which are known to the applicant and not to what he ought to have known. The obligation to disclose necessarily depends upon the knowledge one possesses. His opinion of the materiality of that knowledge is of no moment.
The disclosure of information should be absolute without any limitations. The hiding of facts and non-disclosure of information known to him amounts either to misrepresentation or fraud depending upon the motive of the perty. Giving information with the knowledge that it is false, amounts to fraud and giving information which the party believes to be true and there is no reason to believe it to be wrong, amounts to disclosing the information in good faith. The insurer is also bound by an obligation to give the information regarding the product of the insurance contract and risks covered and method of payment of claims. If he has not mentioned to the insured, processing of insurance claims, coverage of risks amounts to not disclosing the information. Information mentioned in the policy as per Section 41 of the Act, in relation to the rebates allowed by the agent, binds the insurer.
The duty to disclose facts runs through out the continuance of contract of insurance and it is binding both parties of the contract. The character, scope and duration of an insured duty to disclose information to an insurer after the conclusion of the contract of insurance depends upon the nature of the contract and also on the judicial pronouncements.
Lord Mansfield who is remembered as the father of English Commercial and Insurance law stated the principle of good faith in Carter v. Boehm , thus:
“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 representations and proceeds upon confidence that he does not keep back any circumstances 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 such circumstance is a fraud and, therefore, the policy is void.” According to more recent authority the word ‘void’ in this passage should be ‘voidable’.
It is the fundamental principle of Insurance law that utmost good faith must be observed by the contracting parties. Good faith forbids either party from concealing (non-disclosure) of what he privately knows, to draw the other into a bargain from his ignorance of the fact and his believing the contrary. Just as the insurer has a duty to disclose, it is the duty of the insurers and their agents to disclose, all material facts within their knowledge, since obligation of good faith applies to them equally with the assured.
Disclosure of facts and Consensus Ad Idem
Insurance contract is an agreement of consensus ad idem. It is the agreement with mutual consent on the subject matter. It is similar to the contract where the parties agree upon the facts of a contract without giving scope for a mistake either unilateral or bilateral. Insurance contract, being a contract of uberrimae fidei, creates obligation on the part of the parties to the contract to execute it with consensus ad idem and it is presumed that the statements made and facts disclosed are correct and the parties have understood in similar manner and the information is true to the knowledge of the recognized .there are no different understandings or mistakes on the part of the parties to the contract. And the doctrine of consensus ad idem also states that the parties to the contract should have the consent on the contract by understanding the insurance product and risk in a similar way.
The calculation of premium and payment of claim depends upon various terms and conditions incorporate or inserted in the policy. The parties should understand them in a proper way and have a mutual consent not only relating to the terms and conditions of risk but also relating to the consideration that is payment of insurance premium. If there is any difference of opinion or mistake in calculation of the premiums then there will not be any consensus ad idem and it leads to invalidity of the contract.
Failure to have mutual consent will lead to breaking of the contract. The disclosure is the process of providing information, to the other party, which is actual knowledge that the party making the statement has in relation to the subject matter of the contract. Thus, the insurance contracts being contracts of good faith require the disclosure of facts, which are known to the parties to the contract themselves.
Specific Provisions under the Indian Marine Insurance Act, 1963
Section 19 of the Act states that insurance is uberrimae fidei. Section 20 provides for disclosures by the assured. The question as to whether a particular circumstance which is not disclosed is material or not is essentially a question of fact. What facts need to be disclosed and what need not, have clearly been laid down in sub-sections (2) and (3) of Section 20 respectively.
Section 21 of the Act provides for the disclosure by an agent effecting the insurance. A Bank acting as an agent, thus, has a responsibility to disclose all material facts.
The terms of the contract of insurance, thus, being governed by the provisions of a statute; non-disclosure of such material facts would render the policy repudiable.
Insured’s Duty of Disclosure
MacGillivray on Insurance Law (Tenth Edition) has recognized the assured’s duty to disclose as under:
“…the assured must disclose to the insurer all facts material to an insurer’s appraisal of the risk which are known or deemed to be known by the assured but neither known nor deemed to be known by the insurer. Breach of this duty by the assured entitles the insurer to avoid the contract of insurance so long as he can show that the non-disclosure induced the making of the contract on the relevant terms.”
The question of the knowledge or opinion of the proposer for insurance raises three further questions – first, his knowledge of the duty to disclose, secondly, whether his opinion as to materiality is relevant and thirdly, what knowledge of the material facts on his part is required.
Whether or not the proposer knows of his duty to disclose is wholly irrelevant. Innocent non-disclosure is as actionable as negligent non-disclosure or concealment, as all the cases assume. Similarly, his opinion regarding materiality of non-disclosed facts is irrelevant even though he may have acted in good faith. It is the law that a man may act in perfect good faith within the ordinary meaning of the phrase, yet still be held not to have acted in utmost good faith in the legal sense.
As for the question of Constructive knowledge, whether the insurer is bound to disclose not only what he knows but also what he ought to know, it is an open one so far as non-marine insurance is concerned. However, an insurer will be deemed to have the knowledge that his agent has if that knowledge had been acquired by the agent acting in the scope of his authority 0 actual or ostensible.
Insurer’s Duty of Disclosure
The occasions where the disclosure by the insurer is required might be rare in practice since the circumstances material to the insurance shall ordinarily be known only to the proposed insured. Nevertheless such occasions do arise. The duty falling on the insurer must at least extend to disclosing all facts known to him which are material either
(a) to the nature of risk sought to be covered, or
(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 by his agents. He must issue the policy in conformity with the terms mutually agreed to 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 kind of insurance. But if he does not ask for it, he will be considered to have accepted the policy that is issued.
Waiver of disclosure raises a number of points. First are those that arise from the fact that in the majority of cases insurance if effected following the completion by the proposer of the proposal form on which a great deal of information is solicited. The fact that many questions are expressly asked does not relieve the insurer of hid duty to disclose facts outside the scope of the questions, but in some cases the form of questions may reduce the scope of the duty of disclosure.
Similarly, if the proposer leaves a blank to a question which is accepted without any inquiry by the insurer, it will be taken as a waiver by the insurer of the duty for disclosure with respect to the matter covered by the question.
Waiver as a result of the form of the questions asked will usually arise when the question asks for some details about certain facts or types of facts. Disclosure of other details will be waived if it is felt that a reasonable man reading the proposal form would consider that the insurer did not seek the other details.
Where a question asked on a proposal form is ambiguous, a fair and reasonable construction must be placed upon it and it will be construed contra proferentem when the proposal form is incorporated into the contract. If, for, example, the answer of the proposer is true according to a construction which a reasonable man would have put on the question, the insurers cannot rely upon its inaccuracy.
Legal Basis of Duty of Disclosure
In Bell v. Lever Bros. Ltd., Lord Atkin said, “.. there are certain contracts expressed by the law to be contracts of the utmost good faith where material facts must be disclosed.; if not, the contract is voidable. Apart from special fiduciary relationships, contracts for partnership and contracts of insurance are the leading instances. In such cases the duty does not arise out of the contract; the duty of the person proposing an insurance arises before the contract is made..”
In March Cabaret Club and Casino Ltd. V. London Assurance , May J. said, “… the duty to disclose is not based upon an implied term in the contract of insurance at all; it arises outside the contract.” As Scott L. J. said, “ … if it did, it would not arise until the contract had been made…”
The principle of utmost good faith implies meaningful reciprocal duties owed by the insured to the insurer and vice versa. But these duties cease to exist as soon as the contract of insurance is made. This also shows that the duty does not arise out of the contract. The duty of disclosure is neither contractual nor tortuous, fiduciary nor statutory in character, but is founded on the jurisdiction originally exercised by the Courts of Equity to prevent impositions.
In the Explanation to Section 17 of the Indian Contract Act, 1872, it is provided that mere silence does not amount to fraud unless there is duty to speak or silence amounts to speech. The duty referred to in the Explanation is a legal duty and not merely a moral duty to speak. It does not apply to cases where there is a positive case of active fraudulent representation which has been responsible for bringing about contract between the parties.
In case of fraud, the party defrauded not only can avoid the contract but can claim damages also. In the case of non-disclosure of facts, the insurer can avoid the contract. Section 19 of the Contract Act gives to the party defrauded an option to enforce the performance of the promise made by the defrauding party or to claim damages for breach of contract. The insurer cannot avoid or repudiate an insurance policy on the ground of non-disclosure of lapsed policies by the insured, which had no bearing on the risk undertaken by the insurer.
Remedy for breach of duty of utmost good faith
The question whether the remedy for the breach of duty by a party to a contract of utmost good faith is avoidance of the contract or whether it gives rise to a claim for damages was considered in Banque Financer v. Westagate Ins. Co. and it was held in the light of Sections 17 and 18 of the Marine Insurance Act, 1906 (same as Sections 19 and 20 of the Indian Act of 1963) that they specifically give the injured party the remedy of avoidance of the contract “and no other remedy”.
Where there has been a suppression of fact, acceptance of the policy by an officer of the insurance company would not be binding on it.
Inherent and contractual duties of good faith
In practice, the duty of the insured to observe utmost good faith is enforced in non-marine insurances by requiring the proposer to complete a proposal form framed to obtain all the relevant information necessary in normal circumstances, with true and complete answers, incorporating it in the policy and making it the basis of the contract.
In contracts of utmost good faith, contracting parties are placed under a special duty towards each other, not merely to refrain from active misrepresentation but to make full disclosure of all material facts within their knowledge and the principle of caveat emptor has no place. This is the inherent or Common law duty of good faith and is distinct from the contractual duty of good faith.
The Common law duty is the basis and it is open to the parties entering into an insurance contract to extend the duty or restrict it to by the terms of the contract. The inherent duty of the insured is invariably got extended as his contractual duty, by requiring him to declare that he warrants the truth of his answers in the proposal form etc. this declaration goes far beyond disclosure of material facts which is the Common law duty as any incorrect answer in the proposal form will render the contract voidable at the option of the insurer. Similarly worded declarations are included in the proposal forms for life insurance by the insured as well as the insurer. The same contractual duty of good faith, therefore arises in these cases as also.
The contractual duty so imposed is such that any suppression or untruth or inaccuracy in the statements 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 whether the statement was made innocently or fraudulently and whether it relates to a material matter or not.
In a recent case, it was urged that a mediclaim policy is issued solely on the basis of the facts disclosed and the representation made by an insured in the proposal form filled in and submitted by him without subjecting the insured to any medical tests. It was also pointed out that the proposal form contains a declaration to the effect that if after the insurance is effected, it is found that the statement, answers or particulars stated in the proposal form and its questionnaire are incorrect or untrue in any respect, the insurance company shall incur no liability under this insurance. It was, thus, asserted that the insured having suppressed the fact that he was suffering from Diabetic Nephropathy/Chronic Renal Failure, which fact was within his knowledge, the respondent was justified in repudiating the claim.
An insurance proposal form is, therefore, not like many a form that is filled up for various other purposes. Great care must be exercised in filling up the proposal form. It is preferable to reveal too much rather than too little in the proposal form.
Scope of Duty of Disclosure
In considering the scope of the duty of disclosure the following points may be noted:
(a) The duty to disclose extends only to material facts. So every material fact must be disclosed which he knows or ought to know. Failure to disclose may be willful to inadvertent or even due to the party’s erroneous belief that the fact not disclosed is not material. Whether or not a fact is material is a question of fact. This question does not depend upon what the particular insured thinks nor even what the insurers think but whether a ‘prudent and experienced insurer would be influenced in his judgment if he knew it.
In LIC v. Sakunthalabai the assured did not disclose that he had suffered from indigestion for a few days, the Court held that it was not a material fact and non-disclosure did not affect the validity of the policy.
(b) The duty extends only to those material facts about which he knows or ought to know. Ignorance of the fact is an excuse but of the materiality of the fact is not. There is no breach of good faith, if the party to the contract is not aware of the fact.
(c) The duty to disclose extends to the authorized 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 facts which the agent must have come to know during the course of his agency.
(d) As utmost good faith is required not only from the insured but also from the insurer, the duty to disclose all relevant facts is a mutual duty of the insured as well as insurer. This rule applies equally to all types of insurance. For example, the assured must declare his state of health in a life insurance or the present condition of a building or ship in case of fire or marine insurance, as the case may be. Similarly, the insurer may be called upon to produce the last audited balance sheet for the satisfaction of the insured. The assured can however not recover damages for this breach but can only rescind the contract.
(e) The duty of disclosure applies only to negotiations preceding the formation of the contract. When a relevant fact comes to the knowledge of either party after the completion of the contract, there is no duty to disclose and as such non-disclosure of such facts does not again offend the rule of good faith. For example, the insured finds on a subsequent medical check up after the policy is issued, that he is suffering from a serious complaint. The policy in such a case is not affected due to non-disclosure of a fact, though material, since it came to his notice after the policy was issued. Thus, the duty to disclose is not a continuing duty, it must be observed throughout the negotiations and continue only until they are completed and the contract is concluded.
(f) The duty of disclosure is deemed to have been cast on the insured when the insurer specifically asks a question. Whether the question asked in the proposal form is material or not or logically relevant or not, it will be deemed to be a material fact and so either a false answer or a dubious answer to such a question may amount to a breach of duty of disclosure. If the half truth given is such as does not invoke an enquiry, it amounts to no disclosure.
(g) The duty 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. These are:
• Facts which he is not aware of
• Facts within the knowledge of the insurers
• Facts of which the information is waived by the insurer
• Facts which tend to diminish the risk
• Any circumstances, which it is superfluous to disclose by reason of any express or implied warranty.
The Insurance Act 1938 regulates the insurance business by defining the limitations of the insurance business and duties and liabilities of the insurers. This Act laid down various provisions for efficient and effective conduct of the insurance business.
All insurance contracts are contracts of uberrimae fidei. Any act which is against the principal of good faith, is not maintainable and attracts penalties. The insurer is permitted to disclose all information related to the insurance schemes and insurance products through advertisements and state that they are true. If any advertisement misleads or misrepresents and a contract of insurance is created because of such misrepresentation, the contract becomes void. Any contract entered into by the parties undedr the undue influence or fraud of the parties, becomes void.
In East and West Insurance Co. v. Venkayya, one Venkayya answered in the negative when asked if he had suffered from any illness between the date of lapse of the policy and the present application for renewal and the renewal was granted, but subsequently the company came to know he had undergone treatment for some skin trouble. It was held that under the rule of utmost good faith, the insurance company was not liable under the contract.
The rule of utmost good faith has been relaxed to some extent by the Insurance Act, 1938 and now with reference to life insurance contracts, on the expiry of two years if the premium had been paid regularly, the insurance policy cannot be set aside on the ground that a fact had not been disclosed, unless there is a deliberate concealment, amounting to fraud on the insurance company.
The rule of good faith imposes the duty to make disclosure of all material facts, known or imputed, but it must be noted that a non-disclosure is not the same thing as concealment. Concealment involves a positive breach of a negative duty while non-disclosure is a negative omission of a positive duty.
Non-disclosure of material facts in the proposal form and breach of good faith are the two most deadly weapons and reasons used by insurers to shoot down a claim
India has adopted the British legal and insurance system whereby a filled-in proposal form is deemed to be on the basis of the insurance contract – also referred to as ‘basis clause’ in the policy. And insurance being a contract of uberrimae fidei, renders the policyholder completely at the insurer’s mercy. In practice, it goes beyond the bounds of the principle of uberrimae fidei. A policyholder even after completing the proposal form to the best of his knowledge and got a policy on payment of premium might end up with a shock when the insurer rejects his claim on the grounds that he had omitted to mention some details.
The principle of non-disclosure as propounded in English Law was apt for the conditions in eighteenth century when the predominant development in insurance was in marine or transit cover, and insurance as a whole was still in its infancy.
At that time, it was common to obtain insurance cover for vessels after they had sailed. The vessel owner would likely to know more about the hazards of a particular voyage while the insurer would be completely in the dark about the ship’s condition. There was no detailed proposal form for the policyholder to fill.
Further, policies at the time contained only a brief description of the risk with few warranties and conditions. Therefore, a rule of law lightening the burden of a nascent insurance market assumed vital importance.
Today, the insurer’s position has altered. He requires the assured to warrant the accuracy of his answers to a long list of detailed question. The insurer also has agents to inspect the property and medical officers to inspect lives proposed for life and health insurance. The insurer also has other facilities to access scientific data and methods to evaluate a risk.
In short, the insurer is in a position to know as much or even more about the policyholder. The question, therefore is whether the insurer needs such a high degree of protection. The law as it stands today is capable of operating harshly against a policyholder.
It is relevant to note that a majority of American state jurisdictions has refused to apply the strict rule of disclosure to non-marine risks so that the assured’s duty of disclosure is less onerous than in English Law. His failure to state a material fact, if innocent, does not avoid the contract. But concealment of a fact known by the assured is considered to be material to the risk.
We in India have the unique distinction of having no law as in the US or self-regulation as in the UK or any specific regulations by the regulator as in many countries to address this issue.
One way to mitigate the problem is to recognize the proposal form so that a prospect is not forced to answer questions irrelevant for an insurer to assess the risk. There is a strong case for prescribing recognized proposal forms for all insurers at least in the case of banana products like motor insurance, personal accident and fire.
As mentioned earlier, insurance is a contract of utmost good faith on both the parties to a contract – the insured and the insurer. The doctrine imposes a duty of disclosure on the insurer as much as the insured. But the only remedy that a policyholder has for breach of this principle by an insurer is avoidance of the contract and return of premium and no avenue to claim damages either under the contract or tort.
Many American state jurisdictions recognize that breach of utmost good faith by an insurer is also a tort and, hence, the insured is entitled to claim damages. Further, in India, insurers to sell and solicit business directly – without the intervention of intermediaries. The obligations and duties of insurers doing direct selling need to be spelt out explicitly. The policyholders need to know their rights against breach of good faith at the point of sale.
The duty of disclosure is on both sides though it is more onerous on the insured because most of the facts relating to the subject matter of the contract are within his exclusive knowledge and they may be such that an insurer cannot find them out on reasonable enquiry. Further, it is the insured that has to be very particular about the observance of the rules for it is the facts relating to the insured that vary in each case while the disclosures of the insurer being made through their published prospectus do not vary much with each individual insured.
 Dr. Avtar Singh, Principles of Insurance Law, 7th Edn. (2002) p. 33
 Lawrence J. in Lucena v. Grauford, (1806) 2 Bos & PNR 269 at p. 301 : 127 ER 42 HL
 Dr. Avtar Singh, Principles of Insurance Law, 7th Edn. (2002) p. 34
 Medical Defence Union Ltd. V. Dept. of Trade, (1979) 2 Ch D 421
 Prudetial Insurance Co. v. Inland Revenue Commrs. (1904) 2 KB 658
 North British Mercantile Insurance Co. Ltd. V. London Liver pool and Global Insurance Co. (1877)
 Section 152, Indian Contract Act 1872
 ICFAI University Press, Insurance Law and Regulations, Vol. 1 (2002), p.10-12
 Chitty on Contracts, 29th Edn., p. 500
 K.S.N. Murthy and K.V.S. Sarma, Modern Law of Insurance in India, 3rd Edn. 1995, p. 13
 Rozanes v. Bowen (1928) 32 LLLR 98
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 Satwant Kaur Sandhu v. New India Assurance Company Civil Appeal No. 2776 of 2002 (SC) – 10 July 2009
 Satwant Kaur Sandhu v. New India Assurance Company Civil Appeal No. 2776 of 2002 (SC) – 10 July 2009
 ICFAI University Press, Insurance Law and Regulations, Vol. 1 (2002), p.103
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 ICFAI University Press, Insurance Law and Regulations, Vol. 1 (2002), p.107
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 Sec 20(1), Indian MI Act 1963
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 Bhagwani Bai v. LIC of India AIR 1984 MP 126
 (1990) 2 All ER 947
 Sea Lark Fisheries v. United India Insurance Co. & Anr. 2008 (4) SCC 131
 Lakshmi Ins. Co. v. Bibi Padmavati AIR 1961 Pun 253
 Satwant Kaur Sandhu v. New India Assurance Company Civil Appeal No. 2776 of 2002 (SC) – 10 July 2009
 Dr. Avtar Singh, Principles of Insurance Law, 7th Edn. (2002) p.66, 67
 Ionides v. Pender (1874) LR 9 QB 531
 AIR 1975 AP 68
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 Bank of Nova Scotia v. Millenic Mutual, The Good Luck 1989 (2) Lloyd’s Rep 238
 Sec 20(1), Indian MI Act, 1963
 Sec 20(3)(c), Indian MI Act, 1963
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 Sec 20(3)(d), Indian MI ACT, 1963
 ICFAI University Press, Insurance law and Regulations, Vol 3 (2004), p. 79
 1945 Mad 150
 K.S.N. Murthy and K.V.S. Sarma, Modern Law of Insurance in India, 3rd Edn. (1995), p. 18
By Aashima Johur