LIABILITY OF INSURANCE COMPANIES AS HELD BY THE SUPREME COURT

An insurance company is always ready and willing to repudiate a claim made by an insurer on some pretext or the other. In this article, we are discussing two Supreme Court cases that have discussed the liability of the insurance company.

Most insurance companies while selling a policy give lot of false hope to the insurer. In many cases the policy does not cover the conditions mentioned by the Insurance agent. Such a sale is known as mis-sale.  In such cases of mis-sale, when the insured  make a claim, in most cases his claim is rejected. In such a case the insured can sue the insurance company for misrepresentation. The law recognises that mis-sale is illegal.

It is therefore advisable and necessary that the insured should always go through the policy document in the “free look period”. The free look period is the period when an insured can cancel the policy if he or she is not satisfied with the terms. However what really happens in most cases is that due to the exhaustive terms and conditions an insured does not read the terms only to regret it later. Also the language used by insurance companies is knowingly kept confusing and the print is in minute font.

However before going further in this article, I would pause here, to add that the insured is also under a legal obligation to make correct disclosures. The principle of uberrima fides in insurance contracts is very important. As per Collin’s Dictionary this word has been defined as, legally obliging all parties to reveal to the others any information that might influence the others’ decision to enter into the contract.

In a Supreme Court judgment on this point Reliance Life Insurance Ltd v Rekhaben Nareshbhai Rathod, Order dated 24-04-2019 the case dealt extensively with insureds’ disclosure obligations. As per this case on 10 July 2009 the insured took out a life insurance policy with Max New York Life Insurance worth Rs110,000. On 16 September 2009 the insured submitted a proposal to Reliance Life Insurance for another life insurance policy worth

Rs 100,000. Among the questions that the insured was required to answer in the Reliance proposal form was whether he was currently insured or had previously applied for life insurance, critical illness or accident benefit cover. The insured answered this question in the negative. The insured also had to answer specific questions regarding other insurance taken. His response to these questions was “NA” or “not applicable”.

Further, the insured provided the following declaration with the proposal form:

I understand and agree that the statements in this proposal form shall be the basis of the contract between me and Reliance Life Insurance Company Limited (“the Company”) and that if any statements made by me are untrue or inaccurate or if any of the matter material to this proposal is not disclosed by me then the Company may cancel the contract and all the premiums paid, will be forfeited.

On 22 September 2009 Reliance issued the policy to the insured. On 8 February 2010 the insured died of a heart attack. On 24 May 2011 the insured’s wife (the nominee and respondent in the present case) notified Reliance and claimed Rs 100,000.

On 30 August 2011 Reliance repudiated the claim due to the suppression of material facts (ie, the insured’s failure to provide details of his policy with Max).

The wife of the deceased fought the case at District Consumer Forum where the complaint was dismissed on the ground of non-disclosure. However, the appeal filed by the insured’s wife was allowed by the State Commission and affirmed by the National Commission in 2015 on the basis that “the omission of the insured to disclose a previous policy of insurance would not influence the mind of a prudent insurer”.

When the matter came up before the Supreme Court the Apex Court held there “was evidently a non-disclosure of the earlier cover for life insurance held by the Insured”; and

the validity of the ground for repudiation of the claim. In this respect, the court held that it was “of the view that the failure of the insured to disclose the policy of insurance obtained earlier in the proposal form entitled the insurer to repudiate the claim under the policy”.

The Supreme Court further held that “The contractual duty so imposed is such that any suppression, untruth or inaccuracy in the statement in the proposal form will be considered as a breach of the duty of good faith and will render the policy voidable by the insurer. The system of adequate disclosure helps buyers and sellers of insurance policies to meet at a common point and narrow down the gap of information asymmetries. This allows the parties to serve their interests better and understand the true extent of the contractual agreement.

The finding of a material misrepresentation or concealment in insurance has a significant effect upon both the insured and the insurer in the event of a dispute. The fact it would influence the decision of a prudent insurer in deciding as to whether or not to accept a risk is a material fact. As this Court held in Satwant Kaur (supra) ‘there is a clear presumption that any information sought for in the proposal form is material for the purpose of entering into a contract of insurance’. Each representation or statement may be material to the risk. The insurance company may still offer insurance protection on altered terms…

Now coming to the liability of the Insurance Company let us discuss United India Insurance Co. Ltd vs Manubhai Dharmasinhbhai Gajera & Ors. (2008) 10 SCC 404, Order dated 16-05-2008 (2 Judge Bench: Justice S.B. Sinha and Justice V.S. Sirpurkar). In this case the Respondent obtained a mediclaim policy from the Appellant- United India Insurance Co. Ltd. in 1995. Since then, Respondent has been renewing the policy. In 1998, the Respondent suffered heart ailment and underwent surgery ‘Angioplasty’. The Insurer reimbursed the mediclaim amount. In 2002, he again underwent minor operations, for which mediclaim amount was reimbursed.

In 2003, when the Respondent approached the Appellant for renewal of the policy, it was refused on the ground of ‘high claim ratio’. The Appellant however agreed to renew the policy by loading 300% premium. The premium was accordingly paid, but the policy was not renewed.

The matter went up to Court and the Delhi High Court directed the Appellant to renew the policy, vide Order dated 07-01-2005. Dissatisfied by the Order the Insurance Company approached the Supreme Court which after hearing parties observed as follows:

69. Each of the aforementioned cases clearly shows that the action on the part of the authorities of the appellant was highly arbitrary. Respondents though were not entitled to automatic renewal, but indisputably, they were entitled to be treated fairly. We have noticed hereinbefore some of the clauses contained in the prospectus as also the insurance policy. When a policy is cancelled, the conditions precedents therefor must be fulfilled. Some reasons therefor must be assigned.

70. When an exclusion clause is resorted to, the terms thereof must be given effect to. What was necessary is a pre-existing disease when the cover was inspected for the first time. Only because the insured had started suffering from a disease, the same would not mean that the said disease shall be excluded. If the insured had made some claim in each year, the insurance company should not refuse to renew insurance policies only for that reason. The words `incepts for the first time’ as contained in clause 4.1 as also the words `continuous and without break’ if the renewal premium is paid in time, must be kept in mind as also the reasons for cancellation as contained in clause 7(1)(n) thereof.

71. Renewal of a medi-claim policy subject to just exceptions should ordinarily be made. But the same does not mean that the renewal is automatic. Keeping in view the terms and conditions of the prospectus and the insurance policy, the parties are not required to go into all the formalities. The very fact that the policy contemplates terms for renewal, subject of course to payment of requisite premium, the same cannot be placed at par with a case of first contract.

In another recent case Jacob Punnen vs United India Insurance Co. Ltd, (2022) 3 SCC 655, Order dated 09-12-2021 the Appellants bought a medical insurance policy from the Respondent-United India Insurance Co. Ltd. (Insurer) in 1982. Since then they have been renewing the Policy every year. The last renewal was in 2008 and the policy was effective for the period 28.03.2008 to 27.03.2009. But owing to his medical condition, the Insured had to undergo multiple surgeries and angioplasty etc and hence, he had to claim medical insurance every time. The Insurer in 2008 partly paid the mediclaim amount.

So, the Appellants approached the District Forum, Kottayam, Kerala. The Insurer had claimed that the terms of policy had changed upon renewal, as per which maximum Rs. 2 Lakhs would be paid for such surgeries. But the District Forum held that the Insurer was duty bound to inform the Insured about the changes in the terms of the policy, which it failed to do. Thus, the District Forum directed the Insurer to pay balance amount.

The State Commission set aside the District Forum’s Order holding that the terms of the policy were known to the Appellants who were bound by it. The NCDRC upheld the State Commission Order.

The Supreme Court held as follows:

51. The insurer was clearly under a duty to inform the appellant policy holders about the limitations which it was imposing in the policy renewed for 2008-2009. Its failure to inform the policy holders resulted in deficiency of service.

52. The Insurer brought about a change in the policy. This change introduced a cumbersome limitation. It kept the Insured in the dark about the limitation at the time when the renewal notice was issued, and what is more, the premium was accepted. The Insurer had a duty to inform the appellants that a change regarding the limitation on its liability was being introduced….This duty to take the insured into confidence was breached. This was the deficiency in service.

Sushila Ram

Advocate

Chief Consultant

The Indian Lawyer & Allied Services