Contract for insurance is based on utmost good faith / uberrima fides which imposes a duty of disclosure on the insured with regard to material facts.

[DEV KUMAR KOTHARI]

Contract for insurance is based on utmost good faith / uberrima fides which imposes a duty of disclosure on the insured with regard to material facts.

Author recalls – studies of commerce from class IX:

From class IX selection of specified stream of studies started. Author choose “commerce” as stream of such studies. In view of that there was more emphasis on subjects of commerce which included compulsory subjects of Commercial Practices and  Book-keeping and accounting,  there were options in some other subjects and author choose banking and finance ( other subjects were typing and economics).

Other subjects of languages, mathematics, science, art and craft, humanities etc. were compulsory with some options for selection of some of subjects.

Author recalls that in class IX itself in the subject of ‘commercial practice’  and banking and finance there were lessons about  contracts of insurance-  and brief studies were provided about general insurance, fire insurance, burglary and theft insurance, life insurance etc.

 In those lesson, it was learnt that any contract of insurance is based on utmost good faith on part of insured. So far insurer was concerned, he has mostly standard terms and conditions  which are  guided by prevailing law and trade practices. However, on part of insurer also there was condition of good faith to disclose terms and conditions to the proposer for insurance.

 It is based on utmost good faith and   uberrima fides, according to which insured must be honest in his disclosures. Any false statement or disclosure or withholding of relevant information will cause breach of utmost good faith and in that case insurance contract can be void. In any case it can involve disputes and litigation when a situation of  claim under insurance cover arises.

 Duty of  true disclosure by the assured is well established centuries ago. With some modifications in view of changes in business of insurance these can be described as follows:

1. Uncertainty hence speculation: Insurance is a contract dealing with uncertainties and thus involves an element of speculation.
2. Knowledge of assured: the special facts upon which the contingent chance depends and are to be considered most commonly are in the knowledge of the assured only;
3. The insurer and underwriters trusts to representations of insured.
4.  The insurer and underwriters work and proceeds upon confidence that assured does not hold back or hide or omit to disclose  any facts and  circumstance  and knowledge  to mislead the insurer and  underwriter into a belief that the circumstance does not exist.
5.  The keeping back such circumstance or information is a fraud a breach of utmost confidence  and therefore the policy can be  void.
6. Although the suppression could happen through mistake, without any fraudulent intention, yet  the  insurer and underwriter can be  deceived and the policy can be void;
7. All risks  and uncertainties causing risk in foreseeable future,  at time of agreement must be disclosed.
8. Good faith of insurer and underwriter is also required. The policy would be equally void against the insurer if he concealed  terms and conditions about eligibility and entitlements of policy holder.
1. Good faith forbids either party, by concealing what he privately knows, to draw the other into a bargain from his ignorance of the fact, and his believing the contrary.

Disputes are common and routine in insurance business:

In spite of well-known principals of utmost confidence, disputes are very common and litigation is going on. Many disputes are based on breach of utmost confidence and withholding of information required in policy proposal forms, which can be considered material facts for contract of insurance.

Ground realities:

Ground realities are that in many cases proposals are made withholding important information as to facts and circumstances related to risks. Many times agents of insurance companies advise to go by rule of minimum disclosures and hide information so that any how proposal is accepted and premium is earned by insurance company and commission by agents.

If one goes with utmost confidence, many proposals can fail so false information, or hiding relevant information at the time of proposal is not uncommon. If problem arises to policy holder,  at the time of claiming under insurance cover, the agent will not be responsible, because responsibility of true disclosures in utmost good faith is of the proposer/ insured and not of insurance company of its agents. Therefore, a person proposing for any kind of insurance must be very careful in submitting his proposal in utmost good faith.

There can be several unforeseen uncertainties in future, and all cannot be and need not be forecasted or imagined. However, disclosures which are required by insurer must be furnished fully. It cannot be put on insurer to be aware and to investigate facts and circumstances which can affect his risks.  

Discussion of a case reported as ORIENTAL INSURANCE COMPANY LIMITED APPELLANT VERSUS MAHENDRA CONSTRUCTION RESPONDENT [2019 (4) TMI 2048 - SUPREME COURT]

Facts relevant to study of utmost confidence are that:

With the proposal for insurance, previous insurance  policy was enclosed. However, relevant information in prescribed form for proposal were not given. This lead to dispute and differences.

The NCDRC recorded a finding that since the previous insurance policy had been enclosed with the proposal form, the insurer could, upon further enquiry, have learnt of the status of the claims under the earlier policy.

While doing so  The NCDRC considered the exception to Section 19 of the Indian Contract Act, 1872 .

Noting that the insurer could have easily verified the claims submitted by the insured under the previous policy.

NCDRC thus held that the insurer cannot deny the benefit of insurance on account of the information not having been disclosed in the proposal form.

The NCDRC, having noted as above, further  noted that the insured had not expressly disclosed the previous claim and in consequence, deducted twenty-five of the amount payable under the contract of insurance.

About earlier policy the fact was that the insurance policy with New India Assurance Company Limited was for the period from 15 November 2004 to 14 November 2005.

The excavator remained uninsured from 15 November 2005 until 10 October 2006.

The case of the respondent was that during that period, it was under repair. This fact, together with the receipt of the earlier insurance claim, was material to the decision of the insurer on whether to accept the proposal for insurance

It was found  evident on a bare reading of the proposal form that material information which was required to be disclosed was suppressed by the insured.

 The proposal form contains a declaration of the insured that the statements which are made are true to the knowledge of the proposer and the declaration forms the basis of the contract with the insurer.

On appeal by insurer the honorable Supreme Court  observed and held as follows:

          Line of reasoning of the NCDRC is flawed.

           Insurance is governed by the principle of utmost good faith, which imposes a duty of disclosure on the insured with regard to material facts.

Referring to law laid down in SATWANT KAUR SANDHU VERSUS NEW INDIA ASSURANCE COMPANY LTD. [2009 (7) TMI 1375 - SUPREME COURT] in which it was  held that:

1. under a contract of insurance, the insured is under a “solemn obligation” to make a true and full disclosure of information asked for in the proposal form
2.  there is a clear presumption that any information sought in the proposal form is a “material fact”,
3.  The burden cannot be cast upon the insurer to follow up on an inadequate disclosure by conducting a line of enquiry with the previous insurer in regard to the nature of the claims, if any, that were made under the earlier insurance policy.
4. It was the plain duty of the respondent while making the proposal to make a clear and specific disclosure.

The decision of the SCDRC to allow the claim was erroneous and the decision of  NCDRC was equally erred in affirming the decision.

Thus the appeal was allowed and decided in favor of the appellant ORIENTAL INSURANCE COMPANY LIMITED.