AUTHORED BY - PRANAV DEEPANKAR KETHINENI

& VENKATA SAI REVANTH RAO MADDI

Alliance School of Law Alliance University, Bangalore

The aim of this legal research paper is to analyze material disclosure with respect to insurance law. The researchers aim to analyze the idea behind section 45 of the Indian Insurance act. It also aims to prove the ambiguity with respect to material disclosure as well as point of the issues that have been created by section 45 of the Insurance act. As the Indian Insurance Act is an act which are being in pari material with the Indian Contract Act the researchers also would like to prove the contradiction between Indian contract Act as well as the Indian Insurance act with respect to misrepresentation and fraud. The researcher would also tend to analyze the term material fact and understand how important of the Insurer it is in assessing the risk which is associated with the Insurance Policy.

The researcher would like to analyze the position of the Material disclosure with respect to the Insurance Contracts in other Jurisdictions and look into the problem solving assessments of those jurisdictions. The researcher would like to make the benefit of such analysis and then aim to suggest possible amendments to remove ambiguity as well as does not pose as a problem for the insurer.

This section implemented by the Insurance act aims to state that if the person insuring themselves have given some Misstatements and if those statements come in light after three years (amendment of 2015) then in that case, the Misstatements shall not be grounds for repudiating the policy.

This section of the Insurance act may be in the favour of the person who is giving Misstatements with complete knowledge and is still being forgiven by the law.

This shall also be a loss for the Insurer. The paper aims to analyse the problems associated with this section and possibilities of repealing this section.

The primary purpose of insurance is to provide protection against future risk, accidents and uncertainty. Insurance cannot check the happening of the risk, but can certainly provide for the losses of risk. And the idea behind Insurance law is to see that there are proper guidelines that are enacted by the law so that none of the parties are going to be cheated.

Types of Insurance policies those are available in India –

The basis and the development of the Insurance Law are purely from the fundamentals of a contract and the same contract shall be defined as contract under Indian Contract Act, 1872.

The Section 19 of Indian Contract Act, 1872 actually deals with the concept of Misrepresentation and it is interpreted as it would be void on such basis. Upon comparison of the same there is Section 45 of the Insurance Act.Section 45 of the Insurance Act, 1938 actually deals with the same objective wherein it says that misrepresentation after 3 years of recognition would be not void and the same so this provision is aiding the Insured and making the individual stand under the shade.

The provision is actually turning out of ambiguous as it contradicting the fundamentals which were framed under the Parent Act and the period of 3 years which was mentioned doesn’t serve any purpose for the Insurer.

The Insured is bound to follow the fundamentals and in case if there is a violation of the same the Insured is still protected. This is actually a win-win situation for the Insured.

Whether the provision in relation to the Material Disclosure is ambiguous in its nature and aiding the Insured person for whatsoever?

Whether the Non-Disclosure of the Material facts is a hardship to the Insurer in assessing risk and in fixation of rate?

Whether the provision with respect to the Material Disclosure seeks an amendment in order to close doors for such forth coming?

The methodology used in this research paper is a traditional method of research that is Doctrinal research. It involves the systematic analysis of provisions which deal with Disclosure of Material facts and then understanding the ambiguity in the provision and explaining the need for a proper regulation. And analysis of certain cases in such sector the researcher actually used secondary sources like journal articles, books and case briefs for the entire process of research.

The hypothesis used by the researchers is that section 45 can be easily being taken advantage by the Insured from the Insurer companies and the aim of the researchers is to prove the same.

45. Policy not to be called in question on ground of mis-statement after two years.—No policy of life insurance effected before the commencement of this Act shall after the expiry of two years from the date of commencement of this Act and no policy of life insurance effected after the coming into force of this Act shall after the expiry of two years from the date on which it 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, unless 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 the policy-holder knew at the time of making it that the statement was false [or that it suppressed facts which it was material to disclose]: [Provided that nothing in this section shall prevent the insurer from calling for proof of age at any time if he is entitled to do so, and no policy shall be deemed to be called in question merely because the terms of the policy are adjusted on subsequent proof that the age of the life insured was incorrectly stated in the proposal.][8]

The life insurer can only question a policy within three years to question a policy on the ground that any statement or suppression of a fact material to the life expectancy of the insured was incorrectly made on the basis of which the policy was issued or revived or issued.

The period of three years has to be from:

The life insurance company has the right to raise a claim for fraud against the policy in writing, along with the supporting evidence. This will be delivered to the policyholder, his or her appointed nominees, or assignees.

The insurance company cannot deny the claim if the alleged parties can substantiate it with the necessary documents and state that there was no intentional attempt to conceal the truth.

Meaning of Mis-representation:

The interpretation of the court actually makes it clearer that even the partial disclosure or the in complete disclosure would actually amount to misrepresentation of the facts.

The court held that failure to disclose in response to the particular question would actually amount to the misrepresentation of the material of material facts as that is a mistruth.

"The failure to disclose is as much a misrepresentation as a false affirmative statement.'

"Incomplete answers or a failure to disclose material information on an application for insurance may constitute a misrepresentation when the omission prevents the insurer from adequately assessing the risk involved."

"A 'fraudulent misrepresentation' may be made by statements of half truth or the concealment of material facts, as well as by affirmative statements or acts.[11]

The general rule is that if in case if upon the information given by the insured in relation to the particular policy the insurer is under no obligation to actually investigate upon the wellness or the facts stated by the Insured. But the obligation is created upon the Insurer when the insured on the face of it is not answering to the question posted by the policy and the same is the subject matter of the whole policy and also even in case if there is a wrong answer to it then it shall be the duty to conduct the reasonable investigation.[12]

However when the applicant is actually giving the sufficient information to alert an insurance company to a possible material factor such as his particular medical condition or history, the company is bound to make such further inquiry as is reasonable under the circumstances in order to ascertain the facts surrounding the information given.'

Any of the following actions taken by the policyholder or his or her agent with the intent to deceive the insurance company or persuade it to issue a life insurance policy are considered to be fraud.

The assertion of what is false and what policyholders do not believe to be true as fact.

Any other act designed to deceive the insurance company Specific acts or omissions declared fraudulent by the law.

Any actively concealed fact by the insured with knowledge or belief.

Mere silence is not considered as an act of fraud unless it is the duty of the policyholder or his/her agent to keep silent to speak, or silence is in itself equal to speaking. It will also depend on the circumstances of a particular case.[13]

The above stated is a legal maxim which means “Principle of utmost good faith”

This principle is one of the founding stones on the basis of which insurance law is based on. This is because a person purchasing the insurance policy has the obligation to disclose truthfully and correctly the information about the subject matter of insurance.[14]

The intent of the insured person is actually not required but the very necessity for the Insurer is that the applicant should have known that the fact would be material enough but did non disclose the same even though the insurer did not actually inquire about it . Under the above situation if that is the case then the insurer can actually void the policy even though the information was unintentional or mistake but still the contract would be rescinded so long as the fact is material.[15]

However the every insurance contract shall have a clause which states that if in case it is being decided that there is misrepresentation of the facts which would hamper the decision of the insurer then in such a scenario the policy would be void. Provided the same shall be proved that the insured have willfully not disclosed the material fact by the Insurer.[16]

Both the parties to an insurance contract which are the insurer and the policy holder have an obligation towards each other. As the duty of the insurer is to verify each detail before deciding upon the premium of the insurance policy it is also the duty of the to be policy holder to exercise care and caution while disclosing the details required in application forms, especially the personal details concerning health, family history, previous insurance policies, occupation, and income, etc. These facts are highly important in nature for the assessment of risk on a life insurance application.[17]

Section 45 shall not be applicable for questioning age or adjustments based on proof of age submitted subsequently.

The insurance company has the right to ask for proof of age anytime. However, the policy will not be considered in question only because the terms of the policy are adjusted based on subsequent proof of age of the policyholder.[18]

Section 19 of the Indian Contract act, 1872 talks about voidability of agreements without free consent, which includes misrepresentation, fraud, etc.

But with respect to section 45, the case is not about the insurer sleeping on their rights but this about one party not disclosing information so in this case there is no defined timeline as to when information can come to light. So putting a limitation upon those is unfair from the point of view of the insurers.

There can be no defined extent up to where the policy holder might to hide the facts that are important are mandatorily to be presented to the insurer while deciding upon the price of the insurance premium.

In the case of Reliance Life Insurance v. Rekhaben Nareshbhai Rathod after deeply studying the requirements of Section 45 the hon’ble court had held that every fact of the material must be disclosed, otherwise, this constitutes a reason for the termination of the contract. If facts are [21]withheld, the policy can be called into question. A medical claim policy is intended to protect the insured against expenses in connection with injuries, accidents, or hospital stays. It is non-life insurance, but it is an insurance contract and falls into the contract.

The court supported the appellants and did not agree with the rulings of NCDRC. The respondent was also permitted to withdraw 50 percent of the amount.

In this case, the court took a clear stand about Section 45 of this act and where it is applicable.

In the case of Mithoolal Nayak v. LIC, The court held that the policy is void and contestable because the insured person replied in the negative to the question that he was never treated for an illness. Not only did the deceased fail to report that he had received medical treatment, but also made a false claim that he had not received medical treatment, suggesting that the intent was to deliberately suppress the material circumstances.

On the second issue, it was held because of company policy, money was paid as a bonus. The policy has been annulled for the suppression of facts. If a contracting party violates its contractual promise, the other contracting party is released from fulfilling its part of the contract. The court ruled in the favour of the insurance company.[22]

policyholder’s death. This shall because is because the policyholder would be paying the premium for that time period. On the topic of short term policies, they are more expensive as compared to those that have a long term.[23]

Some of the above mentioned factors make a huge impact on the price of the insurance premium, such as age, personal habits, medical history, etc. so putting a timeline would affect the insurer.

In the case of Garvey V. Old Colony Insurance Company, the Court held that the ignorance of the material fact or the ignorance of the disputed fact would actually influence the judgment of the insurer in assessing the risk and fixing the premium of the Insurance policy.[24]

In the case of Pan Atlantic Co Ltd and Another V. Pine Top Insurance Co Ltd, the House of Lords have come to conclusion and defined the meaning of the word “Material disclosure” as any every circumstance is material which would influence the judgment of a prudent insurer in fixing the premium, or determining whether he will take the risk.[25]

In the case of Container Transport International Inc v Oceanus Mutual Underwriting Association (Bermuda) Ltd the court have actually interpreted the definition of the material disclosure where it held that if any misrepresented fact or the un disclosed fact turns out to be a influential one and it is dictating the conduct of the Insurer then it is a material fact and if in case the disclosure of the same fact is not influencing the conduct i.e. the insurer would have acted in a same way in which he is presently acting then it is considered as not a material fact.[26]

In the case of Stecker V. American Home Fire Insurance Company, it was observed that the Insurance Companies rely upon the full and honest disclosure from the side of insurer and then assess the risk in association to the kind of policy for which the Insured have claimed for.[27]

The Insurance Companies shall necessarily calculate the risk involved on the basis of the applicant's submissions and disclosures, and must come to an assumption that there is nothing undisclosed that would materially affect the risk.[28]

Life insurance covers the risk of an unexpected death and provides the nominees of the insured person with the sum assured upon the death of the life insured, it is important that insurer is able to properly assess the risk and on the basis of which ca decide on the terms of the coverage, and for this, disclosure about the customer’s health, family history, (‘material facts’), etc become important.

Disclosure of Material facts by Insured:

The basic phenomenon for any Insurance Contracts is the subject matter which actually decides the probability of happening of an event. For instance taking into consideration the for example taking into consideration the age in Life Insurance Contracts. So, as age keep on increasing it also increases the probability of happening of an event. So, there is a chance of happening of an ever in near future so the Insurer would actually tend to impose higher premiums than usual. So, in case if it is exactly the opposite way then the premiums would be usual because there is no immediate risk.

And in case if the situation is in a way that the Insured have disclosed the wrong age to the Insurer then the whole assessment of risk would fail to work. As in the Insured would be paying the lesser premiums but end up getting the sum of money which is as per the policy. If the happening of an event is genuine enough then the obligation is upon the Insurer but if it is the other way around that the Insured tried to misrepresent then the whole problem lies in. And in order to curb such practices the Insurance Companies shall be given an opportunity to express that the act of the Insured amounts to Misrepresentation and a contract which was entered shall be void for that matter.

As mentioned before the extent of disclosure shall be actually be restricted to all the facts which were known to the Insured at the time of the Insurance Contract that would actually influence the contract and assess the risk which would be the subject matter for the whole insurance policy.

Not surprisingly, the onus of proof is upon the insurer seeking to avoid liability to demonstrate that the insured had knowledge of the facts and circumstances to be disclosed. Even less surprisingly, such burden is in practice frequently difficult to meet. The absence of any duty to disclose owing to the insured's unawareness of facts or circumstances which may have an influence on the insurer's opinion of the risk should be distinguished from the rules concerning non-disclosure in good faith. An insured can, of course, have knowledge of such facts and circumstances but not disclose them to the insurer while acting in good faith. The Insurer would be subjected to penalties under other penal provisions when it is being decided that Insured is aware of such material facts at the time of policy but did not disclose the same.

As the general Insurance Contract is entered between the two parties the Insurer and the Insured. The subject matter for the thing insured can be of anything such as one’s life, property or any other. So, the interest which one has to protect the property from any external peril is actually the insurable interest which the concerned is having. In order to do the same there shall be timely premiums which shall be paid by the insured to the insurer in lieu of the contract. So, the fixation of the premium and the extent of the loss which shall be covered is decided through the disclosure.

But in case if the same is actually not presented and there is involvement of misrepresentation of facts then the extent of the misrepresentation shall not be proportional to the risk which was assessed by the Insurer if in case of the extent of facts is proportional then the risk also increases with the disclosure of such non disclosed facts as earlier. Then the only alternative to prove for the insured to the claims of the Insurer is that to prove the conduct of the Insurer would have changed even if the Insurer is aware of that fact or he is not aware and wouldn’t have acted differently upon the notice of such information.

The Law Commission Working Paper 73 it actually deals with Non Disclosure and Breach of Warranty and its main focus was to actually deal with two important aspects:

It was addressed to solve the problems of all three terminals but the focus was mainly upon the Non-disclosure by the Insured and also the breach of warranty by the Insured. It was also criticized that the focus being mainly None disclose by the Insured but the same is not being backed up the misrepresentation by the insured. The assumption was that there is a chance of solving the problem by actually discussing the first element without any furtherance of the second element as such.

In the case of Woolcott v. Sun Alliance in which the insured was given a policy for house insurance on the strength of his mortgage application form-the fact that this would happen was not expressed as such on the form. It was held that the failure to disclose one particular criminal conviction rendered the policy voidable, but the treatment of the duty to disclose in general is disturbing.[29]

First, the question "Are there any other matters which you wish to be taken into account?” could easily have been construed as imposing only a subjective duty, at best it was ambiguous.

Secondly, given that mortgages do not require disclosure beyond the questions, and given that the insurer was willing to issue insurance on that basis, could not waiver have been argued.

The approach which came through all away is that during the time of entering into contract there is always a question which is being asked by the Insurer to the Insured is that is there any other material information which would actually alter upon the assessment of risk. And it is a duty upon the Insured to disclose any such information if in case there is possession of any such material then. So, then on such basis and responsiveness towards the proposal the Insurer would be in a position to actually decide upon policy either it has to repudiated or not.

Further it is being actually suggested from the law report that the insure shall actually plead the Non disclosure only if in case there is fulfillment of the condition mentioned below as such:

No proposal form was completed, in accordance with the established practice of the insurer in the insurance involved.

The Report which is being working ng on the above issue laid down few recommendation in relation to the misrepresentation that the Insured shall not be let down if in case though it amounts to the misrepresentation but still according to his knowledge and if in case it is true to the best conscience of his. And the other suggestion which was brought in and suggested is that an overriding test of “contra proferentem” for ambiguous questions on the proposal. This is to be welcomed because it restricts the previous right of the insurer to have the best of both worlds in the matter, and because it is a much needed reassertion of an ordinary contractual principle which the courts have seemingly been unwilling to apply to contracts of insurance.[30]

In the case of Schoolman v. Hall it was relied upon a test of materiality that rarely lets the insurer down. One possibility, altering the test from that of the reasonable insurer to that of the reasonable insured, might have a marginal effect but cases such as Home v. Poland case actually do suggest that insured’s may fare little better under this more liberal test.[31]

So, it is basically that if in case the Insurer pleads that the same that there is material non disclosure then a test of materiality shall be proposed so it actually decides the extent of the material damage have actually happened to the Insurer upon the disclosure of the same as such.

And if in case if the Insurer are many then the particular material test shall be done individually to that particular Insurer who is claiming that there is misrepresentation and it shall be confined to only that Insurer and cannot include all other insure this is done for the betterment of Insured if in case the policy from the insurer is void ab initio then he shall have the benefit from the other policy as such.

It is very much important for that matter to actually recognize that reform must meet the requirements of the industry as well as those of policyholders. If the changes to the law of disclosure had been wider in their scope, the danger might have been that insurers would withdraw from parts of the market. There is also a risk of demonizing the industry and forgetting its significance to the economy in terms of spreading risk, invisible earnings, tax revenues and investment. At the same time, insurance law must keep up to date with the market.[32]

The general practice of the Life Insurance Contracts as per the Alberta Insurance Contract is that the innocent misrepresentation shall not be actually entertained and shall not end up by making the policy void rather there shall be proof of bad faith to deceive the insurer.

A life insurance contract under section 241 of the Alberta Insurance Act becomes uncontestable after a period of two years. If the insured, which is guilty of non-disclosure or misrepresentation, dies one day short of two years, the claim of the beneficiary is prejudiced, but if he dies at any time after the said period, the beneficiary's interest is fully protected unless the insurer can prove fraud on the part of the insured.

And the interpretation is that if here the facts withheld or misrepresented would have resulted in a higher premium if properly disclosed, and the insured dies within two years, it is mandated that there shall be the differential premium be charged for a full two years for which the Insured paid the premium which actually amounted to lesser amounts and that the contract be made uncontestable vis-a-vis a claim by the beneficiary. This would bring to an end and actually solve the problem of any inequality between the position of innocent Insured, and the Insurer whether the policy has been in effect for less or more than two years, save in the event of fraud provable against any party under a duty of disclosure.

When determining the materiality from the perspective of a reasonable insured, it is stated that only a nondisclosure or a misrepresentation of material information made in bad faith by the insured should render the claim of Insurance.

The status of the Insurance Contracts in the State of United States is also very much similar wherein in case if the Insurance Contracts involves the elements of misrepresentation and the non disclosure then in such a scenario there is complete policy can be ended up turning to be void provided that the situation shall be backed by the intent of the insured to deceive the insurer in order to pay lesser premium but end up getting higher policy amount. And it defined the term tact as a material if its misrepresentation has deprived the insurer of its freedom of choice to accept or reject the risk. And also pointed out that the same disclosure of the fact would have actually increased the risk of the insurer unless made with the intent to deceive or unless the matter misrepresented increases the risk of loss or contributes to the event or contingency upon which the policy becomes payable.

And in case upon the event of an innocent non disclosure of the material fact and the same shall not be proved by the Insured then in such a scenario the Insurer would have grounds for rescission of the insurance contract, but not damages because rescission based on innocent misrepresentation is an equitable remedy. The insurer must rely to its detriment on the misrepresentation. The misrepresentation shall not be the only sole ground for the action by the insurer, but it should have contributed to the conduct of the insurer in issuing the policy. So, the intent behind such a statement is that if in case if there is proper disclosure then there reasonable apprehension to the Insured that the Insurance policy shall be or should have been rejected.

Generally the status of the Insurance Contracts in United States is that the disclosure shall be the absolute. If the disclosure is mentioned as absolute then it is very much needed for Insured to maintain the good faith.

In the case of Gates V. Madison County Mutual Insurance Company, the court held that exclusively in Marine Insurance cases it is very much needed and the Insured is bound to although there is no enquiry from the side of Insurer to disclose every fact which is needed and within its knowledge.[33]

But the situation with respect to the other Insurance contracts it is not so absolute it is restricted to the disclosure of the facts which were asked and the same is relaxed as because there is no enquiry which is being conducted from the end of the Insurer. The disclosure is restricted only to the extent of what is asked as such.

The status of the United States is that it is not essential that what is not asked shall also be disclosed. And any misrepresentation of all such facts would be a problem and a violation of the principle of the good faith for which the Insurer actually believe upon.

The situation of the disclosure was that prior to 1930 if in case if there is any misrepresentation or the non-disclosure the nit can actually give rise to call the whole contract as null and void without any consideration upon the good faith or it is in bad faith. But still after the 1930 statute enactment the situation is that the Insurance companies shall prove that there is involvement of bad faith and only then there is actually a chance of calling the whole policy as void as such.

The extent of bad faith shall be proved only in following conditions juts mere non-disclosure of a fact which would not tend to impact the policy would not be amounted to bad faith but in case if there is any element which is the Insured is aware at the time of policy but did not disclose to the Insurer in order to deceive him or end up paying lesser premiums would be actually amount t to and constitute bad faith as such. The courts have tried to overturn the decision form the good faith to the bad faith if in case upon satisfaction it is felt that there is voluntary non-disclosure of the material facts which would tend to influence the decision of the insurer for that matter.

The remedy when the insurer has shown that the insured had acted in bad faith in not disclosing a circumstance which would have had an influence on the insurer's appreciation of the risk, then there exists necessary provisions which provides that the insurance policy is null, and then the same would cancelled ab initio.

The above stated sanction would apply regardless of whether the misrepresentation or non- disclosure had an influence on the loss at issue. The ab initio cancellation of the policy is applicable to cases of misrepresentation or non-disclosure at the time of conclusion of the contract but where it is a matter of nondisclosure of an increase in risk subsequent to the conclusion of the contract, cancellation would be effective at the time when the change in the nature of the risk should have been disclosed. And when any such policy is called in as void ab initio then the Insurer can actually any such sum of money which was paid in lieu of indemnity during the policy period. The insurer for that matter can also have claim upon the premiums which ought to be paid as per the [policy and is not under any obligation to return the sums collected as a policy amount but still can continue retain the policy amount as such. The claims for any special damages can also be asked for if the matter is related to the misrepresentation and the same would be nothing but the premiums which are due from the Insured.

It can also be observed that in other countries, if there has been an issue with disclosure of information to the insurer or there has been misrepresentation or fraud then in that case it is a common practice for insurance companies in other countries to invalidate the contract completely as void, if it is proved by the insurer that has been bad faith, or with the involvement of material facts.

With reference to the research questions that were taken by the researchers, the below points have been interpreted by the researchers –

The researcher after the analyzing the position of material disclosure in Insurance Contracts with the laws of other countries would like to suggest and recommend that there shall be no bar in the time limit which is being expressly mentioned as three years in the Section 45 of the Insurance Contracts. Rather there shall be a mechanism which shall be adopted by the legislature for that matter to actually impose the burden upon the Insurer that there is Non-disclosure of the Material facts and that actually made the Insurer to alter the risk coefficient provide the mala fide intention shall also be proved in furtherance to the Insurance policy.

And in addition the researcher would also tend to suggest few tests in order to determine the liability of the Insurer and the Insured for that matter;