Insurance Companies in India

Revealing the reality behind the Insurance Companies: Case study under Section 45. 1. Brief History Behind Life Insurance:-
Insurance Act came into force on July 1, 1939 to consolidate and amend the law relating to business of insurance both of life and general insurances; this replaced earlier Life Assurance Companies Act, 1912 and Provincial Insurance Societies Act, 1922 which were only in respect of Life insurance. The basic object of the Act was to ensure that vast power concentrated in the hands of insurance companies was not abused and the policy holder's money was safely invested. However, inspite of the regulations by the law, and restrictions by the Controller of Insurance there was much abuse of the trust by the private insurers therefore this lead to step towards nationalization of life insurance in 1956, and of general insurances in 1972, therefore insurance business came to be conducted through Central Government under life insurance corporations and general insurance corporations. [1]

2.1. Review of Section 45 of The Insurance Act

This section is important under the insurance Act, as it places restrictions on the right of the insurer to repudiate his liability under the policy. According to the provision life insurance policy cannot be called in question after the expiry of two years from the date on which it was effected on the ground of mis-statement in the policy unless it is shown that all the three conditions enumerated under S.45 are satisfied, viz.,

· The statement must be on a material fact,
· There has been suppression of the material fact which it was material to disclose, or been fraudulently made by the policy holder, and
· The policy holder must have known at the time of making the statement that it was false or that it suppressed facts which it was material.

2.2. What Constitutes Material Facts?

The insurer must be prudent in disclosing the risk according to the type of insurance he opted (Life or Motor vehicle Insurance etc.). Therefore the test would be upon the knowledge one possessed of the material fact. And this duty to disclose follows till the time the contract is finally concluded between the parties. And if there's any material alteration the risk disclosed in the proposal during the negotiation stage that must be brought to notice of the insurer, otherwise it'll be presumed that the risk accepted is the risk disclosed in the proposal.

Also that Section 20(3) and (4) of the Motor Vehicles Act, throws a light on the facts which needn't be disclosed by the insured. So the assured duty to disclose doesn't include temporary illness or passing indisposition's as no reasonable person would consider them material to disclose. For e.g., if a person is suffering from normal headache or indigestion for few days would not constitute a material fact, and would be immaterial to the formation of contract.[2]

Misstatement or suppression of a fact that has a direct bearing on the risk undertaken would be in simple words the definition of the material fact. Therefore certain factors are important in this regards while entering into contract of insurance:
· No repudiation can be made by the company where the insured can prove that the suppression or misstatement was true, best of his knowledge and belief, or he had no deliberate intention to suppress the fact.

· Onus of proof is on the insurer to prove that fraud was committed by the insured. This is to safeguard the interest of the policy holders.
· No unilateral repudiation must be enforced by the insurer and notice must be served to the insured or legal heirs etc. with proper grounds/reasons, and must be given a fair hearing by the company itself before repudiation.

· Is the repudiation is based on the grounds of fraud, company is not liable to make any refund of the premium paid, but in case of repudiation on the bases misstatement or suppression material to life expectancy (which is another kind of fraud) premium is liable to be paid.

2.3. Does Silence Amounts To Non-Disclosure?

A policy of life insurance of a person who at the time of insurance is in good state of health, is not vitiated by the non-disclosure by such person of the fact that few years back he had some disease or he had been suffering from headaches or body aches all such things are presumed to be known to the company. What an insured undergoes in his normal course of life needn't be told to the company.[3]

3. How Is Section 45 ,Being Misused By The Insurer?

The section was enacted to prevent immense loss and hardships caused to the insured and his legal representatives because the insurers avoided contract of life insurance policy due to incorrect statements whether material or not made by the insured even after the policy had been in force for several years and all the premium paid by the insured was forfeited by the insurer. Thus the provision in effect mitigated the rule of uberrima fides, i.e., utmost good faith. Obligation to deal fairly and honestly with each other is upon both the parties equally.

In the past, problems have arisen with misrepresentation or non-disclosure by the insured. In this context, the issue is when would failure to make such a disclosure render the contract void or voidable. There have been several judgments of the Hon'ble Supreme Court in this regard which have underscored the importance of the burden of proof shifting to the insurer after the expiry of two years from effective date of the policy, if the insurer seeks to repudiate the claim on the basis of fraud or suppression of facts which were material to be disclosed. [4]

3.1. Brief Discussion Of Case Laws Under Section 45 Of The Act.

Biman Krishna Bose v. United India Insurance Co. Ltd., [5]
Facts Of The Case:  Appellant and his wife Smt. Alka Bose took a mediclaim insurance policy from respondent on 14-12-1990. Thereafter appellant's wife fell ill and was admitted to hospital on 14-8-1991. He paid Rs. 8243 towards the charges of her treatment and appellant lodged a claim for the same with respondent. Despite repeated request for payment they were not honored and she decided to file an application with District Forum, but the complaint was rejected, on further appeal State Commission stuck down the said order and directed the Company to pay the appellant. Further National Consumer Redressal Commission stuck down the demand for payment of money from insurance Co. while the litigation was still going on. In the meanwhile appellant's policy fell due of renewal therefore he sent a letter along with cheques of Rs. 1796 for renewal of his existing mediclaim policy, on 24-1-1996 and was refused of the same by the company on the bases of his previous conduct.

Under such circumstances he filed a Writ petition under Art. 226 of the Constitution before Calcutta High Court, the claim was allowed but the court directed the appellant to take fresh mediclaim as the renewal of the same cannot be granted with retrospective effect as the period for the renewal had already expired. And for the said order appellant preferred an appeal to the Supreme Court.

Arguments Raised: Where appellant referred to the exclusion clause (According to which the company shall not be liable to make payment under this policy in respect of any expenses whatsoever incurred by any insured person in connection with or in respect of: All diseases/injuries which are pre-existing when the cover incepts for the first time.) in the policy and also that the order of the High Court would result him in a disadvantageous position. Respondent argued that since the appellant has not deposited the premium for subsequent years the policy cannot be renewed with retrospective effect, it's not disputed that appellant didn't send the cheques but the same was returned back to him.

Judgment: Insurance Company herein refused to renew the appellant's policy on the bases of his previous conduct, which is hereby approaching the court due to the refusal by the company to grant the payment to him would be arbitrary use of power. Insurance company under the provisions of the Act has assumed monopoly in business of general insurance in the country and thus acquired the trappings of the State being other authority under Art. 12, of the Constitution. State and its instrumentalities are required to enjoinder with obligations to act with fairness taking consideration of relevant materials. Arbitrariness must not appear in their actions or in decisions.

As far as renewal of the old policy is concerned the SC held that appellant made no default in payment of premium and disease which an insured had contracted during the period when the policy was not renewed, such disease cannot be covered under the fresh insurance policy in view of exclusion clause which provides that pre-existing diseases would not be covered under the fresh insurance policy.

Comments: - This case reflects one of the several ways insurance company adopts to ignore the policy holder's claim at the time it's required to pay in accordance to the mediclaim policy held by the policy holder. Here Company arbitrarily rejected the renewal of the policy by sending back the cheque sent by the insured on the grounds of his previous conduct. Heavy penalty must be imposed on such irresponsive acts of the companies which leads to hardship on insured through long litigations he's posed to, and unfair treatment of the party who has honestly trusted the company and entered into agreement
Life Insurance Corporation of India v. Shakuntala. [6]

Facts Of The Case: Jamanadas died of jaundice on 4-11-1986 who had an insurance policy with appellants, one and half years after he died. This policy was taken on the grounds of his personal statement that he had not suffered from any illness and had not consulted any medical practitioner within last five years, but had once suffered from indigestion for few days and had taken chooranam from an ayurvedic practitioner.

Arguments Raised: Learned Counsel for respondents as usually relied on Section 45 of the Insurance Act and stated that insurer had right to repudiate a policy on the grounds that statement made in proposal for insurance or any documents which leads to policy was inaccurate or false.

Judgment: Court was of the view that, treating occasional headaches or a bout of indigestion as a ‘material fact' which an insured was under an obligation to disclose would be extremely unreasonable. No reasonable man would deem it material to tell an insurance company of all the casual headaches he had in his life, and if he knew that it was an ordinary casual headache, there would be no breach of his duty towards the insurance company in not disclosing it.

The confidential report made by the medical officer of the insurance Company shows that the appellant was in ‘first class life'. And the jaundice of which he died had nothing to do with the undisclosed indigestion from which he suffered 18 months earlier. And the only connection between them would be the advantage life insurance was seeking. Therefore non-disclosure would not amount to an untrue statement and Life Insurance Company was held not justified in repudiating the policy. And therefore his wife was entitled to the insurance claim.

Comments: - This case puts forth the principle that the non-disclosure of ‘material facts' only provides power to repudiate the contract by the company, but other ordinary facts which are unconnected to the main contract entered into by the insured cannot be ignored. Here for the same reason Company was restrained from taking such step, on the bases of facts which were irrelevant to be disclosed (i.e. indigestion) by the insured to effect of the contract.
Bhagwati Bai v. LIC . [7]

FACTS OF THE CASE: Plaintiff is (beneficiary of the policy) and her husband late Moolchand insured himself with the defendant on 28-3-1972 for the sum of Rs. 25,000/- he also had filed a proposal form and personal statement on the same date, and died within a month on 16-4-71. Division manager refused the claim by the appellant on the fact that he had concealed the fact that before filing for the present policy he had three policies in March 1965, which had lapsed in March 1970.

Issues: Now it's to be observed under two broad issues:-
· Whether the deceased deliberately concealed the fact of the existence of earlier three policies in hand?
· Was the fact concealed material to the bearing of risk undertaken by the company i.e. if it still would have insured the life of the insurer if the corporation was made aware of the fact of the facts alleged to be concealed?
Arguments Raised: But plaintiff stated that the fact was told but the same was not recorded by the agent, and contended that even if it was not disclosed it's not material to the disentitle the defendant. Plaintiff therefore claims interest amounting to 11,000/-, w.e.f. 16-4-1972 at the rate of 12 % per annum. Corporation contended that if it would have known the fact of existence of three policies with the insured it wouldn't have issued the same to him, and therefore money paid by him would stand forfeited. Being mis-represented by the deceased the contract would stand void under section 45 of the Insurance Act.

Judgment: - Court applied Section 17 and 19 of the Contract Act and held that the Insurer cannot repudiate the liability by showing only some inaccuracy or falsity of the statement, nor can avoid the policy for a material misrepresentation if it has no bearing on the risk. Thus on every misrepresentation or concealment of a fact a contract cannot be avoided merely on trivial and inconsequential misstatement or non-disclosure That the non-disclosure about the lapsed policies had no bearing on the risk and didn't amount to fraudulent misrepresentation as no undue advantage was derived by the concealment of facts and the corporation was made liable to pay the insurance amount with interest at the rate of 6% per annum w.e.f. 29-12-1973 till payment.

Comments: - This case upholds the same principle of materiality of facts; this principle is widely misused by the companies to discharge themselves from liability of paying the insured. Prior policies though disclosed were firstly, not recorded by the insurer's agent and secondly even if proved to be concealed had no bearing on the claim made by the insured. What is important is the nexus between the materiality of the facts and the risk borne by the insurance company and everything else is the way of its escape from the responsibility it bears towards the public.

Ratan Lal and anr. Vs. Metropolitan Insurance Co. Ltd. [8]

Facts Of The Case: Pyare Lal (insured) died on 19-4-1946, plaintiff in this case were his sons (successors and heirs). On accord of his policy, it so happened that before the acceptance could be supplemented with regular policy, the assured died on 19-4-1946. But the amount which had been paid up by the deceased was first kept in suspense account and thereafter on 28-3-1946 was adjusted it first annual premium. Therefore it could be said that on the date of adjustment of account, the policy was deemed to be a binding contract between the parties.

Arguments Raised: But the company contended that though deceased died after the acceptance of policy but illness which was responsible for bringing about his death had already set in since 23-3-1946, much within the time the policy was still under consideration before the company. On this, plaintiff replied that the illness had set in for the first time on 23-3-1946 and not anytime before that, and the intimation was made to the company about the illness.

Judgment: Trial court held the company liable to pay the sum to the insured, but defendants didn't find their way to make any payment to the plaintiffs and hence this appeal came before the High Court. Court on the facts observed that: -
Principle of uberrima fidea would follow till the conclusion of the contract is made by the company. And if breach occurs the contract would be voidable the instance of the party to whom ubarrima fides is due.

Great care must be taken in deciding the difference as to what would be mere illness or what's ordinary simple disorder, and what would constitute material change in health there's a great danger for one being take for another.

Court took a note of the case, Watson v. Mainwaring wherein it was held that disorder is not one
‘tending to shorten life' simply from the circumstance that the assured dies from it. Warranty of good health doesn't mean that man has not in him the seeds of some disorder. Therefore, if in his honest judgment there was no illness or any change of health but only an ordinary disorder, the mere non-communication of that event to the company cannot be a ground for the insurer to avoid the policy. Therefore, the moment the proposal was accepted by the company, the condition as to the remittance of the first installment by the assured and the acceptance of the same by the company also automatically stood complied with, 26th March, 1946.

He had already sent for the doctor on the previous evening, namely, on 27th March, 1946, but on that day the complaint, if any, as stated by P.W. 2, was nothing more than exhaustion or what we may call ordinary simple disorder otherwise had there been anything serious, the doctor, D. N. Roy, should have undoubtedly prescribed some medicine to the patient. And therefore the complaint was of an ordinary disorder character and not illness. If that is so then there was no breach of warranty by Pyare Lal if he did not send any information of his illness which began on the 28th March, 1946 and wherein the policy had already been accepted by company. Plaintiffs were held entitled to interest at 6 per cent, per annum on the amount due from the date of the institution of the suit until the date of realization.

Comments: -This case places a distinction between the fact of ordinary disorder and the material change in health of the insured which could be made ground of repudiation by the company and its important to make this distinction clear as it may lead to grave injustice to the insured. Ordinary disorder if doesn't lead to deterioration of health of the deceased then would not amount to suppression of material fact.

4. Law Commission's Recommendations on Section 45 of The Insurance Act.

After taking the alarming situation into consideration, Law Commission recommended recasting of Section 45 in such a manner as would reconcile the rights of both the interested parties to insurance, i.e. protect the insured from repudiation of his policy on frivolous grounds, and at the same time conserve the right of the insurance company to repudiate the policy on good grounds Changes recommended are as follows:

· Firstly, there would be no right with the insurance companies to reject the policy after the period five years: The period of two years as provided under the main section, must be extended to 5 years, and strict principle must be applied.

· Insured must be given opportunity to be heard and give his part of explanation on the policy which is sought to be repudiated by the company. Therefore there must be no unilateral repudiation of the policy by the insurer.

· In case of repudiation on the ground of ‘misstatement' or ‘suppression of a material fact', the policy premium amount would not be liable to be forfeited by the company, but only on the grounds of the fraud. If fraud is committed by the party to the contract then premium amount must be withheld but not otherwise. [9]
So according to the recommendations by law commission the policy may be called in question at any time within five years on the ground that, any statement being material to the expectancy of the life of the insured was incorrectly made in the proposal, to give effect to the policy. Though these recommendations made are guaranteed by the Commission to better the protection of the policy holders on hands of insurer. But the first recommendation for increasing the time frame for rejection of the policy by the insured from 2 years to 5 years would in fact worsen the situation. Insurer as seen through the study of the cases are already trying to fetch full advantage on the premium amounts paid by the insured by invalidating the whole policy on false grounds of non-disclosure of material facts. This recommendation if given effect would in fact worsen the rights of the policy holders instead of protecting them against the misuse of the provision under section 45 of the insurance Act by the insurance Companies.

4.1. Conclusion & Suggestions.
Even though law seems to be clear in constituting a balance between the insuring party and insured, but in reality, there is no equality between the two, as insurer is the richest corporation and the individual is an ordinary individual. Insured has no legal knowledge about the ambiguous language used in the company's policy with intention to waive them from liability to pay insured on happening of an agreed event. On discussion on these cases we can observe how the companies willfully neglects reimbursing the insured, who later instead of getting their amount from the company have to pay the courts for getting their rights enforced.

It's pertinent to note that the position of disclosure is different between India and England where the insured is only bound to answer the questions being put to him in the policy. As all the questions relevant for the contract are been put before the insured therefore there's more accuracy of facts before the contract comes to force. This reduces the chances of confusion later when the claim is made by the insured on his policy. This system must be adopted by the India also to reduce the chances of ambiguity, and hence the burden of cases on the courts and insured to get the agreed amount. The malpractice and arbitrary use of power by the insurance companies must be restrained by incorporating provisions in the Act similar to the one adopted by the English law to reduce the chances of ambiguity at later date. Else the insurer would keep taking advantage of the insured by falsely repudiating the claims made by the insured. The change if brought in the Act would not only reduce the hardship caused to the insured, but also reduce the burden of courts over the insurance cases flooding on the false rejection of claims been made by the companies, where most of the insured from the rural locality are not even aware of their present rights under the Act.

Great care must be taken in deciding what would constitute illness or material change in health or what ordinary simple disorder is, there's a great chance for one being take for another by the insurance companies. Therefore courts must take due care in identifying if the fact of which insurance company is tending to repudiate the claim is of material nature, or not before deciding the claim. Liberal interpretation must be adopted to further the object of the Act in favor of insurer, for fulfillment of the claim raised by him, which depends on case to case bases. The ambiguity lying in the Act must be removed, and in addition to that the time frame under the Act must be reduced to one year instead of two years, as the premiums paid by the insured would be at great risk if the time limit provided under, Section 45 is increased in accordance to the Law Commission's report.

Insurance is all about serving the consumers, therefore the Act must try furthering the purpose as the greater trust of the consumers would only hamper the business of the insurer. Therefore for its own sake it must try gaining the trust of the insured to gain business at a larger level.

End-Notes
[1] Dr. Avtar Singh, Principles of Insurance Law , 17th ed., 2002, Wadhwa & Co., Nagpur.
[2] Joel v. Law Union and Crown, (1908) 2 KB 863; and L.I.C v. Shakuntalabai, AIR 1975 AP 68.
[3] Brij Anand Singh, ‘New Insurance Law', University Book agency, 4th ed., 2000, Allahabad.
[4] ww.iirmworld.org.in/conference/red-hyd/sv%20krishna%20mohan.ppt visited on September 15, 2007.
[5] (2001) 6 SCC 477.
[6] AIR 1975 A.P 68.
[7] AIR 1984 M.P 126.
[8] AIR 1959 Pat. 413.
[9] ww.iirmworld.org.in/conference/red-hyd/sv%20krishna%20mohan.ppt visited on September 15, 2007

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