Essay: Non disclosure in insurance contracts (India)

.The relationship between the insurer and the insured is recognized as one where mutual obligations of trust and good faith are paramount and no material alteration can be made to the terms of the contract without the mutual consent of the parties. At the time of the application, the essential facts are usually known very well by the applicant but may be difficult for the insurer to ascertain.
There are, in fact, two distinct duties on the applicant during the application process. Typically, the applicant is interviewed by an agent or broker in order to complete the application. Depending upon the nature and type of insurance coverage sought, the application will contain a series of questions regarding the applicant’s background, business activities, health and the like. And the application will typically contain a declaration to be executed by the applicant that the answers provided are full, complete and true.
As a result, there are two separate significant issues:
(1) Has the applicant misrepresented any answers to the questions on the application?
(2) Has the applicant failed to disclose any facts within his or her knowledge that are material to the insurance?
More specifically if analyzed the significance of warranties in different branches of insurance law itself, then it would be seen that the warranties have a wider implication in marine insurance than it has in non-marine insurances. For instance the applicability of breach of warranty is recognized in marine insurance under English Marine Insurance Act, whereas in non-marine insurance the same is not as recognized. Moreover as a statutory rule, express warranty must be stated or incorporated in the policy itself. On the contrary, a mere declaratory signature of the assured will suffice in non-marine insurance.
Warranties may be express or implied, if it is condition implied by law. However, implied warranties are mostly confined to marine insurance. The Marine Insurance Act defines a warranty as a promise whereby the assured under takes that some particular thing shall or shall not be done, or that some condition shall be fulfilled, or affirms or negatives the existence of a particular state of facts.
NON-DISCLOSURE IN INSURANCE CONTRACTS
Misrepresentation or non-disclosure in applications for insurance may have serious ramifications. False, incorrect or incomplete answers in the application or non-disclosure of material facts may go to the root of the contract and put its continued existence in jeopardy.
In Pan Atlantic Co Ltd and Another v Pine Top Insurance Co Ltd , the House of Lords again tackled the vexed question o f the meaning of materiality in English insurance law. The main point at issue was to determine the exact meaning of Section 8(2) of the Marine Insurance Act , which states: “Every circumstance is material which would influence the judgment of a prudent insurer in fixing the premium, or determining whether h e will take the risk.” The insurer is vulnerable and requires the material facts in order to determine whether or not it will issue a policy, what specific exclusions it may require, and what premium it will charge.
When an insurer takes the position that a policy is void by reason of misrepresentation or non-disclosure, the insurer is not required to establish the motives of the insured. The insured’s motives are not relevant as long as the misrepresentations are of a fact known to the insured which could be regarded by a reasonable insurer as material to the risk. The burden of proof to show non-disclosure or misrepresentation is on the insurance company.
As it is standard practice for the insurer to set out in the application a series of specific questions regarding the applicant and matters relevant to insurability, a number of authorities have considered the extent to which the questions on the application form modify, limit or alter the general duty of disclosure. As a general rule, the fact that particular questions relating to the risk are put to the applicant does not relieve him or her of the independent obligation to disclose all material facts. However, the particular form of question may bear on the scope and duty of disclosure and may result in a finding that there has been waiver by the insured.
In situations where the application form is completed with the assistance of an agent or broker, the factual circumstances surrounding the completion of the application are relevant to a determination as to whether there was misrepresentation or non-disclosure. Where the agent or broker misinterprets the question or provides misleading or incorrect advice to the insured, the insured may not be held responsible for inaccurate answers. Further, if there is any uncertainty in the scope and purview of the answers sought, the issue will be resolved in favour of the insured. The situation, though, has changed in England through a recent decision of the House of Lords. The decision in the Star Sea Case lays down that the duty of good faith in insurance contracts continues after the inception of the policy, but the duty is far less strict than it was prior to the commencement of the contract.
And the duty of disclosure imposed on the insured does not stop at the application stage. It continues up to the moment when a binding insurance contract is concluded.
DOCTRINE OF UBERRIMA FIDES
Uberrima fides (sometimes seen in its genitive form uberrimae fidei) is a Latin phrase meaning “utmost good faith” (literally, “most abundant faith”). It is the name of a legal doctrine which governs insurance contracts. This means that all parties to an insurance contract must deal in good faith, making a full declaration of all material facts in the insurance proposal.
Thus the insured must reveal the exact nature and potential of the risks that he transfers to the insurer, while at the same time the insurer must make sure that the potential contract fits the needs of, and benefits, the insured. . The principles underlying this rule were stated by Lord Mansfield in the leading and often quoted case of Carter v Boehm.
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.
PROVISIONS REGARDING NON-DISCLOSURE: LEGAL ASPECTS
Section 45 of The Insurance Act, 1938
(1) Policy cannot to be called in question on ground of mis-statement after two years.
(2) “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:
(3) 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.”
Section 45 of The Insurance Laws (AMENDMENT) Act, 2015
Policy cannot be called in question on ground of misstatement after three years.
(4) “No policy of life insurance shall be called in question on any ground whatsoever after the expiry of three years from the date of the policy.
(5) A policy of life insurance may be called in question at any time within three years from the date of issuance of the policy or the date of commencement of risk or the date of revival of the policy or the date of the rider to the policy, whichever is later, on the ground of fraud.
(6) Notwithstanding anything contained in sub-section (2), no insurer shall repudiate a life insurance policy on the ground of fraud if the insured can prove that the misstatement of or suppression of a material fact was true to the best of his knowledge and belief or that there was no deliberate intention to suppress the fact or that such misstatement of or suppression of a material fact are within the knowledge of the insurer.
(7) A policy of life insurance may be called in question at any time within three years from the date of issuance of the policy or the date of commencement of risk or the date of revival of the policy or the date of the rider to the policy, whichever is later, on the ground that any statement of or suppression of a fact material to the expectancy of the life of the insured was incorrectly made in the proposal or other document on the basis of which the policy was issued or revived or rider issued.
(8) 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.”
Section 17 of the Indian Contract Act, 1872
Explanation to Section 17 of the Contract Act provides that mere silence does not amount to fraud unless there is a duty to speak. So we can say that the legal duty as provided in the Explanation does not apply to cases where there is a positive case of active fraudulent misrepresentation. There is no difference between a contract of insurance and any other contract except that in a contract of insurance there is a requirement of utmost good faith. 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.
Section 19, 20 and 21 of the Indian Marine Insurance Act, 1963
Section 19, 20 and 21 of the Indian Marine Insurance Act, 1963, lays down the provisions as to the effect of non-observance of utmost good faith. These above mentioned sections provides for the facts that the assured or the insured compulsorily needs to disclose or need not disclose. It must also be noted that these may be taken as applying mutandis to all classes of insurance.
Section 20 of the Indian Marine Insurance Act, 1963
On the other hand, under the section, the assured/insured is required to disclose all material facts/circumstances, in the ordinary course of business, which might be known to the assurer/insurer before the contract is concluded. If the insured/assured fails to disclose, then the insurer/assurer avoid the contract. So, only in cases of fraud, the party defrauded can not only avoid the contract, but also can claim damages/compensation for it. But the vital thing that is to be kept in mind is that an insurer cannot avoid an insurance contract on grounds of non-disclosure of lapsed policy by the insured, which has no bearing on the risk undertaken by the insurer.
To conclude the legal basis of disclosure, Lord Atkin quoted in a landmark judgment in a famous case of Bell v Lever Bros. Ltd. where he said that, “there are certain contracts expressed by law to be contracts of the utmost faith where material facts should be disclosed. If not the contract is voidable. Apart from special fiduciary relationships, contracts for partnership and contracts of Insurance are leading instances. In such cases the duty does not arise out of the contract; the duty of the person proposing the insurance arises before the contract is made.”
BREACH OF WARRANTY IN INSURANCE CONTRACTS
Section 35 of the Indian Marine Insurance Act incorporates warranty. This Act resembles striking similarity to that of the English Marine Insurance Act, 1906. In India, warranty in marine insurance refers to a promissory warranty apart from a ‘warranty free of capture and seizure’ clause.
A warranty may be distinguished from a representation in as much a representation may be equitably and substantially answered but a warrant y must be strictly complied with. A breach of warranty will avoid the policy, although it may not relate to a matter material to the risk insured.
The statements must be true in fact without any qualification of judgement, opinion or belief. The warranty should be in the policy or must be incorporated by reference. If any of the statements or representations made by the assured in the proposal have been made the “basis” of the contract and they are found to be untrue, the contract of insurance would be void and unenforceable in law, irrespective of the question whether the statement, concerned is of a material nature or not.
However, non-compliance of a warranty is excused when, by reason of a change of circumstances, the warranty ceases to be applicable to the circumstances of the contract, or when compliance with the warranty is rendered unlawful by any subsequent law or when such a warrant y has not been mentioned in the policy.
Warranty in insurance law is not exactly what it means in law of contract. “In insurance law, it refers to a certain term of an insurance contract, breach of which has particular legal consequences”. It simply means that by virtue of a warranty the assured confirms certain fact or situation, the compliance of which is a must on the part of the assured and in case the assured fails to comply with the same, it simply relieves the insurer of his liability.
In Thomas v Tyne and Wear Freight Insurance Association, it was held that an insurer to set up a defence under claim for the loss of a ship on the grounds of the unseaworthiness of the vessel, the unseaworthiness must have been causative of the relevant loss. In this case, the ship was insured under a time policy. With due acknowledgment or privity of the assured the ship was sent to the voyage with insufficient crew. But during its voyage the ship was lost in the sea because of a defect in its hull. But this defect in the hull was not within the privity of the assured. It was held that the assured was entitled to claim the loss from the insurer. It becomes clear that though the so called unseaworthiness was repaired still it made no sense since once a breach always a breach of implied warranty in marine insurance.
The term ‘privity’ is best explained in the case Compania Maritima San Basilio SA v. Oceanus Mutual Underwriting Association (Bermuda) Ltd. In this case the plaintiffs insured their vessel named ‘Eurysthenes’ with the defendant P and I Club under a time policy. In 1974, during its voyage from the United States to the Philippines, the vessel stranded. The owners of the cargo it was carrying made claim against the plaintiff. Thus the plaintiff wanted the insurer to compensate the loss. But the insurer alleged that the ship was unseaworthy in many respects and the same was under the privity of the assured. It was held that the term ‘privity’ includes both ‘knowledge and concurrence’. And at the same time privity does not necessarily include willful misconduct. To prove that there was a privity of unseaworthiness of the ship on the part of the assured it is not enough that the assured had knowledge of the facts constituting the unseaworthiness but also the knowledge that all these factors in turn can render the ship unseaworthy.
CONCLUSION
Non-Disclosure refers to that situation where a customer fails to reveal a relevant fact when applying for or renewing an insurance contract. It is concerned with the insured’s duty to volunteer material facts.
Thus, it is clear from the above discussion that the duty of disclosure imposed on an applicant for insurance should be modified, and those facts should be disclosed to the insurers by the applicant if it is material to the risk; if it is either known to the applicant or is one which he can be assumed to know; or it is one which a reasonable man with ordinary prudence, in the position of the applicant would disclose to his insurers, having regard to the nature and extent of the insurance cover which is sought and the circumstances in which it is sought. The Indian Marine Insurance Act, 1963, which is an authoritative statute governing these principles has also provided for the disclosure requirements that are required to be followed by a person who proposes for an insurance. The act also provides for what constitutes material fact. But while analyzing the provisions one can see that what constitutes material circumstance. It is very wide and favours the insurers which are often huge multinational corporations. But this definition is an exhaustive one as given in the act. This act also provides for only the disclosure requirements of the proposer and neglects the need of the insurer. Thus, it can be said that the act could have been balanced if these shortcomings are fulfilled.
More specifically if analyzed the significance of warranties in different branches of insurance law itself, then it would be seen that the warranties have a wider implication in marine insurance than it has in non-marine insurances. For instance the applicability of breach of warranty is recognized in marine insurance under English Marine Insurance Act, whereas in non-marine insurance the same is not as recognized. Moreover as a statutory rule, express warranty must be stated or incorporated in the policy itself. On the contrary, a mere declaratory signature of the assured will suffice in non-marine insurance.