Insurer Has Duty To Disclose Changed Policy Conditions During Renewal : Supreme Court Grants Mediclaim Relief To Senior Citizens

The failure of an insurance agent to disclose to the policy-holder the changes in the policy conditions at the time of renewal of the policy will amount to 'deficiency in service' within the ambit of the Consumer Protection Act 1986, held the Supreme Court while allowing mediclaim relief to two senior citizens.

In this case Jacob Punnen and another versus United India Insurance Co Ltd, a bench comprising Justices S Ravindra Bhat and KM Joseph was considering an appeal against an order of the National Consumer Disputes Redressal Commission, which denied relief to the appellants.

The appellants, two senior citizens, had availed a mediclaim policy from United India Insurance in 1982, which was renewed on yearly basis. In 2008, the second appellant had to undergo angioplasty surgery.  A claim of Rupees 3.82 lakhs was submitted by the appellants to the insurer with respect to the angioplasty surgery. The coverage at the relevant time was Rs 8 lakhs. However, the insurer accepted the claim for only Rupees 2 lakhs, saying that the renewed agreement had a clause which limited the liability with respect to surgeries like angioplasty to an amount of Rs.2 lakhs.

This was challenged by the appellants before the District Consumer Forum, which ruled in their favour. However, the District Forum's order was reversed by the State Commission in insurer's appeal. Although the appellants filed a revision before the National Commission, they could not secure relief. Ultimately, the matter reached the Supreme Court.

The insurer's stand was that a careful reading of the policy for the year 2008-2009 would have indicated that it differed radically from the policy from the previous year because of a term indicating a monetary limit on the reimbursable expenditure, by the insurer. The insurer also argued that it has no legal duty to inform the policy holder about the changes in policy conditions when compared to the lapsed policy, because there is no concept of 'renewal' as such since it is a fresh agreement executed on annual basis.

Renewal of existing terms

According to the lead judgment authored by Justice Ravindra Bhat, if the insurer is unilaterally introducing fresh terms about which the policyholder is in the dark, then it can be regarded only as a renewal of the existing terms. Because, in such a situation, the parties are not at consensus ad idem. The policy holder is under the impression that the existing conditions are being renewed.

"If the renewed contract is agreed, in all respects, by both parties, undoubtedly the fresh terms (with restrictions) would be binding. However, that would not be the case when a new term is introduced unilaterally about which the policy holder is in the dark. Further, the allusion to continuation of the terms of the Gold policy in respect of senior citizens (who were not to be compelled to migrate to another policy) but were to be subject to the same terms, upon payment of a different rate of premia, reinforces the conclusion that there was in fact, a renewal of the existing terms".

Duty of insurers

The Court noted that a striking feature of the insurance contract is the principle of uberrima fide (duty of utmost good faith). In this backdrop, the insurer cannot plead that it is the duty of the policyholders to satisfy themselves about the terms and conditions. The Court took note of two particular facts - (1) the appellants are in need of health insurance due to advanced age; (2) the insurance policies are in standard form which offers no space for bargain or negotiation.

"In the present case, the standard form contract, renewed year after year, left the appellants only with the choice of raising the insurance cover". That being the situation, the "informational blackout" by the insurer was a crucial omission, held the Court.

The Court noted that the insurer has not produced any evidence to show that the agent had disclosed the material changes to the appellants. The judgment also referred to IRDA(Health Insurance) Regulations 2016, particularly Regulation 11 and 13, which had restricted insurers from compelling an insured to migrate to other schemes and imposed a duty on the insurers to ensure adequate dissemination of product information.

In this background, the Court observed :

"These regulations only underline expressly what was implicit, i.e., the insurer's obligation to inform every policy holder, about any important changes that would affect her or his choice of product. These have been given statutory shape. Yet, the obligation of the insurer to provide information to existing and policy holders, for them to exercise choice, meaningfully, and choose products suited to their needs, existed. In this case, that obligation was breached".

"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".

Justice Joseph's judgment

Justice KM Joseph wrote a separate judgment reaching the same conclusion. Justice Joseph held that a renewed contract of insurance may provide terms which are different from the terms of the original contract of insurance.

However, if a cumbersome limitation is introduced, the insurer is duty-bound to inform the policyholder.

Justice Joseph held :

"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. Even proceeding on the basis that the policy incorporates the terms of the contract, insofar as the respondent insurer unilaterally purported to incorporate a clearly cumbersome limitation involving a breach of the duty to take the appellants into confidence, the court would not be powerless to undo the wrong. Be it that the policy purported to incorporate the substantive limitation, the appellant can be relieved of the result of the deficiency in service by the insured. This can be done by restoring the position, the appellants would occupy if there was no breach. I would, therefore, agree with my learned Brother that the appeal be allowed on the basis that there was unjustifiable non-disclosure by the Insurer about the introduction of clause of limitation and, in this case, it constituted a deficiency in service and resultantly the appellants are entitled to relief".

Accordingly, the appeals were allowed to restore the order of District Forum which directed the insurer to reimburse the balance surgery cost.

Case Title : Jacob Punnen and another versus United India Insurance Co Ltd

Appearances : Advocate Arundhati Katju for appellants; Advocate Amit Kumar for respondents

Citation : LL 2021 SC 723

Click here to read/download the judgment