Insurance Contract Necessitates Full Disclosure Of Material Facts: NCDRC

The National Consumer Disputes Redressal Commission, presided by Mr. Subhash Chandra and Dr. Sadhna Shanker, in held that an insurance contract mandates utmost good faith, requiring complete disclosure of material facts, and an insurer is entitled to repudiate the contract if such facts are withheld.

Brief Facts of the Case

The complainant's late husband took a Jeevan Anand (with profits) (with Accident Benefit) policy from the Life Insurance Corporation/insurer for Rs. 10,00,000. He passed away in Max Hospital after 7 months. The insurer denied the claim, stating that the deceased had been suffering from Chronic Liver Disease (CLD) for the past four years due to alcoholism and was admitted with jaundice, a direct result of CLD. The policy did not disclose these material health facts, which are required in contracts of uberrima fides. Aggrieved, the complainant filed a complaint before the State Commission of New Delhi, which allowed the complaint. It directed the insurer to pay Rs 10,00,000 to the complainant with simple interest at 6% p.a. along with Rs 1,00,000 as costs for mental agony and harassment and litigation costof Rs 50,000. Consequently, the insurer appealed to the National Commission against the State Commission's order.

Contentions of the Insurer

The insurer argued that the complainant's late husband failed to fully disclose his health condition, specifically withholding details about his Chronic Liver Disease (CLD) when submitting the proposal form. The insurer claimed that the husband was a chronic alcoholic and that his death resulted from jaundice due to liver damage, as indicated in the hospital's medical report. Challenging the State Commission's order, the insurer pointed out several issues: the Commission ignored medical records from the hospital, treatment records indicated the husband had CLD for four years prior to the policy proposal, and the Commission wrongly assumed that a medical examination negated the requirement for full disclosure in a contract of uberrima fides. The policy was correctly denied on grounds of fraud due to non-disclosure, and the State Commission lacked territorial jurisdiction since the policy was issued in Hisar, Haryana. The Commission also erred by not recognizing that the husband had suppressed material facts. The insurer contended that these reasons demonstrated there was no deficiency in service on their part.

Observations by the National Commission

The National Commission observed that the key issue is whether the insurer's repudiation of the claim was justified based on the alleged suppression of material facts. The Supreme Court has established in Satwant Kaur Sandhu Vs. New India Assurance Co. Ltd. that an insurer is justified in repudiating an insurance contract if material facts are suppressed, and in P C Chacko & Anr. Vs. Chairman, LIC of India & Ors., it was emphasized that an insurance contract requires utmost good faith, necessitating full disclosure of material facts. However, the commission questioned whether the claim of Chronic Liver Disease (CLD) as a pre-existing condition could be established solely based on an unverified statement from the deceased life assured's brother-in-law, who was not examined. Although the deceased had a history of road traffic accidents and poor health upon admission, neither the insurer nor the hospital linked these to pre-existing CLD. The insurer failed to provide evidence that the deceased was treated for CLD prior to the insurance proposal, and there were no documented details of medication during hospitalization. It was emphasized that the burden of proof lies with the insurer to demonstrate that the deceased's CLD was a known pre-existing condition that was willfully concealed. The hospital records did not substantiate claims of treatment for CLD. Furthermore, the post-mortem report did not conclusively determine the cause of death, pending chemical analysis. For these reasons, the basis for the insurer's repudiation could not be upheld. The commission found no reason to alter the State Commission's ruling in favor of the complainant, ordering payment of the insured sum with interest. However, the compensation awarded for mental agony was deemed excessive, as the interest covered all compensatory claims.

The National Commission disallowed the appeal, but modified the State Commission's order and directed the insurer to pay the complainant Rs. 10,00,000 under the insurance policy with interest at 6% per annum along with ₹50,000 as litigation costs, while also setting aside the order for ₹1,00,000 for mental agony and harassment.

Case Title: Life Insurance Corporation Of India Vs. Shikha Jain

Case Number: F.A. No. 349/2023

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