Suppression Of Facts Made In Proposal Form Will Render Insurance Policy Voidable By The Insurer: SC [Read Judgment]

The bench comprising Justice Dhananjaya Y. Chandrachud and Justice Hemant Gupta said that any suppression, untruth or inaccuracy in the statement in the proposal form will be considered as a breach of the duty of good faith and will render the policy voidable by the insurer.

In this case (Reliance Life Insurance Co Ltd vs. Rekhaben Nareshbhai Rathod), the insurer repudiated the claim on the ground of 'suppression of material fact', and it said that there was a glaring omission to answer the question relating to details of the life insurance policies held by the life assured. The proposer had answered the query as to whether he was currently insured for a cover of life insurance, critical illness or accident benefit in the negative. It turned out that he was insured with Max New York Life Insurance Co Ltd.

The District Forum dismissed the complaint filed in this regard on the ground that there was a non-disclosure of the fact that the insured had held a previous policy in the proposal form filled up by the proposer. However, State Commission (SCDRC) allowed the complaint. Later, National Commission (NCDRC) upheld the State Commission order.

In appeal filed by the insurer, the bench observed that there was evidently a nondisclosure of the earlier cover for life insurance held by the insured. It also noted that the repudiation in the present case was within a period of two years from the commencement of the insurance cover. Section 45 of the Insurance Act restricts the right of the insurer to repudiate a policy of life insurance after a period of two years of the date on which the policy was effected. Beyond two years, the burden lies on the insurer to establish the inaccuracy or falsity of a statement on a material matter or the suppression of material facts.

However, the contention was that, even within a period of two years, a non-disclosure or suppression must be of a material fact to justify repudiation. This contention was reiterated before the Apex Court and it was submitted that before a non-disclosure can be utilized as a ground to repudiate, it must pertain to a realm where it can be found that the non-disclosure was of a circumstance or fact which would have affected the decision of the insurer regarding whether or not to grant a cover. Referring to some earlier judgments, the bench said:

"Materiality of a fact also depends on the surrounding circumstances and the nature of information sought by the insurer. It covers a failure to disclose vital information which the insurer requires in order to determine firstly, whether or not to assume the risk of insurance, and secondly, if it does accept the risk, upon what terms it should do so. The insurer is better equipped to determine the limits of risk-taking as it deals with the exercise of assessments on a day-to-day basis. In a contract of insurance, any fact which would influence the mind of a prudent insurer in deciding whether to accept or not accept the risk is a material fact. If the proposer has knowledge of such fact, she or he is obliged to disclose it particularly while answering questions in the proposal form. An inaccurate answer will entitle the insurer to repudiate because there is a presumption that information sought in the proposal form is material for the purpose of entering into a contract of insurance"

The court further observed that the Proposal forms are a significant part of the disclosure procedure and warrant accuracy of statements. The court also reiterated that there is a clear presumption that any information sought for in the proposal form is material for the purpose of entering into a contract of insurance. It said:

"Utmost care must be exercised in filling the proposal form. In a proposal form the applicant declares that she/he warrants truth. The contractual duty so imposed is such that any suppression, untruth or inaccuracy in the statement in the proposal form will be considered as a breach of the duty of good faith and will render the policy voidable by the insurer. The system of adequate disclosure helps buyers and sellers of insurance policies to meet at a common point and narrow down the gap of information asymmetries. This allows the parties to serve their interests better and understand the true extent of the contractual agreement"

Restoring the order of dismissal of complaint by the District Commission, the bench observed:

"In the present case, the insurer had sought information with respect to previous insurance policies obtained by the assured. The duty of full disclosure required that no information of substance or of interest to the insurer be omitted or concealed. Whether or not the insurer would have issued a life insurance cover despite the earlier cover of insurance is a decision which was required to be taken by the insurer after duly considering all relevant facts and circumstances. The disclosure of the earlier cover was material to an assessment of the risk which was being undertaken by the insurer. Prior to undertaking the risk, this information could potentially allow the insurer to question as to why the insured had in such a short span of time obtained two different life insurance policies. Such a fact is sufficient to put the insurer to enquiry."

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