PRE-CONTRACTUAL DUTY TO DISCLOSE MATERIAL

CIRCUMSTANCES IN LIFE INSURANCE:

A CASE FOR REFORM

Badrinath Srinivasan

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Electronic copy available at: http://ssrn.com/abstract=2475300

 Table of Contents

Abstract ..................................................................................................................................... 3
I. Introduction .......................................................................................................................... 3
II. Indian Law on the Pre-Contractual Obligation to Disclose Material Circumstances . 4
Material Circumstances in General Insurance ........................................................................ 6
Material Circumstances in Life Insurance .............................................................................. 6
Remedies Available to the Insurer.......................................................................................... 7
Ombudsman ............................................................................................................................ 8
III. Problems with the Pre-Contractual Duty of Disclosure in Life Insurance Contracts 8
Case Studies ............................................................................................................................ 8
Problems with the Extant Law.............................................................................................. 11
IV. Reforms ............................................................................................................................ 13
Recent Reforms in the UK.................................................................................................... 13
Features of the UK Consumer Insurance (Disclosure & Representations) Act, 2012 ......... 15
Reforms in India on the Pre-Contractual Duty of Disclosure in Life Insurance .................. 17
Inadequacies of the Existing Reforms and Recommendations for Further Reforms ........... 19
V. Conclusion.......................................................................................................................... 21
References ............................................................................................................................... 23
Reports .................................................................................................................................. 23
Cases ..................................................................................................................................... 24
Ombudsman Decisions ......................................................................................................... 24
Books, Articles and News Paper Reports ............................................................................. 24

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Electronic copy available at: http://ssrn.com/abstract=2475300

 Pre-Contractual Duty to Disclose Material Circumstances in Life Insurance:
A Case for Reform

Badrinath Srinivasan*

Abstract

The principle of uberrima fidei or utmost good faith is one of the hallmarks of insurance law
and has been in vogue at least since the eighteenth century. However, the insurance market
as was in existence at that time has changed considerably in the present. This has resulted in
a review of the principle in the past decade and its consequent dilution, especially in
prominent insurance markets such as United Kingdom and New York. The Indian insurance
law, however, has stuck to its colonial past, although there have been several pro-consumer
reforms. The leitmotif of this paper is that the existing state of law of pre-contractual duty to
disclose material circumstances in life insurance contracts largely ignores the problems in
life insurance. The present state of affairs often results in unjust and unfair results to the
family of the life insured. The penalties levied in respect of the life insurance consumers are
wholly disproportionate to the failure to disclose material circumstances. While there have
been several reforms proposed by the Law Commission of India, it is the argument of this
paper that the reforms are insufficient in addressing the concerns of the Indian life insurance
market. Consequently, this paper recommends certain reforms in Section 45 that would go a
long way in making the law fair, just and efficient.

I. Introduction

The principle of uberrima fidei or utmost good faith is one of the hallmarks of insurance law
and has been in vogue at least since the eighteenth century.1 The principle is regarded as one
of the most fundamental principles of insurance law world over. However, the insurance
market as was in existence at that time has changed considerably in the present. 2 This has
resulted in a review of the principle in the past decade and its consequent dilution, especially
in prominent insurance markets such as United Kingdom and New York. The Indian
insurance law, however, has stuck to its colonial past, although there have been several pro-
consumer developments, especially with the advent of the Insurance Regulatory
Development Authority (hereinafter “IRDA”).3

Recently, the Law Commission of India has suggested several reforms on the application of
the said principle.4 The Commission has recommended that except in cases of fraud, the life

* B.A. (Law) LL.B. (S.D.M. Law College, Mangalore), LL.M. (West Bengal National University of Juridical
Sciences, Kolkata). The author is currently working in a Public Sector Undertaking. The views stated herein are
his own and do not represent the views of anyone else. Thanks to Mr. J. Ravichandran, Vellore for his critical
comments on a draft of this paper. The author can be contacted at lawbadri@gmail.com.
1
Carter v Boehm (1766) 3 Burr 1905 has been regarded by many as the earliest authority recognizing the
principle of Uberrima fidae in insurance law. For a critique of the said decision and its relevance in the present
circumstances, see, RA Hasson, The Doctrine of Uberrima Fides In Insurance Law-A Critical Evaluation, 32
Modern L. Rev. 615 (1969).
2
Malcolm Alistair Clarke, Policies and Perceptions of Insurance: An Introduction to Insurance Law 96-97,
Oxford (2003)
3
See, for instance, IRDA (Protection of Policyholders' Interest) Regulations, 2002.
4
Law Commission of India, 190th Report on the Revision of the Insurance Act, 1938 and the Insurance
Regulatory and Development Authority Act, 1999 (2004), available at
http://lawcommissionofindia.nic.in/reports/InsuranceReport-2nddraft1.pdf (accessed on 14 April 2014)
(hereinafter “190th Report).

Page 3 of 25
insurers shall return the premium paid till then by the insured even in case of non-fraudulent
misstatement/ suppression of material facts.5 Even so, it is the argument of this paper that the
reforms are insufficient in addressing the concerns of the Indian life insurance market. The
leitmotif of this paper is that the existing state of law largely ignores the problems in life
insurance sector.

The law as it stands today does not afford solutions to numerous hardships faced by the
relatives of the life insured receiving the proceeds of the life insurance policy. The purpose of
this endeavour is not to argue that the life insurers act in a draconian manner. They are also
beset with several problems such as fraudulent claims and the costs and intricacies involved
in proving such fraud. Yet, the law must be fair, just and the remedies provided therein must
be proportionate. The present state of affairs often results in unjust and unfair results to the
beneficiaries of the life insurance policy. The penalties applied on the life insurance
consumers are wholly disproportionate to the wrong committed. For instance, an insurer is
allowed to repudiate the life insurance policy on account of an unintentional omission to state
a material fact. This leads to an unjust result and often the family of the insured (who is no
more alive) is put to great hardship and suffering, thus denying the family the benefit of life
insurance. Taking note of these problems, the 190th Law Commission Report has suggested
expansive changes as regards life insurance. Yet, it is possible to further reform the law and
mitigate the difficulties faced by the life insurance consumers.

For the above purpose, this paper is structured in the following manner. Part II analyses the
Indian insurance law on the principle of uberrima fidei in life insurance. This part extensively
deals with the scope of the obligation to disclose material facts prior to entering into the life
insurance contract and the consequences of the failure to comply with the said duty in the
Indian context. In Part III of the paper, twelve case studies are discussed on the problems in
the law from which inferences are drawn. The said part lists out various deficiencies in the
said law as identified through the case studies. Part III also discusses problems identified by
the Law Commission of India in its 190th Report. Part IV compares the recent reforms
undertaken in the UK insurance market with the proposals contained in the 190th Law
Commission report and recommends reforms in the law to address the problems identified in
the previous part of the paper. Part V concludes.

II. Indian Law on the Pre-Contractual Obligation to Disclose Material Circumstances

The duty of the insured to disclose material circumstances to the insurer has been recognised
in India since the advent of modern insurance in British India. The all-pervading nature of the
doctrine has been recognised in several cases. For instance, in All India General Insurance
Co. Ltd. v. S.P. Maheswari6, a two-judge Bench of the Madras High Court observed:

“One great principle of insurance law is that a contract of insurance is based upon utmost
good faith Uberrima fides; in fact it is the fundamental basis upon which all contracts of
insurance are made. In this respect there is no difference between one contract of insurance
and another. Whether it be life or fire or marine the understanding is that the contract is
uberrima fides and though there may be certain circumstances from the peculiar nature of
marine insurance which require to be disclosed, and which do not apply to other contracts of

5
190th Report, Para 5.1.33
6
AIR 1960 Mad 484

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insurance, that is rather an illustration of the application of the principle than a distinction in
principle.”7

Although India had a full fledged Insurance Act in 1938, the principle of utmost good faith
was not codified in the said Act. In British India, the courts applied the doctrine as a matter of
common law.8 The primary objective behind enactment of the Insurance Act, 1938
(hereinafter “1938 Act”) was to lay down a statutory framework of the business of insurance.
Consequently, the 1938 Act does not address insurance contracts expansively.9 However,
Section 45 of the 1938 Act affords certain level of protection to the life insured. It provides
that no life insurance policy shall be called into question after two years from the date on
which it was effected on the ground that a statement made in the proposal for insurance/ in a
report of medical officer/ referee/ friend of insured/ in any other document leading to the
insurance was inaccurate or false.

The first statutory recognition in India of the obligation to disclose material circumstances
was in the Marine Insurance Act, 1963 (hereinafter 1963 Act”). The Marine Insurance Act,
1963 was enacted pursuant to the Marine Insurance Bill, 1959 introduced in the Rajya Sabha
by Mr. MP Bhargava, a private member.10 The said Bill was referred by the Government to
the Law Commission of India and the Law Commission submitted its 21st Report on Marine
Insurance recommending enactment of a statute based on the English Marine Insurance Act,
1906 (hereinafter “1906 Act”).11 Section 20 of the 1963 Act, which is based on Section 18 of
the 1906 Act, reads as under:

“20. Disclosure by assured

(1) Subject to the provisions of this section, the assured must disclose to the insurer, before
the contract is concluded, every material circumstance which, is known to the assured, and
the assured is deemed to know every circumstance which, in the ordinary course of business,
ought to be known to him. If the assured fails to make such disclosure, the insurer may avoid
the contract.
(2) Every circumstance is material which would influence the judgment of a prudent insurer
in fixing the premium, or determining whether he will take the risk.
(3) In the absence of inquiry the following circumstances need not be disclosed, namely:-
(a) any circumstance which diminishes the risk;
(b) any circumstance which is known or presumed to be known to the insurer. The insurer is
presumed to know matters of common notoriety or knowledge, and matters which an insurer
in the ordinary course of his business as such, ought to know;
(c) any circumstance as to which information is waived by the insurer;
(d) any circumstance which it is superfluous to disclose by reason of any express or implied
warranty.

7
Ibid, Para 10.
8
For instance, in Imperial Pressing Co. v. British Crown Assurance (1914) ILR 41 Cal 581, the Calcutta High
Court held: “So far as insurance contracts are concerned, they are based, as has always been said, upon the
utmost good faith, "uberrima fides," and I do not think there is any doubt that every circumstance which would
influence, or be likely to influence, the judgment of a prudent insurer in fixing the premium and in determining
whether he would take the risk or not, should be disclosed.”
9
Preamble to the Act reads: “An Act to consolidate and amend the law relating to the business of insurance.”
Also see, Law Commission of India, 21st Report on Marine Insurance 1 (1 September 1961), available at
http://lawcommissionofindia.nic.in/1-50/Report21.pdf (accessed on 22 March 2014).
10
Ibid. p. 2
11
Ibid., p. 3

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(4) Whether any particular circumstance, which is not disclosed, be material or not is, in
each case, question of fact.
(5) The term "circumstance" includes any communication made to, or information received
by, the assured.”

The contours of the law on disclosure of material circumstances in insurance, irrespective of

the nature of insurance contract, is still governed by the principles codified in the above
provisions, although the 1963 Act applies only to marine insurance. Thus, the law on the
point applies irrespective of the kind of insurance contract12, except in case of life insurance
where statute13 and case law14 take a slightly pro-consumer approach.

Material Circumstances in General Insurance

Indian insurance law classifies insurance business based on two broad categories: life
insurance and general insurance businesses. Section 2(6B) of the 1938 Act defines general
insurance business to mean “fire, marine or miscellaneous insurance business, whether
carried on singly or in combination with one or more of them”. The obligation to disclose
material circumstances as enacted in Section 20 of the 1963 Act applies to contracts of
general insurance, although the 1963 Act is not applicable to such contracts. As to what
material circumstances are is a question of fact and may differ from case to case. Similar to
marine insurance and other classes of general insurance even the motor vehicle insurance
takes the same “prudent insurer” approach.15

Material Circumstances in Life Insurance

A life insurance contract is governed by the applicable law and the terms of the contract. The
applicable law, including the 1938 Act, regulations of the IRDA and common law govern the
terms of the life insurance contract. The Consumer Protection Act, 1986, the Arbitration and
Conciliation Act, 1996, The Redress of Public Grievances Rules, 1998 and the Code of Civil
Procedure, 1908 govern the procedure of enforcing the remedies in insurance contracts in
various forums. The IRDA has notified several regulations regarding protection of the life
insured, including regulations pertaining to proposal forms, etc.

As stated previously, a life insurance contract is also governed by the principle of uberrima
fidei and the life insured is obligated to disclose material circumstances which would
influence the judgment of a prudent insurer in fixing the premium, or determining whether he
will take the risk.16 In addition to this, Section 45 of the 1938 Act protects the life insured. It
reads:

“45. Policy not to be called in question on ground of mis-statement after two years
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
12
All India General Insurance Co. Ltd. and Anr. v. S.P. Maheswari AIR 1960 Mad 484, Para 10.
13
Section 45, Insurance Act, 1938
14
All India General Insurance Co. Ltd. and Anr. v. S.P. Maheswari AIR 1960 Mad 484, Para 30.
15
Section 149(6) of the Motor Vehicles Act, 1988 states that a material fact or particular shall mean “a fact or
particular of such a nature as to influence the judgment of a prudent insurer in determining whether he will take
the risk and, if so, at what premium and on what conditions.”
16
P.C. Chacko v. Life Insurance Corporation of India AIR 2008 SC 424; Life Insurance Corporation of India v.
Asha Goel AIR 2001 SC 549; Mithoolal Nayak v. Life Insurance Corporation of India AIR 1962 SC 814.

Page 6 of 25
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:
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.”

Thus, Section 45 protects the life insured by prohibiting challenge to a life insurance contract
beyond two years on the grounds of inaccuracy or falsity of a statement in any document
(including proposal) leading to a life insurance policy. Indian drafters probably drew
inspiration from Section 125(2) of the Ontario Insurance Act (as it prevailed then) in enacting
Section 45 of the 1938 Act.17 The purpose of the provision was to protect the insured against
the “stringent rule of warranty to trivial or inconsequential misrepresentations”.18 Two
exceptions have been statutorily recognized to this rule.

Exception 1: The insurer could, however, challenge the life insurance policy on satisfaction
of the following conditions:

 the statement was on a material matter or material facts supposed to be disclosed were
suppressed,
 such statement or suppression was fraudulently made by the policyholder, and
 such policy holder knew at the time of making the statement that it was false or that it
suppressed material facts supposed to be disclosed.

Exception 2: The insurer could call for proof of age at any time so long as he is entitled to do
so. No policy can be called into question for the reason that the terms of the policy are
adjusted on subsequent proof that the age of the life insured was incorrectly stated in the
proposal.

In effect, Section 45 does not save the policy if the fraudulent misstatement or suppression
pertained to material facts and was made with the knowledge of its falsity or materiality
respectively. In those cases, the insurer could very well avoid the contract and retain the
premiums paid till then.

It may be noted that Section 45 cannot be contracted out by terms in the insurance policy to
the effect that the insurer can repudiate the policy for all inaccuracies in the proposal or other
document leading to the policy, irrespective of whether such inaccuracy was material or
not.19

Remedies Available to the Insurer

17
All India General Insurance Co. Ltd. and Anr. v. S.P. Maheswari AIR 1960 Mad 484, Para 44.
18
Ibid.
19
Life Insurance Corporation v. Shankuntala Bai AIR 1975 AP 68

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Irrespective of the nature of the contract, insurance law provides for an identical remedy in
case of breach of an obligation to disclose material circumstances. The insurer can avoid the
contract of insurance in such cases. The insurer has a right to forfeit the premiums paid till
then by the insured. In certain cases, the insurer returns the premiums paid but deducts
administrative charges.

Ombudsman
The institution of Insurance Ombudsman was established by the Ministry of Finance,
Government of India through notification of the Redressal of Public Grievances Rules,
1998.20 The Ombudsman Regulations were framed under the power conferred on the
Government by Section 114(1) of the Insurance Act, 1938.21 So far, twelve Ombudsman
centres have been established all over India to settle the grievances of insurance policy
holders. The Ombudsman has been constituted in order to settle such disputes in a cost-
effective, efficient and impartial manner.22 The Ombudsman can entertain claims pertaining
to partial or total repudiation of claim by an insurer, dispute regarding the premium paid, or
payable, in terms of the policy, dispute on the legal construction of the policy in relation to a
claim, delay in the settlement of claim or non-issuance of any insurance document to the
customer, after the receipt of premium.23 The Ombudsman has the power to pass an award
which he deems as fair and just in the circumstances of the case. 24 In addition, the
Ombudsman has the power to grant ex-gratia compensation in appropriate cases.25

III. Problems with the Pre-Contractual Duty of Disclosure in Life Insurance Contracts

The pre-contractual duty to disclose material circumstances in life insurance contracts has not
been without problems. Unlike other insurance contracts, life insurance contracts involve a
lot of sentiment since claims are filed only on the death of the insured. Often the insured
would have been the only breadwinner in the family and his death would have a severe
financial and emotional impact on the family. It is important that the law takes a
compassionate and justice-based approach in dealing with claims in life insurance contracts.

Case Studies

In order to identify the problems with the application of the law, this paper employs the case
study method. A perusal of awards on life insurance policies decided by the Ombudsman in
the recent past (2012-2014) reveal that the law on material disclosure has been not been
satisfactory and has been applied in different ways by different Ombudsmen. Below are
twelve case studies on the application of the said law:

Case Study 1: Anjanaben R. Mehta v. Life Insurance Corporation of India Ltd.26: The
insured had subscribed for three life insurance policies. On his death, the Complainant had
lodged a claim with the insurer who repudiated the claim for suppression of material
information. The Ombudsman rejected the complaint on the ground that the insured had

20
Hereinafter “Ombudsman Regulations”.
21
Section 114(1) of the Insurance Act, 1938 provides: “The Central Government may, subject to the condition
of previous publication by notification in the Official Gazette, make rules to carry out the purposes of this Act.”
22
Rule 3 Ombudsman Regulations.
23
Rule 12, Ombudsman Regulations.
24
Rule 16(1), Ombudsman Regulations.
25
Rule 18, Ombudsman Regulations.
26
Case No.21-001-0001-13, decided by Ahmedabad Ombudsman Centre on 10 December 2012.

Page 8 of 25
failed to disclose the death of his first wife in the Proposal Forms and that the Complainant,
who was the insured’s nominee, was his second wife.

Case Study 2: Pradeep Kumar Padhy v. Bajaj Allianz Life Ins. Co Ltd.27: The
Complainant was the sister and nominee of the insured under the life insurance policy. On
death due to cerebral malaria in June 2010, a claim was filed under the policy. The same was
repudiated by the insurer on the grounds that the insured had misrepresented facts relating to
her occupation and income and that the insured had obtained consultations/ treatment for
neurological problems in 2006. The Ombudsman upheld the rejection by the insurer.

Case Study 3: Prafulla Kumar Sahoo v. Bajaj Life Ins. Co. Ltd. Angul28: The insured had
taken a ten year policy commencing from February 2010 and had paid Rs. 50,000 towards
annual premium. She died in November 2010. The nominee’s claim was repudiated by the
insurer on the ground that the insured had been treated for diabetes mellitus since January
2010. Aggrieved, the nominee filed a claim for payment of the policy amount of Rs. 2,50,000
or, in the alternative, refund of the annual premium of Rs. 50,000. The Ombudsman made
two determinations. One, since the insured had deliberately concealed the material fact that
she was suffering from diabetes, the insurer was correct in repudiating the claim. Two,
Clause 12 of the policy provided that if the policy holder failed to disclose all facts or
misrepresented facts in the proposal form which had effected the insurer’s decision to insure
the risk, the insurer shall have the right to avoid the policy and to refuse to refund the
premium.

Case Study 4: Tarulata Naik Vs S.B.I Life Ins. Co. Ltd.29: The husband of the complainant
had taken an insurance policy for Rs. 3 lakhs and had deposited the entire premium of Rs.
60,000 in February 2011. The insured fell ill and died in December 2011. When the
complainant lodged a claim for Rs. 3 lakhs, the insurer rejected the claim and returned only
Rs. 54,238 representing the fund value of the policy (after deductions). The ground for
rejection was that the insured had failed to disclose that he had suffered from diabetes
mellitus in the proposal form. The ombudsman upheld the decision of the insurer on the
ground of suppression of material facts.

Case Study 5: Suman Sharma v. HDFC Standard Life Ins. Co. Ltd.30: The Complainant
had obtained a policy in 2003. After the death of her husband, the insured, the Complainant
filed a claim with the insurer, who repudiated the claim on the ground that the insured had
suppressed the material fact that he had heart problems in 1992. The Ombudsman overturned
the repudiation on the grounds that the insurer cannot repudiate a claim when the ailment
occurred eleven years prior to taking the policy and that the insurer had medically examined
the insured in detail and had even conducted treadmill test.

Case Study 6: Anita Devi v. HDFC Life Insurance Co. Ltd. 31: The insured expired in
April 2010 and the insurer’s wife filed a claim based on the policy purchased in January
2008. The insurer repudiated the claim for the reason that the insured failed to disclose that

27
Complaint No. 21-009-1458, decided by Bhubaneswar Ombudsman Centre on 8 November 2012
28
Complaint No. 21-009-1497 decided by Bhubaneswar Ombudsman Centre on 21 December 2012
29
Complaint No. 21-002-1556 decided by Bhubaneswar Ombudsman Centre on 7 March 2013
30
Case No. HDFC/760/Mumbai/Chandigarh/21/10 decided by Chandigarh Ombudsman Centre on 18 October
2012.
31
Case No. HDFC/594/Mumbai/Rohtak/22/11 decided by Chandigarh Ombudsman Centre on 7 November
2012.

Page 9 of 25
he had previously suffered from hypertension and diabetes prior to the policy date and had
been admitted in a hospital. The Ombudsman dismissed the claim on the ground of lack of
conclusive evidence and held that merely because the insured had a history of disease did not
amount to suppression of material facts.

Case Study 7: Ram Saran v. Birla Sun Life Insurance Company32: Insured took a policy
in April 2009 and expired in March 2010. The Complainant filed a claim with the insurer
who repudiated the claim due to suppression of material facts that the insured had suffered
from Osteomyelitis and had undergone treatment in a hospital. The Ombudsman reversed the
decision of the insurer as there was no relation between the cause of death and the said
disease alleged to have been suppressed and directed the insurer to settle the death claim.

Case Study 8: Amina Katun Laskar v. Bajaj Allianz Life Insurance Co. Ltd.33: The
repudiation of the policy took place on the ground that the insured’s school leaving certificate
was fake. The Ombudsman rejected the contention of the insurer even though the policy was
taken only sixty two days prior to the death for the following reasons:
 the certificate was issued/ attested by the relevant school authorities,
 the insurer relied on the certificate for issuing the policy and accepting the entire
premium for the policy, and
 the insurer would not have repudiated the claim had the policy attained maturity or
had the claim been a non-early claim (where the insurer would have settled the same
without investigation).

Case Study 9: Santa Mandal v. Life Insurance Corporation of India34: Here, the
ombudsman upheld the decision of the insurer to repudiate the claim which was revived three
days prior to the death of the insured but directed the insurer to pay the revival premium on
an ex-gratia basis.

Case Study 10: Anjana Mondal v. SBI Life Insurance Co. Ltd.35: The insured had taken a
life insurance policy in March 2008 and had paid the initial premium. The insured died in
June 2010 due to chronic liver disease with hepato-renal syndrome. The wife of the deceased
filed a claim with the insurer who repudiated in for the reason that the deceased had
suppressed the material fact of diagnosis of liver cirrhosis prior to the policy. The
Ombudsman rejected the contentions of the insurer by holding that liver cirrhosis did not
constitute critical illness and that the insured could perform routine functions. The
Ombudsman held that although the insured had wrongly stated that he was of good health
that alone cannot be a ground for repudiating the policy. However, the Ombudsman held that
a total denial of the claim is not justified considering that the insured had not suffered from
any critical illness and that the Complainant was suffering from acute financial hardship and
ordered the insurer to pay 50% of the amount on an ex-gratia basis.

Case Study 11: Safeela Beevi v. LIC of India36: The insured had taken a policy for Rs.
50,000 and died in June 2009. The Complainant, wife of the insured, filed a claim which was

32
Case No. Birla/1111/Mumbai/Fatehabad/21/11 decided by Chandigarh Ombudsman Centre 23 January 2013.
33
Decided by Guwahati Ombudsman Centre on 13 March 2013.
34
Complaint No. 470/21/001/L/06/2012-13 decided by the Kolkata Insurance Ombudsman on 14 December
2012.
35
Complaint No. 446/21/002/L/06/2012-13 decided by the Kolkata Insurance Ombudsman on 3 January 2013.
36
Complaint No IO/KCH/LI/21-001-675/2011-12 decided by the Kochi Insurance Ombudsman on 8 January
2013.

Page 10 of 25
repudiated by the insurer on the ground of suppression of material facts pertaining to diabetes
mellitus and treatment of haemodialysis. The Ombudsman took note that the insured had
been suffering from dialysis for the past twenty seven years. The solitary statement of
treatment for haemodialysis in December 2008 did not amount suppression to material fact.

Case Study 12: Tinsu v. LIC of India37: The insured who had died in 2009 due to an
accident had taken two policies from the insurer. The complainant filed a claim with the
insurer but the insurer repudiated the claim on the ground that the insured had suppressed the
material fact of him taking treatment for diabetes and hypertension in the hospital. The
Ombudsman rejected the contentions of the insurer and held: “The term material shall mean
and include all important, essential and relevant information in the context of underwriting
the risk to be covered by the insurer.” Further, it was held that the insured had taken
treatment in July 2007, much prior to his death in 2009. Importantly, the Ombudsman held
that the cause of the accident was injuries due to the accident and the alleged non-disclosure
had no importance to the case. The Ombudsman held that if the non-disclosure did not relate
to material facts, the policy would not be vitiated.

Problems with the Extant Law

Perusal of the above case studies reveals the following problems with the existing law:

1. Repudiation for Extraneous Reasons: The Ombudsman has upheld the decision of
the insurer for extraneous reasons. For instance, in Case Study 1, the rejection had no
relation to suppression of any medical condition of the insured which existed prior to
obtaining insurance. Death of the first wife was not a fact which would have made the
insurer demand a higher premium or affect his judgement on whether to issue the
policy. Nevertheless, the Ombudsman chose to uphold the action of the insurer.
Similarly, in the Case Study 2, the Ombudsman upheld the decision of the insurer to
repudiate the claim on the ground that the insured had misrepresented facts relating to
the income and occupation. The question is whether the actual facts pertaining to
income or occupation had any bearing on the quantum of premium or the insurer’s
decision to insure the risk.

2. Repudiation on Non-Serious Grounds: At times, the Ombudsman has upheld the

insurer’s decision to repudiate the policy on grounds that were not connected to the
cause of death. For instance, in the second case study, there was no relation between
the fact concealed and the cause of death. This begs the question: whether
concealment of a non-serious medical condition that was wholly unconnected to the
cause of death was a sufficient ground to repudiate the policy. Case Study Nos. 6, 10,
11 and 12 are examples where the Ombudsman questioned repudiation of the policy
on non-serious grounds.

3. Reliance on Terms that Expand the Basis of Obligation: It can be observed from a
perusal of Case Study No. 3 that the ombudsman partially relied on a clause in the
Contract which expanded the disclosure obligation to “all facts” rather than mere
material facts. Such an approach was reproached even in 1975 by the Andhra Pradesh

37
Complaint No. IO/KCH/LI/21-001-690/2011-12 decided by the Kochi Insurance Ombudsman on 15 January
2013.

Page 11 of 25
 High Court in in the landmark case of Life Insurance Corporation of India v.
Shakuntala Bai38

4. Inconsistent Decisions by the Ombudsman: Case Study 2 is an illustration of

inconsistent decisions by the Ombudsman on similar facts. Although the material
facts purportedly suppressed did not relate to the cause of death, the Ombudsman
chose to hold in favour of the insurer. However, in Case Study 7, the Ombudsman
rejected the insurer’s contention regarding suppression of material facts on the ground
that the cause of death did not relate to the facts purportedly suppressed by the
Claimant.

5. The insured are in several cases not aware of the materiality of their own health. For
instance, diabetes in India has become so common that people no more consider it to
be a disease but merely a health condition39 and therefore fail to disclose such fact to
the insurer. Although diabetes per se may not be a sufficient reason for the insurer not
to enter into an insurance contract with such insured, it may very well have an impact
on the premium charged. Nevertheless, the insured do not disclose the same to the
insurer, especially at the time of renewal. Case Studies 3, 4, 6, 11 and 12 would
support such a conclusion. In fact, in All India General Insurance Co. Ltd. v. S.P.
Maheswari40, the Madras High Court acknowledged this fact: “Life Insurance is
peculiar in that the assured is often genuinely ignorant as to the fact most material in
assessing the premium, the state of his own health.”41

In addition to the above, several problems have been identified in the Law Commission’s
190th Report.42 These are summarised below:

6. The insurer makes an effort to find examine non-disclosure of material circumstances

only after a claim is lodged by the relatives of the insured. Settlement of claims occurs
only after such time as may be necessary for the insurer to check the veracity of the
insured’s disclosures. The entire premium paid by the insured stands forfeited for
misstatements.

7. The family members of the insured may not be aware of such misstatement and might
not have any means to prove the contrary. The insurer would be armed with the
resources to unearth records from various sources. This unequal battle often forces the
relatives of the deceased to pursue legal remedies such as courts/ ombudsman/
consumer forums for remedies and wait in an atmosphere of uncertainty. The insurer,
with its resources, fight all the way up to the highest court in order to contest such
claims.

8. The present law in Section 45 does not distinguish between misstatement/ suppression
not amounting to fraud (e.g., innocent suppression) and fraud. This means that even in

38
AIR 1975 AP 68: MANU/AP/0077/1975
39
Estimates indicate that at least 107 million people in India suffer either from pre-diabetes or diabetes. See,
Ismat Tahseen, Diabetes Epidemic on the Rise in India, Times of India (14 November 2013), available at
http://timesofindia.indiatimes.com/life-style/health-fitness/health/Diabetes-epidemic-on-the-rise-in-
India/articleshow/25758884.cms (accessed on 26 April 2014).
40
AIR 1960 Mad 484.
41
Para 30.
42
Para 5.1.21

Page 12 of 25
 case of non-fraudulent suppression/ misstatement, the insurer has the right to forfeit
all premiums so far paid under the policy. In such cases, the remedy of forfeiture is
unduly harsh against the insured’s relatives.43

9. In India, insurance is sold through an army of agents who do not inform to the insured
the latter’s duties and liabilities in the policy.44 In practice, the insured does not even
fill the policy in its entirety. This problem is further compounded in view of the
peculiar position of illiterate insured who can least “be expected to read the fine print
or be aware of the consequences either of filling up or not filling up a particular
column in the proposal form…”45

Thus, it can be inferred that the existing state of affairs is far from satisfactory as regards
protection of the insured from stringent legal provisions and their application. While the
amendments recommended by the Law Commission go a long way in reforming the law on
the subject, the same is not adequate.

The next part of the paper proposes the reforms that are to be undertaken in order to eliminate
the hardships and bring the law in the same lines as that of international law and practice.

IV. Reforms

Numerous countries have reformed their insurance law to make the duty of disclosure of
material circumstances in documents leading to the insurance contract to make the duty more
meaningful and insured-friendly. Examples of such jurisdictions include Australia, Canada,
France, USA and UK. This Part notes the developments in the UK market on the Pre-
Contractual Duty of Disclosure in life insurance. The law in UK is analysed for two reasons.
First, UK is one of the most developed insurance markets in the world. Two, Indian insurance
law takes its cue from the English Insurance law. Except for the IRDA Act, the insurance
legal framework has either been laid down during the British regime or is based on the
analogous provisions as it prevailed in England. In particular, the recent developments in the
UK pertaining to the said duty merits detailed attention considering that Indian insurance law
is virtually based on the principles in English law on insurance.

Recent Reforms in the UK

Till 2012, the law as regards pre-contractual duty of disclosure was virtually similar to the
law in India. The legal scenario in UK dramatically changed with the enactment of the UK
Consumer Insurance (Disclosure & Representations) Act, 2012 (hereinafter “2012 Act”). The
2012 Act bought a dramatic shift the manner in which the pre-contractual duty of disclosure
of material circumstances in consumer insurance contracts was viewed. The reforms that lead
to the 2012 Act began in 2006 when the English and the Scottish Law Commissions decided
43
Para 5.1.27
44
Also see, Life Insurance Corporation of India v. Shakuntala Bai AIR 1975 AP 68: MANU/AP/0077/1975,
Para 7, wherein the court took judicial notice of the fact that the agents approach prospective customers asking
them to sign the papers while assuring that they would take care of the rest of it.
45
Para 5.1.29. This is not the first time that the problem with regard to the literacy of the insured has been
discussed. In All India General Insurance Co. Ltd. and Anr. v. S.P. Maheswari AIR 1960 Mad 484, the Madras
High Court held that the insurer had an obligation to make the insured understand the contents of the
information. Such an obligation has also been recognised in East and West Life Insurance Co. Ltd. v. Venkiah
MANU/TN/0216/1944 : AIR 1944 Mad 559 and Kulla Ammal v. Oriental Govt. Security Life Assurance Co.
Ltd. MANU/TN/0305/1954 : AIR 1954 Mad 636 (Mack and K. Naidu JJ.).

Page 13 of 25
to review the law on pre-contractual disclosure of material circumstances pursuant to a
scoping paper issued in January 200646 on the areas that needed law reform. Based on the
responses received to the scoping paper, three issue papers were published on topics
associated with the pre-contractual disclosure obligations.47 These aspects were discussed in
several seminars and meetings and the Law Commissions came up with a Report in June
2007 where the reform proposals were clearly outlined. The 2007 Report identified the
following broad difficulties with the existing law in the UK:

1. Individuals and small businesses are not aware of the nature and scope of obligation
to disclose, especially the obligation to disclose information relevant to the insurer.48
2. The policy could be avoided even when the insured has acted honestly and reasonably
but has given inaccurate or partly accurate information.49
3. The remedy afforded to the insurer to avoid the policy when the insured was honest
but careless while answering the questions is overly harsh.50
4. An insurer can make a mere statement into a warranty by drafting the contract
suitably and if such fact, although not material, is found to be untrue, the insurer can
avoid the contract.51
5. These problems are further worsened when the insured discloses the correct
information to the intermediary such as broker but the intermediary fails to convey
such information to the insurer. Even in such cases, the existing state of affairs act
against the interests of the insured.

The 2007 Report went on to call the existing state of affairs of permitting the insurer to avoid
a policy for the consumer’s honest and reasonable failure to disclose material circumstances
and at the same time empowering the Financial Ombudsman Service to order the insurer to
pay the claim as “nonsense”.52 On the prevailing conditions, the 2007 Report observed:

“We think that the law should generally follow accepted practice, in the absence of an
agreement to the contrary. Not every term is thought about or negotiated in advance.
Currently the law imposes a default regime that undercuts, rather than supports, accepted
market practice. In so doing, it risks defeating the reasonable expectations of the insured.”53

The 2007 Report identified the following adverse effects of the existing regime on the UK
insurance market:

1. Insurance fails to meet the reasonable expectations of the customer since rejection of
insurance claim creates a deep sense of grievance.54

46
UK Law Commission & Scottish Law Commission, Insurance Contract Law: Misrepresentation, Non-
Disclosure and Breach of Warranty by the Insured: A Joint Consultation Paper (June 2007)(hereinafter “2007
Report”), Para 1.2.
47
The topics covered were misrepresentation and non-disclosure, warranties, and intermediaries and pre-
contractual information. Ibid, Para 1.4.
48
2007 Report, Para 1.12(1)
49
2007 Report, Para 1.12(2)
50
2007 Report, Para 1.12(3)
51
2007 Report, Para 1.14(1) and , Para 1.14(2)
52
Para 1.57
53
Para 1.49
54
Para 1.52

Page 14 of 25
 2. It is in the best interests of consumers to obtain insurance. The existing state of
affairs, however, creates a negative incentive deterring the consumer from obtaining
insurance.55
3. The relevant law in the European and commonwealth countries are more insurance-
friendly. This might drive away consumers from the UK market to more favourable
insurance markets.56

In view of the problems and the adverse effects of such problems on the UK insurance
market, the 2007 Report sought to reform the law by taking into consideration the salutary
objectives of disclosure of material circumstances of preventing adverse selection and
thereby protecting the insurance market from non-viability. At the same time, the 2007
Report clarified that the consumers should be obligated to take reasonable care to answer the
questions asked by the insurer clearly and accurately and in case of failure to do so, the
insurers should be suitably compensated. The Report also noted that the proposed reforms
would increase the premiums slightly considering that more claims would have to be paid by
the insurer. Even so, the Report claimed that the consumers would not mind a small increase
in premium for the additional cover these reforms would provide.57 On the quantum of
increase, the 2007 Report claimed that since the reforms were either requirements of the
Financial Services Authority or practice of the insurance ombudsman, the increase would be
negligible.58 The reforms, the 2007 Report, claimed would ensure that law would ensure
consumers’ reasonable expectations and good practice.

Based on further consultation and discussion, the UK and the Scottish Law Commissions
published a joint Report59 in 2009 and tabled it in the UK and Scottish Parliaments in
December 2009. Based on the recommendations in the 2009 Report, a Bill titled “UK
Consumer Insurance (Disclosure & Representations) Bill” was initiated which eventually
became UK Consumer Insurance (Disclosure & Representations) Act, 2012 after receiving
royal assent in March 2012. The said statute came into force on 6th April 2013.

Features of the UK Consumer Insurance (Disclosure & Representations) Act, 2012

Salient features of the UK Consumer Insurance (Disclosure & Representations) Act, 2012 are
summarised below:

1. The Act wholly replaces the doctrine of utmost good faith as applicable to the insurer
and the non-business insured.60 For the purposes of the 2012 Act, a non-business
insured is an individual who enters into the insurance contract wholly or mainly for
purposes unrelated to such individual’s trade, business or profession.61
2. The replaced duty is “the duty to take reasonable care not to make a
misrepresentation to the insurer.”62

55
Ibid
56
Para 1.54
57
Para 1.69
58
Para 1.72
59
UK Law Commission & Scottish Law Commission, Consumer Insurance Law: Pre-Contract Disclosure and
Misrepresentation (December 2009), available at
http://lawcommission.justice.gov.uk/docs/lc319_Consumer_Insurance_Law.pdf (hereinafter “2009 Report”)
60
Section 2(5)
61
Section 1
62
Section 2(2)

Page 15 of 25
 3. The purport of the said duty is that the insured must take reasonable care to answer
insurer’s questions fully and accurately and in case the insured volunteers
information, reasonable care must be taken to ensure that the information is not
misleading.63
4. The question as to whether reasonable care has been taken or not has to be determined
after taking into account all the relevant circumstances 64, including the type of
insurance contract, relevant explanatory material or publicity produced/ authorized by
the insurer, clarity and specificity of the insurer’s questions, whether the agent was
acting for the consumer.65
5. Another relevant circumstance in case of a failure to respond to the insurer’s
questions with respect to renewal/ variation of an insurance contract is the
communication by the insurer to the insured of the importance of answering the said
questions or the possible consequences of failing to answer those questions.66
6. Misrepresentation made dishonestly amounts to lack of reasonable care.67
7. However, if the insurer was, or ought to have been aware of particular characteristics
or circumstances of the actual consumer, such characteristics have to be taken into
account.68
8. A qualifying misrepresentation is a misrepresentation by the insured before the
insurance contract is entered into or varied for which insurer has a remedy against the
consumer.
9. The insurer has a remedy only when the following are established:
a. where the consumer breached the duty to take reasonable care as stated above,
and
b. the insurer shows that without the misrepresentation, the insurer would not
have entered into or varied the contract or would have done so on different
terms.
10. Unless contrary is shown, there is a presumption that:
a. the consumer is a reasonable consumer, and
b. the consumer knew the matter about which insurer asked a clear and specific
question which was relevant to the insurer.
11. A qualifying representation is deliberate or reckless if the insured knew that such
misrepresentation was misleading or did not care whether or not it was untrue or
misleading.
12. A qualifying representation is careless if it is not deliberate or reckless.
13. The onus lies on the insurer to show that the qualifying representation was deliberate
or reckless.
14. Remedies69:

Qualifying Misrepresentation Remedy

Deliberate or reckless Avoid the contract and refuse all claims.
Need not return premiums paid unless it is
unfair to the consumer.
63
UK Law Commission & Scottish Law Commission, Consumer Insurance Law: Pre-Contract Disclosure and
Misrepresentation (December 2009), Para 4.7, available at
http://www.lawcom.gov.uk/insurance_contract.htm (accessed on 22 March 2014).
64
Section 3(1)
65
Section 3(2)(a) to (c)
66
Section 3(2)(d)
67
Section 3(5)
68
Section 3(4)
69
Schedule I to the Act.

Page 16 of 25
 Careless- insurer would not have
entered into contract but for it
Careless- insurer would have entered
into contract on different terms
Careless- insurer would have
charged higher premium
Avoid the contract and refuse all claims but
return the premiums paid
Contract is to be treated as having been
entered into on different terms
Amount paid on a claim may be reduced
proportionately (X%):

X% = (premium actually charged ÷ higher

premium) * 100

15. In case of careless misrepresentations, the insurer may give a notice of the careless
misrepresentations and the remedy available or terminate the contract by giving
reasonable notice to the consumer.
16. However, the insurer does not have the right to terminate a life insurance contract for
careless misrepresentation.
17. Premiums paid for careless misrepresentation for the balance contract period after
termination of contract by either party pursuant to the reasonable notice specified
above should be returned.
18. Termination, however, does not affect the treatment of a claim that arose during the
contract period prior to termination.
19. These provisions cannot be contracted out to the disadvantage of the consumer.70

Reforms in India on the Pre-Contractual Duty of Disclosure in Life Insurance

112th Report of the Law Commission: It is not that life insurance in India has been devoid
of any reforms. In June 1985, the Law Commission of India submitted its 112th Report on
Section 45 of the Insurance Act, 1938.71 In the report, it was recognised that the existing
Section 45 was inserted in order to prevent the insurers from repudiating insurance policies
on frivolous grounds merely by inserting the “basis” clause in the policy. 72 The said clause
made materiality of a fact immaterial and allowed the insurer to repudiate a policy even on
the ground of failure to disclose any fact and not merely material facts relevant to the
policy.73 The Law Commission was of the view that while repudiating a claim on the
satisfaction of the three conditions mentioned in Section 45, the insurer has to act fairly. After
analysing the provision and its working, the Law Commission made the following
recommendations:

1. A life insurance policy cannot be questioned after three years from the date of the
policy or from the date of its revival.
2. Such a policy could be questioned within the said three years only if the insured had
incorrectly made a statement material to the expectancy of the life of the insured in
the a document which formed the basis of which such policy was issued.

Despite the recommendations, the law was not amended. Subsequently, in June 2003, a
Consultation Paper on Revision of the Insurance Act 1938 & the Insurance Regulatory &
Development Act 1999 was floated by the Law Commission discussing reforms on insurance

70
Section 10.
71
Law Commission of India, 112th Report on Section 45 of the Insurance Act, 1938 (June 1985), available at
http://lawcommissionofindia.nic.in/101-169/Report112.pdf (accessed on 30 May 2014).
72
Ibid, Para 2.1
73
Life Insurance Corporation of India v. Shakuntala Bai AIR 1975 AP 68: MANU/AP/0077/1975, Para 7.

Page 17 of 25
law.74 In the said Consultation Paper, it was suggested that the reforms of the 112th Law
Commission discussed above should be implemented. Based on the Consultation Paper and
consequent discussions with stakeholders, the Law Commission of India submitted its 190th
Report on the Revision of the Insurance Act, 1938 and the Insurance Regulatory and
Development Authority Act, 1999. The Law Commission sought to substantially revise the
law on pre-contractual disclosure of material facts in life insurance. Based on the
recommendations of the Law Commission, a Bill titled Insurance Laws (Amendment) Bill,
2008 was introduced in the Parliament in 2008. The Bill was referred to the Standing
Committee on Finance. The Bill sought to recast Section 45. Following are the salient
features of the recommendations of the Law Commission and the Bill:

1. No life insurance policy could be questioned on any ground after five years from the
date of the policy. It is pertinent to note that although the 112th Report recommended
that the said period should be three years, the Law Commission eventually zeroed in
on five years in view of the suggestions by the Life Insurance Corporation
(hereinafter “LIC”) that the three year period was very short.75 The Law Commission
decided to follow those recommendations since LIC was the largest player in the life
insurance business.76
2. Within the said period of five years, a life insurance policy could be questioned on
two broad grounds:
a. fraud, and
b. statement of or suppression of fact material to the expectancy of the life of the
insured.
3. The ground of fraud and materials relied on in support thereof should be
communicated in writing to the insured or the legal representatives/ nominees/
assignees of the insured.
4. The following acts done with the intent to deceive the insurer or induce the insurer to
issue a life insurance policy amount to fraud for the purposes of Section 45 even if it
is committed by the insured’s agent:
a. Suggestion of an untrue fact which is not true or which the insurer does not
believe to be true.
b. Active concealment of a fact by the insured with knowledge or belief of the
fact.
c. Any act fitted to deceive the insurer
d. Any act or omission as the law declares as fraudulent.
5. Mere silence of the facts likely to affect insurer’s risk assessment is not fraud unless it
was the duty of the insured or his agent to disclose such facts.
6. An insurer cannot repudiate a life insurance policy if the insured proved that
misstatement/ suppression of a material was true to the best of his knowledge or belief
or that there was not deliberate intent to suppress such fact or that such misstatement/
suppression was within the insurer’s knowledge.
7. Within the period of five years, a life insurance policy could be questioned on
satisfaction of the following conditions:
a. Incorrect statement or suppression of fact material to the life expectancy of the
insured

74
Law Commission of India, Consultation Paper on Revision of the Insurance Act 1938 & the Insurance
Regulatory & Development Act 1999 (June 2003), available at http://lawcommissionofindia.nic.in/archives.htm
(accessed on 17 April 2014).
75
Para 5.1.13
76
Para 5.1.22

Page 18 of 25
 b. Communication of the said ground and materials relied on to repudiate the
policy to the insured/legal representatives/ nominees/ assignees of the insured.
c. In case of repudiation of the policy on grounds of misstatement or suppression
of material facts, premiums collected till date of repudiation shall be paid
within ninety days from such repudiation.
The Law Commission chose to make distinction between the grounds of fraud and
misstatement/ suppression only as regards the remedies. The Commission was of the
view that fraud vitiated all acts and the insurer could, on proof of fraud, deny the
insured all the benefits under the insurance contract, including forfeiture of premiums
paid.77
8. A misstatement or suppression of a fact is material when it has a direct bearing on the
risk undertaken by the insurer. The onus is on the insurer to show that had the insurer
been aware of the said fact, no life insurance policy would have been issued.
9. No policy shall be called into question merely because the terms of the policy are
adjusted on subsequent proof that the age of the life insured was not correctly stated
in the proposal.

Inadequacies of the Existing Reforms and Recommendations for Further Reforms

It may be noted that at the time of publication of the 190th Report, neither the UK Law
Commission’s Report was published nor did the UK Consumer Insurance (Disclosure &
Representations) Act, 2012 come into force. Hence, the Law Commission could not have
taken into account those developments. It is submitted that the developments in UK go
several steps ahead than the Law Commission’s proposals in addressing the existing
deficiencies in the law. Although, the measures suggested by the Law Commission alleviate
several problems identified in the previous Part of this paper, the suggested reforms fail to
address certain critical aspects. Following are the reasons:

1. One of the fundamental differences between the approaches of the Indian and the UK-
Scottish Law Commissions has been that the latter has chosen to abolish the doctrine
altogether and replace it with a duty to take reasonable care. 78 The UK-Scottish
approach abrogates the duty to voluntarily disclose material information and instead
places a duty of the insured to take reasonable care in not making a misrepresentation
to the insurer.79 A significant reason why the UK-Scottish Commission chose to do so
was that often the consumers did not clearly know what material circumstances
were.80 Originally, the duty of disclosure seems to have arisen in business contracts
and the evolution of law in extending the same to consumer insurance contracts such
as life insurance contracts was stretching the doctrine unreasonably. 81 The question
arises as to whether India should retain this age-old doctrine and replace the same
with the duty to take reasonable care. India chose to retain so. Given the fact that the
IRDA (Standard Proposal Form for Life Insurance) Regulations, 2013 provides for a
Standard Insurance Proposal Form containing specific questions, there would be no
77
It may be noted that the Law Commission also acknowledged that the remedy of forfeiture appeared harsh in
certain circumstances. See, Para 5.1.27 of the 190th Report.
78
2007 Report, Para 4.2;
79
Section 2(2) of the 2012 Act.
80
2007 Report, Para 4.103 and 4.106
81
Peter J Tyldesley, Consumer Insurance and the Duty of Disclosure, Journal of the British Insurance Law
Association, No. 123, 38, 43 (November 2011), available at
http://www.peterjtyldesley.com/files/2011_Consumer_insurance_and_the_duty_of_disclosure.pdf (accessed on
19 May 2014).

Page 19 of 25
 need for the consumer to volunteer information. Such a scenario would be favourable
for eliminating the doctrine altogether as did several jurisdictions such as UK, France,
Norway and New York did.82

2. Insured at times mechanically renew their policies even if they are diagnosed with
certain diseases such as diabetes, hypertension, etc. without disclosing the same to the
insurers. Consequently, it should be the duty of the insurer to clearly make it known
to the insured to disclose such material circumstances at the time of renewal. This
obligation becomes more relevant in the present times where the periodic premium is
paid online. Similar to the IRDA Regulations for Standard Proposal Form, standard
forms may be provided for renewal of life insurance policies as well, seeking specific
questions pertaining to common medical conditions like diabetes, hypertension.

3. The life insured should not be asked general questions such as an omnibus query
seeking information generally. The questions addressed by the insurer must be
specific.83

4. Variation of policy: Unlike the English approach, the Law Commission does not
distinguish between deliberate/ reckless misrepresentation and careless
misrepresentation. The English law further differentiates various degrees of
misrepresentation and provides for different remedies in respect of each class of
careless misrepresentation. Below is a table describing the remedies for the various
kinds of misrepresentation in the UK:

Qualifying Misrepresentation Remedy

Deliberate or reckless Avoid the contract and refuse all claims.
Need not return premiums paid unless it is
unfair to the consumer.
Careless- insurer would not have Avoid the contract and refuse all claims but
entered into contract but for it return the premiums paid
Careless- insurer would have entered Contract is to be treated as having been
into contract on different terms entered into on different terms
Careless- insurer would have Amount paid on a claim may be reduced
charged higher premium proportionately (X%):
X% = (premium actually charged ÷ higher
premium) * 100

The Law Commission of India has also recommended different approaches but only in
respect of fraud on the one hand and non-fraudulent suppression or misstatement of material
fact on the other. Remedies for different degrees of misstatement/ suppression recommended
by the Law Commission of India is dealt with below:

Wrong Remedy
Fraud Avoid the contract and need not return
premiums paid.
Non-fraudulent misstatement or Return of premiums collected on the policy
suppression of material fact till date within 90 days.

82
See, 2007 Report, Para 4.18.
83
IRDA (Standard Proposal Form for Life Insurance) Regulations, 2013.

Page 20 of 25
It would be seen from a comparison of the above approaches that the English approach is
more nuanced and is in accord with the ubiquitous principle of proportionality. 84 It is not that
the Law Commission of India wholly ignored reworking of premiums or the terms of
insurance. The Law Commission, in fact, took note of the policy in USA where the terms of
insurance could be reworked on discovery of failure by insured to disclose material facts.85
However, the Commission held the view that such measures could be undertaken by the
insurer voluntarily to make his business competitive and left it for the market to determine
whether to provide for such remedies. It is submitted that the Law Commission seriously
erred by not recognizing that the remedy of reworking of terms/ premiums were remedies of
fairness, proportionality and justice to the relatives of the insured, which principles the Law
Commission clearly acknowledged. A typical example is the failure to disclose diagnosis of
diabetes mellitus. Complete repudiation appears to be overly harsh. Such cases are apt cases
for honouring the insurance policy after reworking the terms of insurance or the premium.

5. The 2012 Act retained the limited right of the insurer to forfeit the premiums paid in
case of deliberate or reckless misrepresentation. The reasoning was that such a
provision would be a negative incentive on the prospective insured not to fraudulently
misstate or suppress information.86 Nevertheless, the said Act also provided that even
in such case if forfeiture is unfair to the consumer, the paid premiums should be
returned.87 The UK-Scottish Law Commissions justified this rule on the ground that
in cases of joint insurance policies when one of the insured made a reckless
misrepresentation, forfeiture in such cases of paid premiums would be overly harsh on
the other insured.88 Another rationale that led the said Commissions to support the
rule is that as per the existing practice, the insurers generally returned the paid
premiums even in cases of reckless/ deliberate misrepresentation.89 Similarly, Section
45 should also contain a provision to the effect that in case of fraud premiums paid
shall not be forfeited if such forfeiture would be unfair to the consumer. In such cases,
the court or the ombudsman would be entitled to exercise their discretion on whether
the action of the insurer in forfeiting the premiums was unfair or not.
6. It is prudent to incorporate a provision similar to the 2012 Act that Section 45 cannot
be contracted out. It may be noted that although the proposed Section 45 (as
recommended by the Law Commission) is worded in a manner indicative of the
mandatory nature of the provision, it is better to clearly state its mandatory rather than
its default nature.90 Such a provision should not, however, proscribe a contractual
provision more favourable than as enacted under Section 45.

V. Conclusion
84
The principle of proportionality provides that punishment imposed on a person must be proportionate to the
severity of the wrong committed. Similarly, remedy provided to a person must be in proportion to the loss
suffered.
85
190th Report, Para 5.1.31.
86
2009 Report, , Para 6.42.
87
Section 3(4)
88
2009 Report, Para 6.40-6.45 & Para 6.48-6.53.
89
2009 Report, Para 6.40.
90
Legal theorists distinguish between mandatory and default legal rules. In case of the former, such a rule
cannot be contracted out by the parties; in the latter’s case, parties could contract out such a provision. A typical
default rule would generally begin with the phrase “unless agreed otherwise…” Ian Ayres and Robert Gertner
brought this important insight of the dichotomy of default rules and mandatory rules. For a detailed discussion,
see, Ian Ayres and Robert Gertner, Filling Gaps in Incomplete Contracts: An Economic Theory of Default
Rules, 99 Yale L.J. 87 (1989)

Page 21 of 25
Thus, the above paper began with an analysis of the existing law on the pre-contractual
obligation of the life insured to disclose material facts, that is, those facts having an impact on
the premium that would be charged by the insurer or on the fact as to whether to extend
coverage to the insured at all. Later, the problems associated with the working of the existing
law on the subject were analysed. Following this, the recent reforms in UK were analysed in
detail. The proposals by the Law Commission of India in reforming the existing law were
discussed. It is the argument of this paper that while the proposed reforms of the Law
Commission would go a long way in improving the current situation, the disproportionate
remedies provided by the law has not been addressed and this, it is argued, would lead to
injustice. Consequently, it is suggested that in addition to the reforms suggested by the Law
Commission, the law should also be amended to provide for the following:

 The pre-contractual duty of disclosure of material circumstances may be replaced

with the duty to take reasonable care in answering the queries posed by the life
insurer.
 At the time of renewal of the policy, it should be the duty of the insurer to clearly
make it known to the insured to pose questions relating to common medical
conditions such as diabetes mellitus, hypertension, etc.
 The insurer should be prohibited from asking omnibus queries seeking information
generally and the questions should be specific.
 The remedies must be proportionate to the breach of the life insurance contract.
Accordingly, the approach adopted by the UK-Scottish Law Commissions of different
remedies, viz., avoidance of contract and refusal of all claims including paid
premiums, avoidance of all claims but return of paid premiums, and proportionate
reduction of claim amount may be adopted for various degrees of misrepresentation.
 In case of fraud, the paid premiums should be returned by the insurer if such forfeiture
is unfair to the consumer.
 An express provision in Section 45 stating that the remedies provided in Section 45
shall not be contracted out should be incorporated. Such a provision shall not bar a
contract more beneficial than Section 45.

Another important idea derived from the recent reforms in the UK pertains to the introduction
of the concept of consumer insurance. Section 1 of the Consumer Insurance (Disclosure &
Representations) Act, 2012 defines consumer insurance to mean insurance issued to an
individual who enters into the contract wholly or mainly for purposes unrelated to the
individual’s trade, business or profession. Such insurance would include home, life, health,
pension annuity, travel, or other insurance policies taken for personal, family or household
purposes.91 The UK Act does not restrict itself to life insurance as all consumer insurance is
more or less beset with the problems identified in Part III. In the Indian context, however,
Section 45 as well as the reforms proposed in the 190th Law Commission Report pertain to
life insurance alone and do not address other forms consumer insurance. The law makers
should look at reforming the law from the consumer insurance point of view and not merely
restrict reforms to life insurance.

91
Association of British Insurers, What the Consumer Insurance Act Means for Customers (17 June 2013),
available at https://www.abi.org.uk/Insurance-and-savings/Tools-and-resources/How-to-buy-insurance/What-
the-Consumer-Insurance-Act-means-for-customers (accessed on 29 May 2014).

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Lastly, recent developments in UK suggest that the law of utmost good faith would be
reformed even in the case of business insurance, that is, insurance for purposes relating to
trade, business or profession. A Joint Consultation92 published by the UK-Scottish Law
Commissions has found that even the business insured are not clear about the precise scope
of the information required to be disclosed to the insurer despite the availability of resources
at their disposal. Further, the said Consultation has stated that the insurers are over-protected
in their remedies as even non-disclosure of a minor issue by the insured may be sufficient for
the insurer to deny all benefits under the policy to the insured. 93 The Consultation has also
cited a survey conducted by the Mactavish Group in which it was found that about 87% if the
business insurance policy buyers were unaware of the nature of the said duty of disclosure.94
The Consultation concludes that reforms in business insurance should aim at clarifying the
manner in which policyholders should present a risk and the nature of information to be
provided, encouraging insurers to assist policyholders in understanding information to be
disclose and providing fair and proportionate remedies.95 Thus, the law makers ought to take
steps to reform the doctrine as regards business insurance as well.

It is high time that Indian insurance law takes a positive step to towards reforming insurance
law, both consumer and business, to ensure a fair and efficient insurance market.

References

Statutory Instruments

1. IRDA (Protection of Policyholders’ Interest), 2002

2. IRDA (Standard Proposal Form for Life Insurance) Regulations, 2013.
3. Marine Insurance Bill, 1959
4. Marine Insurance Act, 1963
5. Insurance Act, 1938
6. (English) Marine Insurance Act , 1906
7. (Ontario) Insurance Act
8. Consumer Protection Act, 1986
9. Redressal of Public Grievances Rules ,1998
10. Arbitration and Conciliation Act, 1996,
11. Code of Civil Procedure, 1908
12. (UK) Consumer Insurance (Disclosure and Representations) Bill
13. (UK) Consumer Insurance (Disclosure and Representations) Act, 2012

Reports

1. Law Commission of India, 21st Report on Marine Insurance (September 1961)

2. Law Commission of India, 112th Report on Section 45 of the Insurance Act, 1938
(June 1985)

92
UK Law Commission & Scottish Law Commission, Insurance Contract Law: The Business Insured’s Duty of
Disclosure and the Law of Warranties: A Joint Consultation Paper (June 2012), available at
http://lawcommission.justice.gov.uk/docs/cp204_ICL_business-disclosure.pdf (accessed on 29 May 2014).
93
Ibid, Para 4.53
94
Ibid, Para 4.29- 4.48.
95
Ibid, Para 4.73.

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 3. Law Commission of India, 190th Report on the Revision of the Insurance Act, 1938
and the Insurance Regulatory and Development Authority Act, 1999 (2004)
4. UK Law Commission & Scottish Law Commission, Insurance Contract Law:
Misrepresentation, Non-Disclosure and Breach of Warranty by the Insured: A Joint
Consultation Paper (June 2007)
5. UK Law Commission & Scottish Law Commission, Consumer Insurance Law: Pre-
Contract Disclosure and Misrepresentation (December 2009)
6. UK Law Commission & Scottish Law Commission, Insurance Contract Law: The
Business Insured’s Duty of Disclosure and the Law of Warranties: A Joint
Consultation Paper (June 2012)

Cases

1. All India General Insurance Co. Ltd. v. S.P. Maheswari AIR 1960 Mad 484
2. Carter v Boehm (1766) 3 Burr 1905
3. East and West Life Insurance Co. Ltd. v. Venkiah AIR 1944 Mad 559
4. Imperial Pressing Co. v. British Crown Assurance (1914) ILR 41 Cal 581
5. Kulla Ammal v. Oriental Govt. Security Life Assurance Co. Ltd. AIR 1954 Mad 636
6. Life Insurance Corporation of India v. Asha Goel AIR 2001 SC 549
7. Life Insurance Corporation v. Shankuntala Bai AIR 1975 AP
8. Mithoolal Nayak v. Life Insurance Corporation of India AIR 1962 SC 814
9. P.C. Chacko v. Life Insurance Corporation of India AIR 2008 SC 424

Ombudsman Decisions

1. Amina Katun Laskar v. Bajaj Allianz Life Insurance Co. Ltd. (13 March 2013)
2. Anita Devi v. HDFC Life Insurance Co. Ltd. Case No.
HDFC/594/Mumbai/Rohtak/22/11 (7 November 2012)
3. Anjana Mondal v. SBI Life Insurance Co. Ltd Complaint No. 446/21/002/L/06/2012-
13 (3 January 2013)
4. Anjanaben R. Mehta v. Life Insurance Corporation of India Ltd. Case No.21-001-
0001-13 (10 December 2012)
5. Pradeep Kumar Padhy v. Bajaj Allianz Life Ins. Co Ltd. Complaint No. 21-009-1458
(8 November 2012)
6. Prafulla Kumar Sahoo v. Bajaj Life Ins. Co. Ltd. Angul Complaint No. 21-009-1497
(21 December 2012)
7. Ram Saran v. Birla Sun Life Insurance Company Case No.
Birla/1111/Mumbai/Fatehabad/21/11 (23 January 2013)
8. Safeela Beevi v. LIC of India Complaint No IO/KCH/LI/21-001-675/2011-12 (8
January 2013)
9. Santa Mandal v. Life Insurance Corporation of India Complaint No.
470/21/001/L/06/2012-13 (14 December 2012)
10. Suman Sharma v. HDFC Standard Life Ins. Co. Ltd. Case No.
HDFC/760/Mumbai/Chandigarh/21/10 (18 October 2012)
11. Tarulata Naik Vs S.B.I Life Ins. Co. Ltd. Complaint No. 21-002-1556 (7 March 2013)
12. Tinsu v. LIC of India Complaint No. IO/KCH/LI/21-001-690/2011-12 (15 January
2013)

Books, Articles and News Paper Reports

Page 24 of 25
1. Association of British Insurers, What the Consumer Insurance Act Means for
Customers (17 June 2013)
2. Ian Ayres and Robert Gertner, Filling Gaps in Incomplete Contracts: An Economic
Theory of Default Rules, 99 Yale L.J. 87 (1989)
3. Ismat Tahseen, Diabetes Epidemic on the Rise in India, Times of India (14 November
2013)
4. Malcolm Alistair Clarke, Policies and Perceptions of Insurance: An Introduction to
Insurance Law Oxford (2003)
5. Peter J Tyldesley, Consumer Insurance and the Duty of Disclosure, Journal of the
British Insurance Law Association, No. 123, p. 38 (November 2011)
6. RA Hasson, The Doctrine of Uberrima Fides In Insurance Law-A Critical Evaluation,
32 Modern L. Rev. 615 (1969)

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