Relevance of Uberrimae Fidei in Life Insurance in the present day
Uberrimae
Fidei refers to a Latin phrase meaning “utmost good faith” and is the
cornerstone of insurance contracts. The doctrine of uberrimae fidei is applicable equally on the insurer as well as the
insured and requires the declaration of all facts material to the insurance
contract by all the parties to the contract.
Uberrimae Fidei in Life Insurance contracts in India:
Section 45 of the Insurance Act, 1938 pertaining to
life insurance policies stated that life insurance policies could not be called
into question by the insurer after a period of two years from the commencement
of the policy unless the insured at the time of making such misrepresentation
did so fraudulently suppressing information which he knew to be vital to the
insurance contract. This clause allowed the insurer to conduct an investigation
even after the expiry of two years and repudiate the claim if the material
suppression was found to be deliberate.
However, with the passing of The Insurance Laws
(Amendment) Act, 2015, the Section 45 has been amended to the extent that a
policy can be called into question by an insurer only for a period of 3 years
after the issuance of the policy on any ground including that of fraud. This
amendment has put a noose around the necks of life insurance companies with the
effect that all future contracts entered into will be required to be
investigated at the time of issuance of the policy and not at the time of
processing of the claim as has been the established practice in the field of
life insurance.
The amendment in Section 45 also raises a question
on the relevance of the doctrine of Uberrimae
Fidei in modern insurance contracts as the focus for policyholders will
shift to suppression of material facts for a period of 3 years rather than
disclosure at the proposal stage itself to avoid payment of higher premiums and
for ease of issuance of policies.
Judgments
in the post Insurance Laws (Amendment) Act, 2015 world:
There has been a spate of judgments favouring the
Insured post the 2015 amendment in Section 45 side-lining the age old Uberrimae Fidei doctrine. Some of the
landmark judgments are discussed below:
Sulbha
Prakash Matalgaoker Vs. Life Insurance Corporation of India (Civil Appeal No.
8245 of 2015)
The insured in the instant case had suppressed the
fact that he was suffering from lumbar spondylitis with PID with sciatica at
the time of filling the Proposal Form. The insured subsequently passed away due
to ischaemic heart disease and myocardial infection. Since there was
suppression of pre-existing disease, the insurer repudiated the death claim.
The Hon’ble Supreme Court however, held that that
since the undisclosed disease had nothing to do with the cause of death, the
alleged concealment was not of a nature which would disentitle the deceased
from getting his life insured and hence, the repudiation of the claim was
unjustified.
Life
Insurance Corporation of India Vs. Jyotsana Rawal
The Hon’ble National Commission has reiterated the
principles laid down in Sulbha Prasad
Matalgaonker discussed above. The insurer had alleged that the insured was
suffering from tuberculosis prior to filling up of Proposal Form. The insured
had died due to heart attack, and it was held that since there is no
co-relation between tuberculosis and heart attack, the order passed by both the
District Consumer Disputes Redressal Forum and State Consumer Disputes
Redressal Commission was upheld and the Revision Petition filed by Life
Insurance Corporation of India was dismissed.
Neelam
Chopra Vs. Life Insurance Corporation of India (Revision Petition No. 4461 of
2012)
The Revision Petition was filed challenging the
order passed by the State Consumer Disputes Redressal Commission allowing the
appeal filed by Life Insurance Corporation of India. The insurer had repudiated
the death claim on the ground that the insured had concealed the fact that he
was suffering from diabetes and for the last five years and also suffering from
LL Hansen disease at the time of filling the Proposal Form.
The Hon’ble National Commission, in the instant
case has observed from the judgment passed by the Hon’ble High Court of Delhi
in Hari Om Aggarwal Vs. Oriental
Insurance Co. Ltd. WP(C) No. 656 of 2007 that insurance claim cannot be
denied on the ground of common lifestyle diseases such as hypertension,
diabetes mellitus etc. However, the Hon’ble National Commission has furthered
the observation of the High Court of Delhi by stating that the insured cannot
suppress common lifestyle ailments as a matter of right and the claimants may
suffer the consequences of such suppression in terms of the reduced claims.
This raises several questions such as the
proportion by which the death claim should be reduced and who will decide in
what circumstances the death claim is liable to be reduced. A sweeping
observation such as the above without any statutory legislation or established
legal principles may result in a plethora of unscrupulous litigants knocking
the doors of various courts seeking relief for their fraudulent claims.
The Hon’ble National Commission goes on further to
discuss Sulbha Matagaonkar and has
held, “it is clear that suppression of
any information relating to pre-existing disease, if it has not resulted in
death or has no direct relationship to the cause of death, would not completely
disentitle the claimant for the claim”. It was further held that
suppression of a disease having no relationship to the cause of death such as
in the instant case when the insured died due to “Cardio Respiratory Arrest”,
it cannot be treated as material information and cannot be a ground for total
denial of the claim.
The above-discussed judgments seem to be creating a
new grey area in insurance contracts which were earlier completely black and
white. Uberrimae Fidei required the
insured to disclose all information asked for by the insured in a true and
correct manner irrespective of the same seeming to be material or not at that
time. The fact of whether the information was material or not was left at the
discretion of the insurer in order to enable the insurer to decide whether and
on what terms to issue the policy in question or not. The present trend of
selective disclosure may discourage complete honesty from the potential insured
leading to greater number of false claims and distrust in the mind of the insurer.
Conclusion:
The contract of insurance has since its inception been governed by the principle of uberrimae fidei. The concept of slight or discretionary good faith seems to be an upcoming trend in the Indian insurance industry. This raises a question mark on the future of the Indian insurance industry. There is a strong probability that the number of fraudulent policyholders would increase, selectively suppressing material facts, which is already a plague being faced by the insurers. Such a practice would cause inconvenience and suffering to the most genuine of potential policy customers. The insurers will now be required to be more stringent at the underwriting stage itself and the cost of issuance of policies would increase as well leading to higher premiums. This would lead to less affordability which ultimately might even causing a downfall of the insurance industry, simply by creation of an algorithm for supressing just the right amount of material information for exactly the right amount to time in order to defraud the insurers.
Contributed by –Chandni Arora
Designation –Senior Associate
King Stubb & Kasiva,
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