the critical inquest of materiality under incontestability provision in life insurance law

8/3/2019 The Critical Inquest of Materiality under Incontestability Provision in Life Insurance Law

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Page | 1The Critical Inquest of Materiality under Incontestability Provision in Life

Insurance Law

IntroductionResearch ProposalIncontestability Law in India: The Common Law Origin & Deviation

Principles of Common Law on InsuranceConflict of Warranty & Condition

Representation- An Interpretative SolutionLegislative Amendment in India- The Common Law Deviation

Materiality under Incontestability Law: The Evolution of TestSubjective & Objective Knowledge- The Judicial CrossroadThe Origin of the TestIn Search of Prudent InsurerThe Materiality Matters

The Amendment Bill 2008: A ReformerConclusion

Introduction

One of the most recent investigations on the Insurance Act, 19381 conducted byKPN Committee Report in 20052 had commented on incontestability provisionunder Section 45 of 1938 Act as well settled and any amendment of the present Act provisions unnecessary for an equitable and adequate protection of the interest ofpolicyholders or of other beneficiary claimants.3Having said so, they had noted andmootedtheir reservation to the earlier recommendations proposed by the LawCommission of India in its 190th Report4 on the issue of substituting the two yearsframework tofive years5 under Section 45 of Insurance Act, 1938.

Vivek Dubey, Manager-Legal & Compliance Dept. Kotak Mahindra Old Mutual Life Insurance Company Ltd. All views expressed in this Article

are of authors personal view and does not respresent any company or industry in any manner whatsoever. The auhor can be contacted on

[email protected]

1 The Insurance Act, 1938 (Act IV of 1938). Received Governor Generals assent on 26th February, 1938. See Notification No. 589-I(4)/38, dated 1st

April, 1939 in the Gazette of India, 1939, Part I page 631. (Hereinafter referred as 1938 Act )

2 Report of KPN Committee on Provisions of Insurance Act, 1938. Dated: July, 2005.

3 Id para 7.45.

4 190th Report: The Revision of Insurance Act, 1938 & the IRDA Act, 1999, Law Commission of India, June 2004.

5 Id para 5.1.40.


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However, KPNs rejection of any required change in existing law seems more

due to their limited observation on the specified subject, which was contrary tothe Law Commissions6 observation that 65% of Policyholders had commoncomplaint regarding the claims. It would be worth mentioning here that the LawCommission in 1985 had felt the need to review Section 45 of Insurance Act, 1938arose out of certain difficulties in the existing incontestability provision.7

The multifaceted issues of incontestability have constantly come before theconstitutional courts in India to address a fair and correct interpretation thereinbut they their efforts have gone in vain relatively due to wrong approach.

The major conflict in respect to the incontestability provision under 1938 Act issurrounded over the interpretation of materiality and to provide a principlebased test for it. Ever since 1941 Amendment Act, there was feeling and a subtleattempt to revise Section 45, but it seems the industry was quite apprehensiveabout the changes.8

However, the United Kingdoms Law Commission had issued its ConsultationPaper9 jointly with Scottish Law Commission on wide range of issues pertainingto the incontestability under English Law in the line of Australian experience ofinsurance law reform.

Robert Merkin observed in his article10 the need to reform in English law onsimilar lines of Australian reform and he remarked:

The decision to reform the law in Australia in 1984 was greeted with a chorus ofdisapproval from the industry, which feared for its future. Twenty plus years on, thesystem appears to have bedded down with relatively little difficulty, and there hasundoubtedly been a change not just in the law but in the entire culture which surroundsthe insurance industry. Doubtless any attempt to change the law in the UK will be metwith protests from some quarters: the Australian experience shows that the market adaptsvery easily to new laws as long as they strike a fair balance between the interests of the

parties. Many jurisdictions have revised their insurance laws, and the London marketmay find itself becoming less sought after if there are rival centres with a more benignlegal environment.

6 Id para 5.1.19.

7 112th Report on Section 45 of Insurance Act, 1938, Law Commission of India, June, 1985.

8ReferSupra Note 4 page 43 to 65(Chapter V).9 Consultation Paper 182 on Insurance Contract Law: Misrepresentation, Non-Disclosure and Breach of Warranty by the Insured A joint Consultation

Paper by the Law Commission, UK and The Scottish Law Commission 2007.

10 Markin, Robert Reforming Insurance Law: Is there A Case of Reverse Transportation? http://www.lawcom.gov.uk/docs/merkin_report.pdf


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In such a background, the recent attempt by the Indian Parliament to address theissues of concerns under existing Insurance Act, 1938 by mooting the Insurance

Laws (Amendment) Bill, 200811

is heart warming.

This paper will appraise the problems arose due to these judicial decisions underthe existing law and its impact on the proposed Amendment Bill, 2008.

Research Proposal

The issues under the incontestability provision have been examined by Indiancourts through various angles i.e. public policy, unequal bargaining position,evidentiary credibility of a fact, test of materiality so on and so forth.

The scope of the paper is limited to the extent of life insurance law and judicialpronouncement and examines the test of materiality as applied to the lifeinsurance policies therein. The English cases are only cited and referred to theextent to which they have been quoted in their respective Indian judgments. Thepaper examines the theoretical foundation of incontestability provision underIndian insurance law and judicial approach thereof.

Incontestability Law in India: The Common Law Origin & Deviation

An interesting reading on the legislative history of insurance law in India was

published in the Journal of the Institute of the Actuaries, UK by R.W. SturgeonF.I.A. in 193912. In that article Sturgeon highlighted the need for introducing the1938 Act in that era by saying that as time passed and there was no early prospect ofthe introduction of such a Bill in Parliament here and as the position of insurance inIndia was becoming increasingly serious, Indian Government decided in 1936 thatimmediate legislation was necessary. Mr. Susil C. Sen, a well known Calcutta solicitorwho had taken a prominent part of in the recent revision of the Indian Companies Act,was appointed as a special officer to report on what amendment was necessary in theinsurance laws in India.13

The article specified the situation with regards to incontestability provision as:It [the Advisory Committee] was not required to advise on the shape of the proposedBill and indeed certain provisions of the Act as finally passed (e.g. limitation ofcommission, incontestability of the life policies) were not discussed by the Committee asproposals.

11 Bill No. LXXII of 2008. The Bill was introduced in Rajaya Sabha on 22nd December, 2008. (Hereinafter refereed as the Amendment Bill, 2008 )

12 R.W. Sturgeon F.I.A., The Indian Insurance Act, 1938, JIA 70 (1939) 0151-0192.

13 Id page 154.


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Later on when the 1938 Act was introduced before the Legislative Assembly, itdid not get due attention from the members for deliberation since the larger

portion of its discussion was concentrated towards the ongoing tussle forindiscriminate treatment of Indian insurance companies and non Indianinsurance companies including British, due to the Swadeshi movementinfluence.14

The incontestability provision was deliberated over by the Assembly andAdvisory Committee only to the extent of inadmissibility of age proof in theIndian scenario due to lack of credible evidence.

Although Insurance Act, 1938 came into being in 1939 and went throughsignificant changes thereafter, the Indian judicial precedent hailed to age oldEnglish decisions and decided on the Common law perspective even aftercommencement of 1938 Act.

Principles of Common Law on Insurance

Under Common law, the insurance was founded on some of the following broadand well settled principles:

First that contracts of insurance including the contracts of life assurance arecontracts uberrima fides and every fact of materiality must be disclosed, otherwise

there is good ground for rescission; and

Second, this duty to disclose continues up to the conclusion of the contract andcovers any material alteration in the character of the risk which may take placebetween proposal and acceptance15.

Determining the true nature of material, the Court first observed the same fromCommon Law perspective. They were as follows16:

I. Subjective Determination: Distant from Marine Insurance, otherInsurance, including Life should be judged on subjectivedetermination where knowledge of true facts of the part of the assuredrelating to the misstatement or suppression of material facts in a sense

14 Supra 11. It has been commented in that Article that the incontestability provision with some other provisions had been adopted from the

Canadian Acts. Page 158.

15 Ref. Looker v. Law Union and Rock Insurance Co. (1928) 1 KB 554. Cited in Smt. Benarasi Debi v. New India Assurance Co. Ltd AIR1959Pat540;

MANU/BH/0157/1959. Hon'ble Judges: K. Ahmad and K. Dayal, JJ.

16 Id.


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necessary in order to deprive him of the benefit that accrues in hisfavour under the contract17.

II. Rule of Condition Precedent: The right of the claimant to demandpayment cannot be enforced until he has done all the things which bythe terms of the policy under which the right is asserted are madeconditions precedent to the liability of the insurer.18

III. Absolute Condition: All collateral conditions are considered to bewarranty and non compliance would treat the insurance contract asvoid.

IV. Warranty, Condition & Representation: In general recital made underproposal is considered to be very basis of the contract and same treatedas warranty. It was considered to be beyond materiality determination.However, later all such recital when treated as representation themateriality of the representation is an element to be considered.19

Conflict of Warranty & Condition

The principles of warranty and condition, as apply to general contractualrelationship under Common law are mutatis mutandis, applicable to insurance

contract as well. It has been seen from the English cases that the Insurer cansuccessfully repudiate a claim on the ground of breach of warranty, which maynot have otherwise be material, foundational or essential to the InsuranceContract.20

Condition being vital to the contract and goes to the root of the contract andentry entitles the Insurer to repudiate the entire contract. Warranty, on the otherhand is considered to be collateral to the contract and does not go to the root ofthe contract and its falsity would not vitiate the contract in entirety.

17 Halsbury's Laws of England, Volume 18, Article 588, cited Supra note 15. However, there is a contra view on the same point:, where it reads thus:

whether it is life, or fire, or marine insurance, I take it good faith is required in all cases 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 insurance, that is rather in my

opinion an illustration of the application of the principle than a distinction of principle. acceptance Looker v. Law Union and Rock Insurance Co.,

(1928) 1 KB 554. Jessel M.R. in London Assurance Co. v. Monsel, (1879) 11 Ch D 363 cited in Ratan Lal and Anr. v. Metropolitan Insurance Co. Ltd

AIR1959Pat413. B.N. Rai and K. Ahmad, JJ.

18 Supra Note 15. .

19Mutual Life Insurance Co. of New York v. Ontario Metal Products Co. (1925) AC 344. Supra Note 15. .

20 Ref: Lakshmi Insurance Co. Ltd. v. Bibi Padma Wati AIR1961P&H253; MANU/PH/0079/1961; Hon'ble Judges: Tek Chand and P.C. Pandit, JJ. Quoted

Lord Blackburns observation in Thomson v. Weems, (1884) 9 AC 671 as it is not of any importance, whether the existence of that thing was or was not

material; the parties would not have made it a part of the contract if they had not thought it material, and they have a right to determine for themselves what they

shall deem material.


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The strict adherence with the warranties had been given effect by both English21

and Indian Courts22

. It has been noted that the indiscriminate treatment of theterminologies, warranty and condition under the Insurance contract had causedgravely to the Insured.

Representation- An Interpretative Solution

Later on, other jurisdictions enacted several remedial legislations to relieve therigor rule of warranty under the Common law with the distinction of warrantyfrom representation that the liability of the insurer is not avoided by the breach ofwarranty which did not relate to matters material to the risk insured. The harshness ofthe doctrine of warranty, in the life insurance policies, had been diluted by

treating warranties as representation, which went to mitigate the severity of therigid of Common law rule, was that in absence of deliberate fraud on the part ofInsured, the insurance policy would not be forfeited, unless representationrelated to a matter material to the risk.

Legislative Amendment in India- The Deviation

In India, legislators working on the similar line brought change to Section 45 of1938 Act vide Insurance (Amendment) Act, 194123 and the words on materialmatter and fraudulently made was substituted to on a material matter or suppressed

facts which it was material to disclose and that it was fraudulently made; and or thatit suppressed facts which it was material to disclose.

Therefore, the said change had completely eliminated the scope of readingCommon laws doctrine of warranty as it where earlier applied intoincontestability provision.

Materiality under Incontestability Law- The Evolution of Test

The Amendment was made with the perspective to restrict the insurance

companies to repudiate a claim, wherever the subtle misstatement or inaccuracyin the Proposal forms not being material to the contract exists, and with the

21 MacDonald v. Law Union Company (1874) LRQB 328; Thomson v. Weems (1884) 9 App Cas 671; New York Life Insurance Co. v. Phoebe Stella Gamble ILR

27 Cal 593. Cases cited in Banerjee, B. N.; Law of Insurance, 443, (Allahabad: The Law Book Company (P.) Ltd; 1994: IV Ed.)

22 Ref.Oriental Government Security Life Assurance Co. L td. v. Narasimhachai ILR 25 Mad 183; Lakshmi Shankar v. Gresham Life Assurance Society 1922 Bom582; Great Eastern Life Assurance Co. v. Bai Hira ILR 55 Bom 124;Muthappa Chettiar v. Venus Assurance Co. Ltd. ILR (1944) Mad 842; Light of Asia Insurance

Co. v. Karotaya Debi 1936 Cal 437; Western Indian Life Insurance Co. v. Asim Sirkar ILR (1942) 1 Cal 100: 46 CWN 659: 1942 Cal 412; Manufactures Life

Insurance Co. Ltd. v. Haridasi Debi 42 CWN 823: 1939 Cal 8; Bharat Insurance Co. Ltd. Subal Chandra Mender 48 CWN 263;Hemanta Kumar v. Alliantz and

Stuttgarter Life Insurance Co. Ltd. 1938 Cal 120; Asian Insurance Co. Ltd. V. Asa Ram 15 Luck 360: 1940 Oudh 212; Shivkumar Radhakrishnadas v. North

British Mercantile Insurance Co. (1939) Kar 611: 1939 Sind 254; East and West life Insurance Co. Ltd. v. Kalla Venkiah 1944 Mad 559. Referred in Id.

23 Act XIII of 1941. The proviso to the Section 45 was inserted by an amendment Act ofVII of 1944.


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intent to deceive the Insurer. Its object may also be gathered from theobservations of the Select Committee, who remarked thus if the insurer does not

discover and question the falsity of any such statement in two years, he ought not to beallowed by the clause, [except] cases in which the insurer can show that the falsestatement was fraudulently made with the knowledge and concerned a material error.24

To determine what constitute to be material, the Court observed that any factswhich tend to suggest that the life insured is likely to fall short of the averageduration is a material fact25. Any fact the knowledge or ignorance of whichwould materially influence an insurer in making the contract or in estimating thedegree and character of the risk, or in fixing the rate of premium is material.26

Subjective & Objective Knowledge- The Judicial Crossroad

The changes made through 1941 Amendment Act were elaborately discussed bytheir lordships in various judgments. The major issue which was debated inthose cases was in respect to the knowledge of the insured in determining thequestion of materiality. This specific issue has two aspects, firstly whether thequestion of materialityper se exits in its objective criteria without looking into theactual knowledge of the Insured and secondly, whether subjective criteria shouldbe the test of materiality qualified by the actual knowledge of the insured.

Justice Vasudevmurthy27 expressly denied the proposition laid down in theEnglish Judges inJoel case28, where it was held that the non-disclosure of certainfacts in answer to questions put by the medical referee of the insurer was not, inthe absence of fraud, sufficient to vitiate the contract of insurance. It was heldthat, having regard to the nature and purpose of those questions, the truth of theanswers to them was not on the true construction of the documents made part ofthe basis of the contract and, therefore, could not vitiate the policy. Theknowledge of the insured to consider a fact to be material is of no moment exists;if a reasonable man would have recognized that it was material to disclose theknowledge in question, it was no excuse to say that the insured had not

recognized it to be so.29

His Lordship had also declined to accept the rule of representation which saysthat when statements made by an insured person in his application for a policy

24 Supra Note 20 at page 444.

25 Thomson v. Weems (1884) 9 A. C. 671. cited in Infra Note 39.

26 London Assurance v. Mansel (1879) 11 Ch. D. 363. cited in Infra Note 31. .

27 Kesave Seethamma v. Bombay Life Assurance Co. Ltd. AIR1954Kant134. MANU/KA/0058/1954; Hon'ble Judges:Vasudevamurthy, J.28Joel v. Union and Crown Insurance Co. (1908) 2 KB 863 cited in Id. .

29 Supra Note 31 para 4.


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of life insurance, can not be treated as the basis of the contract, but merelyrepresentations. An inaccurate statement is material so as to vitiate the policy if

the matters concealed or misrepresented, had they truly been disclosed wouldhave influenced a reasonable insurer to decline the risk or to have stipulated fora higher premium.30

The Honble Court had opined that anything within the knowledge of insuredwhether material or otherwise need to be disclosed. In such case as the Courtascertained, it does not matter whether the insured felt it not to be of materialimportance, beside that the test should be when he conceals anything that mayinfluence the rate of premium which the underwriter may require although he does notknow that it would have that effect.31 It is the duty of a party effecting insurance onlife or property to communicate to the under-writer all material facts within hisknowledge touching the subject-matter of the insurance.32 The contracts ofinsurance were 'uberrima fidei' and that what fact is material is a question of factin each case. All such facts which would influence a reasonable man either toaccept or decline a risk or stipulate for a higher premium would be material.33

In their objective determination of materiality, the courts stressed on the test ofunderwriters judgment. It is noteworthy to mention here that the reasonable manofShiv Kuma case is an underwriter as stipulated in Lindenan case.

In this case the Lordship surrogated and stressed more on the fact of materiality

over the existence of actual knowledge of the Insured about the material fact.Except for the qualifying test of reasonable man, the Lordship determined thequestion of materiality based upon pretext if a fact being material per se as perunder-writers point of view it need not require the actual knowledge of theInsured. However, the paradox exists here is that even if a particular fact ismaterial; it requires the proof of existence of knowledge from the side of theparty who has been alleged of misrepresentation or fraud. In other wards, aparty can not commit a misrepresentation or fraud without having theknowledge of fact being material to the contract.

30Mutual Life Insurance Co. of New York v. Ontario Metal Products Co.1925 AC 344 cited in Supra Note 31.

31 Lond Assurance v. Mansel (1879) 11 ChD 363. In the proposal in answer to a question similar to the one in the present case, the insured had stated that he had

insured already in two offices at ordinary rates. It was, however, found that his life had been declined by s everal other insurance companies, and it was held that there

had been a material concealment and that the insurance company was entitled to have the contract set aside. Cited in Supra Note 31.

32 Lindenan v. Desborough (1828) 108 ER 1160 cited in Supra Note 31. .

33 Shivkumar v. North British & Mercantile Insrance Co.Ltd. AIR 1936 Sind 222 cited in Supra Note 31.


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In the same year Honble Madras High Court34 had observed the Englishdecision ofJoel35, and remarked that English decisions placed importance of

descriptive analysis of Proposal form in each case and does not determine theinsurance companys liability on the basis of simply yes or no answers givenby the applicant. Referring to Lord Blackburns dictum36, Fletcher Moulton L. J.in Joel case, as quoted by Madras Judge made following observation:

There is, therefore, something more than an obligation to treat the insurer honestly andfrankly, and freely to tell him what the applicant thinks it is material he should know....The disclosure must be of all you ought to have realised to be material, not of that onlywhich you did in fact realise to be so.

To prevent themselves from walking on the line ofhard cases must not be allowed to

make bad law37 as they call it, the Madras Justices called the strict rule ofinterpretation to the written Proposal form as Shylockian. Their Lordship indetermining the question of the active concealment of a fact stressed more onknowledge than the question of materiality. The interesting example they havecited from Newshoime Brothers case38, where the Judges disowned the law laiddown in Bawden39against the Biggar40 case. On the contrary to the NewshoimeBrothers decision, the Madras High Court preferred Bawden case over Biggarcase.41

It was decided by the Madras Judges that the knowledge of the Proposed

Applicant is most important in determining the falsity under the proposal form.This simply means the Insured knowledge about his pre-existing illness beforethe application is most important in determining the material factor.

34 Kulla Ammal (died) and Ors. v. The Oriental Government Security Life Assurance Co. Ltd. by its Manager, at Bombay AIR1954Mad636:

MANU/TN/0305/1954, Mack and Krishnaswami Nayudu, JJ.

35Joel v. Union and Crown Insurance Co. (1908) 2 KB 863 cited in Id.

36 Brownlie v. Campbell (1880) 5 AC 925 cited in Supra Note 40.

37 Dawsons Ltd. v. Bonnin (1922) 2 AC 413 cited in Supra Note 40.

38 Newshoime Brothers v. Road Transport and General Insurance Co. Ltd. (1929) 3 KB 356 cited in Supra Note 40.

39 Bawden v. The London, Edinburgh and Glasgow Assurance Co. (1892) 2 QB 534 (D) where Bawden, who was blind in one eye, was insured against

accidental injury on a proposal form which did not disclose this infirmity. It was held that the Insurance company agent was aware of this but did not

communicate it to the company and that his knowledge was knowledge of the company. cited in Supra Note 40.

40 Biggar v. Rock Life Assurance Co. (1902) 1 KB 516. A proposal form was filled up by the agent containing false particulars inserted without the

knowledge of the applicant, who signed the proposal form. It was held that in view of the declaration that the answers should form the basis of the

policy, it was the duty of the applicant to read the answers before signing them, and the agent of the company was acting not as the agent of the

insurance company but of the applicant. The policy was held to be void. Cited inSupra Note 40.41 The Madras High Court opined that in the case of Bawden, Supra Note 45. however, the important point of differentiation was that he was almost

an illiterate man who was not in a position to read and to appreciate the significance and implications of the document he was signing, and the agent

appears to have withheld knowledge of Bawden's infirmity from the insurance company in order to put the policy through and get his commission.

Supra Note 40 para 15.


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Furthermore, they express their disagreement with the opinion of King andShahabuddin JJ., from the same Court, where they hold that the insured person

must be held responsible for the untrue averments in the application form whichhe signed as the duty of making himself acquainted with the contents of what hewas signing lay upon the insured person himself.42

The Origin of the TestLater in Benarasi Debi case43 the Honble Patna High Court laid down the test forthe second part of Section 45 of Insurance Act, 1938 as follows:

(1) that the false statements were on a material matter;

(2) that the policy-holder knew at the time of making them that the statements were

false,44

(3) that they were fraudulently made.

They also stressed on the knowledge of the insured in determining the questionof materiality of a fact. They said: it is true that concealment as used in the insurance field means the designed and intentional withholding of any fact, material to the risk,which the assured in honesty and good faith ought to communicate.

However, a more comprehensive test lay down by the Punjab & Harayana High

Court in Bibi Padma Wait Case45

after observing the Patna High Courts test:

(a) such a statement was material;

(b) or was on suppressed facts, which it was material to disclose, and

(c) that it was fraudulently made by the policy-holder; and

(d) that the policy-holder knew at the time of making it that the statement was false; or

(e) that it suppressed facts which it was material to disclose.

The first part of Section 45 of the Insurance Act, 1938, the Honble Courtobserved as in the case of policies of life insurance which are not excepted by thetwo years rule, proof of deliberate fraud, and not merely of constructive fraud orof misstatements has to be shown, in order to avoid the policy.

42 East and West Life insurance Co. v . Venkiah AIR 1944 Mad 559 Cited in Supra Note 40.

43 Supra Note 15.

44 The Manufacturers' Life Insurance Co.. Ltd. v. Sm. Haridasi Devi 42 Cal WN 823: AIR 1939 Cal 8 . Cited in Supra Note 40.

45 Lakshmi Insurance Co. Ltd. v. Bibi Padma Wati AIR1961P&H253; MANU/PH/0079/1961; Hon'ble Judges: Tek Chand and P.C. Pandit, JJ.


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However, these later judgments show that the dictum of JusticeVasudevmurthy46 or Justice Nayudu47 was not accepted across all benches. As

P&H High Court opined that the rule of construction against the insurer andfavorable to the insured, stems from what otherwise is called, the rule of contraproferentem, which is based on the maxim, Verba chartarum fortius accipiunturcontra proferentem. It means that the words of deeds are to be taken most stronglyagainst the party, employing them. What it meant was that if the words of aninstrument or of a grant are of doubtful import, then, that construction shall beplaced upon them which are most favorable to the holder of the instrument orthe grantee.

Finally these tests simplified by the Honble Supreme Court and madeconclusive in Mithoolal Nayak case48, but it has not quite settled the debate. The

test was as follows:

(a) the statement must be on a material matter or must suppress facts which it wasmaterial to disclose;

(b) the suppression must be fraudulently made by the policy-holder; and

(c) the policy-holder must have known at the time of making the statement that it wasfalse or that it suppressed facts which it was material to disclose.

According to the Lordships, Fraud under Indian Contract Act, 1872 must be onewhere any of the following acts committed by a party to a contract with intent todeceive another party or to induce him to enter into a contract -

(i) the suggestion, as to a fact, of that which is not true by one who does not believe it tobe true; and

(ii) the active concealment of a fact by one having knowledge or belief of the fact.

Moreover, the Honble Lordships did not obliged to accept the explanation to S.1949 of the Contract Act as a defense to fraud, which was well establish and

applicable to the general contract. The Court did not assigned any reason for thesame and without distinguishing how Insurance contract are different from othercontract on this point.

46 Supra Note 31.

47 Supra Note 40.

48 Mithoolal Nayak Vs. Life Insurance Corporation of India AIR1962SC814, [1962]32CompCas177(SC), [1962]Supp2SCR571Hon'ble Judges:K. Subba Rao,

Raghuvar Dayal and S.K. Das, JJ.

49 The principle underlying the Explanation to s. 19 of the Contract Act is that a fa lse representation, whether fraudulent or innocent is irrelevant if it

has not induced the party to whom it is made to act upon it by entering into a contract. Section 19 of Indian Contract Act, 1872 (Act IX of 1872)


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It is interesting to note here that though their Lordship had not observed anyprior judicial response of various High Courts, they had not addressed the issue

whether prior knowledge of a concealed fact is important in determining thesaid question or not.

In Search of Prudent Insurer

The Apex Court ruling in the Mithoolal Nayak50 later substantiated with morelegal inputs, by the Delhi High Court51 independently by refereeing to theMarine Insurance Act, 196352. The learned Court hold that the provisions ofMarine Insurance Act in India are in pari materia with the English Act53 in thisrespect, they would therefore similarly hold that the test of what is a material factand the degree of good faith which is required is otherwise the same in all classes

of insurance. To determine the test of materiality, they refereed- prudent insurerthe wording of Section 20(2) of Marine Insurance Act, 1963, and stated that theCourt must apply the objective standard of business usage and disregard the exactingstandard of particular insurer54. The Court had also observed that facts need not bedisclose those diminishing the risk and matters of common knowledge generally or in theinsurer's business.

Distinguishing from the English position, the Delhi High Court relied on thephraseology of Section 45 of Insurance Act, 1938, which says leading to the issue ofthe policy55which means the questioned misrepresentation should be the basis of

the contract and should be qualified on the test of materiality. The material nondiscloser by the Insured being fraudulently made, result into the avoidance ofthe Policy, was imported from the Section 1956 of the Marine Insurance Act, 1963by the Delhi Court.

Madras High Court57 made it observation on the nature of the knowledgepossess by the Insured and his liability there under. Their Lordship observedthat the under insurance contact law the discloser and non-discloser of materialfacts which forms the foundation to create the consensus ad idem between theinsurer and the insured. The Court stated that all the information need to be

50 Supra Note 55.

51 Krishna Wanti Puri Vs. The Life Insurance Corporation of India, Divisional Officer, New Delhi and Anr.AIR1975Delhi19 Hon'ble Judges: Avadh Behari

Rohtagi, J.

52 Marine Insurance Act, 1963 (Act XI of 1963)

(5) The term "circumstance" includes any communication made to, or information received by, the assured.

53 Marine Insurance Act, 1906

54 supra Note 58 para 24.

55 Supra Note 58 para 31.

56 contract based upon the utmost good faith a nd if the utmost good fai th be not observed by either party, the contract may be avoided by the opposite party

57 V. Srinivasa Pillai Vs. Agent of Life Insurance Corporation of India, Madras and AnrAIR1977Mad381 Hon'ble Judges: Ramaprasada Rao and Ratnavel

Pandian, JJ.


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disclosed by the Insured which is within the exclusive knowledge of the Insuredand being not known or capable of being known to others. Given the nature of such

information they can be classified as (a) Voluntary information; (b) answers toquestions; (c) submission of details which are within the exclusive knowledge ofthe insured; and (d) details which evolve round immaterial particulars. In so faras voluntary information is concerned, the answers to queries or evensubmission of details regarding insignificant matters the insured might commit abona fide mistake. If such answers or particulars do not strike at the foundationof the good faith contract, courts are very lenient towards the insured. But in acase where the insured gives such details which are exclusively within his or herknowledge then the question becomes somewhat difficult. There again therepresentations may be of two kinds that which is innocuous and that if provedto be false shakes the very foundation of the uberrima fides contract.

The reasoning given by the Court pointed out that any information though beinginnocent if shack the foundation of the uberrima fides may lead the contract to bevoid.58 In other words a misrepresentation would not ipso facto to be a groundavailable to an aggrieved party (insurer) to avoid the contract unless it wasfound that the consent of the other party was secured by practicing somedeception. Thus on every misrepresentation or concealment of a fact a 'contractcannot be avoided merely on trivial and inconsequential misstatement or non-disclosure.59

Therefore, with the necessary implication the above fact lead to an interpretationthat an innocuous concealment of a fact from the side of the insured can onlyavoid the contract, if by applying the test of prudent insurer, the insurerestablishes that there exists common usage within the insurance industry aboutthe fact in question.

The Materiality Matters

A more deliberate discussion on the issue of treating the insurer honestly andfrankly, was made by Mysore High Court60, where they emphasized on the duty

to disclose material facts continues right up to the conclusion of the contract andalso implies any material alteration in the character of the risk which may takeplace between proposal and acceptance. Their Lordships observing theproposition laid down by Lord Blackburn61, where he stated that as a proposedinsured if you know any circumstances at all that may influence the underwriter's

58 Id para 9.

59 Bhagwani Bai Vs. Life Insurance Corporation of India, J abalpurAIR1984MP126 Hon'ble Judges: G.P. Singh, C.J. and Faizanuddin, J.

60 Life Insurance Corporation of India Vs. Smt. B. Kusua Rai [1992]75CompCas712(Kar), 1989(1)KarLJ52 Hon'ble Judges: K.B. Navadgi and S.G.

Doddakale Gowda, JJ.

61 Brownlie v. Campbell [1880] 5 AC 925 cited in Id.


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opinion as to the risk he is incurring, and consequently, as to whether he will take it, orwhat premium he will charge, if he does take it, you will state what you know. There is anobligation there to disclose what you know, and the concealment of materialcircumstances known to you, whether you thought it 'material or not, avoids the policy.

The above proposition was laid down on the basis honble Courts opinion whereit had emphasized that there is a legal obligation cast upon the party proposingthe insurance to communicate not only every material fact of which he had actualknowledge, but he is also deemed to know every material fact which he ought tohave knowledge, in the ordinary course of business. A complete and bona fidedisclosure of all the facts by the assured is a must to make the transaction validand enforceable.

On the question of test of materiality, the Honble Court quoted the PrivyCouncil Judgment62 and stated that it is the insurers who propound the questionsstated in the application form, and the materiality or otherwise of a misrepresentation orconcealment must be considered in relation to their acceptance of the risk. Quoting thecase of Canara Bank Ltd. 63 being the materiality of a fact depends on thesurrounding circumstances, and also on the nature of information sought by theinsurer. It is not open to an assured to decide for himself as to which fact ismaterial and which is not.

Later in 1990, the Honble apex court had privilege of observing the issues left

out by them in Mithoolal Nayak64

case, forlornly it was remained unansweredeven thereafter. In Smt. G.M. Channabasemma65 the Honble Supreme Court ofIndia had relied on the conclusion of Mithoolal Nayak case and decidedaccordingly.

The left out opportunity of the Honble Supreme Court was later utalised by theHonble Kerala High Court in the case of Sosamma Punnan66. Though its ratiodecidendi was based on the president laid down by the apex court in its earilerjudgements; its obiter dicta form the part of great insight on the issues. Justice P.K.Shamsudhin, as he than was observed that innocent misstatement67, mistake andforgetfullness68 do not afford any defence in such cases. On the question ofwhether the test of materiality depend up prudent insurer or reasonable

62Mutual Life Insurance Co. v. Ontario Metal Products Co. Ltd. [1925] AC 344 (PC). Cited in Supra Note 67.

63 Life Insurance Corporation of India v. Canara Bank Ltd. [1973] 43 Comp Cas 534; [1973] 2 Kar LJ; AIR 1974 Mys 51 cited in Supra Note 67.

64Mithoolal Nayak v. Life Insurance Corporation of India (1962) Supp. 2 SCR 571. Hon'ble Judges: K. Subba Rao, Raghuvar Dayal and S.K. Das, JJ.

65 Life Insurance Corporation of India Vs. Smt. G.M. Channabasemma1991ACJ303, AIR1991SC392, [1991]70CompCas634 (SC), JT1991 (5) SC73, 1990(2)

SCALE1191, (1991)1SCC357, 1991(1) UJ218 (SC). Hon'ble Judges: L.M. Sharma and M. Fathima Beevi, JJ.

66 Life Insurance Corporation of India Vs. Sosamma Punnan I(1991)ACC701 Hon'ble Judges: P.K. Shamsudhin, J.

67 Carter v. Beehm (1766) 3 Burr. 1905, 1909; ) Macdowell v. Fraser (1779) 1 Doug. 260. As quoted in Id.

68 Bates v. Hewitt (1867) L.R.2Q.B. 595, 607. as quoted in Supra note 74.


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insurer, the Court quoted E.R. Hardy Ivamy69, as in no case is it relevant toconsider whether the non-discloser would influence the particular insurer concerned orwhether the assured himself thought that the facts were material. What is material is thatwhich would influence the mind of a prudent insurer in deciding whether to accept therisk of fix the premium, and if this be proved it is not necessary further to prove that themind of the actual insurer was so affected. The Justice further added that the properquestion is whether any particular circumstance was in fact material?; and notwhether the party believed it to be so. The contrary doctrine would lead tofrequent suppression of information, and it would often be extremely difficult toshow that the party neglecting to give the information thought it material.70 Thequestion on such a policy is not whether a particular fact material, but whether itwas in truth material?71

Late in 2000, the apex court had made two remarkably interesting prepositions inthe case ofAsha Rani72, one where had observed that mere inaccuracy of falsity inrespect of some recitals or items in the proposal is not sufficient. The burden of proof is onthe insurer to establish these circumstances and unless the insurer is ablaze to do so thereis no question of the policy being avoided on ground of misstatement of facts. Secondly,for determination of the question whether there has been suppression of any material factsit may be necessary to also examine whether the suppression relates to a fact which is inthe exclusive knowledge of the person intending to take the policy and it could not beascertained by reasonable enquiry by a prudent person.73

The above preposition is important since in its first preposition it has beenhighlighted that a misstatement per se does not provide ground to the insurer toavoid the policy, it require to proof that if the correct fact was known to them,than they had not issued the policy at all or which otherwise called as the fact inquestion should led the insurer to issuance of the policy. It requires that thequestion of prudent insurers judgment is directly addressed to the judgment ofinsurer in question (the opposite party). The first proposition gets more strengthfrom the second preposition of the Honble court where the extra burden put onthe insurer to proof that the suppressed facts where could not be ascertained byreasonable enquiry by a prudent person/insurer in question.

The importance of these observations is that earlier where the misstatement perse, even being innocent amount to suppression of material fact could lead toavoidance of the policy, is now require to be proofed by insurer how the falsityhad led the insurer to issuance of the policy or why a true fact material to him?

69 E.R. Hardy Ivamy,General Principles of Insurance Law, 5th EditionSupra Note 74.70 Lindenau v. Desborough (1828), 8 BAC at P. 592. As quoted in Supra Note 74.

71 Supra Note 74.

72 Life Insurance Corporation of India & Ors. v. Smt. Asha Goel & Anr. 2001ACJ806, [2001]104CompCas79(SC), (2001)3GLR1990, JT2001(1)SC10,

2000(8)SCALE320, [2000]Supp5SCR646, 2001(1)UJ456(SC). Hon'ble Judges: B.N. Kirpal and D.P. Mohapatra, JJ.

73 Id para 12.


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It is important to highlight that any insurer before a court of law can proof thequestion of materiality by showing two sets of evidence, either the true fact being

contrary to the internal underwriting guidelines of the insurer or contrary to theindustry in general.

In an interesting observation on the question of whether any misstatement per sewould satisfy the test of materiality; the Madras High Court inAthayee case74heldthat the test is as to whether the policy would have been issued, had it beendisclosed that the insured was suffering from a particular kind of ailment.Therefore, it is for us to see whether the fact suppressed was of a disorder, whichis relevant or material, touching the longevity or the expectancy of life of theinsured.

In this case, the judges did not find any other disorder prior to the acceptance ofthe policy. The reason for the death of the insured was also only due to heartattack, regarding which no ailment was earlier found. they further held that evenassuming that there was suppression of ulcer, it is not a material matter so as toattract the provision of Section 45. Thus, even considering that the suppressionwas made by Muthu Gounder voluntarily and with full knowledge thereof; sinceit has no relation with the cause of death, the Insurance Company cannot beallowed to repudiate the contract.

Similarly in another case, P&H Court had concluded that mere not disclosing the

fact about conducting of previous ECG does not amount to suppression ofmaterial fact and could not attract second part of the Section 45 of InsuranceAct.75

Later in 2007, the Honble Supreme Court of India had decided the case of P.C.Chacko76, where the case fall under first part of section 45 since the insured wasdied within six months of the policy issuance. The case was discussed by theirLordships with the pragmatic view of objective criteria. There was no newprinciple discussed.

The Amendment Bill 2008: The Old Ghosts Chase

The proposed Section 45 of Amendment Bill, 200877 is the child of 190th LawCommissions recommendation78. It bears a common consensus of the insurance

74Athayee (died) and Anr. v. Life Insurance Corporation of India, represented by its Divisional Manager and Anr.2004ACJ2125, AIR2003Mad382,

2003(3)CTC526, (2003)3MLJ110 Hon'ble Judges: K. Sampath and S.R. Singharavelu, JJ.

75 Vidya Singh v. Life Insurance Corporation of India and Anr.AIR2004P&H359 Hon'ble Judges: Adarsh Kumar Goel, J.

76 P.C. Chacko and Anr. V. Chairman, Life Insurance Corporation of India and Ors 2008ACJ456, AIR2008SC424, 2008(1)ALD30(SC), 2008(1)CTC152,

2008(1)KLT698(SC), (2008)1MLJ1256(SC), (2008)149PLR257, 2007(13)SCALE329, (2008)1SCC321 .Hon'ble Judges: S.B. Sinha and Harjit Singh Bedi, JJ.

77 Supra Note 10.

78 Supra Note 4 page no. 43-65.


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market and stakeholders though not all, even not in terms of itsrecommendations.

The proposed Amendment Bill, 2008 offers a conceptual deviation from its to be predecessor, the Insurance Act, 1938 and attempts to resolve some of keyproblems exist in the1938 Act. The test of materiality in the 1938 Act was basedupon the principle that such misleading fact if leads to issuance of the policywhereas the test of materiality under proposed Amendment Bill, 2008 rest uponif the suppressed facts material to the expectancy of the life of the insured79. In theproposed Amendment Bill, 2008 any such fact adversely affecting mortality ormorbidity of a life assured would be the determining factor to the test ofmateriality. However, it is not clear in respect to the new age instruments i.e.ULIP, where investment are clearly demarcated from the mortality factor, that if

misstatement would equally affect the investment portion of the instrument asaffecting the mortality.

The proposed Amendment Bill, 2008 distinguishes between fraudulentsuppression of fact with the deliberate intent to deceive the insurer or to inducethe insurer to issue a life insurance policy and suppression of material fact ormisstatement not with the intend to commit fraud. The element of knowledgebecomes very crucial to distinguish between the two, where the knowledge tocommit fraud exists in the former case, lead to forfeiture of all the premium paidto the insurer unlike the later case, where such premiums need to be refunded to

the claimant. It would not be inappropriate to mention here that the basisquestion raised in this article in respect to the subjective and objectivedetermination of knowledge of the insured to establish the materiality of the factis still left blank in the proposed Amendment Bill, 2008.

To the some extent a legislative fallacy has been created in the proposedAmendment Bill, 2008. Since it put the burden of proof to establish thesuppressed material fact or misstatement on the Insured to show that the saidfact was based upon true to the best of his knowledge and belief. 80 However, adeath benefit claim under life insurance policy arises due to the death of the

Insured, the subject matter of the insurance contract makes theabovementioned provision redundant by casting burden on Insured toestablish the same.

The proposed Amendment Bill, 2008 denies right of insurer to repudiate a claimon any ground whatsoever once a policy celebrates its fifth anniversary, evenin cases where a blatant suppression of vital facts surfaces at the time of claim

79 Section 58 of proposed Amendment Bill, 2008. Section 58 proposes to replace section 44 and section 45 of the Insurance Act, 1938.

80 Id. Proposed Section 45 (3).


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investigation. It seems that any absolute conditions such as this may lead tounjust enrichment or what is called in insurance, an anti-selection.

Conclusion

Today, the life insurance industry in India is very much at its crossroad, makingeffort to improve life insurance penetration in the market. There is no doubt thata deeper insurance penetration would help the society at large, acting as a socialsecurity tool, divergent investment opportunity or a mechanism to improvenational saving; the same is not difficult to accept because of the innovativeinsurance products. Nevertheless, still any life insurance policy has to proof, itsworth in terms of an insurance product which provides economic security to thedependent of the insured.

The application ofuberrima fides in India has lead to more questions than it hasanswered, since it has granted excessive discretion to the Courts to adjudge onquestion of fact which can not be ascertained conclusively. In addition to thesame, the law laid down by various courts including the Honble Supreme Courtis neither exhaustive nor consistence on the subject matter. The whole idea of thetest of materiality as exists in the present Act revolves around view point of prudent underwriter, which overlooks the understanding of insured about theinsurance product. More so, the prudent underwriter does not differentiate between the general underwriters perspective and particular underwriters

perspective either.

Its seems hard to believe that a legislative correction through proposedAmendment Bill, 2008 would be able to rectify judicial ambiguity until the courtscome up with a different test which takes into account a better perspective ofinsured.

It certainly requires re-visit the test of materiality by the apex court.

the critical inquest of materiality under incontestability provision in life insurance law

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