[Kamakshi Puri is a final year student at Jindal Global Law School]
In a series of cases last year, a Supreme Court bench comprising Justice Dhananjaya Chandrachud and Justice Hemant Mehta delivered judgments on important aspects of insurance law. Oriental Insurance Company v Mahindra Construction, Life Insurance Corporation of India v Manish Gupta and Reliance Life Insurance Company Limited v Rekhaben Nareshbhai Rathod addressed important principles governing insurance contracts, elucidating their application in the Indian context. The last of the three judgments, viz. Reliance Life Insurance, sought to analyze three of the most relevant areas of the law: (i) the duty of good faith and the test of materiality. (ii) “basis of contract language” in an insurance policy, and (iii) the defence of non-est factum. In this post, I discuss the case to examine how the judgment takes the otherwise deficient Indian jurisprudence on insurance law forward.
Indian insurance law predominately follows English insurance law. Though the courts have not expressly cited provisions of English legislation, by essentially relying on English case law and treatises to decide cases before them, the Supreme Court has time and again indicated that the roots of Indian insurance law lie in English law. Before examining the judgment, I will briefly set out the position as regards the three areas of law as they stand under English law.
Duty of Utmost Good Faith and Test of Materiality
In England, the Marine Insurance Act, 1906 (in section 17 and 18) elucidates the doctrine of uberrimae fidei (doctrine of utmost good faith). This doctrine is applicable on all insurance cases since, under English Law, the Marine Insurance Act applies to non-marine insurance cases as well. In Pan Atlantic Insurance Co Ltd v Pine Top Insurance Co, the Court of Appeal applied clauses of the Marine Insurance Act to a non-marine insurance case, and this came to be accepted as law (as discussed by John Birds and Norma Hird). One aspect of the doctrine of utmost good faith is the duty of disclosure. This is essentially a requirement for disclosure of all material information by all parties to an insurance contract. This test for materiality is elucidated under section 18, which explains a material fact as being any piece of information that would potentially influence the judgment of a prudent insurer in determining their risk. Therefore, any information that a prudent insurer would have taken into account for their assessment of risk would qualify as material fact and needs to be disclosed by the insured. In Satwant Kaur v New Insurance Co, the Supreme Court of India held that all information sought in the proposal form would be presumed to be material information for the insurer. Section 17 of the Marine Insurance Act, on the other hand, specifies a consequence of avoidance of contract for breach of good faith, in that the contract may be avoided by the affected party.
Basis of Contract Language
A basis of contract clause in a proposal form is a declaration in the contract by which the insured represents that all answers given in the proposal form are true and accurate to the best of their knowledge. Such language has the consequence of converting all the answers given in the proposal form into warranties. If the insured provides an inaccurate or false answer in the proposal form, it would amount to a breach of warranty. A warranty is a promise that, among other things, affirms or negates the existence of a particular state of facts (section 33 (1) of the Marin Insurance Act). Under insurance law, the penalty for a breach of warranty is the insurer’s automatic discharge from liability (section 33 (3) of the Marine Insurance Act).
Defence of Non-est Factum
Non-est factum is a plea taken by the insured claiming a mistake in understanding the character of document signed by them. As most insurance policies are entered into through an insurance agent in India, this defence is regularly taken, arguing the breach to be a result of misguided advice from the agent or due to the illiteracy of the insured.
Facts and Decision in Reliance Life Insurance
In September 2009, the appellant, being the insurer, issued a life insurance policy for a cover of Rs. 10 lakhs to the husband of the respondent, being the insured. The insured died within six months of purchasing the policy and his wife, the respondent, made a claim under the insurance policy. While applying for this policy, the insured already had existing life insurance policy. However, he answered the question in the proposal form seeking disclosure on other existing policies in the negative. Relying on disclosures made in the proposal form, the insurer extended cover to the insured. In 2011, when the wife of the insured made claim under the policy, the insurer repudiated the claim, relying on the failure of the insured to disclose details of prior insurance cover with other companies. The wife filed a complaint before the Consumer Forum against this repudiation, which reached the Supreme Court on appeal.
At the outset, the Court stated that insurance contracts were contracts uberrimae fidei,andthat the duty of disclosure was a facet of uberrimae fidei. To bridge the information asymmetry between the contracting parties, the insured had a duty to bring all material facts to the knowledge of the insurer. The Court held that materiality had to be seen from the insurer’s point of view, and every circumstance that would affect their assessment of risk would qualify as material and was required to be disclosed. Relying on Satwant Kaur,the Court held that non-disclosure related to facts sought in the proposal form, and therefore a presumption of materiality was accorded to them. Accordingly, the insured failed to meet his duty of disclosure; therefore, the resultant repudiation of contract by the insurer was valid.
On the second issue, the Court while citing the Privy Council on good faith, relied on Condogianis v Guardian Assurance Co, which also identified basis of contract clauses in the proposal forms as express warranties furnished by an insured. It affirmed that materiality was unimportant in cases of warranties. Therefore, where an answer in such a proposal was untrue, the warranty would stand breached resulting in automatic discharge of the insured. However, despite citing cases to this respect and including the insurer’s arguments on this issue without a rejection of this argument, the Court failed to apply the law of warranties to this case. The case was decided strictly in terms of the duty of disclosure.
As a final argument, counsel for the insured pled ignorance on his part as to the details of the proposal form signed by the insured. This argument was rejected by the Court. The duty of ensuring that accurate information is given to the insurer was placed on the person signing the document. Signing the document was held to be akin to adopting all answers as one’s own and, therefore, the defence of non-est factum was rejected. The burden was correctly shifted to the insured to make themselves aware of the contents of the document before signing the same.
Despite missing some finer points of insurance law, this case is pivotal for insurance jurisprudence in India. Heavy reliance on English cases and treatises led the Court to precisely set out the law on pressing issues under insurance law. The law on good faith and materiality was further refined in line with the settled law in England. As most insurance disputes find their way first to the consumer forums, which tend to lean towards the protection of insured as priority, this case clarified safeguards provided for the insurer under law.
However, the Court did miss the opportunity to apply the law on warranties by remaining silent on the argument for breach of a basis of contract clause and illustrating the consequence it would ensue. Then again, it is plausible that the Court intentionally avoided doing so, evaluating Indian insurance jurisprudence as still too nascent to allow the penalty of automatic discharge of liability in favor of an insurer.
– Kamakshi Puri
I find it strange that the insurance company could find merely 6 months later that the insured had another policy as against doing their due diligence before the policy was issued.
That the insured has another policy should have no bearing on the settlement either. It is the insured person’s prerogative how many policies he has and how he pays, as long as he is capable of paying premium.
The benefit of doubt should go to the insured rather than to insurer.
Unfortunately courts too often fail to understand the nuances and the predicament of the common man who is crushed by corporate and bureaucracy, especially in banana republics like India.
SC did not look at the above two issues when making the decision rather it went blindly with the law which is tortuous and flagrantly against common man.