Report No. 190

Response to the Proposal in the Consultation Paper

5.1.11 The response received to the above proposal in the Consultation Paper has been a mixed one. Predictably, the private insurers have opposed the change arguing that it would encourage frauds and is liable to be misused. Birla Sun Life Insurance Company Ltd. points out that that the recommendation of the Law Commission would "completely negate the uberrimae fidei character of a life insurance contract." Birla Sunlife is of the view that the courts are anyway leaning in favour of the claimant. ICICI Prudential Life Insurance Ltd. suggests retention of the present section 45 without change.

HDFC Standard Life Insurance Ltd., while insisting that there should be no change, has suggested that a proviso be inserted to the effect that even within two years a policy can be called in question by the insurer only if the statement incorrectly made is material to the expectancy of life. OM Kotak Mahindra Life Insurance Co. suggests retention of the provision subject to the condition that where the repudiation is after the expiry of three years after the coming into force of the policy, the onus of proving materiality of the misstated fact/fraud shifts to the insurer. Aviva Life Insurance suggests increasing the period of unilateral repudiation by the insurer to three years and retention of the second part of the present section 45.

5.1.12 The public sector major, LIC, has also suggested retention of the existing provision subject to the following changes:

"In sub-section (1) the words 'on which the policy is effected' may be replaced by the words 'date on which proposal is accepted/ policy is revived/ reinstated'".

"In clause (2) the words 'material to the expectancy of the life insured' may be substituted with 'material to the assessment of risk or deciding premium on the life of the insured'. Further the words 'reinstated' may be added at the end of the clause".

5.1.13 LIC opposes the three year time limit as being "a very short period" and states that "if at all this is to be provided we may agree that if policy has been continuously in force for a period of 6-8 years without being in question the insurer shall be deemed to have waived his right to repudiate the policy on whatever ground". LIC also suggests that where a claim is repudiated on the ground of fraud, there should be no additional requirement for the insurer to establish the nexus between the non-disclosure of the material fact and the assessment of the risk.

5.1.14 The suggestion by the Federation of Indian Chambers of Commerce and Industry (FICCI) is that the present provision be retained. FICCI suggests that the interest of the consumer (policy holder) be protected by providing a remedy if there is a breach of contract by the insurer. FICCI has nevertheless pointed out that the law obtaining in the United Kingdom restricts, by negative definition, the grounds on which an insurer can repudiate the policy. Para 2 (b) of the statement of General Insurance Practice issued in 1986 in the U.K. reads thus:

"An insurer will not repudiate to indemnify a policy holde.- On grounds of non-disclosure of a material fact which a policyholder could not reasonably be expected to have disclosed.

On grounds of misrepresentation unless it is a deliberate or negligent misrepresentation of a material fact."

5.1.15 FICCI also points out that in the USA, a majority of the States have refused to apply the strict rule of disclosure to non-marine risks and therefore a failure by the insured to state a material fact, if innocent, does not avoid the contract but only a wilful concealment of fact known by the insured to be material to the risk. The test in both Canada and USA is that a material misrepresentation sufficient to deny a claim cannot be just any misstatement but one that if fully and truthfully disclosed would have led to a refusal by the insurer to issue the policy, at least on the terms and conditions on which it issued the policy. FICCI finally suggests that the test of 'reasonable man' be adopted for determining whether a fact that has been suppressed is 'material' or not. The additional safeguards it suggests from the point of view of the insured are:

No repudiation of the policy to be permitted on ground of misstatement of fact "where the insured can prove that the statement was true to the best of his knowledge and belief."

That a person who solicits and negotiates a contract of insurance "should be deemed for the purpose of the formation of the contract, to be the agent of the insurers, and that the knowledge of such person should be deemed to be the knowledge of the insurers."

The defence to a claim to be disallowed if the repudiation of the policy is not communicated in writing by the insurer to the insured.

5.1.16 The National Insurance Academy views that the proposed change is not justified and suggests that a policy could be called in question even after three years on the ground of fraud. The policy can be repudiated within three years "if concealment or misrepresentation of material facts (materiality referring to the factors affecting all the risks that are being covered) is proved."

5.1.17 The Actuarial Society of India (ASI) has also not agreed with the proposal of the Law Commission as contained in the Consultation Paper. It states that "from the moral hazard perspective, and as a protection to the bonafide policyholders from the fraudulent ones, it is necessary that a life insurer is able to prove, anytime, that the incorrect information given was on a material matter or suppressed facts which it was material to disclose and that it was fraudulently made by the policyholder and that the policyholder knew at the time of making it that the statement was false or that it suppressed facts which it was material to disclose".

The ASI suggests that a policy of life insurance or a rider granted subsequent thereto could be called in question "at any time" if the insurer shows that the inaccurate or false statement on the basis of which the policy was issued "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."

5.1.18 The views of the consumer groups are quite the opposite. The Consumer Education Research Centre, Ahmedabad has wholeheartedly welcomed the Law Commission's proposal. They point out how in the United States even a material misstatement would not automatically result in repudiation of the policy but a reworking of the sum liable to be paid as if the policy was issued after accounting for the changed circumstance. The Consumer Rights Education and Awareness Trust, Bangalore also support the Law Commission's proposal but want the period to be retained at two years.

5.1.19 In this context it is also necessary to notice an important fact highlighted in the response received from the Institute of Insurance Surveyors and Adjusters which refers to a sensitivity survey conducted by the General Insurance Corporation of India to get a report on customer satisfaction and feedback from policyholders. As per this Report "feedback from over 10,000 policy holders indicated that 99.8% were by and large satisfied with the services of insurers although there was a common complaint regarding delay in settlement of claims, which was rated as high as 65%".

Back

Index

Next