Report No. 190

Views of the Law Commission

5.1.20 The responses to the proposal contained in the Consultation Paper can be broadly stated in the following terms:

(a) The insurers want no dilution of the principle of uberrimae fidei in relation to insurance contracts.

(b) The insurers by and large want retention of their option of repudiating a policy of life insurance at any time on the ground of fraud subject to the condition that where the repudiation is after the expiry of two/ three years after the coming into force of the policy, the onus of proving that the misstated fact is material to the risk shifts to the insurer.

(c) LIC is prepared to say that if a life policy has been in force continuously for a period of 6-8 years no repudiation on any ground should thereafter be permitted.

(d) FICCI suggests retention of the existing provision with important additions that would protect policyholders' interests.

(e) The consumers agree entirely with the proposal of the Law Commission.

5.1.21 The Law Commission views the present exercise of law reform as providing an opportunity to balance the competing interests of the insurers on the one hand and of the policyholders on the other. First it is proposed to examine the difficulties faced by the policyholders or those claiming under them. It cannot be gainsaid that the consumer fora and courts are increasingly being petitioned to decide disputes involving the legal heirs of a deceased policyholder and the insurers. By all accounts, it appears that the rate of settlement of claims by insurers has not been satisfactory.

Secondly, it is only after a claim is lodged by the family of the 51deceased policyholder that the insurer makes the effort to find out about the misstatement made or fraud played by the policyholder (at the time of taking the policy) and by this time several years have elapsed during which the premium has also been paid. This is compounded by the fact that the entire premium that has been paid also stands forfeited. Thirdly, very often the family members may not at all be aware of any such misstatement by the policyholder and have no means to prove to the contrary. The insurer on the other hand would be armed with the records unearthed by the surveyor appointed by it.

There is an unequal battle here with the claimant being then forced to go to the courts or consumer fora and wait for an uncertain result. Fourthly, there is the issue of delay in disposal of the claims by the courts with insurers being known to contest an adverse order up to the final court. Finally, a factor that cannot be lost sight of is that there has been for several years now a hardselling of life insurance policies by insurers through a wide network of agents who go and personally collect the forms, the premium and arrange for the requisite medical certificate for issuance of the policy. (This is perhaps the flip side of the adage that in India "insurance is not bought but sold").

The practical reality of the policyholder, in such a situation, of not being informed of his duties and liabilities, cannot be lost sight of. It is in this context that the question of a deliberate intention on the part of the policyholder to defraud an insurer requires to be examined. This is even more significant when one considers the present moves on the part of the insurance industry to foray into the untapped 'rural' sector.

5.1.22 From the point of view of the insurers, that an insurance policy is essentially a contract governed by the mandatory principle of true and full disclosure by the parties to the contract of all material facts affecting the contract, cannot be overemphasised. The proposition that fraud vitiates all contracts is also unexceptionable. Nevertheless, there is also the principle of limitation for bringing actions both in civil and criminal law. The LIC in its response concedes that where a policy has been continuously operative for six to eight years, an insurer would be deemed to have waived its right to repudiate the policy on any ground whatsoever.

Given the fact that this response comes from the largest player in the life insurance business (commanding as of January 2004 over 88% of the total premiums and 94% of the total policies), it could be said to reflect a realistic position from the point of view of the insurer. The expectation of the role of the life insurer has been succinctly stated by the Supreme Court in Asha Goel's case (supra) in the following words, which bear repetition:

"The public in general and crores of policy holders in particular, look forward to prompt and efficient service from the Corporation. Therefore, the authorities in charge of the management of the affairs of the Corporation should bear in mind that its credibility and reputation depend on its prompt and efficient service. Therefore, the approach of the Corporation in the matter of repudiation of a policy admittedly issued by it, should be one of extreme care and caution. It should not be dealt with in a mechanical and routine manner." (emphasis supplied)

5.1.23 While it may be argued that the present provision is best left untouched, since it is the view of several insurers that the courts are any way inclined to interpret it in favour of the policyholder, it cannot be forgotten that only a small number of contested claims, for reasons not hard to imagine, reach the courts. A greater clarity in the statute would facilitate easy and efficient disposal of the claims from the point of view of both the insurer and the claimant. The Law Commission is of the view that the provision requires to be amended in light of the experience gained over the years.

5.1.24 The Law Commission is of the firm view that there should be no unilateral repudiation of a life insurance policy by an insurer. Accordingly, section 45 of the Act requires to be amended to expressly state this position. Further, the Law Commission accepts in principle the suggestion by the LIC that if a policy of life insurance has been in force continuously for a period, no repudiation on any ground should thereafter be permitted.

Although the Law Commission in its Consultation Paper had suggested that this period should be three years, taking 53into account the view of LIC (which still controls nearly 90% of the life insurance business in this country) that this period should be 6-8 years, the Law Commission finally recommends that this period should be fixed at 5 years, i.e. five years after the coming into force of the policy, i.e. the date of issuance of the policy or the date of commencement of the policy or the date of the revival of the policy or the date of the rider to the policy whichever is later (this is to account for the problem that was noticed in the Dharam Vir Anand case (para 5.1.7 supra).

In other words, no insurer should be permitted to repudiate a life insurance policy on any ground whatsoever, five years after the coming into force of the policy, i.e., the date of issuance of policy or the date of commencement of the policy or the date of the revival of the policy or the date of the rider to the policy whichever is later.

5.1.25 The question that remains is about the grounds on which an insurer should be permitted to repudiate a policy of life insurance any time after the commencement of the policy and upto the expiry of five years from that date. After considering the various responses received to the proposals in the Consultation Paper, the Law Commission finds merit in the need to make a distinction, only in regard to the ensuing consequences, between repudiation on the ground of fraud and repudiation on the ground of misstatement or suppression of facts that were material to the expectancy of the life of the insured.

It is unexceptionable as a legal proposition that fraud vitiates all actions. A party to a contract that is vitiated by fraud can legitimately repudiate it and the party guilty of the fraud can legitimately be deprived of all benefits under such contract. Further, since a policy of life insurance is essentially a contract between the insurer and the insured, it may be useful to refer to section 17 of the Indian Contract Act, 1872, which defines fraud thus:

"'Fraud' define.- "Fraud" means and includes any of the following acts committed by a party to a contract, or with his connivance or by his agent with intent to deceive another party thereto or his agent, or to induce him to enter into the contrac.-

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

(2) the active concealment of a fact by one having knowledge or belief of the fact;

(3) a promise made without any intention of performing it;

(4) any other act fitted to deceive;

(5) any such act or omission as the law specially declares to be fraudulent.

Explanation: Mere silence as to facts likely to affect the willingness of a person to enter into a contract is not fraud, unless the circumstances of the case are such that, regard being had to them, it is the duty of the person keeping silence to speak, or unless his silence is, in itself, equivalent to speech."

(emphasis supplied)

5.1.26 Where an insurer seeks to repudiate a policy of insurance on the ground that it is vitiated by fraud, he has to discharge a greater burden of proof to show that there was the intention on the part of the insured to deceive the insurer. The element of mens rea would require to be established. The present section 45 of the Insurance Act requires the insurer to satisfy the existence of all of the following elements in order to repudiate a policy at any time after the expiry of two years from the date on which it was effected:

(i) that a statement made in the proposal for insurance or any report of medical officer, or referee, or friend of the insured, or in any other document leading to the issue of the policy;

(ii) the said statement was on a material matter or suppressed facts which it was material to disclose; and

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

(iv) that the policy holder knew at the time of making that the statement postpones or that it suppressed facts which it was material to dismissed.

5.1.27 Thus, it is open under the present section 45 for the insurer t any time after the expiry of two years after the coming into effect of the life insurance policy, to repudiate such policy by showing that all the above elements constituting fraud exist. The consequence that results upon the insurer so repudiating the policy is that the entire amount of premium paid till then stands forfeited and no amount whatsoever is payable under the policy. In other words, the claimants under the policy so repudiated would get nothing.

There would be many instances where the suppression of fact or misstatement may not be to the extent of a fraud and actually may be an innocent misstatement. In other words, such misstatement, made without any intention to deceive, may fall short of fraud. However, the present section 45 makes no such distinction and the consequences of repudiation with forfeiture of premiums would result even in the case of misstatement or suppression of material fact.

The practical working of section 45 of the Act as is evident in the cases that have come before the courts is that the insurers invariably try and prove the existence of the parameters of section 45 and are able to deny the claimants even the premium amounts paid till the date of discovery of fraud. This compounds the hardship caused to the family of the deceased policyholder. It bears repetition that in many an instance, the claimants or the family of the deceased policy holder may not even be aware of the policy having been vitiated on the ground of fraud. In other words, the present section 45 is like an all or nothing clause.

5.1.28 The recommendation of the Law Commission that an outer limit of time (five years from the date of commencement of the policy) beyond which no repudiation is permissible be incorporated in section 45 is clearly in favour of the policy holders and the claimants and makes a clear departure from the present section 45. Further, it has been recommended that no insurer be permitted to unilaterally repudiate a policy of life insurance. In addition to the above, the Law Commission would not want the policyholders or their claimants to be deprived of the premiums paid under a life policy which is sought to be repudiated on the ground of misstatement or suppression of facts, although material to the expectancy of life, but not amounting to fraud.

Thus, the policyholders or their claimants must have an opportunity of showing that the misstatement or suppression of the material fact was true to the best of the knowledge and belief of the insured or that there is no deliberate intention to suppress the fact or make the misstatement or that such misstatement or suppression of a material fact was within the knowledge of the insurer or the agent of the insurer.

5.1.29 What really happens in a market where policies are sold and not bought is that an agent of an insurance company will approach the prospective policyholder and get him to sign the proposal form. The agent will also assure the policyholder that he will arrange for the requisite medical certificates to the approved panel of doctors. Very often, the proposal form is not filled by the policyholder himself. In the peculiar social circumstances in India, where an illiterate policyholder (also perhaps even literate ones) can hardly be expected to read the fine print or be aware of the consequences of either filling up or not filling up a particular column in the proposal form, the knowledge of the agent should be deemed to be the knowledge of the insurer. The law should be amended to expressly provide for this.

5.1.30 At this juncture, it may help to illustrate the proposition. An agent of an insurance company approaches a prospective policyholder, a farmer, and sells him an insurance policy by getting him to sign the proposal form as well as make payment towards the first premium. The proposer (insured) is addicted to chewing tobacco but in the proposal form the relevant column is left blank. The information in this regard is a material fact, a fact that is material to the assessment of the risk undertaken by the insurer.

However, the policyholder in this case goes entirely by the agent who assures him that all he has do is to sign the proposal form and agree to be examined by a panel doctor. The agent organises the medical certificate by the panel doctor and subsequently a life insurance policy comes to be issued. The policyholder dies within three years from the date of commencement of the policy after suffering from cancer of the mouth. The claimants are his family members comprising the widow and two children who at no point in time were privy to the transaction between the agent, the policyholder and the insurance company.

5.1.31 In the above instance, the insurance company would seek to repudiate the policy on the ground that the fact of the policyholder being a tobacco addict was a material fact; that it was deliberately suppressed; that such suppression was fraudulent and that the policyholder knew that it was material to disclose such fact. Normally, in the above circumstances, the insurance company would be able to make good its case by showing that the relevant column in the proposal form was left blank. The claimants would be hard pressed to show that this was not a fraudulent suppression of fact.

The Law Commission is aware of the practice in the U.S.A of the policy being reworked where, for instance, the insurer discovers the material fact subsequent to the issuance of the policy. In the illustration narrated above, the policy premium would be reworked as if the life is being insured after accounting for the risk and premium amounts recalculated accordingly. Thus the repudiation of the policy may not be automatic. It may be open, even in India, for an insurer to do so particularly where private insurance companies have made the business competitive. However, that is a matter for the consideration of the insurers.

5.1.32 The Law Commission is of the view that in cases like the above, the family or claimants of a deceased policyholder should not suffer unduly by having to lose even the premium amounts. While they may not be able to recover the amount under the policy, they should not stand to lose the premiums collected by the insurance company on the policy. Of course, the insurance company will have to communicate in writing to the claimants the reasons for which it seeks to repudiate the policy of life insurance on the ground of misstatement or suppression of a material fact. This also prompts the Law Commission to recommend that the knowledge of the agent about the facts concerning the insured at the time of submission of the proposal would be deemed to be the knowledge of the insurer.

The Law Commission is aware that this places an extra burden on the insurer to ensure that its agents perform their duties with a sense of responsibility so that the 'uberrimae fidei' principle is honoured. The insurer will have to rework its contract with the agent and seek to indemnify itself against claims brought about as a result of the negligence of the agent. It may also entail more serious consequences for the agent but these are matters for consideration of the insurer.

5.1.33 The Law Commission accordingly recommends that in case of repudiation of the policy on the ground of misstatement or suppression of a material fact, and not on the ground of fraud, the premiums collected on the policy till the date of repudiation will be liable to be returned to the insured or the legal representatives/ nominees/ assignees of the insured.

5.1.34 Having said the above, by the Law Commission wishes to reiterate that in a case where the insurance company is able to conclusively prove that the suppression or misstatement of a material fact was fraudulent, i.e., where the claimants have failed to show that such suppression or misstatement was not with an intent to deceive, the insurance company would be entitled to deny the claimants even the 59premium amounts since fraud vitiates the entire contract.

To illustrate, there could be a situation where a policyholder has undergone a heart bypass surgery one year prior to the date of proposal and in the proposal form in response to the question "have you undergone any major surgery in the past two years?" he fills up the column with 'no'. In such an instance it will be impossible for the claimants to argue that there was no intention on the part of the insured to deceive the insurer. The insurance company will be justified, in such instance, to repudiate the policy on the ground of fraud. However, the insurance company should disclose the reasons on the basis of which it has come to such a conclusion and has to communicate such reasons to the claimants under the life insurance policy which is sought to be repudiated.

5.1.35 The illustrations given are only for distinguishing the two situations, viz., a misstatement or suppression of a material fact without an intention to deceive and one with an intention to deceive. There may be myriad situations that cannot possibly be illustrated. However, the principle for determining the existence of fraud needs to be clearly understood.

5.1.36 Accordingly, the Law Commission recommends that the insurer can repudiate a policy of life insurance at any time before the expiry of a period of five years from the date of issuance of the policy or the date of commencement of risk or the date of revival of the policy or the date of the rider to the policy whichever is later on the ground of fraud. Where repudiation is on the ground of fraud, the insurer is not obliged to pay even the premium amounts to the claimants under the policy. The insurer will have to communicate in writing to the insured or the legal representatives/ nominees/ assignees of the insured the grounds and materials on which such decision is based. The Law Commission recommends that the statutory provision to give effect to the above change will also set out the definition of 'fraud', for which section 17 of the Indian Contract Act can be referred to.

5.1.37 The practice of issuance of life insurance policies for a total period of less than 5 years may possibly exist but no such details have been brought to the notice of the 60Law Commission. It is expected that where the entire term of the life insurance policy is as short as five years or less, the insurance company would be doubly careful to ensure that the antecedents of the policyholder are thoroughly checked.

5.1.38 The above approach, it is expected, sufficiently balances the interests of both the policyholders as well as the insurers. It also accounts for the apprehension expressed by the insurer that any dilution in the existing provision will encourage fraudulent practices. It requires greater degree of diligence on the part of both the insurers as well as policyholders.

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