Dalbir Singh aged 40 took a policy on 5th August, 2014 for a sum insured of ₹10 lakh from a private Indian Insurer on the basis of the solicitation made by an agent of the insurer. The agent had indicated to Dalbir Singh

CS Professional · Insurance - Law & Practice · PYQS · June 2022
Dalbir Singh aged 40 took a policy on 5th August, 2014 for a sum insured of ₹10 lakh from a private Indian Insurer on the basis of the solicitation made by an agent of the insurer. The agent had indicated to Dalbir Singh that in the event of death, twice the amount of the sum insured will be paid under the policy by the insurer on the payment of a small additional premium at the inception of the policy. Dalbir signed the proposal form on the strength of the advice of the insurance agent who guided the proposer in answering the questions in the proposal form and getting it completed. One of the specific questions in the proposal form was on the subject of recent health condition of the proposer, viz, "whether the proposer had within six months of the date of the proposal had any disease or disorder of the respiratory system like asthma, tuberculosis, fever etc. To this question the proposer had indicated "No" as the answer. The proposal was put through the normal process in the insurer's office and after a medical examination of the proposal and on the payment of the first annual premium and the additional payment of the sum assured, the policy was issued. Dalbir Singh nominated his wife Smt Pushpa to secure the benefits under the policy. On 28th December, 2014 the insurer received an intimation from the beneficiary through the insurance agent that Dalbir Singh had died on 20th December, 2014- apparently by natural causes. A medical report from a doctor was filed along with the claim. The beneficiary asked for the double payment under the conditions of the policy. Since the claim by death arose within six months of the inception of the policy the insurer was surprised by the shortness of the time lapse between the dates of issue of the policy and the death claim. It instituted an investigation into the claim. The investigator went through the proposal form etc. and made enquiries in the neighbourhood where Dalbir had lived. He found out that hardly a fortnight before the proposal, Dalbir had been hospitalised for about a week in the end of July, 2014. He then proceeded to check with the hospital where Dalbir had received the treatment and found that around 20th July, 2014 Dalbir had vomited blood and had suffered from a stomach ailment probably caused by an infected liver. Dalbir had stayed in the hospital for a week and had been discharged on 31st July, 2014. On the strength of the investigation report the insurance company repudiated the claim for non-disclosure of material facts and purposely giving a wrong and misleading information in the proposal form viz that he had not suffered from any disease during the period of six months prior to issue of the policy. The beneficiary appealed to the Dispute Resolution Board of the insurance company but was not successful. She then proceeded against the insurer in the District Consumer's Forum which decided in her favour considering the fact that Dalbir had suffered from a minor stomach upset and the answer contained in the proposal form was not incorrect. The insurer then took up the matter to the State's Consumers' Council which confirmed the view of the District Forum. On this, the insurance company filed an appeal in the Supreme Court of India contending that there was a material non-disclosure of the facts and the proposal form did not indicate the real state of health of the proposer. There was breach of contract terms and the insurer wanted the Supreme Court to set aside the decision of the Council. The insurer contended before the Supreme Court that "there was breach of terms of contract". Indicate what the insurance company meant by this statement?

Answer & Explanation:

Insurance is a contract, represented by a policy, in which an individual or entity receives financial protection or reimbursement against losses from an insurance company. An insurance policy is a document or a contract that evidences an agreement between the proposer (insured) and the insurance company and is as much as contract under the Contract Act as any financial or commercial contract. It has all the details of the conditions or circumstances under which either the insured individual or policy nominee receives insurance benefits from the insurer. In the case of life policy, the proposer specifically declares certain answers to the questions raised by insurer on the quality of life, health etc. that would enable the insurer to price the product properly. Insurance policy is a document evidencing the transfer of risk from one to another and therefore is subject to the scrutiny of the acceptor term and conditions as prescribed. Though in a community of risks covered, they are generally prescribed and applied across the board. Hence the insurance company expects each of the answer given to the issues raised in the proposal form as an admission of fact or a statement of fact supported by proof and evidence. Any incorrect statement or misleading entry in the proposal form will therefore be contended by the insurer as a false statement or an attempt to mislead the insurer to accept the proposal and grant an insurance cover. Statement in the proposal form can be direct or derived, can be answer to question posed or offer of facts that a proposer makes to enable him / her to fetch an insurance cover. In the present case, the proposer, Mr. Dalbir Singh had answered on direct question in the proposal from that required a candid statement on the state of health of the proposer. Not only this, the question was specific and wanted a detailed answer from the proposer whether he had, in the immediate past had any health problem relating to the heart, liver, lungs etc. To this question, Mr. Dalbir Singh has given a negative reply meaning thereby that he did not have any problems on health ground. This statement was accepted by the insurer and on the basis of that a life policy for a cover of ₹10 lakh was issued. Thereafter, within six month of the commencement of the policy, Mr. Dalbir dies leading to a claim on the policy. On an investigation, it was found that hardly a fortnight before the proposal, Mr. Dalbir Singh had been hospitalized with a problem for a week or so. On 20th July 2014 Mr. Dalbir had vomited blood and suffered from severe stomach ailment probably caused by an infected liver. He stayed in hospital for a week and got discharged on 31st July, 2014 which was not disclosed at the time of issue of the policy. Insurer considers this as a material fact and a disclosure of this might have resulted in the risk cover being rejected and a claim cannot be passed due to Breach of contract. This is the basis of contention of the insurer before the Supreme Court. Another important ground for an insurance contract is that it is governed by the principle of Utmost good faith which mandates the proposer and the insurer to be truthful, and disclose all facts fully, positively and correctly. Therefore, in this contract, there is breach of the principle of utmost good faith and hence thereby there is breach of terms of contract, as the non-disclosure of hospitalization is indeed a vital fact to the insurer.

Topics: Insurance Contract Law

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