259979252-misrepresentation-non-disclosure-abd-breach-of-warranty-by-the-insured.docx

CHANAKYA NATIONAL LAW UNIVERSITY

SUBJECT- INSURANCE LAW PROJECT WORK ON NON-DISCLOSURE AND MISREPRESENTATION UNDER INSURANCE LAW

SUBMITTED TO- MR. SHANTANU BRAJ CHOUBEY SUBMITTED BY RAJAT KASHYAP ROLL NO. 1423 8TH SEMESTER

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ACKNOWLEDGEMENT I would like to express my gratitude towards our law of Insurance Professor Mr. SHANTANU BRAJ CHOUBEY for giving me the opportunity to work on this topic and guiding towards completing the project in an appropriate manner. I would like to thank everyone who has supported me and guided me towards completing this project.

Rajat kashyap Roll no - 1423

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TABLE OF CONTENTS S.No

Title

Page No.

1

TABLE OF CASES

4

2

TABLE OF STATUTES

4

3

INTRODUCTION

5

4

RESEARCH

6

METHODOLOGY

5

MISREPRESENTATION

7

6

DISCLOSURE

9

7

CONCLUSION

16

8

BIBLIOGRAPHY

18

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TABLE OF CASES St. Paul Fire and Marine Insurance Co. (UK) Ltd. v. Mc Connell Dowell Constructors Ltd Elton v. Larkins Economides v. Commercial Union Assurance Co. plc LIC v. Shakunthalabai Bhagwani Bai v. LIC of India Life Insurance Corporation of India v. Shakuntala Bhagwati Bai v. LIC Bank of Nova Scotia v. Hellenic War Risks Assn. (Bermuda) Ltd., The Good Luck Banque Finaciere de la Cite v. Westgate Insurance Co. Ltd Brownlie v. Campbell Rozanes v. Bowen United India Insurance Co. Ltd. v. MKJ Corpn Joel v. Law Union

TABLE OF STATUTES Insurance Act, 1938 Motor Vehicle Act, 1988 Marine Insurance Act, 1963

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AIMS AND OBJECTIVES OF THE STUDY: Through this paper the researcher aims at understanding the concept of misrepresentation, non disclosure and breach of warranty by the insured as it appears in a new chapter inserted into both Insurance act, 1938 and as well as marine insurance from which the researcher has tried to understand as to what is meant by misrepresentation and non disclosure, who will be liable upon such misrepresentation and related questions and issues. Also the objective of this paper is to see why proper and good faith in required in the terms of insurance. RESEARCH QUESTIONS: 

What is a misrepresentation and whether the insured’s interest are effected through the misrepresentation?



What is meant by non disclosure and who will be principally liable upon such act?



When the breach of warranty in a insurance arises?

INTRODUCTION In insurance contract, all the information shall be disclosed by the parties. If a party fails to adhere to the principle of utmost good faith then the outcome of claim may be affected. The parties must disclose all relevant information. A false or misleading statement that, if intentional and material, can allow the insurer to void the insurance contract. Some insurance policies and state laws that govern insurance contract provisions vary on the exact details of the conditions under which coverage may be voided; these variations are usually denoted in state amendatory endorsements. Insurers need information from consumers to decide whether to offer (and renew) insurance, and to decide the price or other terms of the insurance to be offered to the consumer. The law imposes a duty of disclosure on policyholders when they seek to take out new insurance cover or to renew existing insurance cover.

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Insurers may be able to refuse to pay a claim or part of a claim under an insurance policy if the policyholder has not complied with their duty of disclosure. However, an insurer must first establish that: 

the insurer clearly informed the policyholder in writing about the duty of disclosure and the consequences of non-disclosure;



the policyholder knew or should have known that the insurer required information about certain matters;



the policyholder failed to provide information, or misrepresented the information; and



the insurer would not have offered insurance, or would have offered insurance on different terms, had the policyholder properly disclosed the information.

SCOPE AND LIMITATIONS OF THE STUDY: The scope of this research paper is to understand the concept of misrepresentation, non disclosure and breach of warranty by the insured as it appears under the Insurance Act. The researcher has limited himself to discussing the substantial law aspects of the paper which are connected with law of insurance and has kept the discussion of the procedural aspects at a minimum. RESEARCH METHODOLOGY METHOD OF WRITING: The researcher has used both a descriptive and analytical method of writing in order to understand the issues better. The researcher has also relied on case law, to get an in depth understanding of the topic. MODE OF CITATION: A uniform mode of citation has been followed throughout this project. SOURCES OF DATA : The researcher has used secondary sources in order to obtain sufficient data for this project, namely, books, articles and the internet. 6

Chapterization: 

Chapter 1: this chapter deals with the misrepresentation, material facts and misrepresentation of material facts.



Chapter 2: this chapter deals with the Disclosure, Facts which need to be disclosed, facts which need not be disclosed and Facts which need not be disclosed.



Chapter 3: this chapter deals with the Warranty, Breach of warranty and Conclusion & Suggestions.

CHAPTER 1: Misrepresentation Getting into a contract with a person or a company by making statements that are not in accordance with the facts is known as misrepresentation.

Definition: Getting into a contract with a person or a company on false grounds by making statements that are not in accordance with the facts is known as misrepresentation. In an insurance policy, misrepresentation on the behalf of the insured gives the insurance company a right to terminate the policy.

In case of health insurance if the applicant is aware of the inaccuracy of the clause(s) in an insurance statement and he/she does not disclose it before signing the contract, then he/she can be denied coverage for the same. An insurer can refuse a claim only if the misrepresentation is unjustifiable or in other words the risk is substantial.

Material Fact Another problem arises as to the definition of the term material fact. What may be material for one may be immaterial for the other and vice-versa. But, generally speaking, a material fact is one which affects the judgmental capacity of a person. It must be such that a different consequence would have occurred had it not been disclosed. The following cases illustrate the different theories evolved by the judiciary regards this.

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In the case of St. Paul Fire and Marine Insurance Co. (UK) Ltd. v. Mc Connell Dowell Constructors Ltd,1 Two major questions were decided in this case. The first was the test of materiality according to which the fact in question must have been of interest to a prudent insurer. Secondly, as regards the presumption of inducement, it was held that the test would be satisfied if the insurer could show that he was influenced in whole or in part by the assureds misleading presentation of the risk.

The Prudent insurer test has been adopted in S.149(6) of Indian MV Act,1988 and S. 149(5) of English Road Traffic Act, 1972. Misrepresentation of Material Facts This is the offence most often thought of when the term fraud is used. Misrepresentation cases can be prosecuted criminally or civilly under a variety of statutes or they might be the basis for common law claims. The gist of the offence is the deliberate making of false statements to induce the intended victim to part with money or property. The specific elements of proof of misrepresentation vary whether the case is prosecuted as a criminal or civil action. The elements normally include: •

Material false statement;

•

Knowledge of its falsity;

•

Reliance on the false statement by the victim;

•

(A loss) Damages suffered;

•

A deceit or fraud constituting a false statement made willfully or recklessly, which causes

loss to another.

1

45 Con LR 89

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Not only is a misrepresentation fraudulent if it was known or believed by the maker of the representation to be false when made, but mere non-belief in the truth is also indicative of fraud. Thus whenever a person makes a false statement which he does not actually and honestly believe to be true, for purposes of civil liability, that statement is as fraudulent as if he had stated that which he did not know to be true, or knew or believed to be false. The motive of the person making the representation is irrelevant. The maker of the representation will not, however, be fraudulent if he believed the statement to be true as he perceived it, provided that perception was one that might reasonably be held, though the court later holds that the representation objectively bears another meaning.

CHAPTER 2: Disclosure The assured must disclose to the insurer, before the contract is concluded, every material circumstance which is known to be assured and the assured is deemed to know every material circumstances which, in the ordinary course of business ought to be known to him. Usually, the parties to the contract can examine the items or service, which is the subject matter of the contract. Each party can verify the correctness of the statements of the other party. There is no need to take the statements on trust. Assignment of Interest-Section 17 of the Marine Insurance Act, 1963 provides: 'Where the assure d assigns or otherwise pans with his interest in the subject-matter insured, he does not thereby tra nsfer to the assignee his rights under the contract of insurance, unless there be an express or impli ed agreement with the assignee to that effect. But the provisions of this section do not affect trans mission of interest by operation of law." Disclosure and Representation I. Disclosure Marine insu rance is uberrimae files (utmost good faith) Section 19 of the Marine Insurance Act, 1963 provid es that: "A contract of marine insurance is a contract based upon the utmost good faith, and if the utmost good faith be not observed by either party, the contract may be avoided by the other party. ' The doctrine of caveat emptor (let the buyer beware) applies to commercial contracts, but insura nce contracts are based upon the legal principle of uherrimae fidel (utmost good faith) If this is n ot observed by either of the parties, the contract can be avoided by the other party. In marine insu rance the material facts are as to the subject matter, the .ship and the perils to which the ship is ex

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posed; knowing these facts the underwriter must form his own judgment of the premium and othe r people's judgment is quite immuterial. Thus in a marine proposal it is not material to disclose w nether any other office has refused the proposal.

The duty of the utmost faith applies to the insurer. He may not urge Ae proposer to affect an insu rance which he knows is not legal or has run off safety. But, the duty of disclosure of material fac ts rests highly on the insured because he is aware of the material common in other branches of ins urance are not used in the marine insurance. Disclosure by assured Section 20 of the Marine Insu rance Act, 1963 provides that: "(1) Subject to the provisions of this section, the assured must disc lose to the insurer, before the contract is concluded, every material circumstance which, is known to the assured, and the assured is deemed to know every circumstance which, in the ordinary cour se of business, ought to be known to him. If the assured fails to make such disclosure, the insurer may avoid the contract. (2) Every circumstance is material which would influence the judgment o f a prudent insurer in fixing the premium, or determining whether he will take the risk. (3) In the absence of inquiry the following circumstances need not be disclosed, namely:— (a) any circums tance which diminishes the risk. (b) any circumstance which is known or presumed to be known t o the insurer. The insurer is presumed to know matters of common notoriety or knowledge, and m atters which an insurer in the ordinary course of his business as such ought to know; (c) any circu mstance as to which information is waived by the insurer; (d) any circumstance which it is superf luous to disclose by reason of any express or implied warranty. (4) Whether any particular circum stance, which is not disclosed, be material or not is, in each case, a question of fact. (5) The term "circumstance" includes any communication made to. or information received by, the assured." I n "Elton v. Larkins,2, it has been observed that where the material facts are known to the assured at the time of affecting a policy, he is bound to communicate them and the circumstance of their b eing contained in what are called Lloyd's lists, which the underwriter has the power of inspecting , will nol dispense with the necessity of such communication.

Facts which need to be disclosed and facts which need not be disclosedFacts required to be disclosed-

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[(1832) 8 Bing 198] 10

1. A fact which is earlier immaterial but becomes material later on must be disclosed if it has been expressly mentioned in the terms and conditions of the policy. Eg. Fire insurance of ones house. Earlier, vacant plot located nearby. Later on a petrol pump is constructed on such plot. 2. A fact which increases the risk must be disclosed in all circumstances. E.g. incase of theft insurance, if a person lives alone in an isolated place, the same needs to be compulsorily disclosed as it increases the risk. 3. Previous losses incurred and claims under previous policies needs to be disclosed. This is mainly in case of double insurance where it needs to be ascertained as to whether the subsequent insurance company is willing to insure and to what extent. 4. Special terms and conditions under previous policies if any. 5. Fact of existence of non-indemnity is to be disclosed. This relates to any charge or encumberance on the policy in the form of a loan security or otherwise. 6. The description of the subject matter must be stated properly. This is mainly to locate the property if it is immovable and to recognize it if it is movable. 7. Facts which suggest any special motive to take the insurance. 8. Facts which suggest the existence of any moral hazards which relate to the moral integrity of the proposer, etc. CASE: In Economides v. Commercial Union Assurance Co. plc,3 It was held that the duty of the assured to disclose all material facts required an assured only to disclose facts known to him. There is no obligation on the assured to make enquiries as to the factual basis of his belief. Facts which need not be disclosed1. Fact lessening the risk need not be disclosed. 2. Public knowledge. E.g. facts regarding govt. policies, taxes, subsidies, etc. which are expected to be known to all.

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(1997) 3 All ER 636

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3. Fact of law like rules, regulations, etc. which have already been made available to all by way of the notification in the official gazette. 4. Superfluous facts or such information which is not logical. 5. Facts which are inferred information. 6. Fact waived by the insurer himself. 7. Facts governed by the policy itself. In LIC v. Shakunthalabai,4 In this case, the insured had failed to disclose that he suffered from indigestion for a few days and took chooram from an ayurvedic doctor. He died within that year due to jaundice. The insurer repudiated the claim on this account. The court did not approve of the repudiation as the insurer did not establish by clear and cogent evidence that the question was properly explained to the insured and that he was told that illness included such casual disturbances to health and medicines included tablets that could be purchased at the nearest coffee store. In Bhagwani Bai v. LIC of India,5 The insurer cannot avoid or repudiate an insurance policy on the ground of non-disclosure of lapsed policies by the assured which had no bearing on the risk taken by the insurer. Does Silence Amounts To Non-Disclosure? A policy of life insurance of a person who at the time of insurance is in good state of health, is not vitiated by the non-disclosure by such person of the fact that few years back he had some disease or he had been suffering from headaches or body aches all such things are presumed to be known to the company. What an insured undergoes in his normal course of life needn’t be told to the company.6 How Is Section 45, Being Misused By The Insurer?

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AIR 1975 AP 68

5

AIR 1984 MP 126(130) BrijAnand Singh, ‘New Insurance Law’, University Book agency, 4th ed., 2000, Allahabad.

6

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The section was enacted to prevent immense loss and hardships caused to the insured and his legal representatives because the insurers avoided contract of life insurance policy due to incorrect statements whether material or not made by the insured even after the policy had been in force for several years and all the premium paid by the insured was forfeited by the insurer. Thus the provision in effect mitigated the rule of uberrima fides, i.e., utmost good faith. Obligation to deal fairly and honestly with each other is upon both the parties equally. In the past, problems have arisen with misrepresentation or non-disclosure by the insured. In this context, the issue is when would failure to make such a disclosure render the contract void or voidable. There have been several judgments of the Hon’ble Supreme Court in this regard which have underscored the importance of the burden of proof shifting to the insurer after the expiry of two years from effective date of the policy, if the insurer seeks to repudiate the claim on the basis of fraud or suppression of facts which were material to be disclosed.7 Life

Insurance

Corporation

of

India

v.

Shakuntala.8

Facts Of The Case: Jamanadas died of jaundice on 4-11-1986 who had an insurance policy with appellants, one and half years after he died. This policy was taken on the grounds of his personal statement that he had not suffered from any illness and had not consulted any medical practitioner within last five years, but had once suffered from indigestion for few days and had taken “chooranam” from an ayurvedic practitioner. Arguments Raised: Learned Counsel for respondents as usually relied on Section 45 of the Insurance Act and stated that insurer had right to repudiate a policy on the grounds that statement made in proposal for insurance or any documents which leads to policy was inaccurate or false. Judgment: Court was of the view that, treating occasional headaches or a bout of indigestion as a ‘material fact’ which an insured was under an obligation to disclose would be extremely unreasonable. No reasonable man would deem it material to tell an insurance company of all the casual headaches he had in his life, and if he knew that it was an ordinary casual headache, there would be no breach of his duty towards the insurance company in not disclosing it.

7 8

ww.iirmworld.org.in/conference/red-hyd/sv%20krishna%20mohan.ppt visited on March 15, 2015. AIR 1975 A.P 68.

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The confidential report made by the medical officer of the insurance Company shows that the appellant was in ‘first class life’. And the jaundice of which he died had nothing to do with the undisclosed indigestion from which he suffered 18 months earlier. And the only connection between them would be the advantage life insurance was seeking. Therefore non-disclosure would not amount to an untrue statement and Life Insurance Company was held not justified in repudiating the policy. And therefore his wife was entitled to the insurance claim. Comments: - This case puts forth the principle that the non-disclosure of ‘material facts’ only provides power to repudiate the contract by the company, but other ordinary facts which are unconnected to the main contract entered into by the insured cannot be ignored. Here for the same reason Company was restrained from taking such step, on the bases of facts which were irrelevant to be disclosed (i.e. indigestion) by the insured to effect of the contract. Bhagwati

Bai

LIC .9

v.

FACTS OF THE CASE: Plaintiff is (beneficiary of the policy) and her husband late Moolchand insured himself with the defendant on 28-3-1972 for the sum of Rs. 25,000/- he also had filed a proposal form and personal statement on the same date, and died within a month on 16-4-71. Division manager refused the claim by the appellant on the fact that he had concealed the fact that before filing for the present policy he had three policies in March 1965, which had lapsed in March 1970. Issues: Now

it’s

to

be

observed

under

two

broad

issues:-

· Whether the deceased deliberately concealed the fact of the existence of earlier three policies in hand? · Was the fact concealed material to the bearing of risk undertaken by the company i.e. if it still would have insured the life of the insurer if the corporation was made aware of the fact of the facts alleged to be concealed? Arguments Raised: But plaintiff stated that the fact was told but the same was not recorded by the agent, and contended that even if it was not disclosed it’s not material to the disentitle the defendant. Plaintiff therefore claims interest amounting to 11,000/-, w.e.f. 16-4-1972 at the rate of 9

AIR 1984 M.P 126.

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12 % per annum. Corporation contended that if it would have known the fact of existence of three policies with the insured it wouldn’t have issued the same to him, and therefore money paid by him would stand forfeited. Being mis-represented by the deceased the contract would stand void under section 45 of the Insurance Act. Judgment: - Court applied Section 17 and 19 of the Contract Act and held that the Insurer cannot repudiate the liability by showing only some inaccuracy or falsity of the statement, nor can avoid the policy for a material misrepresentation if it has no bearing on the risk. Thus on every misrepresentation or concealment of a fact a contract cannot be avoided merely on trivial and inconsequential misstatement or non-disclosure That the non-disclosure about the lapsed policies had no bearing on the risk and didn’t amount to fraudulent misrepresentation as no undue advantage was derived by the concealment of facts and the corporation was made liable to pay the insurance amount with interest at the rate of 6% per annum w.e.f. 29-12-1973 till payment. Comments: - This case upholds the same principle of materiality of facts; this principle is widely misused by the companies to discharge themselves from liability of paying the insured. Prior policies though disclosed were firstly, not recorded by the insurer’s agent and secondly even if proved to be concealed had no bearing on the claim made by the insured. What is important is the nexus between the materiality of the facts and the risk borne by the insurance company and everything else is the way of its escape from the responsibility it bears towards the public.

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Conclusion & Suggestions Even though law seems to be clear in constituting a balance between the insuring party and insured, but in reality, there is no equality between the two, as insurer is the richest corporation and the individual is an ordinary individual. Insured has no legal knowledge about the ambiguous language used in the company’s policy with intention to waive them from liability to pay insured on happening of an agreed event. On discussion on these cases we can observe how the companies willfully neglects reimbursing the insured, who later instead of getting their amount from the company have to pay the courts for getting their rights enforced. It’s pertinent to note that the position of disclosure is different between India and England where the insured is only bound to answer the questions being put to him in the policy. As all the questions relevant for the contract are been put before the insured therefore there’s more accuracy of facts before the contract comes to force. This reduces the chances of confusion later when the claim is made by the insured on his policy. This system must be adopted by the India also to reduce the chances of ambiguity, and hence the burden of cases on the courts and insured to get the agreed amount. The malpractice and arbitrary use of power by the insurance companies must be restrained by incorporating provisions in the Act similar to the one adopted by the English law to reduce the chances of ambiguity at later date. Else the insurer would keep taking advantage of the insured by falsely repudiating the claims made by the insured. The change if brought in the Act would not only reduce the hardship caused to the insured, but also reduce the burden of courts over the insurance cases flooding on the false rejection of claims been made by the companies, where most of the insured from the rural locality are not even aware of their present rights under the Act. Great care must be taken in deciding what would constitute illness or material change in health or what ordinary simple disorder is, there’s a great chance for one being take for another by the insurance companies. Therefore courts must take due care in identifying if the fact of which insurance company is tending to repudiate the claim is of material nature, or not before deciding the claim. Liberal interpretation must be adopted to further the object of the Act in favor of insurer, for fulfillment of the claim raised by him, which depends on case to case bases. The ambiguity lying in the Act must be removed, and in addition to that the time frame under the Act must be reduced to one year instead of two years, as the premiums paid by the insured would be at great risk if the time limit provided under, Section 45 is increased in accordance to the Law Commission’s report. 16

Insurance is all about serving the consumers, therefore the Act must try furthering the purpose as the greater trust of the consumers would only hamper the business of the insurer. Therefore for its own sake it must try gaining the trust of the insured to gain business at a larger level.

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BIBLIOGRAPHY

BOOKS REFFERED: 

Dr. Avtar Singh, “Principles of Insurance Law”, 17th ed., 2002,Wadhwa& Co., Nagpur.



BrijAnand Singh, “New Insurance Law”, University Book agency, 4th ed., 2000, Allahabad.



Dr. S.R. Myneni, “Law of Insurance”, Asia Law House, First Edition,2014,Hyderabad.

WEBSITES REFFERED:   

ww.iirmworld.org.in/conference/red-hyd/sv%20krishna%20mohan.ppt visited on March 17th, 2015. www.Indian kanoon.com www.westlaw.com

ARTICLES REFFERED 

http://www.mondaq.com/x/78140/The+Duty+Of+Disclosure+Part+1+of+2



http://www.indialaw.in/non-disclosure-material-facts-good-ground-insurance-comp any-repudiate-claim/



http://m.businesstoday.in/story/why-accurate-disclosures-are-must-for-insurance-p olicies/1/186559.html

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