by Contributed Papers | November 3, 2010 6:59 pm
|If, although a material fact was suppressed at the time when the insurance was effected, it was disclosed to the insurance office before the premium was paid, so that the payment is made to the office with the full knowledge of facts, the insurer is liable. Thus, where a person making a proposal to an insurance against fire makes a bona fide mistake in his answers to the question in proposal form, but before the issue of the cover note, draws the attention of the agent of the company to the mistake and corrects it, it is the duty of the agent of the company to convey to the company the correct answer, and, if he fails to do so, the company are not entitled to refuse to pay a claim under the cover note, on the ground that there was a non-disclosure of a material fact in the proposal form.
In the interesting case of Ayrey v. British Legal and United Provident Assurance Co., the proposal form of a policy of life assurance contained a clause, providing that if any information which ought to be made known to the assurance company with reference to the insurance was withheld, the policy would be absolutely void. The proposal form described the assured as a fisherman. However, the assured was also a member of the Royal Naval Reserve, and as such, he was exposed to additional risks. This fact was not mentioned in the proposal form, but was mentioned verbally to the District Manager of the company, and the premiums due under the policy were paid and accepted by the District Manager. In an action on the policy, it was held that the District Manager’s knowledge of the true facts was the knowledge of the company, and the acceptance of the premiums was waiver by the company of the breach of the clause in the proposal form.
|The ‘duty of disclosure’ requires that statements made by the proposer be of facts and not opinion. In fact, a misstated opinion is actionable only if not given in good faith as held in Anderson v. Pacific Fire & Marine Insurance Co.
However, the distinction between questions of fact and questions of opinion is not always an easy one and may not matter greatly in practice. This is more so in the proposals for life insurance, where a proposer may very well not know highly material facts regarding his health, because he is not an expert and even is he knows something he might fail to appreciate its importance. An illustration in this point would be the cases of Joel v. Law Union & Crown Insurance Co. and Godfrey v. Britannic Assurance Co. Ltd. While in the case of Joel v. Law Union & Crown Insurance Co., a statement regarding the health of the proposer, made by her, was regarded as a statement of opinion, in Godfrey v. Britannic Assurance Co. Ltd., a proposer who failed to disclose a visit to a specialist was held to be guilty of non-disclosure of a material fact, even though he did not know that there was anything seriously wrong with him.
|The duty of disclosure arises before the contract is ‘formed‘ or ‘concluded‘ and is exhausted once and for all on the completion of the contract of insurance. Thus, the duty to disclose continues till the completion of the contract and, therefore, during this period if any fact is brought to the knowledge of the assured, which is material to be disclosed to the insurers, non-disclosure of such fact would vitiate the contract. Furthermore, if the assured becomes acquainted with such fact after the completion of the contract, he is not bound to disclose it. Nonetheless, there may be certain contracts, which specifically require the insured to inform the insurer about changes taking place in the nature of the risk it. Here it is pertinent to note that a breach of the duty during the original negotiations avoids the insurance policy, however often it may have been renewed.
An illustration of this principle of law can be found in the case of Looker v. Law Union and Rock Insurance Co. Ltd. In the instant case, the applicant had represented in his proposal form that he was free from disease and ailments. The insurers informed him that the insurance would become effective when the first premium due was received. Five days after this information was relayed to the assured, he became seriously ill with what was diagnosed as pneumonia. Four days later the assured died and the insurer, one-day prior to the assured’s death, received a cheque for the premium. Acton J., in this case held that
“…the insurers were not liable. One reason for the decision was the effect of an express condition in the insurers acceptance of the risk, but he also held, that there was here a failure to discharge a duty incumbent upon all proposers of contract of insurance such as these…namely a duty to inform the insurers of any material change in the nature of the risk to be undertaken by them”.
Additionally, whenever the insured negotiates a variation to the terms of insurance for his benefit, a limited duty of disclosure applies and he must disclose facts material to the desired alternation. However, the insured need not disclose circumstances supervening since inception, which are relevant to the risk originally agreed to be run.
|The duty of disclosure being absolute, the assured cannot take his defence on any of the following pleas:
|When the insurer seek to avoid the policy on the ground of concealment or non-disclosure, they must prove:
|The issue of an insurance policy raises a presumption that all the formalities leading up to the formation of a valid contract of insurance have been rightly performed. Consequently, if any party seeks to impugn the contract of insurance on the ground of non-disclosure, the onus of proof of establishing the same is upon the party alleging the same. In fact, in a number of English decisions it has been held that the burden of proving non-disclosure of a material fact lies heavily on the insurers and as the onus is on the insurer, it is the insured who receives the benefit of any doubt.
In consonance with the Courts in England, the Courts in India seemed to have followed a similar line. The Karnataka High Court held in L.I.C. v. Smt. B. Kusuma T. Rai, that before an insurer can successfully repudiate liability he must establish non-disclosure of material facts by the insured in his knowledge. Similarly, in the case of Rameshwar Singh v. L.I.C., a lady got her life insured and an insurance policy was issued after a proper medical examination had been conducted. However, on her death the L.I.C. repudiated the claim of the nominee on the plea that the lady had been suffering from asthma but had suppressed this fact. The Apex Court, on appeal, held that the L.I.C. could not repudiate the claim in the absence of production of documents supporting their plea of suppression of material facts.
|Section 20(2) of the Indian Marine Insurance Act, 1963 describes what are material circumstances. These have been held to be circumstances, which would influence the judgment of ‘prudent insurer’ in assessing the risk and fixing the appropriate premium to be charged or determining whether he will take the risk or reject it. Further, questions in the proposal form are presumed to relate to material circumstances, though there is no presumption that other matters not so dealt with are not material.
Even in the absence of specific questions, the proposer must disclose voluntarily the following facts or circumstances as they are material:
|The materiality of information is a question of fact determined by reference to the judgment of the prudent insurer at the time that the proposer is obliged to disclose. Though it has been stated that what is material is what a ‘reasonable man’ would regard as material and not necessarily whether the assured so regarded, the classic test of materiality has been laid down by Lord Chief Justice Cockburn in Bates v. Hewitt, wherein it was stated that:
“The person proposing the insurance is bound to communicate to the insurer all matters which will make him to determine the extent of risk against which he undertakes to guarantee the insured.”
Thus, in considering the materiality of a fact, the test is to see whether the fact is one which would have reasonably effected the mind of prudent and reasonable insurer at the time of the contract of insurance in deciding whether to accept the risk and if so at what rates of premium.
|Material facts can be categorised on the basis of facts in relation to physical hazards and facts in relation to moral hazards. Furthermore, since the underwriter must give due weight to the quality of the hazards involved in the risk, while assessing a risk, it is therefore, important to understand the types of hazards.
Physical Hazards pertain to the physical features of the property to be insured. Such factors as the location, age and nature of the property, manner and materials of its construction, its occupation such as storing of combustibles or otherwise and the manufacturing process carried on, etc., indicate the extent of the physical hazard involved in the risk to be covered. This is capable of a fairly accurate assessment either from the details given of the proposed risk or by a personal inspection of the subject matter of insurance. Furthermore, since these are normally included in the proposal form, so dispute with respect to material physical hazards does not normally arise.
Moral Hazards pertain to the human factors, which may contribute to the occurrence of the event insured against. Not only the character or moral integrity of the insured, but also his motive in seeking cover etc. have a bearing on moral hazards. Moral Hazards are more difficult to assess than physical hazard and are often revealed only when a claim arises.
Further, the facts relating to moral hazard can be classified on the basis of insurance history of the applicant and history of criminal record of the applicant.
However, in England, consequent on the passing of the Rehabilitation of Offenders Act, 1974, for rehabilitating ‘offenders who have not been reconvicted of any serious offence for periods of years’, the proposer for insurance is relieved of any duty to disclose not only a ‘spent’ conviction but also the events out of which it arose, nor can the insurer treat the non-disclosure as a breach of warranty. There exists no corresponding statute in India. However, in India the Prohibition of Offenders Act, states that if person is released on prohibition, no stigma shall attach to such person for all purposes for example, for seeking employment in public office. This provision may be applied to insurance contract also.
The Proposal Form
|In practice, the duty of the insured to observe utmost good faith is enforced in non-marine insurances by requiring the proposer to complete a proposal form framed to obtain all the relevant information necessary in normal circumstances, with true and complete answers, incorporating it in the policy and making it the basis of the contract.
The questions put in the proposal form by the insurers either expands or limits the duty on applicant to disclose. As a general rule, the fact that particular questions relating to the risk are put to the proposer does not per se relieve him of his independent obligation to disclose all material facts. Thus, even if there are no specific questions in the proposal form that may be applicable to the facts of a particular case, the proposer is not relieved of his duty of disclosure and must disclose all the material facts, which he knows or ought to know, are material to his risk, so that the insurer is not misled. Consequently, if a burglary insurance proposal form asks questions chiefly concerned with the nature of the proposer’s premises and the business carried on there, this will not of itself relieve the proposer of his duty to disclose material facts relating to his personal experience, such as possession of a criminal record.
However, it must be remembered that it is more likely, however, that the questions asked in the proposal from will limit the duty to disclose, in that, if questions are asked on particular subjects and the answers to them are warranted, it may be inferred that insurer has waived his right to information, either on the same matters but outside the scope of the questions, or on matters kindred to the subject matter of the questions. Thus a question is posed as regards the number of accidents the proposer has had in the last three years, it may well be implied that he does not want to know of accidents before that time, though these would still be material.
It is pertinent to remember that the presence of waiver depends on a true construction of the proposal form, the test being, would a reasonable man reading the proposal form be justified in thinking that the insurer had restricted his right to receive all material information, and consented to the omission of the particular information in issue.
Nonetheless, it must be remembered that in most proposal forms, the proposer also required to declare that he warrants the truth of the statements made therein and that he has not misrepresenmted or concealed any material fact. The contractual duty so imposed is such that any suppression or untruth or inaccuracy in the statements in the proposal form will be considered as a breach of duty of good faith and will render the policy voidable by the insurer whether the statement was made innocently or fraudulently and whether it relates to a material matter or not.
|In an insurance contract there is no equality between the two parties to the contract, as the insurer is the richest corporation and the insured an ordinary individual. Furthermore, the insured’s position is made more vulnerable as a result of the ‘duty of disclosure’ and the practice of ‘converting statements in the proposal from into warranties’.
While there was a need for such a doctrine to protect the insurers in the middle of the 18th century when the insurance market was in its infancy, the same cannot be said to be the case in the present when the insurers have improved methods to assess risks and protect themselves. In fact, the British Insurance Association and Lloyd’s have voluntarily drawn up statements of practice relating to life and non-life insurances applicable within the United Kingdom, in the light of the English Unfair Contract Terms Act, 1977, which considerably alleviate the position of the insured there. However, these ‘statements of practice’ do not have the force of law and the law as regards the ‘duty to disclose’ has remained static.
In the wake of the static state of the law the need of the hour is for both the Government owned insurance undertakings and the private entrepreneurs to voluntarily give assurances of fair dealing to their customers in India in line with the practice of the private insurers in England.
a) B. N. Banarjee, Law of Insurance, 1994.
b) Brij Nanda Singh, Insurance Law, 1993.
c) E. R. Hardy Ivamy, General Principles of Insurance Law, 1993.
d) John Birds, Modern Insurance Law, 1997.
e) M.N. Srinivasan, Principles of Insurance Law, 1998.
f) MacGvillivary, Insurance Law, 1997.
g) Malcolm A. Clarke, The Law of Insurance Contracts, 1989.
 Wing v. Harvey, (1854) 23 L.J. Ch. 511.
 British Equitable Iunsurance Co. v. Great Western Railway, (1869) 38 L.J. Ch. 314.
 (1918) 1 K.B. 136.
 (1872) L. R. 7 CP. 65 as cited in Brij Nanda Singh, Insurance Law, 1993 at 182.
  2 KB 863.
 (1922) L. R. 7 CP. 65 as cited in Brij Nanda Singh, Insurance Law, 1993 at 185.
 Section 20(1) of the Marine Insurance Act, 1963 states that “Subject to the provisions of this Section, the assured must disclose to the insurer, before the contract is concluded, every material circumstance which is known to the insured, and the assured is deemed to know every circumstance which, in the ordinary course of business, ought to be known by him. If the assured fails to make such disclosure, the insurer may avoid the contract.”
 See Looker v. Law Union and Rock Insurance Co., (1928) 1 KB 554 as cited in M.N. Srinivasan, Principles of Insurance Law, 1998 at 79. Also see Yager and Guardian Insurance Co., (1912) 108 L.T. 38; Allis-Chalmers v. Maryland Fidelity and Deposit Co., (1916) 32 T.L.R. 263 as cited in Brij Nanda Singh, Insurance Law, 1993 at 167.
 Lishman v. Northern Maritime Insurance Co., (1857) L.R. 10 C.P. 179 as cited in Brij Nanda Singh, Insurance Law, 1993 at 167.
 Personal Accident Policies normally contain a condition where a change in the nature of the risk has to be agreed to by the insurer, if the policy is to continue.
 Joel v. Law Union and Crown Insurance Co., (1908) 2 KB 863.
 (1928) 1 KB 554.
 MacGvillivary, Insurance Law, 1997 at 393.
 New India Assurance Co. v. Sulochna Choudhrani, (1962) 32 Comp. Cas. 1029 (Assam). See contra Hamborough v. Mutual Life Assurance Company of New York, (1895) 72 L.T. 140, wherein Lopes, LJ, stated that mere silence respecting a material fact in absence of any fraudulent intention does not avoid policy, unless an express condition to that effect is found in the policy.
 Cantiere Meccanico Etc. v. Janson, (1912) 3 KB 452.
 Jayshree Roy Chowdhury v. Oriental Insurance Co. Ltd., AIR 1992 Cal 35.
 Supra note 30 at 182-183.
 Supra note 30 at 181.
 Stebbing v. Liverpool and London and Globe Insurance Co., (1917) 2 KB 433.
 See Greenhill v. Federal Insurance Co., (1927) 1 KB 65; Joel v. Law Union and Crown Insurance Co., (1908) 2 KB 863.
 Butcher v. Dowlen,  1 Lloyds Rep. 310 as cited in Malcolm A. Clarke, The Law of Insurance Contracts, 1989 at 436.
 (1991) 70 Comp. Cas. 86.
 AIR 1991 SC 55.
 Section 20(2) of the Indian Marine Insurance Act, 1963 states that “Every circumstance is material which would influence the judgment of a prudent insurer in fixing the premium, or determining whether he will take the risk.”
 Schoolman v. Hall, (1951) 1 Lloyds’ Rep. 139. Also see Stiptrih v. Insurance Co., (1927) 277 U.S. 311, wherein it has been held that information not asked for in application is presumably deemed immaterial in America, as questions asked are extremely numerous and detailed.
 M.N. Srinivasan, Insurance Law, 1998 at 75.
 Joel v. Law Union and Crown Insurance Co., (1908) 2 KB 863.
 (1867) 36 L.J.Q.B. 282 as cited in Brij Nanda Singh, Insurance Law, 1993 at 185.
 ShivkumarRadhakrishandas v. North British and Mercantile Etc., AIR 1936 Sind 222.
 The word ‘hazard’ denotes the features in a risk, which tend to bring about the event or increase the loss when the vent takes place.
 Supra note 67 at 79.
 Supra note 67 at 80.
 However, if the applicant has been arrested and not convicted, then courts are divided whether it is material fact or not.
  2 Lloyd’s Rep. 440.
 If a person convicted for two and a half year it is ‘spent conviction’. If convicted for more than two and a half year it is to be disclosed.
 Class Lecture on the Duty of Disclosure delivered by Mr. Pulla Reddy.
 Schoolman v. Hall,  1 Lloyd’s Rep. 139.
 Supra note 67 at 82.
 John E. Feeley, “The Non-disclosure/misrepresentation Defence: UK and California Law regarding the ‘materiality’ requirement”, International Insurance Law Review, 1995.
 Supra note 67 at 82.
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