The Duty of Disclosure in Insurance Contracts

In the interesting case of Ayrey v. British Legal and United Provident Assurance Co.,[3][3] 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.

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.[5][5] and Godfrey v. Britannic Assurance Co. Ltd.[6][6] 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.

An illustration of this principle of law can be found in the case of Looker v. Law Union and Rock Insurance Co. Ltd.[12][12] 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.[13][13]

1. That the non-disclosure was not intentional.[14][14]
2. That the non-disclosure was due to any carelessness.[15][15]
3. That the assured did not consider the matter concealed to be material.
4. That the concealment was not fraudulent. Since the contracts of insurance call for uberrima fidie on the part of the assured, the insurance policy may be avoided on the ground of non-disclosure, notwithstanding that the assured may have acted in good faith and honesty of intention.[16][16]

1. That the fact alleged to exist did exist.
2. That it was material
3. That it was within the knowledge of the assured.
4. That it was not communicated to the insurers.[17][17]

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,[22][22] 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.,[23][23] 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.

Material Facts

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Even in the absence of specific questions, the proposer must disclose voluntarily the following facts or circumstances as they are material:

1. Facts which render or tend to show that the risk is greater than normal
2. Facts which suggest any special motive for taking the insurance
3. Facts which suggest the existence of moral hazard which relate to the moral integrity of the proposer or which suggest that the proposer is himself abnormal, that which indicate his accident proneness etc. Thus, any fact is material which leads to the inference that the particular proposer is a person or one of a class of persons whose proposal for insurance ought to be subjected to special consideration before it can be decided whether it is accepted at all or accepted at normal rates. This is usually referred to as the moral hazard.[26][26]

“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.[29][29]

Physical Hazards pertain to the physical features of the property to be insured.[31][31] 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.[32][32] 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.[33][33]

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.

1. Where Insurance Company refuses the application by an individual because of integrity of person, it will be material and should be disclosed while taking a new insurance policy, provided that the nature of the ‘new insurance policy’ has some connection with the nature of the ‘old insurance policy’.

1. Criminal History of the insured is categorized as a moral hazard that needs to be disclosed. Thus, if the applicant is convicted, even if it is wrongful conviction, the same is to be disclosed.[34][34] In the case of Reynolds and Anderson v. Phonex Association Company Ltd,[35][35] the plaintiff has been convicted under Rehabilitation of Offenders Act for defrauding Tractor Company with respect to its batteries. However, the plaintiff did not disclose the fact of conviction and on the basis of this non-disclosure, the Insurance Company sought to avoid the contract. In the instant case, the court held that the burden lies on defendant to prove reasonable nexus between conviction and claim made and loss suffered. The Court found that the Insurance Company had failed to discharge such burden and therefore, held that there exist no such reasonable nexus.

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[36][36] 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.[37][37]

The Proposal Form

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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.[38][38]

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.[39][39] 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.[40][40]

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.

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While there was a need for such a doctrine to protect the insurers in the middle of the 18^th 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.