The Critical Inquest of Materiality under Incontestability Provision in Life Insurance Law Introduction Research Proposal Incontestability Law

in India: The Common Law Origin & Deviation Principles of Common Law on Insurance Conflict of Warranty & Condition Representation- An Interpretative Solution Legislative Amendment in India- The Common Law Deviation Materiality under Incontestability Law: The Evolution of Test Subjective & Objective Knowledge- The Judicial Crossroad The Origin of the Test In Search of Prudent Insurer The Materiality Matters The Amendment Bill 2008: A Reformer Conclusion

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Introduction One of the most recent investigations on the Insurance Act, 19381 conducted by KPN Committee Report in 20052 had commented on incontestability provision under Section 45 of 1938 Act as well settled and any amendment of the present Act provisions unnecessary for an equitable and adequate protection of the interest of policyholders or of other beneficiary claimants.3 Having said so, they had noted and mootedtheir reservation to the earlier recommendations proposed by the Law Commission of India in its 190th Report4 on the issue of substituting the two years framework to five years5 under Section 45 of Insurance Act, 1938.
Vivek Dubey, Manager-Legal & Compliance Dept. Kotak Mahindra Old Mutual Life Insurance Company Ltd. All views expressed in this Article are of authors personal view and does not respresent any company or industry in any manner whatsoever. The auhor can be contacted on vivek.dubey001@gmail.com 1 The Insurance Act, 1938 (Act IV of 1938). Received Governor Generals assent on 26th February, 1938. See Notification No. 589-I(4)/38, dated 1st April, 1939 in the Gazette of India, 1939, Part I page 631. (Hereinafter referred as 1938 Act ) 2 Report of KPN Committee on Provisions of Insurance Act, 1938. Dated: July, 2005. 3 Id para 7.45. 4 190th Report: The Revision of Insurance Act, 1938 & the IRDA Act, 1999, Law Commission of India, June 2004. 5 Id para 5.1.40.

However, KPNs rejection of any required change in existing law seems more due to their limited observation on the specified subject, which was contrary to the Law Commissions6 observation that 65% of Policyholders had common complaint regarding the claims. It would be worth mentioning here that the Law Commission in 1985 had felt the need to review Section 45 of Insurance Act, 1938 Page | 2 arose out of certain difficulties in the existing incontestability provision.7 The multifaceted issues of incontestability have constantly come before the constitutional courts in India to address a fair and correct interpretation therein but they their efforts have gone in vain relatively due to wrong approach. The major conflict in respect to the incontestability provision under 1938 Act is surrounded over the interpretation of materiality and to provide a principle based test for it. Ever since 1941 Amendment Act, there was feeling and a subtle attempt to revise Section 45, but it seems the industry was quite apprehensive about the changes.8 However, the United Kingdoms Law Commission had issued its Consultation Paper9 jointly with Scottish Law Commission on wide range of issues pertaining to the incontestability under English Law in the line of Australian experience of insurance law reform. Robert Merkin observed in his article10 the need to reform in English law on similar lines of Australian reform and he remarked: The decision to reform the law in Australia in 1984 was greeted with a chorus of disapproval from the industry, which feared for its future. Twenty plus years on, the system appears to have bedded down with relatively little difficulty, and there has undoubtedly been a change not just in the law but in the entire culture which surrounds the insurance industry. Doubtless any attempt to change the law in the UK will be met with protests from some quarters: the Australian experience shows that the market adapts very easily to new laws as long as they strike a fair balance between the interests of the parties. Many jurisdictions have revised their insurance laws, and the London market may find itself becoming less sought after if there are rival centres with a more benign legal environment.

6 Id para 5.1.19. 7 112th Report on Section 45 of Insurance Act, 1938, Law Commission of India, June, 1985. 8 Refer Supra Note 4 page 43 to 65(Chapter V). 9 Consultation Paper 182 on Insurance Contract Law: Misrepresentation, Non-Disclosure and Breach of Warranty by the Insured A joint Consultation Paper by the Law Commission, UK and The Scottish Law Commission 2007. 10 Markin, Robert Reforming Insurance Law: Is there A Case of Reverse Transportation? http://www.lawcom.gov.uk/docs/merkin_report.pdf

In such a background, the recent attempt by the Indian Parliament to address the issues of concerns under existing Insurance Act, 1938 by mooting the Insurance Laws (Amendment) Bill, 200811 is heart warming. This paper will appraise the problems arose due to these judicial decisions under Page | 3 the existing law and its impact on the proposed Amendment Bill, 2008. Research Proposal The issues under the incontestability provision have been examined by Indian courts through various angles i.e. public policy, unequal bargaining position, evidentiary credibility of a fact, test of materiality so on and so forth. The scope of the paper is limited to the extent of life insurance law and judicial pronouncement and examines the test of materiality as applied to the life insurance policies therein. The English cases are only cited and referred to the extent to which they have been quoted in their respective Indian judgments. The paper examines the theoretical foundation of incontestability provision under Indian insurance law and judicial approach thereof. Incontestability Law in India: The Common Law Origin & Deviation An interesting reading on the legislative history of insurance law in India was published in the Journal of the Institute of the Actuaries, UK by R.W. Sturgeon F.I.A. in 193912. In that article Sturgeon highlighted the need for introducing the 1938 Act in that era by saying that as time passed and there was no early prospect of the introduction of such a Bill in Parliament here and as the position of insurance in India was becoming increasingly serious, Indian Government decided in 1936 that immediate legislation was necessary. Mr. Susil C. Sen, a well known Calcutta solicitor who had taken a prominent part of in the recent revision of the Indian Companies Act, was appointed as a special officer to report on what amendment was necessary in the insurance laws in India.13 The article specified the situation with regards to incontestability provision as: It [the Advisory Committee] was not required to advise on the shape of the proposed Bill and indeed certain provisions of the Act as finally passed (e.g. limitation of commission, incontestability of the life policies) were not discussed by the Committee as proposals.

11 Bill No. LXXII of 2008. The Bill was introduced in Rajaya Sabha on 22nd December, 2008. (Hereinafter refereed as the Amendment Bill, 2008 ) 12 R.W. Sturgeon F.I.A., The Indian Insurance Act, 1938, JIA 70 (1939) 0151-0192. 13 Id page 154.

Later on when the 1938 Act was introduced before the Legislative Assembly, it did not get due attention from the members for deliberation since the larger portion of its discussion was concentrated towards the ongoing tussle for indiscriminate treatment of Indian insurance companies and non Indian insurance companies including British, due to the Swadeshi movement Page | 4 influence.14 The incontestability provision was deliberated over by the Assembly and Advisory Committee only to the extent of inadmissibility of age proof in the Indian scenario due to lack of credible evidence. Although Insurance Act, 1938 came into being in 1939 and went through significant changes thereafter, the Indian judicial precedent hailed to age old English decisions and decided on the Common law perspective even after commencement of 1938 Act. Principles of Common Law on Insurance Under Common law, the insurance was founded on some of the following broad and well settled principles: First that contracts of insurance including the contracts of life assurance are contracts uberrima fides and every fact of materiality must be disclosed, otherwise there is good ground for rescission; and Second, this duty to disclose continues up to the conclusion of the contract and covers any material alteration in the character of the risk which may take place between proposal and acceptance15. Determining the true nature of material, the Court first observed the same from Common Law perspective. They were as follows16: I. Subjective Determination: Distant from Marine Insurance, other Insurance, including Life should be judged on subjective determination where knowledge of true facts of the part of the assured relating to the misstatement or suppression of material facts in a sense

14 Supra 11. It has been commented in that Article that the incontestability provision with some other provisions had been adopted from the Canadian Acts. Page 158. 15 Ref. Looker v. Law Union and Rock Insurance Co. (1928) 1 KB 554. Cited in Smt. Benarasi Debi v. New India Assurance Co. Ltd AIR1959Pat540; MANU/BH/0157/1959. Hon' Judges: K. Ahmad and K. Dayal, JJ. ble 16 Id.

necessary in order to deprive him of the benefit that accrues in his favour under the contract17. II. Rule of Condition Precedent: The right of the claimant to demand payment cannot be enforced until he has done all the things which by the terms of the policy under which the right is asserted are made Page | 5 conditions precedent to the liability of the insurer.18 Absolute Condition: All collateral conditions are considered to be warranty and non compliance would treat the insurance contract as void. Warranty, Condition & Representation: In general recital made under proposal is considered to be very basis of the contract and same treated as warranty. It was considered to be beyond materiality determination. However, later all such recital when treated as representation the materiality of the representation is an element to be considered.19

III.

IV.

Conflict of Warranty & Condition The principles of warranty and condition, as apply to general contractual relationship under Common law are mutatis mutandis, applicable to insurance contract as well. It has been seen from the English cases that the Insurer can successfully repudiate a claim on the ground of breach of warranty, which may not have otherwise be material, foundational or essential to the Insurance Contract.20 Condition being vital to the contract and goes to the root of the contract and entry entitles the Insurer to repudiate the entire contract. Warranty, on the other hand is considered to be collateral to the contract and does not go to the root of the contract and its falsity would not vitiate the contract in entirety.
17 Halsbury' Laws of England, Volume 18, Article 588, cited Supra note 15. However, there is a contra view on the same point:, where it reads thus: s whether it is life, or fire, or marine insurance, I take it good faith is required in all cases and though there may be certain circumstances from the peculiar nature of marine insurance, which require to be disclosed, and which do not apply to other contracts of insurance, that is rather in my opinion an illustration of the application of the principle than a distinction of principle. acceptance Looker v. Law Union and Rock Insurance Co., (1928) 1 KB 554. Jessel M.R. in London Assurance Co. v. Monsel, (1879) 11 Ch D 363 cited in Ratan Lal and Anr. v. Metropolitan Insurance Co. Ltd AIR1959Pat413. B.N. Rai and K. Ahmad, JJ. 18 Supra Note 15. . 19 Mutual Life Insurance Co. of New York v. Ontario Metal Products Co. (1925) AC 344. Supra Note 15. . 20 Ref: Lakshmi Insurance Co. Ltd. v. Bibi Padma Wati AIR1961P&H253; MANU/PH/0079/1961; Hon' Judges: Tek Chand and P.C. Pandit, JJ. Quoted ble Lord Blackburns observation in Thomson v. Weems, (1884) 9 AC 671 as it is not of any importance, whether the existence of that thing was or was not material; the parties would not have made it a part of the contract if they had not thought it material, and they have a right to determine for themselves what they shall deem material.

The strict adherence with the warranties had been given effect by both English21 and Indian Courts22. It has been noted that the indiscriminate treatment of the terminologies, warranty and condition under the Insurance contract had caused gravely to the Insured. Representation- An Interpretative Solution Later on, other jurisdictions enacted several remedial legislations to relieve the rigor rule of warranty under the Common law with the distinction of warranty from representation that the liability of the insurer is not avoided by the breach of warranty which did not relate to matters material to the risk insured. The harshness of the doctrine of warranty, in the life insurance policies, had been diluted by treating warranties as representation, which went to mitigate the severity of the rigid of Common law rule, was that in absence of deliberate fraud on the part of Insured, the insurance policy would not be forfeited, unless representation related to a matter material to the risk. Legislative Amendment in India- The Deviation In India, legislators working on the similar line brought change to Section 45 of 1938 Act vide Insurance (Amendment) Act, 194123 and the words on material matter and fraudulently made was substituted to on a material matter or suppressed facts which it was material to disclose and that it was fraudulently made; and or that it suppressed facts which it was material to disclose. Therefore, the said change had completely eliminated the scope of reading Common laws doctrine of warranty as it where earlier applied into incontestability provision. Materiality under Incontestability Law- The Evolution of Test The Amendment was made with the perspective to restrict the insurance companies to repudiate a claim, wherever the subtle misstatement or inaccuracy in the Proposal forms not being material to the contract exists, and with the
21 MacDonald v. Law Union Company (1874) LRQB 328; Thomson v. Weems (1884) 9 App Cas 671; New York Life Insurance Co. v. Phoebe Stella Gamble ILR 27 Cal 593. Cases cited in Banerjee, B. N.; Law of Insurance, 443, (Allahabad: The Law Book Company (P.) Ltd; 1994: IV Ed.) 22 Ref. Oriental Government Security Life Assurance Co. Ltd. v. Narasimhachai ILR 25 Mad 183; Lakshmi Shankar v. Gresham Life Assurance Society 1922 Bom 582; Great Eastern Life Assurance Co. v. Bai Hira ILR 55 Bom 124; Muthappa Chettiar v. Venus Assurance Co. Ltd. ILR (1944) Mad 842; Light of Asia Insurance Co. v. Karotaya Debi 1936 Cal 437; Western Indian Life Insurance Co. v. Asim Sirkar ILR (1942) 1 Cal 100: 46 CWN 659: 1942 Cal 412; Manufactures Life Insurance Co. Ltd. v. Haridasi Debi 42 CWN 823: 1939 Cal 8; Bharat Insurance Co. Ltd. Subal Chandra Mender 48 CWN 263; Hemanta Kumar v. Alliantz and Stuttgarter Life Insurance Co. Ltd. 1938 Cal 120; Asian Insurance Co. Ltd. V. Asa Ram 15 Luck 360: 1940 Oudh 212; Shivkumar Radhakrishnadas v. North British Mercantile Insurance Co. (1939) Kar 611: 1939 Sind 254; East and West life Insurance Co. Ltd. v. Kalla Venkiah 1944 Mad 559. Referred in Id. 23 Act XIII of 1941. The proviso to the Section 45 was inserted by an amendment Act of VII of 1944.

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intent to deceive the Insurer. Its object may also be gathered from the observations of the Select Committee, who remarked thus if the insurer does not discover and question the falsity of any such statement in two years, he ought not to be allowed by the clause, [except] cases in which the insurer can show that the false statement was fraudulently made with the knowledge and concerned a material error.24 To determine what constitute to be material, the Court observed that any facts which tend to suggest that the life insured is likely to fall short of the average duration is a material fact25. Any fact the knowledge or ignorance of which would materially influence an insurer in making the contract or in estimating the degree and character of the risk, or in fixing the rate of premium is material.26 Subjective & Objective Knowledge- The Judicial Crossroad The changes made through 1941 Amendment Act were elaborately discussed by their lordships in various judgments. The major issue which was debated in those cases was in respect to the knowledge of the insured in determining the question of materiality. This specific issue has two aspects, firstly whether the question of materiality per se exits in its objective criteria without looking into the actual knowledge of the Insured and secondly, whether subjective criteria should be the test of materiality qualified by the actual knowledge of the insured. Justice Vasudevmurthy27 expressly denied the proposition laid down in the English Judges in Joel case28, where it was held that the non-disclosure of certain facts in answer to questions put by the medical referee of the insurer was not, in the absence of fraud, sufficient to vitiate the contract of insurance. It was held that, having regard to the nature and purpose of those questions, the truth of the answers to them was not on the true construction of the documents made part of the basis of the contract and, therefore, could not vitiate the policy. The knowledge of the insured to consider a fact to be material is of no moment exists; if a reasonable man would have recognized that it was material to disclose the knowledge in question, it was no excuse to say that the insured had not recognized it to be so.29 His Lordship had also declined to accept the rule of representation which says that when statements made by an insured person in his application for a policy
24 Supra Note 20 at page 444. 25 Thomson v. Weems (1884) 9 A. C. 671. cited in Infra Note 39. 26 London Assurance v. Mansel (1879) 11 Ch. D. 363. cited in Infra Note 31. . 27 Kesave Seethamma v. Bombay Life Assurance Co. Ltd. AIR1954Kant134. MANU/KA/0058/1954; Hon' Judges: Vasudevamurthy, J. ble 28 Joel v. Union and Crown Insurance Co. (1908) 2 KB 863 cited in Id. . 29 Supra Note 31 para 4.

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of life insurance, can not be treated as the basis of the contract, but merely representations. An inaccurate statement is material so as to vitiate the policy if the matters concealed or misrepresented, had they truly been disclosed would have influenced a reasonable insurer to decline the risk or to have stipulated for a higher premium.30 The Honble Court had opined that anything within the knowledge of insured whether material or otherwise need to be disclosed. In such case as the Court ascertained, it does not matter whether the insured felt it not to be of material importance, beside that the test should be when he conceals anything that may influence the rate of premium which the underwriter may require although he does not know that it would have that effect.31 It is the duty of a party effecting insurance on life or property to communicate to the under-writer all material facts within his knowledge touching the subject-matter of the insurance.32 The contracts of insurance were ' uberrima fidei' and that what fact is material is a question of fact in each case. All such facts which would influence a reasonable man either to accept or decline a risk or stipulate for a higher premium would be material.33 In their objective determination of materiality, the courts stressed on the test of underwriters judgment. It is noteworthy to mention here that the reasonable man of Shiv Kuma case is an underwriter as stipulated in Lindenan case. In this case the Lordship surrogated and stressed more on the fact of materiality over the existence of actual knowledge of the Insured about the material fact. Except for the qualifying test of reasonable man, the Lordship determined the question of materiality based upon pretext if a fact being material per se as per under-writers point of view it need not require the actual knowledge of the Insured. However, the paradox exists here is that even if a particular fact is material; it requires the proof of existence of knowledge from the side of the party who has been alleged of misrepresentation or fraud. In other wards, a party can not commit a misrepresentation or fraud without having the knowledge of fact being material to the contract.

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30 Mutual Life Insurance Co. of New York v. Ontario Metal Products Co.1925 AC 344 cited in Supra Note 31. 31 Lond Assurance v. Mansel (1879) 11 ChD 363. In the proposal in answer to a question similar to the one in the present case, the insured had stated that he had insured already in two offices at ordinary rates. It was, however, found that his life had been declined by several other insurance companies, and it was held that there had been a material concealment and that the insurance company was entitled to have the contract set aside. Cited in Supra Note 31. 32 Lindenan v. Desborough (1828) 108 ER 1160 cited in Supra Note 31. . 33 Shivkumar v. North British & Mercantile Insrance Co.Ltd. AIR 1936 Sind 222 cited in Supra Note 31.

In the same year Honble Madras High Court34 had observed the English decision of Joel35, and remarked that English decisions placed importance of descriptive analysis of Proposal form in each case and does not determine the insurance companys liability on the basis of simply yes or no answers given by the applicant. Referring to Lord Blackburns dictum36, Fletcher Moulton L. J. Page | 9 in Joel case, as quoted by Madras Judge made following observation: There is, therefore, something more than an obligation to treat the insurer honestly and frankly, and freely to tell him what the applicant thinks it is material he should know.... The disclosure must be of all you ought to have realised to be material, not of that only which you did in fact realise to be so. To prevent themselves from walking on the line of hard cases must not be allowed to make bad law37 as they call it, the Madras Justices called the strict rule of interpretation to the written Proposal form as Shylockian. Their Lordship in determining the question of the active concealment of a fact stressed more on knowledge than the question of materiality. The interesting example they have cited from Newshoime Brothers case38, where the Judges disowned the law laid down in Bawden39against the Biggar40 case. On the contrary to the Newshoime Brothers decision, the Madras High Court preferred Bawden case over Biggar case.41 It was decided by the Madras Judges that the knowledge of the Proposed Applicant is most important in determining the falsity under the proposal form. This simply means the Insured knowledge about his pre-existing illness before the application is most important in determining the material factor.

34 Kulla Ammal (died) and Ors. v. The Oriental Government Security Life Assurance Co. Ltd. by its Manager, at Bombay AIR1954Mad636: MANU/TN/0305/1954, Mack and Krishnaswami Nayudu, JJ. 35Joel v. Union and Crown Insurance Co. (1908) 2 KB 863 cited in Id. 36 Brownlie v. Campbell (1880) 5 AC 925 cited in Supra Note 40. 37 Dawsons Ltd. v. Bonnin (1922) 2 AC 413 cited in Supra Note 40. 38 Newshoime Brothers v. Road Transport and General Insurance Co. Ltd. (1929) 3 KB 356 cited in Supra Note 40. 39 Bawden v. The London, Edinburgh and Glasgow Assurance Co. (1892) 2 QB 534 (D) where Bawden, who was blind in one eye, was insured against accidental injury on a proposal form which did not disclose this infirmity. It was held that the Insurance company agent was aware of this but did not communicate it to the company and that his knowledge was knowledge of the company. cited in Supra Note 40. 40 Biggar v. Rock Life Assurance Co. (1902) 1 KB 516. A proposal form was filled up by the agent containing false particulars inserted without the knowledge of the applicant, who signed the proposal form. It was held that in view of the declaration that the answers should form the basis of the policy, it was the duty of the applicant to read the answers before signing them, and the agent of the company was acting not as the agent of the insurance company but of the applicant. The policy was held to be void. Cited in Supra Note 40. 41 The Madras High Court opined that in the case of Bawden, Supra Note 45. however, the important point of differentiation was that he was almost an illiterate man who was not in a position to read and to appreciate the significance and implications of the document he was signing, and the agent appears to have withheld knowledge of Bawden' infirmity from the insurance company in order to put the policy through and get his commission. s Supra Note 40 para 15.

Furthermore, they express their disagreement with the opinion of King and Shahabuddin JJ., from the same Court, where they hold that the insured person must be held responsible for the untrue averments in the application form which he signed as the duty of making himself acquainted with the contents of what he was signing lay upon the insured person himself.42 The Origin of the Test Later in Benarasi Debi case43 the Honble Patna High Court laid down the test for the second part of Section 45 of Insurance Act, 1938 as follows: (1) that the false statements were on a material matter; (2) that the policy-holder knew at the time of making them that the statements were false,44 (3) that they were fraudulently made. They also stressed on the knowledge of the insured in determining the question of materiality of a fact. They said: it is true that concealment as used in the insurance field means the designed and intentional withholding of any fact, material to the risk, which the assured in honesty and good faith ought to communicate. However, a more comprehensive test lay down by the Punjab & Harayana High Court in Bibi Padma Wait Case45 after observing the Patna High Courts test: (a) such a statement was material; (b) or was on suppressed facts, which it was material to disclose, and (c) that it was fraudulently made by the policy-holder; and (d) that the policy-holder knew at the time of making it that the statement was false; or (e) that it suppressed facts which it was material to disclose. The first part of Section 45 of the Insurance Act, 1938, the Honble Court observed as in the case of policies of life insurance which are not excepted by the two years rule, proof of deliberate fraud, and not merely of constructive fraud or of misstatements has to be shown, in order to avoid the policy.

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42 East and West Life insurance Co. v. Venkiah AIR 1944 Mad 559 Cited in Supra Note 40. 43 Supra Note 15. 44 The Manufacturers'Life Insurance Co.. Ltd. v. Sm. Haridasi Devi 42 Cal WN 823: AIR 1939 Cal 8. Cited in Supra Note 40. 45 Lakshmi Insurance Co. Ltd. v. Bibi Padma Wati AIR1961P&H253; MANU/PH/0079/1961; Hon' Judges: Tek Chand and P.C. Pandit, JJ. ble

However, these later judgments show that the dictum of Justice Vasudevmurthy46 or Justice Nayudu47 was not accepted across all benches. As P&H High Court opined that the rule of construction against the insurer and favorable to the insured, stems from what otherwise is called, the rule of contra proferentem, which is based on the maxim, Verba chartarum fortius accipiuntur contra proferentem. It means that the words of deeds are to be taken most strongly Page | 11 against the party, employing them. What it meant was that if the words of an instrument or of a grant are of doubtful import, then, that construction shall be placed upon them which are most favorable to the holder of the instrument or the grantee. Finally these tests simplified by the Honble Supreme Court and made conclusive in Mithoolal Nayak case48, but it has not quite settled the debate. The test was as follows: (a) the statement must be on a material matter or must suppress facts which it was material to disclose; (b) the suppression must be fraudulently made by the policy-holder; and (c) the policy-holder must have known at the time of making the statement that it was false or that it suppressed facts which it was material to disclose. According to the Lordships, Fraud under Indian Contract Act, 1872 must be one where any of the following acts committed by a party to a contract with intent to deceive another party or to induce him to enter into a contract (i) the suggestion, as to a fact, of that which is not true by one who does not believe it to be true; and (ii) the active concealment of a fact by one having knowledge or belief of the fact. Moreover, the Honble Lordships did not obliged to accept the explanation to S. 1949 of the Contract Act as a defense to fraud, which was well establish and applicable to the general contract. The Court did not assigned any reason for the same and without distinguishing how Insurance contract are different from other contract on this point.

46 Supra Note 31. 47 Supra Note 40. 48 Mithoolal Nayak Vs. Life Insurance Corporation of India AIR1962SC814, [1962]32CompCas177(SC), [1962]Supp2SCR571Hon' Judges:K. Subba Rao, ble Raghuvar Dayal and S.K. Das, JJ. 49 The principle underlying the Explanation to s. 19 of the Contract Act is that a false representation, whether fraudulent or innocent is irrelevant if it has not induced the party to whom it is made to act upon it by entering into a contract. Section 19 of Indian Contract Act, 1872 (Act IX of 1872)

It is interesting to note here that though their Lordship had not observed any prior judicial response of various High Courts, they had not addressed the issue whether prior knowledge of a concealed fact is important in determining the said question or not. In Search of Prudent Insurer The Apex Court ruling in the Mithoolal Nayak50 later substantiated with more legal inputs, by the Delhi High Court51 independently by refereeing to the Marine Insurance Act, 196352. The learned Court hold that the provisions of Marine Insurance Act in India are in pari materia with the English Act53 in this respect, they would therefore similarly hold that the test of what is a material fact and the degree of good faith which is required is otherwise the same in all classes of insurance. To determine the test of materiality, they refereed- prudent insurer the wording of Section 20(2) of Marine Insurance Act, 1963, and stated that the Court must apply the objective standard of business usage and disregard the exacting standard of particular insurer54. The Court had also observed that facts need not be disclose those diminishing the risk and matters of common knowledge generally or in the insurer' business. s Distinguishing from the English position, the Delhi High Court relied on the phraseology of Section 45 of Insurance Act, 1938, which says leading to the issue of the policy55 which means the questioned misrepresentation should be the basis of the contract and should be qualified on the test of materiality. The material non discloser by the Insured being fraudulently made, result into the avoidance of the Policy, was imported from the Section 1956 of the Marine Insurance Act, 1963 by the Delhi Court. Madras High Court57 made it observation on the nature of the knowledge possess by the Insured and his liability there under. Their Lordship observed that the under insurance contact law the discloser and non-discloser of material facts which forms the foundation to create the consensus ad idem between the insurer and the insured. The Court stated that all the information need to be
50 Supra Note 55. 51 Krishna Wanti Puri Vs. The Life Insurance Corporation of India, Divisional Officer, New Delhi and Anr. AIR1975Delhi19 Hon' Judges: Avadh Behari ble Rohtagi, J. 52 Marine Insurance Act, 1963 (Act XI of 1963) (5) The term "circumstance" includes any communication made to, or information received by, the assured. 53 Marine Insurance Act, 1906 54 supra Note 58 para 24. 55 Supra Note 58 para 31. 56 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 opposite party 57 V. Srinivasa Pillai Vs. Agent of Life Insurance Corporation of India, Madras and Anr AIR1977Mad381 Hon' Judges: Ramaprasada Rao and Ratnavel ble Pandian, JJ.

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disclosed by the Insured which is within the exclusive knowledge of the Insured and being not known or capable of being known to others. Given the nature of such information they can be classified as (a) Voluntary information; (b) answers to questions; (c) submission of details which are within the exclusive knowledge of the insured; and (d) details which evolve round immaterial particulars. In so far as voluntary information is concerned, the answers to queries or even Page | 13 submission of details regarding insignificant matters the insured might commit a bona fide mistake. If such answers or particulars do not strike at the foundation of the good faith contract, courts are very lenient towards the insured. But in a case where the insured gives such details which are exclusively within his or her knowledge then the question becomes somewhat difficult. There again the representations may be of two kinds that which is innocuous and that if proved to be false shakes the very foundation of the uberrima fides contract. The reasoning given by the Court pointed out that any information though being innocent if shack the foundation of the uberrima fides may lead the contract to be void.58 In other words a misrepresentation would not ipso facto to be a ground available to an aggrieved party (insurer) to avoid the contract unless it was found that the consent of the other party was secured by practicing some deception. Thus on every misrepresentation or concealment of a fact a ' contract cannot be avoided merely on trivial and inconsequential misstatement or nondisclosure.59 Therefore, with the necessary implication the above fact lead to an interpretation that an innocuous concealment of a fact from the side of the insured can only avoid the contract, if by applying the test of prudent insurer, the insurer establishes that there exists common usage within the insurance industry about the fact in question. The Materiality Matters A more deliberate discussion on the issue of treating the insurer honestly and frankly, was made by Mysore High Court60, where they emphasized on the duty to disclose material facts continues right up to the conclusion of the contract and also implies any material alteration in the character of the risk which may take place between proposal and acceptance. Their Lordships observing the proposition laid down by Lord Blackburn61, where he stated that as a proposed insured if you know any circumstances at all that may influence the underwriter' s
58 Id para 9. 59 Bhagwani Bai Vs. Life Insurance Corporation of India, Jabalpur AIR1984MP126 Hon' Judges: G.P. Singh, C.J. and Faizanuddin, J. ble 60 Life Insurance Corporation of India Vs. Smt. B. Kusua Rai [1992]75CompCas712(Kar), 1989(1)KarLJ52 Hon' Judges: K.B. Navadgi and S.G. ble Doddakale Gowda, JJ. 61 Brownlie v. Campbell [1880] 5 AC 925 cited in Id.

opinion as to the risk he is incurring, and consequently, as to whether he will take it, or what premium he will charge, if he does take it, you will state what you know. There is an obligation there to disclose what you know, and the concealment of material circumstances known to you, whether you thought it ' material or not, avoids the policy. The above proposition was laid down on the basis honble Courts opinion where Page | 14 it had emphasized that there is a legal obligation cast upon the party proposing the insurance to communicate not only every material fact of which he had actual knowledge, but he is also deemed to know every material fact which he ought to have knowledge, in the ordinary course of business. A complete and bona fide disclosure of all the facts by the assured is a must to make the transaction valid and enforceable. On the question of test of materiality, the Honble Court quoted the Privy Council Judgment62 and stated that it is the insurers who propound the questions stated in the application form, and the materiality or otherwise of a misrepresentation or concealment must be considered in relation to their acceptance of the risk. Quoting the case of Canara Bank Ltd. 63 being the materiality of a fact depends on the surrounding circumstances, and also on the nature of information sought by the insurer. It is not open to an assured to decide for himself as to which fact is material and which is not. Later in 1990, the Honble apex court had privilege of observing the issues left out by them in Mithoolal Nayak64 case, forlornly it was remained unanswered even thereafter. In Smt. G.M. Channabasemma65 the Honble Supreme Court of India had relied on the conclusion of Mithoolal Nayak case and decided accordingly. The left out opportunity of the Honble Supreme Court was later utalised by the Honble Kerala High Court in the case of Sosamma Punnan66. Though its ratio decidendi was based on the president laid down by the apex court in its eariler judgements; its obiter dicta form the part of great insight on the issues. Justice P.K. Shamsudhin, as he than was observed that innocent misstatement67, mistake and forgetfullness68 do not afford any defence in such cases. On the question of whether the test of materiality depend up prudent insurer or reasonable

62 Mutual Life Insurance Co. v. Ontario Metal Products Co. Ltd. [1925] AC 344 (PC). Cited in Supra Note 67. 63 Life Insurance Corporation of India v. Canara Bank Ltd. [1973] 43 Comp Cas 534; [1973] 2 Kar LJ; AIR 1974 Mys 51 cited in Supra Note 67. 64 Mithoolal Nayak v. Life Insurance Corporation of India (1962) Supp. 2 SCR 571. Hon' Judges: K. Subba Rao, Raghuvar Dayal and S.K. Das, JJ. ble 65 Life Insurance Corporation of India Vs. Smt. G.M. Channabasemma 1991ACJ303, AIR1991SC392, [1991]70CompCas634 (SC), JT1991 (5) SC73, 1990(2) SCALE1191, (1991)1SCC357, 1991(1) UJ218 (SC). Hon' Judges: L.M. Sharma and M. Fathima Beevi, JJ. ble 66 Life Insurance Corporation of India Vs. Sosamma Punnan I(1991)ACC701 Hon' Judges: P.K. Shamsudhin, J. ble 67 Carter v. Beehm (1766) 3 Burr. 1905, 1909; ) Macdowell v. Fraser (1779) 1 Doug. 260. As quoted in Id. 68 Bates v. Hewitt (1867) L.R.2Q.B. 595, 607. as quoted in Supra note 74.

insurer, the Court quoted E.R. Hardy Ivamy69, as in no case is it relevant to consider whether the non-discloser would influence the particular insurer concerned or whether the assured himself thought that the facts were material. What is material is that which would influence the mind of a prudent insurer in deciding whether to accept the risk of fix the premium, and if this be proved it is not necessary further to prove that the mind of the actual insurer was so affected. The Justice further added that the proper Page | 15 question is whether any particular circumstance was in fact material?; and not whether the party believed it to be so. The contrary doctrine would lead to frequent suppression of information, and it would often be extremely difficult to show that the party neglecting to give the information thought it material.70 The question on such a policy is not whether a particular fact material, but whether it was in truth material?71 Late in 2000, the apex court had made two remarkably interesting prepositions in the case of Asha Rani72, one where had observed that mere inaccuracy of falsity in respect of some recitals or items in the proposal is not sufficient. The burden of proof is on the insurer to establish these circumstances and unless the insurer is ablaze to do so there is no question of the policy being avoided on ground of misstatement of facts. Secondly, for determination of the question whether there has been suppression of any material facts it may be necessary to also examine whether the suppression relates to a fact which is in the exclusive knowledge of the person intending to take the policy and it could not be ascertained by reasonable enquiry by a prudent person.73 The above preposition is important since in its first preposition it has been highlighted that a misstatement per se does not provide ground to the insurer to avoid the policy, it require to proof that if the correct fact was known to them, than they had not issued the policy at all or which otherwise called as the fact in question should led the insurer to issuance of the policy. It requires that the question of prudent insurers judgment is directly addressed to the judgment of insurer in question (the opposite party). The first proposition gets more strength from the second preposition of the Honble court where the extra burden put on the insurer to proof that the suppressed facts where could not be ascertained by reasonable enquiry by a prudent person/insurer in question. The importance of these observations is that earlier where the misstatement per se, even being innocent amount to suppression of material fact could lead to avoidance of the policy, is now require to be proofed by insurer how the falsity had led the insurer to issuance of the policy or why a true fact material to him?
69 E.R. Hardy Ivamy, General Principles of Insurance Law, 5th Edition Supra Note 74. 70 Lindenau v. Desborough (1828), 8 BAC at P. 592. As quoted in Supra Note 74. 71 Supra Note 74. 72 Life Insurance Corporation of India & Ors. v. Smt. Asha Goel & Anr. 2001ACJ806, [2001]104CompCas79(SC), (2001)3GLR1990, JT2001(1)SC10, 2000(8)SCALE320, [2000]Supp5SCR646, 2001(1)UJ456(SC). Hon' Judges: B.N. Kirpal and D.P. Mohapatra, JJ. ble 73 Id para 12.

It is important to highlight that any insurer before a court of law can proof the question of materiality by showing two sets of evidence, either the true fact being contrary to the internal underwriting guidelines of the insurer or contrary to the industry in general. In an interesting observation on the question of whether any misstatement per se Page | 16 would satisfy the test of materiality; the Madras High Court in Athayee case74 held that the test is as to whether the policy would have been issued, had it been disclosed that the insured was suffering from a particular kind of ailment. Therefore, it is for us to see whether the fact suppressed was of a disorder, which is relevant or material, touching the longevity or the expectancy of life of the insured. In this case, the judges did not find any other disorder prior to the acceptance of the policy. The reason for the death of the insured was also only due to heart attack, regarding which no ailment was earlier found. they further held that even assuming that there was suppression of ulcer, it is not a material matter so as to attract the provision of Section 45. Thus, even considering that the suppression was made by Muthu Gounder voluntarily and with full knowledge thereof; since it has no relation with the cause of death, the Insurance Company cannot be allowed to repudiate the contract. Similarly in another case, P&H Court had concluded that mere not disclosing the fact about conducting of previous ECG does not amount to suppression of material fact and could not attract second part of the Section 45 of Insurance Act.75 Later in 2007, the Honble Supreme Court of India had decided the case of P.C. Chacko76, where the case fall under first part of section 45 since the insured was died within six months of the policy issuance. The case was discussed by their Lordships with the pragmatic view of objective criteria. There was no new principle discussed. The Amendment Bill 2008: The Old Ghosts Chase The proposed Section 45 of Amendment Bill, 200877 is the child of 190th Law Commissions recommendation78. It bears a common consensus of the insurance
74 Athayee (died) and Anr. v. Life Insurance Corporation of India, represented by its Divisional Manager and Anr. 2004ACJ2125, AIR2003Mad382, 2003(3)CTC526, (2003)3MLJ110 Hon' Judges: K. Sampath and S.R. Singharavelu, JJ. ble 75 Vidya Singh v. Life Insurance Corporation of India and Anr. AIR2004P&H359 Hon' Judges: Adarsh Kumar Goel, J. ble 76 P.C. Chacko and Anr. V. Chairman, Life Insurance Corporation of India and Ors 2008ACJ456, AIR2008SC424, 2008(1)ALD30(SC), 2008(1)CTC152, 2008(1)KLT698(SC), (2008)1MLJ1256(SC), (2008)149PLR257, 2007(13)SCALE329, (2008)1SCC321 .Hon' Judges: S.B. Sinha and Harjit Singh Bedi, JJ. ble 77 Supra Note 10. 78 Supra Note 4 page no. 43-65.

market and stakeholders though not all, even not in terms of its recommendations. The proposed Amendment Bill, 2008 offers a conceptual deviation from its to be predecessor, the Insurance Act, 1938 and attempts to resolve some of key problems exist in the1938 Act. The test of materiality in the 1938 Act was based Page | 17 upon the principle that such misleading fact if leads to issuance of the policy whereas the test of materiality under proposed Amendment Bill, 2008 rest upon if the suppressed facts material to the expectancy of the life of the insured79. In the proposed Amendment Bill, 2008 any such fact adversely affecting mortality or morbidity of a life assured would be the determining factor to the test of materiality. However, it is not clear in respect to the new age instruments i.e. ULIP, where investment are clearly demarcated from the mortality factor, that if misstatement would equally affect the investment portion of the instrument as affecting the mortality. The proposed Amendment Bill, 2008 distinguishes between fraudulent suppression of fact with the deliberate intent to deceive the insurer or to induce the insurer to issue a life insurance policy and suppression of material fact or misstatement not with the intend to commit fraud. The element of knowledge becomes very crucial to distinguish between the two, where the knowledge to commit fraud exists in the former case, lead to forfeiture of all the premium paid to the insurer unlike the later case, where such premiums need to be refunded to the claimant. It would not be inappropriate to mention here that the basis question raised in this article in respect to the subjective and objective determination of knowledge of the insured to establish the materiality of the fact is still left blank in the proposed Amendment Bill, 2008. To the some extent a legislative fallacy has been created in the proposed Amendment Bill, 2008. Since it put the burden of proof to establish the suppressed material fact or misstatement on the Insured to show that the said fact was based upon true to the best of his knowledge and belief.80 However, a death benefit claim under life insurance policy arises due to the death of the Insured, the subject matter of the insurance contract makes the abovementioned provision redundant by casting burden on Insured to establish the same. The proposed Amendment Bill, 2008 denies right of insurer to repudiate a claim on any ground whatsoever once a policy celebrates its fifth anniversary, even in cases where a blatant suppression of vital facts surfaces at the time of claim

79 Section 58 of proposed Amendment Bill, 2008. Section 58 proposes to replace section 44 and section 45 of the Insurance Act, 1938. 80 Id. Proposed Section 45 (3).

investigation. It seems that any absolute conditions such as this may lead to unjust enrichment or what is called in insurance, an anti-selection. Conclusion Today, the life insurance industry in India is very much at its crossroad, making Page | 18 effort to improve life insurance penetration in the market. There is no doubt that a deeper insurance penetration would help the society at large, acting as a social security tool, divergent investment opportunity or a mechanism to improve national saving; the same is not difficult to accept because of the innovative insurance products. Nevertheless, still any life insurance policy has to proof, its worth in terms of an insurance product which provides economic security to the dependent of the insured. The application of uberrima fides in India has lead to more questions than it has answered, since it has granted excessive discretion to the Courts to adjudge on question of fact which can not be ascertained conclusively. In addition to the same, the law laid down by various courts including the Honble Supreme Court is neither exhaustive nor consistence on the subject matter. The whole idea of the test of materiality as exists in the present Act revolves around view point of prudent underwriter, which overlooks the understanding of insured about the insurance product. More so, the prudent underwriter does not differentiate between the general underwriters perspective and particular underwriters perspective either. Its seems hard to believe that a legislative correction through proposed Amendment Bill, 2008 would be able to rectify judicial ambiguity until the courts come up with a different test which takes into account a better perspective of insured. It certainly requires re-visit the test of materiality by the apex court.