The contracts of insurance including the contract of life assurance are based upon utmost good faith uberrima fides in fact it is the fundamental basis upon which all contracts of Insurance are made and every fact of material must be disclosed, otherwise, there is good ground for rescission of the contract. 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 the proposal and its acceptance. If there are any misstatements or suppression of material facts, the policy can be called into question. The aforesaid is important because Insurance is a contract of speculation and involves a risk and that it purports to shift the risk from one party to the other, each one is required to be absolutely innocent of every circumstance which goes to influence the judgment of the other while entering into the transaction. The special facts upon which the contingent chance is to be computed are lie most commonly in the knowledge of the assured only; the underwriter trusts to his representation, and proceeds upon confidence that he does not keep back any circumstance in his knowledge to mislead the underwriter into a belief that the circumstance does not exist.

MacGillivray on Insurance Law (Tenth Edition) has summarized the assured’s duty to disclose as under:

“………the assured must disclose to the insurer all facts material to an insurer’s appraisal of the risk which are known or deemed to be known by the assured but neither known nor deemed to be known by the insurer. Breach of this duty by the assured entitles the insurer to avoid the contract of insurance so long as he can show that the non-disclosure induced the making of the contract on the relevant terms.”

Lord Mansfield in Carter v. Boehm while dealing with the principles of necessary of discloser by the assured held that:

“Although the suppression should happen through mistake, without any fraudulent intention, yet still the underwriter is deceived and the policy is void; because the risque run is really different from the risqué understood and intended to be run at the time of the agreement……….The policy would be equally void against the underwriter if he concealed……..Good faith forbids either party, by concealing what he privately knows, to draw the other into a bargain from his ignorance of the fact, and his believing the contrary.”

That the Insurance Act, 1938 which is the governing Act of Insurance policies, and also the Regulations framed thereunder impose a duty upon the Proposer-Life Assured to disclose all the material facts to the insurer in the proposal form, to enable them to assess the risk to be undertaken. That as per Regulation 2(1) (d) of the Insurance Regulatory And Development Authority (Protection of Policyholder’s Interests Regulations) 2002: –

“Proposal form means a form to be filled in by the proposer for insurance, for furnishing all material information required by the insurer in respect of a risk, in order to enable the insurer to decide whether to accept or decline, to undertake the risk and in the event of acceptance of the risk to determine the rates, terms and conditions of a cover to be granted”.

Regulation 11 (3) of the Insurance Regulatory and Development Authority (Protection of Policy Holders Interest) Regulation, 2002 of the Insurance Act, 1938 also provides as that:-

“The Proposer shall furnish all information that is sought from him by the insurer and also any other information which the insurer considers as having a bearing on the risk to enable the latter to assess properly the risk sought to be covered by a policy”.

Section 45 of the Insurance Act, 1938 provides inter alia, that no policy of life insurance effected after the coming into force of this Act shall, after the expiry of two years from the date on which it was effected, be called in question by an insurer on the ground that a statement made in the proposal for insurance or in any report of a medical officer, or referee, or friend of the insured, or in any other document leading to the issue of the policy, was inaccurate or false, unless the insurer shows that such statement was on a material matter or suppressed facts which it was material to disclose and that it was fraudulently made by the policyholder and that the policy-holder knew at the time of making it that the statement was false or that it suppressed facts which it was material to disclose.

The proviso which deals with proof of age of the insured is not relevant for the purpose of the present proceeding

On a fair reading of the Section it is clear that it is restrictive in nature. It lays down three conditions for applicability, of the second part of the Section namely:-

• The statement must be on a material matter or must suppress facts which it was material to disclose;
• The suppression must be fraudulently made by the policy holder; and
• 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.

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. The burden of proof is on the insurer to establish these circumstances and unless the insurer is able to do so there is no question of the policy being avoided on ground of misstatement of facts. As stated in Pollock and Mulla’s Indian Contract and Specific Relief Acts 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 risks in fixing the rate of premium is a material fact.

It is trite that the term “material fact” is not defined in the Act and, therefore, it has to be understood and explained by the Courts in general terms to mean as any fact which would influence the judgment of a prudent insurer in fixing the premium or determining whether he would like to accept the risk. Any fact which goes to the root of the Contract of Insurance and has a bearing on the risk involved would be “material”. 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 risks in fixing the rate of premium is a “material fact”.

In Ratan Lal and Anr. v. Metropolitan Insurance Co. Ltd. reported as AIR 1959 Pat 413 , a distinction was made between as to what is material and what is not material. In regard to the disclosure of facts in that case itself, it was opined:

“The well-settled law in the field of insurance is 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 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 acceptance.”

The effect of misrepresentation on the contract is precisely the same as that of nondisclosure; it affords the insurer for avoiding the contract. In order to give the insurer grounds for avoidance of contract under nondisclosure as well as misrepresentations, both must relate only to material information. The information with regard to the other previous policy is a material fact (M/s ICICI Prudential Life Insurance Co. Ltd. Vs. Lalita Jain – 1986- 2015(1) CONSUMER 875 (NC)). The information about the income is a material fact which certainly influence the decision of the Insurance Company (Neetaben Mukund Shah & Ors. Vs. Birla Sun Life Insurance Company – 1 (2016) CPJ 57(NC)). Concealment of preexisting decease in the proposal form amounts to suppression of material facts (P. Prabha Vs. L.I.C. of India – 1986-2015(1) CONSUMER 692(NC)).

The upshot of the entire discussion is that in a Contract of Insurance, any fact which would influence the mind of a prudent insurer in deciding whether to accept or not to accept the risk is a “material fact”. If the proposer has knowledge of such fact, he is obliged to disclose it particularly while answering questions in the proposal form. Needless to emphasize that any inaccurate answer will entitle the insurer to repudiate it’s liability because there is clear presumption that any information sought for in the proposal form is material for the purpose of entering into a Contract of Insurance.