Non-Disclosure in Life Insurance: Supreme Court Upholds Insurer’s Right to Repudiate Claims

The Supreme Court of India, in the case of Reliance Life Insurance Co. Ltd. & Anr. vs. Rekhaben Nareshbhai Rathod, ruled in favor of the insurance company, holding that non-disclosure of existing insurance policies in a life insurance proposal form is a valid ground for repudiation of the policy. The decision clarifies the importance of utmost good faith in insurance contracts and reiterates that any material misrepresentation or suppression entitles the insurer to deny the claim.

Background of the Case

This appeal arose from a decision of the National Consumer Disputes Redressal Commission (NCDRC) dated 20 February 2015. The case involved the rejection of a life insurance claim on the grounds that the insured had failed to disclose an existing policy while applying for a second life insurance policy with Reliance Life Insurance.

The respondent’s spouse had taken a policy from Max New York Life Insurance for Rs. 11 lakhs on 10 July 2009. Barely two months later, on 16 September 2009, he submitted a proposal for a second life insurance policy with the appellant, Reliance Life Insurance, for an additional cover of Rs. 10 lakhs. In the proposal form, he answered ‘No’ to the question of whether he had any existing life insurance policies or had applied for life insurance previously. The insurance company issued the policy based on this representation.

The insured passed away on 8 February 2010. The respondent, as the nominee, filed a claim under the policy. Upon investigation, the insurer discovered that the insured had an existing policy from Max New York Life Insurance, which was not disclosed in the proposal form. On this basis, the insurer repudiated the claim, citing suppression of material facts.

The respondent filed a complaint with the District Consumer Disputes Redressal Forum, which ruled in favor of the insurer. However, on appeal, the State Consumer Disputes Redressal Commission (SCDRC) reversed this decision, holding that the non-disclosure was not material enough to influence the insurer’s decision. The NCDRC affirmed the SCDRC’s ruling, leading the insurer to challenge the decision before the Supreme Court.

Legal Issues Before the Supreme Court

Whether non-disclosure of an existing life insurance policy is a material fact that justifies repudiation of the insurance claim.
Whether the insured’s misrepresentation in the proposal form voids the policy under the principle of utmost good faith.
Whether the decision of the NCDRC was contrary to established legal precedents.

Arguments Before the Supreme Court

Appellant’s (Reliance Life Insurance Co. Ltd.) Contentions:

The appellant argued that the proposer had a duty of full disclosure under the principle of utmost good faith, which governs insurance contracts.
They contended that the proposer had knowingly concealed a material fact—his existing life insurance policy—which was relevant for assessing the human life value and determining the underwriting risk.
Reliance was placed on the Supreme Court’s ruling in Satwant Kaur Sandhu vs. New India Assurance Co. Ltd., which held that any suppression, misstatement, or fraudulent omission in the proposal form entitles the insurer to repudiate the policy.
It was further argued that Section 45 of the Insurance Act, 1938, allows an insurer to repudiate a policy within two years of its issuance if a misrepresentation or suppression of material fact is discovered.

Respondent’s (Nominee of the Deceased) Counterarguments:

The respondent argued that the insured had not knowingly made any false statement, and that he had signed the proposal form under the guidance of an insurance agent.
They contended that the failure to disclose the previous insurance policy was not a material fact and did not affect the insurer’s decision to grant coverage.
Reliance was placed on the NCDRC’s ruling in Sahara India Life Insurance Co. Ltd. vs. Rayani Ramanjaneyulu, which held that omission to disclose an existing policy does not influence the insurer’s decision in an adverse manner.
The respondent also submitted that the insured was an illiterate person who may not have understood the implications of the questions in the proposal form.

Supreme Court’s Observations

The Supreme Court examined the principle of utmost good faith in insurance contracts and made the following observations:

“The duty of disclosure in insurance contracts is absolute. It is not for the proposer to determine whether a particular fact is material; it is for the insurer to make that determination.”
“The insured’s failure to disclose an existing life insurance policy is a material misrepresentation, as it directly affects the insurer’s assessment of the risk.”
“An insured cannot escape liability for false statements in a proposal form merely by arguing that he signed the document without reading or understanding it.”
“Section 45 of the Insurance Act allows repudiation of a policy within two years of its issuance if material facts were suppressed. The present case falls squarely within this provision.”

The Court also distinguished the present case from Sahara India Life Insurance, noting that in that case, the omission was found to be immaterial, whereas in the present case, the misrepresentation directly affected the underwriting process.

Final Judgment

The Supreme Court ruled:

The decision of the NCDRC is set aside, and the insurance company’s repudiation of the claim is upheld.
The insurer was entitled to repudiate the policy due to the proposer’s failure to disclose an existing insurance policy.
The principle of utmost good faith requires that all material facts be disclosed in a proposal form.
The claim of the respondent is dismissed, and the insurer is not liable to pay the insurance amount.

Conclusion

This judgment reinforces the principle that insurance contracts are based on utmost good faith, and any misrepresentation or suppression of material facts can lead to the repudiation of the policy. It serves as a warning to policyholders that they must disclose all relevant information truthfully while applying for insurance. The ruling also provides clarity on the scope of Section 45 of the Insurance Act, allowing insurers to reject claims when material non-disclosures are identified within two years of policy issuance.

Petitioner Name: Reliance Life Insurance Co Ltd & Anr.
Respondent Name: Rekhaben Nareshbhai Rathod.
Judgment By: Justice Dhananjaya Y Chandrachud, Justice Hemant Gupta.
Place Of Incident: Bhavnagar, Gujarat.
Judgment Date: 24-04-2019.

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