The Insurance laws in India and the United Kingdom have seen sweeping changes over the years. A series of changes and reforms have been made in both countries, and multiple acts and rules govern and regulate the Insurance industry in these countries. The United Kingdom recently introduced the The Consumer Insurance (Disclosure and Representations) Act (CIDRA) 2012 and the Insurance Act 2015. This paper would seek to discuss these reforms, through a discussion of these reforms and its impact on the following , components of Insurance law, which are 1) The principles of duty of disclosure and misrepresentation in insurance contracts and 2) “Basis of Contract Clauses” under the domain of warranties in insurance law. These two components of Insurance law underwent important reforms under the aforementioned acts, promoting a culture of consumer welfare in insurance law.
The discussion in this paper would be limited to the above two components, to try to understand the fundamental role these components play in insurance contracts, in terms of its impact on the parties to the contract, and particularly the insured party. Under the traditional regime of Indian insurance law this impact on the insured party has been largely negative, since these components have traditionally been more favourable to the insurers, allowing them resort to unfavourable practices, by taking advantage of certain inherent lapses in the traditional law. Similarly the United Kingdom also faced comparable and similar lapses under in its traditional insurance law regime. Through the recent reforms made in the United Kingdom, an attempt was been made to curb these practices in order to better protect the insured.
Therefore the scope of this paper would seek to discuss the lapses in law in India, and the need to reform insurance law in India by examining the reforms made in the the UK and the advantages associated with it.
Duty of Disclosure and Misrepresentation
In any potential contract of insurance, there is a pre-contractual duty of disclosure to state relevant facts, which is the duty of the insured as well as that of the insurer. Now, before entering into a contract, in insurance law, the duty which arises is threefold: a duty to disclose material facts; a duty not to misrepresent material facts; and a duty not to make fraudulent claims. It is the fundamental principle of insurance law that utmost good faith must be observed by the contracting parties and good faith forbids either party from non-disclosure of the facts which the parties know. The insured has a duty to disclose and similarly it is the duty of the insurance company and its agents to disclose all material facts in their knowledge since the obligation of good faith applies to both equally.”
Now with regard to misrepresentation and non disclosure, there is a thin line of distinction between the two, which often goes unrecognised. In general, non-disclosure means that you have failed to disclose something which was not the subject of a question but which was known to you and which you ought to have considered for yourself would be material, whereas a representation is something directly said in answer to a specific question, if in answer to the question “Has a person who is going to drive the car been convicted of an offence?” you answer “No,” you are making a direct representation that such person has not been convicted. However most of the legal questions that arise in the context of misrepresentation, in particular the need for the misrepresented fact to be material, however materiality is judged and the possibilities of excluding the remedies for a misrepresentation, are the same as applied to non-disclosure. John Birds in his book states that the extreme width of the duty to disclose material facts, has meant that non disclosure has often subsumed questions of misrepresentation. Further he states that cases have frequently failed to distinguish between the same.
Non Disclosure and Misrepresentation in India
Now, with regard to the duty of disclosure, although it may seem that both parties, the insured and the insurer, have a equal duty with regard to disclosure, it is important for one to differentiate between the two. Most judgements have emphasised strictly on the duty of the insured to disclose materials facts. For instance the Supreme Court of India in Life Insurance Corporation of India vs Smt. G.M. Channabasemma stated that an assured is thus under a solemn obligation to make full disclosure of material facts which may be relevant for the insurer to take into account while deciding whether the proposal should be accepted or not. It further stated that while making a disclosure of the relevant facts, the duty of the insured to state them correctly cannot be diluted. In the recent case of Oriental Insurance Company Limited vs. Mahendra Construction, the Supreme Court held 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”. Indian judgements have also often used the same test of misrepresentation. In Satwant Kaur Sandhu vs New India Assurance Company Ltd it was held 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 emphasise that any inaccurate answer will entitle the insurer to repudiate his 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.
Now the question arises as to what constitutes these material facts and how can the insured understand as to what it means. Section 20 of the Marine Insurance Act 1963 of India, defines as to what constitutes material facts. The section 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. It also states that if the insured fails to make such disclosure, the insurer may avoid the contract altogether. The section further states that that the assured is deemed to know every circumstance which, in the ordinary course of business, ought to be known to him.
However with regard to misrepresentation for insurance policies, the law seems to more favourable. Section 45 of the The Insurance Act 1938 of India lays down three conditions to establish that the misrepresentation was wilful; (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. This is however restricted to life insurance polices. Section 45 does not confer any right on the insurer to renounce the insurance policy which has been in force for less than three of years, except on the ground of fraud. However under Section 45 sub section (4) a policy of life insurance may be called in question at any time within three years from the date of issuance of the policy or the date of commencement of risk or the date of revival of the policy or the date of the rider to the policy, whichever is later, on the ground that any statement of or suppression of a fact material to the expectancy of the life of the insured was incorrectly made in the proposal or other document on the basis of which the policy was issued or revived or rider issued. Further in case of repudiation of the policy on the ground of misstatement or suppression of a material fact, and not on the ground of fraud, the premiums collected on the policy till the date of repudiation shall be paid to the insured. It is to be also noted that under the explanation to section 45(4), it was stated that the misstatement of or suppression of fact shall not be considered material unless it has a direct bearing on the risk undertaken by the insurer, the onus is on the insurer to show that had the insurer been aware of the said fact, no life insurance policy would have been issued to the insured.
Summary and analysis of the Indian position
Therefore if one were to consider the present position in India with regard to non disclosure and misrepresentation firstly there is a heavy burden imposed on the insured , to reveal every fact which a prudent insurer would consider material, irrespective of howsoever innocent or reasonable the insurer is, when he considers as to whether a particular fact is indeed material or not. The harshness of this duty is that it allows the insurer to avoid the contract and does not depend on a causal connection between the non disclosure and the loss. The only exception to this strict rule, seems to be applicable only for life Insurance policies, under the 2015 Insurance Act. that has clearly been set out in Section 45. Instead if the act had clearly extended and applied the explanation as to what should be considered material as given under explanation to Section 45(4) to other types of insurance, this would have a major impact in Indian insurance. Further as set out under the Marine Insurance Act , the assured is not expected to know facts which in the ordinary course of business ought to be known by him. In fact in the English case of Economides vs Commercial Union Assurance Co, it was stated that a consumer assured does not enter into an insurance contract in the ordinary course of business, and so must disclose only material facts known to him. Therefore in most cases, the insured party is most likely to be unfamiliar with his pre contractual duties of disclosure. Despite this, he or she is still expected to determine as to what fact is material or not.
Non Disclosure and Misrepresentation in United Kingdom
The erstwhile position in the United kingdom with regard to non disclosure and misrepresentation was more or less similar to the Indian position. Under the UK Marine Insurance Act, the test of materiality was the same as that of Section 20 of the Marine Insurance Act 1963, of India. Subsequently in the landmark case of Pan Atlantic v Pine Top Ins. Co, the existing position under the Marine Insurance Act was reaffirmed by the House of Lords. The case had also introduced a new test of inducement which was followed by subsequent cases. This additional requirement was that the non disclosed fact, material in the opinion of the prudent insurer must also have induced the actual insurer to enter into the contract.
Reforms in the UK and its analysis
Now once the the Consumer Insurance (Disclosure and Representations) Act (CIDRA) 2012 was enacted, a new set of standards emerged which applied to consumer insurance contract. The new act abolished the traditional duty of disclosure, and henceforth under Section 2 of the act the insured now only had a “duty to take reasonable care” not to make a misrepresentation..Therefore this created a new standard, which did away with the test of materiality and duty of good faith favourable to an insurer, replacing it with a test of reasonable care to be observed by the consumer or the insured. Further in the event of misrepresentation by the insured, remedies are provided for the insurer only if it was which were deliberate and reckless. This meant that for for innocent and reasonable misrepresentation, the insurer could no longer avoid the policy. Further if the consumer made a careless misrepresentation, which is if the if the insured was not careless or reckless then the following remedies were available to the insurer: 1) if the insurer would not have entered into the contract if it had known the truth about the misrepresentation, it may refuse all claims, but it must return any premiums 2) if the insurer entered into the contract on different terms, the contract may be taken to include those different terms and 3) if the insurer would have entered into the consumer insurance contract, but would have charged a higher premium, the insurer may reduce the claim amount accordingly. Therefore the act has imposed a new standard for careless misrepresentations, stating that even if the consumer was in fact careless, the insurer’s remedy would be based on would what it would have done, had proper information been provided to it.
The Insurance 2015 Act set out new standards for non consumer insurance contracts. It introduced a new standard for the duty of disclosure, which is the that the insured had a new duty to make a fair presentation of the risk. The act retained the traditional duty of disclosure which was that the insured party will have to disclose every matter, which would influence the judgement of the insured in deciding whether to insure the risk and the terms in which it will be done. However it also introduced a “duty of fair presentation of risk”, in the event that the insured is not able to fulfil the usual disclosure standard. This duty allowed the insured to make a disclosure which gives the insurer sufficient information to put a prudent insurer on notice such that it needs to make further enquiries for the purpose of revealing those material circumstances. Similarly like the 2012 act, this act also allows the insurer to take remedies only in the event that insured was deliberate or reckless. In all other cases 1) if the insured would not have entered into the contract, it could avoid the policy, but it had to return the premium 2) if the insurer would have entered the contract on other terms, the contract would be treated as if it included those terms term 3) if the insurer had charged a higher premium, the insurer would could reduce the claim amount accordingly. Further Section 4 and 6 under Part 2 of the act, also clearly lists out what what an insured is supposed to know by distinguishing between insureds who are and are not individuals. This is a very crucial and important aspect in insurance contracts, since it dictates what the insured must disclose, and what it is excused from disclosing to the insurer. Section 5 of the act also sets out what the insurer “knows”, “ought to know” and “is presumed to know”. This helps the respective parties to the insurance prepare themselves better, before entering into a contract of insurance. Insured parties will now be able to review their disclosure processes before entering into the contract. Insurer will also be able to conduct necessary enquiries before underwriting risks.
Comparing the two jurisdictions
Therefore compared to the Insurance Act 2015 of India, the CIDRA 2012 is quite different in its approach. While the Indian act still restricts itself to a test of materiality for duty of disclosure and misrepresentation, the UK legislation introduces a test of reasonable care, for the insured with regard to duty of disclosure and misrepresentation replacing the traditional test of materiality and the good faith test, thus giving consideration and protection for the insured
Secondly, the 2012 CIDRA act has separately distinguished non disclosure and misrepresentation to some extent, unlike the situation in India. In India judgements seemed to have established a more strict test of materiality for non disclosure and misrepresentation without really making a distinction between the two. The insurance act on the other hand has set out a separate more relaxed test of materiality for misrepresentations for life insurance . Even the more recent judgements of the Indian Supreme court, have followed this trend.
Thirdly as discussed, under the India Insurance Act 2015 benefits apply to only life insurance policies in India. In the United Kingdom under the definition of consumer insurance, the 2012 CIDRA benefits are applicable to all types of consumer insurance polices where the policyholder is acting in a personal, as opposed to commercial capacity. Further under the UK’s 2015 act , new standards are also set for various non consumer insurance policies with regard to duty of disclosure.The act has also clearly set out what an insurer and insured should know and what it shouldn’t know, which is also an essential aspect before entering into commercial insurance contracts. The laws in India on the other hand do not provide any such extensive rules with read to the same .
Further with regard to misrepresentation for life insurance, the remedies provided to the insurer in the Indian act are merely restricted to return of premium, in the event of misrepresentation which is not fraud, unlike the act in the UK which lists down wider standards on what the insurer would have done as discussed above, providing greater protection to the insured for consumer insurances and non consumer insurances.
Lastly the Insurance act 2015 provides a comprehensive set of rules for non consumer insurance contracts. It introduced a new duty of fair presentation of risk, restricting the remedies of an insurer only if the insurer was reckless or deliberate. It also set out a list of things which the insurer and insured must keep in mind before entering into a contract. In India on the other hand, commercial insurance contracts do not have such extensive laws to govern it, restricting the law to the traditional regime of insurance.
Basis of the Contract Clause and Warranties
Warranty as defined under Section 35 of the the Marine Insurance Act, 1963, is a promise whereby the the assured undertakes that some particular thing shall or shall not be done, or that some condition shall be fulfilled, or whereby he affirms or negatives the existence of a particular state of facts.” Further Section 35(3) of the Act, defines warranty as a condition which must be exactly complied with, whether it be material to the risk or not. The section further goes on to explain that the insurer is discharged from liability, from the date of breach of the warranty if the same is not complied with. These sections sum up the characteristics of warranties, and by it’s very nature it is generally favourable to the insurer. This is because the insurer can easily avoid liability, even if the breach of the warranty has no connection with the loss that subsequently occurs, and for which the insured is entitled to the benefits of the insurance policy. Therefore warranties are often used by Insurance companies to avoid liability altogether, without any rational explanation, to support the discharge of their liability.
In fact, the most common way for insurance companies to create warranties is through incorporation of the “basis of the contract” clause which is usually contained in most types of insurance contracts. These clauses covert statements made during presentation of a risk, from representations into warranties. The basis clause plays its part by making the questions and answers on a proposal form the basis of the contract, and providing that in the event of any untruth, the contract could be voidable. Therefore the accuracy of the information presented by the insured is guaranteed through the incorporation of the “basis of the contract” clauses, and any misrepresentation and accuracy of the same, entitles the insurer to treat the contract as voidable
The position of the judiciary in India and UK
These clauses have wide ranging consequences on the insured. Courts in the UK and India have identified this problem. Lord Greene in the case of Zurich Insurance Co vs Morrison, stated that the basis of the contract clause creates “traps” for the insured, and described it as a vicious device. In India, certain High Courts courts have also recognised this issue and made observations on the same. For instance, the High Court of Andhra Pradesh in the case of Life Insurance Corporation of India vs Shakuntala Bai, made the following observation “the insurance companies, including the Life Insurance Corporation of India, are very clever. They make it a condition of the contract of insurance that the truth of every one of the statements made by the insurer in the proposal, personal statement, etc,, constitutes the basis of the contract, so that there is a warranty by the insured that all statements made by him are true and if they are not true the contract is void.” Similarly the Punjab and Haryana High Court made an observation in Vidya Singh v. Life Insurance Corporation of India and stated that the introduction of the ‘basis’ clause into a contract of insurance makes the materiality of the assured’s misstatements immaterial for the purpose of avoidance of the contract by the insurer. Thus is the insurer placed in a highly advantageous position. Thus is the insured placed in a vulnerable position. The advantage to the insurer is greater because the questions which the assured answers in his personal statement before the Insurance Company’s Medical Officer are questions framed by the insurer. The great advantage the insurer derives from the basis clause, in my view, carried with it the plain duty on the part of the insurer to explain the implication of the clause fully to the insured and further to explain each of the questions of which answers are sought in the personal statement. Utmost good faith and candour from the insured can only go hand in hand with fair explanation and honourable dealing from the insurer.
Reforms in the UK and its analysis
The United Kingdom laws recognised this and decided to abolish this clause altogether, to better protect the insured. Under the Consumer Insurance (Disclosure and Representations) Act 2012, the basis of the contract clauses were abolished for consumer insurance. However these clauses were still applicable for non consumer insurance contacts. In 2013 this position was corroborated by the England and Wales Court Of Appeal in Genesis Housing Association Ltd vs Liberty Syndicate Management Ltd , allowing the for the use of the clause in non consumer insurance contracts. It was in only 2015, that under Part 3 of the Insurance Act 2015, the basis of the contract clauses were finally abolished for non- consumer insurance contracts. However In India, although courts have recognised this issue, there have been no laws enacted with regard to the same, till date in India. The primary legislations governing insurance in India are the Insurance Act 1938 and the Insurance Regulatory and Development Authority Act, 1999. However these legislations do not talk about such a clause, and neither have any amendments or reforms been made with regard to the same.
In conclusion there is a need for reform in the insurance sector in India. The traditional insurance law regime is in need of urgent amendments, in order to help better protect the consumer or the insured. In this regard the role of the judiciary is important to address these inherent lapses in law and to bring about coherent reforms in the the existing system. However in order for the final implementation process to be completed, the government must take the initiative to introduce necessary legislation.
The insurance sector companies in India, both in the public and private level, should not be left to take advantage of the insured. Some of the egregious lapses in the present law as discussed in this paper leave no room for the welfare of the insured in most sectors of the insurance industry. Therefore it for the government to decide whether to continue with the existing framework of law or to reform the law in order better safeguard the consumer. The recent reforms in the UK as discussed in this paper, can serve as an important lesson for the Indian government, in order to initiate reforms in the future.
- Consumer Insurance (Disclosure and Representations) Act 2012, c.6, https://www.legislation.gov.uk/ukpga/2012/6/introduction/enacted
- Insurance Act 2015, c. 4 , http://www.legislation.gov.uk/ukpga/2015/4/contents/enacted.
- Sudarshan Vohra & Another vs Life Insurance Corporation Of India WRIT PETITION (CIVIL) NO. 5605 OF 2008
- Modern Insulators Ltd. V. Oriental Insurance Co. Ltd
- The Law Commission Consultation Paper No 182 and The Scottish Law Commission Discussion Paper No 134,https://s3-eu-west-2.amazonaws.com/lawcom-prod-storage-11jsxou24uy7q/uploads/2015/03/cp182_ICL_Misrep_Non-disclosure_Breach_of_Warranty.pdf
- John Birds, bird’s modern insurance law(2016)
- AIR 1991 (SC) 392
- AIR 2019 SC 2182
- The Marine Insurance Act, § 20, 1963, No.11, Acts of Parliament
- The Insurance Act, § 45,1938, No.4, Acts of Parliament, as amended by The Insurance Laws (Amendment) Act, 2015, No.5, Acts of Parliament
- Lowry, John, and Philip Rawlings. ‘That Wicked Rule, That Evil Doctrine . . .’: Reforming the Law on Disclosure in Insurance Contracts, The Modern Law Review (2012)
- (1997) 3 All ER 636
- The Marine Insurance Act, 1906, c.41, https://www.legislation.gov.uk/ukpga/Edw7/6/41/data.pdf
- 1995 1 AC 501
- Consumer Insurance (Disclosure and Representations) Act 2012, c.6, https://www.legislation.gov.uk/ukpga/2012/6/introduction/enacted
- Section 1 of CIDRA (2012) defines a “consumer insurance contract” as an insurance contract between an insurer and “an individual who enters into the contract wholly or mainly for purposes unrelated to the individual’s trade, business or profession”. A consumer must therefore be a natural person, rather than a legal person (such as a company or corporation
- Oriental Insurance Company Limited vs. Mahendra Construction Oriental Insurance Company AIR 2019 SC 2182
-  1 ER 529
- AIR 1975 AP 68
- AIR 2004 P H 359
-  EWHC 3105 (TCC)
- The Insurance Regulatory and Development Authority Act, 1999, No.41, Acts of Parliament
ABOUT THE AUTHOR
Joe George is a Junior Legal Executive at Trans Asian Shipping Services (P) Ltd.