It has been more than forty-four years ever since the Supreme Court of India settled important questions of law respecting Section 45 of the Insurance Act, a section dealing with life insurance by the celebrated case of Mithoolal Nayak Vs Life Insurance Corporation of India. That it has continued to be the touchstone in understanding the term ‘Fraud’ as it is defined in the Indian Contract Act, 1872, with reference to life insurance contracts can never be overstated. Not a single judgment, subsequently, was rendered on Section 45 of the Insurance Act without a reference, nay, placing reliance on it. However, is it any longer relevant after amendments to the said Act? Before delving into it, let us proceed to understand the provisions of that Section.
For the sake of brevity, the Section, before and after amendment, has not been reproduced. Therefore, a prior knowledge of the same is a sine qua non.
The import of the revised provisions can be summarized as follows:
i. A life insurance policy, simply put, cannot be questioned after three years from the respective dates;
ii. However, it can be questioned within three years from the respective dates, either on the ground of fraud or suppression/misstatement of a material fact but not on the ground of fraud;
iii. If repudiation is on the ground of fraud, insurer has to inform the grounds and material relied upon for repudiation;
iv. Most importantly, no insurer shall repudiate a life insurance policy on the ground of fraud if the insured can prove that the misstatement of or suppression of a material fact was true to the best of his knowledge and belief or that there was no deliberate intention to suppress the fact or that such misstatement of or suppression of a material fact are within the knowledge of the insurer;
v. In case of fraud, the onus of disproving lies upon the beneficiaries, in case the policyholder is not alive;
vi. In case of fraud, the premiums paid shall stand forfeited;
vii. However, if the policy is not questioned on the ground of fraud but 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, 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;
ix. In such a case (i.e. repudiation not on the ground of fraud ), 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;
x. If repudiation is not on the ground of fraud, the premiums collected on the policy till the date of repudiation shall be paid to the insured or the legal representatives or nominees or assignees of the insured within a period of ninety days from the date of such repudiation.
Section 45 ( before amendment ) vis –a – vis The Insurance Laws (Amendment) Act, 2015
a. Prior to amendment ( which came into force on 26th December 2014 ), should a policy be questioned after two years from the date of effect, the insurer had to fulfill the three conditions of the second part of Section 45 ( see Mithoolal Nayak’s case );
b. The date of effect, was widely construed to mean the date of commencement ( as it was held in Mithoolal Nayak’s case ) as Section 45 was silent on revival;
c. Courts were divided on the opinion as to whether the date of effect would mean the date of revival also; the dispute is now put to rest as it has been specifically stated the three years period would reckon from the date of revival too;
d. As per Section 45 ( before amendment ), beyond two years from the date of effect, materiality of the suppressed fact, fraud & intention to deceive had to be proved by the insurer;
e. Prior to amendment, a policy could be repudiated anytime during the term / subsistence of the policy, subject to the insurer discharging the burden of proof; after amendment, a policy cannot be questioned on any ground whatsoever after the expiry of 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.
f. After amendment, a policy can be repudiated either (a) on the ground of fraud, or (b) suppression of fact material to the expectancy of the life but not on the ground of fraud.
Thus, the upshot of the above discussion is that a policy cannot be questioned on the ground of ‘fraud’ if the insured could prove the misstatement of or suppression of a material fact was true to the best of his knowledge and belief or that there was no deliberate intention to suppress the fact or that such misstatement of or suppression of a material fact are within the knowledge of the insurer. If repudiated not on the ground of fraud but for misstatement and suppression of material fact, the same shall not be considered material unless it has a direct bearing on the risk undertaken by the insurer. Earlier, the onus of proving materiality of fact, fraud & intention to deceive was on the insurer.
What would constitute a ‘fraud‘, ‘material fact’ and ‘intention to deceive’ in a life insurance policy ?
After the amendment, ‘fraud’ and ‘material fact’ are still relevant. So is the ‘intention to deceive’. The difference lies only in the onus, as stated supra. To understand the terms, we shall take recourse to Mithoolal Nayak’s case:
The Hon’ble Court held that the suppressed ailments were not trivial or casual but serious in nature ( note: what is serious, depends on the circumstance of the case and the nature of the suppressed ailment ); and therefore it constituted a ‘material suppression’ ( “ The term ‘material fact’ is not defined in the Act and, therefore, it has been 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’ - Supreme Court of India, in Satwant Kaur Sandhu Vs New India Assurance Co Ltd).”
As it was proved that the life assured had gone out of his village to visit a reputed physician only a few months earlier and was on treatment for many days, it was held that there was intent to deceive, or, in other words, it was a case of deliberate, fraudulent suppression.
We may, therefore, safely conclude that the landmark judgment in Mithoolal Nayak’s case shall continue to guide us, as it did before the amendment, in determining the applicability of the various terms in the amended version of Section 45 of the Insurance Act.
Needless to say, it is highly desirable and hence strongly recommended to go through the entire judgment so as to understand the intricacies and nuances of Section 45, besides the other interesting questions of law settled therein. As my illustrious mentor used to say, no learning on Section 45 would be complete without assimilating the landmark judgment – and there cannot be a truer word.