Uberrima Fidae in Life Insurance Contracts: Recent Developments

Recently, the Supreme Court of India had the occasion to consider an important question in a life insurance contract: whether an insurer can repudiate a life insurance policy for suppression of material information?

In Reliance Life Insurance Co. Ltd. and Ors. vs. Rekhaben Nareshbhai Rathod (24.04.2019 - SC) : MANU/SC/0593/2019, the question before the court was whether the life insurer was correct in repudiating the contract in view of the fact that the insured suppressed the following material information: the insured had suppressed the material fact that he had obtained life insurance just two months earlier to obtaining insurance from the appellant.

After taking life insurance from an insurer, the insured within two months taken life insurance from the appellant and while declaring whether the insurer had obtained another insurance policy previously, the insured had declared "NA". Within a year from obtaining insurance from the appellant, the insured expired and his spouse filed a claim, which was rejected. The respondent put forth an interesting and plausible argument: that the insurance agent took the insured's signature on a blank proposal which was in English and that the proposal form was filled-up either by the agent or the insurer. 

The Supreme Court rejected the contention by citing a decision given by the Mysore High Court, where the court held that when the insured signs on a blank proposal form the agent ceases to become the insurer's agent and instead becomes the insured's agent. It is interesting to note that the insurer was previously asked to deposit the decreetal amount in court, of which 50% was withdrawn by the insured's spouse. The court ordered under Article 142 of the Constitution that the insured's spouse could retain that amount.

In support of its decision, the Supreme Court cited both English and Indian precedents. It is of note that English law has undergone a dramatic shift owing to the enactment of the UK Consumer Insurance (Disclosure & Representations) Act, 2012. In this post, we will analyse these changes and draw heavily from this paper.

Till 2012, the law as regards pre-contractual duty of disclosure was virtually similar to the law in India. The legal scenario in UK dramatically changed with the enactment of the UK Consumer Insurance (Disclosure & Representations) Act, 2012 (hereinafter “2012 Act”). The 2012 Act bought a dramatic shift in the manner in which the pre-contractual duty of disclosure of material circumstances in consumer insurance contracts was viewed. The reforms that lead to the 2012 Act began in 2006 when the English and the Scottish Law Commissions decided to review the law on pre-contractual disclosure of material circumstances pursuant to a scoping paper issued in January 2006 on the areas that needed law reform. Based on the responses received to the scoping paper, three issue papers were published on topics associated with the pre-contractual disclosure obligations. The topics covered were misrepresentation and non-disclosure, warranties, and intermediaries and pre-contractual information.

These aspects were discussed in several seminars and meetings and the Law Commissions came up with a Report in June 2007 where the reform proposals were clearly outlined. The 2007 Report went on to call the existing state of affairs of permitting the insurer to avoid a policy for the consumer’s honest and reasonable failure to disclose material circumstances and at the same time empowering the Financial Ombudsman Service to order the insurer to pay the claim as “nonsense”. On the prevailing conditions, the 2007 Report observed:

“We think that the law should generally follow accepted practice, in the absence of an agreement to the contrary. Not every term is thought about or negotiated in advance. Currently the law imposes a default regime that undercuts, rather than supports, accepted market practice. In so doing, it risks defeating the reasonable expectations of the insured.”

The 2007 Report identified the following adverse effects of the existing regime on the UK insurance market:

• Insurance fails to meet the reasonable expectations of the customer since rejection of insurance claim creates a deep sense of grievance.
• It is in the best interests of consumers to obtain insurance. The existing state of affairs, however, creates a negative incentive deterring the consumer from obtaining insurance.
• The relevant law in the European and commonwealth countries are more insurance-friendly. This might drive away consumers from the UK market to more favourable insurance markets.

In view of the problems and the adverse effects of such problems on the UK insurance market, the 2007 Report sought to reform the law by taking into consideration the salutary objectives of disclosure of material circumstances of preventing adverse selection and thereby protecting the insurance market from non-viability. At the same time, the 2007 Report clarified that the consumers should be obligated to take reasonable care to answer the questions asked by the insurer clearly and accurately and in case of failure to do so, the insurers should be suitably compensated. The Report also noted that the proposed reforms would increase the premiums slightly considering that more claims would have to be paid by the insurer. Even so, the Report claimed that the consumers would not mind a small increase in premium for the additional cover these reforms would provide. On the quantum of increase, the 2007 Report claimed that since the reforms were either requirements of the Financial Services Authority or practice of the insurance ombudsman, the increase would be negligible. The reforms, the 2007 Report, claimed would ensure that law would ensure consumers’ reasonable expectations and good practice.

Based on further consultation and discussion, the UK and the Scottish Law Commissions published a joint Report in 2009 and tabled it in the UK and Scottish Parliaments in December 2009. Based on the recommendations in the 2009 Report, a Bill titled “UK Consumer Insurance (Disclosure & Representations) Bill” was initiated which eventually became UK Consumer Insurance (Disclosure & Representations) Act, 2012 after receiving royal assent in March 2012. The said statute came into force on 6th April 2013.

Salient features of the UK Consumer Insurance (Disclosure & Representations) Act, 2012 are summarised below:

• The Act wholly replaces the doctrine of utmost good faith as applicable to the insurer and the non-business insured. For the purposes of the 2012 Act, a non-business insured is an individual who enters into the insurance contract wholly or mainly for purposes unrelated to such individual’s trade, business or profession. 
• The replaced duty is “the duty to take reasonable care not to make a misrepresentation to the insurer.” 
• The purport of the said duty is that the insured must take reasonable care to answer insurer’s questions fully and accurately and in case the insured volunteers information, reasonable care must be taken to ensure that the information is not misleading. 
• The question as to whether reasonable care has been taken or not has to be determined after taking into account all the relevant circumstances, including the type of insurance contract, relevant explanatory material or publicity produced/ authorized by the insurer, clarity and specificity of the insurer’s questions, whether the agent was acting for the consumer. 
• Another relevant circumstance in case of a failure to respond to the insurer’s questions with respect to renewal/ variation of an insurance contract is the communication by the insurer to the insured of the importance of answering the said questions or the possible consequences of failing to answer those questions. 
• Misrepresentation made dishonestly amounts to lack of reasonable care. 
• However, if the insurer was, or ought to have been aware of particular characteristics or circumstances of the actual consumer, such characteristics have to be taken into account. 
• A qualifying misrepresentation is a misrepresentation by the insured before the insurance contract is entered into or varied for which insurer has a remedy against the consumer. 
• The insurer has a remedy only when the following are established: 
• where the consumer breached the duty to take reasonable care as stated above, and 
• the insurer shows that without the misrepresentation, the insurer would not have entered into or varied the contract or would have done so on different terms. 
• Unless contrary is shown, there is a presumption that: 
• the consumer is a reasonable consumer, and 
• the consumer knew the matter about which insurer asked a clear and specific question which was relevant to the insurer. 
• A qualifying representation is deliberate or reckless if the insured knew that such misrepresentation was misleading or did not care whether or not it was untrue or misleading. 
• A qualifying representation is careless if it is not deliberate or reckless. 
• The onus lies on the insurer to show that the qualifying representation was deliberate or reckless. 
• Remedies:

Qualifying Misrepresentation	Remedy
Deliberate or reckless	Avoid the contract and refuse all claims. Need not return premiums paid unless it is unfair to the consumer.
Careless- insurer would not have entered into contract but for it	Avoid the contract and refuse all claims but return the premiums paid
Careless- insurer would have entered into contract on different terms	Contract is to be treated as having been entered into on different terms
Careless- insurer would have charged higher premium	Amount paid on a claim may be reduced proportionately (X%): X% = (premium actually charged ÷ higher premium) * 100

• In case of careless misrepresentations, the insurer may give a notice of the careless misrepresentations and the remedy available or terminate the contract by giving reasonable notice to the consumer. 
• However, the insurer does not have the right to terminate a life insurance contract for careless misrepresentation. 
• Premiums paid for careless misrepresentation for the balance contract period after termination of contract by either party pursuant to the reasonable notice specified above should be returned. 
• Termination, however, does not affect the treatment of a claim that arose during the contract period prior to termination. 
• These provisions cannot be contracted out to the disadvantage of the consumer. 

In short, English law replaces uberrima fidae in life insurance law, with a more nuanced set of standards based on facts. Although the present decision cites English cases, these developments in English law and their impact have not been taken into account. The previous round on reforms in India in the form of the 190th Law Commission Report preceded these reforms in English law. Nevertheless, it would do good to have a re-look at our law in light of the developments world over. These questions should once again be discussed by the Law Commission. 

Apart from the above, in view of the requirement of insurance agents to achieve targets and the realities that the insured are not really explained about the nuances of the proposal form, it would do good to making it mandatory to video-record all policy subscriptions. The agent read over the questions in the language that is understood by the insured and also record the answers. Leveraging technology can be solution to such problems.