Principle of utmost good faith

Through the judgment of the case - Oriental Insurance Company Ltd. v. Mahendra Construction, delivered on April 1, 2019, Justice Dr. Dhananjaya Y. Chandrachud and Justice Hemant Gupta, at the Supreme Court have termed the line of reasoning of the National Consumer Disputes Redressal Commission-NCDRC- as flawed with the observation that insurance is governed by the principle of utmost good faith, which imposes a duty of disclosure on the insured with regard to material facts.

Elaborating on the principle, in the judgment of the case - Life Insurance Corporation of India v. Smt. G.M. Channabasamma - (1991) 1 SCC 357, the Court has held:

'7......It is well settled that a contract of insurance is contract uberrima fides and there must be complete good faith on the part of the assured. The 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 for deciding whether the proposal should be accepted or not. While making disclosure of the relevant facts, the duty of the insured to state them correctly cannot be diluted......'.

In the judgment of the case - LIC of India v. Asha Goel - (2001) 2 SCC 160-, a two-judge bench of Apex-Court held that for determination of the question whether there has been suppression of any material facts it may be necessary to examine also 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 inquiry by a prudent person.

In the judgment of the case - Satwant Kaur Sandhu v. New India Assurance Co. Ltd. - (2009) 8 SCC 316, it has been stated that It needs little emphasis that when an information on a specific aspect is asked for in the proposal form, an assured is under a solemn obligation to make a true and full disclosure of the information on the subject which is within his knowledge. It was further held that there is a clear presumption that any information sought in the proposal form is a 'material fact'.

The burden of establishing that the insured made a false representation and suppressed material facts lies on the insurer. The mere disclosure of a previous insurance policy did not discharge the obligation which was cast on the respondent, as the proposer to make a full, true and complete disclosure of the claims which were lodged under the previous policy in the preceding three years. The respondent was under a bounden duty to disclose that the excavator was previously insured with another insurer and that a claim for damage to the excavator on April 12, 2005 had been settled. This material fact was suppressed from the proposal form.

The burden cannot be cast upon the insurer to follow up on an adequate disclosure by conducting a line of inquiry with the previous insurer in regard to the nature of the claims, if any, that were made under the earlier insurance policy. On the contrary, it was the plain duty of the insured while making the proposal to make a clear and specific disclosure. The disclosures which were required in paragraph 25(g) of the proposal form were material to assess the risk profile of the vehicle at the time of accepting the proposal for insurance.

The State Consumer Disputes Redressal Commission - SCDRC proceeded on the hypothesis that the insurer had not denied the averment of the respondent-insured in the complaint that the Administrative Officer was 'fully satisfied' of the previous insurance cover and claim, as is evident from use of the expression 'enclosed' in paragraph 25(g).

It is evident on a bare reading of the proposal form that the material information which was required to be disclosed was suppressed by the insured.

This appeal arose from a decision rendered by the NCDRC on September 19, 2018. The National Commission partly allowed the appeal filed by the insurer against a decision of the SCDRC on April 3, 2017, directing the insurer to pay 75 pc of the amount awarded by the SCDRC- State Commission, which had allowed an insurance claim in the amount of Rs 23.84 lakhs, together with interest at the rate of 7 pc per annum from the date of the institution of complaint.

The respondent- Mahendra Construction, was the original complainant before the State Commission. The respondent purchased a hydraulic excavator machine in 2004-05. The excavator was insured with New India Assurance Co. Ltd. from November 15, 2004 to November 14, 2005. A claim was lodged under the insurance policy on April 12, 2005 on the ground that the excavator had been set on fire by Naxalites. The claim was settled by the earlier insurer. According to the respondent, the machine was under repair until October 10, 2006.

On October 10, 2006, the excavator was insured with the appellant from October 11, 2006 to October 10, 2007. A premium of Rs 43,847 was paid to the appellant for an insurance cover of Rs 32 lakhs. Five days after issuance of the insurance cover, the excavator is alleged to have caught fire at a work site on October 15, 2006.Theinsurer deputed a surveyor for a spot survey on October17, 2006 and a report was submitted on October 26, 2006. It appears that other surveyors were also appointed.

On November 25, 2008, the insurance claim was repudiated on the ground that all material facts which were required to be disclosed through the proposal form to enable the insurer to assess the risk profile had not been disclosed and in consequence, the insurer was deprived of the opportunity to assess the risk profile of the vehicle at the time of accepting the proposal for insurance. This led to the institution of a complaint before the State Commission.

The claim was allowed by the SCDRC in the sum of Rs 23.84 lakhs, together with interest. In appeal, the National Commission held that since the previous insurance policy was annexed to the proposal, the appellant could have known of the claims lodged with the previous insurer on making an enquiry. If there was non-disclosure of information under paragraph 25(g) of the proposal, the appellant could have returned the proposal. The NCDRC held that the insurer could have discovered the true state of facts with the exercise of ordinary diligence and was, hence, not justified in repudiating the claim.

According to the Supreme Court, in the circumstances, the decision of the State Commission to allow the claim was erroneous and the National Commission equally erred in affirming the decision. The fact that such a claim was lodged with the previous insurer and was settled at Rs 36.66 lakhs was suppressed. This suppression goes to the very root of the contract of insurance which would validate the grounds on which the claim was repudiated by the appellant-insurer.

The Supreme Court allowed the appeal and set aside the impugned judgment and order of the National Commission passed on September 19, 2018. The appeal filed by the respondent stand dismissed.