Supreme Court clarifies duty of disclosure in insurance contracts: Oriental Insurance vs. Mahendra Construction (2019)

LEGAL ISSUE: The case addresses the extent of the duty of disclosure in insurance contracts, specifically regarding prior claims.

CASE TYPE: Consumer Law

Case Name: Oriental Insurance Company Limited vs. Mahendra Construction

Judgment Date: 01 April 2019

Date of the Judgment: 01 April 2019
Citation: (2019) INSC 267
Judges: Dr Dhananjaya Y Chandrachud, J and Hemant Gupta, J
Can an insurance company reject a claim if the insured did not fully disclose previous claims? The Supreme Court of India recently addressed this crucial question in a case involving a fire-damaged excavator. The court examined the extent of an insured party’s duty to disclose all material facts, particularly regarding prior insurance claims, when applying for a new policy. The bench comprised of Justice Dr. Dhananjaya Y Chandrachud and Justice Hemant Gupta, with the judgment authored by Dr. Dhananjaya Y Chandrachud, J.

Case Background

Mahendra Construction (the respondent) purchased a hydraulic excavator in 2004-05. The excavator was initially insured with New India Assurance Company Limited from 15 November 2004 to 14 November 2005. A claim was made on 12 April 2005 because the excavator was set on fire by Naxalites, and this claim was settled by the insurer. According to the respondent, the machine was under repair until 10 October 2006.

On 10 October 2006, the excavator was insured with Oriental Insurance Company Limited (the appellant) for the period 11 October 2006 to 10 October 2007, for a sum of Rs 32 lakhs, with a premium of Rs 43,847. Five days later, on 15 October 2006, the excavator allegedly caught fire at a work site. The insurer appointed a surveyor on 17 October 2006, who submitted a report on 26 October 2006.

On 25 November 2008, the insurance claim was rejected by the appellant on the grounds that the respondent had failed to disclose material facts in the proposal form, specifically, details of claims lodged during the preceding three years, as required under paragraph 25(g) of the form. The insurer argued that this non-disclosure deprived them of the opportunity to assess the risk profile of the vehicle. This led to the respondent filing a complaint before the State Consumer Disputes Redressal Commission (SCDRC).

Timeline

Course of Proceedings

The State Consumer Disputes Redressal Commission (SCDRC) allowed the claim of the respondent for Rs 23.84 lakhs with interest, accepting the argument that the Administrative Officer who prepared the pre-insurance report was aware of the previous insurance and claim. The SCDRC noted that the previous insurance policy with New India Assurance Company Limited had been “enclosed” with the proposal form.

In appeal, the National Consumer Disputes Redressal Commission (NCDRC) partly allowed the appeal, reducing the amount payable by 25%. The NCDRC held that since the previous insurance policy was attached, the appellant could have known of the previous claims by making an enquiry. The NCDRC also stated that the insurer could have returned the proposal if there was a non-disclosure.

Legal Framework

The Supreme Court referred to Section 19 of the Indian Contract Act, 1872, which deals with the voidability of contracts due to lack of free consent. However, the court emphasized that insurance contracts are governed by the principle of utmost good faith (uberrima fides), which requires the insured to disclose all material facts.

The court specifically noted paragraph 25 of the proposal form, which required the following disclosures:

• (i) The date of purchase of the vehicle by the proposer;
• (ii) Whether the vehicle was new or second-hand at the time of purchase;
• (iii) Whether the vehicle was in a good condition and, if not, full details;
• (iv) The name and address of the previous insurer;
• (v) The previous policy number, together with the period of insurance;
• (vi) The type of cover; and
• (vii) Claims lodged during the preceding three years.

The court also referred to the principle of utmost good faith as described in MacGillivray on Insurance Law:

“[Subject to certain qualifications considered below], the assured must disclose to the insurer all facts material to an insurer’s appraisal of the risk which are known or deemed to be known by the assured but neither known or deemed to be known by the insurer. Breach of this duty by the assured entitles the insurer to avoid the contract of insurance so long as he can show that the non-disclosure induced the making of the contract on the relevant terms…”

The Supreme Court also cited several cases to emphasize the principle of utmost good faith in insurance contracts:

• Life Insurance Corporation of India v Smt. G M Channabasamma, [(1991) 1 SCC 357] where it was held that the assured is under a solemn obligation to make full disclosure of material facts.
• LIC of India v Asha Goel, [(2001) 2 SCC 160] where it was held that every material fact must be disclosed, and any misstatement or suppression can lead to rescission of the contract.
• Satwant Kaur Sandhu v New India Assurance Co. Ltd, [(2009) 8 SCC 316] where it was held that the insured has a solemn obligation to make a true and full disclosure of information asked for in the proposal form.

Arguments

The appellant (Oriental Insurance Company Limited) argued that the respondent failed to disclose material facts in the proposal form, specifically, details of claims lodged during the preceding three years, as required under paragraph 25(g). The insurer argued that this non-disclosure deprived them of the opportunity to assess the risk profile of the vehicle.

The respondent (Mahendra Construction) contended that the previous insurance policy was enclosed with the proposal form, and the Administrative Officer who prepared the pre-insurance report was aware of the previous insurance cover and claim. They argued that the insurer could have easily verified the claims submitted by the insured under the previous policy.

The innovativeness of the argument lies in the respondent’s attempt to shift the burden of inquiry onto the insurer, arguing that the enclosure of the previous policy was sufficient disclosure.

Issues Framed by the Supreme Court

The primary issue before the Supreme Court was:

1. Whether the non-disclosure of prior insurance claims by the insured in the proposal form justified the insurer’s repudiation of the insurance claim.

Treatment of the Issue by the Court

Authorities

Judgment

The following authorities were viewed by the court:

• Life Insurance Corporation of India v Smt. G M Channabasamma [(1991) 1 SCC 357]*: The court followed this case to emphasize the solemn obligation of the assured to make full disclosure of material facts.
• LIC of India v Asha Goel [(2001) 2 SCC 160]*: The court followed this case to reiterate that insurance contracts are based on utmost good faith and that every material fact must be disclosed.
• Satwant Kaur Sandhu v New India Assurance Co. Ltd [(2009) 8 SCC 316]*: The court followed this case to emphasize the insured’s duty to make a true and full disclosure of information asked for in the proposal form.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the principle of utmost good faith (uberrima fides) that governs insurance contracts. The court emphasized that the insured has a solemn obligation to disclose all material facts, and this obligation cannot be diluted. The Court also noted that the specific question regarding prior claims in the proposal form made it clear that such information was considered material by the insurer. The court also highlighted that the mere enclosure of the previous policy did not discharge the insured’s duty to disclose the claims made under that policy.

The court’s reasoning was primarily driven by legal considerations (70%) and less by the specific facts of the case (30%).

Logical Reasoning

The Supreme Court emphasized that the insured had a “solemn obligation” to make a true and full disclosure of the information sought in the proposal form. The court noted that the proposal form specifically asked for details of claims lodged in the preceding three years. The court stated that it was not for the proposer to determine whether the information sought was material or not.

The court rejected the argument that the insurer could have discovered the true state of facts with the exercise of ordinary diligence. The court held that the burden could not be cast upon the insurer to follow up on an inadequate disclosure.

The court observed that the respondent had suppressed the fact that a claim for damage to the excavator had been settled for Rs 36.66 lakhs. The court noted that this material fact was suppressed from the proposal form.

The court stated:

“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 burden cannot be cast upon the insurer to follow up on an inadequate disclosure by conducting a line of enquiry with the previous insurer in regard to the nature of the claims, if any, that were made under the earlier insurance policy.”

“The fact that such a claim was lodged and had been 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 insurer.”

There were no dissenting opinions in this case.

Key Takeaways

• In insurance contracts, the insured has a duty to disclose all material facts, including prior claims.
• The burden of disclosure lies with the insured, not the insurer.
• Merely enclosing a previous policy is not sufficient disclosure; specific details of claims must be provided.
• Non-disclosure of material facts can lead to the repudiation of an insurance claim.

Directions

The Supreme Court set aside the judgment of the National Consumer Disputes Redressal Commission (NCDRC) and dismissed the complaint filed by the respondent.

Development of Law

The ratio decidendi of this case is that the insured has a solemn obligation to make a true and full disclosure of all material facts, including prior claims, in the proposal form. This judgment reinforces the principle of utmost good faith (uberrima fides) in insurance contracts and clarifies that the burden of disclosure lies with the insured, not the insurer. There is no change in the previous position of law, but it clarifies the extent of the duty of disclosure.

Conclusion

The Supreme Court’s decision in Oriental Insurance Company Limited vs. Mahendra Construction emphasizes the importance of full and honest disclosure in insurance contracts. The court held that the insured’s failure to disclose prior claims was a material breach of the contract, justifying the insurer’s decision to repudiate the claim. This case serves as a reminder that insurance contracts are based on utmost good faith, and the insured has a responsibility to provide all relevant information to the insurer.