Supreme Court rules on Insurance Policy Renewal and Disclosure: Jacob Punnen & Anr. vs. United India Insurance Co. Ltd. (9 December 2021)

Date of the Judgment: 9 December 2021
Citation: 2021 INSC 729
Judges: S. Ravindra Bhat, J. and K.M. Joseph, J.

Is an insurance company obligated to inform its policyholders about changes in policy terms during renewal? The Supreme Court of India recently addressed this crucial question in a case concerning a medical insurance policy. This judgment clarifies the duties of insurers and the rights of policyholders, particularly regarding transparency and disclosure during policy renewals.

Case Background

The appellants, Jacob Punnen and his wife, had been insured under a medical insurance policy with United India Insurance Co. Ltd. since 1982. The policy was renewed annually. In 2007, the policy covered the appellants and their son, with individual coverage limits. For the policy period of March 2008 to March 2009, the appellants renewed their policy, but this time, the policy covered only the appellants with a higher overall limit. However, the renewed policy introduced a new clause that capped the amount payable for certain procedures like angioplasty, which was not present in the previous policy. The second appellant underwent angioplasty in June 2008, and the insurer paid only a portion of the claim, citing the new cap. The appellants contested this, arguing that they were not informed of the change in terms during renewal.

Timeline

Course of Proceedings

The District Consumer Disputes Redressal Forum initially ruled in favor of the appellants, stating that the insurer should have informed them about the changes in the policy terms before renewal. The State Consumer Redressal Commission overturned this decision, holding that the appellants were bound by the new policy terms. The National Consumer Disputes Redressal Commission (NCDRC) upheld the State Commission’s decision, stating that the renewed policy was a fresh contract with new terms that the appellants were presumed to know.

Legal Framework

The judgment discusses the principle of uberrima fides (utmost good faith) in insurance contracts, which requires both the insurer and the insured to act with honesty and transparency. The Court also examines the concept of “renewal” in insurance policies, and whether a renewed policy constitutes a new contract or a continuation of the old one. The Court refers to Section 22 of the Contract Act, 1872 which states that a unilateral mistake of fact does not make a contract voidable.

The Court also discusses the following:

• Section 22 of the Contract Act, 1872: “A contract is not voidable merely because it was caused by one of the parties to it being under a mistake as to a matter of fact.”
• Section 2(g) of the Consumer Protection Act, 1986: Defines deficiency in service as “[A]ny fault, imperfection, shortcoming or inadequacy in the quality, nature and manner of performance which is required to be maintained by or under any law for the time being in force or has been undertaken to be performed by a person in pursuance of a contract or otherwise in relation to any service”.
• Section 2 (r) of the Consumer Protection Act, 1986: Defines “unfair trade practice” as “a trade practice which, for the purpose of promoting the sale, use or supply of any goods or for the provision of any service, adopts any unfair method or unfair or deceptive practice including any of the following practices, namely- (vi) makes a false or misleading representation concerning the need for, or the usefulness of, any goods or services; (vii) gives to the public any warranty or guarantee of the performance, efficacy or length of life of a product or of any goods that is not based on an adequate or proper test thereof:…”
• Section 2 (6C) of the Insurance Act, 1938: Defines “health insurance business” as “(6C) “health insurance business” means the effecting of contracts which provide for sickness benefits or medical, surgical or hospital expense benefits, whether in-patient or out-patient travel cover and personal accident cover;]
• The Insurance Regulatory and Development Authority Act, 1999: The act to regulate entities in the insurance business.
• IRDA (Health Insurance) Regulations, 2016: Regulations governing health insurance policies.

Arguments

Appellants’ Arguments:

• The appellants argued that they had renewed an existing policy, not applied for a new one, and therefore, the existing terms should apply.
• They contended that the insurer failed to inform them of the changes in the policy, particularly the new cap on angioplasty coverage.
• They relied on the judgments in Biman Krishna Bose v. United India Insurance Co. Ltd. [(2001) 6 SCC 477] and United India Insurance Co. Ltd. v. Manubhai Dharmasinhbhai Gajera [(2008) 10 SCC 404], which state that renewal of an insurance policy implies the existing terms would bind the parties.
• They argued that the insurer was guilty of deficiency of service by not informing them of the limited coverage.

Insurer’s Arguments:

• The insurer argued that the renewed policy was a fresh contract with new terms, which the appellants were bound by.
• They claimed that they were under no obligation to inform the appellants about the changes in the policy terms during renewal, as each renewal is a new contract.
• They contended that the appellants should have read the policy document and inquired about any changes.
• The insurer relied on the Standardized General Terms and Clauses in Health Insurance Policy Contracts by the Insurance Regulatory and Development Authority of India (IRDA), 2020, to argue that the obligation to intimate stems out of Clause 14 which deals with the possibility of revision of terms of a policy including the premium rates.

Issues Framed by the Supreme Court

The Supreme Court framed the following issues:

1. Whether the 2008-09 ‘Gold’ policy was a new policy or a renewal of the previous Mediclaim policy.
2. What are the duties of an insurer when a policyholder seeks renewal of an existing policy?

Treatment of the Issue by the Court

The following table demonstrates as to how the Court decided the issues:

Authorities

The Court considered the following authorities:

Judgment

The Supreme Court held that the insurer was under a duty to inform the policyholders about the limitations imposed in the renewed policy for 2008-2009. The failure to do so resulted in a deficiency of service. The Court set aside the orders of the NCDRC and the State Commission and restored the order of the District Forum, directing the insurer to pay the balance amount to the appellants along with costs.

How each authority was viewed by the Court?

• The Court relied on Biman Krishna Bose v. United India Insurance Co. Ltd. [(2001) 6 SCC 477] and United India Insurance Co. Ltd. v. Manubhai Dharmasinhbhai Gajera [(2008) 10 SCC 404] to emphasize that renewal of a policy generally implies continuation of existing terms.
• The Court used LIC v. Raja Vasireddy Komalavalli Kamba [(1984) 2 SCC 719] to highlight the general rule of acceptance of an insurance proposal involving unconditional acceptance of all terms.
• The Court cited Canara Bank v. United India Insurance Co. Ltd. [(2020) 3 SCC 455], Satwant Kaur Sandhu v. New India Assurance Co. Ltd. [(2009) 8 SCC 316], and Tarsem Singh v. Sukhminder Singh [(1998) 3 SCC 471] to explain the concept of material fact and the effect of a unilateral mistake in a contract.
• The Court used United India Insurance Co. Ltd. v. M.K.J. Corpn. [1996 (6) SCC 428] and Modern Insulators Ltd. v Oriental Insurance Co. Ltd [2000 (2) SCC 734] to emphasize the principle of uberrima fides, which requires both parties to act with utmost good faith.
• The Court cited Sherdley v Nordea Life and Pension [2012] 2 All ER (Comm) 725 to highlight the universal applicability of the principle of uberrima fides.
• The Court relied on Delhi Electric Supply Undertaking v. Basanti Devi [(1999) 8 SCC 229] and Life Insurance Corporation of India v Rajiv Kumar Bhaskar [2005 (6) SCC 188] to explain the role of insurance agents and the liability of insurance companies for their actions.
• The Court cited Pioneer Urban Land & Infrastructure Ltd v Govindan Raghavan [2019 (5) SCC 525], Central Inland Water v Brojo Nath Ganguly&Anr [1986 (3) SCC 156] and Life Insurance Corporation of India v Consumer Education and Research Centre &Ors [1995 (5) SCC 482] to support the courts’ remedial power to refuse enforcement of unfair contracts or contractual terms.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the principle of uberrima fides, which requires utmost good faith from both parties in an insurance contract. The Court emphasized that the insurer had a duty to inform the policyholders about any changes in the policy terms, especially when those changes significantly limited the coverage. The Court also considered the fact that the appellants were senior citizens and had been long-term policyholders, which further underscored the need for transparency and clear communication from the insurer.

Fact:Law:

Logical Reasoning:

The Court reasoned that the insurer’s failure to inform the appellants about the new limitations on coverage was a breach of its duty of good faith. The Court noted that the appellants were not informed about the changed terms and were led to believe that they were renewing the existing policy. The Court also pointed out that the insurer’s argument that the appellants should have inquired about the changes was not valid, as the insurer had a duty to disclose these changes proactively.

The Court rejected the argument that the appellants should have inquired about the terms of the policy, stating:

“In view of the state of law, which is, that the insurer was under a duty to disclose any alteration in the terms of the contract of insurance, at the formation stage (or as in this case, at the stage of renewal), the respondent cannot be heard to now say that the insured were under an obligation to satisfy themselves, if a new term had been introduced.”

The Court also highlighted that insurance policies are often standard form contracts, leaving little room for negotiation by the policyholder:

“Contracts of adhesion (as contracts d’ adhesion are also called), as discussed previously, leave little or no choice to the customer; in this case, the policy holders were left with no room to bargain and negotiate.”

The Court further stated:

“The deficiency of service assumes even more significance in the present case, as it pertains to senior citizens.”

The Court also noted that the insurer had not provided any evidence that its agent had informed the appellants about the changes in the policy terms. The Court also noted that the insurer had not provided any evidence that its agent had informed the appellants about the changes in the policy terms.

Key Takeaways

• Insurers have a duty to inform policyholders about any changes in policy terms during renewal, especially if those changes limit coverage.
• The principle of uberrima fides requires both insurers and insured to act with utmost good faith and transparency.
• A renewed insurance policy is generally considered a continuation of the existing policy unless changes are clearly communicated to the policyholder.
• Policyholders, especially senior citizens, are entitled to clear and transparent communication from insurers.
• Unilateral changes in policy terms without proper disclosure can be considered a deficiency in service under the Consumer Protection Act.

Directions

The Supreme Court restored the order of the District Forum, directing the insurer to pay the balance amount to the appellants along with costs of ₹50,000.

Development of Law

The ratio decidendi of this case is that an insurer has a duty to disclose any changes in the terms of a policy at the time of renewal, especially if those changes limit the coverage. This judgment reinforces the principle of uberrima fides in insurance contracts and clarifies the obligations of insurers towards their policyholders. It also underscores that a renewed policy is generally a continuation of the old one unless the changes are clearly communicated. This case changes the previous position of law by holding that an insurer has a duty to inform the insured about the changes in the policy terms at the time of renewal.

Conclusion

The Supreme Court’s judgment in Jacob Punnen & Anr. vs. United India Insurance Co. Ltd. is a significant ruling that emphasizes the importance of transparency and good faith in insurance contracts. The Court held that insurers must inform policyholders about changes in policy terms during renewal, and failure to do so constitutes a deficiency in service. This decision protects the rights of policyholders, particularly senior citizens, and ensures that they are not unfairly disadvantaged by hidden limitations in their insurance coverage.

Category

Parent Category: Consumer Protection Law

Child Category: Deficiency in Service

Parent Category: Insurance Law

Child Category: Duty of Disclosure

Parent Category: Insurance Law

Child Category: Renewal of Policy

Parent Category: Contract Act, 1872

Child Category: Section 22, Contract Act, 1872

Parent Category: Consumer Protection Act, 1986

Child Category: Section 2(g), Consumer Protection Act, 1986

Parent Category: Consumer Protection Act, 1986

Child Category: Section 2(r), Consumer Protection Act, 1986

Parent Category: Insurance Act, 1938

Child Category: Section 2(6C), Insurance Act, 1938

FAQ

Q: What does this judgment mean for insurance policyholders?

A: This judgment means that insurance companies must clearly inform policyholders about any changes in their policy terms when they renew their policies. If there are changes that limit coverage, the insurer must make this clear to the policyholder.

Q: What is the principle of uberrima fides?

A: Uberrima fides is a legal principle that requires both parties in an insurance contract (the insurer and the insured) to act with utmost good faith, honesty, and transparency. This means that both parties must disclose all relevant information to the other.

Q: Can an insurance company change the terms of my policy during renewal?

A: Yes, an insurance company can change the terms of your policy during renewal, but they must inform you about these changes. If they do not, and the changes limit your coverage, it could be considered a deficiency in service.

Q: What should I do if my insurance company changes the terms of my policy without informing me?

A: If your insurance company changes the terms of your policy without informing you, you can file a complaint with the consumer court or the Insurance Regulatory and Development Authority of India (IRDAI). You should also review your policy documents carefully and seek legal advice if necessary.

Q: Does this judgment apply to all types of insurance policies?

A: While this judgment specifically deals with a medical insurance policy, the principles of transparency and good faith apply to all types of insurance policies. Insurers have a duty to inform policyholders about any material changes in policy terms.