Supreme Court Upholds Insurance Claim Repudiation for Non-Disclosure of Pre-existing Condition: Bajaj Allianz Life Insurance vs. Dalbir Kaur (2020)

Introduction

Date of the Judgment: 9 October 2020

Citation: Civil Appeal No. 3397 of 2020 (Arising out of SLP (C) No. 10652 of 2020)

Judges: Dr. Dhananjaya Y Chandrachud, J., Indu Malhotra, J., and Indira Banerjee, J.

Can an insurance company reject a claim if the insured failed to disclose a pre-existing medical condition? The Supreme Court of India recently addressed this crucial question in a case involving Bajaj Allianz Life Insurance Company. The court examined whether the non-disclosure of a pre-existing illness, specifically a stomach ailment and vomiting of blood, justified the insurance company’s decision to repudiate the claim. The judgment was delivered by a three-judge bench comprising Dr. Dhananjaya Y Chandrachud, J., Indu Malhotra, J., and Indira Banerjee, J., with the opinion authored by Dr. Dhananjaya Y Chandrachud, J.

Case Background

On August 5, 2014, Kulwant Singh submitted a proposal to Bajaj Allianz Life Insurance Company for a life insurance policy. He nominated his mother, Dalbir Kaur, as the beneficiary. In the proposal form, Kulwant Singh stated that he had no pre-existing ailments, had not undergone any hospitalization or treatment, and did not suffer from any respiratory issues. Based on this information, the insurance company issued a policy on August 12, 2014, insuring Kulwant Singh’s life for Rs. 8.50 lakhs, with a death benefit of Rs. 17 lakhs.

Tragically, Kulwant Singh passed away on September 12, 2014, just over a month after the policy was issued. Following his death, a claim was filed with the insurance company. An investigation revealed that Kulwant Singh had been treated at Baba Budha Ji Charitable Hospital in July 2014 for a stomach ailment and vomiting of blood. The insurance company repudiated the claim on May 12, 2015, citing non-disclosure of material facts.

Dalbir Kaur, the respondent, then filed a consumer complaint before the District Consumer Disputes Redressal Forum. The District Forum ruled in her favor, directing the insurance company to pay the full death claim with interest. This decision was upheld by the State Consumer Disputes Redressal Commission (SCDRC) and the National Consumer Disputes Redressal Commission (NCDRC). The NCDRC relied on a previous Supreme Court decision, arguing that a disease must be distinguished from a mere illness and that there was no direct link between the cause of death and the non-disclosure.

Timeline

Course of Proceedings

The District Consumer Disputes Redressal Forum ruled in favor of the respondent, directing the appellants to pay the full death claim with interest. The first appeal was rejected by the State Consumer Disputes Redressal Commission (SCDRC). The National Consumer Disputes Redressal Commission (NCDRC) also dismissed the revision petition, relying on the decision of the Supreme Court in Sulbha Prakash Motegaonkar & Ors vs Life Insurance Corporation of India. The NCDRC held that the death was due to natural causes and there was no reasonable nexus between the cause of death and non-disclosure of the disease.

Legal Framework

The case primarily revolves around Section 45 of the Insurance Act 1938, which deals with the grounds for an insurer to dispute a life insurance policy. Section 45 states:

“45. Policy not to be called in question on ground of mis-statement after two years.—No policy of life insurance shall be called in question on any ground whatsoever after the expiry of two years from the date on which it was effected, on the ground that a statement made in the proposal for insurance or in any report of a medical officer, or referee, or friend of the insured, or in any other document leading to the issue of the policy, was inaccurate or false, unless the insurer shows that such statement was on a material matter or suppressed facts which it was material to disclose and that it was fraudulently made by the policy-holder and that the policy-holder knew at the time of making it that the statement was false or that it suppressed facts which it was material to disclose:
Provided that nothing in this section shall prevent the insurer from calling for proof of age at any time if he is entitled to do so, and no policy shall be deemed to be called in question merely because the terms of the policy are adjusted on subsequent proof that the age of the life insured was incorrectly stated in the proposal.”

The Supreme Court also considered the principle that insurance contracts are based on “utmost good faith” (uberrima fides), requiring the proposer to disclose all material facts that might influence the insurer’s decision to accept the risk.

Arguments

Arguments by the Appellants (Bajaj Allianz Life Insurance):

• The insurance policy is governed by the principle of utmost good faith, requiring full disclosure of material facts.
• The proposer, Kulwant Singh, failed to disclose that he had been hospitalized in July 2014 for vomiting blood, a critical fact that would influence the insurer’s decision.
• The suppression of material facts by the insured entitles the appellants to repudiate the policy under Section 45 of the Insurance Act 1938.
• The judgments of the consumer fora are contrary to the law laid down by the Supreme Court in Life Insurance Corporation of India vs Asha Goel, P.C. Chacko vs Chairman, Life Insurance Corporation of India and Satwant Kaur Sandhu vs New India Assurance Company Limited.

Arguments by the Respondent (Dalbir Kaur):

• The death of Kulwant Singh was due to natural causes, and there was no direct link between his death and the alleged non-disclosure.
• The NCDRC correctly distinguished between a disease and a mere illness, and the non-disclosure did not relate to a life-threatening condition.
• The NCDRC’s decision was based on the precedent set in Sulbha Prakash Motegaonkar & Ors vs Life Insurance Corporation of India.

The appellants argued that the proposer was duty-bound to make a full disclosure in response to the queries in the proposal form, which he failed to do. The respondent, on the other hand, contended that the death was due to natural causes and there was no nexus between the cause of death and the alleged non-disclosure.

Innovativeness of the argument: The insurance company’s argument was based on well-established principles of insurance law, emphasizing the duty of utmost good faith and the materiality of the non-disclosed facts. The respondent’s argument was innovative in trying to distinguish between a disease and a mere illness, and in relying on a previous Supreme Court judgment that had taken a different view.

Issues Framed by the Supreme Court

The Supreme Court did not explicitly frame issues in a separate section. However, the core issue before the court was:

1. Whether the non-disclosure of a pre-existing medical condition (hospitalization for vomiting blood) by the insured justified the repudiation of the insurance claim by the insurer.

Treatment of the Issue by the Court

Authorities

The Supreme Court considered the following authorities:

Judgment

How each authority was viewed by the Court:

• Life Insurance Corporation of India vs Asha Goel [2001] 2 SCC 160*: The Court followed this authority, reiterating the principle of utmost good faith and the duty to disclose material facts.
• P.C. Chacko vs Chairman, Life Insurance Corporation of India [2008] 1 SCC 321*: The Court followed this authority, reiterating the principle of utmost good faith in insurance contracts.
• Satwant Kaur Sandhu vs New India Assurance Company Limited [2009] 8 SCC 316*: The Court followed this authority, holding that any fact that would influence a prudent insurer is a material fact, and non-disclosure justifies repudiation.
• Reliance Life Insurance Co. Ltd. vs Rekhaben Nareshbhai Rathod [2019] 6 SCC 175*: The Court followed this authority, which held that failure to disclose a previous insurance policy was a material misrepresentation justifying repudiation.
• Sulbha Prakash Motegaonkar & Ors vs Life Insurance Corporation of India*: The Court distinguished this case, stating that the concealed ailment was not life-threatening, unlike the present case.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the principle of utmost good faith in insurance contracts and the materiality of the non-disclosed facts. The court emphasized that the proposer had a duty to disclose all relevant medical history, and the failure to do so justified the repudiation of the claim. The court distinguished the case from Sulbha Prakash Motegaonkar, highlighting the seriousness of the undisclosed condition and its proximity to the death of the insured. The court also considered the fact that the repudiation was done within two years of the policy issuance, as per Section 45 of the Insurance Act, 1938.

The Court’s reasoning can be summarized as follows:

The Court considered alternative interpretations, such as the argument that the death was due to natural causes and not directly linked to the non-disclosed condition. However, the Court rejected this argument, emphasizing that the non-disclosure itself was a breach of the duty of good faith. The Court also considered the precedent in Sulbha Prakash Motegaonkar, but distinguished it based on the facts of the case.

The Court held that the judgment of the NCDRC did not lay down the correct principle of law and had to be set aside. The Court stated:

“The medical records which have been obtained during the course of the investigation clearly indicate that the deceased was suffering from a serious pre-existing medical condition which was not disclosed to the insurer.”

“In fact, the deceased was hospitalized to undergo treatment for such condition in proximity to the date of his death , which was also not disclosed in spite of the specific queries relating to any ailment, hospitalization or treatment undergone by the proposer in Column 22 of the policy proposal form.”

“We are, therefore, of the view that the judgment of the NCDRC in the present case does not lay down the correct principle of law and would have to be set aside.”

Key Takeaways

• Insurance contracts are based on the principle of utmost good faith, requiring full disclosure of all material facts by the proposer.
• Non-disclosure of pre-existing medical conditions, especially if they are serious and proximate to the date of the policy, can justify the repudiation of an insurance claim.
• The materiality of a fact is determined by whether it would influence the decision of a prudent insurer to accept the risk.
• The Supreme Court’s decision reinforces the importance of accurate and complete disclosure in insurance proposal forms.

Directions

The Supreme Court, exercising its powers under Article 142 of the Constitution, directed that no recoveries of the amount already paid to the respondent should be made. However, the impugned judgment of the NCDRC was explicitly set aside.

Development of Law

The ratio decidendi of this case is that the non-disclosure of a pre-existing medical condition, especially if it is serious and proximate to the date of the policy, can justify the repudiation of an insurance claim. This case reinforces the principle of utmost good faith in insurance contracts and clarifies the distinction between material and non-material facts. The judgment also clarifies that the decision of Sulbha Prakash Motegaonkar is limited to its specific facts, where the concealed ailment was not life-threatening. This case does not change the previous position of law but clarifies the application of existing principles.

Conclusion

In conclusion, the Supreme Court’s decision in Bajaj Allianz Life Insurance vs. Dalbir Kaur upholds the insurance company’s right to repudiate a claim when the insured fails to disclose material facts about their health. This judgment underscores the importance of honesty and transparency in insurance contracts and clarifies the legal implications of non-disclosure. While the Court did not order the recovery of the already paid amount due to the respondent’s age and circumstances, the legal principle remains that the suppression of material facts can void an insurance policy.

Category

Parent Category: Insurance Law

Child Categories:

• Duty of Disclosure
• Material Facts
• Repudiation of Insurance Claim
• Section 45, Insurance Act 1938
• Consumer Law

Parent Category: Insurance Act, 1938

Child Category: Section 45, Insurance Act, 1938

FAQ

Q: What is the principle of “utmost good faith” in insurance contracts?

A: The principle of utmost good faith (uberrima fides) requires both the insurer and the insured to be completely honest and transparent with each other. The insured must disclose all material facts that could influence the insurer’s decision to provide coverage.

Q: What constitutes a “material fact” in an insurance proposal?

A: A material fact is any information that would influence a prudent insurer’s decision to accept the risk and issue a policy. This includes details about the proposer’s health, medical history, and other relevant circumstances.

Q: Can an insurance company reject a claim if the insured did not disclose a pre-existing medical condition?

A: Yes, if the non-disclosure is of a material fact, the insurance company can reject the claim, especially if the pre-existing condition is serious and proximate to the date of the policy. This is because the insured has a duty to disclose all material facts.

Q: What is the significance of Section 45 of the Insurance Act, 1938?

A: Section 45 of the Insurance Act, 1938, limits the grounds on which an insurer can challenge a policy after two years from the date of issuance. However, within two years, the insurer can challenge the policy if there was a misstatement or suppression of material facts.

Q: What should I do when filling out an insurance proposal form?

A: You should provide accurate and complete information in the proposal form. Disclose all pre-existing medical conditions, hospitalizations, and treatments. If you are unsure about whether a piece of information is material, it is best to disclose it.