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Contract of insurance is of utmost good faith, says Supreme Court

A contract of insurance is of utmost good faith and a proposer who seeks to obtain life insurance policy is duty bound to disclose all material facts bearing upon the issue, the Supreme Court has said.

The apex court said this while setting aside the March this year verdict of the National Consumer Disputes Redressal Commission (NCDRC) which had dismissed the plea of an insurance firm against the order asking it to pay full death claim along with interest to the mother of the deceased.

A bench headed by Justice D Y Chandrachud noted that the proposal form requires a specific disclosure of pre-existing ailments, so as to enable the insurer to arrive at a considered decision based on the actuarial risk.

A contract of insurance is one of utmost good faith. A proposer who seeks to obtain a policy of life insurance is duty bound to disclose all material facts bearing upon the issue as to whether the insurer would consider it appropriate to assume the risk which is proposed, said the bench, also comprising Justices Indu Malhotra and Indira Banerjee.

The bench delivered its judgement on an appeal filed by insurance firm against the NCDRC’s verdict which had rejected its plea against the state’s CDRC order in the matter.

While setting aside the NCDRC’s order, the bench noted the proposer had failed to disclose that he was suffering from pre-existing illness and also about vomiting of blood which had taken place barely a month prior to the issuance of policy.

The investigation by the insurer indicated that the assured was suffering from a pre-existing ailment, consequent upon alcohol abuse and that the facts which were in the knowledge of the proposer had not been disclosed, it said.

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. We order accordingly, it said.

The counsel appearing for the insurance firm informed the apex court that during the pendency of proceedings, the entire claim was paid over to the nominee, except the amount of cost.

Having regard to the age of the respondent (mother of deceased), who is seventy years old and the death of the assured on whom she was likely to be dependent, we are of the view that it would be appropriate for this court to utilize its jurisdiction under Article 142 of the Constitution, by directing that no recoveries of the amount which has been paid shall be made from the respondent, it said.

In August 2014, a proposal for obtaining insurance policy was submitted by the man and the form contained questions pertaining to his health, medical history and required a specific disclosure on whether any ailment, hospitalization or treatment had been undergone by him.

The proposer had answered these queries in the negative, indicating that he had not undergone any medical treatment or hospitalization and was not suffering from any ailment.

Based on the information provided by the man, an insurance policy was issued. Later in September 2014, he died following which a claim was lodged.

During independent investigation, the hospital treatment records were obtained and it revealed that he had been suffering from Hepatitis C.

The insurance firm had repudiated the claim in May 2015 on account of non-disclosure of material facts.

The nominee had initiated a consumer compliant before the district consumer disputes redressal forum which had directed the insurance firm to pay full death claim together with interest.

The appeal against the order was rejected by the state consumer disputes redressal commission and later, the NCDRC also dismissed the plea of the insurance firm.

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