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Principle of Utmost Good Faith in Life Insurance

Life insurance cover is considered as a welfare instrument that protects a man from unforeseeable difficult times. It is one of the most important social security tools which reduces or eliminates the risk of life. It further enables a common man in taking care of his commitments e.g. spending on higher education, the marriage of his children and similar contingencies. It thus ensures desired peace of mind to the insured. Life insurance is a contract based on mutual trust between the two parties and is primarily built on the principle of ‘utmost good faith’ wherein both the insured and the insurer are required to disclose all the relevant information to each other honestly.

Definition of the Principle of Utmost Good Faith

No, there is no direct equivalent to the principle under Indian law. Nevertheless, general references to uberrimae fidei or utmost good faith are made in Indian insurance law literature and imply an extended duty of loyalty between the parties.

Uberrimae fidei is a Latin expression, which literally means ‘the utmost good faith’.  In Jowitt’s 1977 Dictionary, the term is described as follows:

A contract is said to be uberrimae fidei when the promisee is bound to communicate to the promisor every fact and circumstance which may influence him in deciding whether to enter into the contract or not. Contracts which require uberrimae fidei are those entered between persons in a relationship, as guardian and ward, solicitor and client (and) insurer and insured.

Although expressed as being mutually applicable to the parties, uberrimae fidei is mainly referred to in connection with the policyholder’s/insured’s obligations/duties towards the insurer which are mainly manifested in the insured’s pre-contractual and post-contractual duties of disclosure. However, the insurer’s obligation to provide information under the IRDAI may also be regarded as an expression of the parties’ extended duty to act loyally towards each other. In addition to the principles of insurance, general contractual principles apply to a contractual party’s unethical behaviour, such as actions in conflict with good faith etc.

Thus, although there is no direct equivalent to the principle of utmost good faith under Indian law, the questions below will be answered with reference to Section 17 of Indian Contract Act 1872. At times references are made to the utmost good faith in insurance and reinsurance terms and conditions, due to the international nature of many insurance contracts. When such a condition provides no definition of the utmost good faith, an interpretation would be dependent upon Section 17 of ICA 1872, along with inputs from foreign law.

Does the principle of utmost good faith apply to all types of insurance contracts (life insurance, general insurance, reinsurance etc?

This principle applies to most insurance contracts, except for reinsurance contracts. The provisions on the insured’s duty of disclosure and the duty for the insurer to provide information differ depending on whether the relevant insurance is life insurance, non-life insurance.

Does the duty of utmost good faith apply only at the pre-contractual stage or is it a continuous duty applying both pre-contractually and post-contractually?

Both insured’s duty of disclosure and the insurer’s duty to provide information apply both pre-contractually and post-contractually.

What is the content of the duty of utmost good faith for the insured?

Describe the insured’s pre-contractual, the duty of utmost good faith by providing examples of the best-known cases in which it has been applied.

A potential policyholder seeking Life Insurance or General Insurance has a duty to disclose information, upon request of the insurer, which may be material to the insurer’s decision to issue the insurance. The duty includes providing true and complete answers to the insurer’s questions.

The following is mentioned in one of the recent cases: State Consumer Disputes Redressal Commission

Bharat Bhushan Singla vs Pnb MetLife India Insurance Co. … on 18 March 2014.

In cases Kapil Sharma Vs. Life Insurance Corporation of India, III (2013) 684 (NC) and Rajesh Sharma Vs. Life Insurance Corporation of India, III (2013) CPJ 650 (NC), it was held by the National Commission that Contract of Insurance is based on doctrine of utmost good faith and life assured was under obligation to disclose each and every aspect with respect to his health at time of submitting proposal form as well at time of revival of lapsed policy, as revival amounts to new contract of policy. In Life Insurance Corporation of India & Anr. Vs. Surekha Shankar & Ors., IIIc (2012) CPJ 651 (NC), it was held that when there is deliberate suppression of material fact pertaining to health on the part of life assured, contract of Insurance, which is based on principle of utmost good faith, gets vitiated and the cause of death becomes irrelevant. In National Insurance Company Ltd. Vs. Ashok Kumar Gupta, I (2012) CPJ 547 (NC), it was held that duty of utmost good faith in disclosing the material facts lies with the insured when he seeks insurance cover for the insurer’s assessment of the risk involved in accepting the insurance coverage would depend on such disclosure.

If the duty of utmost good faith operates separately pre-contractually from the duty of disclosure describe that operation and how the two fit together.

From the above examples, it is evident that utmost good faith and duty of disclosure go hand in hand in any form of Insurance Contract.

What are the remedies for a precontractual breach by the insured of the duty of utmost good faith? Are the remedies different from a breach of the duty of disclosure?

The remedies for a breach of the duty of disclosure differ depending on whether the insurance is life insurance or general insurance. In case of General insurance, if a policyholder has intentionally or negligently disregarded the duty of disclosure, the insurance indemnification may be reduced in respect of each insured in accordance with what is reasonable considering the significance which the fact would have had for the insurer’s risk assessment, whether such disregard was intentional or negligent, and other circumstances.

If a policyholder or an insured of a life insurance has intentionally or negligently provided incorrect or incomplete information of significance for assessment of the risk, and any negligence was not insignificant, the insurer shall be released from liability for all insured events where the insurer can show that it would not have issued the insurance had the duty of disclosure been fulfilled. Where the insurer can show that the insurance would have been issued for a higher premium or would have otherwise been issued on other terms and conditions like applying lien or clause than those contracted to, its liability shall be limited to the amount reflected by the premium (pro rata) and other terms and conditions agreed to. The insurer’s liability may also be adjusted if the insurer has not acquired reinsurance which otherwise would have been acquired.

The insurer’s liability in relation to the instances, shall not be limited pursuant to the above if the insurer knew or should have known, at the time that the duty of disclosure was disregarded, that the information provided was incorrect or incomplete. The aforesaid applies also where the incorrect or incomplete information lacked

significance or subsequently ceased to be of significance to the contents of the agreement.

What are the remedies for a precontractual breach by the insurer of its duty of utmost good faith?

If an insurer has failed to separately emphasise important limitations of the coverage – either before or after execution of the contract – such limitations may not be relied upon by the insurer.

Moreover, if an insurer fails to comply with the duty to provide information, the insurer may be sanctioned and/or required to disclose the information in accordance with the Indian Contract Act, IRDAI Act, Consumer Protection Act etc.

Please note that all types of insurance contracts may also be challenged with reference to general principles under Indian contract law.

Conclusion

The term utmost good faith signifies good intention and due care and caution. The contracts of insurance including the contract of life insurance is that Uberrimae fides means contract based on “utmost good faith” hence every material fact must be disclosed and the concealment of any material information or providing any false or incorrect information in the policy is a violation of the insurance contract. This emanates from the right of every person to know about every material fact associated with the subject matter of the contract and there is no escape to this. Concealment of any material fact will entitle the insurer to deprive the assureds’ benefits of the contract.

About the Author

Mr. Paramesh Kumar S has a diversified work experience of 27 years. He has worked with McMillan Press as an Editor for 2 Years, 22 Years in various capacities in leading Insurance Companies including LIC, HDFC, Reliance, Exide Life. He was heading South India for training needs of Apps Daily, the mobile app Company, before joining Manipal.

Currently, he is associated with MABFSI since November’16 as Assistant Professor with Life Insurance vertical.

 

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