MATERIAL FACT M. K. Das* Law Officer, The New India Assurance Co. Ltd., Mumbai. INTRODUCTION World over, one of the most common-word invariably found in the policy of insurance relates to material fact. MEANING Literally material fact means a fact, which is material to the subject matter to which, it relates. What is material fact is a pure question of fact to be determined in each case, which may vary based on the peculiar facts and circumstances of each case. It is difficult to generalise and state, what is meant by material fact before finalising the contract. It varies from contract to contract and depends upon various circumstances. In one case a particular fact may be material and in the other case the same fact may not be material. ( Calcutta Discount Co. Ltd. vs. Income-tax Officer, Companies District I, Calcutta & Anr. AIR 1, 1961 SC 372, Para 8). MATERIAL FACT IN INSURANCE In insurance parlance generally the word material fact is not used in isolation but in-conjunction with either suppression of or non-disclosure or misrepresentation of or concealment of or representation of a fact, which was false in some material particulars, which would have bearing on finalising the contract. Any fact, which goes to the root of the contract of insurance and has a bearing on the risk involved, is material, e.g. pre-existing disease relating to Mediclaim policy. 1 AIR: All India Reporter * The author can be contacted at mkdas1@gmail.com Bimaquest - Vol. IX Issue I, January 2009 9
Uberrima Fidae : Utmost Good Faith Usage of material fact in insurance parlance had its origin from the concept of utmost good faith, otherwise known as uberrima fidae, one of the basic features that distinguish a contract of insurance from contract of indemnity. Contract of insurance is fiduciary in nature, built on trust, subject to mutual duty of utmost good faith, in comparison to general duty of good faith in other contract. Concept of utmost good faith binds the proposer to disclose all material facts with regard to the proposed risk to the insurer. This principle applies to all the material facts, which the insured knows and which he ought to have known. However, a particular fact whether or not material in a particular matter is a pure question of fact depended upon the facts and circumstances of each individuals case. Breach of Utmost Good Faith Breach of utmost good faith arises under the following circumstances 1) non-disclosure 2) misrepresentation. 1) Non-disclosure: This arises when the insured remains silent to a material fact due to absence of a specific query or made an evasive reply. The intentional non-disclosure of a material fact is regarded as concealment. 2) Mis-representation: Representation with regard to facts, knowing the same to be inaccurate or false is misrepresentation. It may be either innocent or fraudulent representation. Innocent misrepresentation: Innocent misrepresentation arises when, inaccurate statements made without fraudulent intention, where as fraudulent representation denotes inaccurate statement with the intention to deceive or defend insurer. An innocent mis-representation does not make a contract necessarily voidable at the option of insurer but a fraudulent misrepresentation makes a contract voidable where insurer can avoid the contract. Misrepresentation and Fraud : Difference The principal difference between fraud and misrepresentation is that in one case the person making the suggestion does not believe it to be true and in the other he believes it to be true, 10 Bimaquest - Vol. IX Issue I, January 2009
though in both cases it is a misstatement of fact which misleads (53 ACL 74) (Legal Digest published by FIII, at P- 309.) Fraud involves intentional deception or misrepresentation intended to result in an unauthorized benefit. Roman Law: Suggestio and Suppressio Vari - The Roman law of suggestio and suppressio vari also has the element of intention but any one suggesting falsehood with intention of suppression of truth deliberately, where it is needed to be expressed commits only a civil fraud. Material Fact: Disclosure in English Law - The law relating to the disclosure of material facts in insurance was operating harshly in the UK. because the insured did not realise that the particular facts were in law material. (Modern Insurance Law, by John Birds, 4 th Edn.) Practice in and Reform of Non-Disclosure and Misrepresentation - Indeed, it has often been said that a proposer for insurance may act with perfect good faith and yet not satisfy the duty of disclosure which the law requires because he did not realise that particular facts were in law material, or did not realise that he had to do any more than truthfully complete the answers to questions on a proposal form. It could be argued that there is no real need for a duty of disclosure in modern conditions other than one requiring the insured to answer honestly all the questions expressly put to him. Suggested Reforms in Insurance Contracts in the UK In UK, recommendations for reform have been made by both the Law Reform Committee of 1957 and by the Law Commission in 1980. 1. Law Commission in England recommended for withering away of a pure duty of disclosure. However, even though Government accepted the same, there was opposition from the Insurance Companies, which led to self-regulations by the insurers. 2. The revised statement issued in 1986 reflected Law Commission s recommendation. As far as non-disclosure and misrepresentation are concerned, their effect is that insurers, conduct not to rely on innocent breach by the insured. Bimaquest - Vol. IX Issue I, January 2009 11
3. The insurance policy is not to be repudiated on the ground of misrepresentation unless it is deliberate or negligent misrepresentation of material facts. 4. For the consumer protection, it was pointed out that Judges have on occasion railed (protest) against the insurers for not producing the policies in a form intelligible to the ordinary consumer. 5. The Law Commission clearly intended that conditions and exceptions in the insurance contract should be brought within the ambit of what became Unfair Contract Terms Act, 1977. But, pressure from the insurance industries secured their exclusion from the Act. It is to be made clear that in India, there is no such exclusion. Statements of Insurance Practice in UK The important and carefully considered recommendations of the Law Commission, which in practice would probably have meant the withering away of a pure duty of disclosure, were accepted by the government, but were strongly opposed by the insurance industry particularly in respect of their application to business insurance. The unfortunate result of this has been that actual legal reform seems unlikely at present. Instead, the government has accepted reform by way of self-regulation by the insurers themselves. This self-regulation takes the form of declaratory Statements of Insurance Practice. In so far as they do, in practice, provide a measure of protection for the individual insured, but one cannot be certain that the statements are universally complied with because those insurers who are not members of the Association of British Insurers of Lloyd s are not party to them, although they are expected to comply. The revised Statements issued in 1986 reflect the UK Law Commission s recommendations. As far as non-disclosure and misrepresentation are concerned, their effect is that insurers undertake not to rely on an innocent breach by the insured. By paragraph 2(b) of the Statement of General Insurance Practice, An insurer will not repudiate liability to indemnify a policyholder: (i) (ii) on the grounds of non-disclosure of a material fact which a policy-holder could not reasonably be expected to have disclosed on grounds of misrepresentation unless it is a deliberate or negligent misrepresentation of material fact 12 Bimaquest - Vol. IX Issue I, January 2009
Applicability of English Law in Indian Context However, the situation is entirely different in India since the term material fact have been duly defined under various laws and as such the terms of the insurance policy do not operate harshly and frustrate the purpose of insurance coverage due to contemplated peril, for which insurance policy is taken. Material Fact: Indian Laws Indian Contract Act, 1872 Section 17 of the Contract Act, 1872 provides for (a) (b) (c) A party having knowledge of fact essential to the contract did not disclose the fact, which would have altered the decision of the other party, or a material misstatement was made knowing that the statement was false, and that the party intended to obtain a favourable decision from the other party by committing such an act. Material Fact: Motor Vehicles Act, 1988 Sec 149 (6) MV Act, 1988: - In this section the expression material fact and material particular means, respectively a fact or particular of such a nature as to influence the judgment of a prudent insurer in determining whether he will take the risk and, if so, at what premium and on what conditions. Material Fact: Consumer Protection Act, 1986 Section 2(1)(r) Consumer Protection Act, 1986,while defining the term unfair trade practices have been extensively dealt with the term material fact. Material Fact: IRDA (Protection of Policy Holders) Regulation Insurance Regulatory and Development Authority, (IRDA) (Protection of Policy-Holders Interest) Regulations, 2002, inter alia, provides what is the material for the purpose of the Bimaquest - Vol. IX Issue I, January 2009 13
insurance policy to mean all important, essential and relevant information in the context of underwriting the risk to be covered by the insurer. Regulation 2(1)(d) provides Proposal Form to mean, a form to be filled in by the proposer for insurance, for furnishing all material information required by the insurer in respect of a risk, in order to enable the insurer to decide whether to accept or decline, to undertake the risk, and in the event of acceptance of the risk, to determine the rates, terms and conditions of a cover to be granted. Explanation: Material for the purpose of these regulations shall mean and include all important, essential and relevant information in the context of underwriting the risk to be covered by the insurer. Where a proposal form is not used, the insurer shall record the information obtained orally or in writing, and confirm it within a period of 15 days thereof with the proposer and incorporate the information in its cover note or policy. The onus of proof shall rest with the insurer in respect of any information not so recorded, where the insurer claims that the proposer suppressed any material information or provided misleading or false information or any matter material to the grant of a cover. The object of the aforesaid regulation is to protect the interest of insured. The word material has been defined to mean and include all of important, essential and relevant information in the context of underwriting the risk to be covered by the insurer. Thirdly, the onus of proof shall rest with the insurer in respect of any information not so recorded, where the insurer claims that the proposer suppressed any material information or provided misleading or false information or any matter material to the grant of a cover; Material Fact: Defence Whether non-disclosure by the assured was of the material fact, which would entitle the Insurance Company to avoid the contract? Defence Under MV Act, 1988 Sec 149 (2) (b) MV Act, 1988, That the policy is void on the ground that it was obtained by the non disclosure of material fact or by a representation of fact which was false on some material particular 14 Bimaquest - Vol. IX Issue I, January 2009
Defence Under Contract Act, 1872 Section 19 of the Contract Act, 1872, reads thus: 19. Voidability of agreements without, free consent. - When consent to an agreement is caused by coercion, fraud or misrepresentation, the agreement is a contract voidable at the option of the party whose consent was so caused. A party to contract, whose consent was caused by fraud or misrepresentation, may, if he thinks fit, insist that the contract shall be performed, and that he shall be put in the position in which he would have been if the representations made had been true. Exception If such consent was caused by misrepresentation or by silence, fraudulent within the meaning of section 17, the contract, nevertheless, is not voidable, if the party, whose consent was so caused, had the means of discovering the truth with ordinary diligence. Explanation A fraud or misrepresentation which did not cause the consent to a contract of the party on whom such fraud was practiced, or to whom such misrepresentation was made, does not render a contract voidable. Bare reading of exception and explanation to the Section makes the position clear that (i) (ii) the contract would not be voidable if the consent was caused by misrepresentation and the party whose consent was so caused had the means of discovering the truth with ordinary diligence, the fraud or misrepresentation did not cause consent to the contract of the party on whom such fraud was practiced or to whom such misrepresentation was made, and in such case the contract is not voidable. Defence Under Insurance Act, 1939 Section 45 of the Insurance Act: states that policy not to be called in question on ground of mis-statement after two years. No policy of life insurance effected before the commencement of this Act shall, after the expiry of two years from the date of commencement of this Act and no policy of life insurance effected after the coming into force of this Act shall after the expiry of two years from the date on which it was effected, be called in question by an insurer 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 Bimaquest - Vol. IX Issue I, January 2009 15
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. Thus a policy of life insurance can be called in question on ground of misstatement within a period of 2 years. In the case of Life Insurance Corporation of India & Ors. Vs. Ashal Goel (Smt.) and Anr. (2001) 2 SCC 2 160 and the Supreme Court held that: On a fair reading of the section, it is clear that it is restrictive in nature. It lays down three conditions for applicability of the second part of the section namely: (a) (b) (c) the statement must be on a material matter or must suppress facts which it was material to disclose; the suppression must be fraudulently made by the policy-holder; and the policy-holder must have known at the time of making the statement that it was false or that it suppressed facts, which it was material to disclose. Mere inaccuracy or falsity in respect of some recitals or items in the proposal is not sufficient. The burden of proof is on the insurer to establish these circumstances and unless the insurer is able to do so there is no question of the policy being avoided on ground of misstatement of facts. For determination of the question whether there has been suppression of any material facts it may be necessary to also examine whether the suppression relates to a fact, which is in the exclusive knowledge of the person intending to take the policy, and it could not be ascertained by reasonable enquiry by a prudent person. (pr. 12) Therefore, the approach of the Corporation in the matter of repudiation of a policy admittedly issued by it should be one of extreme care and caution. It should not be dealt with in a mechanical and routine manner. (pr. 16) 2 SCC: Supreme Court Cases 16 Bimaquest - Vol. IX Issue I, January 2009
Similarly, in Life Insurance Corporation of India Vs. Smt. G. M. Channabasamma, (1991) 1 SCC 3 357, it is held that the burden of proof that the insured had made false representation and suppressed material facts is undoubtedly on the L.I.C. Breach of Condition Relating to Material Fact Lord reading, if a material statement is made inducing the contract and is untrue, it entitles the other party to repudiate the contract. But the essential matters to be proved are: 1 That the statement was untrue 2 That it was material and 3 That it induced the contract By the terms of the policy, which is the contract between the parties, in order to settle disputes as to whether it has induced the contract, the parties have agreed that the declaration and statement on the proposal form should form the basis of the contract. As soon as the parties have agreed to that, it is no longer open to the Appellant to say either that the statement if untrue was not material or that it did not induce the contract. ( Stebbing v/s Liverpool & London & Glasgow Ins. Co Ltd. 1916 17 Rep 248 KBD 4 ) Untrue Statement is not Necessarily A Material Misstatement The principle underlying the Explanation to Section 19 of the Contract Act is that a false representation, whether fraudulent or innocent, is irrelevant if it has not induced the party to whom it is made to act upon it by entering into a contract as held in the case of Mithoolal Vs. Life Insurance Corporation of India, AIR 5 1962 SC 880, we do not think that that principle applies in the present case. The terms of the policy make it clear that the averments made as to the state of health of the insured in the proposal form and the personal statement were the basis of the contract between the parties, and the circumstance that Mahajan Deolal had taken pains to falsify or conceal that he had been treated for a serious ailment by Dr Lakshmanan only a few months before the policy was taken shows that the falsification or concealment had an important bearing in obtaining the other party s consent. 3 SCC: Supreme Court Cases 4 KBD: Kings Bench Division 5 AIR: All India Reporter Bimaquest - Vol. IX Issue I, January 2009 17
Test of Determination Whether a particular fact is material depends upon the circumstances of a particular case. The test to determine materiality is whether the fact has any bearing on the risk undertaken by the insurer. If the fact has any bearing on the risk it is a material fact, if not it is immaterial. Only those facts, which have a bearing on the risk, are material facts. Otherwise, they are not material facts, which need to be disclosed. (Rohini Nandan V/s. Ocean Accident and Guarantee Corporation AIR 6 1960 Kolkata 696 ) Materiality is a question of fact, to be decided in the circumstances which would influence the judgment of a prudent insurer in fixing the premium on determining whether he will take the risk and if so, at what premium and on what conditions (1967 ACJ 7 54) Everything is material which will guide a prudent insurer in determining whether he will take the risk and, if so, at what premium and on what conditions. (Lloyd s Law Reports (1970) Vol.2, Babatsikos Vs. Car Owners Mutual Insurance Company Ltd. 314 at p.316) Product Insurer Test In determining the question whether a particular fact is one which ought to be disclosed, the test to be applied is not what the assured thinks, nor even what the insurers think, but whether a prudent and experienced insurer would be influenced in his judgment if he knew of it. There are dicta to suggest that the test is, What would a reasonable assured consider material? The aforesaid proposition could be applied as a proper test for deciding whether the contract is vitiated because of non-disclosure of some facts. It neither depends upon the decision of the insurer or that of the assured, but it is to be decided with the yardstick of a prudent and experienced insurer and that of what a reasonable assured, would consider it to be material. Further there can be no doubt that the insurance policy is a contract based on utmost good faith and the terms of the contract are to be read as they are. However, as a general rule, it cannot be held that if any part of the information that is sought in the proposal form is inaccurately stated, it would vitiate the contract irrespective of the fact that inaccurately 6 AIR: All India Reporter 7 ACJ: Accident Claims Journal 18 Bimaquest - Vol. IX Issue I, January 2009
stated information is irrelevant, unimportant and not essential for concluding the contract or in case it is known to the insurer. However, it is equally important that if there is some vagueness in the proposal form, the benefit would go to the insured and not to the insurer. CONCLUSION From the above it is inferred that for avoiding the contract of insurance: (a) (b) (c) (d) the Insurance Company must establish that the statement in the proposal form must be on a material matter, suppression must be fraudulently made by the policyholder, policy holder must have known that it was false, merely inaccuracy and falsity in respect of some recital in the proposal is not sufficient, the burden of proof is on the insurer to establish the circumstances and unless the insurer is able to do so there is no question of policy being avoided on the ground of misstatement of facts. Every misrepresentation or concealment of fact will not amount to a misrepresentation to justify cancellation. Misrepresentation must pertain to those facts, which would have disentitled the petitioner to obtain an order in his favour. In other words, the misrepresentation must be such that if true facts had come to the notice of the insurer, it would not have allowed the insurance. Bimaquest - Vol. IX Issue I, January 2009 19