Insurance claim with pre-existing illness: Surprise decision by consumer redress body

In an interesting departure from the decisions applied in many insurance-related cases so far, the District Consumer Disputes Redressal Commission, UT, has decided that an insurance company cannot escape its liability on the grounds that the deceased had concealed facts about his pre-existing disease.

Case details

The case relates to a resident of Punjab’s Mohali, Manju Bala. Her husband Naresh Kumar had applied for a home loan from HDFC, Chandigarh, which had sanctioned ₹9,50,000 on April 25, 2019. Thereafter, Naresh Kumar bought an insurance policy from DHFL Pramerica Life Insurance Company to secure the home loan.

It was assured that in the case of any casualty to the insured, the insurance company would bear the entire loan amount. Manju Bala said Naresh Kumar paid all the instalments during his lifetime. He died on August 18, 2019 following an illness.

Manju Bala applied for the insurance claim, but the company declined her plea on January 24, 2020, on the grounds that her husband died of a heart disease, and he had concealed his condition from the firm.

The insurance company claimed that Naresh Kumar had been diagnosed with blood cancer and body ache, but he had not disclosed these in the proposal form while filling in the health declaration section. The investigator for the firm had also discovered that he died on account of a chronic kidney disease, a chronic liver disease, and diabetes, all of which he had been suffering from for several years.

Decision in the case

After hearing the arguments, the commission held the company guilty of deficiency in service. It observed that the policy document did not contain any clause to state that any pre-existing disease would not be entitled for coverage.

Similarly, the exclusion clause did not contain that if the insured died due to some pre-existing disease after buying the policy, he would not be entitled to any claim. Moreover, the medical evidence relied upon by the insurance company indicated that Naresh Kumar was diagnosed with multiple myeloma three months after policy issuance.

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Based on these, the District Consumer Disputes Redressal Commission, UT, directed DHFL Pramerica Life Insurance to pay a compensation of ₹ 60,000 to Manju Bala for rejecting the policy claim after her husband’s death. The commission also directed the company to pay the policy coverage amount (₹10,07,168) with 9% per annum interest rate from the date of Naresh Kumar’s death.

Insurance contract is on “utmost good faith”

An insurance contract is known as a contract of uberrima fides, the Latin term for a contract based on “utmost good faith.” This means both the insured and the insurer must disclose all material facts, such as pre-diagnosed medical conditions, history of illnesses in the family, and other relevant details. When a fact that affects the policy issuance decision is not disclosed in the proposal, it is termed as “non-disclosure.” Similarly, withholding information or providing incorrect information while answering questions in the proposal form is termed as “misstatement.”

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In several cases, it has been decided that any suppression of fact at the time of obtaining insurance coverage will allow the insurance company to decline the payment. In legal terms, if one party commits a breach of contract by not maintaining the declaration (in the proposal form) of having replied truly and correctly, the other party, i.e., the insurer, is not liable to honour the claim.

But the decision in this case by the District Consumer Disputes Redressal Commission runs contrary to the above provisions.

Supreme Court’s rulings

In the case Oriental Insurance Company Limited Vs Mahendra Construction (Civil Appeal No. 3359 of 2019 Date of Judgement/Order: 01/04/2019), the Supreme Court observed the following:

“In our view, this line of reasoning of the NCDRC is flawed. Insurance is governed by the principle of utmost good faith, which imposes a duty of disclosure on the insured with regard to material facts. Breach of this duty by the assured entitles the insurer to avoid the contract of insurance so long as he can show that the non-disclosure induced the making of the contract on the relevant terms…”

While deciding the above case, the court has drawn reference to another case between LIC of India v. Asha Goel, (2001) 2 SCC 160 as follows: “a two-judge Bench of this Court held thus: ‘12…The contracts of insurance including the contract of life assurance are contracts uberrima fides and every fact of material (sic material fact) must be disclosed, otherwise, there is good ground for rescission of the contract. …If there are any misstatements or suppression of material facts, the policy can be called into question.’”

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In another case, Satwant Kaur Sandhu v. New India Assurance Co. Ltd, (2009) 8 SCC 316, a two-judge Bench of this court held that under a contract of insurance, the insured is under a “solemn obligation” to make a true and full disclosure of information asked for in the proposal form. It was further held that there is a clear presumption that any information sought in the proposal form is a “material fact.”

Hence, the present decision by the district forum seems to be contrary to the principles so far adopted by the Supreme Court, and this will open a floodgate that insurance companies will find difficult to manage. The insurance company may head for appeals.

(The writer is a retired banker. The views expressed here are his own.)