"Uberrimae Fidei” and the Rule of Contra Proferentem vis-à-vis an Insurance Policy

In a civil appeal before the Supreme Court, the Court inter alia discussed what constitutes a material fact and the relevance of “uberrimae fidei” and the rule of contra proferentem vis-à-vis an insurance policy.

Insurance contracts are special contracts based on the general principles of full disclosure inasmuch as a person seeking insurance is bound to disclose all material facts relating to the risk involved. Law demands a higher standard of good faith in matters of insurance contracts which is expressed in the legal maxim “uberrimae fidei”, i.e., utmost good faith. This duty of disclosure is codified in Section 45 of the Insurance Act, 1938 which prohibits any insurance contract being called into question after two (2) years, except where good faith obligations are violated.

The insured has a duty to the insurer to disclose all material facts, and vice-versa, the insurer must also inform the insured about the terms and conditions of the policy that is going to be issued to him and must strictly conform to the statements in the proposal form or prospectus, or those representations made through his agents. Thus, the principle of utmost good faith imposes meaningful reciprocal duties owed by the parties towards each other.  

What is a “material fact” for the purpose of an insurance policy?

A ‘material fact’ would be any fact which has a bearing on the very foundation of the contract of insurance and the risk to be covered under the policy.

It is the duty of the insured to disclose any fact within his/ her knowledge which would influence the appraisal of risk by a prudent insurer. Whether a fact is material will be proved by evidence of the particular case. It is then for the courts to rule, as a matter of law, whether a particular fact is capable of being a material fact.

In the context of insurance contracts, the burden is on the insurer repudiating the contract on the grounds of non-disclosure of a material fact to show that the non-disclosure of such material fact was fraudulent, that the statement made was false and that there was suppression of material facts at the time of making it.

The rule of Contra proferentem and its relevance and application in insurance:

Contra proferentem rule —

According to the contra proferentem rule, when the meaning applied to words can result in two alternative interpretations, then that interpretation that would apply is the one which is against the person using or drafting the words or expressions. 

This rule is often invoked while interpreting standard form contracts. Such contracts heavily comprise forms with printed terms which are invariably used for the same kind of contracts. Also, such contracts are harshly worded against individuals and not read and understood most often, resulting in grave legal implications. When such standard form contracts ordinarily contain exception clauses, they are invariably construed against the person who has drafted the same as per the “contra proferentem rule." In the context of insurance contracts, in the event of any ambiguity in the interpretation of the insurance contract, the same shall be held against the insurer since it is its responsibility to see that precision and clarity are attained in its products made available to the general public.

Brief background of the case before the Supreme Court: 

The complainant was the nominee under the life insurance policies of her late father [hereinafter mentioned as the complainant]. After the death of her father, the complainant approached the insurance company [hereinafter referred to as the opposite party] and submitted the claim form along with the necessary documents. However, the opposite party rejected the complainant’s claims on the ground that the policyholder/ deceased father had suppressed material facts in his application form with respect to existing life insurance policies from other insurance companies.

Being aggrieved by the repudiation of the claim, the complainant approached the concerned District Forum which allowed the consumer complaint, on the ground that the opposite party had not produced any documentary evidence to support its contention of suppression of facts. The Consumer Commission found a deficiency of services on the part of the opposite party in rejecting the claim and directed the opposite party to pay the amount of the insurance policy to the complainant.

Being aggrieved by the order, the insurance company/ opposite party filed an appeal before the State Consumer Forum. The State Commission concurred with the observation of the District Forum that there was no material produced to prove the suppression alleged by the insurance company. The State Forum, therefore, dismissed the appeal and upheld the order of the District Commission.

The insurance company/ opposite party thereafter filed a Revision Petition before the National Consumer Disputes Redressal Committee [NCDRC] and challenged the order passed by the State Commission.

The NCDRC vide impugned judgment, allowed the petition by the insurance company/ opposite party and held that the insurance company was right in rejecting the claim on the grounds that the complainant had not specifically denied that multiple insurance policies were not bought by the deceased, and that the opposite party had furnished details of such policies in their affidavit. The consumer complaint came to be dismissed.

The complainant then preferred the present Special Leave Petition against the impugned judgment of the NCDRC.

Submissions of the Parties:

The complainant/ appellant submitted that the opposite party/ insurance company has failed to provide any documentary evidence on record to support the contention that the insured-deceased had suppressed any material fact about the previous policies issued by other insurers.

It was further submitted by the complainant/ appellant that the NCDRC erred in upholding the repudiation of the claim based on an affidavit of evidence. It was reiterated that the opposite party/ insurance company has not discharged their burden of proof by leading any documentary evidence to support their allegation.

The opposite party/ insurance company contended that the insured-deceased had taken fifteen other insurance policies prior to the issuance of the subject policies with them.  As these policies were not disclosed in the proposal forms, the present insurance company was unaware of these other insurance policies with other insurance companies. It was the case of the opposite party/ insurance company that they would have certainly not issued the subject policies to the insured/ deceased had they been aware of the said other insurance policies. Thus, the insured-deceased has suppressed a material fact, and the claim has been rightly repudiated on this ground.

The opposite party/ insurance company further submitted that the failure to disclose a material fact shows the mala fide intention on the part of the insured/ deceased and renders the policy invalid void ab-initio, inoperative and unenforceable.

Analysis of the Court:

The Court opined that in the present case, the onus was on the insurer to show that the insured had fraudulently given false information and the said information was related to a material fact.

The Court observed that while passing the impugned order, the NCDRC had relied upon the reply and the affidavit filed by the opposite party/ respondent company before the District Forum wherein details of as many as fifteen insurance policies taken from various insurers, other than the policy taken from the respondent company, have been given.

Therefore, the NCDRC concluded that the deceased insured had withheld information in respect of several insurance policies which he had taken from other insurers.

The Supreme Court disagreed with the observations of the NCDRC, inter alia, on the following ground.

The Court noted that the opposite party had failed to produce documentary evidence of the aforesaid policies or in the alternative failed to examine the officers of the various insurance companies so as to prove that the said policies had indeed been issued to the insured who had suppressed this material fact.

The Court examined the documents executed by the insured with the opposite party/ respondent company and applied the contra proferentem rule, and noted that the queries requiring disclosure of more than one policy with other insurer(s) in the form were ambiguous and therefore, the answer given by the deceased cannot be taken in a manner so as to negate the benefit of the policy by repudiation of the same on the demise of the insured.

The question before the Court was whether the opposite party/ respondent company in the present case had adequately discharged its burden of proof about the fact of suppression of previous life insurance policies of the insured.

The Court answered the question in the negative as the respondent insurance company had failed to produce any documentary evidence before the District Forum as well as the State Commission and had only produced a table of incomplete information about the other policies held by the insured-deceased.

The Court held that the repudiation of the policy was without any basis or justification.

The Court also held that given the facts of the case, having regard to the nature of queries, there was no suppression of any material fact based on the contra proferentem rule.

The Court set aside the impugned order of the NCDRC and directed the respondent insurance company to make payment of the insurance claim of the policies to the appellant/ complainant.

The judgement highlights the importance of transparency between the insurer and the insured. The ambiguous nature of the standard formats preferred by the insurance companies and its potential to cause confusion in the minds of the proposer/ consumer can be detrimental.

About the authors: Mahua Roy Chowdhury is the Managing Partner of Royzz & Co. Sanjay Visen is a Litigation Partner at the Firm.