Utmost good faith
Any insurance contract is based on the principle of utmost good faith. It means that both parties the insurer and the insured must enter into the contract with full faith in the other party. The insured has full faith in the insurer as the latter will meet the contractual obligations if the event that is insured for happens during the term of the policy. Similarly, the insurer believes that whatever information is furnished by the proposer is correct.
The insurer believes that all information provided in the proposal form is correct to the best of the knowledge of the prospect. The proposer is the source of all material information regarding the health and habits of the life to be assured. The insurer knows very little. Even an honest medical examination may not be able to unearth everything about a persons physical health. There are some habits, such as regular smoking and having alcohol, that can affect a persons health severely in future. Certain adventure sports are known to have life risks.
Unlike many developed countries, where the insurer can access the past medical history of the life to be assured, thats not the case in India. So, the proposer has the extra responsibility of disclosing all facts about the past and present health.
Section 45, Insurance Act, 1938
This section says the insurer reserves the right to cancel a contract if it comes to know, within the first two years of the policy, that there has been suppression of information sought from the proposer.
Let us suppose that the proposer understated the age of the life to be assured by two years. Now, this misrepresentation may have nothing to do with the acceptance of a risk. But the insurer is within its rights to declare the contract null and void. However, after the expiry of two years from the date of acceptance of risk, the insurer cannot cancel the contract merely by saying there was misrepresentation of a fact somewhere in the proposal form. Then, the onus is on the insurer to prove that the information suppressed was material to the assessment of risk and that the proposer fraudulently made this misrepresentation to benefit unduly from the insurance contract.
The major implication of Section 45 is that the insurer can repudiate a death claim arising within two years if it can prove that there has been some suppression of fact.
So, it is not for the proposer to decide whether a question asked is important or not. All questions are important and the proposer should see the questions himself and give appropriate answers. He should never be guided by what the agent/broker/bank official says on the matter.
Underwriting a proposal
Many proposers think if they give a true picture of their present health and habits, they will never get insurance. That is wrong. There is hardly a person in the world who has not suffered from a disease or an injury. Conditions such as hypertension and diabetes are quite common and one should not hide these facts. If the life to be assured has suffered from typhoid, jaundice etc, there may be a small waiting period after which the proposal is accepted at no extra premium. Or, the proposer may be suggested to take a policy that is different from the one proposed. These are some safeguards that insurers have to take for obvious reasons.
The policyholder must keep all the policy bonds in a safe place and this should be made known to the family members. On many occasions, it so happens that the claimant comes to know about the existence of a policy many years after the death of the policyholder. Under the Law of Limitation, the insurers may not entertain a claim if it is preferred after three years from the date of death. Normally, insurers settle time-barred claims if the death occurred after three years of taking the policy. But when death may have occurred within two or three years of commencement of the policy, some insurers may decline to entertain the claim. So, the policyholders must keep their family members informed about where the policy related documents are kept.
The writer is research associate, Zonal Training Centre, Kolkata, LIC of India
Word of caution
* Section 45, Insurance Act, 1938, says the insurer reserves the right to cancel a contract if it comes to know, within the first two years of the policy, that there has been suppression of information sought from the proposer
* The major implication of Section 45 is that the insurer can repudiate a death claim arising within two years if it can prove that there has been some suppression of fact.
* It is not for the proposer to decide whether a question asked is important or not. All questions are important and the proposer should see the questions himself and give appropriate answers. He should never be guided by what the agent/broker/bank official says