Life insurance is integral to financial planning for every individual. There are many things that a prospect must know before buying a life insurance policy.
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 person’s physical health. There are some habits, such as regular smoking and having alcohol, that can affect a person’s 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, that’s 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