ORIENTAL INSURANCE COMPANY LIMITED versus MAHENDRA CONSTRUCTION on 1 April 2019

[2019] 6 S.C.R. 673

ORIENTAL INSURANCE COMPANY LIMITED

v.

MAHENDRA CONSTRUCTION

(Civil Appeal No. 3359 of 2019)

APRIL 01, 2019

[DR. DHANANJAYA Y CHANDRACHUD AND

HEMANT GUPTA, JJ.]

Insurance – Insured – Duty of Disclosure – Respondent-Complainant purchased hydraulic excavator machine in 2004-05–Excavator was insured with New India Assurance Company Limited(earlier insurer) from 15 Nov. 2004 to 14 Nov. 2005 – Claim lodgedon 12 April 2005 on the ground that the excavator had been set onfire by Naxalites – Claim settled – On 10 Oct. 2006, the excavatorwas insured with the appellant-insurer from 11 Oct. 2006 to 10 Oct.2007 – Excavator allegedly caught fire on 15 Oct. 2006 – Insuranceclaim repudiated on the ground that u/para.25(g) of the printedproposal form, the details of claims lodged during the precedingthree years were required to be disclosed, but were not furnishedand hence, the insurer was deprived of the opportunity to assessthe risk profile of the vehicle at the time of accepting the proposalfor insurance – Complaint before State Consumer Dispute RedressalCommission (SCDRC) – Allowed – National Consumer DisputeRedressal Commission (NCDRC) inter alia held that the insurer wasnot justified in repudiating the claim – On appeal, held: Insuranceis governed by the principle of utmost good faith, which imposes aduty of disclosure on the insured with regard to material facts –Information regarding insurance claims lodged by the respondentfor his excavator in the preceding three years was a material fact –Mere disclosure of previous insurance policy did not discharge theobligation cast on the respondent, as the proposer, to make a trueand complete disclosure of the claims lodged under the previouspolicy in the preceding three years – Burden of establishing thatthe insured made false representation and suppressed material factslies on the insurer – Insurer placed on record the best possibleevidence in support of the plea that there was misrepresentationand suppression of material facts – Respondent was under bounden

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Aduty to disclose that the excavator was previously insured withanother insurer and that a claim for damage to the excavator on 12April 2005 was settled– It was only in the affidavit of evidence dtd.6 Jan.2017, that the respondent disclosed that the earlier insurerhad paid Rs 36.66 lakhs by cheque on 23 Sep. 2005 – This materialfact was suppressed from the proposal form – Impugned order setBaside.

Respondent-Complainant purchased a hydraulic excavatormachine in 2004-05. The excavator was insured with the NewIndia Assurance Company Limited (earlier insurer) from 15 Nov.2004 to 14 Nov. 2005. Claim lodged by the respondent on theCground that the excavator had been set on fire by Naxalites. Claimwas settled. On 10 Oct. 2006, the excavator was insured with theappellant-insurer from 11 Oct. 2006 to 10 Oct. 2007. Excavatorallegedly caught fire on 15 Oct. 2006. Appellant repudiated theinsurance claim. Complaint filed by the respondent beforeDSCDRC, which was allowed. NCDRC, in appeal, inter alia heldthat the insurer was not justified in repudiating the claim. Hence,the present appeal.

Allowing the appeal, the Court

Conclusion

Allowing the appeal, the Court

HELD: 1.1 Insurance is governed by the principle ofutmost good faith, which imposes a duty of disclosure on theEinsured with regard to material facts. Information regardinginsurance claims lodged by the respondent for his excavator inthe preceding three years was a material fact. The burden ofestablishing that the insured made false representation andsuppressed material facts lies on the insurer. The insurer hasFplaced on record the best possible evidence in support of theplea that there was misrepresentation and suppression of materialfacts. Mere disclosure of previous insurance policy did notdischarge the obligation which was cast on the respondent, asthe proposer, to make a full, true and complete disclosure of theclaims which were lodged under the previous policy in theGpreceding three years. It was only in the affidavit of evidencedated 6 January 2017, that the respondent disclosed that NewIndia Assurance Company Limited had paid an amount of Rs 36.66lakhs by cheque on 23 Sep. 2005. This material fact wassuppressed from the proposal form. [Para 11][678-F-G;H680-F-H; 681-A-B]

1.2 The burden cannot be cast upon the insurer to followup on an inadequate disclosure by conducting a line of enquirywith the previous insurer in regard to the nature of the claims, ifany. It was the plain duty of the respondent while making theproposal to make a clear and specific disclosure. The insurancepolicy with earlier insurer was for the period from 15 November2004 to 14 November 2005. The excavator remained uninsuredfrom 15 November 2005 until 10 October 2006. The case of therespondent was that during that period, it was under repair. Thisfact, together with the receipt of the earlier insurance claim, wasmaterial to the decision of the insurer on whether to accept theproposal for insurance. The disclosures which were required inparagraph 25(g) of the proposal form were material to assess therisk profile of the vehicle at the time of accepting the proposalfor insurance. Material information which was required to bedisclosed was suppressed by the insured. The proposal formcontains a declaration of the insured that the statements whichare made are true to the knowledge of the proposer and thedeclaration forms the basis of the contract with the insurer.[Paras 12-14][681-C-E; G]

1.3 The respondent was under obligation to make fulldisclosure of the status of the previous insurance policy, togetherwith the material facts relevant to the claim which had been lodgedwith the earlier insurer. The fact that such a claim was lodgedand was settled at Rs 36.66 lakhs was suppressed. Thissuppression goes to the very root of the contract of insurancewhich would validate the grounds on which the claim wasrepudiated by the insurer. The impugned judgment and order ofthe NCDRC is set aside. The complaint filed by the respondentshall stand dismissed. [Paras 15, 16][682-A-C]

Mac Gillivray on Insurance Law Twelfth Edition, Sweetand Maxwell (2012)– referred to.

Life Insurance Corporation of India v Smt. G MChannabasamma (1991) 1 SCC 357 ; LIC of India vAsha Goel (2001) 2 SCC 160 : [2000] 5 Suppl.SCR 646 ; Satwant Kaur Sandhu v New IndiaAssurance Co. Ltd. (2009) 8 SCC 316 : [2009]10 SCR 560 – relied on.

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ACase Law Reference

BCIVIL APPELLATE JURISDICTION : Civil Appeal No. 3359of 2019.

From the Judgment and Order dated 19.09.2018 of the NationalConsumer Disputes Redressal Commission, New Delhi in First AppealNo. 8 of 2018.

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Mohan Babu Agarwal, Celeste Agarwal, Chetanya Siddarth,Mukesh Kumar Sharma, Advs. for the Appellant.

Ms. Pankaj Bala Verma, Dr. (Mrs.) Vipin Gupta, Advs. for theRespondent.

DThe Judgment of the Court was delivered by DR. DHANANJAYA Y. CHANDRACHUD, J.

1. Leave granted.

2. This appeal arises from a decision rendered by the NationalEConsumer Disputes Redressal Commission[1] on 19 September 2018. TheNCDRC partly allowed the appeal filed by the insurer against a decisionof the State Consumer Disputes Redressal Commission[2] dated 3 April2017, directing the insurer to pay seventy-five percent of the amountawarded by the SCDRC. The SCDRC had allowed an insurance claimin the amount of Rs 23.84 lakhs, together with interest at the rate of 7%Fper annum from the date of the institution of the complaint.

3. The respondent, Mahendra Construction, was the originalcomplainant before the SCDRC. The respondent purchased a hydraulicexcavator machine in 2004-05. The excavator was insured with NewIndia Assurance Company Limited from 15 November 2004 to 14GNovember 2005. A claim was lodged under the insurance policy on 12April 2005 on the ground that the excavator had been set on fire byNaxalites. The claim was settled by the earlier insurer. According tothe respondent, the machine was under repair until 10 October 2006.

1 “NCDRC”H2 “SCDRC”

4. On 10 October 2006, the excavator was insured with theappellant from 11 October 2006 to 10 October 2007. A premium of Rs43,847 was paid to the appellant for an insurance cover of Rs 32 lakhs.Five days after the issuance of the insurance cover, the excavator isalleged to have caught fire at a work site on 15 October 2006. Theinsurer deputed a surveyor for a spot survey on 17 October 2006 and areport was submitted on 26 October 2006. It appears that other surveyorswere also appointed.

5. On 25 November 2008, the insurance claim was repudiated onthe ground that all material facts which were required to be disclosedthrough the proposal form to enable the insurer to assess the risk profilehad not been disclosed. More specifically, it was stated that underparagraph 25(g) of the printed proposal form, the details of claims lodgedduring the preceding three years were required to be disclosed but werenot furnished and, in consequence, the insurer was deprived of theopportunity to assess the risk profile of the vehicle at the time of acceptingthe proposal for insurance. This led to the institution of a complaintbefore the SCDRC.

6. The claim was allowed by the SCDRC in the amount of Rs23.84 lakhs, together with interest. The SCDRC accepted the contentionof the insured that the Administrative Officer who had prepared the pre-insurance report had been “fully satisfied” about the previous insurancecover and claim and with reference to paragraph 25(g) of the proposalform, the insurance policy with New India Assurance Company Limitedhad been “enclosed”.

7. In appeal, the NCDRC held that since the previous insurancepolicy was annexed to the proposal, the appellant could have known ofthe claims lodged with the previous insurer on making an enquiry.Alternatively, it was held that if there was a non-disclosure of informationunder paragraph 25(g), the appellant could have returned the proposal.The NCDRC held that the insurer could have discovered the true stateof facts with the exercise of ordinary diligence and was, hence, notjustified in repudiating the claim.

8. Learned counsel appearing on behalf of the appellant has drawnthe attention of the Court to the disclosure which was required to bemade in paragraph 25(g) of the proposal for insurance. Paragraph 25requires a disclosure of:

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A(i) The date of purchase of the vehicle by the proposer;(ii) Whether the vehicle was new or second-hand at the time ofpurchase;

(iii) Whether the vehicle was in a good condition and, if not, fulldetails;B

(iv) The name and address of the previous insurer;

(v) The previous policy number, together with the period ofinsurance;

(vi) The type of cover; and

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(vii) Claims lodged during the preceding three years.

9. The proposal form which was filled up in order to obtain thepolicy of insurance merely records the date of purchase of the vehicleas 2004. As against the other queries, there is a handwritten endorsement,namely, “enclosed”.D

10. The NCDRC entered a finding that since the previous insurancepolicy had been enclosed with the proposal form, the insurer could, uponfurther enquiry, have learnt of the status of the claims under the earlierpolicy. The NCDRC considered the exception to Section 19 of theIndian Contract Act, 1872 and held that the insurer could have easilyEverified the claims submitted by the insured under the previous policy. Itwas thus held that the insurer cannot deny the benefit of insurance onaccount of the information not having been disclosed in the proposalform. However, the NCDRC noted that the insured had not expresslydisclosed the previous claim and in consequence, deducted twenty-fiveFof the amount payable under the contract of insurance.

11. In our view, this line of reasoning of the NCDRC is flawed.Insurance is governed by the principle of utmost good faith, which imposesa duty of disclosure on the insured with regard to material facts. InMacGillivray on Insurance Law[3]the rule concerning duty of disclosureGis stated in the following terms:

“[Subject to certain qualifications considered below], the assuredmust disclose to the insurer all facts material to an insurer’sappraisal of the risk which are known or deemed to be known bythe assured but neither known or deemed to be known by the H3 Twelfth Edition, Sweet and Maxwell (2012)

insurer. Breach of this duty by the assured entitles the insurer toavoid the contract of insurance so long as he can show that thenon-disclosure induced the making of the contract on the relevantterms…”

Elaborating on the principle, in Life Insurance Corporation ofIndia v Smt. G M Channabasamma[4], this Court has held:

“7...It is well settled that a contract of insurance is contractuberrima fides and there must be complete good faith on thepart of the assured. The assured is thus under a solemn obligationto make full disclosure of material facts which may be relevantfor the insurer to take into account while deciding whether theproposal should be accepted or not. While making a disclosure ofthe relevant facts, the duty of the insured to state them correctlycannot be diluted…”

In LIC of India v Asha Goel[5], a two-judge Bench of thisCourt held thus:

In LIC of India v Asha Goel[5], a two-judge Bench of thisCourt held thus:

“12…The contracts of insurance including the contract of lifeassurance are contracts uberrima fides and every fact of material(sic material fact) must be disclosed, otherwise, there is goodground for rescission of the contract. The duty to disclose materialfacts continues right up to the conclusion of the contract and alsoimplies any material alteration in the character of the risk whichmay take place between the proposal and its acceptance. If thereare any misstatements or suppression of material facts, the policycan be called into question. For determination of the questionwhether there has been suppression of any material facts itmay be necessary to also examine whether the suppressionrelates to a fact which is in the exclusive knowledge of theperson intending to take the policy and it could not beascertained by reasonable enquiry by a prudent person.”

(Emphasis supplied)

In Satwant Kaur Sandhu v New India Assurance Co. Ltd[6], atwo-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 4 (1991) 1 SCC 357

5 (2001) 2 SCC 160

6 (2009) 8 SCC 316

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Adisclosure of information asked for in the proposal form:

“18…Nonetheless, it is a contract of insurance falling in thecategory of contract uberrimae fidei, meaning a contract of utmostgood faith on the part of the assured. Thus, it needs littleemphasis that when an information on a specific aspect isBasked for in the proposal form, an assured is under a solemnobligation to make a true and full disclosure of theinformation on the subject which is within his knowledge.It is not for the proposer to determine whether the informationsought for is material for the purpose of the policy or not. Ofcourse, the obligation to disclose extends only to facts which areCknown to the applicant and not to what he ought to have known.The obligation to disclose necessarily depends upon the knowledgeone possesses. His opinion of the materiality of that knowledge isof no moment…”

(Emphasis supplied)

DIt was further held there is a clear presumption that any informationsought in the proposal form is a “material fact”:

“25. The upshot of the entire discussion is that in a contract ofinsurance, any fact which would influence the mind of a prudentEinsurer in deciding whether to accept or not to accept the risk is a“material fact”. If the proposer has knowledge of such fact, he isobliged to disclose it particularly while answering questions in theproposal form. Needless to emphasise that any inaccurate answerwill entitle the insurer to repudiate his liability because there isclear presumption that any information sought for in the proposalFform is material for the purpose of entering into a contract ofinsurance.”

Information regarding insurance claims lodged by the respondentfor his excavator in the preceding three years was a material fact. Theburden of establishing that the insured made a false representation andGsuppressed material facts lies on the insurer. The insurer has placed onthe record the best possible evidence in support of the plea that therewas a misrepresentation and a suppression of material facts. The meredisclosure of a previous insurance policy did not discharge the obligationwhich was cast on the respondent, as the proposer, to make a full, trueand complete disclosure of the claims which were lodged under the H

previous policy in the preceding three years. The proposal form containeda specific question regarding claims lodged in the preceding three years.The respondent was under a bounden duty to disclose that the excavatorwas previously insured with another insurer and that a claim for damageto the excavator on 12 April 2005 had been settled. It was only in theaffidavit of evidence dated 6 January 2017, that the respondent disclosedthat New India Assurance Company Limited had paid an amount of Rs36.66 lakhs by cheque on 23 September 2005. This material fact wassuppressed from the proposal form.

12. The burden cannot be cast upon the insurer to follow up on aninadequate disclosure by conducting a line of enquiry with the previousinsurer in regard to the nature of the claims, if any, that were madeunder the earlier insurance policy. On the contrary, it was the plain dutyof the respondent while making the proposal to make a clear and specificdisclosure. The insurance policy with New India Assurance CompanyLimited was for the period from 15 November 2004 to 14 November2005. The excavator remained uninsured from 15 November 2005 until10 October 2006. The case of the respondent was that during that period,it was under repair. This fact, together with the receipt of the earlierinsurance claim, was material to the decision of the insurer on whetherto accept the proposal for insurance. The disclosures which wererequired in paragraph 25(g) of the proposal form were material to assessthe risk profile of the vehicle at the time of accepting the proposal forinsurance.

13. The SCDRC proceeded on the hypothesis that the insurerhad not denied the averment of the respondent in the complaint that theAdministrative Officer was ‘fully satisfied’ of the previous insurancecover and claim, as is evident from the use of the expression “enclosed”in paragraph 25(g). The averment in paragraph 8 of the complaint wasspecifically denied by the insurer. But, that apart, it is evident on a barereading of the proposal form that material information which was requiredto be disclosed was suppressed by the insured. The proposal formcontains a declaration of the insured that the statements which are madeare true to the knowledge of the proposer and the declaration forms thebasis of the contract with the insurer.

14. In the circumstances, the decision of the SCDRC to allow theclaim was erroneous and the NCDRC equally erred in affirming thedecision.

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A15. Learned counsel appearing on behalf of the insured urgedthat the respondent relied on the Administrative Officer who filled in therequisite details in the proposal form. The fact of the matter is that therespondent was under an obligation to make a full disclosure of the statusof the previous insurance policy, together with the material facts relevantto the claim which had been lodged with New India Assurance CompanyBLimited. The fact that such a claim was lodged and had been settled atRs 36.66 lakhs was suppressed. This suppression goes to the very rootof the contract of insurance which would validate the grounds on whichthe claim was repudiated by the insurer.

16. We accordingly allow the appeal and set aside the impugnedCjudgment and order of the NCDRC dated 19 September 2018. Thecomplaint filed by the respondent shall stand dismissed. However, in thefacts and circumstances of the case, there shall be no order as to costs.

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Divya Pandey

Appeal allowed.

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