Utmost good faith, non-disclosure and section 45

1. The principle

Ordinary contracts are governed by caveat emptor: neither party has to volunteer information. Section 17 of the Contract Act says mere silence is not fraud unless there is a duty to speak. Insurance is an exception. The facts about the risk (the proposer’s health, the state of the building, earlier losses) are known to the proposer and not to the insurer, which fixes the premium on what it is told. So the law imposes a positive duty on both sides to disclose, without being asked, every material fact. This is uberrimae fidei, utmost good faith.

The classic statement is Lord Mansfield’s in Carter v. Boehm (1766): insurance is a contract upon speculation, the special facts lie mostly in the knowledge of the insured, and the underwriter trusts to his representation; concealment of such a fact, even by mistake, avoids the policy because the risk run is really different from the risk understood. Section 19 of the Marine Insurance Act, 1963 puts it in statute for marine insurance: the contract is based on utmost good faith, and if it is not observed by either party the contract may be avoided by the other. The same principle is applied by courts to every class of insurance.

The duty is mutual. The insurer must disclose the terms and, in particular, exclusion clauses, and must not mis-sell. IRDAI regulations on protection of policyholders require the insurer to explain the policy and to supply the proposal form, and an agent who solicits the contract is treated as the insurer’s agent for formation of the contract (Explanation to s.45(3)).

2. What is a material fact

A fact is material if it would influence the judgment of a prudent insurer in deciding whether to accept the risk, or in fixing the premium or terms. That is the test in section 20(2) of the Marine Insurance Act and in clause (d) of the Explanation to section 150 of the Motor Vehicles Act, and the Supreme Court applies it generally.

In Satwant Kaur Sandhu v. New India Assurance Co. Ltd., 2009 INSC 899, (2009) 8 SCC 316, the insured under a mediclaim policy had chronic diabetes and renal failure and was on dialysis, but answered the health questions in the proposal in the negative. The Court held that the state of health of the insured is a material fact for a mediclaim policy, that a fact is material if it has a bearing on the risk the insurer is asked to cover, and that its suppression entitled the insurer to repudiate.

The questions in the proposal form are themselves evidence of materiality. In Reliance Life Insurance Co. Ltd. v. Rekhaben Nareshbhai Rathod, 2019 INSC 565, (2019) 6 SCC 175, the proposer, asked whether he held or had applied for any other life policy, said no, though he had taken one two months earlier. He died within about a year. The Court held that information about existing cover is material because it tells the insurer whether the total cover is proportionate to the proposer’s income, and upheld the repudiation (it directed under Article 142 that money already paid to the widow should not be recovered).

The duty extends only to facts known to the proposer. In Manmohan Nanda v. United India Assurance Co. Ltd., 2021 INSC 826, (2022) 4 SCC 582, the appellant took an overseas mediclaim policy after a medical examination at the insurer’s instance, which recorded diabetes. He suffered a heart attack in the United States and the claim was rejected for non-disclosure of hyperlipidaemia and diabetes. The Court allowed his appeal: the insurer knew of the diabetes from its own examination, the proposer must disclose what he knows but is not required to disclose what he does not know, and the very purpose of a mediclaim policy is to cover sudden illness; the insurer could not reject the claim on a ground that had nothing to do with the facts it had chosen to examine.

Facts that ordinarily need not be disclosed: facts that diminish the risk, facts the insurer knows or is presumed to know (matters of common knowledge), facts the insurer waives information about, and facts covered by an express warranty (s.20(3), Marine Insurance Act).

3. Non-disclosure, misrepresentation and fraud

• Non-disclosure: silence about a material fact. Innocent non-disclosure is enough to let the insurer avoid in general and marine insurance.
• Misrepresentation: a positive statement that is untrue in a material particular (s.18, Contract Act). The contract is voidable at the insurer’s option (s.19).
• Fraud: a false statement or active concealment with intent to deceive (s.17). The contract is voidable and the premium is not returnable.

The remedy is avoidance ab initio, with return of premium unless there was fraud. The onus is on the insurer to prove the suppression and its materiality.

4. Section 45: life policies cannot be questioned after three years

For life insurance, section 45 cuts down the general rule. The section was substituted by the Insurance Laws (Amendment) Act, 2015 with retrospective effect from 26 December 2014. It reads in substance:

• s.45(1): no policy of life insurance shall be called in question on any ground whatsoever after the expiry of three years from the date of the policy, that is, from the date of issuance, commencement of risk, revival or rider, whichever is later.
• s.45(2): within three years a policy may be called in question on the ground of fraud, the insurer communicating in writing the grounds and materials of its decision. “Fraud” follows s.17 of the Contract Act; mere silence is not fraud unless there was a duty to speak.
• s.45(3): even then, no repudiation for fraud if the insured proves that the misstatement or suppression was true to the best of his knowledge and belief, or that there was no deliberate intention to suppress, or that the facts were within the insurer’s knowledge. If the policyholder is dead, the onus of disproving fraud lies on the beneficiaries.
• s.45(4): within three years a policy may also be questioned on the ground that a fact material to the expectancy of the life of the insured was incorrectly stated or suppressed. The misstatement is not material unless it has a direct bearing on the risk, and the onus is on the insurer to show that, had it known the fact, no policy would have been issued. If the policy is repudiated on this ground (not fraud), the premiums collected must be paid back within ninety days.
• s.45(5): the insurer may call for proof of age at any time, and adjusting terms on proof of wrong age is not questioning the policy.

Before 2015 the period was two years, and after two years the insurer could avoid only by proving three things: the statement was on a material matter, it was fraudulently made, and the policyholder knew it was false. The leading early case on fraudulent suppression of illness in a life proposal is Mithoolal Nayak v. Life Insurance Corporation of India, 1962 INSC 4, AIR 1962 SC 814, where the insurer was held entitled to avoid the policy. In P.C. Chacko v. Chairman, Life Insurance Corporation of India, 2007 INSC 1166, (2008) 1 SCC 321, the policy was repudiated within two years for a wrong answer in the proposal about the insured’s health; the Court said a deliberate wrong answer with a great bearing on the contract vitiates it. In LIC v. Asha Goel, 2000 INSC 598, (2001) 2 SCC 160, the Court stressed that the insurer must exercise the power to repudiate with care, because the purpose of life insurance is to protect the family.

Under the present section the burden stays on the insurer. In Mahakali Sujatha v. Branch Manager, Future Generali India Life Insurance Co. Ltd., 2024 INSC 296, the claim of the deceased’s daughter was repudiated for suppression of earlier policies. The Court held that it is for the insurer to prove the suppression by proper evidence and, finding that it had not, allowed the claim.

5. Problem

A took a life policy on 1 March 2021 without disclosing that he was being treated for hypertension. He died of a stroke on 10 April 2024. The insurer repudiates for suppression of a material fact. Advise the nominee.

Issue. Whether the insurer may question the policy for non-disclosure after more than three years from its date.

Law. Section 45(1) bars any challenge to a life policy on any ground after three years from issue, commencement of risk, revival or rider, whichever is later. Within three years the insurer may repudiate for fraud (s.45(2)) or material misstatement (s.45(4)), with the onus on it.

Application. The policy dates from 1 March 2021. Three years expired on 1 March 2024; the death and the repudiation came after. Hypertension may well have been material to the expectancy of life, but materiality no longer matters once the period has run. Had A died in 2023, the insurer would have had to prove either fraud or that it would not have issued the policy at all had it known, and on a s.45(4) repudiation it would still have had to refund the premiums within ninety days.

Conclusion. The repudiation is bad. The nominee may complain to the Insurance Ombudsman or the Consumer Commission and recover the sum assured with interest.

How this is examined

“Explain the principle of utmost good faith and non-disclosure in insurance contract” (January 2026), “What is the material fact in insurance contract? State the consequences of non-disclosure” (June 2025), and “Utmost good faith is an essential element in all insurance contracts. Discuss” (February 2025). Build the answer as above: Carter v. Boehm, s.19–20 of the Marine Insurance Act, the materiality cases, the remedy, and section 45 as the special rule for life policies. Section 45 is also asked alone as a short note.