Case: ORIENTAL INSURANCE COMPANY LIMITED Vs. MAHENDRA CONSTRUCTION

3. The respondent, Mahendra Construction, was the original complainant before theSCDRC. The respondent purchased a hydraulic excavator machine in 2004-05. The excavator was insured with New India Assurance Company Limited from 15 November 2004 to 14 November 2005. A claim was lodged under the insurance policy on 12 April 2005 on the ground that the excavator had been set on fire by Naxalites. The claim was settled by the earlier insurer. According to the respondent, the machine was under repair until 10 October 20064. On 10 October 2006, the excavator was insured with the appellant from 11 October 2006 to 10 October 2007. A premium of Rs 43,847 was paid to the appellant for an insurance cover of Rs 32 lakhs. Five days after the issuance of the insurance cover, the excavator is alleged to have caught fire at a work site on 15 October 2006. The insurer deputed a surveyor for a spot survey on 17 October 2006 and a report was submitted on 26 October 2006. It appears that other surveyors were also appointed5. On 25 November 2008, the insurance claim was repudiated on the ground that all material facts which were required to be disclosed through the proposal form to enable the insurer to assess the risk profile had not been disclosed. More specifically, it was stated that under paragraph 25(g) of the printed proposal form, the details of claims lodged during the preceding three years were required to be disclosed but were not furnished and, in consequence, the insurer was deprived of the opportunity to assess the risk profile of the vehicle at the time of accepting the proposal for insurance. This led to the institution of a complaint before the SCDRC6. The claim was allowed by the SCDRC in the amount of Rs 23.84 lakhs, together with interest. The SCDRC accepted the contention of the insured that the Administrative Officer who had prepared the pre-insurance report had been fully satisfied about the previous insurance cover and claim and with reference to paragraph 25(g) of the proposal form, the insurance policy with New India Assurance Company Limited had been enclosed7. In appeal, the NCDRC held that since the previous insurance policy was annexed to the proposal, the appellant could have known of the claims lodged with the previous insurer on making an enquiry. Alternatively, it was held that if there was a non- disclosure of information under paragraph 25(g), the appellant could have returned the proposal. The NCDRC held that the insurer could have discovered the true state of facts with the exercise of ordinary diligence and was, hence, not justified in repudiating the claim.

Reasoning:
9. The proposal form which was filled up in order to obtain the policy of insurance merely records the date of purchase of the vehicle as 2004. As against the other queries, there is a handwritten endorsement, namely, enclosed10. The NCDRC entered a finding that since the previous insurance policy had been enclosed with the proposal form, the insurer could, upon further enquiry, have learnt of the status of the claims under the earlier policy. The NCDRC considered the exception to Section 19 of the Indian Contract Act, 1872 and held that the insurer could have easily verified the claims submitted by the insured under the previous policy. It was thus held that the insurer cannot deny the benefit of insurance on account of the information not having been disclosed in the proposal form. However, the NCDRC noted that the insured had not expressly disclosed the previous claim and in consequence, deducted twenty-five of the amount payable under the contract of insurance11. In our view, this line of reasoning of the NCDRC is flawed. Insurance is governed by the principle of utmost good faith, which imposes a duty of disclosure on the insured with regard to material facts.Information regarding insurance claims lodged by the respondent for his excavator in the preceding three years was a material fact. The burden of establishing that the insured made a false representation and suppressed material facts lies on the insurer. The insurer has placed on the record the best possible evidence in support of the plea that there was a misrepresentation and a suppression of material facts. The mere disclosure of a previous insurance policy did not discharge the obligation which was cast on the respondent, as the proposer, to make a full, true and complete disclosure of the claims which were lodged under the previous policy in the preceding three years. The proposal form contained a specific question regarding claims lodged in the preceding three years. The respondent was under a bounden duty to disclose that the excavator was previously insured with another insurer and that a claim for damage to the excavator on 12 April 2005 had been settled. It was only in the affidavit of evidence dated 6 January 2017, that the respondent disclosed that New India Assurance Company Limited had paid an amount of Rs 36.66 lakhs by cheque on 23 September 2005. This material fact was suppressed from the proposal form12. The burden cannot be cast upon the insurer to follow up on an inadequate disclosure by conducting a line of enquiry with the previous insurer in regard to the nature of the claims, if any, that were made under the earlier insurance policy. On the contrary, it was the plain duty of the respondent while making the proposal to make a clear and specific disclosure. The insurance policy with New India Assurance Company Limited was for the period from 15 November 2004 to 14 November 2005. The excavator remained uninsured from 15 November 2005 until 10 October 2006. The case of the respondent was that during that period, it was under repair. This fact, together with the receipt of the earlier insurance claim, was material to the decision of the insurer on whether to accept the proposal for insurance. The disclosures which were required in paragraph 25(g) of the proposal form were material to assess the risk profile of the vehicle at the time of accepting the proposal for insurance13. The SCDRC proceeded on the hypothesis that the insurer had not denied the averment of the respondent in the complaint that the Administrative Officer was fully satisfied of the previous insurance cover and claim, as is evident from the use of the expression enclosed in paragraph 25(g). The averment in paragraph 8 of the complaint was specifically denied by the insurer. But, that apart, it is evident on a bare reading of the proposal form that material information which was required to be disclosed was suppressed by the insured. The proposal form contains a declaration of the insured that the statements which are made are true to the knowledge of the proposer and the declaration forms the basis of the contract with the insurer14. In the circumstances, the decision of the SCDRC to allow the claim was erroneous and the NCDRC equally erred in affirming the decisionThe fact of the matter is that the respondent was under an obligation to make a full disclosure of the status of the previous insurance policy, together with the material facts relevant to the claim which had been lodged with New India Assurance Company Limited. The fact that such a claim was lodged and had been settled at Rs 36.66 lakhs was suppressed. This suppression goes to the very root of the contract of insurance which would validate the grounds on which the claim was repudiated by the insurer.