ORIENTAL INSURANCE COMPANY LIMITED versus MAHENDRA CONSTRUCTION
[2019] 6 S.C.R. 673, Supreme Court of India, 2019
Outcome: Appeal(s) allowed (Granted)
Segment: Facts
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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 lodged
on 12 April 2005 on the ground that the excavator had been set on
fire by Naxalites – Claim settled – On 10 Oct. 2006, the excavator
was insured with the appellant-insurer from 11 Oct. 2006 to 10 Oct.
2007 – Excavator allegedly caught fire on 15 Oct. 2006 – Insurance
claim repudiated on the ground that u/para.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 hence, the insurer was deprived of the opportunity to assess
the risk profile of the vehicle at the time of accepting the proposal
for insurance – Complaint before State Consumer Dispute Redressal
Commission (SCDRC) – Allowed – National Consumer Dispute
Redressal Commission (NCDRC) inter alia held that the insurer was
not justified in repudiating the claim – On appeal, held: 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 –
Mere disclosure of previous insurance policy did not discharge the
obligation cast on the respondent, as the proposer, to make a true
and complete disclosure of the claims lodged under the previous
policy in the preceding three years – Burden of establishing that
the insured made false representation and suppressed material facts
lies on the insurer – Insurer placed on record the best possible
evidence in support of the plea that there was misrepresentation
and suppression of material facts – Respondent was under bounden
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[2019] 6 S.C.R.
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 was settled– It was only in the affidavit of evidence dtd.
6 Jan.2017, that the respondent disclosed that the earlier insurer
had paid Rs 36.66 lakhs by cheque on 23 Sep. 2005 – This material
fact was suppressed from the proposal form – Impugned order set
aside.
Respondent-Complainant purchased a hydraulic excavator
machine in 2004-05. The excavator was insured with the New
India Assurance Company Limited (earlier insurer) from 15 Nov.
2004 to 14 Nov. 2005. Claim lodged by the respondent on the
ground that the excavator had been set on fire by Naxalites. Claim
was settled. On 10 Oct. 2006, the excavator was insured with the
appellant-insurer from 11 Oct. 2006 to 10 Oct. 2007. Excavator
allegedly caught fire on 15 Oct. 2006. Appellant repudiated the
insurance claim. Complaint filed by the respondent before
SCDRC, which was allowed. NCDRC, in appeal, inter alia held
that the insurer was not justified in repudiating the claim. Hence,
the present appeal.
Allowing the appeal, the Court
HELD: 1.1  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 false representation and
suppressed material facts lies on the insurer. The insurer has
placed on record the best possible evidence in support of the
plea that there was misrepresentation and suppression of material
facts. Mere disclosure of 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. 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 Sep. 2005. This material fact was
suppressed from the proposal form. [Para 11][678-F-G;
680-F-H; 681-A-B]
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1.2  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. It was the plain duty of the respondent while making the
proposal to make a clear and specific disclosure. The insurance
policy with earlier insurer 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 insurance. 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 insurer.
[Paras 12-14][681-C-E; G]
1.3  The respondent was under obligation to make full
disclosure of the status of the previous insurance policy, together
with the material facts relevant to the claim which had been lodged
with the earlier insurer. The fact that such a claim was lodged
and was 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. The impugned judgment and order of
the NCDRC is set aside. The complaint filed by the respondent
shall stand dismissed. [Paras 15, 16][682-A-C]
Mac Gillivray on Insurance Law Twelfth Edition, Sweet
and Maxwell (2012)– referred to.
Life Insurance Corporation of India v Smt. G M
Channabasamma (1991) 1 SCC 357 ; LIC of India v
Asha Goel (2001) 2 SCC 160 : [2000] 5 Suppl.
SCR 646 ; Satwant Kaur Sandhu v New India
Assurance Co. Ltd. (2009) 8 SCC 316 :  [2009]
10 SCR 560 – relied on.
ORIENTAL INSURANCE CO. LTD. v. MAHENDRA CONSTRUCTION
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Case Law Reference
(1991) 1 SCC 357
relied on
Para 11
[2000] 5 Suppl. SCR 646
relied on
Para 11
[2009] 10 SCR 560
relied on
Para 11
CIVIL APPELLATE JURISDICTION : Civil Appeal No. 3359
of 2019.
From the Judgment and Order  dated  19.09.2018 of the  National
Consumer Disputes Redressal Commission, New Delhi in First Appeal
No. 8 of 2018.
Mohan Babu Agarwal, Celeste Agarwal, Chetanya Siddarth,
Mukesh Kumar Sharma,  Advs. for the Appellant.
Ms. Pankaj Bala Verma, Dr. (Mrs.) Vipin Gupta,  Advs. for the
Respondent.
The 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 National
Consumer Disputes Redressal Commission1 on 19 September 2018.  The
NCDRC partly allowed the appeal filed by the insurer against a decision
of the State Consumer Disputes Redressal Commission2 dated 3 April
2017, directing the insurer to pay seventy-five percent of the amount
awarded by the SCDRC. The SCDRC had allowed an insurance claim
in the amount of Rs 23.84 lakhs, together with interest at the rate of 7%
per annum from the date of the institution of the complaint.
3. The respondent, Mahendra Construction, was the original
complainant before the SCDRC.  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 2006.
1 “NCDRC”
2 “SCDRC”
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4. 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 appointed.
5. 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 SCDRC.
6. 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 “enclosed”.
7. 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.
8. Learned counsel appearing on behalf of the appellant has drawn
the attention of the Court to the disclosure which was required to be
made in paragraph 25(g) of the proposal for insurance.  Paragraph 25
requires a disclosure of:
ORIENTAL INSURANCE CO. LTD. v. MAHENDRA CONSTRUCTION
[DR. DHANANJAYA Y. CHANDRACHUD, J.]
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(i)  The date of purchase of the vehicle by the proposer;
(ii) Whether the vehicle was new or second-hand at the time of
purchase;
(iii) Whether the vehicle was in a good condition and, if not, full
details;
(iv) The name and address of the previous insurer;
(v) The previous policy number, together with the period of
insurance;
(vi) The type of cover; and
(vii) Claims lodged during the preceding three years.
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, “enclosed”.
10. 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 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 imposes
a duty of disclosure on the insured with regard to material facts. In
MacGillivray on Insurance Law3the rule concerning duty of disclosure
is stated in the following terms:
“[Subject to certain qualifications considered below], the assured
must disclose to the insurer all facts material to an insurer’s
appraisal of the risk which are known or deemed to be known by
the assured but neither known or deemed to be known by the
3 Twelfth Edition, Sweet and Maxwell (2012)
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insurer. Breach of this duty by the assured entitles the insurer to
avoid the contract of insurance so long as he can show that the
non-disclosure induced the making of the contract on the relevant
terms…”
Elaborating on the principle, in Life Insurance Corporation of
India v Smt. G M Channabasamma4, this Court has held:
“7...It is well settled that a contract of insurance is contract
uberrima fides and there must be complete good faith on the
part of the assured.  The assured is thus under a solemn obligation
to make full disclosure of material facts which may be relevant
for the insurer to take into account while deciding whether the
proposal should be accepted or not.  While making a disclosure of
the relevant facts, the duty of the insured to state them correctly
cannot be diluted…”
In LIC of India v Asha Goel5, a two-judge Bench of this
Court held thus:
“12…The contracts of insurance including the contract of life
assurance are contracts uberrima fides and every fact of material
(sic material fact) must be disclosed, otherwise, there is good
ground for rescission of the contract. The duty to disclose material
facts continues right up to the conclusion of the contract and also
implies any material alteration in the character of the risk which
may take place between the proposal and its acceptance. If there
are any misstatements or suppression of material facts, the policy
can be called into question. For determination of the question
whether there has
been suppression of any material facts it
may be necessary to also examine whether the suppression
relates to a fact which is in the exclusive knowledge of the
person intending to take the policy and it could not be
ascertained by reasonable enquiry by a prudent person.”
                                                                 (Emphasis supplied)
In Satwant Kaur Sandhu v New India Assurance Co. Ltd6, a
two-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
ORIENTAL INSURANCE CO. LTD. v. MAHENDRA CONSTRUCTION
[DR. DHANANJAYA Y. CHANDRACHUD, J.]
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disclosure of information asked for in the proposal form:
“18…Nonetheless, it is a contract of insurance falling in the
category of contract uberrimae fidei, meaning a contract of utmost
good faith on the part of the assured. Thus, it needs little
emphasis that when an information on a specific aspect is
asked for in the proposal form, an assured is under a solemn
obligation to make a true and full disclosure of the
information on the subject which is within his knowledge.
It is not for the proposer to determine whether the information
sought for is material for the purpose of the policy or not. Of
course, the obligation to disclose extends only to facts which are
known to the applicant and not to what he ought to have known.
The obligation to disclose necessarily depends upon the knowledge
one possesses. His opinion of the materiality of that knowledge is
of no moment…”
(Emphasis supplied)
It was further held there is a clear presumption that any information
sought in the proposal form is a “material fact”:
    “25. The upshot of the entire discussion is that in a contract of
insurance, any fact which would influence the mind of a prudent
insurer in deciding whether to accept or not to accept the risk is a
“material fact”. If the proposer has knowledge of such fact, he is
obliged to disclose it particularly while answering questions in the
proposal form. Needless to emphasise that any inaccurate answer
will entitle
the insurer to repudiate his liability because there is
clear presumption that any information sought for in the proposal
form is material for the purpose of entering into a contract of
insurance.”
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
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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 form.
12. 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
insurance.
13. 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 insurer.
14. In the circumstances, the decision of the SCDRC to allow the
claim was erroneous and the NCDRC equally erred in affirming the
decision.
ORIENTAL INSURANCE CO. LTD. v. MAHENDRA CONSTRUCTION
[DR. DHANANJAYA Y. CHANDRACHUD, J.]
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15. Learned counsel appearing on behalf of the insured urged
that the respondent relied on the Administrative Officer who filled in the
requisite details in the proposal form.  The 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.
16. We accordingly allow the appeal and set aside the impugned
judgment and order of the NCDRC dated 19 September 2018.  The
complaint filed by the respondent shall stand dismissed.  However, in the
facts and circumstances of the case, there shall be no order as to costs.
Divya Pandey
Appeal allowed.