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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

[2019] 6 S.C.R. 673

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674 SUPREME COURT REPORTS [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 CONSTRUCTIO N

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676 SUPREME COURT REPORTS [2019] 6 S.C.R.

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 Commission

1

on 19 September 2018. The

NCDRC partly allowed the appeal filed by the insurer against a decision

of the State Consumer Disputes Redressal Commission

2

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”

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“SCDRC”

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677

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 CONSTRUCTIO N

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678 SUPREME COURT REPORTS [2019] 6 S.C.R.

(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 Law

3

the 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

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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 Channabasamma

4

, 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 Goel

5

, 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)

InSatwant Kaur Sandhu v New India Assurance Co. Ltd

6

, 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

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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.

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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.