In part I of this blog, we have discussed some of the principles of interpretation set and relied upon by Courts whilst construing and interpreting insurance contracts, including that of strict construction, essentials of an insurance contract and the requirement of Uberrimei fidei i.e., good faith. In this part, we will delve into other principles which form the basis for interpretation of insurance contracts, including presumption as to materiality of information sought, effect of misrepresentation and the applicability of the rule of contra proferentem to insurance contracts
1. Presumption as to materiality of information sought and effect of misrepresentation:
1.1 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 a 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[i].
1.2 The expression “material” in the context of an insurance policy can be defined as any contingency or event that may have an impact upon the risk appetite or willingness of the insurer to provide insurance cover. Materiality from the insured’s perspective is a relevant factor in determining whether the insurance company should be able to cancel the policy arising out of the fault of the insured. Whether a question concealed is or is not material is a question of fact. Materiality of a fact also depends on the surrounding circumstances and the nature of the information sought by the insurer. It covers a failure to disclose vital information which the insurer requires in order to determine, firstly, whether or not to assume the risk of insurance, and secondly, if it does accept the risk, upon what terms it should do so. The insurer is better equipped to determine the limits of risk-taking as it deals with the exercise of assessments on a day-to-day basis.. An inaccurate answer will entitle the insurer to repudiate because there is a presumption that information sought in the proposal form is material for the purpose of entering into a contract of insurance[ii].
1.3 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[iii].
1.4 The finding of material misrepresentation or concealment in insurance has a significant effect on both the insured and the insurer in the event of a dispute. The fact it would influence the decision of a prudent insurer in deciding as to whether or not to accept a risk is a material fact. Each representation or statement may be material to the risk. The insurance company may still offer insurance protection on altered terms.[iv]
2. The Rule of contra proferentem is applicable to Insurance Contracts:
2.1 It is the duty of the Court to interpret the document of contract as was understood between the parties[v].
2.2 In case of any ambiguity, or doubt pertaining to the Interpretation of an Insurance policy, the same ought to be construed contra proferentem[vi], i.e. against the insurer.
2.3 It is well settled that exemption of liability clauses in insurance contracts are to be construed in the case of ambiguity contra proferentem[vii].
2.4 The insured cannot claim anything more than what is covered by the insurance policy. The terms of the contract have to be construed strictly, without altering the nature of the contract as the same may affect the interests of the parties adversely. The clauses of an insurance policy have to be read as they are. Consequently, the terms of the insurance policy, that fix the responsibility of the insurance company must also be read strictly. The contract must be read as a whole and every attempt should be made to harmonise the terms thereof, keeping in mind that the rule of contra proferentem does not apply in case of commercial contract, for the reason that a clause in a commercial contract is bilateral and has mutually been agreed upon[viii].
2.5 In a contract of insurance, there is a requirement of good faith on the part of the insured and in case of ambiguity, it has to be construed against the company. As per other authorities, the insurance policy has to be strictly construed and it has to be read as a whole and nothing should be added or subtracted. That apart, it is the duty of the Court to interpret the document as is understood between the parties and regard being had to the reference to the stipulations contained in it. The terms of the policy are to be strictly construed. There can be no cavil about the proposition of law that in case of ambiguity, the construction has to be made in favour of the insured[ix].
2.6 In Halsbury’s Laws of England (5th Edn., Vol. 60, Para 105) principle of contra proferentem rule is stated thus:
Contra proferentem rule.—Where there is ambiguity in the policy the court will apply the contra proferentem rule. Where a policy is produced by the insurers, it is their business to see that precision and clarity are attained and, if they fail to do so, the ambiguity will be resolved by adopting the construction favourable to the insured. Similarly, as regards language which emanates from the insured, such as the language used in answer to questions in the proposal or in a slip, a construction favourable to the insurers will prevail if the insured has created any ambiguity. This rule, however, only becomes operative where the words are truly ambiguous; it is a rule for resolving ambiguity and it cannot be invoked with a view to creating a doubt. Therefore, where the words used are free from ambiguity in the sense that, fairly and reasonably construed, they admit of only one meaning, the rule has no application[x].
2.7 The Common Law rule of construction “verba chartarum fortius accipiuntur contra proferentem” means that ambiguity in the wording of the policy is to be resolved against the party who prepared it. MacGillivray on Insurance Law [Legh-Jones, Longmore et al (Eds.), MacGillivray on Insurance Law (9th Edn., Sweet and Maxwell, London 1997) at p. 280.] deals with the rule of contra proferentem as follows[xi]:
“The contra proferentem rule of construction arises only where there is a wording employed by those drafting the clause which leaves the court unable to decide by ordinary principles of interpretation which of two meanings is the right one. ‘One must not use the rule to create the ambiguity – one must find the ambiguity first.’ The words should receive their ordinary and natural meaning unless that is displaced by a real ambiguity either appearing on the face of the policy or, possibly, by extrinsic evidence of surrounding circumstances.”
2.8 Where there is an exclusionary clause in an insurance policy, the burden lies on the insurer to establish that the exclusion is attracted. Any ambiguity must be construed in favour of the insured.[xii]
2.9 In a case of real doubt, the policy ought to be construed most strongly against the insurer; they frame the policy and insert the exception. But this principle ought only to be applied for the purpose of removing a doubt, not for the purpose of creating a doubt, or magnifying an ambiguity, when the circumstance of the case raise no real difficulty[xiii].
2.10 The fact that a provision in a contract is expressed as an exception does not necessarily mean that it should be approached with a pre-disposition to construe it narrowly. Like any other provision in a contract, words of exception or exemption must be read in the context of the contract as a whole and with due regard for its purpose. As a matter of general principle, it is well established that if one party, otherwise liable, wishes to exclude or limit his liability to the other party, he must do so in clear words; and that the contract should be given the meaning it would convey to a reasonable person having all the background knowledge which is reasonably available to the person or class of persons to whom the document is addressed. This applies not only where the words of exception remove a remedy for breach, but where they seek to prevent a liability from arising by removing, through a subsidiary provision, part of the benefit which it appears to have been the purpose of the contract to provide. The vice of a clause of that kind is that it can have a propensity to mislead, unless its language is sufficiently plain. All that said, words of exception may be simply a way of delineating the scope of the primary obligation[xiv].
2.11 The Court must adopt an approach to the interpretation of insurance exclusions, which is sensitive to their purpose and place in the insurance contract. The Court should not adopt principles of construction which are appropriate to exemption clauses – i.e. provisions which are designed to relieve a party otherwise liable for breach of contract or in tort of that liability – to the interpretation of insurance exclusions, because insurance exclusions are designed to define the scope of cover which the insurance policy is intended to afford. To this end, the Court should not automatically apply a contra proferentem approach to construction. That said, there may be occasions, where there is a genuine ambiguity in the meaning of the provision, and the effect of one of those constructions is to exclude all or most of the insurance cover which was intended to be provided. In that event, the Court would be entitled to opt for the narrower construction.[xv]
2.12 In the absence of ambiguity, a party is not entitled to invoke the principle underlined in the rule of contra proferentem for interpreting the clauses of the policy. The presence of ambiguity in the language of policy is the sine qua non for invocation of the contra proferentem rule[xvi].
3. Burden of proving suppression of material facts:
The burden of proving that the insured has made false representations and has suppressed material facts, is undoubtably on the Insurer[xvii].
Insurance contracts must be interpreted and construed in accordance with well-established principles of construction, some of which also generally apply to commercial contracts. Courts must endeavour to ascribe a reasonable and commercial meaning to insurance contracts, and must not seek to, through their interpretation, arrive at a contract or term not contemplated by the parties. In other words, Courts are not permitted to rewrite the contract between the parties. The Court must also endeavour to interpret such contracts strictly, including the exclusions and the extent of liability of the insurer thereunder. In interpreting an insurance contract, the Court may also take into consideration other commercial documents that form part of the policy, like the proposal form, but a surveyor’s report or other outside aid is impermissible in the interpretation of the insurance policy. The entire contract must be read as a whole while interpreting it, and only in case of an ambiguity, will the Court construe the contract (and especially exemption of liability clauses) contra proferentum, i.e. against the insurer.
A person insured has the right to demand a policy in relation to which he has accepted the proposal, read with the relevant cover notes. When a contract of insurance is complete, it is immaterial whether the policy is delivered or not, as the rights of the parties are regulated by the policy which ought to have been delivered.
All contracts of insurance are centred around the principle of utmost good faith. All parties to such contracts are mandated to be fair and open with each other to create and maintain trust between them. In line with the requirement of uberimma fides in such contracts, every material fact is required to be disclosed by the person seeking to be insured. Any fact which would influence the mind of a prudent insurer in deciding whether or not to accept the risk is a “material fact”. Such disclosures are necessary to enable the insurer to arrive at a considered decision based on relevant actuarial risk. Each representation or statement may be material to the risk on the part of the insurer. In fact, any suppression, untruth or inaccuracy in the proposal form will render the policy voidable by the insurer. Pertinently, the burden to prove misrepresentation or suppression by the insured, would lie on the insurer. Such duty of disclosure remains up until the conclusion of the contract, and includes a duty to disclose any material alteration in the character of risk which may take place between the proposal and its acceptance. The obligation to disclose extends only to facts which are known to the applicant and not to what he ought to have known, and must at least meet the standard of reasonable enquiry by a prudent person.
*The author was assisted by Paralegal, Agneya Gopinath.
[i] Branch Manager, Bajaj Allianz Life Insurance Company Limited and Ors. v. Dalbir Kaur (Civil Appeal No. 3397 of 2020).
[ii] Oriental Insurance v. Sony Cheriyan 1999 (6) SCC 451.
[iii] Branch Manager, Bajaj Allianz Life Insurance Company Limited and Ors. v. Dalbir Kaur (Civil Appeal No. 3397 of 2020).
[iv] Supra Note ii.
[v] Vikram Greentech India Ltd. v. New India Assurance Co. Ltd., (2009) 5 SCC 599.
[vi]General Assurance Society Ltd. v. Chandumull Jai, (1966) 3 SCR 500; United India Insurance Company Limited v M/s Orient Treasures Private Limited, (2016) 3 SCC 49; and Sushilaben Indravadan Gandhi & Ors. v. The New India Assurance Company Limited & Ors., 2020 SCC OnLine SC 367.
[vii] Sushilaben Indravadan Gandhi & Ors. v. The New India Assurance Company Limited & Ors., 2020 SCC OnLine SC 367.
[viii] Export Credit Guarantee Corpn. of India Ltd. v. Garg Sons International, (2014) 1 SCC 686.
[ix] BHS Industries v. Export Credit Guarantee Corpn. Ltd., (2015) 9 SCC 414.
[x] Quoted by the Court in United India Insurance Co. Ltd. v. Orient Treasures (P) Ltd., (2016) 3 SCC 49.
[xi] Industrial Promotion & Investment Corpn. of Orissa Ltd. v. New India Assurance Co. Ltd., (2016) 15 SCC 315.
[xii] New India Assurance Company Limited and Ors. vs. Rajeshwar Sharma and Ors. (2019) 2 SCC 671, relying upon National Insurance Co. Ltd. V. Ishar Das Madan Lal, (2007) 4 SCC 105.
[xiii] (1889) 23 Q.B.D. 453, 456; as relied upon in New India Assurance Company Limited and Ors. vs. Rajeshwar Sharma and Ors. (2019) 2 SCC 671.
[xiv] Supreme Court as per Lord Toulson JSC (with whom Lord Mance, Lord Sumption and Lord Hodge JJSC agreed)  UKSC 57; relied upon in New India Assurance Company Limited and Ors. vs. Rajeshwar Sharma and Ors. (2019) 2 SCC 671 .
[xv] Crowden and Crowden v QBE Insurance (Europe) Ltd, 2017 EWHC 2597 (Comm.); relied upon in New India Assurance Company Limited and Ors. vs. Rajeshwar Sharma and Ors. (2019) 2 SCC 671.
[xvi] United India Insurance Company Limited v M/s Orient Treasures Private Limited, (2016) 3 SCC 49.
[xvii] Life Insurance Corporation of India vs. G.M. Channabasemma AIR 1991 SC 392.