Insurance is the act of providing against a possible loss, by entering into a contract with one who is willing to give assurance — that is, to bind himself to make good such loss should it occur. In this contract, the chances of benefit are equal to the insurer and the insured. The first actually pays a certain sum and the latter undertakes to pay a larger, if an accident should happen. The one renders his property secure; the other receives money with the probability that it is clear gain. The instrument by which the contract is made is called a policy; the stipulated consideration a premium.[i]

It is often said that the fundamental principle of Insurance is mathematical, its application financial, and its interpretation legal. For a layman to understand the Insurance principle, he should be an actuary (who designs and prices the insurance product); to understand its application to financial problems, he need not be a financial expert; and to understand its legal concepts, he need not be a lawyer. This blog is a step in the direction of demystifying and collating the interpretational concepts of insurance contracts.

All contractual arrangements in India are governed by the Indian Contract Act, 1872. Insurance contracts are no exception to this, though the Insurance Act 1938 would also have a bearing on such species of contract. However, as far as the interpretation of Insurance contracts is concerned, Courts have, over time, evolved certain unique rules and principles of interpretation. These rules, although not set in watertight compartments, offer assistance to the Court in interpreting contracts of insurance, balancing the interests of the insurer as well as the insured, and settling disputes between them.

This two-part blog is intended as a ready reference/guide for practitioners. To this end, we haven’t been very descriptive, and have attempted to collate, verbatim, the principles of interpretation set and relied upon by Courts, whilst construing and interpreting insurance contracts.

1. The terms of an insurance policy must be strictly construed, in the manner intended by the parties.

1.1 Since upon issuance of insurance policy, the insurer undertakes to indemnify the loss suffered by the insured on account of risks covered by the insurance policy, its terms have to be strictly construed to determine the extent of liability of the insurer[ii].

1.2 The insurance policy between the insurer and the insured represents a contract between the parties. Since the insurer undertakes to compensate the loss suffered by the insured on account of risks covered by the insurance policy, the terms of the agreement have to be strictly construed to determine the extent of liability of the insurer. The insured cannot claim anything more than what is covered by the insurance policy. That being so, the insured has also to act strictly in accordance with the statutory limitations or terms of the policy expressly set out therein [iii]. The endeavour of the court must always be to interpret the words in which the contract is expressed by the parties. The court while construing the terms of policy is not expected to venture into extra-liberalism that may result in re-writing the contract or substituting the terms which were not intended by the parties. The insured cannot claim anything more than what is covered by the insurance policy.[iv]

1.3 In interpreting documents relating to a contract of insurance, the duty of the court is to interpret the words in which the contract is expressed by the parties, because it is not for the court to make a new contract, however reasonable, if the parties have not made it themselves.[v]

1.4 It is the duty of the Court to interpret the document of contract as was understood between the parties. The terms of the contract have to be construed strictly without altering the nature of the contract as it may affect the interest of the parties adversely.[vi]

1.5 The provisions of an insurance contract must be imparted a reasonable business like meaning bearing in mind the intention conveyed by the words used in the policy document. Insurance policies should be construed according to the principles of construction generally applicable to commercial and consumer contracts. The court must interpret the words in which the contract is expressed by the parties and not embark upon making a new contract for the parties. A reasonable construction must therefore be given to each clause in order to give effect to the plain and obvious intention of the parties as ascertainable from the whole instrument. The liability of the insurer cannot extend to more than what is covered by the insurance policy. In order to determine whether the claim falls within the limits specified by the policy, it is necessary to define exactly what the policy covered and to identify the occurrence of a stated event or the accident prior to the expiry of the policy[vii].

2. What may aid in the construction of an Insurance contract[viii]:

2.1 Document like proposal form is a commercial document and being an integral part of policy, reference to the proposal form may not only be appropriate but rather essential. However, the surveyors’ report cannot be taken aid of nor can it furnish the basis for construction of a policy. Such outside aid for construction of insurance policy is impermissible.

3. Essentials of an Insurance contract[ix]:

3.1 The four essentials of a contract of insurance are:

(a) the definition of risk;

(b) the duration of risk;

(c) the premium; and

(d) the amount of insurance.

3.2 But the policy which is issued contains more than these essentials because it lays down and measures the rights of the parties and each side has obligations which are also defined. In a policy against fire, the purpose is not so much to insure the property but to insure the owner of the property against loss. The policy not only defines the risk and its duration but also lays down the special terms and conditions under which the policy may be enforced on either side[x].

4. Formation of an Insurance Contract[xi]:

4.1 Insurance of property is not a bet but a well-known commercial deal. Acceptance of the proposal read with the cover notes clothes the assured with a right to demand a policy in relation to the kind of insurance he had bought and he could only claim to be covered against risk in the manner laid down in the policy.

4.2 A contract of insurance is a species of commercial transactions and there is a well- established commercial practice to send cover notes even prior to the completion of a proper proposal or while the proposal is being considered or a policy is in preparation for delivery. A cover note is a temporary and limited agreement. It may be self-contained or it may incorporate by reference the terms and conditions of the future policy. When the cover note incorporates the policy in this manner, it does not have to recite the term and conditions, but merely to refer to a particular standard policy. If the proposal is for a standard policy and the cover note refers to it, the assured is taken to have accepted the terms of that policy. The reference to the policy and its terms and conditions may be expressed in the proposal, or the cover note, or even in the letter of acceptance including the cover note. The incorporation of the terms and conditions of the policy may also arise from a combination of references in two or more documents passing between the parties. Documents like the proposal, cover note and the policy are commercial documents and to interpret them commercial habits and practice cannot altogether be ignored.

4.3 During the time the cover note operates, the relations of the parties are governed by its terms and conditions, if any, but more usually by the terms and conditions of the policy bargained for and to be issued. When this happens the terms of the policy are incipient but after the period of temporary cover, the relations are governed only by the terms and conditions of the policy, unless insurance is declined in the meantime. Delay in issuing the policy makes no difference. The relations even then are governed by the future policy if the cover notes give sufficient indication that it would be so.

4.4 In other respects there is no difference between a contract of insurance and any other contract except that in a contract of insurance there is a requirement of uberrima fides e. good faith on the part of the assured and the contract is likely to be construed contra proferentem that is against the company in case of ambiguity or doubt. A contract is formed when there is an unqualified acceptance of the proposal. Acceptance may be expressed in writing or it may even be implied if the insurer accepts the premium and retains it. In the case of the assured, a positive act on his part by which he recognises or seeks to enforce the policy amounts to an affirmation of it.

4.5 Even if the letter of acceptance went beyond the cover notes in the matter of duration, the terms and conditions of the proposed policy would govern the case because when a contract of insuring property is complete, it is immaterial whether the policy is actually delivered after the loss and for the same reason the rights of the parties are governed by the policy to be, between acceptance and delivery of the policy. Even if no terms are specified the terms contained in a policy customarily issued in such cases, would apply. There is ample authority for the proposition.

4.6 When a contract of insuring property is complete, it is immaterial whether the policy is delivered or not for the rights of the parties are regulated by the policy which ought to be delivered.

5. The Principle of Uberrimei fideie., good faith governs Insurance contracts:

5.1 Contracts of insurance are governed by the principle of utmost good faith. The duty of mutual fair dealing requires all parties to a contract to be fair and open with each other to create and maintain trust between them. In a contract of insurance, the insured can be expected to have information of which she/he has knowledge. This justifies a duty of good faith, leading to a positive duty of disclosure[xii].

5.2 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 risk which may take place between the proposal and its acceptance. If there is 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[xiii].

5.3 An insurance contract is a species of commercial transaction and must be construed like any other contract to its own terms and by itself. In a contract of insurance, there is requirement of uberimma fidese. good faith on the part of the insured. Except that, in other respects, there is no difference between a contract of insurance and any other contract[xiv].

5.4 A contract of insurance is one of utmost good faith. A proposer who seeks to obtain a policy of life insurance is duty bound to disclose all material facts bearing upon the issue as to whether the insurer would consider it appropriate to assume the risk which is proposed. It is with this principle in view that the proposal form requires a specific disclosure of pre-existing ailments, so as to enable the insurer to arrive at a considered decision based on the actuarial risk[xv].

5.5 A mediclaim policy is a non-life insurance policy, meant to assure the policy-holder in respect of certain expenses pertaining to injury, accidents or hospitalizations. 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 [xvi].

5.6 It is standard practice for the insurer to set out in the application a series of specific questions regarding the applicant’s health history and other matters relevant to insurability. The object of the proposal form is to gather information about a potential client, allowing the insurer to get all information which is material to the insurer to know in order to assess the risk and fix the premium for each potential client. Proposal forms are a significant part of the disclosure procedure and warrant accuracy of statements. Utmost care must be exercised in filling the proposal form. In a proposal form the applicant declares that she/he warrants truth. The contractual duty so imposed is such that any suppression, untruth or inaccuracy in the statement in the proposal form will be considered as a breach of the duty of good faith and will render the policy voidable by the insurer. The system of adequate disclosure helps buyers and sellers of insurance policies to meet at a common point and narrow down the gap of information asymmetries. This allows the parties to serve their interests better and understand the true extent of the contractual agreement.[xvii]

5.7 The finding of a material misrepresentation or concealment in insurance has a significant effect upon 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.[xviii] In a similar case, however, the Court has held that since the undisclosed disease had nothing to do with the cause of death, the alleged concealment was not of a nature which would disentitle the deceased from getting his life insured, and hence the Court found the repudiation of the claim unjustified[xix].

In part II of this blog, 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.

*The author was assisted by Paralegal, Agneya Gopinath.

[i] Assce. Corpn. v. Robertson, [1909] AC 4

[ii] Vikram Greentech India Ltd. v. New India Assurance Co. Ltd., (2009) 5 SCC 599; General Assurance Society Ltd. Vs. Chandumull Jain AIR 1966 SC 1644; Oriental Insurance Co. Ltd. Vs. Sony Cheriyan (1999) 6 SCC 451; United India Insurance Co. Ltd. Vs. Harchand Rai Chandan Lal (2004) 8 SCC 644.

[iii] Oriental Insurance v. Sony Cheriyan 1999 (6) SCC 451.

[iv] Vikram Greentech India Ltd. v. New India Assurance Co. Ltd., (2009) 5 SCC 599.

[v] General Assurance Society Ltd. v. Chandumull Jain, (1966) 3 SCR 500.

[vi] Polymat India P. Ltd. & Ors. v. National Insurance Co. Ltd. & Ors. AIR 2005 SC 286.

[vii] Bajaj Allianz General Insurance Co. Ltd. and Ors. v. The State of Madhya Pradesh, 2020 SCC OnLine SC 401.

[viii] Supra Note ii.

[ix] Id.

[x] Supra Note iii.

[xi] Id.

[xii] Reliance Life Insurance Co. Ltd. v. Rekhaben Nareshbhai Rathod, (2019) 6 SCC 175.

[xiii] Life Insurance Corporation of India v. Asha Goel, (2001) 2 SCC 160.

[xiv] Supra Note ii.

[xv] Branch Manager, Bajaj Allianz Life Insurance Company Limited and Ors. v. Dalbir Kaur (Civil Appeal No. 3397 of 2020).

[xvi] Satwant Kaur Sandhu v. New India Assurance Company Ltd., (2009) 8 SCC 316.

[xvii] Reliance Life Insurance Co. Ltd. v. Rekhaben Nareshbhai Rathod, (2019) 6 SCC 175.

[xviii] Id.

[xix] Sulbha Prakash Matalgaoker Vs. Life Insurance Corporation of India (Civil Appeal No. 8245 of 2015).