All insurance policies are issued based on the material facts disclosed to the Insurer by you as the proposer (buyer of the insurance policy). The Insurer decides whether to accept the risk or not and if he decides to accept, calculates the premium to be collected only based on the material facts of the risk provided by you.
So, the Insurance contract between you and the Insurer is completely based on the facts provided by you in a proposal form and you are bound by duty of disclosure of all material facts known to you with regard to the risk you are covering under the insurance.
For example, you renew your car insurance policy with another insurer as you find them cheaper than existing insurer. In case, if you forget or fail to disclose that your car met with an accident in the previous year, based on the assumption that there is ‘no claim’, your new insurer will offer you the No Claim Bonus that you are actually not eligible for.
What happens in case of a ‘Non-Disclosure’ Or ‘Misrepresentation’
The above example is usually considered as ‘non-disclosure’ and a ‘mis-representation’ of facts. In such cases, the insurer can
- Void the Policy
- Can Reject Claims
- Can penalise you as it is appropriate
- Can still ignore the breach of good faith and honour claims
As per a recent Supreme Court judgement, wilful non-disclosure of previous accident incidence is considered as fraudulent misrepresentation and entails penalty equivalent to the percentage of NCB deducted from a fresh claim. For eg. in such a case if the fresh claim amount is Rs. 1,00,000/- and the NCB on the renewal premium availed is 45%, then Rs. 45,000/- will be deducted from the claim in addition to the NCB amount of the premium.
In case, if the insurer reviews the claim and understands that the non-disclosure was not wilful or fraudulent, the insurer may allow the claim without any deductions. However, such a decision will be at the sole discretion of the Insurer.
Duty of Disclosure applicable to the Insurers too!
It is essential for all buyers of insurance to disclose all relevant, known and material facts asked by the insurer in a proposal form. Insurer also has the duty of disclosure to all insurance buyers on the terms, conditions and coverage agreed under the insurance policy in clear, intelligible and transparent language.