Repudiation Of Contract of Insurance

A contract can be repudiated if there is a valid contract. A contract to be valid should have the
following requisites i.e. there should be an offer, an acceptance to such offer for a consideration
which will give rise to an agreement1. An agreement enforceable by law is a contract.2

When one party does not intend to fulfill the obligations arising out of the contract and makes it
clear, absolute and unconditional refusal to perform contractual obligation, it amounts to the
repudiation of contract. To ensure whether the conduct or the words amounts to repudiation or
not can be done by applying two major principles. Firstly, there should be an intention to
repudiate the contract and Secondly, such intention should be clear and unequivocal so that the
other party can get it by the conduct of the guilty party.3 There can be two aspects of repudiation
of contract namely- Non acceptance or acceptance of repudiation of contract.

Non acceptance of repudiation of contract means disregarding the repudiation which would be a
wise a decision and be favorable to both innocent and guilty party. If there is non-acceptance of
the repudiation, innocent party cannot claim damages.4 On the other hand acceptance of
repudiation of contract discharges both the parties from any further contractual obligation the
only condition to it is that innocent party should communicate it in clear and unambiguous
manner5.

The nature of contract of Insurance is similar to that of a standard form of contract. An offer is
made by the assured for an agreed consideration “premium” and offer be accepted by the insurer
resulting in a lawful contract of insurance. In the present paper the company, or corporation
providing insurance or indemnifying another will be stated as ‘insured’ and the person who takes
the policy or is been indemnified will be quoted as “insured”

The contract of insurance stands on the principle of ‘ubberima fidae’ which is a Latin term
meaning utmost good faith, which is the duty of both the parties. The principle of good faith
applies to the contract of insurance for the mandatory particulars like health, occupation etc. for
convenience of the insurer for accurate assessment of risk and fixation of premium. It is the duty
of the assured to mention all the material facts any non-disclosure6 of material facts would lead
to repudiation of contract which is subject to a condition that it cannot be done after 2 years.7
The State Redressal Commission has been very stringent on the notion that pre existing diseases
will lead to repudiation of the claim.8 Furthermore Section 45 also states three points that an

1
T. S. VenkateshIyer, TREATISE ON LAW OF CONTRACTS, 241 (6 thedn. 1995).
2
Sec. 2(h) & sec. 10, Indian Contract Act, 1872
3
1Joseph H. Beale Jr., Damages upon Repudiation of a Contract, 17(6) THE YALE LAW JOURNAL443, 448
(1908).
4
P.M. Bakshi, Anticipatory Breach of Contract, 17(2) LAWYERS COLLECTIVE 13, 13 (2002).
5
2Avatar Singh, LAW OF CONTRACTS AND SPECIFIC RELIEF, 455 (10thedn. 2008)
6
Smt..Benarasi Debi Vs New India Assurance AIR 1959 Pat 540
7
Section 45 of IRDA Act
8
New India Assurance Co. Ltd. vs Shiv Kumar Rupramka
insurer may prove to ensure that contract stands repudiated. Those points be Firstly, Any
statement made in any medical report or document falsely which would affect the judgment of
the underwriter Secondly, Intention was fraudulent and Lastly, the knowledge of policy holder
on the material facts being false or suppressed.9 There are various forums and authorities where
assured can avail a remedy when a claim is repudiated by the insurer.

The paper will be dealing with repuditiation of contract of insurance in 2 different types of
insurance-

1- Repudiation of contract of Life insurance.

2- Repudiation of contract of Fire insurance.

 Repudiation of contract of Life Insurance

There has been no explicit definition for Life Insurance. “Life insurance is a contract to pay a
certain sum of money on the death of a person in consideration of the due payment of a certain
annuity for his life calculated according to the probable duration of life.”10 The insurance Act
under Section 45 clearly states the limitation in which ‘insurer’ can repudiate a contract and
other things which are discussed above. It is pertinent to note that contract of life insurance is
based on the principle of ‘good faith ‘, Therefore all the material facts should be disclosed and
non disclosure of the same would give a upper hand to the insurer and can deprive the ‘insured’
of any benefit.11 Section 45 further states that the onus of proof lies on the ‘insurer ‘ on the fact
that the material facts were suppressed by the ‘insured’ even after exclusive knowledge12. In
order to repudiate a contract of insurance in this case be rejection of claims, where ‘insurer’
intends not to fulfill any obligation arising out of the contract of insurance. IRDA has issued a
circular to ensure that the claims are not rejected on mere small technical grounds but on valid
and sound grounds. 13 There has been a wide interpretation of Section 45 by Indian Judiciary-

 The statement made by the ‘insured’ Must be on material facts-

The contract of life Insurance is based on the principle of good faith and any non disclosure of
material facts which are so relevant that it affects the expectation of a life of ‘insured’ would
give a right to the ‘insurer’ to restrain the ‘insured’ from claiming benefits of the policy.14 There

9
Section 45 of IRDA Act
10
Dalby v. India and London Life Assurance Company (1854) 15 CB 365:139 AII ER465.
11 Life Insurance Corporation Of ... vs Smt.Asha Goel & Anr
12 Life Insurance Corporation vs Smt. G.M. Channabasemma AIR 1991 SC 392,
13 http://www.policyholder.gov.in/uploads/CEDocuments/Repudiation%20of%20Claim%20Circular.pdf
14 Life Insurance Corporation vs Janaki Ammal AIR 1968 Mad 324
can be several grounds on which insurer can deprive ‘insured’ from claiming benefits they are as
follows-

1. Concealment of Material facts in the Proposal form- The ‘insurable interest’ in contract
of life insurance is different from other type of insurances as the value of the subject
matter can be estimated. In life insurance contract the value of human life cannot be
estimated so fixation of the premium is quiet hard. It is settled law that any fact which
may affect the fixation of premium is a material fact15 The premium is fixed by the
‘insurer’ on the basis of ‘risk’ which can be determined only by material facts mentioned
in the proposal form. If the ‘insured’ conceals any facts which are important it would
amounts to concealment of wrongful act. In furtherance of which ‘insurer’ can repudiate
a contract.

2. The existence of the disease prior to the formation of contract- If there is any pre existing
disease it is a material fact. If it has not been disclosed by the ‘insured’ then ‘insurer’ can
repudiate a contract. The Indian Judiciary also have extensively dealt with this notion in
the case of New India Assurance Co. Ltd. Vs Shiv Kumar Rupramanka where State
Forum has mentioned about the guidelines for determining a pre existing disease. It
pertinent to mention that if a person is suffering of hypochondria, where he imagines that
he is suffering from a disease and take medicines without any subscription it is not a
material fact.16

3. The Intention was fraudulent- The fraudulent intention of the ‘insured’ can be a ground
for repudiating a contract of life insurance . The term fraud is standard which can be took
from Indian Contract Act17 which means and includes any deliberate misrepresentation
or concealment of facts. The contract of Insurance is Void ab Initio if false and untrue
statements are made by the ‘assured’ and signed by him in order to avail the policy18

4. Knowledge of fraud and suppression of material facts- There may be instance where the
‘insured’ was not able to disclose the material facts because of lack of knowledge can be
held innocent. When a person did not mention about the fever that he had didn’t
amounted to suppression of material fact19

 Onus lies on the insurance company –

15
LIC v. Sakuntalabai (AIR 1975 AP 68)
16
Life Insurance Corporation v. Janaki Ammal AIR 1968 Mad 324
17
Mithoolal Nayak vs Life Insurance Corporation 1962 AIR 814
18
S. Abubaker v. Life Insurance Corporation 1985 A.C.J. 416 (Bombay)
19
Dipashri v. L.I.C. of India 1985 A.C.J. 416 (Bombay)
The ‘insurer’ while repudiating a claim on above grounds is the one who needs to prove that the
facts which were ‘material’ in nature were not disclosed and if these facts would have been
disclosed they wouldn’t have come into contract the contract of insurance or there would have
been other consequences.

The aforementioned points deals with the scope of repudiation. A life insurance policy also tend
to lapse if there is non- payment of the fixed period on the stipulated time. The Hon’ble Supreme
Court has stated that a grace time of 30 days and 15days should be given according to the
premium of policy. Any failure of payment even after the granting of grace period would amount
to lapse of policy.20 Hence, insurance company can repudiate the contract of life insurance but
the limitation is imposed by section 45 of Insurance Act, which is 2 years.

 Repudiation of Contract of Fire Insurance –

Fire Insurance contract is a contact where one party agrees to indemnify another party for
consideration i.e. premium for a particular subject matter which has incurred loss or destruction
due to fire. India doesn’t have a statutory legislation for fire insurance. The insurable interest of
the property lies with the person who has interest in existence of such property and prejudice by
the loss of the property. The contract of fire insurance can be repudiated on the various grounds-

1. The cause due to which loss was incurred was not covered by the policy- The contract of
fire insurance is a contract over a particular subject matter which may incur loss or
destruction due to fire but there may be instances where the loss is incurred was not
because of the fire or added perils. There are 12 types of standard perils in the fire
insurance policy other than standard perils insurer may repudiate the contract.
2. The loss falls within the specific exclusion- If there is a specific exclusion in the contract
and the loss caused was due to the reason of the same. If the ‘insured’ claims the amount
then ‘insurer has a right to repudiate the contract on the grounds that the matter falls in
the purviews of specific exclusion.
3. Lack of insurable interest- In the case of fire insurance insurable interest lies with the
person who has an interest in the existence of the property and loss or destruction to such
a property would prejudice such interest on the property. ‘Insurer’ can repudiate the
contract if the insured lack insurable interest on the property which is the subject matter
off the contract. It is also important to mention that in case of contract of fire insurance.
In case of contract of fire insurance the ‘insured’ must have “insurable interest” at the
inception and at the time when loss is incurred. The reason is logical for it that at the
commencement of the contract if no insurable interest it does not become subject matter
of the insurance contract as there is no insurable interest and at the time of loss if its
missing then the insured doesn’t have the claim over the same.

20
Life Insurance Corporation of India & Anr. v. Dharam Vir Anand
 4. The event happened at the place which was not covered under the policy- For Example A
covered his goods kept at place A1 from fire insurance, the goods were kept at place A2
and caught fire. It was explicitly mention in the contract of Insurance that the goods kept
at A1 will be covered under the policy. Hence the insurer has the right to repudiate the
contract of fire insurance.

The insurer in the case of Fire Insurance has a right of depriving the insured from claiming the
benefits hence amounting to repudiation of contract of fire insurance.

Conclusion

The repudiation of contract of insurance is different from the standard form of contract. A
repudiation in standard form of contract is when a party intends not to fulfill the obligation
arising out of contract even when he is capable of fulfill the obligations of the contract. In the
contract of Insurance its the action of the other party or we can say it was the repucursion of the
act of the insured which will further amounts to repudiation of the contract. If the ‘insured’ with
the knowledge fails to disclose the material facts it will amount to repudiation of the contract.
The repudiation in both the case of life and fire are not same it depends upon the nature of the
contract. In the life insurance contract it is on the insured, If insured complies with the contract
and discloses all the material facts a repudiation by the insurer would amount to the wrongful
repudiation which would not subsists in the court of law. Indian Judiciary has been very clear on
the notion that insurer can only repudiate if the material facts have not been disclosed. In the case
of fire insurance it depends on the terms of the contract of insurance. Therefore it is clearly stated
that contract of Insurance can be repudiated as per the nature and the terms of contract.