Repudiation of Contract of Insurance

By- Ramaditya Jadon

Legal Intern, H.K. Law Offices

If there is a valid contract, it can be repudiated. To be valid, a contract must include the following elements an offer, an acceptance of that offer for a consideration that will result in an agreement[1]. An agreement enforceable by law is a contract.[2]

Repudiation of contract occurs when one party does not intend to fulfil the contract’s responsibilities and expresses a clear, total, and unqualified refusal to perform contractual commitments. Two key principles can be used to determine whether or not the conduct or words amount to repudiation. First, there must be a clear and unequivocal purpose to repudiate the contract, and this intention must be plain and unequivocal so that the other party can obtain it through the guilty party’s actions.[3] There can be two aspects of repudiation of contract namely- Non acceptance or acceptance of repudiation of contract.

Non-acceptance of a contract repudiation means disregarding the repudiation, which would be a prudent decision that would benefit both the innocent and guilty parties. If the repudiation is not accepted, the innocent party cannot sue for damages.[4]  Acceptance of contract repudiation, on the other hand, releases both parties from any further contractual obligations; the only requirement is that the innocent party communicates it in a clear and unambiguous manner[5]

The nature of an insurance contract is comparable to that of a normal contract form. The assured makes an offer for an agreed-upon consideration “premium”, which is accepted by the insurer, resulting in a valid insurance contract. The company or corporation providing insurance or indemnifying someone will be referred to as “insured” in this paper, while the person who accepts the policy or is indemnified will be referred to as “insured.”

The insurance contract is based on the principle of “ubberima fidae,” which is a Latin term that means “utmost good faith,” and it is the responsibility of both parties. The principle of good faith applies to insurance contracts for the mandatory particulars such as health, occupation, and so on, which are necessary for the insurer’s proper risk assessment and premium fixation. It is the duty of the assured to mention all the material facts any non-disclosure[6] 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 Redress Commission has been quite strict on the idea that pre-existing ailments will result in the claim being rejected.[8] Section 45 further specifies three things that an insurer must establish in order for a contract to be deemed repudiated. Those are the points. To begin with, any fraudulent statement made in any medical report or document that would influence the underwriter’s decision. Second, Intention was deceptive, and Finally, the policyholder’s knowledge of material facts that are false or suppressed.[9] When an insurer denies a claim, there are a number of venues and institutions where the assured might claim compensation.

The paper will be dealing with repudiation 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

Life insurance has never been defined explicitly. “Life insurance is a contract to pay a specific amount of money in the event of a person’s death in exchange for the timely payment of a specific annuity for his life determined based on the expected length of life.”[10] Section 45 of the Insurance Act spells forth the conditions under which a “insurer” might repudiate a contract, as well as additional details. It is important to remember that life insurance contracts are based on the principle of “good faith.” As a result, all material information should be disclosed, and failure to do so would give the insurer an advantage and might deny the “insured” of any benefits.[11] Section 45 further provides that the “insurer”bears the burden of evidence if the material facts were withheld by the “insured” despite having exclusive knowledge of them[12].In order to repudiate a contract of insurance, the “insurer” must reject claims, indicating that the “insurer” does not intend to satisfy any obligations arising from the contract of insurance. The IRDA has issued a circular to ensure that claims are rejected on valid and sound grounds rather than minor issues. [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 Agreement on Life Insurance is based on the principle of good faith, and any failure to disclose material facts that are so important that they influence the “insured’s” life expectancy would give the “insurer” the authority to prevent the “insured” from collecting benefits under the policy.[14] There can be several grounds on which insurer can deprive “insured” from claiming benefits they are as follows-

  • Concealment of Material facts in the Proposal form-

The term “insurable interest” in a life insurance contract differs from other types of insurance in that the subject matter’s value can be evaluated. Because the value of a human life cannot be quantified in a life insurance policy, determining the premium is difficult. Any fact that may affect the premium fixing is a material fact, according to established law.[15] The premium is set by the “insurer” based on “risk,” which can only be evaluated based on the information provided in the proposal form. If the ‘insured’ conceals any relevant facts, it is considered wrongful act concealment. In support of which, a “insurer” has the right to cancel a contract.   

  • The existence of the disease prior to the formation of contract- 

It is a significant fact if there is any pre-existing sickness. If the “insured” does not disclose it, the “insurer” has the right to cancel the 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 preexisting disease. It is important to note that a person’s hypochondria, in which he believes he is suffering from a sickness and takes drugs without a license, is not a material fact.[16]

  • The Intention was fraudulent- 

A contract of life insurance can be repudiated if the “insured” has a false intent. The term fraud is standard which can be took from Indian Contract Act[17] which means and includes any deliberate misrepresentation or concealment of facts. If the ‘assured’ makes misleading and untrue assertions in order to get the policy, the contract of insurance is Void ab initio. [18]

  • Knowledge of fraud and suppression of material facts-

There may be cases when the “insured” was unable to reveal material facts due to a lack of knowledge and was therefore found to be innocent. It was not suppression of material truth when a person did not mention that he had a fever.[19]

  • Onus lies on the insurance company –

While rejecting a claim on the aforementioned grounds, the “insurer” must demonstrate that “material” facts were not given, and that if these facts had been disclosed, the insurance contract would not have been entered into or other consequences would have resulted.

The scope of repudiation is covered in the preceding points. A life insurance policy will also tend to lapse if the set term payment is not made on time. According to the Supreme Court, a grace period of 30 days and 15 days shall be allowed depending on the policy premium. Failure to pay even after a grace period has been granted will result in the policy lapse.[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 –

A fire insurance contract is an agreement in which one party promises to indemnify another party in exchange for a compensation, such as a premium, for a specific subject matter that has been lost or destroyed due to fire. There is no legislative fire insurance legislation in India. The person who has an interest in the property’s existence and is prejudiced by its loss has the insurable interest in the property. The contract of fire insurance can be repudiated on the various grounds-

  • The cause due to which loss was incurred was not covered by the policy-

Fire insurance is a contract covering a specific subject matter that may suffer loss or destruction due to fire, however there may be times when the loss is not caused by the fire or other risks. In a fire insurance policy, there are 12 types of standard dangers. If the coverage is not covered by standard hazards, the insurer may cancel the contract.

  • The loss falls within the specific exclusion-

If the contract has a specific exclusion and the loss was caused by that exclusion. If the “insured” seeks the money, the ‘insurer’ has the authority to cancel the contract on the grounds that the matter is covered by specific exclusions.

  • Lack of insurable interest-

In the case of fire insurance, the insurable interest is held by the individual who has an interest in the property’s existence and whose loss or destruction would endanger that interest. If the insured does not have an insurable interest in the property that is the subject of the contract, the insurer has the right to cancel it. It’s also worth mentioning that in the event of a fire insurance policy. In the event of a fire insurance policy, the “insured” must have “insurable interest” at the time of the contract’s creation and at the time of the loss. The reason for this is because if there is no insurable interest at the start of the contract, it does not become subject matter of the insurance contract since there is no insurable interest, and if it is missing at the time of loss, the insured does not have a claim on it.

  • The event happened at the place which was not covered under the policy-

For example, A’s goods kept at location A1 were protected by fire insurance, but the items were housed at location A2 and caught fire. The products maintained at A1 are clearly mentioned in the insurance contract as being covered under the policy. As a result, the insurer has the authority to cancel the fire insurance contract.

In the case of fire insurance, the insurer has the power to prevent the insured from receiving benefits, which amounts to repudiation of the contract.

CONCLUSION

The rejection of an insurance contract is not the same as the usual form of contract. A repudiation in the conventional form of contract occurs when a party intends not to fulfil the contract’s duties, despite the fact that he is capable of doing so. In an insurance contract, the other party’s behavior, or, to put it another way, the insured’s recursion of the insured’s act, amounts to repudiation of the contract. If the ‘insured’ with knowing fails to reveal the material information, the contract would be canceled. The repudiation in both life and fire is not the same; it is determined by the nature of the contract. In a life insurance contract, the burden of proof is on the insured. If the insured follows the contract and discloses all material facts, the insurer’s repudiation would be considered improper repudiation, which would not be upheld in a court of law. The Indian judiciary has made it plain that an insurer can only repudiate if material information is not provided. It is dependent on the conditions of the insurance contract in the case of fire insurance. As a result, it is clearly stated that an insurance contract might be repudiated depending on the nature and terms of the contract.


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 

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

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)

20 Life Insurance Corporation of India & Anr. v. Dharam Vir Anand 

Published by meghachaturvedi

Associate Partner, H.K. Law Offices

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