Failure to Disclose Every Policy Is Not a Fraud: Supreme Court Orders Insurance Payout in Favor of Policyholder's Son

A Minor Omission in Disclosure Cannot Be Used to Deny a Genuine Insurance Claim – In a significant ruling Supreme Court of India overturned the repudiation of a life insurance claim, holding that failure to disclose every existing policy does not amount to material suppression if the insurer was already aware of another high-value policy held by the insured. The Court directed Exide Life Insurance Company to honor the claim of Mahaveer Sharma, the son of the deceased policyholder, and pay the insurance benefits with 9% annual interest from the date the amount became due.

"The fundamental principle of insurance law is utmost good faith, but that does not mean an insurer can exploit minor omissions to deny rightful claims. A policyholder cannot be expected to make redundant disclosures when the insurer already has sufficient information to assess the risk," the Court observed while allowing the appeal.

This ruling marks a significant victory for policyholders, reaffirming that insurance companies cannot reject claims on technicalities when the core risk assessment remains unaffected.

"Can an Insurance Claim Be Denied for Not Listing Every Policy? Supreme Court Rejects Insurer's Strict Interpretation"

The case arose when Ramkaran Sharma, father of the appellant Mahaveer Sharma, purchased a life insurance policy from Exide Life Insurance on June 9, 2014. Unfortunately, he died in an accident on August 19, 2015. His son, the nominee under the policy, submitted a claim, but Exide Life Insurance rejected it on March 3, 2016, citing "material suppression of facts."

According to the insurer, Ramkaran had disclosed only one insurance policy from Aviva Life Insurance but had not mentioned three other policies from Life Insurance Corporation of India (LIC). The insurance company argued that this omission violated the duty of full disclosure, leading to the claim's repudiation.

The State Consumer Commission dismissed Mahaveer Sharma’s complaint in 2018, and the National Consumer Disputes Redressal Commission (NCDRC) upheld the rejection in 2019, relying on previous Supreme Court rulings in Reliance Life Insurance Co. Ltd. v. Rekhaben Nareshbhai Rathod (2019) and Satwant Kaur Sandhu v. New India Assurance Co. Ltd. (2009).

Disagreeing with these findings, Sharma appealed to the Supreme Court, arguing that the omission was not deliberate, nor was it related to his father’s health, which is the core concern in risk assessment for life insurance policies.

"This was a life insurance policy, not a Mediclaim or health-related insurance. The insured died due to an accident, not due to any pre-existing health condition. The insurer had no grounds to reject the claim on the basis of undisclosed LIC policies, which were of lesser value than the declared Aviva policy," Sharma’s counsel contended before the Court.

"When an Insurer Already Knows the Risk, Can It Still Claim Suppression?"

The Supreme Court scrutinized the proposal form and the insurer’s own records, revealing that Ramkaran had, in fact, disclosed a policy from Aviva Life Insurance, which was worth ₹40 lakh—higher than the sum assured under the Exide policy itself.

"If the insured disclosed a policy worth ₹40 lakh and the insurer still issued a policy with an assured sum of ₹25 lakh, how can it now argue that non-disclosure of smaller policies worth ₹2.3 lakh materially affected its risk assessment?" the Court asked.

The Court further noted that the insurance proposal form was filled by an agent, and any inadvertent omission should not be used to penalize the policyholder’s family.

"A technical omission in listing smaller policies does not amount to fraudulent suppression. The insurer must prove that the omission was intentional and material to the risk assumed. In this case, the insurer had sufficient knowledge to make a fair decision, and it cannot now exploit a minor disclosure lapse to reject a valid claim," the Court ruled.

"Material Suppression Must Be Intentional and Impact Risk Assessment" – Supreme Court Lays Down Key Principles

The Court distinguished this case from previous rulings where insurance claims were rejected for failing to disclose critical health conditions or pre-existing policies taken shortly before purchasing new ones.

Referring to Rekhaben Nareshbhai Rathod (2019), where a claim was rejected because the insured had secretly purchased another policy just two months prior, the Supreme Court noted that the case at hand was entirely different.

"Unlike cases where an applicant deliberately hides a new policy to deceive the insurer, here the insured disclosed another substantial policy, which was enough for risk evaluation. The omitted policies did not change the insurer’s risk exposure," the Court observed.

The Court also relied on Mahakali Sujatha v. Future Generali India Life Insurance (2024), which emphasized that for an insurer to repudiate a claim, it must prove that the non-disclosure was deliberate, material, and would have altered its decision to grant the policy.

"A mere technical omission does not void an insurance contract. The insurer must establish that the undisclosed information was so critical that it would have refused to issue the policy had it known. In this case, Exide Life Insurance had sufficient data to assess risk, making the repudiation unjustified," the Court held.

"Insurance Contracts Must Be Fair: Courts Will Not Allow Companies to Deny Genuine Claims on Technical Grounds"

After analyzing the facts, the Supreme Court set aside the orders of the State Commission and the NCDRC and directed Exide Life Insurance to pay all benefits due under the policy.

The Court further ordered that the insurance company pay 9% interest per annum on the claim amount from the date it became due until its realization, holding that the policyholder’s family should not suffer financial loss due to the insurer’s arbitrary repudiation.

"Insurance contracts are built on mutual trust, but that trust must be fair. A policyholder cannot be expected to recall and list every past insurance policy when a major policy is already disclosed. Courts will not allow insurance companies to escape liability by exploiting technicalities," the Court warned.

The Supreme Court’s ruling reaffirms the principle that insurance claims cannot be denied for immaterial omissions, ensuring that policyholders and their families are not unfairly deprived of their rightful benefits.

Date of decision: 25/02/2025