Contract Law

Bhagwani Bai v. Life Insurance Corporation of India

AIR 1984 MP 126

Facts

Bhagwani Bai’s husband obtained a life-insurance policy for ₹25,000.
He died shortly after the policy was issued.
Bhagwani Bai, as beneficiary, claimed the policy amount.
LIC repudiated the claim.
It alleged that the insured had failed to disclose earlier life-insurance policies that had lapsed.
LIC contended that the omission amounted to fraudulent suppression and material misrepresentation in the proposal form.
Bhagwani Bai argued that the non-disclosure:
was not deliberate;
was not material to the risk;
did not justify avoidance of the policy.

Whether failure to disclose the earlier lapsed policies amounted to fraudulent misrepresentation.
What LIC had to prove before avoiding the policy on the ground of non-disclosure.

Insurance contracts require disclosure of material facts.
However, to avoid a policy for fraudulent suppression, the insurer must establish that:
the statement or omission was false;
the insured knew it was false or deliberately concealed the fact;
the fact was material to the insurer’s assessment of the risk;
the policy was obtained through that misrepresentation.
A fact is material if it would influence a prudent insurer in deciding:
whether to accept the risk;
on what terms;
at what premium.
Innocent or irrelevant omission is insufficient.

LIC relied substantially on the fact that earlier policies had lapsed.
But the mere existence of previous lapsed policies did not automatically prove fraud.
LIC had to show that the insured deliberately concealed them with the intention of misleading the insurer.
It also had to establish why the prior policies materially affected:
his health;
life expectancy;
financial insurability;
the risk accepted under the new policy.
A previous lapse may occur for many reasons unrelated to health or dishonesty, including inability or failure to pay premiums.
The Court found insufficient evidence connecting the omission with the cause of death or the risk undertaken.
The insurer could not repudiate merely by pointing to an inaccurate answer without proving its material and fraudulent character.
Since LIC drafted and controlled the proposal process, it bore the burden of showing that the statutory and contractual grounds for avoidance were satisfied.
The evidence did not demonstrate conscious fraud of the kind required.
The policy therefore remained enforceable.

The Madhya Pradesh High Court held LIC liable to pay the policy amount.
Fraudulent and material suppression had not been adequately proved.
Use this case for: an insurer must prove deliberate concealment of a material fact; every inaccurate answer does not automatically avoid the policy.