Circumstances Affecting the Risk

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Matters Affecting the Risk

Risk in life Ins is the risk of death at an early date due to disease as distinguished from accident. o Thomson v Weems, (1884) Lord Blackburn observed: those whose business is to insure lives calculate on the average rate of mortality, and charge a premium which on that average will prevent their being losers.
o

In life insurance facts which tend to shorten the span of the life assured would amount to the circumstances affecting the risk and those facts are regarded as material facts for purposes of the duty of disclosure. It is common practice for the insurers to put specific question in the proposal form about these facts.

A life insurer makes enquiries regarding the following facts, namely,

i) ii) iii) iv)

v)

Age of the proponent His family history Personal health Moral history including habits of life, past and present Geographical position and occupation

Age of the Proponent

o

Age is an important material fact in life insurance as the rate of premium depends on the age of the assured. The age is generally proved when the policy is issued and if the age is admitted an endorsement declaring age admitted is generally made on the policy. When once the endorsement in writing is there on the policy no further proof is necessary.

Proof of age
i)

ii) iii) iv) v) vi) vii)

Birth register extract from Municipal or other authentic public record School or college certificate Certificate of Baptism Passport Domicile certificate Marriage certificate Extract from service register in the case of govt servants or employees of other authorised institutions.

Once the age is admitted by the insurer, the correctness of the age cannot be questioned unless the insurer can prove that his admission was procured by the fraud of the assured. If age is not proved and admitted on the policy when issued, it should be proved by the assured during the performance of his contract.

It becomes more difficult and inconvenient to prove it for the claimant after the death of assured. When once a date is given as date of birth, and on subsequent verification after the issue of the policy, the date is found to be wrong it may result in either overstatement of age or understatement of age.

If it is overstatement, it is considered to be an innocent misrepresentation as it will be against the interest of the maker and so in such cases the validity of the policy is not affected. In such cases if the insurer accepts the proof of age, he can be compelled to refund the excess payment towards the premium and to adjust the rate for future payment according to the proved age. But when it turns out to be an understatement of age, if it is a gross understatement or is proved to have been made willfully, it amounts to fraud and the policy becomes voidable.

If it does not amount to fraud the insurer may follow either of the following two courses:
i)

ii)

The sum assured may be reduced to such amount as would have been secured if the correct age is known at the time when the policy is issued; or The assured may be required if he wants to continue the policy for the entire insured amount to pay difference of premium with interest for the earlier period and raise the rate of premium for future payment.

Hemmins v Sceptore Life Association, (1905)

o

The proposer effected with the insurers an endowment policy payable at the age of 60 or at death and negligently misstated her age as 41 years though in fact she was at that time 44 yrs of age, this fact was brought to notice of the insures in 1897 and in spite of that the insurers accepted the premiums for 2 subsequent yrs. Later they demanded from the assignee a higher rate of premium and also the difference of premiums accumulated to date at the revised rate.

Cont
o

The assignee declined to pay the higher rate and tendered the original rate premium and the insurers refused to receive the same. It was held that the insurers had forfeited their right to claim adjustment of premium as they accepted the original rates of premium without protest even after they came to know about the error in age.

Houseman also observes:

o

if after becoming acquainted with a breach of warranty the life office continues to treat the policy as valid it will be held to have waived the breach.

In USA
o

The Standard Provisions Law in USA provides a simpler and better solution for this problem by insisting a clause to be included in every policy to the effect that if the age of the assured has been misstated, the amount payable and every benefit accruing thereunder shall be said as the premium paid would have purchased at the correct age.

Family History
o

The risk in life policies depends on longevity of the assured and heredity throws sufficient light and plays an important role in the determination or the probable longevity of a person. Therefore the medical officers usually put a number of questions about the births and deaths of brothers, sisters, parents and near relation, the diseases from which they suffer then or suffered in the past, the causes of their death, and ages at their deaths.

Family history gives a clue to the insurers as to the constitution and prospects of longevity of the assured. Insanity of the near relatives is one of the things to be revealed. The assured must give correct answers regarding the family history.

Asia Assurance Company v Kartiya Devi, (1936)

o

The total number of brothers and sisters had to be filled in one column and the actual number alive in another column, the assured filled the first column but left the other blank. It was held the answer amounted to suppression of truth and hence amounted to misrepresentation and the policy was void.

Personal Health and Moral History

o

The habits of life, past and present and which tend to shorten the life must be disclosed, eg. The use of opium, tobacco or alcohol. Question are often asked as to the temperate habits of the assured. What is intemperance has nowhere been defined but it has been held that it is not limited to such intemperance as would impair the general health of the assured.

The present state of health is material because no prudent insurer would underwrite the life of a person afflicted with a fatal disease or who is one on a death bed. The past illness also becomes material because sometimes, some kinds of diseases leave a permanent effect on the constitution of the person and shorten his life, the nature and duration of treatment becomes useful to make an enquiry from the previous medical attendants.

Geographical Position
o

The place where the applicant lives is important as climate and environment have an appreciable effect on ones health. Unhealthy surrounding have a tendency to shorten the life. Further, the particular place may be subject to earthquake, volcanoes and floods. Therefore the applicant must give his residential address.

Occupation
o

Information regarding the occupation is essential to understand the nature of the risk. If it is a dangerous occupation like a soldier, sailor, airman or a workman in an ammunition factory the insurers charge a higher rate of premium. If the description is with reference to nondangerous occupation, it will not affect the validity of the policy,

Section 45 of Insurance Act, 1938

It lays down that no policy can be challenged after two years from the date of the policy on the ground that any statement made in the proposal or in any report of the medical officer or any document was inaccurate or false, unless insurer shows that, (i) it is material to disclose, (ii) it was fraudulently made and (iii) the policy holder knows at the time that it was false or he suppressed the fact material to be disclosed, provided that nothing in that section prevents the insurer from calling for proof of age of the assured or to adjust the rate of premium according to the correct age proved subsequently.
o

LAW COMMISSION OF INDIA 112th REPORT ON SECTION 45 OF THE INSURANCE ACT, 1938 (JUNE 1985)

Under the Chairmanship of Justice K.K. Methew, referred to many judgments and observed that whenever claims are repudiated or disputes come to courts of law, the LIC should not put up fight on the pattern of ordinary litigants. But it must be on a higher plane so as to inspire confidence in the public that claims are not resisted on frivolous pleas and reckless allegations. All the relevant materials gathered by the LIC in the course of its investigation of a particular claim shall be placed before the court to enable it to judge the truth. There shall be a frank and full disclosure of all the material evidence and no attempt should be made to suppress or withhold the same.

Cont..
o

Finally, after elaborate discussion on this section and also compared with UK and USA, had given recommendation to change three years from two years in section 45. But this recommendation was not been implemented.

REPORT OF K.P.NARASINHAN COMMITTEE ON PROVISIONS OF INSURANCE ACT, 1938, (JULY 2005)

observation on section 45:

o

The Committee noted the elaborate consideration given in the Law Commission Report and the recommendations made with regard to amendments to the provisions on the policy of life insurance being called in question on account of any misstatements in the proposal for other papers leading to the issue of the policy

.The Law Commission Report has refer to several Court rulings, including those of the Supreme Court, and the Committee considered that there was a quite well settled case law on the subject that insurers did appreciate, making any amendment of the present Act provisions unnecessary for an equitable and adequate protection of the interest of policyholders or of other beneficiary claimants.

Cont..
o

This report clearly shows that there is no necessity of amendment to the section 45 of Insurance Act, 1938.

The new proposed amendment to section 45 of Insurance Act, 1938 is not consumer friendly because of following reasons:

1. Insurers can repudiate the contract on any ground whatsoever is increased to 5 years (Presently it is two years). 2. That five years period counted from the date of issuance of the policy or the date of commencement of risk or the date of revival of the policy or the date of the rider to the policy, whichever is later (Presently the policy period counted from the date of issuance of the policy) .

Cont..

Burden of Proof is shifted to insured to prove that insured has not done fraud o (presently Burdon of Proof is on Insurer).
3.

Cont..
4. In case of repudiation of the policy within five

years on the ground of mis-statement or suppression of a material fact, and not on the ground of fraud, the premiums collected on the policy till the date of repudiation shall be paid to the insured or the legal representatives or nominees or assignees of the insured within a period of ninety days from the date of such repudiation o [Presently insurer cant have a right to repudiate the contract on the ground that insureds statement or suppression of a material fact, which himself dont know at the time of entering into the contract (i.e. which was not fraud) ].