Insurable interest and the duty of disclosure across three proposals
Ravi Mehta, 38, a Nagpur trader, wants a ₹25,00,000 endowment policy on the life of his wife's brother, Anand, 41, a salaried engineer. Ravi will pay every premium, sign as proposer and name himself nominee so that 'the money stays in the family'. That same week he asks for two more proposals: ₹40,00,000 on his business partner Suresh, under a written buy-sell agreement that each partner will buy the other's share on death; and ₹8,00,000 on his friend Kamal, who has borrowed ₹8,00,000 from Ravi against a promissory note. While filling Anand's form, Anand mentions an angioplasty two years ago. Ravi tells the agent, 'Leave it out, it was minor and the doctor has certified fitness.' The agent, chasing his monthly target, ticks 'No' against every medical question and takes the signed declaration.
1. For each of the three lives, state whether insurable interest exists, the test you apply, and what you would recommend to the branch.
Read the worked answer
Test applied: insurable interest means a pecuniary loss on the death of the life assured, arising from a relationship recognised by law. It must exist when the proposal is made; life insurance is not a contract of indemnity, so the full sum assured is paid even if the interest later stops.
- Anand (brother-in-law): no. Relationship by marriage creates no presumption of insurable interest, and Ravi neither depends on Anand nor loses money on his death. Paying the premium and being nominee do not create interest, and nomination only gives a right to receive the claim; it does not make Ravi the owner of the policy. Recommend: decline the proposal as framed; Anand should be proposer and policyholder on his own life, with Ravi as a permitted third-party premium payer if desired.
- Suresh (business partner): yes. A partnership plus a written buy-sell agreement means Suresh's death causes a measurable loss. Recommend: each partner insures the other for the buy-out value, with consent and a copy of the agreement on record.
- Kamal (debtor): yes, but limited to ₹8,00,000, the debt outstanding, and to the repayment period. A larger cover would be speculative. Recommend: sum assured not exceeding the loan, ideally with assignment to the creditor.
2. How should the branch treat the undisclosed angioplasty, and what are the consequences for Ravi and the agent?
Read the worked answer
An angioplasty two years before the proposal is a material fact: a prudent insurer would want it before deciding whether to accept the risk, charge an extra premium or decline. The duty of disclosure rests on the proposer and life assured who sign the declaration; an agent cannot waive it and has no authority to decide what is 'minor'.
Consequences if it stays hidden:
- If a claim arises within three years of issuance, the insurer may call the policy into question, repudiate it and refund premiums as per policy terms - the family loses the cover it paid for.
- The agent has abetted a false declaration. That is a breach of the agent's code of conduct and can lead to agency termination and IRDAI penalties; the branch also faces a conduct and audit finding.
- The premium charged is wrong: after medical underwriting the policy might carry an extra premium or a postponement/exclusion, so the policyholder is being sold a contract that may never pay.
Action: correct the proposal before submission - disclose, attach treatment records, and let the medical officer call for tests. Better an extra premium now than a repudiation later.
3. Assume the policy is issued without disclosure. A death claim arises in the fourth year. Can the insurer repudiate? Explain with reference to the law in force.
Read the worked answer
This is governed by Section 45 of the Insurance Act, 1938, the period running from the date of issuance (or from revival, if the policy was revived later).
- Within three years: the insurer may call the policy in question on the ground of misstatement or suppression of a material fact, and may repudiate after giving the prescribed notice; premiums are then refunded as per policy terms.
- After three years: the policy cannot be called in question on the ground of fraud or misstatement unless the insurer proves that the policyholder knowingly, and with intent to defraud, gave false information or suppressed material facts. The bar is not absolute, but the burden shifts heavily to the insurer.
So for a claim in year four, a bare omission may not be enough; the insurer must prove deliberate intent to defraud. That is a costly, uncertain fight for the family. Note also that a death by accident may have no connection with the suppressed illness, which weakens the insurer's causation argument. Advice to the customer: disclose at the proposal stage; Section 45 is a protection for honest policyholders, not a licence to conceal.