The Non-Smoker Who Smoked: Material Non-Disclosure, Section 45 and the Agent's Duty
Rohit Mehra, 47, a sales manager earning ₹18 lakh a year, applies for a ₹1 crore, 30-year term plan at an annual premium of about ₹26,000. On the proposal form he ticks 'non-smoker' although he has smoked 8-10 cigarettes a day for 20 years, and he omits a 2019 hospitalisation for chest pain. The medical reports, collected by the agent Farah, show HbA1c 7.8%, BMI 31 and blood pressure 148/94 on medication. Farah knows about the smoking and the hospitalisation because she collected the reports, and she tells him, 'Don't worry, they only investigate if you die in the first year.' The policy is issued at standard rates and the first premium is paid by cheque from Rohit's own account. Fourteen months later Rohit dies of a myocardial infarction. The nominee files a claim, and the insurer's investigation reveals the smoking history, the 2019 hospitalisation and the diabetic markers.
1. Can the insurer repudiate the claim fourteen months after issue? Explain the legal test and what the insurer must prove.
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Yes, repudiation is legally open, but it is not automatic.
The time test (Section 45, Insurance Act, 1938). A life policy may be called in question on the ground of fraud or misstatement only within three years from the later of the date of issue, commencement of risk, revival or rider. Fourteen months is well inside that window, so the policy is still 'questionable'.
The procedural test. Before calling the policy in question the insurer must communicate in writing the grounds and the materials on which its decision is based, and give the policyholder an opportunity to respond. A bare repudiation letter that does not disclose the investigation findings is defective.
The substantive test. Life insurance is not a contract of indemnity, so the insurer does not need to show the non-disclosure caused the death. It must show that the facts were material, that they were within Rohit's knowledge, that they were not disclosed, and that a prudent underwriter would have rated, postponed or declined the risk. Here smoking, a chest-pain hospitalisation and HbA1c 7.8% are plainly material to a ₹1 crore term risk; a standard-rate issue is implausible once these are known.
If materiality is established, the insurer may repudiate; where fraud is proved it may also forfeit premiums under the proviso to Section 45(2). If it cannot prove materiality, it must pay the ₹1 crore with interest for delay.
2. What would a prudent underwriter most likely have done with this risk, and how does the financial side of the proposal look?
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Medical/financial picture. A 47-year-old male smoker with HbA1c 7.8% (poorly controlled diabetes), BMI 31 (obese) and treated hypertension at 148/94 presents three overlapping cardiovascular risk factors. Insurers usually load rather than decline such cases, but the combination often pushes into postponement until control improves.
Likely outcomes, in order of preference for the insurer:
- Postpone for 6-12 months with evidence of HbA1c below 7.0%, BP below 140/90 and weight reduction, then reconsider at a rated premium.
- Accept with an extra mortality rating. A typical loading might be in the region of 75-150% of standard mortality, i.e. a premium of roughly ₹45,000-65,000 for ₹1 crore, plus a smoker rate. Ratings are expressed as EMR multiples and translated into a percentage loading on the tabular premium.
- Decline if the reports showed unstable ischaemic heart disease or albuminuria.
Financial underwriting. ₹1 crore against ₹18 lakh income is about 5.5 times income. Standard practice allows roughly 10-15 times income for a term plan at this age, so no financial over-insurance issue arises; the risk here is medical and moral, not financial. The moral hazard comes from the agent's coaching to conceal, which is itself a red flag in the file.
3. Assess Farah's conduct and what action she and the insurer should expect.
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Farah has crossed from poor advice into a regulatory breach.
Code of Conduct. Under the IRDAI (Insurance Agents) Regulations, 2016, an agent must make a true and complete disclosure of all material facts to the insurer, must not misrepresent the policy or its terms, and must not induce a proposer to withhold information. Her statement that 'they only investigate if you die in the first year' is a misrepresentation of Section 45 and of the claims process. Because she personally collected reports showing the smoking and the diabetic markers, she cannot claim ignorance.
Consequences. IRDAI can suspend or cancel her licence and impose penalties; the insurer can terminate her agency and seek indemnity for any loss it suffers. If the claim is paid because materiality cannot be proved, the insurer may still act against her for the defective proposal. There is no rebate here, so Section 41 (rebate penalty up to ₹10 lakh) is not the operative provision, but the conduct rules bite regardless.
Correct practice. She should have recorded the smoking and hospitalisation on the proposal, attached the reports and let the underwriter rate the risk. A rated or postponed policy is a lawful sale; a standard-rate policy obtained by concealment is not, and it leaves the nominee fighting for a claim fourteen months later.