l -circumstances affecting risk

8/2/2019 L -Circumstances Affecting Risk

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Circumstances Affectingthe Risk


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Matters Affecting the Risk

o Risk in life Ins is the risk of death at anearly date due to disease asdistinguished from accident.

o Thomson v Weems, (1884)

Lord Blackburn observed: those whosebusiness is to insure lives calculate on the

average rate of mortality, and charge apremium which on that average willprevent their being losers.


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o In life insurance facts which tend toshorten the span of the life assuredwould amount to the circumstances

affecting the risk and those facts areregarded as material facts forpurposes of the duty of disclosure.

o

It is common practice for the insurersto put specific question in theproposal form about these facts.


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A life insurer makes enquiries

regarding the following facts, namely,

i) Age of the proponent

ii) His family history

iii) Personal healthiv) Moral history including habits of

life, past and present

v) Geographical position andoccupation


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Age of the Proponent

o Age is an important material fact in lifeinsurance as the rate ofpremiumdepends on the age of the assured.

o

The age is generally proved when thepolicy is issued and if the age isadmitted an endorsement declaring ageadmitted is generally made on thepolicy.

o When once the endorsement in writing isthere on the policy no further proof isnecessary.


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Proof of age

i) Birth register extract from Municipal orother authentic public record

ii) School or college certificate

iii) Certificate of Baptismiv) Passport

v) Domicile certificate

vi) Marriage certificate

vii) Extract from service register in the case ofgovt servants or employees of otherauthorised institutions.


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o Once the age is admitted by the insurer,the correctness of the age cannot bequestioned unless the insurer can prove

that his admission was procured by thefraud of the assured.

o If age is not proved and admitted on the

policy when issued, it should be provedby the assured during the performanceof his contract.


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o It becomes more difficult andinconvenient to prove it for theclaimant after the death of assured.

o When once a date is given as date ofbirth, and on subsequent verificationafter the issue of the policy, the date isfound to be wrong it may result ineither overstatement of age orunderstatement of age.


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o If it is overstatement, it is considered to be aninnocent misrepresentation as it will be against theinterest of the maker and so in such cases thevalidity of the policy is not affected.

o In such cases if the insurer accepts the proof ofage, he can be compelled to refund the excesspayment towards the premium and to adjust therate for future payment according to the provedage.

o

But when it turns out to be an understatement ofage, if it is a gross understatement or is proved tohave been made willfully, it amounts to fraud andthe policy becomes voidable.


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If it does not amount to fraud the insurer may

follow either of the following two courses:

i) The sum assured may be reduced to such

amount as would have been secured if thecorrect age is known at the time when the

policy is issued; orii) 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 earlierperiod and raise the rate of premium forfuture payment.


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Hemmins v Sceptore Life Association,(1905)

o The proposer effected with the insurers anendowment policy payable at the age of 60or at death and negligently misstated herage as 41 years though in fact she was atthat time 44 yrs of age, this fact wasbrought to notice of the insures in 1897and in spite of that the insurers acceptedthe premiums for 2 subsequent yrs.

o

Later they demanded from the assignee ahigher rate of premium and also thedifference of premiums accumulated todate at the revised rate.


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Cont

o The assignee declined to pay the higherrate and tendered the original ratepremium and the insurers refused to

receive the same.o It was held that the insurers had

forfeited their right to claim adjustment

of premium as they accepted the originalrates of premium without protest evenafter they came to know about the errorin age.


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Houseman also observes:

o if after becoming acquainted

with a breach of warranty the

life office continues to treatthe policy as valid it will be

held to have waived the

breach.


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In USA

o The Standard Provisions Law in USAprovides a simpler and better solutionfor this problem by insisting a clause

to be included in every policy to theeffect that if the age of the assuredhas been misstated, the amountpayable and every benefit accruingthereunder shall be said as thepremium paid would have purchasedat the correct age.


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Family History

o The risk in life policies depends onlongevity of the assured and hereditythrows sufficient light and plays an

important role in the determination orthe probable longevity of a person.o Therefore the medical officers usually

put a number of questions about thebirths and deaths of brothers, sisters,

parents and near relation, the diseasesfrom which they suffer then or sufferedin the past, the causes of their death,and ages at their deaths.


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o Family history gives a clue to theinsurers as to the constitution andprospects of longevity of theassured.

o Insanity of the near relatives is oneof the things to be revealed.

o The assured must give correctanswers regarding the familyhistory.


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Asia Assurance Company v Kartiya

Devi, (1936)

o The total number of brothers andsisters had to be filled in one columnand the actual number alive in

another column, the assured filledthe first column but left the otherblank.

o

It was held the answer amounted tosuppression of truth and henceamounted to misrepresentation andthe policy was void.


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Personal Health and Moral History

o The habits of life, past and present and

which tend to shorten the life must bedisclosed, eg. The use ofopium, tobacco or

alcohol.o Question are often asked as to the

temperate habits of the assured.o What is intemperance has nowhere been

defined but it has been held that it is notlimited to such intemperance as would

impair the general health of the assured.


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o The present state of health is materialbecause no prudent insurer wouldunderwrite the life of a person afflictedwith a fatal disease or who is one on adeath bed.

o The past illness also becomes materialbecause sometimes, some kinds ofdiseases leave a permanent effect on the

constitution of the person and shorten hislife, the nature and duration of treatmentbecomes useful to make an enquiry fromthe previous medical attendants.


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Geographical Position

o The place where the applicant lives isimportant as climate and environmenthave an appreciable effect on ones

health.o Unhealthy surrounding have a tendencyto shorten the life.

o Further, the particular place may besubject to earthquake, volcanoes andfloods.

o Therefore the applicant must give hisresidential address.


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Occupation

o Information regarding the occupation is

essential to understand the nature of therisk.

o

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.o If the description is with reference to non-

dangerous occupation, it will not affect the

validity of the policy,


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Section 45 of Insurance Act, 1938

o It lays down that no policy can be challenged after twoyears from the date of the policy on the ground thatany statement made in the proposal or in any report ofthe 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 orhe suppressed the fact material to be disclosed,

providedthat nothing in that section prevents theinsurer from calling for proof of age of the assured or toadjust the rate of premium according to the correct ageproved subsequently.


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LAW COMMISSION OF INDIA 112th REPORT ONSECTION45 OF THE INSURANCE ACT, 1938 (JUNE 1985)

o Under the Chairmanship of Justice K.K. Methew,referred to many judgments and observed that

o whenever claims are repudiated or disputes come tocourts of law, the LIC should not put up fight on the

pattern of ordinary litigants. But it must be on a higherplane so as to inspire confidence in the public thatclaims are not resisted on frivolous pleas and recklessallegations. All the relevant materials gathered by theLIC in the course of its investigation of a particularclaim shall be placed before the court to enable it tojudge the truth. There shall be a frank and fulldisclosure of all the material evidence and no attemptshould be made to suppress or withhold the same.


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Cont..

o Finally, after elaborate discussion onthis section and also compared withUK and USA, had givenrecommendation to change threeyears from two years in section 45.

o But this recommendation was not

been implemented.


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REPORT OF K.P.NARASINHAN COMMITTEE ON

PROVISIONS OF INSURANCE ACT, 1938, (JULY 2005)

observation on section 45:

o The Committee noted theelaborate consideration given in theLaw Commission Report and the

recommendations made withregard to amendments to theprovisions on the policy of lifeinsurance being called in question

on account of any misstatements inthe proposal for other papersleading to the issue of the policy


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o .The Law Commission Report hasrefer to several Court rulings, includingthose of the Supreme Court, and the

Committee considered that there was aquite well settled case law on thesubject that insurers did appreciate,making any amendment of the present

Act provisions unnecessary for anequitable and adequate protection of theinterest of policyholders or of otherbeneficiary claimants.


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Cont..

o This report clearly shows that

there is no necessity of

amendment to the section 45 ofInsurance Act, 1938.


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The new proposed amendment to section 45 ofInsurance Act, 1938 is not consumer friendlybecause of following reasons:

1. Insurers can repudiate the contract on any

ground whatsoever is increased to 5years (Presently it is two years).

2. That five years period counted from thedate 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 fromthe date of issuance of the policy) .


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Cont..

3. Burden of Proof is shifted toinsured to prove that insured

has not done fraudo (presently Burdon of Proof is

on Insurer).


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Cont..

4. In case of repudiation of the policy within fiveyears on the ground of mis-statement orsuppression of a material fact, and not on theground of fraud, the premiums collected on

the policy till the date of repudiation shall bepaid to the insured or the legal representatives ornominees or assignees of the insured within a periodof ninety days from the date of such repudiationo [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 enteringinto the contract (i.e. which was not fraud) ].

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