'Undeclared life insurance?' SC says disclose or risk losing your claim!

In a recent ruling, the Supreme Court of India addressed the issue of whether failure to disclose existing life insurance policies while purchasing a new one could justify claim rejection. The verdict, delivered by Justices B.V. Nagarathna and Satish Chandra Sharma, reaffirmed the principle of utmost good faith ("uberrima fides") in insurance contracts. The Court emphasized that policy applicants must reveal all relevant details that could influence an insurer’s decision to underwrite the policy.

Case Overview

The dispute originated when the appellant’s father secured a life insurance policy worth Rs 25 lakh from Exide Life Insurance. However, upon his passing, the insurance company declined the claim on the grounds of "material non-disclosure." Exide Life asserted that while the policyholder had mentioned a plan from Aviva Life Insurance, he had omitted information about other existing life insurance policies. This, according to the insurer, constituted a failure to disclose material facts, leading to claim rejection.

Legal Interpretation and Expert Opinions

According to Ravi Bhadani, Partner at SNG & Partner Advocates & Solicitors, the core function of life insurance is financial protection, aligning coverage with an individual’s financial exposure. Insurers determine coverage amounts based on an applicant’s total insured value. Omitting existing policies prevents insurers from accurately assessing risk, which could lead to policy cancellation or claim repudiation due to misrepresentation. Despite this, the Supreme Court ruled in favor of the appellant, considering the materiality of the undisclosed policies. The Court noted that the declared policy value (Rs 40 lakh) significantly outweighed the undisclosed term plans (Rs 2.3 lakh), rendering the non-disclosure immaterial to the insurer’s risk assessment.

Materiality of Disclosure

The ruling underscored that not all omissions should automatically result in claim denial. The significance of non-disclosed information must be evaluated on a case-to-case basis. Mohak Marwah, Senior Manager, Growth Advisory at Aranca, explained that an applicant’s insurance history aids underwriters in assessing risk, determining eligibility, and setting premium rates. Surinder Bhagat, Vice President at Prudent Insurance Brokers, elaborated that insurers calculate coverage based on an individual’s Human Life Value (HLV), which reflects their earning potential. Inaccurate or incomplete disclosure of policies can lead to over-insurance and disrupt an insurer’s financial risk assessment. While undisclosed small-value policies may not impact claims, omitting a significant existing policy can raise concerns.

The principle of full disclosure extends to health insurance as well. In health policies, non-disclosure of prior coverage can indicate past claims or undisclosed medical conditions, which directly affect underwriting decisions. Failure to disclose critical medical history could lead to claim rejection under misrepresentation clauses. The Supreme Court’s ruling has sparked discussions on whether it will discourage individuals from holding multiple life insurance policies. According to Rakesh Goyal, Director of Probus Insurance, some policyholders might hesitate to take additional coverage due to concerns over increased premiums or stricter scrutiny. Others may worry that minor omissions could lead to disputes or claim rejections.

However, legal experts suggest that the judgment offers a balanced approach. Alay Razvi, Managing Partner at Accord Juris, noted that the verdict prevents insurers from rejecting claims based on technicalities unless the omission materially affects underwriting. This ensures protection for policyholders against arbitrary claim denials while reinforcing the necessity of transparency in disclosures.

Judiciary’s Balanced Stance on Non-Disclosure

Yatharth Rohila, Advocate & Partner at Aeddhaas Legal LLP, highlighted that insurers must substantiate that non-disclosure was deliberate and significantly impacted their decision to issue the policy. Without such proof, insurers cannot void a policy or deny claims merely based on an omission. This precedent strengthens consumer protection while maintaining insurers’ right to assess risk fairly.

Does Disclosing Multiple Policies Affect Premiums?

The disclosure of prior policies does not necessarily result in increased premiums unless there is a history of fraudulent claims or policy misuse. Marwah clarified that an individual’s past insurance records do not automatically lead to higher rates unless they indicate frequent claims or misleading information. Narendra Bharindwal, Vice President of the Insurance Brokers Association of India (IBAI), stated that insurers assess financial justification rather than using existing policies to inflate premiums. In health insurance, while past claims history can influence premium pricing, merely holding multiple policies does not impact costs.

Transparency Remains Key

While the ruling underscores the importance of honest disclosure in insurance applications, it also ensures that insurers cannot misuse technical omissions to reject legitimate claims. Policyholders must be mindful of full disclosure to avoid complications, while insurers must adopt a fair and case-sensitive approach when assessing claims. This decision strengthens consumer rights and provides clarity on how non-disclosure should be evaluated in future insurance disputes.