Analysis of Section 45 of Insurance Act, 1938

Introduction:

Life Insurance helps people secure the financial future of their family in the event of an unfortunate death during the term of the policy. While choosing a life insurance policy from an insurer, it is seen that a question is often asked about section 45 of the Insurance act of 1938. According to this section, the first three years of a policy life insurance are an important period because no insurer can question the claim if the death of an insured occurs after this period. Therefore, you should always see the details of Section 45 which is usually seen in the last section of the policy.

If you want a life insurance plan for you and your family, you must understand Section 45 of this act exhaustively. Well, this article might help you to understand this section better as we will discuss the important points related to it.

Everybody wants that their family should be protected and that is why they buy life insurance policies and certain terms and conditions are with the agent but what happens when one goes for the claim and if the person has already died his family members go for the claim and it was seen that insurance companies investigate the claim and tried to reject the claim as much as possible this was like their tradition. Because of which people were afraid of taking insurance they had the apprehension that they would pay the premium regularly but once the claim arose the insurance company would reject the claim stating one or the other reason. So for this kind of practice the Insurance Regulatory and Development Authority of India (IRDAI) came into the protection of the Insurance holder and made changes within Section 45 of the Insurance Act in the year 2014 and now the insurance companies cannot reject a claim just like that. So the insurance holders can have faith in the insurance they can buy one and protect their family.

Amendment of Section 45, the Insurance Act, 1938

This amendment is very beneficial for the policyholders and it has grown trust among the insurance holders. So what is section 45?

Section 45^[1] says “No policy of life insurance shall be called in question on any ground whatsoever after the expiry of three years from the date of issuance of the policy or the date of commencement of risk or the date of revival of policy or the date of the rider to the policy, whichever is later.”

This means that the insurance regulator has given only three years to the insurance companies to investigate the proposal if the insurer, insurance holder is paying the premium for three years and if thereafter the insurance claim arises then the insurance companies cannot reject the claim on any ground ‘whatsoever’ they cannot reject the claim.

The next question that might come to one’s mind is, from when do these three years commence from and when does it come to an end? Let’s look into each time condition one by one.

1. The date of issuance of the policy: This means once you have made the premium and have bought the policy then the insurance company will hand over the policy bond from that date the three years will be calculated. Suppose a person has bought the insurance and received their insurance on 1st January 2021 so after three years i.e; 1st January 2024 is the last date up to that date the insurance company can investigate the claim if they receive any claim but if the claim comes after 1st January 2024 the company cannot reject the claim on any grounds.
2. The date of commencement of risk: Many a time the risk commencement doesn’t need to start from the date of issuance. In the case of LIC Policy where a policy is issued to small kids of zero-days or 60 days in such circumstances, the commencement date of risk will start in the future. If a person has bought a policy on 1st January 2021 but the kid was 7 years old. In the small kid’s policy, it is seen that the risk starts after the kid is 8 years old. So the commencement risk in this scenario will start on 1st January 2022 and end on 1st January 2025. Here the insurance company cannot reject the claim three years after the commencement of the risks.
3. The date of revival of the policy: This is the third condition stated in this section. Sometimes it is seen that people pay the premium of the insurance and sometimes they forget to pay the premium or are not able to pay due to some financial difficulties. So what happens is after a certain number of years like after two or three years the person goes to the insurance company and pays the remaining premium and starts the policy that is you revive your policy. In such cases, the three years will be considered after the revival of the policy. The policy lapsed and was revived on 1st January 2024 and will end on 1st January 2027. Section 45 will be applicable only after 1st Jan. 2027. It doesn’t matter if the policy was bought in which year. If the policy lapsed and was revived again after a certain time the counting of three years will be done from the date the policy was revived.
4. The date of the rider to the policy: It is seen that many times people forget to take the riders and subsequently add the riders like the critical illness rider or the accidental death benefit rider. Riders are the add ons on the base policy that provides additional benefits to suit one’s needs. So the date of three years will start from the rider date. So if a person has taken the accidental rider on 1st Jan. 2022 so the three years will be complete on 1st Jan. 2025. 

So these are the four conditions mentioned in section 45. It is highly recommended that whenever you buy a policy, pay the premiums regularly so that the three years window can start from the very first day. If you leave your policy mid-way then you will have to serve the three-year window again. So the chances of claim rejections are very less after this amendment.

Even if the policyholder did not tell correct information or has forgotten to disclose information or forgot to tell about some disease. Even though he has done all these things his claim cannot be rejected after three years. The insurance company will have to pass the claim. So this is the kind of booster given by the insurance regulator to the insurance holders. Now the holders have an upper hand over the insurance companies.

What did Section 45 state before its amendment?

Before the amendment^[2] (which came into effect on December 26, 2014), if a policy was contested, the insurer had to meet all three conditions mentioned in the second half of this section to question the policy after two years from the date it came into effect.

• The date of effect was widely interpreted as the start date as Section 45 was silent on the terms of revival before its amendment.
• For many years Courts have been divided at the opinion as to whether or not the date of effect could suggest the date of revival also, the dispute is now placed to relax because it has been especially mentioned that the 3 years timeline reckons from the date of revival.
• According to Section 45 (before the amendment), the insurer had to prove the materiality of the concealed fact, the fraud, and the deception. If such claims were done two years after the date of effect.
• Before the change, a policy could be terminated at any time during the term of the policy under the burden of the insurer. After the changes, a policy cannot be questioned after the end of three years from the policy issue date or the date of risk commencement or the revival date of the policy, or the date of adding a rider to the policy whichever occurs later as mentioned earlier.
• After the amendment, a policy can be rejected for either (a) fraud or (b) suppression of facts relevant to life expectancy, but not for fraud.

The result of the above discussion is therefore that a policy cannot be challenged based on “fraud” if the insured could prove that the misrepresentation or deletion of a material fact was true to the best of its knowledge or belief, or that the insurer was not deliberate. Intended to conceal the facts or that such a false indication or concealment of an essential fact is known. Unless it is directly related to the risk assumed by the insurer. Up to now, the burden of proof for the relevance of facts, fraud, and deception rests with the insurer.

What is fraud under Section 45 of the Insurance Act?

According to Section 45 of the Act, fraud^[3] means any of the following acts by the policyholder or his agent to mislead the insurance company or cause it to issue a life insurance policy.

• The indication is a fact of what is not true and what the insured does not consider to be true.
• A fact which is actively concealed by the insured person who has this knowledge or conviction.
• Any other act likely to mislead the insurance company Special Acts or omissions declared fraudulent by law.

Important Note: Mere silence will not be taken into consideration as an act of fraud until it’s far the responsibility of the policyholder or his/her agent to preserve silence to speak, or silence is in itself identical to speaking. It will even rely upon the situation of a specific case.

When a policy is called into question due to the life expectancy of policyholders?

A life insurance policy can be challenged within 3 years due to any statement or suppression of a fact related to the insured’s incorrect life expectancy in an application form or any other insurance document. For this purpose, the company must inform the policyholder or his legal representative or agents in writing on what basis and on what materials the decision to reject the claim is based.

What if the rejection is based on false information and not on fraud?

In this case, the insurance premium charged up to the date of rejection will be paid to the Insured or his legal representative or agents within 90 days of the date of rejection.

Will section 45 of the Insurance Act apply to the issue of age?

no, this section does not apply to the issue of age or adjustments based on proof of age submitted at the later stage. The insurance company can request proof of age at any time. However, the policy will not be called into question just because the terms of the policy are adjusted based on the later evidence of the policyholder’s age.

What will be considered as ‘material fact’ in a life insurance policy?

The court in Mithoolal Nayak’s case has ruled that the suppressed illnesses were not trivial or accidental but were serious (note: what is serious depends on the circumstances of the case and the nature of the suppressed illness); and therefore constituted a “material suppression.” The term “material fact” is not defined in this act and has therefore been generally understood and declared by the courts to be any fact that could influence the judgment of a prudent insurer when setting the premium or determining if he/she wants to take the risk. Any facts that go to the root of the insurance contract and are related to the risk involved would be treated like “material”- the Hon’ble SC of India stated this in Satwant Kaur Sandhu Vs New India Assurance Co. Ltd^[4].

Landmark Cases that mentioned Section 45 of the Insurance Act

In Reliance Life Insurance v. Rekhaben Nareshbhai Rathod^[5], the respondent’s spouse took out a life insurance policy from the appellant in 2009. Previously in 2009, the respondent had a life insurance policy from Max New York Life Insurance Co.Ltd. The Appellant was not made aware of this information when they issued the policy to the respondent. After the Respondent’s spouse died, she made use of the policy in February 2010. Max New York informed the complainant that the respondent’s spouse had previously been insured with their company. The appellant thereupon rejected the claim together with the respondent.

After this, the respondent filed a complaint in district court which was dismissed on the grounds of non-disclosure. The State Commission and National Commission favored the respondent stating that the insured’s failure to disclose a previous policy would not affect the opinion of a prudent insurer.

Later the appellant filed an appeal against the ruling of NCDRC in the Supreme Court. The legal provisions included in this case were Section 45 of the Insurance Act 1938 which states the time limit within which the policy can be brought into question. Section 17 and Section 19 of the Contract Act 1872 talk about the Fraud and voidability of agreements without free consent and Article 142 of the Indian Constitution.

After deeply studying the requirements of Section 45 the hon’ble court held that

• Every fact of the material must be disclosed, otherwise, this constitutes a reason for the termination of the contract. If facts are withheld, the policy can be called into question.
• A mediclaim policy is intended to protect the insured against expenses in connection with injuries, accidents, or hospital stays. It is non-life insurance, but it is an insurance contract and falls into the contract.

The court supported the appellants and did not agree with the rulings of NCDRC. The respondent was also permitted to withdraw 50 percent of the amount.

In this case, the court took a clear stand about Section 45 of this act and where it is applicable.

Another landmark case where suppression of material facts affects the claim of the policy was discussed was Mithoolal Nayak v. LIC^[6]. Here the appellant took out life insurance for 25,000 rupees for the lifetime of Mahajan Deolal. After Mahajan Deolal’s death, the claim was rejected on the grounds of misstatement. Dr. Desai checked and reported that Mahajan looked 55 years old compared to what he had claimed, i.e. 45 years old and suffered from pneumonia. The company suggested that 2 other doctors examine him.

It was stated that Mahajan gave a negative answer to the question, “Have you seen a doctor for treatment in the last 5 years?” The respondent company had claimed that the answer given was a lie because Dr. P.N. Lakshman from Jabalpur said that he had treated Mahajan who was suffering from diarrhea and panting. On the other hand, the brother of the appellant who also was a doctor stated in his report that Mahajan was fit and healthy. Whereas the death certificate showed that Mahajan’s cause of death was Malaria with Diarrhoea and anemia. The Hon’ble Supreme Court upheld these contradictions.

The issue in front of the case was to decide, whether a policy can be held void due to suppression of material facts by Mahajan and whether the appellant is entitled to a refund of money paid?

The court held that the policy is void and contestable because the insured person replied in the negative to the question that he was never treated for an illness. Not only did the deceased fail to report that he had received medical treatment, but also made a false claim that he had not received medical treatment, suggesting that the intent was to deliberately suppress the material circumstances.

On the second issue, it was held because of company policy, money was paid as a bonus. The policy has been annulled for the suppression of facts. If a contracting party violates its contractual promise, the other contracting party is released from fulfilling its part of the contract. The court ruled in the favour of the insurance company.

Conclusion

Life insurance secures the financial future of a family in the event of premature death within the contract period. People ask about section 45 of the Insurance Act when choosing a life insurance plan from an insurer. According to this, the first three years of life insurance are important as no insurer can contest a claim if the insured dies afterward. When taking out life insurance, the insured must disclose all essential facts. A person buying the insurance should always read terms and conditions before signing the proposal because once a person signs the insurance paper, it is presumed by law that all questions are read and filled. So it is always advised to be vigilant and buy life insurance so that your loved ones don’t have to suffer in the future because of your actions. 

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References:

^[1] Life Insurance Plan Info 2021, Section 45 of Insurance Act, 1938, LIC INSURANCE ONLINE (Jan. 10, 2021), https://licinsurance.online/section-45-of-insurance-act-1938/?amp=1

^[2] Srinivasan Rangarajan, The relevance of Mithoolal Nayak’s case after amendments to Section 45 of the Insurance Act, 1938, LAWYERSCLUBINDIA (June 08, 2021) https://www.lawyersclubindia.com/articles/the-relevance-of-mithoolal-nayak-s-case-after-amendments-to-section-45-of-the-insurance-act-1938-733.asp

^[3] Wish Policy Articles, Section 45 of the Insurance Act, WISHPOLICY (April 22, 2021), https://www.wishpolicy.com/articles/section-45-of-the-insurance-act/

^[4] Satwant Kaur Sandhu v. New India Assurance Company Ltd, (2009) 11 S.C.R. 2006.

^[5] Reliance Life Insurance Co. Ltd vs. Rekhaben Nareshbhai Rathod, 15 (2001) 2 S.C.C. 160.

^[6] Mithoolal Nayak vs. Life Insurance Corporation of India, 1962 AIR 814, 1962 SC Supl. (2) 571.