Report No. 112
Scope of Section 45 of the Insurance Act, 1938
2.1. Scope of section 45.-
Under the English Common Law, contracts of insurance are contracts uberrima fides or contracts of utmost good faith, so that, if the insured had made incorrect statements or suppressed facts, the insurer could avoid the contract even after the policy had been in force for several years and all the premiums paid would be forfeited to the insurer. It had been the practice of the insurer to insert in the policy and the form of proposal, a clause, that all the answers stated formed the basis and part of the terms of the contract. The result was that any variation, whether it was material or not, and however slight the variation may be, gave a right to the insurer to avoid the policy. This caused immense loss and hardship to the insured and more often to his legal representatives, if he was dead, especially to illiterate widows. The section was therefore enacted to modify the rule and to mitigate the rule of utmost good faith.
The contractual right of the insurer to repudiate a claim whenever the inaccuracy or suppression was discovered, was restricted. The section does not affect the insurer's right for a period of two years from the date of the policy, but thereafter, no policy can be challenged on the ground that any statement made in the proposal or in any report of the medical officer or any document was inaccurate or false unless it was material to disclose, and it was fraudulently made, and the policy-holder knew at the time he made it, that it was false; or he suppressed a fact material to be disclosed, provided that nothing in that section prevents the insurer from calling for proof of age of the insured or to adjust the rate of premium according to the correct age.