Mithoolal Nayak vs Life Insurance Corporation Of India

Rewritten Version Notice: This is a rewritten version of the original judgment.

Court: Supreme Court of India

Case Number: C.A. No. 224 of 1959

Decision Date: 15 January, 1962

Coram: S.K. Das, Raghubar Dayal

The case titled Mithoolal Nayak versus Life Insurance Corporation of India was decided by the Supreme Court of India on 15 January 1962. The judgment was authored by Justice S K Das and was delivered before a bench comprising Justice S K Das and Justice Raghubar Dayal. The appeal was recorded as Civil Appellate Jurisdiction Case No. 224 of 1959 and sought to set aside the judgment and decree dated 28 August 1956 rendered by the Madhya Pradesh High Court in First Appeal No. 90 of 1949. Counsel for the appellant included A V Viswanatha Sastri, S N Andley, Rameshwar Nath and P L Vohra, while the respondent was represented by S T Desai, R Ganapathy Iyer and K L Hathi.

The appellant, Mithoolal Nayak, had obtained an assignment on 18 October 1945 of a life‑insurance policy that had been issued on the life of Mahajan Deolal for a sum assured of Rs 25,000. Mahajan Deolal died on 12 November 1946, and following his death the appellant demanded payment of Rs 26,000‑odd from the insurer on the basis of the assigned policy. The insurer responded on 10 October 1947, refusing the claim and stating that Mahajan Deolal had deliberately made false statements and had fraudulently suppressed material information in his answers to the proposal form and personal statement that formed the basis of the insurance contract. After this repudiation the appellant instituted suit against Oriental Government Security Life Assurance Co. Ltd., Bombay, the original issuer of the policy dated 13 March 1945. Subsequently, the Life‑Insurance‑Corporation Act 1956 effected a statutory transfer of the assets and liabilities of the life‑insurance business of all insurers operating in India to a newly created entity called the Life Insurance Corporation of India. By an order dated 16 February 1960, this Court substituted the corporation in place of the original respondent company. For convenience the judgment refers to the Life Insurance Corporation of India simply as “the respondent company,” disregarding the technical distinction between the original insurer and its statutory successor. The Additional District Judge of Jabalpur decreed the suit on 7 May 1949. The respondent company appealed that decree to the Madhya Pradesh High Court, where a Division Bench heard the matter and, by a judgment dated 28 August 1956, allowed the appeal, dismissed the suit and awarded costs to the respondent. The present appeal before this Court arises from that High Court judgment and decree.

The trial court required the applicant to answer a specific health question. The questionnaire asked, “Have you within the past five years consulted any medical man for any ailment, not necessarily confining you to your house?” It further required the applicant to provide details, including names and addresses, of any medical man consulted. Several issues were litigated between the parties before the trial court. The appeal before the High Court turned on four principal questions. The first question concerned whether the policy had been vitiated by fraudulent suppression of material facts by Mahajan Deolal. The second question asked whether the present appellant lacked an insurable interest in the life of the insured and, if that were true, whether he could sue on the policy. The third question examined whether the respondent company had issued the policy with full knowledge of the insured’s health facts and, if so, whether it was estopped from challenging the policy’s validity. The fourth question considered whether, irrespective of the other issues, the appellant was entitled to a refund of the premiums he had paid to the respondent company. These four questions were the matters raised before us, and we will address only those necessary to resolve the appeal. Regarding the first question, the trial judge observed that Mahajan Deolal had answered “no” to question thirteen in the proposal form and to questions 5(a), 5(b), 5(f) and 12(b) in his personal statement. The judge held that, although those answers were not strictly accurate, they did not furnish a basis for the respondent company to repudiate the appellant’s claim. The reasoning was that section 45 of the Insurance Act, 1938 governed the issue and the answers did not amount to fraudulent suppression of material facts as defined by that provision. The learned trial judge also found that the ailments for which Dr. Lakshmanan treated Mahajan Deolal in September‑October 1943 were of a causal or trivial nature, and the policy‑holder’s failure to disclose those ailments did not trigger the second part of section 45 of the Insurance Act. The High Court reached a contrary conclusion, holding that even applying section 45, the policy‑holder was guilty of fraudulent suppression of material facts relating to his health within the meaning of that section, and therefore the respondent company was entitled to avoid the contract on that ground. On behalf of the appellant, it was argued before us that the trial judge’s finding on this issue was correct and that the High Court erred in arriving at a contrary conclusion in light of the evidence presented in the case. The judgment of the High Court is a judgment in reversal, and the appellant possesses a right of appeal under article 133(1)(a) of the Constitution because the value of the subject matter of the dispute in the court of first instance and still in dispute exceeds Rs. 20,000. We have,

In this hearing the Court permitted the counsel for both sides to lead it through the evidentiary material that had been produced in the matter. After reviewing that evidence the Court found that the decision of the High Court was correct. The Court noted that before analysing the facts in detail it would be useful to set out the relevant wording of section 45 of the Insurance Act, 1938, as it existed at the time the case arose. For the purposes of this judgment the provision read as follows: “No policy of life insurance effected before the commencement of this Act shall after the expiry of two years from the date of commencement of this Act and no policy of life insurance effected after the coming into force of this Act shall, after the expiry of two years from the date on which it was effected, be called in question by an insurer on the ground that a statement made in the proposal for insurance or in any report of a medical officer, or referee, or friend of the insured, or in any other document leading to the issue of the policy, was inaccurate or false, unless the insurer shows that such statement was on a material matter or suppressed facts which it was material to disclose and that it was fraudulently made by the policy‑holder and that the policy‑holder knew at the time of making it that the statement was false or that it suppressed facts which it was material to disclose…”. The Court observed that the operative part of section 45 essentially provides that, for policies issued after the Act became law, an insurer may not set aside the contract after the lapse of two years from the date the policy was effected on the basis that any statement in the proposal or related medical report was inaccurate or false. The second segment of the provision is a proviso creating an exception: if the insurer can demonstrate that the inaccurate or false statement concerned a matter of material importance, that the policy‑holder deliberately suppressed information that was material, and that the suppression or falsity was made knowingly and fraudulently, then the insurer is empowered to challenge the policy. The Court then turned to the specific facts of the present case. The life‑insurance policy under dispute had been issued on 13 March 1945 with an intended commencement date of 15 January 1945. The policy provided that the sum assured would become payable on 15 January 1968 or earlier upon the death of the insured, whichever occurred first. The insurer, Life Insurance Corporation of India, had refused to honour the claim in a letter dated 10 October 1947.

By a letter dated 10 October 1947 the respondent company repudiated the claim, and thereby it became evident that more than two years had elapsed since the policy had first been effected. The Court was firmly of the view that section 45 of the Insurance Act was applicable to the present dispute, given the unambiguous language of that provision. The learned counsel for the respondent company had at one stage contended that the revival of the lapsed policy in July 1946 created a fresh contract between the parties, and that, if the two‑year period were to be measured from that revival date, the statutory period would not yet have expired. However, the Court held that, irrespective of whether the revival of a lapsed policy might be treated as a new contract for other purposes, the operative wording of section 45 requires that the two‑year period be calculated from the date on which the policy was originally effected. In the facts of this case the original effect date is the date shown on the policy document marked as Exhibit P‑2. Consequently, from that original date a full two‑year period had clearly expired by the time the respondent company issued its repudiation, and the statutory bar under section 45 was therefore in force.

Because section 45 was found to apply, the Court was relieved of the task of analysing the legal consequences that would arise where the provision does not apply and where inaccurate statements in the proposal form or personal statement form the basis of the contract. The Court then set out the three conditions prescribed in the second part of section 45 that must be satisfied for the insurer to void the contract on the ground of misrepresentation: first, the statement must relate to a material matter or must suppress facts that were material to disclose; second, the suppression must have been made fraudulently by the policy‑holder; and third, the policy‑holder must have known at the time of making the statement that it was false or that it concealed material facts. The pivotal issue for determination was whether these three conditions were fulfilled in the present case. The Court concluded that they were indeed satisfied. The Court could not accept the learned trial judge’s view that the ailments for which Mahajan Deohal had been treated by Dr Lakshmanan in September‑October 1943 were trivial or casual. Nor could the Court agree that Mahajan Deolal might have forgotten in July 1944 that he had received treatment for serious conditions only a few months earlier. The evidence of Dr Lakshmanan was clear and unequivocal. Dr Lakshmanan testified that Dr Motilal Nayak had brought the patient to him in Jabalpur. The Court had already noted that Dr Motilal Nayak had made a false declaration in his friend’s report dated 17 July 1944, when he stated that he had never …

In this case the Court considered the testimony of Dr Lakshmanan, who examined Mahajan Deolal on several occasions in 1943. The Court observed that Dr Motilal Nayak had previously asserted in a report dated 17 July 1944 that he had never heard of any illness affecting the insured. The Court found it implausible that Dr Motilal Nayak could forget that he himself had escorted the insured to Jabalpur to be treated by Dr Lakshmanan, who was a recognised consulting physician. According to Dr Lakshmanan’s evidence, the first examination of Mahajan Deolal took place on 7 September 1943, at which time the physician diagnosed a serious condition caused by the poor quality of the patient’s blood. Dr Lakshmanan reported that Mahajan Deolal was suffering from anaemia, oedema of the feet, diarrhoea and shortness of breath on exertion. He ordered a blood test, and the pathological report confirmed secondary anaemia, meaning the anaemia was due to iron deficiency and malnutrition. Dr Lakshmanan further concluded that, based on the disclosed symptoms, the disease was of a major nature. He also noted that Mahajan Deolal had cardiac asthma, a manifestation of anaemia associated with dilation of the heart. The physician saw the patient again on 9 September 1943 and on 16 September 1943. On 6 October 1943 Mahajan Deolal visited Dr Lakshmanan personally, and on that date the doctor observed that the anaemia had markedly improved. During cross‑examination Dr Lakshmanan admitted that the anaemia, heart dilation and cardiac asthma were transient conditions that could lessen with treatment, and he also admitted that his letter to the respondent company omitted any mention of cardiac asthma. After carefully evaluating Dr Lakshmanan’s testimony, the Court could not accept the view that the ailments suffered by Mahajan Deolal were trivial or casual; rather, they were serious although amenable to medical care.

The Court also recorded the evidence of Mahajan Deolal’s son, who testified that although Dr Lakshmanan had prescribed medication, his father did not take the medicines. The son explained that his father was a strict vegetarian and that the physician had recommended fresh liver juice, prepared at home according to the doctor’s directions, to be taken three times daily, together with iron sulphate tablets taken with plenty of water. The son further described that, during his father’s stay in Jabalpur, Mahajan Deolal experienced weakness but was still able to move about freely and was never confined to bed. The son appeared to try to present his father’s condition as insignificant. Dr Lakshmanan testified that his professional fee for each visit to Jabalpur was Rs 16. The Court agreed with the High Court that if Mahajan Deolal had not been suffering from a serious ailment, he would not have been transported by Dr Motilal Nayak from his village to Jabalpur, nor would he have consulted a physician of Dr Lakshmanan’s reputation for several days at a fee of Rs 16 per visit. The Court therefore concluded that the evidence demonstrated the seriousness of the illness and rejected the son’s attempt to downplay it.

In this case the appellant attempted to minimise the seriousness of his father’s illness, yet the testimony of Dr Lakshmanan made clear that during the months of September and October 1943 Mahajan Deolal suffered from a serious form of anaemia for which Dr Lakshmanan provided treatment. The appellant could not have forgotten this treatment when he gave his statements in July 1944, a short time after the medical episode, and he should have realised that the existence of such a condition was material information that needed to be disclosed to the respondent insurance company. However, in answering the questions posed to him, the appellant not only omitted the required disclosure but also asserted falsely that he had not been treated by any doctor for any serious ailment such as anaemia, shortness of breath, or asthma. This omission amounted to a deliberate suppression of a material fact. Under section 17 of the Indian Contract Act, 1872 (IX of 1872), fraud includes, inter alia, (1) suggesting a false fact that the party does not believe to be true, and (2) actively concealing a fact that the party knows or believes to exist. Applying the standard set out in that provision, the appellant’s statements of 16 July 1944 were clearly fraudulent suppressions of material facts, made with knowledge of their falsity. Consequently, the Court agreed with the High Court’s finding on the first question and held that the appellant was guilty of fraud by suppressing material information.

The Court then turned to the third question raised by counsel for the appellant. The appellant’s counsel argued that the respondent company had examined Mahajan Deolal under the direction of four physicians—Dr Desai, Dr Kapadia, Dr Belapurkar, and Dr Clarke—and that the appellant had correctly disclosed prior illnesses of malaria, pneumonia, and cholera. It was further submitted that Dr Kapadia had been specifically instructed to examine the appellant because of conflicting reports previously submitted by Dr Desai, and that, on this basis, the respondent company possessed full knowledge of all facts relevant to the appellant’s health. Accordingly, counsel contended that the company could not rely on the inaccurate answers given in the proposal form and personal statement to call the policy. The appellant’s counsel also cited the Explanation to section 19 of the Indian Contract Act in support of this position. The Court found this argument unpersuasive. While it is undisputed that the appellant was examined by four doctors and that the earlier points raised by counsel were accurate, the Court could not accept that the company’s knowledge of the examinations negated the appellant’s fraudulent nondisclosure. The Court therefore rejected the appellant’s reliance on the Explanation to section 19 and proceeded to address the remaining issues on the merits.

The Court noted that the respondent company possessed the conflicting medical reports prepared by Dr Desai and that it had expressly directed Dr Kapadia to examine Mahajan Deolal in light of the reports submitted by Dr Desai. Nevertheless, the Court pointed out that the company had no way of being aware that Mahajan Deolal had received treatment for a serious condition described as secondary anaemia followed by dilatation of the heart during September‑October 1943, treatment that had been provided by Dr Lakshmanan. The Court further held that it could not be assumed that, even if the company had known of those facts, the knowledge would not have altered its decision. The principle underlying the Explanation to section 19 of the Indian Contract Act states that a false representation, whether fraudulent or innocent, is immaterial if it does not induce the party to whom it is made to enter into a contract. The Court found that this principle did not apply to the present case. The policy terms clearly stipulated that the statements made regarding the insured’s health in the proposal form and the personal statement formed the basis of the contract between the parties. Moreover, the fact that Mahajan Deolal had deliberately falsified or concealed his treatment for a serious ailment by Dr Lakshmanan only a few months before obtaining the policy demonstrated that the falsification and concealment were material to securing the other party’s consent. The Court observed that a person who has acted in such a manner cannot subsequently claim that “it could have made no difference if you had known the truth.” Accordingly, the Court concluded that no question of waiver arose and that the appellant could not rely on the Explanation to section 19 of the Indian Contract Act. Turning to the remaining issue, the Court considered whether the appellant was entitled to a refund of the premiums paid to the respondent company. One of the policy provisions expressly provided that any monies paid in connection with the policy would belong to the company if the policy was vitiated by the insured’s fraudulent suppression of material facts. The Court agreed with the High Court that where a contract is void on the ground of fraud, the party responsible for the fraud, or any person claiming under that party, cannot seek a refund of the amount paid. It is a well‑established principle that courts will not entertain an action for money had and received where the plaintiff must prove his own fraud in order to succeed. The Court also concurred with the High Court that, in situations where a contract contains a stipulation that a breach of warranty by one party discharges the other party from performance, neither section 65 nor section 64 of the Indian Contract Act is applicable.

In view of the reasons that had been set out earlier, the Court examined the factual and legal submissions presented by the parties. After considering those reasons, the Court concluded that the appeal did not disclose any point of law or fact that could sustain a reversal of the lower court’s order. Consequently, the Court held that the appeal was wholly lacking in merit and therefore could not be allowed to proceed further. Accordingly, the Court ordered that the appeal be dismissed in its entirety and that the respondent be awarded costs of the proceedings. The order confirming the dismissal of the appeal also incorporated a direction that the costs be borne by the appellant as part of the final relief. No further relief was granted to either party beyond the cost award, and the judgment of the lower tribunal stood affirmed. Thus, the appeal was dismissed with costs, and the decision conclusively terminated the litigation that had been pending between the two parties. The judgment reaffirmed the established principle that a contract obtained through fraudulent concealment cannot be upheld by the party who engaged in the fraud. Accordingly, any claim for restitution of premiums paid could not succeed where the insured had deliberately suppressed material information.