“Insurance is a contract of speculation. Good faith forbids either party, by concealing what he privately knows, to draw the other into a bargain from his ignorance of the fact, and his believing the contrary.”
– Lord Mansfield, Carter v. Boehm, (1766) 3 Burr 1905.
What is necessary to be disclosed are ‘material facts’ which phrase is not definable as such, as same would depend upon nature and extent of coverage of risk under a particular type of policy. In simple terms, it could be understood, any fact which has a bearing on the very foundation of a contract of insurance and risk to be covered would be a ‘material fact’.
Explanation to Section 2(d) of Insurance Regulatory and Development Authority (Protection of Policyholders’ Interests) Regulations, 2002 throws light on what is ‘material’. It means and includes all ‘important’, ‘essential’ and ‘relevant’ information in context of guiding an insurer in deciding whether to undertake risks or not.
The basic test hinges on whether mind of a prudent insurer would be affected, either in deciding whether to take risks at all or in fixing premium, by knowledge of a particular fact if it had been disclosed.
– Hon’ble Justice B.V. Nagarathna, Manmohan Nanda v. United India Assurance, [Civil Appeal No. 8386 of 2015].
The general law on avoidance of a contract was explained in Canara Bank v. United India Insurance Co. Ltd., (2020) 3 SCC 455: “To make a contract void, non-disclosure should be of some very ‘material fact’.“ What is a ‘material fact’ was explained in Satwant Kaur Sandhu v. New India Assurance Co. Ltd., (2009) 8 SCC 316. Tarsem Singh v. Sukhminder Singh, (1998) 3 SCC 471 clarified, a unilateral mistake would not render a contract void. Unless a unilateral mistake about terms of a contract is so serious as to adversely undermine entire bargain, it does not result in automatic avoidance of a contract.