Sudarshan Vohra & Another vs Life Insurance Corporation Of ...
2010 Latest Caselaw 1137 Del

                                                     REPORTABLE

*             IN THE HIGH COURT OF DELHI AT NEW DELHI

+            WRIT PETITION (CIVIL) NO. 5605 OF 2008

                            Reserved on : 11th December, 2009.
%                           Date of Decision : February 26th , 2010.

SUDARSHAN VOHRA & ANR.                  .... Petitioners.
                    Through Mr. Ankur Singhal, advocate.

                               VERSUS

LIFE INSURANCE CORPORATION OF INDIA .... Respondent.
                     Through Mr.Mohinder Singh and Ms.
                     Diksha Ahuja, advocates.
CORAM:
HON'BLE MR. JUSTICE SANJIV KHANNA

1. Whether Reporters of local papers may be
allowed to see the judgment?
2. To be referred to the Reporter or not ?  YES
3. Whether the judgment should be reported
in the Digest ?                             YES

SANJIV KHANNA, J.:

      Petitioner no.1-Ms.Sudarshan Vohra had purchased annuity

plan under Jeevan Akshay Plan III vide Policy no. 113632069 for a

premium of Rs.15 lacs under receipt dated 25th January, 2005 and

the petitioner no.2- Ms. Sukesh Vohra had purchased two annuity

plans under Jeevan Akshay Plan III vide Policy nos. 113632426 and

114716867 for premium of Rs.17 lacs and Rs.25 lacs respectively

under receipts dated 25th February, 2005 and 22nd August, 2005 from

the respondent-Life Insurance Corporation of India (hereinafter

referred to as the respondent, for short).
WPC No.5605/2008                                                Page 1
 2.    In July 2007, i.e after more than 2 years of purchase, the

petitioners surrendered the three policies for encashment. It is the

case of the petitioners that they were given to understand that the

surrender value would be calculated @ 95% of the amount payable

on death. Thus, they had agreed to forego 5% of the amount payable

at the time of death.


3.    The respondent by their letter dated 1st December, 2007 issued

three cheques in favour of the petitioners, for sums of Rs.13,32,319/-,

Rs.20,74,863/- and Rs.14,64,556/- as the surrender value in respect

of the three policies. Thus, the petitioners received back a total

amount of Rs.45,12,821/- out of the total premium of Rs.57,00,000/-

paid by them, causing a loss of Rs.11,87,179/-. This is clear from the

table given below :-



Policy No. Premium          Annuity         Surrender       Loss
                                            Value
113632069 15,00,000.00 94,350.00            13,32,319.00-   2,62,031.00
                                            94,350.00 =
                                            12,37,969.00
113632426 17,00,000.00 1,09,567.00          14,64,556.00    3,45,011.00
                                            - 1,09,567.00
                                            =

13,54,989.00 114716867 25,00,000.00 1,55,000.00 20,74,863.00- 5,80,137.00 1,55,000.00 = 19,19,863.00 TOTAL 57,00,000.00 3,58,917.00 45,12,821.00 11,87,179.00

WPC No.5605/2008 Page 2

4. The petitioners protested by writing letters stating that the

surrender value has not been calculated @ 95% of the amount

payable at the time of death as was explained to them at the time of

surrender of the policies but has been calculated by applying some

other formula. It was stated that in case the surrender value had

been calculated @ 95% of the amount payable at the time of death

they would have suffered a loss of premium of Rs.2,85,000.00

instead of Rs.11,87,179.00. Thus, an excess amount of

Rs.9,02,179.00 had been deducted by the respondent. They made

complaint to the Ombudsman and the Insurance Regulatory

Development Authority but without success.

5. The respondent by their letter dated 28th January, 2008

informed the petitioners that the matter has been examined by the

competent authority at the Zonal level and the surrender values of the

policies were calculated in terms of the Circular dated 19th January,

2007. As per the said Circular, the calculation is to be made by

applying lower of the two formulas stipulated therein i.e. (i) by taking

annuity factor and risk factor for age last birthday at surrender and

the period from the last policy anniversary till the date of surrender or

(ii) by taking 95% of the amount payable on death. It was stated that

the payment in the present case was made by applying the first

formula. Same stand has been taken before this Court in the counter

WPC No.5605/2008 Page 3 affidavit filed by the respondent. However, the counter affidavit filed

by the respondent on 4th February, 2009 is completely silent and

does not state whether the petitioners were informed about the first

formula and that the surrender value would be calculated according

to „whichever is lower‟ principle when the petitioners had surrendered

their policies in July, 2007. The petitioners in paragraph 4 of the Writ

Petition have specifically pleaded that at the time of surrender of the

policies they were given to understand that the surrender value would

be calculated @ 95% of the amount payable on death and therefore

they had agreed to suffer the said partial loss. It is the case of the

petitioners that they were never informed about the first formula and

the fact that the same would be applicable in case the surrender

value calculated by the said formula is lower. The said statement is

also made in the letter dated 4th December, 2007 which was written

by the petitioners immediately after they received the three cheques

vide letter dated 1st December, 2007 for refund.

6. The respondent have filed along with the list of documents

dated 8th October, 2009, the calculation sheet on the basis of which

refund was made by applying the first formula. They have also filed

copy of the Circular dated 19th January, 2007 enclosing therewith

letter dated 13th January, 2007. The said letter dated 13th January,

2007 stipulates that the surrender value in case of Jeevan Akshay

WPC No.5605/2008 Page 4 and New Jeevan Akshay Plans under the option "Annuity for life with

Return of Purchase Price on death" shall be calculated as under:-

".... Even then such requests were being considered on merits basis and in certain cases, surrender value was allowed.

xxxxxx

The Surrender Value shall be calculated as :

(F(1) * Annuity per annum + F(2)* Amount payable on death) * F(3)

OR

95% of the amount payable on death, which ever is lower.

Where F(1) is the annuity factor for Age last birthday at surrender for the mode of annuity payment,

F(2) is the Risk Factor for Age last birthday at surrender and

F(3) is the period in months from the last policy anniversary till the date of surrender.

For factor F(1) and F(2), please refer to Annexure A and for Factor F(3), please refer to Annexure B."

7. Perusal of the calculation sheet providing the surrender value of

the policies would show that the first formula is extremely complex

and difficult to compute. It is impossible for any layman or even a

person associated with the insurance business to calculate the

surrender value as per the first formula which at the first instance

requires calculation of value of F(1), F(2) and F(3) for computing the

WPC No.5605/2008 Page 5 surrender value. For factors F(1), F(2) and F(3) another set of

formulas available with the respondent-Corporation have to be

applied for the values to be computed. In the case of the petitioner

no.1, value of F(1), F(2) and F(3) have been taken as 5.3297, 0.5046

and 1.0576 respectively and in the case of the petitioner no.2, in

respect of one of the policy these have been taken as 7.1645, 0.3755

and 1.0510 and in case of the third policy, figures F(1) and F(2) are

the same but the figure of F(3) has been taken as 1.0125. The

calculations may be justified and correct in terms of the letter dated

13th January, 2007, but the question is whether as per the general

principles of uberrimae fidei, the petitioners should have been

informed about the said calculation at the time when they wanted to

surrender their policies so that they could take a considered or

informed decision. In the counter affidavit it is not averred that the

petitioners were informed of the exact surrender value by making

necessary calculations. Neither is this stand taken in any of the letters

written by the respondent to the petitioners, or before the

Ombudsman or IRDA.

8. In the additional affidavit filed by the respondent on 9th

December, 2009 for the first time, Mr. Rajiv Kumar Banerjee, Branch

Manager of the respondent has averred that the agent of the

petitioners-Mr.Vikram Kakkar at the time of surrender of the policies

WPC No.5605/2008 Page 6 had discussed the matter with them and he was informed that the

surrender value would be calculated as per the two formulas and the

lower amount would be payable. It is difficult to accept this belated

plea raised by the respondent in the affidavit filed in this Court on 9 th

December, 2009 as the said plea was not taken in any of the earlier

correspondences or even in the counter affidavit. However, even if

the said plea is accepted I do not think that the stand of the

respondents can be considered fair and reasonable which can

withstand the legal challenge based on uberrimae fidei raised by the

petitioners. Further, Mr. Vikram Kakkar is an agent of the respondent

and is paid commission by the respondent on the business procured.

9. Law of contract is not only about creating liabilities or

obligations but also to respond to social aspects of a contract and its

impact. Contracting parties are expected to observe certain standards

of behaviour. These are terms implied by law and are generally

regarded as non consensual i.e imposed by law. Contracts of

insurance, by law, requires uberrimae fidei i.e. utmost good faith and

duty to make full disclosure of material facts when the fact is known

to one party alone. Referring to the law of contracts relating to

insurance, Chitty on Contracts, Vol.II, has observed:

"In Insurance law, "the duty which arises is threefold: a duty to disclose material facts; a duty not to misrepresent material facts; and a duty not to make fraudulent claims.

WPC No.5605/2008 Page 7 Although there have been suggestions in the past that the first of these duties is founded upon an implied term of contract, the weight of authority is to the effect that the duty to disclose, as well as the duty not to misrepresent, material facts are obligations imposed by law."

10. It was observed in Banque keyser Illman SA v Skandia (UK)

Insurance Co. Ltd (1990) 1QB. 65,771-772 that as far as insurance

contract is concerned, the duty of the parties are as under:

"Subject to what follows, the duty is upon the assured, and the insurer, to disclose every material fact to the other party..... So far as the insurer's duty is concerned, a fact is material and must be disclosed to the assured if it is relevant to the nature of the risk sought to be covered, or to the recoverability of a claim under the policy which a prudent assured would take into account in deciding whether or not to place the risk with the proposed insurer."

11. Thus this principle of ubberimae fidei applies not only to the

insured but equally to the insurance company. In United India

Insurance Company Ltd versus M.K. J. Corporation (1996) 6 SCC

428, the insurance company sought to deny the claim for damages to

goods by relying upon statutory tariff advisory committee advise

which was deemed to be part of the policy. Relying upon the said

report it was submitted that the insurance policy excluded cover for

damages resulting from total or partial cessation of work. However,

this exclusion was not specifically incorporated in the terms of the

policy. The Supreme Court observed that the recommendation of the

advisory committee was a material fact which the insurance company

ought to have disclosed to the insured at the time when contract was WPC No.5605/2008 Page 8 concluded. The insurance company could not avoid the policy. It was

held:

"6. It is a fundamental principle of Insurance law that utmost good faith must be observed by the contracting parties. Good faith forbids either party from concealing (non-disclosure) what he privately knows, to draw the other into a bargain, from his ignorance of that fact and his believing the contrary. Just as the insured has a duty to disclose, "similarly, it is the duty of the insurers and their agents to disclose all material facts within their knowledge, since obligation of good faith applies to them equally with the assured".

7. The duty of good faith is of a continuing nature. After the completion of the contract, no material alteration can be made in its terms except by mutual consent. The materiality of a fact is judged by the circumstances existing at the time when the contract is concluded. In the present case, the introduction of the Tariff Advisory Committee document materially affects the terms of the policy, resulting in the denial of the very indemnity of claim. And this was what the appellant sought to do, at the stage of clearing of the complaint. The Commission rightly rejected the appellant‟s plea. Notwithstanding this, on behalf of the appellant, it was insisted that the instructions of the Tariff Advisory Committee form part of the contract. Admittedly, the appellant-insurer had not incorporated the above-quoted clause as part of the policy undertaken with the insured. Consequently, the insured is not bound by this exclusionary clause of liability since the appellant-insurer, admittedly, had undertaken liability for the riot or strike, damage due to riot or strike."

12. Again in Modern Insulators Ltd versus Oriental Insurance

Company Ltd. AIR 2000 SC 1014 the exclusion clause which was

mentioned in the contractual document but was not communicated to

the insured was not applied and the insurance Company was directed

to pay up, inter alia, holding

"5. The appellant also urged before the National Commission that only the cover note and the schedule of the insurance policy were supplied and other terms and conditions including the exclusion clause were not

WPC No.5605/2008 Page 9 communicated. According to the appellant the above document supplied did not contain the exclusion clause. The said exclusion clause runs as follows:

"In the case of second-hand/used property the insurance hereunder shall, however, cease immediately on the commencement of the test."

6. The National Commission asked the parties to file affidavit to prove that the exclusion clause was duly communicated to the appellant. We have been taken through the affidavits filed and we find in the affidavit of the appellant the letter received by the appellant from the Branch Manager of the respondent was referred to wherein it was confirmed that the appellant was supplied only with a cover note and the schedule of the policy. So the other terms and conditions containing the above exclusion clause were not communicated. In the reply affidavit filed by the respondent it was not specifically mentioned that the exclusion clause was also communicated to the appellant.

7. The National Commission was of the view that "it is equally the responsibility of the respondent to call for these terms and conditions even if they were not sent by the appellant as alleged, to understand the extent of risks covered under the policy and the associated aspects".

8. It is the fundamental principle of insurance law that utmost good faith must be observed by the contracting parties and good faith forbids either party from non-disclosure of the facts which the parties know. The insured has a duty to disclose and similarly it is the duty of the insurance company and its agents to disclose all material facts in their knowledge since the obligation of good faith applies to both equally."

13. The test to determine materiality of a fact/information is

whether a reasonable man would be influenced by it in deciding

whether or not to enter into a contract. (Ref. Satwant Kaur Sandhu

Vs. New India Assurance Co. Ltd. (2009) 8 SCC 316;- material

information would mean all important, essential and relevant

information; Bhawany Rai versus LIC AIR 1984 MP 126; Pan

Atlantic Insurance versus Pine top Insurance Company Ltd.

WPC No.5605/2008                                                    Page 10
 (1994) 3 All.E.R. 581 (HL).     In the present Writ Petition, merely

disclosing the formula, which in turn required reference to other

formulas available only with the respondent cannot be regarded as a

good and material disclosure by the respondent. On the basis of

incomplete information no one can make calculations of the amount

refundable unless first there is an access to, and knowledge of the

formula to compute values F1, F2 and F3. Formula to compute

values F1, F2 and F3 were material facts available with the

respondent but these were not disclosed. Thus, even if it is presumed

and accepted that the formula without Annexures A and B was

communicated to the petitioners, this was not sufficient as the formula

itself required disclosure of the said annexures. The figures to be

taken and calculated for the purpose of F(1), F(2) and F(3) were

within the knowledge and had to be calculated by the respondent. It

was the obligation of the respondent to inform and disclose material

facts and disclose calculation or value of factors F1,F2 and F3.

Failure to disclose the formula applicable to compute F1, F2 and F3

and their values under the first formula, a material fact violates the

principle of uberrimae fidei.

14. Insurance policies are also taken by laymen who to a large

extent abide by and follow the advice given and recommendations

made by the insurance companies or agents appointed by the

insurance companies. Insurance is a service industry and interest of WPC No.5605/2008 Page 11 common man cannot be ignored. Common man does not know or

understand the intricate mathematical calculations. They are not

expected to know nor do they have the capability to undertake the

said exercise. Commercial expediency and business considerations

may require formulation and calculation by a complex formula but in

such cases the insured should be specifically informed about the

exact and full amounts which shall be deducted or be paid and not

mere formulas and mathematical equations. Insured in the present

case is not a corporation or a business enterprise. The insurance

company has the duty, responsibility and obligation to be clear,

candid and transparent, especially when it is aware that a gullible

insured will get confused, spoofed or beguiled to suffer a substantial

monetary loss. Thus, merely telling and informing a complex formula,

which a laymen cannot understand in all cases is not sufficient. The

insured should be given the right to make an informed choice in

simple and lucid words which he can understand. It was the

obligation of the respondent to inform and disclose material facts as

to the total surrender value under the first formula.

15. The policies were surrendered in July, 2007 and the cheques

were dispatched only in November, 2007. The delay shows that the

respondent themselves took about 4 months to compute the amount

payable under the said formulas. Even for the respondent it required

WPC No.5605/2008 Page 12 skill of and calculation by proficient experts in their office. The

respondent may not have misrepresented or made a fraudulent

statement but they have certainly failed in their duty to disclose the

material and relevant facts as to the surrender value payable to the

petitioners under the formula.

16. In addition to the above reasoning, it cannot be disputed that

the respondent, being a public authority or instrumentality of State is

required, even in contractual matters, to be just and fair and not act in

an arbitrary manner. It owes a public duty to act reasonably. In Life

Insurance Corporation of India versus Consumer Education and

Research Centre (1995) 5 SCC 482, the Supreme Court had

observed :-

"20 It is true that life insurance business as defined under the Insurance Act, is business effecting contracts of insurance upon human life......Thereby, the contract of insurance is hedged by bilateral agreement on human life on payment of premia (premium) subject to the covenants thereunder.

21. x x x x x

22. x x x x x 23 Every action of the public authority or the person acting in public interest or any act that gives rise to public element should be guided by public interest. It is the exercise of the public power or action hedged with public element that becomes open to challenge.

If it is shown that the exercise of the power is arbitrary, unjust and unfair, it should be no answer for the State its instrumentality, public authority or person whose acts have the insignia of public element to say that their actions are in the field of private law and they are free to prescribe any

WPC No.5605/2008 Page 13 conditions or limitations in their actions as private citizens simpliciter do in the field of private law. Its actions must be based on some rational and relevant principles. It must not be guided by irrational or irrelevant considerations. Every administrative decision must be hedged by reasons."

17. Recently again in United India Insurance Company versus

Manu Bhai Dharamasinhbhai Gajera (2008) 10 SCC 404 the

Supreme Court emphasized that Article 14 of the Constitution of India

encompasses within its fold the obligation on the part of the State

instrumentalities to act fairly and this equally applies to contractual

fields specially when the bargaining power is unequal or the contract

is not negotiated but is a standard form contract between unequals.

Referring to Article 14 of the Constitution of India as also Section 23

of the Contract Act, it was observed as under:-

"Existence of the jurisdiction of the superior courts of India upon invoking Article 14 of the Constitution as also Section 23 of the Contract Act to strike down a clause in the contract which the court feels to be unconscionable having regard to the unequal bargaining power of the parties is not in question, but the said provisions would have no application for the purpose of modifications, alterations or additions of a term in the contract. There cannot furthermore be any doubt whatsoever that each case must be considered on its own facts which would obviously lead to the conclusion that by reason thereof the court shall not read into the contract an automatic renewal clause in a contract of insurance if there does not exist any."

18. In Delhi Development Authority versus Joint Action

Committee (2008) 2 SCC 672 it has been held that the terms of the

contract can be altered or modified but this cannot be done

unilaterally unless there is a provision in the contract itself or in the

law. However, if a contracting party intends to modify the terms of the WPC No.5605/2008 Page 14 contract it is obligatory on its part to bring the same to the notice of

the other side.

19. For the reasons stated above, it is also held that this Court while exercising writ jurisdiction can interfere with the unreasonable stand taken by the respondent which was against the mandate laid down in Article 14 of the Constitution of India and law of Insurance. An element of public character is inherent in life insurance contracts and to that extent the actions of the respondent Life Insurance Corporation can be tested on the touchstone of justness and fairness. The Supreme Court in Life Insurance Corporation of India versus Consumer Education and Research Centre (Supra) has observed:

"The actions of the State, its instrumentality, any public authority or person whose actions bear insignia of public law element or public character are amenable to judicial review and the validity of such an action would be tested on the anvil of Article 14.While exercising the powers under Article 226, the Court would be circumspect to adjudicate the disputes arising out of the contract depending on the facts and circumstances in a given case. But, the distinction between public law and private law remedy is now narrowed down. The actions of the appellants bears public character with an imprint of public interest element in their offers with terms and conditions mentioned in the appropriate table inviting the public to enter into contract of life insurance. It is not a pure and simple private law dispute without any insignia of public element."

20. In LIC of India v. Asha Goel, (2001) 2 SCC 160, it was

observed :

"10. Article 226 of the Constitution confers extraordinary jurisdiction on the High Court to issue high prerogative writs for enforcement of the fundamental rights or for any other purpose. It is wide and expansive. The Constitution does not place any fetter on exercise of the extraordinary jurisdiction. It is WPC No.5605/2008 Page 15 left to the discretion of the High Court. Therefore, it cannot be laid down as a general proposition of law that in no case the High Court can entertain a writ petition under Article 226 of the Constitution to enforce a claim under a life insurance policy. It is neither possible nor proper to enumerate exhaustively the circumstances in which such a claim can or cannot be enforced by filing a writ petition. The determination of the question depends on consideration of several factors like, whether a writ petitioner is merely attempting to enforce his/her contractual rights or the case raises important questions of law and constitutional issues, the nature of the dispute raised; the nature of inquiry necessary for determination of the dispute etc. The matter is to be considered in the facts and circumstances of each case. While the jurisdiction of the High Court to entertain a writ petition under Article 226 of the Constitution cannot be denied altogether, courts must bear in mind the self-imposed restriction consistently followed by High Courts all these years after the constitutional power came into existence in not entertaining writ petitions filed for enforcement of purely contractual rights and obligations which involve disputed questions of facts. The courts have consistently taken the view that in a case where for determination of the dispute raised, it is necessary to inquire into facts for determination of which it may become necessary to record oral evidence a proceeding under Article 226 of the Constitution, is not the appropriate forum. The position is also well settled that if the contract entered between the parties provide an alternate forum for resolution of disputes arising from the contract, then the parties should approach the forum agreed by them and the High Court in writ jurisdiction should not permit them to bypass the agreed forum of dispute resolution. At the cost of repetition it may be stated that in the above discussions we have only indicated some of the circumstances in which the High Court have declined to entertain petitions filed under Article 226 of the Constitution for enforcement of contractual rights and obligation; the discussions are not intended to be exhaustive. This Court from time to time disapproved of a High Court entertaining a petition under Article 226 of the Constitution in matters of enforcement of contractual rights and obligation particularly where the claim by one party is contested by the other and adjudication of the dispute requires inquiry into facts......."

11. The position that emerges from the discussions in the decided cases is that ordinarily the High Court should not entertain a writ petition filed under Article 226 of the Constitution for mere enforcement of a WPC No.5605/2008 Page 16 claim under a contract of insurance. Where an insurer has repudiated the claim, in case such a writ petition is filed, the High Court has to consider the facts and circumstances of the case, the nature of the dispute raised and the nature of the inquiry necessary to be made for determination of the questions raised and other relevant factors before taking a decision whether it should entertain the writ petition or reject it as not maintainable. It has also to be kept in mind that in case an insured or nominee of the deceased insured is refused relief merely on the ground that the claim relates to contractual rights and obligations and he/she is driven to a long-drawn litigation in the civil court it will cause serious prejudice to the claimant/other beneficiaries of the policy. The pros and cons of the matter in the context of the fact- situation of the case lshould be carefully weighed and appropriate decision should be taken. In a case where claim by an insured or a nominee is repudiated raising a serious dispute and the Court finds the dispute to be a bona fide one which requires oral and documentary evidence for its determination then the appropriate remedy is a civil suit and not a writ petition under Article 226 of the Constitution. Similarly, where a plea of fraud is pleaded by the insurer and on examination is found prima facie to have merit and oral and documentary evidence may become necessary for determination of the issue raised, then a writ petition is not an appropriate remedy."

21. The relief which should be granted to the petitioners is required

to be modulated as the petitioners have encashed the cheques which

were sent by the respondent. The payments were made in December

2007. Keeping in view the bank rate of interest prevailing during this

period from December 2007 till today, the petitioners are given the

option to surrender the amounts paid by the respondent along with

simple interest @8% p.a. w.e.f. 1st December, 2007 till the date they

return the said amount. The petitioners will have the option to repay

the said amount within two months from the date of judgment and in

case the said payment is made, the policies will be revived. If the

WPC No.5605/2008 Page 17 petitioners do not make the said payment along with the interest it

would be treated that they have accepted the refund and cancellation

of the policies.

In the facts and circumstances of the case, there will be no

order as to costs.

                                       (SANJIV KHANNA)
                                            JUDGE
FEBRUARY           26 , 2010.
P




WPC No.5605/2008                                              Page 18