As you are aware that a Contract which has no legal validity is a void contract. Same in the case of an Insurance Policy, when an insurer discovers that the Insurance Policy has been acquired on the basis of fraud, mi-statement or mis-representation of material facts,it declares void the Insurance Policy.
When an insurance policy is void, it is no longer legal and, therefore, the power of its provisions, including the benefits the policyholder is supposed to receive, is cancelled. Since insurance business places a very high priority on disclosure. Information given to the insurer is important for determining the appropriate pricing of the policy or its premium. In other words, the insurance company wants truthful information so it can provide the best policy.
But if a policyholder withholds vital information, they risk voiding their policy. A smoker purchasing health insurance, for instance, must tell the insurer about their habit. If they don't disclose it—perhaps out of fear that it will raise their premium payments—they might not get any healthcare provided through the policy if the insurance company voids it after investigating the claim.
Please note that whole contract of insurance is based on Principle of Good Faith between insured and the insurance company. An insured approaching for insurance must come with clean hands and have to disclose all material facts required and asked by the insurance company to access the severity of risk insurance company is going to bear at the time of claim.
WHAT IS A VOIDED INSURANCE?
Voided insurance is any policy that has been ruled invalid by the insurer. There are a number of reasons this may happen. The most common are that the customer fails to pay their premium, or has submitted false or incorrect information to the insurer.
If an insurance provider voids an insurance policy, it is equivalent to that policy never having existed and no protection ever having been in place. This, in turn, means that any claim being made (even before the date on which the policy was voided) will not be successful.
Ultimately, you'll want to avoid having your insurance voided at all costs. But to do that, you'll need to understand how this could happen in the first place.
WHAT'S THE DIFFERENCE BETWEEN VOIDED AND CANCELLED CAR INSURANCE?
While the end result can be similar - you're left without insurance - there is a subtle but important difference between your insurer voiding and cancelling your cover.
- Voided insurance: means that an insurance provider has reason to completely invalidate your insurance, leaving you unprotected for the entire term. This means that even claims made since you took out the policy, but before the void date, won't be covered. This might be if, for example, you lied or omitted important details when you applied for insurance.
- Cancelled car insurance: means that your policy has been terminated for some reason before it was due to end, but was valid before the cancellation date. Claims made before the cancellation date may still be covered. An insurer might cancel your policy part way through the term if you miss a monthly payment or change jobs without letting your insurer know.
In both cases, you may not be entitled to any refund of premiums you've already paid.
WHAT ARE THE MAIN REASONS FOR AN INSURER VOIDING OR CANCELLING A POLICY?
There could be several reasons why an insurance provider might cancel or void an insurance policy, but these reasons tend to fall into 1 of 4 categories:
• Non-payment of insurance premiums: This can include failing to pay them on time or missing payments entirely.
• Non-disclosure or omission: Essentially, failing to tell the complete truth when you apply for insurance or failure to update your insurer about important changes to your circumstances.
• Fraud: The guidelines for fraud will vary by insurer, but it could include faking an accident, for example.
• Breaching terms and conditions: By using your car for purposes that aren't covered by the policy, for example.
THE APEX COURT IN CASE OF Mithoolal Nayak vs Life Insurance Corporation Of ... on 15 January, 1962 has decided that, whether the appellant is entitled to a refund of the money he had paid to the respondent company. Here again one of the terms of the policy was that all money that had been paid in consequence of the policy would belong to the company if the policy was vitiated by reason of a fraudulent suppression of material facts by the insured.
We agree with the High Court that where the contract is bad on the ground of fraud, the party who has been guilty of fraud or a person who claims under him cannot ask for a refund of the money paid. It is a well-established principal that courts will not entertain an action for money had and received, where, in order to succeed, the plaintiff has to prove his own fraud.
We are further in agreement with the High Court that in cases in which there is stipulation that by reason of a breach of warranty by one of the parties to the contract, the other party shall be discharged from the performance of his part of the contract, neither Section 65 nor Section 64 of the Indian Contract Act has any application.
BRIEF FACTS OF THE CASE
1. In 1942, one M sent a proposal for the insurance of his life.
2. He was examined by Dr. Dwho submitted two reports, one with the proposal form and one confidential.
3. The confidential reports showed that M was anaemic, had a dilated heart and his right lung showed indications of an old attack of pneumonia or pleurisy and that he was a total physical wreck.
4. Nothing came out of this proposal and it lapsed.
5. In 1943, M consulted and was treated by one Dr. L for anaemia oedema of the feet, diarrhea and panting on exertion.
6. In 1944, M made a second proposal for insurance of his life. Against the question in the proposal form whether he had consulted any medical man for any ailment within the last five years, he gave the answer, "Nor'.
7. He also did not disclose any of his ailments. After medical examination by one Dr. K. The proposal was accepted and a policy for Rs.25,000/- was issued on March 13, 1945.
8. The policy lapsed for non-payment of premium but was revived in July, 1946.
9. In November, 1946, Mdied.
10. His assignee, the appellant, made a demand for Rs.26,000/-but the Company on October 10, 1947, repudiated it on the ground that the policy had been obtained by deliberate misstatement and fraudulent suppression of material facts.
11. Thereupon, the appellant filed a suit to recover the amount of the policy contending that Section Insurance Act, barred the company from calling in question the policy after two years on the ground that any statement made in the proposal was inaccurate or false.
Held, that the policy-holder was guilty of fraudulent suppression of material facts relating to his health and the Company was entitled to avoid the contract.
Section 45 -Insurance Act applied to the case as two years had lapsed since the policy was effected; in view of the language of Section 45 the two years could not be counted from the date of the revival of the policy.
The second part of Section 45 entitled the company to repudiate the contract even after the expiry572of two years if three conditions were fulfilled viz.
(a) the statement was on a material matter or there was suppression of facts which it was material to disclose;
(b) the suppression was fraudulently made by the policy-holder, and
(c )the policy-holder must have known at the time of the making of the statement that it was false or that it suppressed facts that it was material to disclose.
When M was treated in 1943 by Dr. L was suffering from serious ailments. He must have known that it was material to disclose this but made a false statement that he had not been treated by any doctor for any serious ailment.
There was deliberate suppression fraudulently made by M. Even though the Company had got M examined by four doctors before issuing the policy, it was not stopped from questioning the policy. It had no means of knowing that M had been treated by Dr.L for serious ailments.
Held, further, that the appellant was not entitled even to a refund of the money paid as premium as one of the terms of the policy was that all monies paid belonged to the company if the policy was vitiated by fraudulent suppression of material facts. To such a contract neither Section 65 nor Section 64 of the Indian Contract had any application.
LET'S DISCUSS PROVISIONS OF SECTIONS 64 & 65 OF THE INDIAN CONTRACT ACT, 1872:
SECTION 64- CONSEQUENCES OF RESCISSION OF A VOIDABLE CONTRACT
When a person at whose option a contract is voidable rescinds it, the other party thereto need not perform any promise therein contained in which he is the promisor. The party rescinding a voidable contract shall, if he had received any benefit thereunder from another party to such contract, restore such benefit, so far as may be, to the person from whom it was received.
SECTION 65 OF THE INDIAN CONTRACT ACT 1872
It mainly deals with the doctrine of restitution and it relates to the obligation of the person who has received some advantage under void agreement or contract. This section starts from the very basis that there being an agreement or contract and if there was no agreement or contract then the doctrine of restitution cannot come into play. This doctrine is based on a very common rule of consideration which means that a person pays consideration only when he gets something in return.
PROVISIONS OF SECTION 65
It apply only when an agreement at a subsequent stage is discovered to be void or when a contract becomes void later on by one person or the other. But Section 65 will never come into play if the contract was void-ab-initio .i.e. void from the very beginning.
Supreme Court of India in the case of Kujiu Collieries limited v/s Jharkhand mines ltd: held that an agreement which was discovered to be void at a later stage will invite Section 65 into the picture and in such a case an advantageous person is bound to restore the disadvantaged party.
APPLICABILITY OF SECTION 65
Section 65 is applicable only when an agreement was valid when it was entered into and became void only at a future date. Moreover if the agreement was entered into between a major person being the plaintiff and the minor defendant in this case then doctrine of restitution will not be applied, this was held in the case of Mohiri Bibi v/s Dharmodass Ghosh but the scenario will be different if minor has misrepresented his age and then he can be enforced by the court to return the benefit.
In another case Bank of Rajasthan Ltd v/s Sh Pala Ram Gupta it was held that an agreement or contract which was void and illegal from the very beginning can never apply the provisions of this doctrine.
DOCTRINE OF RESTITUTION INCLUDES THE KEY POINTS AS FOLLOWS
1. One party has entered into a contract with another for consideration.
2. There was some consideration involved in the said contract.
3. Both parties were competent to enter into a contract
4. Thereafter one party failed to perform his part of the contract or the contract became void due to any unforeseen condition.
5. Now the party which has paid any consideration as the advance is entitled to recover the same from the other party and other party is not entitled to receive an unfair advantage over it.
EXCEPTIONS TO DOCTRINE OF RESTITUTION
Where an agreement is known to be void:- This doctrine will not be applied for an agreement known to be void e.g., where an agreement is for some illegal act or an impossible act like an agreement that A will pay B Rs 10,000 if B picks stars from the sky. A pays Rs 500 as security to B, now being an impossible act to perform A cannot recover even his Rs 500.
Where an agreement has been entered into between incompetent persons:- Contract entered into between incompetent persons like a person suffering from insanity, intoxication or a minor will not invite this doctrine to play.
Where the party is required to give some earnest money as security and later on defaults:- This provision deals with a situation like paying application money for a residential scheme. Now if a person fails to future allotment money, then his application money will also be forfeited and he cannot claim his earlier earnest money by revoking the doctrine of restitution.
LET'S ANALYZE THE ABOVE PROVISIONS- THE OBLIGATION OF A PERSON WHO HAS RECEIVED AN ADVANTAGE UNDER A VOID AGREEMENT OR CONTRACT THAT BECOME VOID
When an agreement is discovered void , or when a contract becomes void, any person who has received any advantage under such agreement or contract is bound to restore it, or to make compensation for it , to the person from whom he received it.
It was held by Bombay High Court that " if the document known as the policy stands alone and does not incorporate in any other documents, only that document can be looked at but if it does not expressly incorporate another document, the document must be part of the Insurance Policy."
The Court further held that - " this is view taken in a number of cases of Indian and English Courts , and I am unable agree with suggestions ……that it is not open for the court to look at the terms of the proposal to ascertain the contract and that the contract must be ascertained only from formal document called issued by the Insurance Company."
Where parties have entered into contract , but have failed to express themselves correctly in the instrument concerned, if the mistake is real one and mutual, it must be rectified under Section 26 of Specific Relief Act, 1963, either party may institute a suit is such a case to have the instrument rectified.
SECTION 26 -OF THE SPECIFIC RELIEF ACT, 1963
When instrument may be rectified.
(1) When, through fraud or a mutual mistake of the parties, a contract or other instrument in writing [not being the articles of association of a company to which the Companies Act, 1956 (1 of 1956) applies] does not express their real intention, then—
(a) either party or his representative in interest may institute a suit to have the instrument rectified; or
(b) the plaintiff may, in any suit in which any right arising under the instrument is in issue, claim in his pleading that the instrument be rectified; or
(c) a defendant in any such suit as is referred to in clause (b), may, in addition to any other defense open to him, ask for rectification of the instrument.
(2) If, in any suit in which a contract or other instrument is sought to be rectified under sub-section (1), the court finds that the instrument, through fraud or mistake, does not express the real intention of the parties, the court may, in its discretion, direct rectification of the instrument so as to express that intention, so far as this can be done without prejudice to rights acquired by third persons in good faith and for value.
(3) A contract in writing may first be rectified, and then if the party claiming rectification has so prayed in his pleading and the court thinks fit, may be specifically enforced.
(4) No relief for the rectification of an instrument shall be granted to any party under this section unless it has been specifically claimed: Provided that where a party has not claimed any such relief in his pleading, the court shall, at any stage of the proceeding, allow him to amend the pleading on such terms as may be just for including such claim.
PLEASE NOTE THAT
A Life Insurance contract comes into existence when proposal of the insured is accepted by insurance company and terms of acceptance are complied by the parties to the contract. The Proposal is the basis of an Insurance Contract and same is going to be a part of the Insurance Contract. Insurance Policy is the final contract, which is based on the proposal of the insured and hence a proposal is the basis of an Insurance Contract.
THE DOCTRINE OF FRUSTRATION
The principal of frustration of contract is contained in section 56 of the Indian Contract Act, 1882. The principal underlying the section is that performance of contract can be avoided if on account of happening of an event which is not the result of action of either party, the performance of contract may be avoided.
The Doctrine of Frustration as embodied in Section 56, of the Contract Act, may apply if below mentioned three conditions satisfied;
i) A valid and subsisting contract between parties;
ii) There must be some part of the contract yet to be performed;
iii) The contract after it is made, become impossible.
The Doctrine of frustration is applicable only where performance of contract become impossible.
NOTE: After discussion on provisions of Sections 56 and 65 of the Indian Contract Act, 1882 it would be seen that the premium or proportionate of it could be recovered or refunded even where risk has begun to run.
NOTE:
1. When insurer elect to set aside the contract on the ground of innocent misrepresentation, non-disclosure, concealment or mistake, the assured is entitled to the return of the premium, in absence of fraud on his part and of any express conditions to the contrary;
2. Fraud on the part of insurers create a valid claim for the return of the premium;
3. Prince of Wales Insurance Co. Vs. Palmer; it was held that the insurers were not allowed to retain premium for their own use, when policy was set aside on the ground of fraud and lack of insurable interest;
4. British Equitable Insurance Co. Vs. Musgrave; the premium in similar case was not refunded on the basis of cancellation clause in the policy;
5. Biggar Vs. Rock Life Insurance Co.: " if plaintiff is entitled to anything, I think the most he could have asked for would be that the court should say that the contract is void on the ground of either fraud or mistake, with the consequences perhaps he may entitled to return of premium".
6. When there is fraud or inducement by an insurance agent, to the insured to subscribed insurance policy.
LAWS IN INDIA GOVERNING REFUND OF PREMIUM
A contract of insurance is like any other contract, is a contract between and insured and the insurance company. The amount of premium paid will be treated as the consideration paid to conclude the contract.
Section 64VB of the Insurance Act, 1938 provides that; No risk to be assumed unless a premium is received in advance. —
(1) No insurer shall assume any risk in India in respect of any insurance business on which premium is not ordinarily payable outside India unless and until the premium payable is received by him or is guaranteed to be paid by such person in such manner and within such time as may be prescribed or unless and until deposit of such amount as may be prescribed, is made in advance in the prescribed manner.
(2) For the purposes of this section, in the case of risks for which premium can be ascertained in advance, the risk may be assumed not earlier than the date on which the premium has been paid in cash or by cheque to the insurer.
Explanation. Where the premium is tendered by postal money order or cheque sent by post, the risk may be assumed on the date on which the money order is booked or the cheque is posted, as the case may be.
Section 65 of the Indian Contract Act, 1882 provides that; "When an agreement is discovered to be void, or when a contract becomes void, any person who has received any advantage under such agreement or contract is bound to restore it, or to make compensation for it to the person from whom he received it."
Note: the main object of Section 65 of the Indian Contract Act, 1882 is not to make a new contract between the parties, when the contract entered into by them has been discovered to be void but only to restore the advantage received by one party thereunder to the other.
Section 65, Contract Act codifies the rule of equity. Only two classes of contracts are mentioned in this section;
i) Contracts that are discovered to be void;
ii) Contracts that become void;
LET'S CONSIDER ONE BY ONE
i) Contract that are discovered to be void; it means and includes contracts that are void as initio. The general rule of the contract is that the parties entering into a contract are presumed to know the applicable laws and hence if the contracts are void ab initio to the knowledge of the parties, or if parties are presumed to have knowledge of such void transactions it is no contract at all and it cannot be said to be discovered to be void and hence provisions of Section 65 do not apply here.
Prabhumal Gulamal Vs. Baburam Bassesar Das; it was held that "the agreements were void to the knowledge of both parties at the time they were made, and it cannot, therefore, be said that it was discovered to be void, or when a contract become void any person who has received any advantage under such agreement is bound to restore it."
Srinivas Ayyer Vs. Sesha Ayyer; Justice Blackwell "The words discovered to be void", are more opt to describe an agreement which was void ab initio, but not then known to the parties to be so than to an agreement of which illegally must be taken to have been always know to them". Where the contract void ab initio the consideration cannot be refunded.
ii) Contracts that become void; it refers to those contracts which are perfectly valid and binding at the time when they are entered into, but subsequently become void on happening of certain events.
IN CONTRACT OF INSURANCE, it is submitted, where a contract is binding and enforceable in its inception but subsequently, on account of a breach of warranty or the happening of some event like, war or for any other cause, the contract become void the premium paid thereunder cannot be refunded.
CONCLUSION
The IRDAI(PPHI) Regulations, 2017 and PPHI Guidelines provides that the premium should be refunded within a period of 15 days from the date of receipt of request from policyholder. We have discussed various aspects on refund of premium based on provisions of the Indian Contract Act, 1882 and the Insurance Act, 1938 and have drawn conclusion that the premium amount received by insurer should be returned to the insured on fulfillment of specified conditions.
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