IN THE HIGH COURT OF GUJARAT AT AHMEDABAD
LETTERS PATENT APPEAL No 1028 of 2003
LETTERS PATENT APPEAL No 1003 of 2003
LETTERS PATENT APPEAL No. 1004 of 2003
SPECIAL CIVIL APPLICATION NO. 9425 of 2002
For Approval and Signature:
HON'BLE MR.JUSTICE R.K.ABICHANDANI
and
HON'BLE MR.JUSTICE D.A.MEHTA
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1. Whether Reporters of Local Papers may be allowed : YES
to see the judgements?
2. To be referred to the Reporter or not? : YES
3. Whether Their Lordships wish to see the fair copy : NO
of the judgement?
4. Whether this case involves a substantial question : NO
of law as to the interpretation of the Constitution
of India, 1950 of any Order made thereunder?
5. Whether it is to be circulated to the concerned : NO
Magistrate/Magistrates,Judge/Judges,Tribunal/Tribunals?
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1. LETTERS PATENT APPEAL No. 1028 of 2003
UNITED INDIA INSURANCE COMPANY LTD.
Versus
MOHANLAL AGGARWAL
Appearance:
MR RAJNI H. MEHTA, Advocate for Appellant
MR NAVIN K. PAHWA, Advocate for Respondent
--------------------------------------------------------
2. LETTERS PATENT APPEAL No. 1003 of 2003
UNITED INDIA INSURANCE CO. LTD.
Versus
PRAVIN B. NANAVATI
Appearance :
MR P.V. NANAVATI, Advocate for Appellant
MR B.I. MEHTA FOR MR AMIT C NANAVATI Advocate for
the Respondent
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3. LETTERS PATENT APPEAL NO. 1004 of 2003
UNITED INDIA INSURANCE CO. LTD.
Versus
MANUBHAI DHARAMSINHBHAI GAJERA
Appearance :
MR P.V. NANAVATI, Advocate for the Appellant
MR B.M. MANGUKIA, Advocate for the Respondent No.1
MR S.N.SHELAT, ADVOCATE GENERAL with
MS. MEGHA JANI, Advocate for the Respondent No.2
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4. SPECIAL CIVIL APPLICATION NO. 9425 OF 2002 :
CONSUMER EDUCATION & RESEARCH SOCIETY & ORS.
Versus
NEW INDIA ASSURANCE CO. LTD.
Appearance :
MR.A.J.PATEL, Advocate for the Petitioners
MR.P.V.NANAVATI, Advocate for the Respondent No.1
MR.S.N.SHELAT, ADVOCATE GENERAL WITH
MS.MEGHA JANI, Advocate for the Respondent No.2
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CORAM : HON'BLE MR.JUSTICE R.K.ABICHANDANI
and
HON'BLE MR.JUSTICE D.A.MEHTA
Date of decision: 05/12/2003
ORAL JUDGEMENT
Contents
* Brief Facts and Pleadings - Paragraphs 3 to 6
* The Decision under Appeal - Paragraphs 7 to 7.1.1
* Contentions and Case Law - Paragraphs 8 to 11
* Reasoning - Paragraphs 12 to 38
* Conclusions - Paragraph 39
* Final Order - Paragraphs 40 to 40.1
(Per : HON'BLE MR.JUSTICE R.K.ABICHANDANI for the Court)
1. These three Letters Patent Appeals have been
directed against the judgement and order of the learned
Single Judge passed on 8th August 2003, allowing the
three petitions from which these appeals arise, while the
Special Civil Application No. 9425 of 2002 has been
filed for a direction on the respondents - insurance
companies not to exclude the diseases contracted by the
petitioner No.2 during the period of mediclaim policy,
which was renewed from time to time, and not to load the
premium, as was sought to be done, and to renew the
mediclaim policies of the petitioner No.2 and 3.
2. All the matters relate to mediclaim insurance
policy and revolve around the question, whether the
insurer has absolute right to cancel the contract of
mediclaim insurance or to refuse renewal of the mediclaim
policy and have been argued together by the learned
counsel appearing for all the parties.
Brief Facts and Pleadings :
3. The Letters Patent Appeal No.1028 of 2003, which
arises from Special Civil Application No.11844 of 2002,
in which a direction was sought for setting aside the
action of the insurer (United India Insurance Co. Ltd.)
in seeking to exclude certain diseases as per the
communication dated 3rd October 2002 addressed by the
Divisional Manager of the insurance company to the
insured, as illegal, arbitrary, unreasonable and
violative of Article 14 of the Constitution. A direction
was sought on the insurer to renew the mediclaim policy
with effect from 3rd October 2002 and to settle all the
claims of medical dues covered by the insurance company
as per the terms of the existing insurance policy.
3.1 In that case, the petitioner had applied for a
mediclaim insurance policy for the first time in 1990 for
a sum of Rs.90,000=00. The sum insured under the policy
was thereafter revised to Rs.3 lakhs from 1993-94. The
policy was being renewed from time to time on the regular
payment of the premium amount by the insured and was
lastly renewed on 4th October 2001. The insured
requested for a further renewal by his letter dated 9th
September 2002 forwarding the banker's cheque of the
premium amount to the insurer, which was well ahead of
the date of 3rd October 2002 on which the existing policy
was to end. A reminder was sent by the insured on
17-9-2002 requesting the insurer to renew the policy,
followed by a legal notice dated 27-9-2002. Thereafter,
on 30th September 2002, the insurer addressed a letter to
the insured that, due to "high claim experience", the
policy will be renewed by loading of 300% premium and the
insured was accordingly required to issue a cheque for
the revised premium. The insured accordingly deposited
the amount of the revised premium by cash on 1-10-2002
being 300% premium for which a receipt was issued by the
insurer on 1-10-2002. The regular premium as well as
extra premium were thus paid by the insured in time i.e.
before the end of the term of the existing policy.
However, thereafter, on 3rd October 2002, the insurer
issued a letter on the insured to the effect that the
policy could be renewed only subject to the exclusion of
five diseases. The major diseases against which the
insured was covered were sought to be excluded from the
policy. According to the insured, he was 65 years of age
and needed coverage of mediclaim the most, because of his
chronic renal failure, and, the action of the insurer
seeking to exclude all major diseases from the coverage
was arbitrary and illegal and not befitting a Government
of India Company, which was created for the public and
social welfare.
3.2 The insurer contested the petition by filing
affidavit-in-reply dated 25th December 2002 contending
that the insured was not entitled to get the mediclaim
insurance policy renewed without the exclusionary clause
in view of the stipulation in clause No.5.9 of the
policy, as per which, the policy may be renewed by mutual
consent and the company may at any time cancel the same
by sending the insured a thirty days' notice and
refunding the prorata premium for the unexpired period.
According to the insurer, the policy cannot be renewed
without mutual consent and the extraordinary jurisdiction
of the High Court cannot be invoked in getting it
renewed. It was further contended that the mediclaim
policy which was issued by the insurance company was "not
statutorily required and, therefore, there is no legal
right and obligation between the Company and the
petitioner". It was also submitted that there was
nothing arbitrary in refusing to renew the policy, and
that the decision of the Apex Court in Biman Krishna Bose
v. United India Insurance Company Ltd., reported in 2001
(6) SCC 477, was not applicable to the case, because, the
question that the policy could be renewed only by mutual
consent did not arise in that case and that the monopoly
as regards the general insurance business did not now
remain with the companies. It was also contended that
the condition of the insured was a chronic condition
requiring dialysis at least four times in a month and the
suggestion implied in his letter dated 2nd October 2002
that dialysis would continue till the end of October 2002
as opined by the doctor, amounted to making of a false
statement for getting the policy renewed. It was
submitted that the insured was financially very sound and
had a roaring business and therefore, the statement that
he was unable to make both ends meet was false. It was
also pointed out that, in the past, the claims of the
insured for Rs.80,000=00 for heart surgery in the year
1994, for Rs.60,000=00 for T.B. treatment in the year
2000 and for Rs.2,05,000=00 for kidney failure treatment
in the year 2002, were paid by the insurer. It was
further contended that now the diseases contracted by the
insured were undisputedly known and in such
circumstances, the element of "unforeseen event or
occurrence" had ceased to exist and therefore, the
insurance being essentially an agreement whereby the
insurer agrees to indemnify the person insured against an
unforeseen event, the insured was not entitled to get the
insurance of such diseases which were by now known.
4. In Letters Patent Appeal No.1003 of 2003, which
arises from Special Civil Application No.8516 of 2003,
the insured sought a direction on the insurer (United
India Insurance Company Ltd.) to renew his mediclaim
policy challenging its refusal to renew the same. The
insured had obtained a mediclaim insurance which was
renewed continuously for a period of eight years, lastly
for the period from 15-12-2001 to 14-12-2002, as stated
in paragraph 3 of the petition. The insured was required
to undergo heart surgery and had put up the claim under
the policy which was paid. However, thereafter, when the
insured requested for renewal of the mediclaim policy for
a further period of one year and also sent a cheque of
the due amount of premium, the insurer, by letter dated
2nd December 2002, cancelled the policy. The insurer
again by letter dated 13th December 2002 took up a stand
that renewal of the policy was dependent upon the
discretion of the company, and that it did not want to
renew the policy. By letter dated 21st February 2003,
the insurer informed the insured that, his request was
refused and that he should not address further letters to
the company which will not be replied.
4.1 In the affidavit-in-reply dated 7th July 2003
filed on behalf of the insurer, the insurer contended
that it had fulfilled its obligations under the existing
policy, which ended on 14-12-2002, and that each
mediclaim policy provides that policy can be renewed by
mutual consent of all the parties. It was contended that
one cannot insist for underwriting for medical insurance
till the insured remains alive. It was also contended
that the general insurance business was nationalized in
the year 1972 from 2nd January 1973 and the General
Insurance Corporation of India was to carry out its
objectives under Section 9 of the Act. The Act of 1972
bestowed an exclusive privilege to operate, on the four
nationalized insurance companies. However, the exclusive
privilege was taken away by virtue of the provisions of
the Indian Regulatory and Development Authority Act,
1999, which came into force from December 29, 1999, by
insertion of Section 24A in the Act of 1972. It was
submitted that an insurance policy being in the realm of
the contract, renewal could not be sought except by
mutual consent. Moreover, the term "insurance" as
defined in Black's Law Dictionary, indicated that
insurance is a type of contingency contract and it was
not in the nature of an annuity. It was submitted that
the insurer had a legal right to regulate its business
and its business wisdom was not justiciable. Reliance
was placed on the decision of a Division Bench of this
Court rendered on 31st July 1995 in Special Civil
Application No.3628 of 1995 in paragraph 9 of the
affidavit-in-reply, in which it was held that no mandamus
can be issued directing the State to frame a policy in a
particular way and that the scheme of mediclaim did not
expressly include the case of a mentally retarded person.
The decision of the Apex Court in General Assurance
Society v. Chandmull Jain, reported in AIR 1966 SC 1644
was referred in paragraph 11 of the affidavit-in-reply,
for contending that the condition in the insurance policy
giving mutual rights to the parties to terminate the
insurance at any time cannot be read as a right to
terminate for a reasonable cause. The Supreme Court held
that, where the party agrees upon certain terms which
were to regulate their relationship, it was not for the
court to make a new contract, however reasonable, if the
parties have not made it for themselves.
5. In Letters Patent Appeal No.1004 of 2003, which
arises from Special Civil Application No.1128 of 2002,
the insured had challenged refusal to renew the mediclaim
insurance policy by the communication dated January 16,
2002 sent by the insurer. The insurer had refused to
renew the mediclaim policy stating in its letter dated
16-1-2002, at Annexure "D" to the petition: "We have to
inform you that we are not interested to renew your above
policy". According to the insured, the action of the
insurer, which was "State" within the meaning of Article
12 of the Constitution, is arbitrary and violative of the
fundamental rights of the insured guaranteed by Articles
14 and 21 of the Constitution.
5.1 In the affidavit-in-reply dated 26-4-2002 filed
by the insurer (United India Insurance Company Ltd.), it
was contended that the decision to refuse renewal taken
by the insurer was in the course of the business of the
company and therefore, not amenable to the writ
jurisdiction of this Court. Reliance was placed on
condition No.5.9 of the policy, as per which, the policy
may be renewed by mutual consent, contending that there
was no obligation on the insurer to renew the policy. It
was contended in paragraph 6 of the reply that since the
general insurance business was no longer a monopoly of
the General Insurance Corporation and its subsidiary
Companies, the cases decided earlier on the footing that
the four insurance companies were the only statutory
bodies who could undertake the business of general
insurance now no longer apply, and that the decision of
the Supreme Court in General Assurance Company Ltd. v.
Chandmull Jain (supra) was applicable.
6. In Special Civil Application NO. 9425 of 2002,
which was filed by the Consumer Education and Research
society and two insured persons for a direction on the
respondent No.1 (New India Assurance Co. Ltd.) not to
exclude the diseases contracted by the petitioner No.2
during the period of the policy which had been renewed
from time to time and not to load the premium; and to
include the diseases and renew the policy including such
diseases, and, a direction on the respondent No.2
(National Insurance Co. Ltd.) to renew the policy of the
petitioner No.3, setting aside the refusal in its letter
dated 15-1-2002 made on the ground of "adverse claim
ratio".
6.1 The insured - petitioner No.2 had taken mediclaim
insurance for himself, his wife and other family members
continuously from the year 1992-93 and was regularly
paying the premiums from time to time. In August
September 1999, he was admitted twice in the hospital for
high grade fever and was diagnosed as having acquired
Hypogamaglobulinemia. The mediclaim policy, which was
last renewed, was valid upto 13th August 2002. On 26th
July 2002, the said insured was informed that his
mediclaim policy will be renewed subject to the exclusion
of the disease "Septicemia with Hypogamaglobulinemia" and
was advised that his next premium will be accepted with
loading of 100% with 5% excess for each and every claim.
6.2 The insured (petitioner No.3) was having
mediclaim and accident policies since 1988 with the
insurer and had renewed the same from time to time. His
mediclaim policy was expiring on 6-2-2002 and he
therefore paid renewal premium by cheque on 7-1-2002
which was debited from his account on 9-1-2002. However,
by letter dated 15-1-2002, he was informed by the
respondent No.2 that, after going through the record, it
had decided not to renew his policy, advising him to
renew his policy with some other insurance company. It
was contended that the respondents were `State' within
the meaning of Article 12 of the Constitution and that,
their action of excluding the diseases acquired during
the period of the cover while renewing the policy, was
arbitrary, unfair and violative of Article 14 of the
Constitution. It was also contended that the refusal to
renew the mediclaim policy on the ground of high claim
ratio after having accepted the premium was also
arbitrary, unfair and unjustifiable at law. Reference
was made to Section 9 of the Health Insurance Act, 1994
of Ireland to illustrate that a registered undertaking
was restrained thereunder from terminating or refusing to
renew a health insurance contract without consent of the
other party. Reliance was also placed on a
circular-letter dated 18-12-1998, at Annexure "I" to that
petition, of the National Insurance Company Ltd., showing
the directions issued on the basis of the General
Insurance Corporation Circular dated 13th June 1988,
which required that in case of renewal without a break in
the period, the policy was to be renewed by including the
diseases contracted during the period of expiring policy.
6.3 In the affidavit-in-reply dated 25th November
2002 filed on behalf of the respondent No.1 insurer, a
stand similar to the one taken in the affidavit-in-reply
filed in the other petitions, which are referred to
hereinabove, has been taken, and it was contended that
the policy decision was taken not to renew the cover,
which was in the realm of business and was, therefore,
not a justiciable issue. A copy of the prospectus of the
mediclaim insurance scheme and a mediclaim policy was
produced with the said affidavit-in-reply, at Annexure
"J" to the petition and it was contended in paragraph
10(d) that : " ....... the annual contract of renewal
is with mutual consent as per the prospectus and also
policy."
6.4 In the affidavit-in-reply dated 2nd December 2002
filed by the respondent No.2 - insurer also, similar
contentions, as were raised by the insurer in the other
petitions, are raised and are, therefore, not repeated.
It is, however, contended that the action of the
respondent No.2 in refusing to renew the mediclaim policy
of the petitioner No.3 was as per its business policy.
It was stated that the guidelines in the circular-letter
at Annexure "I" was an internal correspondence between
the two offices of the respondent No.2 and the insured
cannot claim any relief on the basis of such
correspondence. A copy of the mediclaim (individual)
insurance policy (revised) is annexed at Annexure "A"
with the said affidavit-in-reply.
6.5 In the rejoinder filed by the petitioner No.1, it
is reiterated that the insurers cannot act arbitrarily
and unreasonably like individuals carrying on business in
open market, and that they cannot discriminate among the
insured persons in the matter of renewal of policies. It
was contended that if the insurers refuse to renew the
policy on the ground that the insured had acquired a
disease, the very object of the mediclaim insurance
policy would be frustrated. It was also contended that
the action of the respondents in increasing the premium
was arbitrary and violative of the fundamental rights of
the insured guaranteed by Article 14 of the Constitution.
The decision under appeal :
7. The learned Single Judge, by a common judgement
in the matters from which the Letters Patent Appeals
arise, held that the action of the insurance company of
declining to renew the mediclaim policy on the ground
that the insured had suffered sickness when the policy
was subsisting, would be wholly unreasonable and
arbitrary. It was held that, in a given case, insured
may be healthy at the time when the policy is taken for
the first time, but thereafter he may suffer a disease
for the reasons beyond his control and the treatment of
such disease may continue for a period exceeding the
expiry of the period of insurance, and in such
circumstances, the stand taken by the insurance company
to deny the renewal of the policy for such disease can be
said to be unjust, unfair and arbitrary. Relying upon
the decision of the Supreme Court in Biman Krishna Bose
(supra), the learned single Judge held that, in view of
the said decision, it cannot be said that, in the matter
of mediclaim policy, the Court, while exercising its
jurisdiction under Article 226 of the Constitution,
cannot direct the insurance company to renew the
mediclaim policy if it finds that the action of refusal
or denial to renew the policy was arbitrary and unfair.
Relying upon the decision of the Supreme Court in L.I.C.
of India v. Consumer Education & Research Centre,
reported in (1999)5 SCC 487, the learned Single Judge
rejected the contention raised on behalf of the insurance
companies that they cannot be compelled to renew the
policy and to continue with their insurance since the
subject falls within the realm of contract. It was
further held that the attempt on behalf of the insurance
companies to dilute the effect of the judgement of the
Apex Court in Biman Krishna Bose (supra) was
misconceived, because, the Apex Court had examined the
matter and the action of the insurance company of
refusing to renew the mediclaim policy on the touch-stone
of Article 14 of the Constitution of India. It was held
that the distinction sought to be made on behalf of the
insurers on the ground that the monopoly of insurance
business which was with them was now removed since 1999,
was ill-founded. It was held that these
instrumentalities of the State were duty bound to act in
a just and fair manner as mandated by Article 14 of the
Constitution.
7.1 The learned Single Judge, in Special Civil
Application No.11844 of 2002, directed the insurer to
renew the mediclaim policy of the petitioner with effect
from 4th October 2002 after collecting necessary premium
including the rise in the premium as decided by the
insurance company, without excluding the diseases of
Heart, T.B. and Kidney failure.
7.1.1 In Special Civil Application NO.1128 of 2002, the
learned Single Judge directed the insurance company to
renew the mediclaim policy of the petitioner from
15-12-2002 after collecting the necessary premium without
excluding the sickness of heart.
Contentions and Case Law :
8. It was contended by the learned counsel for the
Appellant appearing in Letters Patent Appeal No.1028 of
2003 that there was no duty on the part of the insurance
company to provide mediclaim insurance unlike insurance
of motor vehicles which was statutorily required. It was
argued that, in view of the stipulation contained in
Clause 5.9 of the policy, the mediclaim policy could be
renewed only by mutual consent and such a policy could be
cancelled by giving a thirty days' notice. There was,
therefore, no right to get the policy renewed, vested in
the insured. It was contended that the mediclaim policy
was not a statutory policy and there was no legal or
statutory right in the insured to seek continuance of
such policy, nor any statutory obligation on the part of
the insurer to issue or to renew such policy. Therefore,
the insurance company can refuse to issue or renew such
policy depending on its volition. It was submitted that
the decision of the Supreme Court in Biman Krishna Bose
(supra) was not applicable to the present case, because,
it was held therein that renewal cannot be refused on
extraneous or irrelevant consideration. The said ratio
of that decision was laid down in the context of the
monopoly of general insurance business with the
nationalized companies that existed at that time, on the
basis of which, it was held that they were having
trappings of "State". It was contended that since the
monopoly of these insurance companies and general
insurance business statutorily ceased in 1999, in view of
the amendment in the Act of 1972 by insertion of Section
24A, they ceased to have trappings of State, and that the
decision in Biman Krishna Bose (supra) would no longer
apply to such companies.
8.1 It was submitted that the decision of the Supreme
Court in General Assurance Society Ltd. v. Chandmull
Jain (supra), which was rendered by a Larger Bench, was
applicable and therefore, as per the ratio of that
decision, right to terminate the policy at will cannot by
reason of the circumstances be read as a right to
terminate for a reasonable cause. It was submitted that
the insurance companies were not `State' within the
meaning of Article 12 of the Constitution and since there
was no right on the part of the insured to get the
insurance renewed, there was no corresponding duty on the
part of the insurer to renew the policy. It was then
argued that the insurance could be taken only of an
unforeseen event and that is why, once the disease is
contracted by the insured, there cannot be any further
insurance of such known event and therefore, renewal
could be refused in respect of such disease. It was
submitted that, if any right to renew the policy is
conceded in favour of the insured, the policy would no
longer remain an annual contract, but would become a
permanent policy, which was not intended under the
mediclaim insurance scheme.
8.2 In support of his contentions, the learned
counsel relied upon the following decisions :
[a] The decision of the Supreme Court in General
Assurance Society v. Chandmull Jain, reported in
AIR 1966 SC 1644, was cited for the proposition
that, in interpreting documents relating to a
contract of insurance, the duty of the Court is
to interpret the words in which the contract is
expressed by the parties. It was held that where
the parties agree upon certain terms which are to
regulate their relationship, it is not for the
Court to make a new contract, however reasonable,
if the parties have not made it for themselves.
A condition in an insurance policy giving mutual
rights to parties to terminate the insurance at
any time is a common condition in policies and
must be accepted as reasonable and the right to
terminate at will, cannot by reason of the
circumstances be read as a right to terminate for
a reasonable cause. In that case, a proposal was
submitted with a view to insure certain houses
against fire, including loss or damage by
cyclone, flood or change of course of river or
erosion of river, landslide and subsidence. The
period of insurance was to be from June 3, 1950
to June 2, 1951, the company accepted the
proposals by letters dated June 3, 1950 stating
that, in accordance with the proposals, the
insured was covered under the cover-notes
enclosed with the letters. It was stipulated
that the protection note cannot under any
circumstances be applicable for a longer period
than thirty days, and that, it is also
immediately terminated, before that date by
delivery of the policy, or, if the risk be
declined by the notification of such declinature.
On July 6, 1950, the company wrote to the assured
that, in accordance with the inspection report
lodged with the company, the risk was cancelled
from 6th July 1950. The cover note, thus, came
to be cancelled from 6th July 1950. In reply, a
stand was taken up by the insured that the risk
had already commenced and there could be no
cancelation. The company had relied upon
condition No.10 of the fire policy which enabled
it to terminate at the request of the insured or
at an option of the Society, on notice to that
effect being given to the insured. A suit came
to be filed thereafter against the society which
was dismissed, but in appeal, the claim was
decreed. The Division Bench of the High Court
held in appeal that the standard fire policy
applied condition No.10 to fire risk and not to
risk by flood, cyclone etc. It was held that
condition No.10 which gave a right to either
party to terminate the policy at will, could not
be considered a usual condition. One of the
questions that came to be considered by the Apex
Court was whether the cancellation of policy was
valid in law. The Supreme Court held that the
cover notes were integral part of the acceptance
of the proposals and the two had to be read
together. When the cover-note incorporates the
policy, it does not have to recite the terms and
conditions, but merely to refer to a particular
standard policy. The Supreme Court held that, as
a matter of pure principle, there was nothing
wrong in including a mutual condition for
cancellation of the insurance. It was held that
cancellation was reasonably possible before the
liability under the policy had commenced or had
become inevitable and it was a question of fact
in each case whether the cancellation was
legitimate or illegitimate (para 20). As regards
the condition No.10, it was held that the said
condition was intended to cancel the risk but not
to avoid liability for loss which had taken place
or to avoid risk which was already turning into
loss. On the facts, it was held that it could
not be said that the loss had commenced or that
it had become so certain as to be inevitable or
that the cancellation was done in anticipation
and with knowledge of inevitable loss. The
cancellation was done at a time when no one could
say with any degree of certainty that the houses
were in such danger, that the loss had commenced
or had become inevitable. It was held that there
was no evidence to establish this. It would be
clear from the judgement that no question of any
renewal option being exercised by the insured, as
in the case of mediclaim policy, was involved in
that decision.
[b] The decision of the Supreme Court in Biman
Krishna Bose v. United India Insurance Co.
Ltd., reported in (2001)6 SCC 477, was referred
for the purpose of distinguishing it on the
ground that the refusal to renew in that case was
on irrelevant considerations and further that the
decision was rendered at the time when there was
monopoly with the insurance companies in respect
of general insurance business in India. The
Supreme Court held that, a renewal of an
insurance policy means repetition of the original
policy and when renewed, the policy is extended,
and the renewed policy in identical terms from a
different date of its expiration comes into
force. It was held that, if a view was taken
that the mediclaim policy cannot be renewed with
retrospective effect, it would give a handle to
the insurance company to refuse the renewal of
the policy on extraneous or irrelevant
considerations and thereby, deprive the claim of
the insured for treatment of diseases which have
appeared during the relevant time, and further,
deprive the insured for all time to come to cover
those diseases under an insurance policy by
virtue of the exclusion clause. It was held
that, once it is found that the act of the
insurance company was arbitrary in refusing to
renew the policy, the policy is required to be
renewed with effect from the date when it fell
due for its renewal.
[c] The decision of the Supreme Court in H.H.
Maharani Shantadevi P. Gaekwad v. Savajibhai
Haribhai Patel, reported in 42(3) GLR 2097 was
cited for the proposition that, under general law
of contracts, any clause giving absolute power to
one party to cancel the contract does not amount
to interfering with the integrity of the
contract. It was held that a contract cannot be
held to be void only on this ground and such a
broad proposition of law that a term in a
contract giving absolute right to the parties to
cancel the contract is itself enough to void it,
cannot be accepted.
9. The learned counsel appearing in Letters Patent
Appeals No. 1003 of 2003 and No.1004 of 2003, adopting
the above contentions, further added that insurance was a
contingent contract and when a disease is already
contracted, there remains no future contingency and
therefore, there is no question of covering insurance in
respect of a disease already known to exist. It was
submitted that renewal being a fresh contract, any
disease which is contracted during the period of the
existing policy, would be a pre-existing disease at the
time of renewal of such policy. It was also contended
that if the insurance company is required to continue
insurance in such case, it would virtually amount to
paying an annuity to the insured. It was also argued
that the insurance company has a right to refuse the
issuance of policy at the initial stage and also to
refuse to renew the policy without any reason. It was
submitted that, under a mediclaim policy, the insurer is
bound to cover the disease suffered during the currency
of the policy, but the insurer has a right to refuse to
underwrite business for that disease or refuse renewal,
having regard to the nature of the disease. It was
submitted that the insurance company was required to
reduce its losses and in order to render better services
to the common men, they are required to draw a line which
is a matter that enters into the business sagacity and
convenience of the insurance company. The Courts,
therefore, cannot regulate such decisions of the
insurance companies. It was submitted that, on the facts
of the case, the insurance company was justified and
within its contractual rights to refuse renewal in both
the cases.
9.1 The learned counsel relied upon the following
decisions in support of his contentions :
[a] The decision of a Division Bench of this Court in
Life Insurance Corporation of India v. Asha
Goel, reported in 42(3) GLR 1990 was cited for
the proposition that, ordinarily the High Court
should not entertain a writ petition filed under
Article 226 of the Constitution for mere
enforcement of a claim under a contract of
insurance. It was held that 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. The court held that
where the claim by an insured or a nominee is
repudiated raising a serious dispute and the
courts find the dispute to be a bonafide one
which requires oral and documentary evidence for
its determination, then the appropriate remedy
would be a civil suit and not a writ petition.
[b] The decision of the Division Bench of this Court
in Special Civil Application NO. 3628 of 1993,
rendered on 31st July 1995 was relied upon for
the proposition that an insurance is a contract
between two parties and it is not possible for a
court exercising its jurisdiction under Article
226 of the Constitution to compel the State or a
statutory authority to enter into a contract
unless and until, by law, they are required to do
so. In that case, the insurance cover was sought
in respect of an ailment (mental retardation)
which was excluded and the argument was that
along with the other ailments which were included
under the mediclaim insurance scheme, even such
ailment should included and insurance cover be
provided to those who contract such disease. The
Division Bench held that, apart from the fact
that the mediclaim scheme did not expressly
include the case of a mentally retarded person,
it was to be borne in mind that the insurance
company may legitimately contend that the
mentally retarded person will not take due care
and caution against the contracting of illness
which a normal person would take, and in these
circumstances, the insurance companies would not
regard this as a prudent business risk to take.
Moreover, it was a matter of policy and the Court
would not direct the State to frame the policy in
a particular way.
[c] Reliance was placed on the decision of the High
Court of Karnataka in case of B. Krishna Bhat
rendered on 30th July 2002, in which also,
following their earlier decision, it was held
that, an insurance was a contract between two
parties and it was neither required and nor was
it desirable for a court to direct the State or
any other authority to enter into a contract
against their interests unless by law they are
required to do so. The Court held that the terms
of policy of insurance and its conditions are
"the contractual prerogatives of an insurance
company" and there is no legal provision which
can compel or make it obligatory for an insurance
company to make mediclaim insurance coverage to
the persons suffering from a particular disease.
In that case, a direction was prayed for to
evolve a scheme for benefit of senior citizens
and against the refusal to cover persons above
the age of 75 years under the mediclaim policy,
and, in that context, it was held that it was a
prerogative of the insurer to contract, undertake
the risk and fix the terms and conditions of the
policy. The same High Court had, in writ
petition No. 32804 of 1996, by its judgement and
order dated 21st November 2000, dealing with a
prayer where mediclaim insurance cover was sought
for epilepsy held that such a course was not
discriminatory and relied upon the decision of
this Court in Special Civil Application No. 3628
of 1995 decided on 31st July 1995, the ratio of
which is re-produced hereinabove.
10. The learned Advocate General appearing for the
insurers (respondents in Special civil Application No.
9425 of 2002) contended that insurance business was no
more concentrated in the hands of the nationalized
insurance companies and therefore, the aspects which have
a bearing on social security, such as, emanating from
Article 47 of the Constitution read with Article 21, may
not be germane for the decision of this case. It was
submitted that the exclusive privilege of these insurance
companies in the field of general insurance business was
given a go-bye and though all the companies were
government companies, they were bound to act in
accordance with business principles even in the field of
healthcare policy. It was contended that the statute
contemplated issuance of individual insurance policy and
there was no statutorily prescribed insurance policy and
therefore, these insurance companies were free to do
their business in accordance with their business
principles. It was submitted that offering a renewal
clause in the policy was itself a sound business
proposition so that business would not get diverted to
other companies after the initial cover is taken. It was
argued that every policy was an annual policy and at the
time of renewal, some exercise was required to be
undertaken. Therefore, renewal was not automatic.
Whether renewal should be given or not, would depend upon
the experience gained with the insured and if the insurer
finds that it is not good to continue business with the
insured, when it becomes burdensome, the insurer can stop
it and refuse to renew such a policy. It was further
contended that if a particular policy appears to be
commercially unviable and is becoming burdensome in view
of the frequency of claims, in the context of premium
paid, the viability in respect of such individual policy
can be examined by the insurance company for deciding
whether to renew the cover or not, and the Courts can
have no say in such matters. It was submitted that there
was no inconsistency between the provision of Clause 11
of the prospectus, at Annexure "J" to the petition, which
enabled the insured to get the policy renewed by payment
of renewal premium in time, because, the offer of renewal
therein was in the nature of soliciting business and did
not preclude the insurer from considering the question of
renewal when such premium was tendered. The insurance
company can keep on renewing the cover until the policy
becomes a burden. It was submitted that Clause 11 of the
prospectus being intended to attract more business, there
was no conflict between that clause and clause 5.9 of the
insurance policy under which renewal depended on mutual
consent of the parties. It was also submitted that
renewal was a fresh contract and therefore, if any
disease occurred during the period of existing policy,
renewal could be refused on the ground that the disease
was pre-existing in the context of the renewal of the
policy. It was finally contended that the right to
terminate the policy or refuse renewal was an absolute
right under the Cancellation Clause No. 14 of the
prospectus, which corresponded to Clause 5.9 of the
policy.
10.1 In support of his submissions, the learned
counsel relied upon the following decisions :
[a] The decision of the Supreme Court in State of
Tamil Nadu v. M/s Hind Stone, reported in AIR
1981 SC 711, was cited for the proposition, laid
down in the context of renewal of a lease, that,
an application for renewal was in essence an
application for the grant of a lease for a fresh
period, and therefore, Rule 8C of the Tamil Nadu
Minor Mineral Concession Rules (1959) was
attracted in considering applications for renewal
of leases also, rejecting the argument that it
should be confined, in its application, to grant
of leases in the first instance.
[b] The decision of the Supreme Court in The Central
Bank of India, Ltd. Amritsar v. The Hartford
Fire Insurance Co. Ltd., reported in AIR 1965 SC
1288, was cited for the proposition that it is
the Court's duty to give effect to the bargain of
the parties according to their intention and when
that bargain is in writing, the intention is to
be looked for in the words used unless they are
such that one may suspect that they do not convey
the intention correctly. The Court must give
effect to the plain meaning of the words however
it may dislike the result. In that case, the
Court was concerned with the clause in the
insurance policy which stated : "This Insurance
may be terminated at any time at the request of
the Insured. .....The Insurance may also at any
time be terminated at the instance of the
company". It was held that, shortly put the
clause says that either party may at its will
terminate the policy and no other meaning of the
words used was conceivable. The policy was taken
out against loss suffered by the destruction of
or damage to certain goods by fire.
[c] The decision of the Supreme Court in Tata
cellular v. Union of India, reported in AIR 1996
SC 11, was cited for pointing out the principles
culled out by the Supreme Court in paragraph 113
of its judgement, inter alia, to the effect that
the Government must have freedom of contract and
a fairplay in the joints was a necessary
concomitant for an administrative body
functioning in an administrative sphere or
quasi-administrative sphere. It was held that
the Court did not sit as a court of appeal but
merely reviews the manner in which the decision
was made. However, the decision must not only be
tested by the application of Wednesbury principle
of reasonableness but must be free from
arbitrariness not affected by bias or actuated by
mala fides.
[d] The decision of the Supreme Court in The State
Financial Corporation v. M/s Jagdamba Oil Mills,
reported in AIR 2002 SC 834, was cited for the
proposition that it is not for the Courts or a
third party to substitute its decision, however,
more prudent, commercial or businesslike it may
be, for the decision of the Corporation.
[e] The decision of the Supreme Court in Balco
Employees' Union (Regd.) v. Union of India,
reported in (2002)2 SCC 333, was cited for the
proposition that wisdom and advisability of
economic policies are ordinarily not amenable to
judicial review unless it can be demonstrated
that the policy is contrary to any statutory
provision or the Constitution. It was held that
it is not for the courts to consider relative
merits of different economic policies and
consider whether a wiser or better one can be
evolved.
[f] The decision of the Supreme Court in National
Insurance Co. Ltd. v. Seema Malhotra, reported
in (2001)3 SCC 151, was cited for the proposition
that, the only profit, if at all the insurance
company makes, out of the insurance business is
the premium paid when no accident or damage
occurs. But to ask the insurance company to bear
the entire loss or damages of somebody else
without the company receiving a pie towards
premium is contrary to the principles of equity,
though the insurance companies are made liable to
third parties on account of statutory compulsions
due to the initial agreement, entered between the
insured and the company concerned. It was held
that the essence of the insurance business is the
coverage of the risk by undertaking to indemnify
the insured against loss or damage, and
motivation of the insurance business is that the
premium would turn to be the profit of the
business in case no damage occurs.
11. The learned counsel appearing for the insured
persons led by the learned counsel for the petitioners in
Special Civil Application No. 9425 of 2002 have
contended that the mediclaim insurance policy was a
beneficial policy and if the insurance premium is paid in
time, as per the standing offer contained in Clause 11 of
the prospectus at Anenxure "J" to that petition, and on
the basis of the implied terms of the policy itself, the
policy was required to be renewed and cover extended. It
was submitted that the provisions regarding renewal on
payment of premium in time which were implied in the
stipulations of the policy in light of the offer to renew
contained in Clause 11 of the prospectus, would not get
nullified by the provisions regarding renewal by mutual
consent and termination contained in Clause 14 of the
prospectus and Clause 5.9 of the insurance policy. The
learned counsel relied upon the circular-letter dated
18-12-1998, at Anenxure "I" to the petition, pointing out
that disease occurring during the period of the existing
policy cannot be excluded at the time of renewal even as
per the understanding of the Insurers. It was also
submitted that it is only when the sum insured was to be
enhanced at the time of renewal that the question of
mutual consent would arise, because, a disease that has
occurred during the existence of the policy can be
excluded from the renewed policy only to the extent of
the enhancement of the sum insured and so far as the
basic sum insured is concerned, no such exclusion is
warranted and renewal could not have been refused on the
ground that the disease was contracted during the
existence of the policy. It was submitted that the
insurance companies were `State' within the meaning of
Article 12 of the Constitution and could not arbitrarily
or unreasonably refuse renewal of the mediclaim policy or
terminate the same, despite there being a clause
requiring mutual consent for renewal in the policy. The
learned counsel for the insured in all these matters
supported the reasoning of the learned Single Judge for
their argument that the policies ought to have been
renewed on payment of the renewal premium in time, and
that diseases could not have been excluded, as was sought
to be done by the insurers at the time of renewing the
policy.
11.1 In support of their contentions, the learned
counsel for the insured persons relied upon the following
decisions :
[a] Decision of the Supreme Court in Som Prakash
Rekhi v. Union of India, reported in AIR 1981 SC
212 was cited for the proposition that if a
statutory corporation body or other authority is
an instrumentality or agency of the government,
it would be an authority and therefore, State
within the meaning of the expression in Article
12 and be subject to the same constitutional
limitations as government.
[b] The decision of the Supreme Court in L.I.C. of
India v. Consumer Education and Research Centre,
reported in AIR 1995 SC 1811, was cited to point
out that the Supreme Court has held that when
public element is involved in the activities of
the Government, then there should be fairness and
equality. If the State does enter into a
contract, it must do so fairly without
discrimination and without unfair procedure. In
paragraph 20 of the judgement, the Supreme Court
held that the insurance being a social security
measure, it should be consistent with the
constitutional animation and conscience of
socio-economic justice adumbrated in the
Constitution as elucidated in the earlier part of
the judgement. In paragraph 17 of the judgement,
it was held that medical facilities to protect
the health of workers are fundamental rights to
workmen. In paragraph 18 of the judgement, it
was held that : "It would thus be well settled
law that the Preamble Chapter of Fundamental
Rights and Directive Principles accord right to
livelihood as a meaningful life, social security
and disablement benefits are integral schemes of
socio-economic justice to the people in
particular to the middle class and lower middle
class and all offendable people." In context of
life insurance coverage, it was held : "The
appropriate life insurance policy within the
paying capacity and means of the insured to pay
premia is one of the social security measures
envisaged under the Constitution to make right to
life meaningful, worth living and right to
livelihood a means for substenance". In
paragraph 22 of the judgement, it was held that
the Government, therefore, cannot anchor its role
as a private person. The exercise of the power
or discrimination to award contract etc. must be
structured by rational, relevant and
non-discriminatory standards or norms. The Court
held in paragraph 23 that : "Every action of the
public authority or the person acting in public
interest or its acts give rise to public element,
should be guided by public interest. It is the
exercise of the public power or action hedged
with public element 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 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." In paragraph 46 of the
judgement, the Court held : "in issuing a
general life insurance policy of any type, public
element is inherent in prescription of terms and
conditions therein. The appellants or any person
or authority in the field of insurance owe a
public duty to evolve their policies, subject to
such reasonable, just and fair terms and
conditions accessible to all the segments of the
society for insuring the lives of eligible
persons." (emphasis added).
[c] The decision of the Supreme Court in Central
Inland Water Transport Corporation Ltd. v.
Brojo Nath Ganguly, reported in AIR 1986 SC 1571,
was cited for the proposition that if there is an
instrumentality or agency of the State which has
assumed the garb of a Government Company as
defined in Section 617 of the Companies Act, it
does not follow that it thereby ceases to be an
instrumentality or agency of the State. It was
held that The Central Inland Water Transport
Corporation Ltd. was nothing but the Government
operating behind a corporate veil, carrying out a
governmental activity and governmental functions
of vital doubt that the Corporation is "the
State" within the meaning of Article 12 of the
Constitution.
Reasoning :
12. Improvement of public health is one of the
primary duties of the State under Article 47 of the
Constitution of India. Protecting health of the citizens
against infectious diseases, promoting better standards
of healthcare and ensuring that there are adequate
safeguards against financial risks connected with severe
ailments would constitute key objectives of the public
health policy in a welfare State. The socially and
economically marginal groups in the society can hardly
afford the financial burden involved in treatment of
diseases. This calls for an equitable distribution of
the financial burden of ill-health. Such
disproportionate economic burden on the poor sections
demands State intervention to ensure that private health
insurance is regulated in a manner that would promote the
goals of the national health policy in the context of the
directive principles of securing high standards of living
of the people, to improve public health and to secure
that the operation of the economic system does not result
in the concentration of wealth and means of production to
the common detriment, as mandated by Articles 39 and 47
of the Constitution. When the government is acting
through its statutory agencies, it is discharging its
obligations contained in the directive principles of
State policy through such arms.
12.1 The Parliament has legislative competence to make
laws with respect to "Insurance" under Entry 47 of the
Union List. In order to serve better needs of the
economy by securing the development of general insurance
business in the best interest of the community and to
ensure that the operation of the economic system does not
result in the concentration of wealth to the common
detriment and for regulation and control of such
business, the Parliament enacted the General insurance
Business (Nationalization) Act, 1972 (Act of 1972) which
by section 2 declared that the said Act was enacted for
giving effect to the policy of the State as defined in
Article 12 towards securing the principles specified in
Clause (c) of Article 39 of the Constitution.
13. The entire general business in India was
nationalized by the General Insurance Business
(Nationalization) Act, 1972. The Government of India,
through nationalization, took over the shares of 55
Indian Insurance Companies and the Undertakings of 52
Insurers carrying on general insurance business. General
Insurance Corporation of India (GIC) was formed in
pursuance of Section 9(1) of the Act of 1972, and was
incorporated on 22nd November 1972 under the Companies
Act, 1956, as a Private Limited Company. The GIC was
formed for the purpose of superintending, controlling and
carrying on the business of general insurance. As soon
as the GIC was formed, the Government of India
transferred all the shares it held of the general
insurance companies to the GIC. Simultaneously, the
nationalized undertakings were transferred to the Indian
insurance companies. After a process of mergers among
Indian insurance companies, four companies were left as
fully owned subsidiary companies of the GIC : (1)
National Insurance Company Limited, (2) The New India
Assurance Company Limited, (3) The Oriental Insurance
Company Limited, and (4) United India Insurance Company
Limited. The next landmark happened on 19th April 2000,
when the Insurance Regulatory and Development Authority
Act, 1999 (IRDAA) came into force. This Act also
introduced amendments to Act of 1972 and the Insurance
Act of 1938. By insertion of Section 24A in the Act of
1972, the exclusive privilege of the GIC and its
subsidiaries carrying on general insurance in India was
removed. By Section 10A inserted in the Act of 1972, by
General Insurance Business (Nationalization) Amendment
Act, 2002, all the shares in the capital of these
Government Insurance Companies that vested in the GIC
before the commencement of the said Amendment Act stood
transferred to the Central Government on such date.
Thus, the ownership of these companies was vested in the
Government of India. The GIC was notified as the "Indian
Re-Insurer" in November 2000 and through administrative
instructions, its supervisory role over subsidiaries was
ended. (Source : Website of General Insurance
Corporation of India - http://www.gicofindia.org/
about_us.html).
14. The expression "general insurance business" as
defined in Section 3(g) of the Act of 1972, means fire,
marine or miscellaneous insurance business, whether
carried on singly or in combination with one or more of
them, but does not include capital redemption business
and annuity certain business. It is unfortunate that the
subject of health insurance, which is at least as
important or perhaps more from the point of view of the
insurer, should find its humble place under the category
of "miscellaneous insurance business", when it clearly
merits recognition as a special type of insurance like
life insurance, and a separate legislation like the Irish
Legislation of Health Insurance Act, 1994.
14.1 Section 18(1) of the Act of 1972, inter alia,
provided that the functions of the General Insurance
Corporation shall include the carrying on of any part of
the general insurance business, if it thinks it desirable
to do so, aiding, assisting and advising the acquiring
companies in the matter of setting up of standards of
conduct and sound practice in general insurance business
and in the matter of rendering efficient service to
holders of policy of general insurance, as also, issuing
directions to the acquiring companies in relation to the
conduct of general insurance business. By proviso
inserted in sub-section (1) of Section 18 by the
Amendment Act, 2002, with effect from 7th August 2002, it
was provided that all the functions specified in
sub-section (1) of Section 18, on and from the date of
commencement of the said Amendment Act, 2002, shall be
performed by the Central Government.
14.2 Under Section 24(1) of the Act of 1972, except to
the extent expressly provided in this Act, on and from
the appointed day, the G.I.C. and the acquiring
companies had the exclusive privilege of carrying on
general insurance business in India. However, by Section
24A of the Act of 1972, which was inserted with effect
from 19th April 2000, the exclusive privilege of the GIC
and the acquiring companies, of carrying on general
insurance business in India ceased on and from the
commencement of the Insurance Regulatory and Development
Authority Act, 1999 (I.R.D.A.) and the GIC and the
acquiring companies were, thereafter to carry on general
insurance business in India in accordance with the
provisions of the Insurance Act, 1938. As per the
proviso added in Section 24A, with effect from 7th August
2002, the General Insurance Corporation, on and from the
commencement of the general Insurance Business
(Nationalization) Amendment Act, 2002 ceased to carry on
general insurance business, as noted above.
14.3 In this context, it was urged before us on behalf
of the insurance companies by their learned counsel that
these insurance companies should now be treated on the
same footing as the private companies, in the realm of
the general insurance business, including health
insurance contracts, with a freedom to decide whether
they should or should not renew a mediclaim policy. This
contention has no merit for the simple reason that
despite entry of private companies in the field, these
insurance companies over which the governmental control
is all pervasive and are owned by the Government of India
and therefore `State' within the meaning of Article 12 of
the Constitution, cannot overlook the underlying object
of their formation and the constitutional obligation to
act in a fair and reasonable manner without
arbitrariness, in providing cover to persons in the field
of general insurance.
15. Limitations have been imposed increasingly both
through legislation and judicial precedents on freedom of
contract to secure fairness and prevent unfair advantage,
for securing social interest. Equity demands a moral
conduct. In the law of insurance, legislation and
judicial decisions have co-operated to limit freedom of
contract. "Statutes such as valued policy laws,
provisions as to warranties, and laws providing for
standard policies, have taken many features of the
subject out of the domain of agreement. To no small
extent, under the guise of interpretation, the tendency
of judicial decision is, in effect, to attach rights and
liabilities to the relation of insurer and insured and
thus, remove the whole subject from the category of
contract." (See "Jurisprudence" by Dean Roscoe Pound,
Volume I, at page 439).
16. Insurance is regulated in increasing measure by
administrative supervision by statutory authorities
controlling terms of policies and prescribing limits to
what may be agreed upon. Legislature has conferred large
powers of regulation to administrative agencies, the
effect of which is to limit freedom to make contracts and
prescribe guidelines or standardize contracts.
17. It is the statutory duty of these government
insurance companies under Section 19 of the Act of 1972
"to carry on general insurance business" and to so
function under the Act, "as to secure that general
insurance business is developed to the best advantage of
the community". Thus, these statutorily controlled
companies which are `State' within the meaning of Article
12 of the Constitution cannot function arbitrarily in
doing their general insurance business and should act in
the best advantage of the community, failure in which
will justify judicial intervention to keep them within
the bounds of their constitutional duty to act in a
reasonable and fair manner. Any action of the Government
Insurance Company which is arbitrary, unfair or
untenable, or adverse to the interest of the community,
would, therefore, amount to breach of duties cast upon
these government companies and become subject to judicial
review. The contention that these government insurance
companies, which are `State' under Article 12 should now
be treated at par with the private insurance companies
which are not `State' for the purpose of considering
whether there is breach of constitutional obligations
imposed on `State', cannot, therefore, be countenanced.
We, however, make it clear that these observations should
not be construed to mean that the private companies doing
statutorily regulated business of general insurance,
particularly healthcare, have no similar obligations
arising by virtue of regulatory control and the Code of
Conduct / Practice that may apply to them for a fair and
reasonable conduct in the field of healthcare, which
predominantly involves public interest. Afterall, public
health cannot be thrown to the mercy of any arbitrary
freedom of private contracts, because, the very nature of
contracts involving health insurance is not a matter of
mere private concerns of two contracting parties, but
operates in a public field where concerns of community
interest have to be read in such transactions, in the
regulatory field. The law in India has addressed this
concern and the Tariff Advisory Committee and the IRDA
have the power to issue guidelines relating to
non-discrimination and control and regulation of rates,
advantages, terms and conditions.
17.1 The IRDA Act of 1999 established the Authority
"to protect the interests of holders of insurance
policy". Under Section 14(2)(b) of the Act of 1999, the
powers and functions of the Authority include,
"protection of the interests of the policy - holders in
matters concerning assigning of policy, nomination by
policy-holders, insurable interest, settlement of
insurance claim, surrender value of policy and other
terms and conditions of contracts of insurance."
(emphasis added). The Authority is empowered to
supervise the functions of the Tariff Advisory Committee
under Clause (n) of sub-section (2) of Section 14. Under
Section 26, the Authority is empowered to make
regulations consistent with the Act and the Rules made
thereunder to carry out the purposes of the Act.
17.2 In the exercise of its powers under Section
114A(2)(zc) of the Insurance Act, 1938 read with Sections
14 and 26 of the IRDA Act, 1999, the Authority, in
consultation with the Insurance Advisory Committee, has
made the regulations known as "Insurance Regulatory and
Development Authority (Protection of Policy Holders'
Interests) Regulations, 2002. The word `cover' is
defined in Regulation 2(c) so as to mean an insurance
contract whether in the form of a policy or a cover note
or a Certificate of Insurance or any other form prevalent
in the industry to evidence the existence of an insurance
contract. The word `prospectus' as defined in Regulation
2(e) means a document issued by the insurer or in its
behalf to the prospective buyers of insurance, and should
contain such particulars as are mentioned in Rule 11 of
Insurance Rules, 1939 and includes a brochure or leaflet
serving the purpose. Such a document should also specify
the type and character of riders on the main product
indicating the nature of benefits flowing thereupon.
Regulation 3, inter alia, provides that, notwithstanding
anything mentioned in regulation 2(e), a prospectus of
any insurance product shall clearly state the scope of
benefits, the extent of insurance cover and in an
explicit manner explain the warranties, exceptions and
conditions of the insurance cover. Under Regulation
7(1), matters to be clearly stated in general insurance
policy are enumerated, and they include, "policy terms,
conditions and warranties", under clause (i), and,
"provision for cancellation of the policy on grounds of
misrepresentation, fraud, non-disclosure of material
facts or non-cooperation of the insured", under clause
(m). The provisions of the Act of 1999 and the nature of
regulation and control exercised thereunder show that the
general insurance business is not left to the exclusive
domain of purely a private contract of two individuals
not involving any public interest. The constitutional
and statutory provisions regulate these insurance
contracts and the interest of the community is kept
paramount in consonance with the Directive Principles of
State Policy.
17.3 The Mediclaim Insurance Scheme, which was framed
by the GIC, was a Scheme approved by the Central
Government. It was not a scheme floated by some private
party. This is evident from circular No. 464 dated 18th
July 1986 issued by the C.B.D.T. under Section 119 of
the Income-tax Act, 1961, in which, there is a reference
to the budget speech in the year 1986-87 of the Finance
Minister in which a proposal to provide relief to
self-employed persons and salary earners other than those
whose medical needs were taken care of by the employers
in respect of medical expenses incurred by them by
allowing a deduction out of their total income, subject
to limits, for any premium on medical insurance policies
taken by them with the General Insurance Corporation of
India, was announced. Pursuant to that, a new clause
(ib) in sub-section (1) of Section 36 of the Income-tax
Act, 1961, was inserted, to allow a deduction to an
employer in respect of premium paid by him by cheque for
insurance on the health of his employees in accordance
with a scheme framed in this behalf by the General
Insurance Corporation of India and approved by the
Central Government. Section 80D was inserted in the
Income-tax Act, 1961 to provide a deduction to an
assessee upto Rs.3,000 a year in respect of the insurance
premium paid by him by cheque. In para 4.2 of the
circular, it was mentioned that the scheme was being
finalized separately. Accordingly, the scheme was
finalized which is known as "Hospitalisation and
Domicilliary Hospitalisation Benefit Policy"; (The said
circular is re-produced in Chaturvedi & Pithisaria's
Income-tax Law, Fifth Edition, Volume 2, at page 1944 and
the scheme appears at page 3407 under Section 80D of that
volume). Thereafter, Circular No. 537 dated 12th July
1989 was issued by the C.B.D.T., which is re-produced in
179 ITR (Statutes) page 1, on the subject of Deduction of
Tax at Source during the financial year 1989-90 under
Section 192 of the Income-tax Act, 1961 and it will be
seen from para (ix) thereof that the said scheme framed
by the General Insurance Corporation of India is referred
to and it is stated that it was approved by the Central
Government and was popularly known as "Mediclaim". We
had to resort to this exercise of finding out whether
this mediclaim insurance scheme was a scheme approved by
the central Government, because, we did not get any
assistance throughout the hearing on the genesis of the
scheme and perhaps the insurance companies themselves
were not aware that the scheme which was framed by the
GIC was a Scheme approved by the Central Government, on
an assumption that this fact could not have been
deliberately withheld from the Court, if it was to their
knowledge.
17.4 It is, therefore, difficult to accept the
argument that the directive principles of State policy
declared under Articles 39 and 47 of the Constitution
would not be germane in the context of the insurance
business in healthcare carried out by these Government
Companies when their exclusive privilege was given a
go-bye, as was sought to be contended on behalf of the
insurer companies.
18. The principal contention canvassed on behalf of
the insurance companies is that, under Clause 5.9 of the
insurance policy, which was a term of the contract of
insurance, it was made clear that the mediclaim policy
can be cancelled at the option of the insurer without any
reason whatsoever, and that it may not be renewed if one
of the parties to the contract did not agree to the
renewal. Therefore, renewal of mediclaim policy cannot
be claimed as a matter of right by the insured. It was
also argued that the insurance companies have to function
on sound business principles and if from the experience
gained, the insurer finds that it is not prudent to
continue the policy of a particular insured, the insurer
can stop it. It was contended that the insurers are
justified in taking a prudent commercial decision and
refusing to insure a person in respect of the diseases
developed by him during the operative period of the
existing policy and are also justified in refusing to
renew the policy.
19. This takes us to the consideration of the nature
and terms of the mediclaim insurance policy. As
mentioned in paragraph 3.4.46 of the 9th Five Year Plan
(Vol.2), surveys carried out by the National Sample
Survey Organization (N.S.S.O.) indicated that high cost
of hospitalization is one of the factors leading to
indebtedness especially among low and middle-income group
population. Health insurance to meet the cost of
hospitalization for major illness will ensure that health
care costs do not become a major financial burden or
cause of indebtedness among these patients or their
families. "Over the last two decades several heath
insurance schemes have been introduced. ...... Some of
the currently operationalised insurance schemes include
Mediclaim, Group Medical Insurance Scheme, Group Health
Insurance Scheme, Bhavishya Arogya (Insurance for senior
citizens), Senior Citizen Unit Plan, Cancer Insurance,
Asha Deep and Jan Arogya Bima Policy". It was observed
that the premium of health insurance may have to be
adjusted on the basis of health status, age and family of
the person at the time of entry into health insurance.
Yearly, "no claim bonus / adjustment of the premium"
could be made on the basis of previous year's
hospitalization cost reimbursed by the insurance scheme.
"This would be a mechanism through which the health
education messages regarding the importance of remaining
healthy through optimum utilization of the preventive and
promotive services as well as adopting a healthy life
style get reinforced by economic incentives. (See para
3.4.46 of the 9th Five Year Plan (Vol.II).
19.1 The above observations in the 9th Five Year Plan
of our country clearly indicate that healthcare schemes
including Mediclaim are devised to ease the financial
burden of the high costs of hospitalization on the low
and middle income group population. This would enable
such class of persons, namely the lower and middle income
group population, who are covered by such health
insurance scheme to avail of a better quality of medical
services which otherwise might be out of the reach of
such persons. The mediclaim scheme is, therefore, not a
subject of mere private concern of two contracting
parties, but a result of a national concern reflected in
the norms of national health policy.
20. The Government intervention for improving health
of the people is a constitutional obligation as reflected
from the Directive Principles of State Policy under
Articles 38, 39 and 47 of the Constitution. It becomes
more imperative for the Government to intervene where
illnesses are very expensive to treat. Equity in
healthcare would mean equity in the burden of health
spending. By providing subsidized health services or
health insurance, the government can militate the
inequity in such cases to achieve an equitable
distribution of the financial burden of ill-health and
morbidity. "The Societies are concerned not just about
improvements in "average health", but also, especially,
about the health and economic welfare of the socially and
economically marginal groups in the society". (See
Health Policy Challenges for India : Private Health
Insurance & Lessons from the International Experience",
by Ajay Mahal).
20.1 Any tendency to undertake risk selection so as to
insure low risk individuals and exclude the high risk
ones from insurance via exclusion conditions would impose
a heavy financial burden on the people who are prone to
get sick and most in need of risk protection, and
obviously work against the above constitutional
perspectives. Public health insurance schemes have,
therefore, to be safeguarded against such tendencies that
may be disguised under a refined argument of business or
commercial prudence.
21. The fact that the field of health insurance is
not left to the uninhibited freedom of contract by these
government insurance companies is clearly reflected from
various statutory provisions. The Act of 1972 was
enacted, inter alia, for securing the development of
general insurance business "in the best interest of the
community". The GIC was created for the purpose of
superintending, controlling and carrying on business of
general insurance and its functions, as noted above,
include under clause (e) of Section 18(1) "issuing
directions to acquiring companies in relation to conduct
of general insurance business"; and under Section 19, it
is obligatory on the part of the insurance companies to
carry on general insurance business and to so function
under the Act, "as to secure that general insurance
business is developed to the best advantage of the
community". Section 39(2) of the Act of 1972 empowers
the Central Government to make rules, inter alia,
providing for conditions, if any, subject to which the
Corporation and the acquiring companies shall carry on
general insurance business. The I.R.D.A., 1999 declares
one of its objects "to protect the interests of holders
of insurance policies" and the powers of the authority
include "protection of the interests of the policy
holders" in the matters concerning, inter alia, terms and
conditions of contracts of insurance, under Section
14(2)(b). The Central Government is, by Section 18(1) of
the Act of 1999, empowered to issue binding directions on
question of policy to the authority.
21.1 The High Powered Committee set up by the Central
Government in April 1993 to examine the structure of the
insurance industry and recommend changes to make it more
efficient and competitive, in its report submitted on 7th
January 1994, felt that the Insurance Regulatory
Apparatus should be activated even in the present set up
of nationalized insurance sector and recommended, inter
alia, the establishment of a strong and effective
regulatory authority in form of a statutory autonomous
board. (See Statement of Object and Reasons of the Act
of 1999).
21.2 It will be seen from the Government of India,
Citizens' Charter of General Insurance Industries, which
was required to be given wide publicity by the GIC and
its subsidiaries that the mission declared therein was to
develop the general insurance business "in the best
interests of the community". The progress on
implementation of the Charter upto quarter ending
September 1999 showed that the GIC and the Government
Companies had introduced several covers "for the weaker
sections of the society at the affordable rates".
(Source : htpp: // goicharters.nic.in / gic.htm).
21.3 The throwing open of the insurance sector to
competition from private Indian Companies, by insertion
of Section 24A in the Act of 1972, which was done by
Section 32 read with the Third Schedule of the Act of
1999, did not, however, mean that the GIC or the
acquiring companies ceased to be "State" within the
meaning of Article 12 of the Constitution. Rightly,
therefore, the learned Advocate general, with his usual
fairness, did not raise the contention, which was raised
by the other counsel for the insurers that these
government insurance companies are not "State" within the
meaning of Article 12 of the Constitution.
23. It is, therefore, clear to us that the
nationalized insurance sector remains in the field and
these four government insurance companies continue to be
bound by their constitutional obligations attached to the
State as defined by Article 12 of the Constitution for
the purpose of Parts III and IV of the Constitution.
Thus, the right to equality as guaranteed by Article 14
of the constitution cannot be violated by them and they
cannot act in a discriminatory manner or arbitrarily even
in the matter of insurance contracts besides being under
a duty to apply the directive principles laid down in
Part IV of the Constitution which are fundamental in the
governance of the country. We would, therefore, view the
obligations of these government insurance companies under
the mediclaim insurance scheme which was introduced by
the GIC with prior approval of the Central Government and
the terms and conditions of the cover in the above
constitutional perspective and not from the angle of a
purely private negotiatory contract between two
individuals not involving any public interest or
statutory regulation of contractual freedom.
23. The standardised prospectus of the mediclaim
insurance policy, a copy of which is produced by the
insurance company with its affidavit-in-reply, at
Annexure "J" of Special Civil Application No. 9425 of
2002 as well as the terms and conditions of a
standardized mediclaim policy which is also produced,
show that the policy covers reimbursement of
hospitalization / domiciliary hospitalization for illness
/ diseases or injury sustained. This insurance scheme
also provides for (1) family discount in premium, (2)
cumulative bonus and (3) cost of health check up, as per
clause 1.3, with a rider that renewal of the insurance
without break is essential. Clauses 4.0, 4.1 and 4.3,
which deal with exclusion are relevant in the context of
the present controversy, read as follows :
"4.0 The Company shall not be liable to make
any payment under this policy in respect
of any expenses whatsoever incurred by
any insured person in connection with or
in respect of :
4.1 All diseases / injuries which are
pre-existing when the cover incepts for
the first time,
4.2 Any disease other than those stated in
clause 4.3, contracted by the insured
person during the first 30 days from the
commencement date of the policy. This
exclusion shall not however apply if in
the opinion of Panel of Medical
Practitioners constituted by the Company
for the purpose, the insured person could
not have known of the existence of the
disease or any symptoms or complaints
thereof at the time of making the
proposal for insurance to the Company.
This condition 4.2 shall not however
apply in case of the insured person
having been covered under this scheme or
group insurance scheme with any of the
Indian Insurance companies for a
continuous period of preceding 12 months
without any break.
4.3 During the first year of the operation of
the policy, the expenses on treatment of
diseases such as Cataract, Benign,
Prostatic, Hypertrophy, Hysterectomy for
Menorrhagia or Fibromyema, Hernia,
Hydrocele, Congential Internal Diseases,
Fistula anus, Piles, Sisusitis and
related disorders are not payable. If
these diseases are pre-existing at the
time of proposal, they will not be
covered even during subsequent period of
renewal too."
23.1 A bare reading of the above exclusionary
provisions in the policy shows that only in respect of
the diseases / injuries which are pre-existing "when the
cover incepts for the first time", the liability of the
company will be excluded. This would mean that the
liability in respect of the disease / injury occurring
during the continuance of the cover without break will
remain. This becomes more evident from clause 4.2 which
affirms the liability in respect of the diseases
contracted by the insured during the first thirty days
from the commencement of the policy where the insured
person is already covered under the scheme with any of
the Indian Insurance Companies for a continuous period of
preceding 12 months without any break. Again, in clause
4.3, the expression "if these diseases are pre-existing
at the time of proposal, they will not be covered even
during subsequent period of renewal" would suggest that
the liability in respect of disease other than those
which are specified in the said sub-clause will arise
even during the subsequent period of renewal if they are
not pre-existing at the time of proposal. There is no
provision for excluding the diseases, contracted during
the first year of operation of the insurance cover, in
the subsequent period when the cover is extended by
virtue of renewal without break. Even for the diseases
specified in clause 4.3, where the liability is excluded
during the first year of operation of the cover, in the
subsequent period of renewal, the liability will arise if
these diseases were not pre-existing at the time of
proposal.
24. In the Prospectus of the mediclaim insurance
scheme, at Annexure "J" to Special Civil Application
No.9425 of 2002, Clause 11 which has a bearing on the
aspect of renewal of the policy, reads as under :
"11. The policy is issued for a period of one
year and subject to review. Continuation of
insurance cover will be available if the renewal
premium is paid in time. On continuation of
insurance cover and timely remittance of premium
insured becomes eligible to following benefits
from first days after renewal :
(a) Cumulative bonus if accrued (Ref.item 9).
(b) Cost of health check-up if due (Ref.
item 10).
(c) Payment of hospitalization cost for
disease / illness / injury sustained even
during first 30 days of renewal and first
year exclusion (Ref. Deletion of 4.2 and
4.3).
Renewal of insurance cover : A further
period of 7 days from the date of expiry will be
permissible in exceptional cases subject to
Health Certificate from Medical practitioner.
N.B.:- Any disease contracted during the period
of seven days extensions will be excluded from
the date of renewal in addition to other disease
excluded in the expiring policy, whereas other
benefits mentioned above in item 11(a), (b), (c)
will be permissible."
24.1 The words "continuance of cover will be available
if the renewal is paid in time" and the provision to the
effect that the benefits on the continuance of cover will
accrue from the first day after renewal, are clearly
indicative of the fact that the only pre-condition to
continuance of cover was timely payment of the renewal.
The rider below this clause that "any disease contracted
during the period of 7 days extensions will be excluded
from the date of renewal", would mean that if the disease
is already covered under the policy and renewal premium
is paid in time, such disease will continue to be covered
as it was already under the existing policy.
24.2 The terms and conditions referred in the
prospectus would throw light on the intention of the
parties to the contract of insurance. The mediclaim
insurance scheme reflected in the prospectus, as noted
above, was floated by the GIC and its subsidiaries which
are "State" and the renewal provision in Clause 5.9, on
which much reliance was placed, is required to be read in
the light of the option of renewal given to the insured
as implied in the aforesaid clauses of the mediclaim
policy and as expressed under Clause 11 of the
prospectus.
25. Clause 5.9 of the mediclaim policy, (which is
same as the Cancellation Clause No. 14 of its
prospectus, (Annexure "J" of the year 2002), reads as
follows :
"5.9 The Policy may be renewed by mutual
consent. The company shall not however be bound
to give notice that its due for renewal and the
Company may at any time cancel this Policy by
sending the insured 30 days notice by registered
letter at the insured's last known address and in
such event the Company shall refund to the
insured a pro-rata premium for unexpired period
of insurance. The Company shall, however, remain
liable for any claim which arose prior to the
date of cancellation. The Insured may at any
time cancel this policy and in such event the
company shall allow refund of premium at
Company's short period rate only (table given
herebelow) provided no claim has occurred upto
the date of cancellation."
26. The insurer, under para 1.1 of the policy, had
undertaken that "If during the continuance of this policy
by renewal, any insured person shall contract any
diseases or suffer from any illness ......... The
Company will pay to the insured person the amount of such
expenses as are reasonably and necessarily incurred.
......". This stipulation clearly indicates that the
policy would be continued by renewal in respect of the
diseases covered by it. The provisions in Clause 7.0
relating to "cumulative bonus" stipulating that the sum
insured under the policy shall be progressively increased
by 5% in respect of each claim free year of insurance
subject to the maximum of ten years and in Clause 7.1
that, in case of claim under the policy in respect of the
insured person who has earned the cumulative bonus, the
increased percentage will be reduced by 10% of the sum
insured at the next renewal, and that, basic sum will not
be reduced, are indicative of the intention of the
parties including the insurer to treat the policy without
break as a continuance of cover so long as the premium
amount is paid, as held out in the above clauses of the
policy and more explicitly in clause 11 of the
prospectus, reference to which would immediately avoid
the ambiguity that is sought to be introduced by reading
the stipulation of renewal by consent in clause 5.9 as
giving an absolute right to the insured to refuse renewal
which is not in tune with the said clauses 1.1, 4.1, 4.2,
4.3, 7.0 and 7.1 of the mediclaim insurance policy.
27. Following aspects clearly emerge from the above
Clauses 1.1, 4.1, 4.2, 4.3 and 7 of the mediclaim
insurance policy and Clause 11 of the prospectus of the
mediclaim insurance policy that : (i) the cover for the
diseases which are not excluded from the first year of
the cover would continue even in the renewal years if the
renewal premium was paid in time; (ii) even if the
insured contracts any disease which is not excluded from
the existing cover, it will be continued to be covered in
the subsequent year, if the renewal premium is paid in
time; (iii) the disease covered under the policy will not
be excluded during the continuance of the cover.
Afortiori, the renewal could not be refused if
insured paid the renewal premium in time.
28. The expression "policy may be renewed by mutual
consent" and "the company may at any time cancel this
policy" occurring in Clause 5.9 of the policy and Clause
14 of its prospectus cannot be resorted to by these
government companies for urging that they can arbitrarily
put an end to the mediclaim policy or arbitrarily refuse
to accept renewal premium which is tendered in time.
These government companies being "State" under Article 12
are under a constitutional obligation to act reasonably
and without any arbitrariness even in the matter of
contract. The stipulation regarding renewal by mutual
consent will, therefore, apply to cases where the
government insurance company is not obliged under the
existing policy to continue the cover on payment of the
renewal premium in time. The disease covered by the
insurance during the continuance of the policy by renewal
can never by itself become the ground for refusing
renewal when the disease surfaces and creates the
obligation to the extent of the sum insured under the
cover which cover is required, as per the stipulation,
"to be continued on payment of the renewal premium in
time". Happening of the event which may give rise to a
claim under the policy cannot be a ground for cancelling
the cover. A party to the contract cannot disown the
liability under the contract by cancelling it. The
insurer is under a duty to accept the renewal premium
paid in time because of the standing offer to renew
implied in various clauses of the policy and expressly
stipulated under Clause 11 of the prospectus, which
standing offer can be accepted by timely payment of the
renewal premium. The cancellation Clause 5.9 of the
policy stating that the policy may be cancelled by giving
30 days' notice will have to be read in the context of
the grounds mentioned in Regulation 7(1)(m) of the
Protection of Policy Holders' Interests Regulations 2002,
which provides that cancellation can be made only on
grounds of misrepresentation, fraud, non-disclosure of
material facts or non-cooperation of the insured.
29. Prospectus issued by the insurer to the
prospective buyers of insurance is required to contain
such particulars as are mentioned in Rule 11 of the
Insurance Rules 1939. The said Rule 11, inter alia,
provides that no person shall supply or exhibit any
prospectus with a view to the issuance of a policy of
insurance unless such a prospectus includes (a) a
description of the contingency or contingencies to be
covered by insurance, and (b) a full statement of
circumstances, if any, in which, rebates of premiums
quoted in the prospectus or table shall be allowed on the
effecting or renewal of a policy. As per Rule 3 of the
Protection of Policy Holders' Interests Regulations,
2002, a prospectus of any insurance product shall clearly
state the scope of benefits, the extent of insurance
cover and in an explicit manner, explain the warranties,
exceptions and conditions of the insurance cover. Thus,
prospectus for an insurance policy is statutorily
required to reflect the terms on which the insurance is
offered. Therefore, the renewal clause in the prospectus
of a policy under this mediclaim insurance scheme which
provided that continuance of insurance cover will be
available if renewal premium is paid in time, is required
to be kept in mind to ascertain the intention of the
parties including the insurance company and such promise
is to be read while construing the aspects of renewal
under clause 5.9 of the policy since it is also borne out
from the other clauses namely, clauses 1.1, 1.2, 4.1,
4.2, 4.3, 7.0 and 7.1 of the policy itself, which all
indicate that cover would continue on renewal premium
being paid in time; and the effect of those clauses will
have to be understood in light of clause 11 of the
prospectus at Annexure "J" in order avoid any ambiguity
over the aspect of renewal of the policy.
30. No excuse of "prudent insurer" or "business
sagacity" can be put forth for shirking the liabilities
that arise by virtue of the terms of the contract of
mediclaim insurance. Business prudence theory does not
warrant escapement from the contractual obligations.
These government insurance companies, therefore, cannot
arbitrarily refuse the cover, which is required to be
continued when renewal premium is paid in time, under the
guise of business sagacity. Business prudence or
sagacity is not a defence to commit a breach of a
contractual obligation. Prudent insurer may ponder
before issuing the cover at its inception and can refuse
to issue the cover for valid reasons or may even stop
doing business, but once the contract is entered into,
the contractual rights and obligations alone matter even
while "prudence" might lament for the onerous situation
that may have arisen under the contract.
30.1 All the bargains of insurance covers need not
result in profits. The very nature of insurance business
would have instances where the diseases may or may not
occur, raising liability in some of greater measure than
others. While arguing that no philanthropic approach is
required to be adopted, the learned counsel for the
insurer overlooked that it is the terms of the renewal as
understood by these government companies themselves in
their prospectus that bind them and the insured were
within their legal rights to insist on continuance of the
cover of their mediclaim insurance on payment of the
renewal premium in time and did not need to appeal to any
philanthropical instincts of the insurer companies.
Indeed, for those who are oblivious of their
constitutional, legal and contractual duties,
philanthropy would be an alien concept.
31. Frequency of claim when it arises under the cover
issued under this mediclaim scheme, which the insurer is
bound to honour under the contract, cannot constitute a
ground for evading the liability nor can it be said that
such frequency amounts to a "high moral hazard" entitling
the insurer to cancel or refuse to renew the cover.
Claims based on occurrence of diseases covered by the
mediclaim insurance can never be considered to be having
any bearing on the moral integrity of the insurer when
they are genuine, and their cover cannot be treated a
"high moral hazard" justifying refusal to renew, or
cancellation of the cover, as was sought to be urged.
32. The contention raised on behalf of the insurers
that these insurers can refuse to renew if the
continuance of the cover becomes more burdensome is
against the basic rule, that the parties to a contract
must either perform or offer to perform their respective
promises, unless such performance is dispensed with or
excused under the provisions of the Indian Contract Act
or any other law. (See Section 37 of the Indian Contract
Act).
32.1 There was neither express nor implied term in the
contract of mediclaim insurance that, on the contract
becoming more onerous or burdensome, the insurer can
refuse renewal of policy despite timely tender of renewal
premium by the insured. Parties to a contract are bound
to perform their obligations undertaken by them and
cannot claim to be excused by the mere fact that
performance has subsequently become more burdensome. A
party cannot be absolved from liability to perform a
contract merely because the performance becomes more
onerous. (See M/s Alopi Parshad and Sons, Ltd. v.
Union of India, reported in AIR 1960 SC 588).
32.2 Therefore, option of renewal given to the insured
being an agreed term of the mediclaim policy, if denied
by any arbitrary refusal or on the ground that the
contract has become more onerous or burdensome, would
amount to breach of term of the contract which enabled
the insured to get the policy renewed by accepting the
standing offer to get it renewed contained in Clause 11
of the prospectus. If the offer to get the policy
renewed by timely payment of insurance can be sent by a
reminder-notice by the insurer and could be accepted by
tendering the premium, there is no reason why the insured
should not be in the same position to accept the offer to
renew which was incorporated in Clause 11 of the
prospectus of the mediclaim insurance policy and also
implied in the contract of insurance under which the
insurance cover was stipulated to be continued on payment
of the annual premium in time and it was provided that
bonus benefits would be given where the continuance of
cover was claim free and without break from year to year.
Hardship or inconvenience or material loss by itself
would not justify repudiation of the contract on the
ground that there is thereby a change in the contractual
obligation to renew the cover, when the insured fulfills
his obligation to pay the premium in time as stipulated.
There is no impossibility of performance of the
contractual obligation to renew the cover as stipulated
merely because the deal becomes less profitable or
entails a loss. When renewal is given in respect of the
insurance under the same policy for a number of claim
free years by letting the insured pay premium in time,
then performance of the obligation to renew as per the
stipulation of renewal, which is clearly implied having
regard to the nature and contents of the contract and so
understood by the insurer itself in its prospectus and
the circular letter, cannot be refused on the ground that
the continuance of cover by renewal of the mediclaim
insurance policy would become financially more onerous.
Any arbitrary refusal to renew the cover by these
government companies will be open to judicial review.
Refusal would, however, be justified on the grounds such
as fraud, misrepresentation, non-fulfillment of the
obligations by the insured, or where the performance of
obligation under the contract to renew the policy as
stipulated is dispensed with or excused under the
provisions of the Indian Contract Act or of any other
law.
33. If the insurance company provides continuity of
cover under the mediclaim policy on payment of renewal
premium in time and simultaneously in the cancellation
clause provides that renewal will be by mutual consent,
then on a harmonious construction of the two seemingly
opposite provisions, the mutual consent provision will
apply only to such renewals which are not consequential
upon the timely payment of premium that would entail
continuity of the cover. This can be illustrated by
reference to the cases where the insured may want to
continue their cover, but with enhancement of the sum
insured. In such cases, the question of consenting to
renew the cover for the extent of enhancement of the sum
insured would arise and it is in the context of such
enhanced sum that the company may become justified to
consider exclusion of the disease so far the enhanced sum
is considered though it would be liable to continue the
cover for the basic sum insured, if the renewal premium
was paid in time, without seeking such enhancement. If,
however, a conflict is to be read between these two
provisions, namely, Clause 11 of the Standard Prospectus
and Clause 5.9 of the policy, same as Clause 14 of the
Prospectus, the policy will have to be construed strongly
against the insurer by giving due weight to the standing
offer to renew contained in the Clause 11 of the
prospectus which gives proper meaning to various clauses
of the policy, entitling continuance of cover on payment
of renewal premium by the insured in time.
33.1 It is a settled legal position that where, after
every effort to reconcile more than two clauses of
contract of insurance appear plainly in conflict, it is
necessary to consider the comparative weight to be given
to each of them. In such cases, one of the rules
applicable to determine which clause shall prevail is
that the policy should be construed strongly against the
insurers. In case of ambiguities in a policy, the rule
is that the policy being drafted in a language chosen by
the insurers, must be taken most strongly against them.
It is construed contra proferentes ( Verba cartarum
fortius accipiuritur contra proferentem i.e. words are
to be interpreted most strongly against he who uses
them), against those who offer it. The insured cannot
put his own meaning upon a policy, but, where it is
ambiguous, it is to be construed in the sense in which he
might have reasonably understood it. If the insurers
wish to escape liability under given circumstances, they
must use words admitting of no possible doubt. [Lord
Russel of Killowen in Provincial V. Morgan, [1933] A.C.
240, 250)].
34. In the context of the renewal clause 5.9 of the
policy and clause 11 of the prospectus, it would be most
significant to refer to the circular letter dated 18th
December 1998, at Annexure "I" to the Special civil
Application No. 9425 of 2002, which totally derails the
argument canvassed on the basis of the cancellation
clause in clause 5.9 of the policy to the effect that the
insurer has a contractual privilege to refuse to renew
even when the insured is paying renewal premium in time
as stipulated in the mediclaim insurance scheme or even
to cancel the cover. This circular-letter is based on
the GIC's letter No. Tech/A/185/2(6) dated 30th June
1988 which clarified the position in case of renewal, if
there was a claim under the expiring policy. It was
emphasized that the mediclaim policies which are renewed
without break in the policy period and without enhancing
the "sum insured" may be renewed, including the diseases
contracted during the expiry period. The circular was
issued by the National Insurance Company Limited,
noticing that, in certain instances, the operating
offices while renewing the policies, were excluding the
illness for which a claim was made by the insured under
the existing policy. The circular summarizes how to deal
with different situations which may arise during renewal
of insurance in the following terms :
"Different situations which may arise during the
renewal of insurance and how to deal with them
are summarized below :-
(1) In case of renewal without a break in the
period the policy will be renewed including the
disease contracted during the expiring policy
period.
(2) If there is a break, the fresh policy
must specifically exclude the disease contracted
during the expiring policy period and during the
break period and it should be mentioned in the
schedule of the policy specifically.
(3) If an insured is already covered under an
insurance policy, say, a group mediclaim, and
wants to take an individual policy, the same may
be issued upto the identical sum insured on the
same terms and conditions if there is no break.
(4) If a person is insured with another
subsidiary and wishes to renew with us, the same
should be considered only after ascertaining the
claim status and exclusion under the previous
policy.
In case the claim status revealed is adverse or
there is a continuing illness or an impending
illness, such cases should be advised to continue
with the same subsidiary and should not be
accepted." (emphasis added).
34.1 The circular-letter dated 18th December 1998
based on the GIC's letter of 13th June 1998 also provided
norms in respect of enhancement of sum insured. One such
norm is that enhancement should be allowed only at the
time of renewal. Requests for enhancement of sum insured
in case of persons below 60 years were to be acceded to,
based on a declaration that the insured has not
contracted any illness or disease if the amount of
enhancement did not exceed Rs.50,000=00. In case of
persons above 60 years, necessary test reports and other
formalities were required. Paragraph 5(c) of the
circular letter, inter alia, provided that the disease
for which claim has been lodged under the previous policy
and of which the insured is not completely recovered,
should also be specifically excluded "so far as
enhancement of sum insured is concerned".
34.2 It, therefore, clearly follows that the diseases
contracted during the period of existing policy cannot be
excluded on renewal of the cover so far as the basic sum
insured is concerned, when the renewal premium is paid in
time. However, in cases where there is a request made at
the time of renewal by the insured for enhancement of sum
insured, the insured cannot, by simply paying renewal
premium in time in response to the standing offer
contained in the stipulation incorporated in clause 11 of
the prospectus, claim cover for the enhanced amount since
earlier, in respect of the amount of enhancement, there
was no contract between the parties. This is why mutual
consent would be required for renewal in cases where
there is a request for enhancement of the sum insured
made by the insured at the time of renewal. Thus, there
can be cases of renewal, which do not fall under the
stipulation giving option to the insured to renew under
the mediclaim insurance scheme by paying renewal premium
in time, in which renewal could be done only under the
mutual consent clause 5.9. Even in cases where there is
a stipulation as to renewal at the option of the insured,
as is contained in the present mediclaim insurance
scheme, the insurer's rights in relation to
misrepresentation or non-disclosure are governed by the
state of affairs that existed at the inception of the
contract and renewal can be refused, if there are
detected vitiating elements in the original contract,
such as, misrepresentation, fraud or non-disclosure of
material facts. Despite the grounds, which would enable
the insurer to repudiate the contract being detected, the
insurer may waive them and, by mutual consent, renew the
policy. Thus, renewal at the option of the insured by
accepting the standing offer for renewal stipulated under
the scheme by payment of renewal premium in time and the
renewal by mutual consent under clause 5.9 of the policy,
would ordinarily operate in different fields and the
option to renew the mediclaim policy given to the insured
cannot be rendered meaningless by subjecting it to the
consent of the insurer, except on the grounds vitiating
the contract when the cover first incepts.
34.3 A policy may be issued to cover a certain risk
for a definite period at a stated premium without any
provision for renewal, but more usually the policy is
expressed to cover first a definite period, say a year,
for which the premium is acknowledged to have been
received, and second, an indefinite period thereafter, so
long as annual or other periodic payment shall be paid in
accordance with the conditions of the policy. Policies
of insurance in which there is no provision for renewal
can be renewed by a new agreement between the parties.
Where there is a provision for renewal, it may, as is
usual in life policies, give the assured an unconditional
right to renew, or as is generally the case in connection
with other policies, renewal may be conditional on the
assent of both the parties. (See Law of Insurance, Raoul
Colinvaux, 5th Edition, para 1-38). Even life policies
may be expressed by an annual contract, which the assured
has the right to renew, by payment of further premium.
34.4 In the contract of insurance, the term "renewal"
is used to denote both extension of the original period
of cover by the exercise of a right given to the insured
by the contract to extend the period of cover without the
assent of the other, and the making of a new contract
through the agreement of both. It is important to
distinguish the two types of renewal, since only in the
former case, will vitiating elements in the original
contract, such as, failure to make full disclosure affect
the extension, and conversely only in the later case will
a duty arise to make full disclosure, at the time of
renewal. Where the insurance (e.g. life insurance)
gives the assured the right to renew automatically on the
payment of a further premium at the end of the first
period, such renewal does not constitute a new contract.
(See Chitty on Contracts, 24th Edition, para 3941 at page
707).
34.5 The health insurance contract is related to the
category of life contracts. A life contract would
obviously include the natural process of dying and a
health insurance contract would obviously include what
may be inevitable illness, which perils would be covered
by the insurance. In a normal contract of life assurance
as distinct from contracts intended to be for a term
certain, the assured must have, at least, a right of
renewal subject to reasonable conditions. A policy of
health insurance is for insuring against the risk of
disease. One is a policy for life while the other for a
healthy life. Even in a health policy, though under an
annual contract on payment of annual premium, the assured
must have a right of renewal subject to reasonable
conditions, because, the policy is not intended to be for
a term certain, but meant to cover the risk of disease
for life so long the renewal premium is paid in time, as
per the renewal clause. The contract of health
insurance, like that of life insurance made in
consideration of an annual premium, is an insurance for a
year with an irrevocable offer to renew upon payment of
the agreed renewal premium.
35. In an existing contract where it is specifically
provided that the insurer is not bound to give notice
when the policy is due for renewal and the insured remits
the renewal premium in time, the insurer cannot invoke
the cancellation clause for refusing renewal, unless any
one of the contingencies permitting cancellation has
occurred. There is already a standing offer seeking
renewal and that is why clause 5.9 stipulates that notice
of renewal need not be given by the insurer. The moment
insured pays premium in time the acceptance of that offer
is complete and there would be no option with the insurer
to deny renewal.
35.1 When offer of renewal comes from the insurer by a
renewal notice or it is there in form of a standing offer
contained in the existing insurance cover or under the
scheme itself as declared in the prospectus, enabling the
insured to get the cover continued by paying renewal
premium in time, payment of the appropriate premium would
amount to acceptance of such offer so as to create a
binding contract and there is no room for refusing to
take the premium in such a case. Therefore, there was no
scope for refusing to continue the cover when the insured
of Letters Patent Appeal No. 1028 of 2003 sent the
revised premium by accepting the offer made by the
insurer in its letter dated 30th September 2002 stating
that the policy will be renewed by paying 300% premium
and requesting insured to send the revised premium.
36. The contention that once the disease occurs it
ceases to be an uncertain event and therefore, there can
be no insurance of the disease that occurs during the
period of the existing policy mocks at the very concept
of health insurance and the public welfare scheme like
the mediclaim insurance scheme. At the time when the
insurance cover incepts, the pre-existing diseases are
not covered and therefore, their being covered during the
duration of the policy at any stage so long as it is
renewed, cannot be considered to be a known event
existing at the time when the cover first incepts.
37. Our above reasoning, which is in the context of
the mediclaim insurance scheme approved by the Central
Government, floated by the GIC, and implemented by the
government companies, draws its full vigour from the
decision of the Hon'ble the Supreme Court in Biman
Krishna Bose (supra), in which the Supreme Court, while
considering the mediclaim insurance policy, holding that
these insurance companies were "State" under Article 12
of the Constitution, in terms, further held in paragraph
5 of the judgement that, the renewed contract was on the
same terms and conditions as that of the original policy,
and that if a view was taken that the mediclaim policy
cannot be renewed with retrospective effect, it would
give handle to the insurance company to refuse the
renewal of the policy on extraneous considerations
thereby deprive the claim of the insured for treatment of
diseases which have appeared during the relevant time,
and further deprive the insured, for all time to come, to
cover those diseases under an insurance policy by virtue
of the exclusion clause. It was held that this being the
disastrous effect of wrongful refusal of renewal of the
insurance policy, the mischief and harm done to the
insured must be remedied. The Court held that, once it
is found that the act of the insurance company was
arbitrary in refusing to renew the policy, the policy is
required to be renewed with effect from the date when it
fell due for its renewal. Earlier, in paragraph 3 of the
judgement, the Court held that, even in an area of
contractual relations, the State and its
instrumentalities are enjoined with the obligations to
act with fairness and in doing so, can take into
consideration only the relevant materials. They must not
take any irrelevant and extraneous consideration while
arriving at a decision. Arbitrariness should not appear
in their actions or decisions. The Court agreed with the
view taken by the High court that the order of the
insurance company refusing to renew the mediclaim policy
of the appellant was unfair and arbitrary. It is clear
from the judgement that its ratio is directed against all
arbitrary or unfair refusals to renew the mediclaim
policy. The fact that, in the case before the Supreme
Court, the ground for refusal was extraneous, will not
reduce the impact of the decision from the level of
setting aside any arbitrary and unfair order to merely
applying it to a particular instance where refusal is on
some extraneous consideration, such as, approaching the
Consumer Forum.
38. It was tried to be urged on the basis of Critical
Illness Insurance Policy, by the learned counsel for the
insurers that, under that policy, disability of insured
arising out of serious illness, such as, coronary artery
surgery, cancer, renal failure, stroke etc., the policy
is required to be surrendered and cancelled on payment of
claim and such policy cannot be required to be renewed.
It will be seen from the Revised Underlying Guidelines of
the Critical Illness Insurance Policy that it is a
benefit policy covering disability of the insured. The
policy is meant to cover earning individuals where the
insured, the company or business will be affected
financially due to the occurrence of disability from the
critical illness. Therefore, no parallel can be drawn
from the nature of that policy for urging that renewal of
mediclaim policy can be refused at the sweetwill of the
insurance company even when the renewal premium is paid
in time. In fact, the guideline No.4 of the said
Underwriting Guidelines, which were relied upon by the
learned counsel for the insurers, incorporates a
pre-condition that the insured "should be having a
mediclaim policy preferably also an LIC policy".
Therefore, a person suffering from such critical illness
in order to cover disability is required to have a
mediclaim policy which also supports the view that
contracting of a disease, which is covered, during the
period of existing policy cannot be a ground for
arbitrary refusal of renewal when the premium is paid in
time by such insured. The insurer may however be
entitled to load the premium at the time of renewal if
permissible under the existing contract and the relevant
law prevalent in relation to charging of premiums in such
cases.
Conclusions :
39. For the foregoing reasons, we conclude as under :
[1] The insured has an option under the existing
mediclaim insurance policy to continue the cover
by payment of renewal premium in time in respect
of the sum insured.
[2] In case of renewal without break in the period,
the mediclaim insurance policy will be renewed
without excluding any disease already covered
under the existing policy which may have been
contracted during the period of the expiring
policy. Renewal of mediclaim insurance policy
cannot be refused on the ground that the insured
had contracted disease during the period of the
expiring policy so far as the basic sum insured
under the existing policy is concerned.
[3] In cases where the insured seeks an enhancement
of the amount of sum insured at the time of
renewal, the option to renew will not extend to
the amount of such enhancement and renewal in
respect thereof will depend upon the mutual
consent of the contracting parties.
[4] Renewal of a medical claim insurance policy
cannot be refused, despite timely payment of the
renewal premium, on the ground that continuance
of the cover would become more onerous or
burdensome for the insurer due to the insured
contracting a covered disease during the period
of the existing policy.
[5] The insurer may refuse renewal, even in cases
where the insured has an option to renew the
policy on payment of the renewal premium in time,
on the grounds, such as, misrepresentation, fraud
or non-disclosure of material facts that existed
at the inception of the contract and would have
vitiated the insurance of the cover at its
inception or non-fulfillment of obligations on
the part of the insured or any other ground on
which the performance of the promise under the
contract is dispensed with or excused under the
provisions of the Indian Contract Act or any
other law or when the insurer has stopped doing
business.
[6] The government insurance companies continue to be
"State" within the meaning of Article 12 of the
Constitution notwithstanding the entry of private
companies in the field of general insurance,
ending their monopoly by virtue of insertion of
Section 24A in the Act of 1972, and they cannot
arbitrarily cancel or refuse to renew an existing
mediclaim policy.
Final Order :
40. For the foregoing reasons, we find ourselves in
agreement with the reasoning and conclusions of the
learned Single Judge in the impugned order from which the
Letters Patent Appeals No.1028 of 2003, No.1003 of 2003
and 1004 of 2003 arise, and there being no warrant for
interference with the same, all the three appeals are,
therefore, dismissed with costs.
40.1 For the foregoing reasons, since the grounds
given for refusing to renew the mediclaim insurance
policies of petitioners Nos. 2 and 3 are arbitrary and
also against the contractual terms, the Special Civil
Application No.9425 of 2002 is partly allowed, by holding
that the refusal of renewal of the mediclaim insurance
policy of the petitioners No.2 and 3 was arbitrary and
illegal, and it is directed that the respondents
insurance companies will renew their respective policies
from the date on which they expired, on payment of the
renewal premium payable by them under the Scheme, without
excluding the diseases that may have been contracted by
them during the period of their existing policies for the
concerned year. Rule is made absolute accordingly with
costs.
[R.K.ABICHANDANI, J.]
[D.A.MEHTA, J.]
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