Non Disclosure in Insurance Contract

If you are buying an insurance policy, especially health insurance, the primary requirement is to disclose all material facts to the insurance company clearly and honestly. Failing to disclose, misrepresenting, or even misdescribing any material fact may not only result in the rejection of your claim but also in the cancellation of your policy. In your health insurance policy, you may come across this as the “Disclosure to Information Norm.” This is the single most important term in your health insurance policy and is a leading cause of claim rejections and policy cancellations.

What is material fact in health insurance?

A material fact in insurance terminology is any information that could potentially affect the insurance company’s decision to provide coverage or issue a policy to the person seeking health insurance. For example, if you smoke, it is a material fact that can influence the premium or coverage of your health insurance policy. If you fail to disclose this, it constitutes a breach of the “Disclosure to Information Norm.”

Examples of non disclosure in insurance

Let’s explore more examples of non-disclosure in insurance to gain further clarity. If you have diabetes, hypertension, or any pre-existing condition that is known to you and for which you have consulted a doctor, it is a requirement of the insurance contract to disclose all such medical conditions/diseases and even lifestyles habits (such as smoking or drinking) to the insurance company before purchasing a health insurance policy.

Non disclosure of pre existing disease or any relevant information/fact may result in a breach of contract from the day the policy is purchased, and the insurance company has the right to cancel your policy and forfeit all the premiums you have paid.

Misconception on non disclosure in insurance

There are a few misconceptions among people regarding non-disclosure in insurance. Some believe they can get away with hiding facts and that the insurance company won’t find out, which is not true. Insurance companies thoroughly audit each claim, and while you might get lucky with one or two claims escaping scrutiny, there’s always a risk of paying premiums for years only to have your claim rejected in the end. Therefore, it is not wise to continue a policy while hiding an important material fact.

Another misconception is that a person might think they won’t raise a claim for the condition they are hiding, and therefore believe the insurance will cover other claims. For example, if a person has undergone surgery for gallbladder removal and hides this fact, even if they are admitted for a completely unrelated illness, the insurance company can still reject the claim under the “Disclosure to Information Norm” if insurance company get to know of this information. In other words, a claim that is unrelated to the condition you failed to disclose can still be rejected for non-disclosure of a material fact.

Moratorium period and Non-disclosure in health insurance

The Insurance Regulatory and Development Authority of India (IRDAI) has recently modified the definition of the moratorium period in health insurance, which will have a significant impact on enforcement of “Disclosure to Information Norm” clause . Under the revised definition, health claims after 60 months of continuous coverage shall not be contestable on the grounds of non-disclosure or misrepresentation. This means that if you hold a health insurance policy that has been continuously renewed for 60 months without a break, your claim cannot be rejected by the insurance company for failing to disclose a material fact or for misrepresentation.

Earlier, the definition of the moratorium period did not include the clauses on non-disclosure or misrepresentation, and the moratorium period was set at 8 years, which has now been reduced to 60 months (5 years). This change was made in response to numerous complaints from policyholders about claim rejections by insurance companies due to non-disclosure of material facts.

At first glance, it might seem that policyholders have a “blank check” after 60 months of continuous coverage, even if they fail to declare a material fact (such as a pre-existing condition). However, this is not the case. Under the new master circular on health insurance business, dated 29.05.2024, IRDAI also allows insurance companies to deny policy renewals in cases of proven fraud, non-disclosure, or misrepresentation by the insured.

Therefore, when reading the two clauses together (Moratorium Period and Renewal of Health Insurance Policy), an insurance company cannot deny a claim based on non-disclosure of material facts if the policy is more than 60 months old. However, the insurance company retains the right to deny the renewal of such policies in cases of non-disclosure or misrepresentation. Thus, policyholders do not have a “blank check” even if their policy is older than 60 months.

Way forward

It is always better to disclose all information related to your medical conditions and lifestyle upfront to the insurance company before buying a health insurance policy. Otherwise, you may end up paying premiums for years only to have your claim rejected or your policy canceled in the future.

Insurance companies operate on the principle of utmost good faith, meaning both the insurer and the person buying insurance must be completely transparent with each other. The person purchasing the insurance must disclose all material facts, and the insurance company must provide clear terms and conditions of policy. By not disclosing relevant information, you are breaching this fundamental principle of insurance, and the insurance company has every right to reject your claim and cancel your policy.