Why “Bad Faith” Matters in India
If you’ve ever held an Insurance policy, whether it’s a crucial Health insurance plan or a long-term Life insurance policy, you’ve likely worried about the day you need to file an insurance claim. You pay your premiums religiously, only to fear the dreaded repudiation letter that says, “Claim Denied due to Non-Disclosure of Material Fact.”
In countries like the US, policyholders talk about “bad faith” lawsuits against companies like Progressive Insurance or Farmers Insurance. While the Indian legal system doesn’t use the exact term “bad faith” as a separate legal tort, the spirit of the fight is identical. When an insurer unfairly denies an insurance claim, it’s a Deficiency in Service and a breach of trust.
Every insurance contract is built on the sacred doctrine of Utmost Good Faith (Uberrima Fides). You, the policyholder, promise to be honest. The insurer promises to act fairly. But when that reciprocal duty is broken—especially during claim time—Indian courts and the Consumer Commissions step in to protect you.
The good news? The rules are changing. Indian law is making it significantly harder for insurers to hide behind technicalities and small print to deny genuine claims in 2025.
The Old Standard: When Technicality Ruled Supreme
For a long time, the insurer’s primary defense was a formidable wall. They relied on Section 45 of the Insurance Act, 1938, which essentially states: if you deliberately suppress any material information, the contract can be voided.
In the past, this was interpreted very broadly. An insurer could reject a Life insurance claim, for instance, years after the policy was issued, if they found you had:
- Failed to mention a minor, old ailment like a bout of flu or mild knee pain.
- Missed listing a small, existing policy with another provider.
The insurer’s logic was simple: “We wouldn’t have offered the policy (or would have charged more) had we known.” This approach often ignored two crucial facts: the non-disclosure may have been an honest mistake, and it was often completely irrelevant to the actual claim.
This is the essence of insurer misconduct, rejecting an insurance claim based on a technical detail that has no bearing on the actual loss.
The Evolving Standard: The Non-Negotiable Principle of Nexus
The biggest shield against arbitrary rejections today is the Principle of Territorial Nexus (or the ‘Materiality Test’). Thanks to landmark rulings by the Supreme Court and the National Consumer Disputes Redressal Commission (NCDRC), the courts now demand the insurer prove a direct, undeniable link between the undisclosed fact and the loss being claimed.
Proving the Nexus: A Double-Barrel Shot
To deny a claim now, the insurer must successfully prove both of the following points:
1. The Fact Was Material to the Risk
It’s no longer enough to say, “The fact wasn’t disclosed.” The insurer must demonstrate that the undisclosed fact was material.
- Example (Health): If your Health insurance claim is for a hip replacement following an accident, the insurer cannot repudiate the claim because you failed to disclose a history of mild childhood asthma. There is no nexus between the asthma and the hip injury. The asthma was not material to the risk of an accidental injury.
- Example (Life): If a person with an undisclosed pre-existing history of mild diabetes dies in a motor accident, the insurer cannot deny the Life insurance payout. The pre-existing condition didn’t cause the death; the accident did.
2. The Non-Disclosure Was Deliberate and Intentional
The courts generally favour the insured when the non-disclosure appears to be a genuine mistake or an oversight. If the insurer cannot prove that you deliberately and fraudulently suppressed the information, the rejection often won’t stand up in court.
In essence, the insurer must show that the policyholder was actively trying to defraud the company, not just that they made a clerical error while filling out the lengthy proposal form.
The Role of the Insurance Advisor: A Matter of Agency
Often, the source of non-disclosure isn’t the policyholder but the agent or insurance advisor.
It’s an open secret that many agents, in their rush to complete the sale, fill out the proposal forms themselves, sometimes minimizing or ignoring the policyholder’s medical history to ensure the policy is quickly issued.
The law is clear: The insurer is responsible for the acts of its agent.
If you can prove that the insurance advisor filled out the form and that you relied on their advice, or that they were aware of the information and chose to omit it, the insurer cannot legally use that non-disclosure against you. This misconduct is deemed the insurer’s fault, not yours.
The Policyholder’s Strongest Weapon: The Consumer Protection Act (CPA), 2019
When an insurer unjustly rejects your claim, delays settlement, or engages in mis-selling (promising one thing, delivering another), it is classified as a Deficiency in Service or an Unfair Trade Practice under the powerful Consumer Protection Act (CPA), 2019.
This is your primary path to fight insurer misconduct.
| Insurer Misconduct (Bad Faith) | What Policyholder Needs to Prove | Redressal Sought |
| Wrongful Repudiation | Lack of Nexus between non-disclosure and the cause of the claim. | Claim amount + Compensation. |
| Unreasonable Claim Delay | Failure to settle the claim within the IRDAI-mandated 30 days without valid written reason. | Interest on claim amount + Compensation for mental agony. |
| Arbitrary Rejections | Using a vague or technical clause against you. (Courts apply the Contra Proferentem rule, interpret ambiguity against the company). | Claim amount + Costs. |
The Power of Compensation
Unlike simply getting the claim paid, filing a complaint under the CPA allows you to demand compensation for mental agony, harassment, and litigation costs. This is where the Indian legal system provides the punitive check against poor behavior, similar to what a “bad faith” claim achieves elsewhere. This provides a strong incentive for life insurance companies to act responsibly.
Practical Takeaways for Policyholders in 2026
The legal landscape is favourable, but preparation is key. Here’s your action plan:
- Be Brutally Honest: Even with the new legal standards, the best defense is a perfect offense. Disclose everything during the proposal stage, no matter how minor. Let the insurance lawyer or insurance legal advisor document it or document it yourself via email.
- Scrutinize the Policy: Immediately check the policy document for clauses that contradict what the insurance advisor promised you (especially for riders or exclusions).
- Document the Claim: Maintain copies of all communication, including the date the claim was submitted, all requested documents, and the date of the final rejection letter. If there is a delay, this paper trail is your proof of Deficiency in Service.
The days when insurers could easily shrug off their responsibilities are fading. If your Health insurance or Life insurance claim is unjustly denied, remember: the courts are no longer accepting mere technicality. They demand justice, reason, and a proven material nexus.
