An insurance policy is a one way road where the insured is bound by its terms and conditions. The insurer's duty is only limited to the obligations specified under the insurance policy.1 The insured can assert his rights under an insurance policy only on compliance with the terms of the policy and fulfilling the liabilities imposed thereupon. The insured only gets the right to assert his rights under any insurance contract only after he has performed the obligations associated with the insurance contract and complied with the requisite conditions for establishing the liability of an insurer as per the terms of the insurance policy. The insured is bound by the terms and conditions of the insurance contract and cannot go beyond them. It is these terms and conditions that specify the obligations of the insured and the performance to which it is entitled.
The doctrine of uberimmae fidei i.e. utmost good faith has to be followed in every insurance contract. Other than that it is similar to any other contract. This common law requirement of utmost good faith underlying the contract provides that the contracting parties shall honestly reveal and not mislead or conceal any information required essentially for the insurance contract or fulfilling the obligations thereof.2 Even if the concealment on the part of the insured is innocent, the insurance contract may be vitiated by the insurer.3 An insurer can avoid any insurance contract where the insured fraudulently concealed the material facts.4 Apart from the Insurance Act, 1938, there are legislations such as the Insurance Regulatory and Development Authority Act, 1999, Marine Insurance Act, 1963 governing the subject. The contracts of insurance are primarily governed by the principles laid down by the Indian Contract Act, 1872 and also the common law principles.
Most insurance policies require the insured to notify the insurer immediately about a claim or a lawsuit.5 The insured should also be responsible for providing the information to support the claim to the insurer.6 Apart from this, the insured must also cooperate with the insurance company during the investigation and settlement of a suit or claim.7
Obtaining the consent of the insurer before making a settlement with a third party by the insured is of great significance and the relevance of the same cannot be ignored. When the insured fails to comply with this provision of an insurance policy, it not only barges in on the rights of the insured but also comes in the way of the principle of natural justice. In Travellers Insurance Co. v. Maplehurst Farms, Inc.8, the court has observed that when an insurer's consent is not obtained while entering into a settlement agreement by the insured, it is a clear violation of the insured's obligation under the insurance contract and in such a case, the claim cannot be recovered from the insurer and prejudice is irrelevant.
Even if there is no explicit provision of consent-to-settle in the insurance policy, it is the duty of the insured to take insurer's consent before making a settlement with the third party for the sake of good faith and fair dealing. The insured must also allow the insurer to investigate and review the settlement and relevant documents. Most courts are of the view that there is an implied covenant of fair dealing and good faith in every contract which infers that the parties are bound not to commit any such act which would injure the right of the other party or refrain it from benefitting from the contract.
The main intent and purpose of an insurer's consent provision in any insurance policy is to provide the insurer with an opportunity for contesting liability and participating in the settlement negotiations9 and for invalidation of any such compromise that is made by the insured with a third party without the consent of the insurer. This only aims to protect the insurer from collusive settlements on unfounded claims. The twofold aim of the consent-to-settle provision is to allow the insurer to control the settlement negotiations with the third party and to prevent such a settlement from which the insured and the third party would benefit in an unjustified manner. Further, as per the principle of subrogation, the insurer is allowed to file a suit against the third party only in the name of the insured. In absence of the insurer's consent and no knowledge of claim to the insurer, no opportunity would be granted to the insurer to guide litigation or choose the attorney it preferred.10
Non-compliance with the insurer's consent provision can also lead to the discharge of the insured from the liabilities of an insurance contract. The Court of Appeals of Indiana in Askren Hub States Pest Control Services, Inc. v. Zurich Ins. Co.11 observed that in presence of an express provision for obtaining insurer's consent in the insurance policy, the insurance company has the right to deny coverage to the insured.
The consent-to-settle and voluntary payments clause also prevents the insured from taking additional risks and incur unnecessary costs, thereby guarding against the problem of moral hazard.12 In West Bend Mutual Insurance Co. v. Arbor Homes, LLC,13 the court made a significant observation that voluntary payment clause was not a notice provision per se, but a consent provision. It is essential that the insurer's consent must not be by implication, but must exist in fact. In case an insured demonstrates insurer's consent by way of implication and acquiescence, it would be legally insufficient. A notice of claim which is not responded to by the insurer would not be considered as consent of the insurer to proceed with the same.
The insured often takes the plea that non-compliance of the consent-to-settle provision would not have made any difference to the settlement of claim. Even in such a scenario, the courts have observed that there is a presumption that the insurer would be prejudiced by the lost opportunity. The burden of proof to rebut such a presumption lies on the insured. The insurer would only have to prove prejudice when the insured rebuts the presumption.
In Dreaded, Inc. v. St. Paul Guardian Inc. Co.14, the Supreme Court of Indiana held that if the insurer has no knowledge of a claim, it cannot defend the same. The duty of the insurer would not arise till the time it receives the foundational and basic information of a claim or suit. The insurer cannot be held accountable without the receipt of such enabling information. Moreover, any settlement done voluntarily on the part of the insured without involving the insurer would preclude the insured from recovering the claim amount from the insurer.15
It would, therefore, be ideal for the insured to involve the insurer in a settlement claim and obtain prior consent of the insurer. In order to verify if the provisions of the insurance policy are invoked in good faith and without any malafide intent, the courts have developed certain tests to verify the same. The development of such rules was considered necessary for preventing the abuse of power by the insurers and using their power and superior resources to the disadvantage of the insured. One of such tests is two-pronged test or the two-part Anderson test developed by the Wisconsin Supreme Court in the matter of Anderson v. Continental Insurance Co.16 According to this test, the burden is placed on the insured to show that there was no reasonable ground for rejection of the claim by the insurer and the insurer had the knowledge of such a lack. The reasonability of the insurer's decisions must be determined as per the terms of the insurance policy.
In India, the pre and post contractual duty of good faith is equally strict. However, in England, the scenario changed completely after the Star Sea case17, wherein the courts emphasised on the continuity of the duty of good faith in the insurance contract, but also observed that the post contractual duty of good faith was less strict. The Indian courts are still far from adopting this approach. Thus, the insured in India has a heavy burden to inform the insurer about any claim or suit immediately.
Most courts also emphasise that the obligation of good faith and fair dealing shall be expressly embedded in the insurance policy. The US courts have also developed a test of "fairly debatable" standard18 to determine if the insurer has acted in bad faith. An insurer can deny claim coverage if it has reasonable basis for the same, otherwise the insured would be entitled to recover the claim.
Obtaining insurer's consent is quite significant when it comes to settlement of claims in cases of third party liability. Non-compliance of consent-to-settle and voluntary payment provision by the insured can even lead to discharge of the insurer's liabilities under an insurance contract. However, it is necessary that denial of claim coverage is done in good faith and without any ulterior motives. Several rules and tests have been developed by the courts to keep a check on false and unfair insurance claims. The burden of proof to show that the insurer's denial was unreasonable is on the insured, otherwise there would be presumption of prejudice to the insurer.
1. W. Polymer Tech., Inc. v. Reliance Ins. Co ., 38 Cal. Rptr. 2d 78 (Ct. App. 1995)
2. The United India Insurance Co. Ltd. vs. M.K.J. Corporation, AIR 1997 SC 408
3. Rohini Nandan Goswami v. Ocean Accident and Guarantee Corporation Ltd., AIR 1960 Cal 696
4. Mithoolal Nayak v. Life Insurance Corporation of India, AIR 1962 SC 814
5. Maryland Cas. Co. v. Clements, 15 Ariz. App. 216, 487, P.2d 437 (1971)
6. House v. State Farm Fire and Cas. Co., 17 Fed Appx. 684 (9th Cir. 2001)
7. Morris v. Economy Fire and Cas. Co., 848 N.E. 2d 663 (Ind. 2006)
8. 953 N.E. 2d 1153 (Ind. Ct. App. 2011)
9. CF Stryker Corp. v. National Union Fire Insurance Co. of Pittsburgh, PA, 842 F.3d 422, (6th Cir.2016)
10. American Ins. Co. v. Crown Packaging International, 813 F. Supp. 2d 1027 (N.D. Ind. 2011)
11. 721 N.E.2d 270 (Ind. Ct. App. 1999)
12. Metavante Corp. v. Immigrant Savings Bank, 619 F.3d 748, 773 (7th Cir. 2010)
13. 703 F.3d 1092 (7th Cir 2013)
14. 904 N.E. 2d 1267
15. Coil Anodizers, Inc. v. Wolverine Insurance, 120 Mich. App. 118 (Mich. Ct. App. 1982), 327 N.W. 2d 416
16. 5 Wis. 2d 675, 271 N.W.2d 368 (1978)
17.  4 Lloyd's Rep IR 247
18. Pickett v. Lloyd's, 131 N.J. 457 (1993)
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.