The Insurance Laws (Amendment) Bill has now been cleared by both Houses of Parliament. The increase in the FDI limit from 26%to 49% has been welcomed by all stakeholders in spite of 15 years of wait and disillusionment. The Bill, however, contains several landmark changes to the 77-year-old Act, which had been gradually growing deficient in maintaining checks and balances in the insurance industry in the face of fast-evolving customer needs, their profile and new distribution opportunities and challenges.
The increased flow of fund from the developed markets is a matter of significant value to promoters or to foreign partners, but for policyholders, I think, there will not be any perceptible difference for the time-being. Their experience after the entry of new players into the Indian market has not necessarily been of awe and confidence. But the less talked-about amendments are of far-reaching value for the public.
The most significant of all the amendments is in respect of Section 45 of the Insurance Act, 1938. This section deals with the right of the insurance companies to repudiate a death claim on the ground of misstatement of facts or of deliberate suppression of certain facts leading to the acceptance of a proposal for life insurance by an insurer on terms as per the disclosed facts regarding age, health, habit, family history, occupation and income, etc.
The Insurance Act, 1938, provided that a policy cannot be called in question after expiry of two years from the date on which it was effected. The Act, however, armed the insurers with the right to challenge the bonafides of a proposal even after two years of commencement of risk if the insurer could prove that the policy was taken on the basis of misrepresentation of facts or suppression of such facts as were material to the basis of decision making by the insurer for issuing a policy in the terms and conditions and the premium rate as incorporated on the body of the policy bond.
Fraudulent intentions were to be proved by the insurer with evidence and decision communicated to the claimant. Every year, life insurers have been repudiating good number of death or rider benefit claims under this provision of Act. However, there was nothing anti-customer here. The spirit of this provision in the Act has been to protect the interest of genuine customers against damages or bleeding of the insurance companies by unscrupulous and fraudulent customers or intermediaries. But this provision has been misunderstood as well as misused by the consumers, courts as well as the insurers.
In the past, there are instances of claims being repudiated on grounds such as (a) sick leave during past two years not disclosed in proposal and the life-assured died of pneumonia after two years; (b) a person dies of cancer after six years of taking the policy, but it is found that he was addicted to tobacco-chewing for last 10 years as reported by neighbours; (c) a policy holder dies of electrocution, but during investigation, it was found that he was polio-affected but had not disclosed his handicap in the proposal (d) another policyholder suppressed information regarding regular check-up for diabetes and blood pressure and died of renal failure after five years of taking the policy. In all such cases claims are generally repudiated by insurers.
Such decisions have led to huge litigation and both claimants and insurers have suffered a lot in the process. In some cases, the brand gets badly hit if the judgment by a court in favour of claimant hits the headline.
Interestingly on several occasions, the judiciary and the consumer fora too created huge confusion by delivering conflicting judgments, which further delayed dispensation of justice or benefits.
The amendment in Section 45 seeks to remove much of the confusion by (i) extending the period for calling to question the facts stated in proposal from two years to three years (ii) dropping the provision for such action even after two years on the ground of fraudulent intentions on the part of the proposer (iii) clearly defining the date of reckoning for determining the period of three years and (iv) defining fraud as any misrepresentation or concealment of fact or omission by the proposer or the agent.
The amendment states that in case of fraud, the insurer must write to the claimant the basis of their considering the proposal or the claim as an attempt to defraud the company. Onus is now on the policyholders or the beneficiaries to prove that the misstatement or suppression of a fact was not done deliberately. The Bill seeks to eliminate chances of litigation after three years of the commencement of risk by clearly stating that a policy cannot be disputed after the expiry of three years ‘on grounds whatsoever’.
The Bill has thus taken full care of the interest of the insurers as well as of the insured and it is likely to reduce litigation. Any policyholder can now be sure of payment of claims amount to his heir in case of his unfortunate demise if his life insurance policy has completed three years since inception or revival. The insurers, on the other hand, will have to upgrade their underwriting standards and skills to protect themselves against potential fraud.
Road to reforms
The amendment in Section 45 seeks to remove confusion by
* Extending the period for calling to question the facts stated in proposal from two years to three years
* Dropping the provision for such action even after two years on the ground of fraudulent intentions on the part of the proposer
* Clearly defining the date of reckoning for determining the period of three years
* Defining fraud as any misrepresentation or concealment of fact or omission by the proposer or the agent
The writer is advisor, GIC Re and former MD & CEO of Star Union Dai-ichi
