How changes in insurance law benefit policy holders
New amendment in the Insurance Laws Act, 2015 has tilted the odds in favour of the policy holders. According the clarification issued by the Insurance Regulatory and Development Authority of India (IRDAI),
New amendment in the Insurance Laws Act, 2015 has tilted the odds in favour of the policy holders. According the clarification issued by the Insurance Regulatory and Development Authority of India (IRDAI), it’s now compulsory for all life insurers to pay claims made three years after the date of issuance of policy or acceptance of the risk. This measure is to protect the policy holders from intricate rules of insurer’s claim procedures but could become an Achilles heel for the insurance companies.
This is beyond the existing indisputability clause under section 45 of the Insurance Act. This section states that “no policy of life insurance shall, after the expiry of two years from the date on which it was effected, be called in question by an insurer on the ground that a statement made in the proposal for insurance or any report of a medical officer or referee or a friend of the insured or in any other document leading the issue of the policy, was inaccurate or false, unless the insurer shows such statement was on material matter or suppressed facts which it was material to disclose and that it was fraudulently made by the policy holder and that the policy holder knew at the time of making it that the statement was false or that it suppressed facts which it was material to disclose.”
Simply, the insurance company can question or contest the facts/information mentioned in the proposal form only within the initial two years from the date of accepting the risk. Also, the onus remains on the insurer to prove the disclosed information is incorrect and made with a fraudulent intent or the insured suppressed the facts that would’ve otherwise affected the issuance of the policy. The new amendment has extended this two year limit to three years to prove the fraud but have to honour the claim at any cost.
To complicate matters for the insurance companies, the IRDAI said that the policy must be honoured regardless of the whether claim arose or intimated, once the three-year window is closed. This puts in an obligation for the insurance company to pay the claim even if the policyholder dies within the three years but the claim is made or reported after three years from the date of inception and if the policy is in effect or operational i.e. premiums are paid for three years. The insurers cry foul as this could lead to fraud nevertheless, such cases could form miniscule or minority of their entire claims.
But, the law has provided a reprieve by provisioning the insurer’s right to examine or inspect the policies irrespective of the claim is made or not within the three years. So, if the insurance company establishes or proves a fraud, then they could deny the claim and also deny the refund of the premiums paid so far. However, if the fraud is not proven, then the insurer could deny the claim on account of suppression or non-disclosure or misrepresentation of material facts but need to refund the entire premiums paid to the claimant.
Also, IRDAI elucidated that this principal works even in cases of revival i.e. the insurer will have three years from the date of revival to question the policy, failing which it will have to honour the claim. The disposal of claim is similar to that of the claim made during the normal procedure i.e. pay back the premiums in case of establishment of non-disclosure but not amounting to fraud. Repudiation of a claim is not accepted within the three years of revival after obtaining the declaration of good health from the policyholder.
In addition, the regulator also explained that the insurance companies have to complete the investigation of death claims within six months from the date of filing of the claim. Besides, the life insurer has to pay or has to give the reasons for disputing the claim within 30 days from the date of receipt of all the relevant documents from the claimant. This move will force the insurance companies to exercise greater filtration through due diligence and strengthen their underwriting process.
This is welcome news for the policyholders as the scope for rejection of the claim is negligible post three year window. This wouldn’t however, reduce the duties of the policyholders as the claim could be contested on the grounds of fraud and also change repudiate on the lines of misrepresentation. Given that the insurance is a contract, duly completed proposal form along with other required information, documents, KYC (Know Your Customer)are to be given due attention. So, for a seamless claim settlement during one’s absence, it’s ideal for the policyholder to come clean on their current facts at the time of availing a life policy.
K Naresh Kumar
(The author is a practising financial planner and could be reached at firstname.lastname@example.org)