New insurance law underwrites customer protection

The long-delayed amendments to the insurance laws that the Parliament passed last week have some good features for protecting the interests of policyholders and their family members, industry experts said.Looking at the provisions, successive central governments could have done a great service to policyholders had they brought these amendments much earlier by keeping out the contentious issue of hike in foreign direct insurance (FDI) to 49 per cent from 26 per cent, the experts added.

After much trouble and tribulation, the much-awaited amendments to the vintage Insurance Act, 1938, and other insurance-related laws have come into being with Parliament passing the Insurance Laws (Amendment) Act, 2015."The act has also brought about substantial changes for protecting the interests of policyholders by amending Section 38 (assignment of policies), Section 39 (dealing with nominations) and Section 45 (limiting the rights of insurers to call in question on the grounds of fraud and the like)," D. Varadarajan, a Supreme Court advocate and an expert in insurance/company/competition laws, said on Sunday.

The new law also prescribes heavy penalties against insurers for mis-selling and other misdeeds which, in a way, would protect the policyholders.A senior industry official said, "The new law protects the interests of policyholders who have been loyal to the life insurance companies.""As a result, if any claim is made under life insurance policies three years after the issuance of policy/commencement of risk/reinstatement of the policy, the insurance company loses the right to cancel the policy proceeds on the grounds of misstatements in the proposal form for insurance," he said.

He said this is on the premise that the life assured has outlived his ailment, if any, and therefore, even if there is a mis-statement in the proposal form, it ceased to have any impact on the health/mortality of the person whose life has been covered and therefore the claim is payable.The amended law gives special protection to parents, spouses and children who are listed as nominees in life insurance policies. "These nominees will be beneficially entitled to the policy proceeds and no other legal heir can claim the policy benefits and dispute the claim made by the family members. Earlier, any nominee acted as a trustee and was accountable to the legal heirs of the life assured," the official said.

Further, the law now recognises partial assignments under life insurance policies as against the earlier situation of total assignment. For example, if a policyholder has borrowed say Rs.500,000 and intends to pledge his Rs.800,000 life insurance policy, he can assign to the lender only up to his borrowings and not the entire policy amount.The balance interest in the policy (Rs.300,000) rests with the nominees. According to an industry official, assignment of rights in a life insurance policy will not impact nomination in certain cases. Under the old law, assignment of policy would cancel the nomination. However, under the new law, a transfer of a policy in consideration of a loan shall not cancel the nomination, but will affect the rights of the nominee to the extent of the outstanding loan.

"Further the bill also states that where the policy is re-assigned, the nomination which was cancelled earlier will stand automatically reinstated," he explained.The new law makes the insurance companies liable for the acts and omissions of their agents, including violation of the code of conduct, and liable to a penalty which may extend to Rs.1 crore."This is intended to fix responsibility on insurers for the misdeeds of its agents - under the "Principal-Agent" relationship," Varadarajan said. The new law also addresses India's uninsured population is around 500 million."Currently the life insurance penetration is only 3.9 percent.

We expect this to go to six percent in five years time. We are projecting the life insurance sector to grow by 15 percent per annum," according to V Manickam, secretary general of the Life Insurance Council. He said the entry of new players would force companies to look at new markets like the northeastern states for business and also rural areas."We expect the sector to receive fresh capital infusion of around Rs.50,000 crore by 2020. The number of life insurance branch offices will go up from 10,000 to 30,000. The number of employees will go up to around 500,000 from the current 200,000," he said.

Manickam said that the number of agents selling life insurance policies will go up to four million from the present levels of around two million."These amendments would bring about many genuine practical difficulties for the insurers, and the fallout of these provisions would be tested before judicial and quasi judicial bodies on various counts, making the lawyers laugh and litigants weep," Varadarajan remarked.

By Venkatachari Jagannathan