An insurer is in position to know as much or even more about a policyholder. Why should the insurer need such a high degree of protection

The Insurance Regulatory and Development Authority's (IRDA) regulations for protection of policyholders - IRDA (Protection of Policyholders' Interests) Regulations 2002 - prescribe the duties and obligations of insurers and intermediaries, pre- and post-sales. And this requires some fine-tuning to secure the insured's interests effectively and also to align with the industry practices.

The two deadly weapons
Non-disclosure of material facts in the proposal form and breach of good faith are the two most deadly weapons and reasons used by insurers to shoot down a claim. And it is the most important area that requires the IRDA's immediate attention.

India has adopted the British legal and insurance system whereby a filled-in proposal form is deemed to be on the basis of the insurance contract - also referred to as 'basis clause' in the policy. And insurance is a contract of Uberrimae fidei - utmost good faith.

This actually renders the policyholder completely at the insurer's mercy. In practice, it goes beyond the bounds of the principle of Uberrimae fidei. A policyholder even after completing the proposal form to the best of his knowledge and got a policy on payment of premium might end up with a shock when the insurer rejects his claim on the grounds that he had omitted to mention some details.

The principle of non-disclosure as propounded in English Law was apt for the conditions in eighteenth century when the predominant development in insurance was in marine or transit cover, and insurance as a whole was still in its infancy.

At that time, it was common to obtain insurance cover for vessels after they had sailed. The vessel owner would likely to know more about the hazards of a particular voyage while the insurer would be completely in the dark about the ship's condition. There was no detailed proposal form for the policyholder to fill.

Further, policies at the time contained only a brief description of the risk with few warranties and conditions. Therefore, a rule of law lightening the burden of a nascent insurance market assumed vital importance.

Today, the insurer's position has altered. He requires the assured to warrant the accuracy of his answers to a long list of detailed question. The insurer also has agents to inspect the property and medical officers to inspect lives proposed for life and health insurance. The insurer also has other facilities to access scientific data and methods to evaluate a risk.

In short, the insurer is in a position to know as much or even more about the policyholder. The question, therefore is whether the insurer needs such a high degree of protection. The law as it stands today is capable of operating harshly against a policyholder.

It is relevant to note that a majority of American state jurisdictions has refused to apply the strict rule of disclosure to non-marine risks so that the assured's duty of disclosure is less onerous than in English Law. His failure to state a material fact, if innocent, does not avoid the contract. But only wilful concealment of a fact known by the assured is considered to be material to the risk.

We in India have the unique distinction of having no law as in the US or self-regulation as in the UK or any specific regulations by the regulator as in many countries to address this issue. And hence this issue needs urgent attention of the IRDA.

One way to mitigate the problem is to standardise the proposal form so that a prospect is not forced to answer questions irrelevant for an insurer to assess the risk. There is a strong case for prescribing standardised proposal forms for all insurers at least in the case of banana products like motor insurance, personal accident and fire.

As mentioned earlier, insurance is a contract of utmost good faith on both the parties to a contract - the insured and the insurer. The doctrine imposes a duty of disclosure on the insurer as much as the insured. But the only remedy that a policyholder has for breach of this principle by an insurer is avoidance of the contract and return of premium and no avenue to claim damages either under the contract or tort.

Many American state jurisdictions recognise that breach of utmost good faith by an insurer is also a tort and, hence, the insured is entitled to claim damages. Further, in India, insurers to sell and solicit business directly - without the intervention of intermediaries. The obligations and duties of insurers doing direct selling need to be spelt out explicitly. The policyholders need to know their rights against breach of good faith at the point of sale.

What if they don't?
Though the IRDA regulations for protection of policyholders' interests prescribes the obligations and duties on the part of the insurers, intermediaries, surveyors and policyholders, in most cases, consequences of non-compliance have not been prescribed.

The IRDA has prescribed the timelines for submission of survey reports by the surveyors and the settlement of claims thereafter by the insurers. It is common experience that this timeframe is not being adhered to by and large.

It is obvious that since regulations do not provide for deterrent penalties against the defaulting parties, there has been grossly casual response to these regulations by the industry and the surveyors.

The provision for payment of interest at a rate higher than the bank rate to policyholders, if the claims are not paid within seven days of its acceptance by the insured, does not serve the purpose. This is because delay takes place in assessing the claim by the surveyors and its processing at the insurer's level. The position will not improve unless regulations provide for sufficient deterrence.

The regulations also mandate every insurer to have in place proper procedure and effective mechanism to address complaints and grievances of policyholders efficiently and with speed. Since the regulations do not prescribe either the mechanism or modalities and/or penalties for non-compliance of the regulation, it has been reduced to a mere statement of intention.

There should be designated compliance officer for each company or office to look into policyholders' grievances with adequate financial and administrative authority to take corrective action.

The Insurance ombudsman set up to resolve policyholder complaints fast has limited jurisdiction - to hear only personal line of insurance claims, that too only up to Rs 20 lakh - and most policyholders do not know the existence of such a body.

It is, therefore, necessary that a grievance redressal authority be set up for the insurance industry with all the powers of a civil court to deal with policyholders' grievances. It is heartening to find that the Law Commission of India is presently engaged in this exercise and hopefully it will be able to recommend an effective machinery to deal with policyholder's grievances.

There is also a need to have effective mechanism for redressal of the insurer's grievances vis-à-vis the IRDA.

Standardise the non-standard
Over the past three decades the government-owned insurers have developed and codified guidelines for settlement of non-standard claims - claims for which insurers are not strictly liable if the policy conditions are strictly adhered to.

This has helped the policyholders immensely. The IRDA should examine these guidelines and use its good offices to persuade all insurers to adopt these guidelines by way of self-regulatory practice.

The other aspects where the IRDA's policyholder's protection regulations need some fine-tuning are free-look period and synchronisation with the policy conditions. Life insurance policyholders have an option to return their policy within 14 days (free-look period) of its receipt in the case of any disagreement. But no such option is given to non-life policyholders. Globally, both life and non-life policyholders get this option.

Similarly, the regulation states that a non-life policy could be cancelled on the grounds of misrepresentation, fraud, non-disclosure of material facts or non-cooperation of the insured. On the other hand the policies issued by insurers allows cancellation for any reasons. So steps need to be taken to synchronise the regulation with policy wordings. The notice period for cancellation by insurers should not be less than 30 days to provide enough time to a policyholder in organising cover from alternative sources.

(The writer is the former chairman-cum-managing director of New India Assurance Company and United India Insurance Company. He is presently an honorary director of Centre for Insurance Studies & Research at National Law University, Jodhpur. This is the second part of the series on the subject. The first part.)