Insurance firms must tell all

Pushpa Girimaji

INSURANCE companies often repudiate claims on grounds of ‘non-disclosure of material information’ by the consumer. However, they conveniently forget that there is an even greater statutory obligation cast on them to give full information to the consumer about the products they sell.

The responsibility of the insurer towards full disclosure is even more because (a) the Insurance Regulatory and Development Authority’s (IRDA) Regulation on the ‘Protection of Policyholders’ Interests’ specifically mandates this and (b) the contracts of insurance, which are ‘Adhesion Contracts’ or ‘Standard Form Contracts’, are drawn up unilaterally by the dominant party — the insurer. The consumer, being the weaker party, has no bargaining power, nor knowledge of the terms of the contract. So, the apex court has often said that these contracts, therefore, demand a very high degree of fairness, good faith and disclosure on the part of the insurer.

Here are two cases where the Supreme Court has reminded insurers of their obligation in this regard and warned them against violations. The two cases also showcase the kind of unfair practices indulged in by insurers.

In Texco Marketing Pvt Ltd Vs TATA AIG General Insurance (CA No. 8249 of 2022, date of judgment: November 9, 2022), for example, the insurance company insured, after due inspection, a shop located in a basement under the Standard Fire and Special Perils Policy, despite the fact that the policy specifically excluded basements. Subsequently, following a fire, when the policyholder made a claim, the insurer repudiated it on the basis of the exclusion clause!

While ruling in favour of the consumer, the apex court observed that first and foremost, the insurer did not bring the exclusion clause to the notice of the consumer. And then, despite having knowledge of the exclusion clause, it insured the basement and received the premium benefits. After this, repudiating the policyholder’s claim on the basis of the exclusion clause was certainly an unfair trade practice. “This view is fortified by the finding that the exclusion clause is an unfair term, going against the very object of the contract, making it otherwise un-executable from its inception,” the apex court said.

Some of the observations of the court in this case would go a long way in upholding the rights of policyholders. For example, the court made it clear that an exclusion clause, if not brought to the notice of the consumer by the insurer or agent, would not be binding on the consumer. Similarly, an unfair term in an insurance contract would be un-executable. The Supreme Court also reminded insurers that an exclusion clause “is not a leverage or a safeguard for the insurer, but is meant to be pressed into service on a contingency, being a contract of speculation”.

Said the court: “Before we part with this case, we would like to extend a word of caution to all the insurance companies on the mandatory compliance of Clause (3) and (4) of the IRDA Regulation, 2002. Any non-compliance on the part of the insurance companies would take away their right to plead repudiation of contract by placing reliance upon any of the terms and conditions included thereunder.”

Clause 3 of the 2002 Regulation dealing with ‘Point of sale’ mandates that the prospectus of every insurance product shall clearly give all information, including benefits, warranties, exclusions, along with explanations. It also says that the intermediary or the insurer shall provide all material information to enable the prospect to make an informed decision. Clause 4 dealing with the “Proposal for Insurance’ also prescribes several steps to protect the policyholder.

IRDA (Protection of Policyholders’ Interests) Regulation 2002 has been replaced by the 2017 Regulation, wherein Clause 6 dealing with the ‘Point of sale’ has replaced Clause 3. Clause 7 mandates all insurers to place on their websites, the terms and conditions of every insurance product on sale. Clause 8 deals with the “Proposal for Insurance”.

In Jacob Punnen Vs United India Insurance Co (CA No. 6778 of 2013, date of decision: December 9, 2021), the apex court underscored the insurers’ obligation to provide all material information to the prospect/policyholder not only at the time of purchase, but also before renewal of a policy, if any changes are introduced in the policy. The court also made it clear that the insurer cannot deny a claim or limit the claim amount on the basis of such subsequent changes not made known to the policyholder.

Here the insurer introduced a limitation in its liability in the health insurance policy, but kept the policyholder in the dark about it at the time of issuing a renewal notice. This breached the duty of the insurer to take the insured into confidence about the change, the Supreme Court said

The insured in this case came to know about the changes only when he made a claim and was told that he would not get the full claim amount on account of the change in the policy! When he challenged this, the insurer argued that the consumer was under an obligation to inquire whether any changes were introduced in the terms at the time of renewal of the policy!

Dismissing such a preposterous argument, the Supreme Court said the insurer had a statutory duty, while sending the renewal notice, to inform the policyholder of the changes. This would have given the policyholder an option to either seek enhanced coverage or a different policy. Without giving that information, the insurer cannot bind the policyholder to the changes introduced, the apex court said.

— The writer is a consumer rights and safety expert

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