Falsity in policy form can lead to claim rejection; check before signing

Insurance contracts are based on the principle of utmost good faith
In a case that went all the way to the Supreme Court, Reliance Life Insurance had repudiated a claim made by Rekhaben Nareshbhai Rathod because her husband, the insured, had failed to disclose at the time of buying the policy that he had purchased another policy from another insurer. The District Consumer Disputes Redressal Forum dismissed her complaint, but the state and the national forum ruled in her favour. However, the Supreme Court decided in favour of the insurer. This judgement underlines the need for insurance buyers to make complete and truthful disclosures in the proposal form.

The question that comes to mind is: Why should a life insurer enquire about the other policies a customer already owns? Experts point to the concept of human life value. “Suppose a person earns 

Rs 1 crore a year. The maximum sum insured he can get should equal an amount, which if invested, can replace this income stream for the family,” says C L Baradhwaj, executive vice president–legal and compliance, Future Generali India Life Insurance. An alternative approach is as follows. “The maximum sum insured can equal the total income a person can be expected to earn over his entire work life, factoring in his current age, salary, and increments,” says Anil Kumar Singh, chief actuarial officer, Aditya Birla Sun Life Insurance. 

From the total sum insured calculated, the sum insured of existing policies is deducted to arrive at the sum insured the insurer can offer. This is done to avoid the risk of over-insurance. “Sub-standard lives may try to insure themselves for a very high sum, resulting in losses for the insurer caused by anti-selection,” says Baradhwaj. 

Insurers enquire about a prospect’s current health and history and that of his family. Questions pertaining to health have a direct bearing on mortality risk. Even information on diseases contracted a few years earlier should not be overlooked. The health history of parents and siblings should also be presented accurately as there is a preponderance of some diseases in certain families, while some tend to be genetically transferred. Insurers also enquire about a prospect’s occupation to assess if the person faces above-average risk in his work environment. 

Those buying a term plan could be asked about their educational qualifications. “Well-educated people are expected to be more aware and hence look after their health better, hence insurers prefer to cover them. Education also has a bearing on income and hence on human life value,” says Bhawna Sharma, general manager, Policyx.

Insurers ask for full disclosures so that they are able to make an accurate assessment of whether to cover the person and to determine the loading to apply to the premium. The customer gives an undertaking in the proposal form that whatever answers are given are true to the best of his knowledge. If there is any misstatement or concealment, the life insurer has the right to repudiate the claim. 

Insurance contracts are based on the principle of utmost good faith. “It means contracting parties act honestly and not mislead or withhold information essential to the contract,” says Subhash Nagpal, CEO and founder, Compare-policy.com. Fill up the proposal form yourself, or read it carefully before signing on the dotted line.

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