Published in Mint on, Sep 12 2012, Written by Kapil Mehta
Over the past year, I have received several complaints about insurance contracts. Often these contracts have vague conditions and include clauses that are patently unfair to policyholders. Since customers receive the policy contract at the end of a long sales process, they normally do not have the energy to re-open a discussion with insurers. Even if they did, I doubt if they would make much headway. In a few cases, I attempted to have a contract modified or perhaps clarified. Unfortunately, I have not yet met with much success. The policy contract is considered non-negotiable. As a result, customers are left with an uneasy feeling that their claims will be dismissed on the basis of technicalities and legalese. Let me share some common issues.
Nature of medical advice
A particularly malfeasant clause in health and travel insurance is: “Claims can be denied if the policyholder fails to seek or follow medical advice.” What exactly does that mean? What diseases should a policyholder seek medical advice for? What if he felt that advice was not needed and the problem was routine? After all most serious diseases begin with some basic symptoms. What if the policyholder took two opinions and disregarded one? This clause is so subjective that it must go.
At a private sector life insurer, we ran into the odd situation of inconsistent exclusions in the base term insurance policy and the accidental death rider. The only exclusion in the base term life cover was suicide in the first policy year. However, the accidental rider excluded suicide in all years. The customer hesitated to clarify this with the insurer because she felt the insurer would interpret her question as an intention to commit suicide after the first policy year and cancel her policy. We sought clarification on her behalf and were quite astonished when the insurer confirmed the inconsistent exclusions? This runs contrary to a directive issued by the Insurance Regulatory and Development Authority (Irda) that disallows any exclusion in life insurance except suicide in the first year.
Definition of pre-existing diseases
A perplexing situation that I have recently taken up with a health insurer is the definition of pre-existing diseases. The definition in some policy documents does not mention if it is necessary for the customer to be aware that they had a disease when they purchased the policy. Technically, this means that if you were suffering from migraine-like headaches before purchasing a health insurance policy and later discover a tumour, the insurer could argue that the disease is pre-existing and deny your claim. These are not hypothetical situations. For one of our clients, the insurer denied a claim two years into a health insurance policy maintaining that the disease had already been contracted when the policy was issued. Our submission that the policyholder would not have allowed the condition to drag on for two years if they were aware of it seems to have fallen on deaf ears.
A common issue is the generic, catch-all nature of questions asked in proposal forms. One such question is: “Have you undergone any tests or investigations or been advised to undergo any tests or investigations?” Unless one has grown up on a diet of Kryptonite, the answer to this question will always be “yes”. Most people would pass this question off as a bureaucratic query and respond in the negative. Does this mean that a belligerent insurer can say that information has been misrepresented in the proposal form and decline a claim? What is the material level at which an investigation should be reported?
Problem in group insurance contracts
Most group contracts allow the insurer to cancel the policy at any time without a penalty. For example, if seven months into an annual group health policy the claims are too high, an insurer can refund the remaining five months of premium and terminate the contract. This puts the insured company at considerable risk if claims shoot up. The rules work differently when the insured company wants to cancel a policy and a severe financial penalty is imposed.
How to address the issues
Guidelines on contracts: A guideline for insurance contracts needs to be publicly available and accepted by insurers. The insurance councils, which are industry bodies, should drive this initiative. Australia had a meaningful public debate on this issue in 2010 and many of their outcomes are directly transferable to India. Elements of Australia’s debate are on http://bit.ly/Q1Y83g. A paper on how the issue is being addressed in Europe is on http://bit.ly/P2bb7a. The Financial Services Authority in the UK also specifies requirements of insurance contracts (http://bit.ly/O82oly).
Grievance redressal: Irda will need to step up grievance redressal and investigate claim issues more actively. This will unearth contractual issues.
Un ambiguous language: Finally, a few insurers will need to take the lead and write out their policy contracts in unambiguous language. The rest of the industry will quickly follow suit.
Insurance is not a tangible product but a promise by an insurer to pay claims. It is imperative that the promise be specific with minimal caveats.