This secret clause may prevent insurance claim rejections

After his father’s death, LIC settled the insurance claim, but Zaidi’s troubles started when the private insurer rejected the claim stating that the policyholder had not disclosed any information about the LIC policy. “Our insurance agent says he had disclosed details of every single insurance policy to the insurer, including the one taken from LIC, and yet the claim has been rejected. I intend to approach the consumer court now,” says Zaidi.

Does Zaidi stand a chance against the insurer? Very much. What may come to his rescue is Section 45 of Insurance Act, 1938, which states that a policy shall not be called into question on the ground of mis-statement or wrong disclosure after three years. In other words, if a policyholder has paid three annual premiums consistently, the insurer cannot reject the claim on the grounds of non-disclosures or otherwise. In Zaidi’s case, his father had paid four premiums until his untimely demise.

The Power of Section-45

Section 45, in its earlier form, had a two-year window for insurers to call in question any approved policy on grounds of mis-statement, wrong disclosure or fraud. The insurers could have still rejected the claim even after two years of the commencement of the policy if they could prove that the claim was fraudulent. However, insurance regulator IRDAI partially amended Section 45 in 2015 in the light of rising number of claims’ rejections.

Section 45 of The Insurance Laws (Amendment) Act 2015 states that no claim can be repudiated or rejected after three years of the policy being in force even if the fraud is detected. “Section 45 provides a very strong regulatory intent to protect the interest of policyholders and prevent frivolous claim rejection,” says Kapil Mehta, Co-founder, Securenow Insurance Broker.

“Mis-representation and fraud are typically committed with a short-term gain in mind. It is unlikely that a fraud will be committed with more than a three-year outlook. An ailing person may know that they could die in the next year or two but for them to predict death beyond three years is difficult. So, if a person has paid premiums for three years it is very likely that their claim is genuine,” adds Mehta.

Besides, a three-year window is good enough time to review the genuineness of approved policies. “The life insurer can question a policy within three years on the ground that any statement or suppression of a fact material to the life expectancy of the insured was incorrectly made on the basis of which the policy was issued. They can also question the policyholder on grounds of fraud within three years,” says Rakesh Goyal, director, Probus Insurance Broker Ltd. If the policy is terminated within three years, the premiums collected from the date of commencement until the date of repudiation are refunded to the policyholder.

If the insurer rejects the claim on non-disclosure after three years, it will have to prove they would have denied the insurance had they got the undeclared information . “For example, if an insurer says that another life insurance was not declared, they will need to prove that had that other insurance been known, then the maximum sum assured level allowed for an individual would have been exceeded,” says Mehta.

If the private insurer in Zaidi’s case manages to prove that they were unaware of existing policies and that his father did not need such high amount of insurance coverage, they may not have to settle the claim. However, in this case, the company will have to settle the claim, says a retired insurance official. For now, the insurer has cancelled the licence of the agent who sold the policy and laid off employees involved in this particular case.

“Zaidi’s case is of a high-net worth individual. Even if the other policy details were hidden, the insurers should have done their due diligence within three years. They are using pressure tactics. Eventually, they will have to settle the claim. Section 45 is very much applicable here,” he says on the condition of anonymity.

There is no denying the fact that organized rackets by fraudsters could have misused Section 45 to file fraudulent claims, but it surely bridges the trust gap that people have about claims settlement of insurance policies.

“One of the consequences of Section 45 is that insurers must put in an extra effort underwriting and assessing a risk before issuing a life insurance. The approach of questioning at the time of claim must come down since most claims will need to be paid after a three-year stipulation,” says Mehta.

health insurance

A similar provision exists in health insurance policies. If the policy has completed eight years, policyholders’ claims cannot be disputed except for proven fraud and permanent exclusions. “Policyholder’s claim won’t be rejected from the ninth policy year unless they have indulged in fraud or are making a claim for a permanent exclusion in the policy,” says Goyal.

Even though the recourse is available, one needs to be cautious about the disclosures one makes in the policy application. Don’t leave it to the agent alone. Check all details personally.