The insurance company cannot reject a claim after a period of three years of commencement of the policy even if there is a mis-statement or non-disclosure by the policyholder.
Apparently, the section dealing with this was amended in 2015 to place a three-year limitation period starting from the date of commencement of policy or reinstating a lapsed policy.
According to Conjeevaram Baradhwaj, executive VP (legal & compliance) and company secretary, Future Generali India, Life Insurance, till 2014, under Section 45 of the Insurance Act, 1938, life insurers had the right to reject claims even beyond two years from the date of taking the policy if fraud was established on the part of the policyholders while giving information in the application form.
“However, Section 45 was amended in 2015 to place a three-year limitation period starting from the date of commencement of policy or date of reinstating a lapsed policy, on the right of life insurers to refuse payment of claims on the grounds of such non-disclosures for any reason whatsoever. Even today, the three-year limitation period continues,” Baradhwaj says.
Given that there were still some doubt on this, the Insurance Regulatory and Development Authority of India (Irdai) has also come out with a clarification.
According to an IRDAI notification, the insurer has only a three-year window for calling a policy in question on the ground of misrepresentation or suppression of a material fact not amounting to fraud, from the date of issuance of policy or date of commencement of risk or date of revival of policy or date of rider of the policy, whichever is later. It is regardless of whether claim has arisen or not and when it is intimated. Once this period of three years is over, the policy cannot be called in question, the notification says.
So, irrespective of when the claim arises or the intimation is made, once the three-year time period lapses, the insurer has to honour the claim.
This is good news for consumers. However, for insurance companies, it means that they cannot reject a claim if a fraud is discovered after a three-year period.
Importance of truthful disclosure: Bharadwaj says that since life insurance covers the risk of untimely death and provides the nominees with the sum assured upon the death of the life insured, it is important that insurer is able to properly assess the risk and decide on the terms of the coverage, and for this, disclosure about the customer’s health, family history, (‘material facts’), etc become important.
“Insurance contracts are based on the principles of ‘utmost good faith’. This means that a person purchasing the insurance policy must disclose truthfully and correctly the information about the subject matter of insurance,” says Baradhwaj.
Therefore, while purchasing life insurance policy, the customer is required to answer the questions asked in the proposal form correctly, Baradhwaj adds.
In case there is non-disclosure or misrepresentation of material facts in the application form, either unintentional or otherwise, there could be a material impact on the decision of the insurer to issue the policy. Therefore, insurers have the right to reject claims if non-disclosure or misrepresentation on material facts is established under Section 45 of the Insurance Act, 1938.
Further, policyholders should exercise care and caution while disclosing the details required in application forms, especially the personal details concerning health, family history, previous insurance policies, occupation, and income, etc. These facts are important for assessment of risk on a life insurance application.
“If there is any mistake/non-disclosure, whether intentional or otherwise, it could give rise to the right to life insurers to refuse payment of claims for non-disclosure of material facts, within three years,” adds Baradhwaj.
