Beyond the dotted line: Sign insurance proposal form after a careful read

A client, and not the insurance agent, has to ultimately bear the consequences of not revealing critical information.

Narendra Singh Rathore had purchased a life insurance policy for Rs 30 lakh from HDFC Standard Life Insurance. Rathore died of breathlessness and in a heart attack. The insurer repudiated the claim after which Rathore’s wife filed a complaint with the State Commission. In her complaint, she stated that her husband had signed the application form in good faith at the behest of the insurance agent.

The insurer argued that Rathore had concealed material information regarding the medical ailments he had been suffering from since 2008. The Commission ruled in favour of the insured, stating that hypertension and diabetes are not life-threatening diseases. Even if the insured had a problem in the pancreas, that could not have been the reason for his death.

The insurer then filed an appeal with the National Consumer Disputes Redressal Commission (NCDRC), which ruled in the insurer’s favour. It stated in the judgment that the insured had died due to a heart attack and respiratory disorder, which were directly linked with the undisclosed diseases: pancreatitis and diabetes mellitus.

The National Commission also asked the Insurance Regulatory Development Authority of India (IRDAI) to look into the role of agents while soliciting life insurance policies. It urged the regulator to formulate new guidelines for agents. It also asked it to modify the proposal form, so that the point that non-disclosure of medical conditions would lead to repudiation of claim, was featured prominently.

Don’t sign blindly on dotted line

In the Reliance Life Insurance Co. Ltd. v. RekhabenNareshbhai Rathod, (2019) case decided by the Supreme Court on November 24, 2019, it was held that suppression of the facts made in proposal form will render the insurance policy voidable by the insurer.

“The NCDRC judgement in the above case relies on the Supreme Court judgement in the 2019 case, where the latter said that if the insured signs an insurance contract, then she has to abide by its provisions. You can’t later claim that you signed the proposal form filled by the agent without reading it,” says Sumit Kumar, a New Delhi-based consumer lawyer.

He adds that after the 2019 Supreme Court judgment, consumer courts are unable to hold agents responsible, which is why in this case the NCDRC requested IRDAI to formulate new guidelines for agents.

Kumar reiterates the advice that customers must sign the proposal form only after reading it, to ensure that all the information entered is correct, or that information about past medical ailments, which they provided to the agent, was incorporated in the form.

Another aspect, which this case also highlighted, was that the nature of the disease that ultimately caused the insured’s death would also have a bearing on court judgements. “The courts will take into account whether the past ailment that was not revealed at the time of policy purchase had any correlation with the cause of death. In case there was no correlation, the courts may rule in favour of the insured’s nominee. But if the ailment that was hidden had a direct role to play in the insured’s death, then the courts are unlikely to rule in their favour,” adds Kumar.

Buyer beware

Before the policy is placed before the insurer for underwriting, the customer has to sign a benefits illustration, which states how much premium the insured will have to pay, the rate of return used for projecting returns, the surrender value if the insured exits the policy prematurely, and so on. “This is a critical document, on which the regulator maintains tight control, specifically with regards to the returns shown, so that the client buys the policy with the right expectations. Understand it before signing,” says Kapil Mehta, co-founder and managing director (MD), Secure Now Insurance Broker.

Once the proposal form goes to the insurer, the latter makes a verification call. An OTP (one-time password) is sent to the customer’s mobile number to ensure she picks up the phone. During this call, the insured is again asked about past ailments and other details.

Sometimes, however, the agent gives his own mobile number. When the verification call comes, the agent answers it. Sometimes, customers wish to avoid the hassle of dealing with this call and they delegate this task to the agent. “When the verification call comes, it is crucial that the customer answers it herself,” says Mehta.

When the policy document is delivered to the insured, the package also contains a photocopy of the final proposal form on the basis of which the underwriting was done. “Customers again have an opportunity to read the proposal form and see whether the declarations in it are correct,” adds Mehta.

In addition to pre-existing diseases, customers must also make sure they reveal information about all the other policies held by them. They should also reveal their income truthfully. Both these pieces of information have a bearing on how much sum insured the insured decides to provide.

Customer bears the brunt

One point that customers must understand is that it is their responsibility to do the due diligence at the time of purchase. Failure to do so will mean that claim will be denied to her nominee. In other words, the ultimate loss will be hers.

“Nowadays, with policies being issued after just a video conversation, you may be able to get a policy even if you hide a disease. After three years, insurance companies are anyway bound to pay the claim under Section 45 of the Insurance Act. But if there is an early claim, the insurer could appoint an investigator. And if the investigations reveals that a past ailment was hidden, the claim could be denied,” says Melvin Joseph, founder, Finvin Financial Planners.

By then the insured company would have collected its premiums while the agent would have gathered his commissions. Ultimately, the insured bears the brunt of non-disclosure—either out of ignorance or mal-intention.

“Stating prominently in the proposal form that not revealing past ailments could lead to repudiation, as proposed by NCDRC, is a step in the right direction,” says Joseph.

However, according to him, the declaration to be made by the customer in this regard must be put in a separate box (or else it could be lost within the lengthy proposal form). A separate signature should be taken from the insured for this declaration. And this point should also be written in vernacular language.

Key points insurance buyers must heed

 Even if the agent fills the proposal form, read it carefully before signing it

• Once you have put your signature to an insurance contract, you are bound by its provisions and can’t claim later that you signed without reading it

• Hiding past ailments can result in claim being denied, especially if the ailment has a direct correlation with the cause of death

• When the insured company makes a verification call, the customer must receive it herself

• When the policy document issued by the insurer comes to the customer, it contains a copy of the proposal form; customers have another chance to check it    
 

Lessons from Supreme Court judgments

Sulbha Prakash Motegaonkar vs LIC of India (October 5, 2015)
Death due to ischaemic heart disease and myocardial infarction had nothing to do with the concealed ailments—lumbar spondylitis with PID with sciatica—and hence insurance claim should not be denied
 
Bajaj Allianz Life Insurance Company vs Dalbir Kaur (October 9, 2020)
A proposer who seeks to obtain a life insurance policy is duty bound to disclose all material facts bearing upon the issue as to whether the insurer would consider it appropriate to assume the proposed risk
 
Manmohan Nanda vs United India Assurance (December 6, 2021)
Insured died due to myocardial infarction. But he had made known to the insurer he had diabetes mellitus II, so insurer must indemnify

Source: NCDRC judgment in HDFC Standard Life Insurance vs Vishan Rathore (June 16, 2022)