There is a fundamental conflict of interest between the company and the customer. No wonder Life Insurance Corporation of India (LIC) is one of the richest organizations in India. “It should realize that it “survives and thrives” on consumer and “propensity to become unjustly rich by rejecting their claims” is highly depriciable,” the Delhi State Consumer Commission said.

This is a big scam to cheat the customers but regulators don’t have the will or political clout to stop them.

The root cause of the problem is — archaic laws which allow thousands of insurance claims to be unfairly rejected by insurance companies year after year. One of the reasons for routine rejection of motor, travel, household and health claims is an anomaly in the law, which puts the “duty of disclosure” on the policyholder. Accordingly a policyholder is expected to disclose not only things he or she has been asked for, such as medical conditions, but also things that they haven’t which could later turn out to be significant. This is the origin of dispute as an insurance company can legitimately reject a claim it was not informed by the insurer.

Both non-disclosure and misrepresentation are like weapons of offense in the law for the insurance companies to use against the consumers. For instance much to Rita Bhat’s dismay her critical illness insurance claim rejected. She had just been diagnosed ovarian cancer and needed the money but the insurance company rejected the claim because of a technical flaw in her initial application form. The insurance company kept insisting that it was a pre-existing disease.

What was particularly shocking was the inhuman manner in which Rita was treated by the insurance company which branded her a liar and on top of that referred to the disease as breast cancer instead of ovarian cancer. This is a fact insurance almost all companies have doctors on their panel whose job is not to facilitate the treatment but to create confusion to avoid paying the claim.

In yet another case – when a relatively junior doctor on the payroll of ICICI Lombard challenged the diagnosis of a senior Consultant at Sir Ganga Ram Hospital, the husband of the lady even offered to forego the claim if the doctor who claimed to know more could come and treat his wife. But the doctor refused.

The basic flaw in the insurance system is that many of the provisions the Insurance Act, 1938 are faulty but due to lack of political consensus amendments in the Insurance act could not be marshaled in the parliament. Some of the basic lacunas in the Insurance Act, 1938 are:

The Insurance Act, 1938 is a redundant legislation of the colonial era that requires deletion.

1. The IRDA Act, 1999 has inserted some provisions in the Insurance Act, 1938 without deleting the old provisions. This is giving rise to anomalies, for example, definition of the term ‘insurance company’.
2. References in Insurance Act 1938 have to be replaced by corresponding new legislations e.g., Indian Companies Act, 1913 has to be replaced by Companies Act, 1956.
3. Reclassification of insurance businesses is necessary. Insurance business may broadly be classified as ‘life’ and ‘non-life’ business. Even definitions of ‘insurance’ and ‘insurer’ have to be amended.
4. The IRDA Act needs to be merged in the Insurance Act, 1938.
5. There must be a provision of appeal against the decisions of the IRDA to an independent body constituted under the Act itself.
6. There should be a full-fledged grievance redressal mechanism.
7. Specific statutory enumerations are required for protecting the interest of policyholders so that unintended minor mistakes in disclosure do not lead to a loss of coverage.
8. Provisions regarding investments, loans and management need review and revision. The term “approved securities” is required to be revised in the context of new economic policy and business practices.

According to legal pundits the insurance contract suffers from procedural or substantive unfairness. The term substantive unfairness means it is one-sided, harsh, oppressive and unfair. By virtue of this contact the insurance Companies have excluded liability for negligence, breach of contract and given themselves the power to vary the terms of the contract unilaterally- which is unfair. The insurance contract also violates the provisions of the Indian Contract Act, 1862 which has several provisions against undue influence, coercion, fraud, mistake, misrepresentation etc. These are ‘procedural’ provisions already contained in the Act.

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