4 months back, my friend lost his father .He was suffering from liver cancer detected almost 6 months back. He was aged 54.
My friend called me yesterday and informed me that LIC rejected the insurance claim. I asked him the reason for claim rejection.
His father used to drink minimum 3 pegs of alcohol almost daily and was a smoker too. These things were not mentioned in the proposal form, while taking the policy. Now, the insurance company rejected the claim based on non-disclosure of material facts.
Be careful about this. While taking a policy, you are supposed to fill a lengthy proposal form and answer lot of questions in that. In most cases, we are not ready to do it by ourselves. Then, the agent gives the better option, you just sign here sir, and I will fill it myself! You are happy. He fills the proposal form and submits it to the insurance company. This is the way majority of the insurance sales happens.
What is the problem in this? If the customer is not interested in doing some paper work and fill the form personally we cannot blame the agent who is doing it for the customer!
At the time of filling up the proposal forms for insurance:
- Ensure that you read and answer all the questions correctly and accurately to the best of your knowledge. Give all details regarding your health, habits etc.
- Ensure that you have disclosed all material facts to the Company. In case of any doubt as to whether a fact is material or not, better mention it.
- Ensure that all the documents submitted by you (E.g. Age Proof, Income Proof etc) along with the proposal form are genuine
- Mention details of other policies on your life taken from all the insurance companies.
Be careful, your insurance agent cannot fill a proposal form in the correct way, without getting complete information from you, regarding your health condition. He may present the case as a clean case to the company, where you may not be as clean as it looks like! Taking tablet for cholesterol for the last 5 years and smoking 5 cigarettes daily. etc may not be known to the agent!
In such cases, there is all likelihood of claims getting rejected in future like in the case of my friend’s father.
It is a pity situation, we run around all day to different places to buy a TV or Fridge. We enquire from many places, read the reviews etc., and make sure we consider all minute details when we buy such products for our home, but sadly we don’t care enough to read financial documents or fill them by ourselves. This can create problem for our family members, when we are not around!
Doctrine of Utmost Good Faith
The doctrine of ‘Utmost Good Faith’ applies to Life insurance. Accordingly, the customer is expected to act honestly and inform all details regarding his health status (which are known to him at the time of taking the policy) and not mislead or withheld critical information.
So the proposer is expected to mention all known facts about his health conditions in the proposal form. This includes any previous surgery, accidents, congenital health issues, major diseases etc. If there is a family history of any hereditary diseases, that also is to be mentioned. Any habits like smoking, drinking alcohol etc. also has to be mentioned.
The agent also is expected to mention, the facts he knows about the customer in his report along with the proposal for insurance.
But the insurance company will not verify the correctness of these statements at this stage. They will issue the policy based on the statements given and on the basis of the medical report if any, depending on the age, plan and value of insurance
What happens when a claim is reported?
At this stage, the insurance company will verify the correctness of all the statements given in the proposal form. If the claim is reported within 2 years of issuing the policy, it will be treated as an early claim and investigations will be in depth. If it is found out that some material information was withheld or represented wrongly at the time of taking the policy, the claim can get rejected.
Better give correct information and pay higher premium if necessary.
If the customer is a smoker or having any health issues, the insurance company will either charge a higher premium or reject the proposal in the beginning itself. Customers tend to give wrong information in the proposal, as giving correct information increases the premium. If you are a smoker, definitely from a business point, you have higher chances of dying than a non smoker. So, it is natural to charge you a higher premium. But, if you give wrong information in the documents or try to misrepresent anything, it means company is covering a higher risk person for the normal premium and they are very correct in rejecting the claim.
Section 45 of the Insurance Act, 1938:
As per this act, the life insurance company cannot reject a claim after 2 years from the start of the policy based on the fact that the party has not disclosed material facts at the time of taking the policy. The company has to prove that the misrepresentation was done intentionally by the party at the time of taking the policy.
But, if the claim is reported within 2 years, the company can reject the claim in such cases.
So, it is in the interest of the customer, to give all material information in the proposal and take the policy. Try to fill the proposal form by yourself after reading each and every question carefully.
After all, you are taking the policy for the long term benefit of your family. So ensure that it should be useful to the family, when you are not around!