Recently, a client filed a claim under a health insurance policy. The claim was filed around six months after the issuance of the policy. Since the policy was not very old, the insurance company scrutinised all the documents, called for additional data and documents and discussed the case with the client. Thereafter, they sent a mail saying that the claim has been rejected due to non- disclosure of facts. They also terminated the policy on the same grounds without refunding the premium.
The client was experiencing a pain in the chest for a few months. All investigations were done and the diagnosis was clear. The pain re-surfaced and the subsequent investigations revealed cancer. Radiation was recommended and completed and thereafter the claim was filed. It was communicated to the Insurer that all the previous investigations before the issuance of the policy had not revealed the cancer or any other issue. Inspite of the same, the insurer chose to reject the claim and terminate the policy. While other legal remedies are being pursued, this article talks about the importance of disclosure in application forms especially for insurance related products.
The principle of Uberrima Fides applies to insurance contracts. It means that both parties (the insurer and the insured) must act with complete honesty and disclose all facts. This principle emphasises transparency and integrity as the insurer relies on the same to assess risk carefully.
Applications (or Proposals) for insurance undergo a process called underwriting. There are two types of underwriting – Financial and medical. Financial Underwriting typically applies to life insurance policies. The insurer will scrutinise the income and net worth of the client to determine whether the applicant’s request for an insurance cover is justified by their financial numbers. Applications can be rejected or approved for a lower sum assured in case the sum assured is very high compared to the financials of the applicant.
Medical underwriting is generally done for life and health insurance policies. The insurers want to ensure that the risk that they are accepting is a standard risk. Accordingly, they ask medical questions in the application form. In case, there is a `yes’ answer to some of the questions, then additional data/ documents/tests may be requested by the Insurer.
Its obvious that insurers will be wary of offering insurance to people who are already unwell or have some issues such as diabetes, blood pressure, etc.
They may choose to insure such applicants at higher premiums or offer a lower sum assured or choose not to cover them at all.
If an applicant files a claim after not disclosing this information, it is likely that the claim may be rejected and the policy is also cancelled due to non- disclosure of information.
It is therefore very important that all disclosures are made correctly and comprehensively in applications for insurance. Insurance is a risk management tool. Life insurance is bought to protect the family in case of death of the main earner in the family and health insurance is purchased to avoid the huge expenditure that generally follows a major illness. Accordingly, being truthful and honest in insurance application forms is of the highest importance. All clients should ensure that they complete the portion of the application forms related to health and lifestyle disclosures themselves. Their agent/advisor may have completed this section and in such a case the same should be reviewed by the client. The Agent may not be aware of the history of the client as well as the medical history of the family and may make some assumptions to complete the form and expedite the process. Non-disclosure related to smoking and drinking habits, medical history, occupation, current medical issues, etc may lead to the claim getting rejected and the premium paid being forfeited.
It is advisable for clients to complete application forms for financial products on their own and if not at least review the same thoroughly before signing the form or pressing `Submit’ on the screen. Please note that the purpose of buying insurance is to get the insurer to `pay’ the `claim’ and not for the insurer to `claim’ the `premium’.
