ESSENCE OF INSURANCE PRACTICE

Insurance customers have been silent sufferers till recent times because insurance interpretations have been more favourable to insurers. This was owing to the fact that insurance works best in a prudent and conservative environment. The principle of good faith was then more skewed in favour of the insurer. Now the situation is turning – from a buyer beware to seller beware environment.

Insurance Laws and Regulations have been rooted in the need of insurers to protect policyholders. Policyholder protection moves on two critical parameters: insurer solvency and insurer conduct. Solvency means that an insurer must have sufficient funds to meet the obligations it faces under  current and future claims. Most often the focus of all regulators has been on this aspect. Courts and other legal forums have battled for the other parameter of insurer conduct.

Insurer conduct is divided into two parts: Fair Terms and Fair Treatment as shown below:

In the area of Fair Terms courts have struck down the misuse of insurers in repudiating claims on technical grounds such as delay in intimation, if the delay can be properly explained/ found reasonable; the misuse of ‘full and final discharge’, to compel insureds to accept lesser payments; striking down of unfair clauses such as the exclusion for genetic conditions in health insurance and so on. The use of the legal principle of ‘contra proferentem’ has been used by the Supreme Court as early as in 1966 in the case “General Assurance Society Ltd vs Chandumull Jain’. Contra proferentem means the interpretation of an ambiguous term in an insurance contract against the party which proposed or drafted the contract or clause. In insurance contracts, the policy is most often drafted on the basis of ‘take it or leave it’ terms and conditions.

Now the focus is shifting to the concept of ‘fair treatment’. Here the Regulator has been active in prescribing timelines which are not yet been practiced in full. We can still hear of claims pending for 12 years, survey reports not being issued even for natcat disasters such as cyclone claims for more than 2 years and so on. These are serious breaches of conduct and will have to get punished in the context of customer protection. Around the world, regulators are taking measures to protect insurance customers from unethical or unlawful practices.

Managing conduct is now an urgent priority and insurers would need to make or update checklists, processes and controls and put in place code of conduct for all employees. Everyone in the organisation must be made to understand the length and breadth of conduct risks. There has to be incentives/ punishments related to the behaviour of employees at the company level because otherwise regulators and courts will step in and the CEO and Boards will have to get embarrassed. In addition, reputational damage to the insurer can be very detrimental, because insurance is a trust product. Policies are annual in nature and this can have cascading effects on insurers whose trust quotient is falling. Those complacently enjoying a sunrise or high noon stage for their organisations can face a sudden sunset state if they neglect the critical aspects of fair terms and fair treatment to consumers in their day to day operations.