People often reach out when they are unable to buy insurance or if their claims are rejected. In one case, an uncle wanted to gift life insurance to his nephew; in another, a fire claim bought by a building maintenance agency was rejected; a friend’s hospitalization for stroke was rejected because he had not disclosed an unrelated heart condition; a colleague wanted to claim the hospitalization cost for a serious condition from two different insurances. In each of these situations, a fundamental insurance principle was violated. As these principles impact you directly, it’s good to know what they are.
An insurable interest is necessary to buy insurance or make a claim. You have an insurable interest in your spouse and your own life and health, obviously. But you do not have insurable interest in a friend or financially independent relative’s life or health. Similarly, you have an insurable interest in your owned home or car but not in a rented house or leased car. A tenant can buy insurance only for the things she owns. This is why insurers did not allow the uncle to insure his nephew’s life.In the case of the maintenance agency buying property insurance, the insurer took the view that the building owner had insurable interest and not the agency. A frequent issue in motor insurance is when you sell your car but do not transfer the insurance to the new owner. In such cases, the new owner cannot claim damages from your insurance if there is an accident because the owner of the car and insurance are different. This is why insurers hesitate to accept third-party cheques from persons other than the asset owner or life insured. They know this could result in a claim rejection later on if there is no insurable interest.
utmost good faith
Insurers check for insurable interest when you buy insurance but also later when you claim. However, the onus of proving insurable interest is on you and that brings up another key principle, which is that of utmost good faith. You are expected to declare information in utmost good faith, which means that you must make all disclosures that can reasonably be considered pertinent to the insurance. This reliance on your declaration keeps costs low and the process efficient because insurers need not verify every fact you share. But it does make you responsible for non-disclosure.
Common non-disclosures are in prior medical conditions, but there are others also. You may, for example, hide the fact that your car has already had an accident to get the no-claim bonus when buying motor insurance, or that your home has a basement used for commercial purposes. The insurance claim pertaining to stroke that I described was rejected precisely because all information was not properly shared. Had the insurer known about the heart condition, it may have decided not to issue health insurance or to change the policy terms.limits on penalties
Fortunately, for policyholders, there are limits to how much you can be penalized for non-disclosure. In life insurance, claims cannot be rejected for non-disclosure after five years. The equivalent period in health insurance is eight years. The hypothesis is that a non-disclosure that does not result in a claim within this time frame is not material.A third principle is that of indemnity. This implies that only actual losses can be compensated in insurance and policyholders should not profit from claims.
Let’s say your medical bill is ₹1 lakh, then the total amount that you will be paid across all your insurances is ₹1 lakh. The amount cannot be taken from multiple insurances.
This indemnity concept does not apply to life insurance because one cannot put a specific financial value to life; it is also not applicable to fixed benefit insurances such as personal accident or critical illness because in these you have contractually agreed to a fixed amount if an insured event happens.Finally, an important pre-condition for insurance is that you are covered only if the premium has been fully paid. Insurances have a grace period for premium payment that varies between 15 and 30 days. However, if you fall ill or die on the 31st day without paying your premium, then the claim can be rejected. This is why timely insurance renewal is critical.
Understanding the principles outlined here and the underlying rationale will help you buy insurance and claim effectively.
(Kapil Mehta is co-founder, SecureNow.)