Basic Legal Tips on Insurance

So far, I have not been able to put up some work which will be understandable as well as useful for those friends of mine who do not belong to legal fraternity. So just thought to have a post which gives very basic idea about a few concepts in insurance contracts which will help you handle your insurance contracts and claims in a better and informed manner.

While I intend to cover a lot of things, this first article will cover few aspects in a nutshell and I will try and cover some other topics in later articles.

For the sake of convenience I have divided this whole article into three parts viz. ‘pre issuance’, ‘post issuance’ and ‘claims’ which will cover major concepts in the life cycle of a life insurance policy.

Pre Issuance:   

Let me first start with the concept of ‘Uberrima Fides’ which literally means ‘Utmost Good Faith’. An insurance contract is based on utmost good faith between the parties and hence it is of utmost importance that both the parties (proposer and the insurance company) are transparent, diligent and honest while entering into the contract.

us analyze what these three words mean for both the parties. Obviously both come to the table with different mindsets. One comes with a view to get best insurance-cover at lowest possible premium rates and the other with a view to earn some money out of the contract.   

So from the point of view of the customer or ‘proposer’ so to say ‘transparency and honesty’ would mean disclosure of all ‘material information’ that the company is seeking in the proposal form.

The term material information is not very difficult to understand. It is basically that information which is necessary for an insurance company to know to ‘underwrite’ the policy. ‘Underwriting’ a policy means analyzing and deciding whether a proposal be accepted or rejected. Decision as to whether the company wants to take the risk on a particular life on its books or not.  

So the next question arises as to, ‘how a lay man would know what is material for the insurance Company’?

It is simple. Legally speaking, any information that is sought by an insurance company in its proposal form and all other connected documents (medical questionnaire, supplementary financial forms, supplementary personal information form etc.) is material information and hence must be answered with full honesty and integrity.  

One must make sure that all medical, financial and personal (family) details are filled by one’s own hands and with utmost sincerity and honesty. It s important that every minute details that the proposal form seeks is filled up and rechecked before it is submitted for the company to consider.       

Be sure, that if the above point is taken care of, there will be no problems for you or your family in that eventuality to get the claim money.

While we talk about ease of getting money at claims stage, one must also ensure that the nomination details are filled up in the proposal form. It will save your family from unnecessary documentation and hassles in that unfortunate event when they have to lodge the claim with the insurance company.

Now that we have spoken about our responsibilities of being transparent and honest, let us understand what is it that insurance company needs to make sure to follow the principle of ‘utmost good faith’.

An insurance company is duty bound to explain all the benefits, charges, features, important terms and conditions like surrender rights, termination, and premium details of a life insurance policy and hence always pay attention to what an agent, broker or company representative is explaining to you.

If you are in doubt ask questions and ask for authorized and printed material like brochures, leaflets etc. make sure that the material shared by the agent is genuine. One can make out as to which material is genuine as it will always have certain crucial details like company logo, full name, registered office address, IRDAI registration number, CIN number etc.

One crucial document that one must see is ‘benefit illustration’. It is required to be signed by the proposer along with the proposal form and it gives a brief idea about how the product is going to give benefits. The document explains the benefits over the entire term of the policy and hence is an important tool to ascertain if the product is suitable to your needs or not.

If required one may also keep a copy of the proposal form that you fill up and submit with agent, broker or company representative. While the company will send one copy of the proposal form along with policy document the copy kept by you will help you ensure that your proposal is not changed and/or fabricated by anybody after you submitted it.  

Post Issuance:    

Most of us do not care to have a look at the life insurance policy once it is issued and sent to us by the company. I would suggest that one must go through the policy document as soon as it is received, for two simple reasons:

·         One, it will make sure that you have got what you had proposed for; and

·        Two, if you haven’t, then you will not lose upon your right to seek cancellation of the policy

The second bullet point brings us to yet another concept, which is unique to life insurance business and it is called ‘Free-Look Period’. As per prevailing regulations every insured has a right to go through the policy document within 15 days of its receipt and seek its cancellation in case of his disagreement with any terms and conditions of the policy.

In case the request is made duly in time the insurance company is liable to refund your premium after deducting stamp duty, medical expenses, if any and proportionate mortality charges.

It is, therefore, important to read the insurance policy in details as soon as it is received as any request made beyond those 15 days, gives right to the insurer to decline your request for cancellation.

Claims:

If the proposer has taken care of the points mentioned in above two heads then there will be no reason for an insurance company to decline the claim.   

One must ensure that whoever has been nominated under the policy is informed about the same. The nominee should also be made aware of the procedure as prescribed in the policy so that no hassles are faced while lodging a claim with the company.

Be aware that insurance company is under regulatory obligation to demand all necessary documents in one go and they can not ask for documents in a piecemeal. Please be also aware that insurance company has to decide the claim within 30 days from the date of receipt of all the relevant documents. Any delay in deciding the claim beyond the period of 30 days would make an insurance company liable to pay interest which is 2% higher than the bank rate prevailing in the year in which claim was reviewed.

However, in case where company feels that documents given by nominee/claimant are not sufficient it has a right to initiate investigation. The said investigation needs to be completed within a period of 180 days from the date of receipt of claim by the company. In such case, therefore, the period of 30 days will have to be computed from the date of completion of investigation or 180 days whichever is before.    

There are few more concepts relating to claims, which I will try and cover in my next article in this series.

Hope you find this article informative.   

Nuggets of Learning from Fali S Nariman's... "The State of The Nation"

Contrasting Provisions in the Constitution of India

The Constitution of India has various contradictions, embedded in it. One such contradiction is, while it creates 'equality before law' as a fundamental right', it also keeps room available for any reasonable law which may favour on sect, class or group of its citizens.

One such example could be : While the Constitution of India guarantees its citizens ‘equality before law’ there have been several amendments to bring forth some exceptions to the same. While the Constitution as originally promulgated had clearly defined the beneficiaries of the said benefits of exception there were several amendments at later date which carved out some more exceptions to the said fundamental right.

Preferential treatment for Women and Children was one such move, which tried to give additional support/benefits or preferential treatment to women and children.

An example could be the 2005 amendment to the Hindu Succession Act which gave equal rights to the daughters with sons in Mitakshara Coparcenery Properties. There were a few High Court orders which had ruled that partition decrees passed before the said amendment which are still in execution will not be affected by the said amendment, the Supreme Court vide its order in Prema VS Nanje Gawda and others, 2011 (6), SCC 462 overruled the same.

It is interesting to observe that while the amendments to the Constitution and various laws seem to create an exception to the rule of ‘equality’, the aim of all such laws/amendments is to bring everyone on the same level so that the ‘oppressed/exploited’ get their due. In a way, therefore, these amendments are meant to bring ‘equality’ and hence are in line with the basic intent of the Constitution.

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Annual Return: [Contributed by Mr. M.K. Apte, Practicing Company Secretary, Indore (M.P.)]

ANNUAL RETURN:

The provisions relating to Annual Return are contained in Section 92 of the Companies Act, 2013. It is an important document, designed to provide information to all the interested persons in the company i.e. stakeholders. The return contains the information relating to the company, its promoters, members, meetings and remuneration of the directors and key managerial personnel. It is the intention of the law makers to improve the corporate governance and empower shareholders. It is a framework based on self-regulation with enhanced disclosures and accountability on the part of the companies and its management. Every company shall prepare its annual return in FORM No: MGT-7.

The documents required to prepare annual return:

1. Memorandum and Articles of Association.
2. Statutory Registers:

                      (a)    Register of members;
                      (b)   Register of Directors;
                      (c)    Register of Directors’ shareholding;
                      (d)   Register of Key Managerial Personnel;
                      (e)   Register of Related Party Transactions;
                      (f)     Register of loans and advances;
                      (g)   Register of Charges
                      (h)   Register of Securities

      3.      Minutes of the meetings of Members; Board of Directors and their committees;

      4.      Attendance register of all the meeting

      5.      Forms and receipts filed with the Registrar of Companies;

      6.      Indebtedness certificate signed by Company Secretary /CFO of the company as well as the                   Bank statement.

      7.      Latest audited financial statements

      8.      Copy of notice of annual general meeting

      9.      List of shareholders as on 1^st April and 31^st March

     10.  List of share transfers during the year.

     11.  Any orders received by the company from the High Court or from any other regulatory body.

     12.  List of promoters.

     13.  If necessary, we can take Management Representation letter

On the basis of the above registers and information, the information mentioned in the annual return is to be checked.

Further, in Point No: XI in the Annual Return a company has to give disclosure as to whether company has made all the compliances and disclosures during the year.  The certifying officer selects YES, it means, the certifying authority is certifying that not only the matters mentioned in Annual Report but also the company has complied with all the provisions of the Companies Act, 2013 during the financial year. Further, the certifying authority is certifying that whatever mentioned in the annual return is true and no facts are concealed as per the original record maintained by the company. It means the certifying authority has checked all the original documents relating to the information mentioned in the annual return e.g. minutes, registers and other documents.

Provisions relating to authentication of an Annual Return:

Section 92(1) provides that the annual return shall be signed by a director and the company secretary or where there is no company secretary, by a company secretary in practice. In relation to One Person Company and small company, the annual return shall be signed by the company secretary, or where there is no company secretary, by the director of the company.

Further, in case of a listed company or a company having a paid up share capital of Ten Crores Rupees or more or turnover of fifty crore rupees or more, shall be certified by a company secretary in practice and the certificate shall be in Form No: MGT-8.

While certifying the annual return, it becomes necessary for a company secretary to certify the annual return only after scrutinizing and checking all the originals (copy of which may be obtained from the company and retained with him) and to find that the information submitted in the Annual Return matches with the originals.

Proposal deposit on the Life Insurance Proposal... Whether liable for Service Tax

Recently the Service Tax department has served notices to almost all the life insurance companies raising demand of service tax, interest on late payment, penalties etc. on the amount of proposal deposit that it collects from the prospective policyholders (proposers) and which does not get converted into a life insurance policy.

The Departments stand contends that insurers are wrongly paying service tax only once the proposals get converted into policies and excluding the proposal deposits which get refunded, thereby causing loss to the exchequer.  

The whole premise of the said notice is based roughly on the following 4-5 points:

• ·   Life Insurer’s accept proposal deposit from the prospective policyholders along with the proposal forms, which is nothing but an advance premium for services to be rendered;
• ·   The said proposal deposit is then adjusted towards the premium once the policy is issued and hence the act of collecting the said proposal deposit from the prospective policyholder is nothing but ‘agreeing to provide’ service which is taxable under the prevailing Service Tax Law;
• ·    The premium so collected in advance is available for the Company to use and invest and hence company has an opportunity to earn money and but still not paying service tax;
• ·   The provisions of Section 65(105)(zx) of the Service Tax Act, while discussing taxability of life insurance, covers not only the concept of ‘policyholder’ but also ‘or any person’ and hence the prospective policyholders whose proposals are not accepted squarely et covered as any person;
• ·    The insurers may first pay the service tax and then in accordance with the provisions of Rule 6.3 of the Service Tax Rules, may claim refund and/or adjustment of the same against then present liability and avoid loss to the exchequer caused on account of delayed payment;   

In my personal opinion the said notice will not stand the test of law on the following grounds:

To analyze the whole issue it becomes imperative that the concept of services under life insurance business is understood vis a vis the provisions of the Service Tax Act, so that it can be analyzed if proposal deposits can be said to be taxable.  

First and the foremost point is that the Service Tax Laws as amended till date levy Service Tax on the basis of amounts received towards taxable service provided or agreed to be provided.

The provisions of Section 2(11) of the Insurance Act, 1938 (Amended till date) the term life insurance business is defined as ‘business of effecting contract of insurance of human life including contract whereby the payment of money is insured on the happening of death of any other event’.

It is pertinent to note here that the provisions of Section 65(61) of the Service Tax Act also recognize the same definition for the term ‘life insurance business’.

Further the provisions of section 65(105)(zx) while discussing Taxable services in relation to life insurance business states ‘to a policyholder  or any person, by an insurer including reinsurer carrying on life insurance business…’  

Now, if we look at the whole process that goes into executing a life insurance contract, it comes to the light that the insurers collect proposal deposit along with proposal forms, which in pure contract term is an offer from the prospective policyholder. It’s important to note that no invoice is issued, but only an acknowledgment of proposal deposit is issued at this point in time.

The insurance company parks said proposal deposit in a separate account till the time it evaluates the proposal. The said evaluation process is called as ‘underwriting’ in insurance parlance. Only once the underwriting is done, the insurer comes to know if proposal is to be accepted or declined.

The proposal deposit for all the declined proposals is refunded in full and the ones which are accepted, their proposal deposit is transferred to premium accounts and policies along with invoices are issued.     

Keeping aforesaid in mind any life insurance company will provide or agree to provide any service only once a contract of insurance is entered into. Infact the contract of insurance being a long term contract is in itself a contract where an insurer agrees to provide services over a period of the policy.

Mere underwriting of a policy cannot be termed as a service or agreement to provide service since, in any ways if policy is declined, entire proposal deposit is refunded. Even if for the sake of argument it is assumed that the underwriting is a ‘Service’, in my view service tax is not chargeable on the services which are provided for free/without charging any service fee/charge.

The second question that arises is that of interpretation of the term ‘any person’ as contemplated under the provisions of Section 65(105)(zx) of the Service Tax.

In my opinion since the life insurance business as per definition itself is a business of providing ‘contracts of life insurance’, the same can by no stretch of imagination be extended to ‘proposal underwriting’ in the garb of saying it’s a service to ‘prospective policyholder‘, who falls within the ambit of ‘any person’.

In a life insurance business the term ‘any person’ can be said to include nominees, legal heirs, life assured (CI Riders) or members and their nominees/legal heirs in a group insurance policy. All these may be separate for a policyholder and as such the act intends to cover all those contracts where the policyholder is not actually served by the insurance company but someone else is being served.

Lastly the argument extended by the department that the insurance companies can make payment of service tax as soon as the proposal deposit is collected and then seek refund of the same if the proposal is not accepted, just goes to demonstrate that the Department in a way admits the fact that proposal deposit on any proposal that is not accepted is not liable for service tax. 

Further in my view the intent of the legislature behind including provisions like Rule 6.3 Service Tax Rule is to provide protection to the assessee in case of erroneous excess payments.

If the service tax is paid on all proposal deposits collected then it would mean payment of service tax is made on the basis of an assumption that the insurer will either provide service or agree to provide service to all the prospective policyholders and not on the actual agreement to provide service.

It is only a matter of time that we will come to know as to which stand holds good before the Courts.

Would love to get views (favour/against) from all the stakeholders going through this blog.