We are living in the age of globalization and liberalization. This is affecting all the economic activities. Insurance is no exception. As far as General Insurance in India is concerned, the globalization and liberalization has ushered in an era of de-tariff regime and entry of private insurance companies along side the government general insurance companies.
Some of the private insurance companies are joint ventures. They have thus access to the resources of their foreign partners in terms of their experience and knowledge, product range and design, services and international practices. This means other insurance companies have to gear up to make substantial improvement in their operation and delivery system. The customer stands to gain.
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De-tariffing in its wake has brought its own challenges. Tariff meant rigidity. It meant that not only rates are fixed, even terms, conditions and wording of policies are to be as laid down in tariff. The demise of tariff means the companies have to work out their own pricing strategy. It also means that they have to come out with the appropriate wordings, terms and conditions, warranties and clauses which should go with the price range. The price of the insurance product goes with the terms and conditions of the policy, apart from other factors. There may be need to customize the products. There may also be the need to conceive and develop new products as per the market need. Development of suitable wordings for policies therefore becomes all the more important. This in turn would require skill development of people to meet this new challenge.
Insurance policies are evidence of contract. The parties to the contract are the insurance company and the insured. Insurance policy contracts are governed by the same rules as are applicable to contracts in general. In India we have Indian Contract Act of 1872. The insurance policy should fulfill the requirement under this Act. Besides, insurance business has its own peculiarities and concerns on account of the special nature of insurance contract which needs to be addressed. We accordingly have what are called the basic principle of insurance namely – insurable interest, utmost good faith and Indemnity (Subrogation and Contribution). These are principle of common law. Incidentally, these have been codified in Marine Insurance Act also.
These principles of insurance are basic to all insurance contract. Once a policy is issued it becomes legally binding contract. Let’s now examine why policy wordings are important. Let’s also examine the implication if these are subject to legal scrutiny in case the matter goes to the court. There may be wider ramification also. Whenever there is conflict of interest, the policy will be put to legal test for interpretation. This we have to accept.
Insurance is an intangible product. In return for the price (premium), the insurance companies issue the policies which are stamped and legally enforceable document. This insurance document is basically a promise to pay for covered loss according to the terms and conditions of the documents. All general insurance policies do not result in claim. Everything is sugar and honey so long there are no claims. Insurance policy is put to test only when there are claims. In fact the payment of claim really consummates the insurance contract.
They say you are buying peace of mind when you are buying insurance. The insured feels cheated if the claims is not settled quickly and to his satisfaction. There may be many reasons why claims are not settled. One reason is the uncertainties in the meaning of policy language and scope of coverage. The language may be ambiguous which means it is susceptible to more than one interpretation in terms of (i) its meaning and (ii) in terms of meaning derived from the arrangement of words in a sentence. The meaning of one part of document may differ from the meaning in another part of the document. There may be vagueness in language when the term used is imprecise. The insurance companies must therefore ensure to detect and clarify uncertainties in the policy language. What you “promise” to pay in your policy document should not become a prisoner of inappropriate policy wordings.
It should be appreciated that conditions in an insurance contract are basically stipulations to regulate the contract. These either impose certain obligations on the insured or give certain rights to the insurer. Warranties are basically additional specific conditions imposed to ensure that the degree of hazard at the time of acceptance of proposal is not increased. It should be very clearly understood that breach of condition and / or warranties may affect the validity of insurance contract and / or payment of claims.
Therefore in order to ensure a good market image, the insurance companies must have to ensure that the policy wordings are clear, unambiguous and consistent throughout the policy especially involving grey area of the policy and they should not become hindrance at the time of the claim and must correctly reflect the intent of the parties. An example would illustrate the point being made. “Building, content, furniture and fixture there in” is covered under fire policy which also covers storm damage.
There was a storm and the neon-sign on the building was damaged, whether fixture therein also include the “neon-sign.” The intent of the insured as reflected in the proposed form was to cover the neon-sign also. This intent was not clearly reflected in the policy document. The personal handling the claim has his own interpretation of the policy wordings and according to him the claim does not come within the purview of the policy. Neon-sign can not be a fixture therein. It is therefore important that not only the insured understands his policy wordings, scope of coverage, his obligations and rights under the policy, but the persons handling the claims also understand them.
The policies must respond when the insured reasonably expects them to. The quality of policy wordings is an issue, therefore. If the policies do not respond in times of claim, there is every chance of losing the renewal besides bringing bad name to the insurance company. Instead of being a source of comfort in a crisis situation, the claim settlement process should not become an additional source of headache to an already bothersome situation. The very purpose of insurance gets defeated.
Most of the insurance policies are drafted by the insurance companies and the same is accepted by the insured as it is without any negotiation or discussion. The insured ordinarily has no say in establishing the terms and condition of policy and has to adhere to policy terms as drawn by the insurer. Hence insurance contracts are said to be contracts of adhesion. There are also situations where big corporate clients are in a position to negotiate and bargain for the scope of coverage and other conditions of insurance. These policies would not constitute contract of adhesion. Whatever may be the situation, in written contract it is an accepted rule of contract law that a party to contract is responsible for knowledge and understanding of contract provision.
However, the fact of the matter is insurance is highly technical and insurance policy language is complicated and is not easily understood by an average insured. This is the reason why court generally have shown reluctance to hold insured responsible for having read or having understood their insurance policies. The court accepts the existence of unequal bargaining power between the insured and the insurer and tries to balance this by giving the insured the benefit of doubt.
In contracts of adhesion, any ambiguity in the wordings or doubts will be resolved against the party that drafted it. Since the insurance company drafts the policy in case of any doubt or dispute the meaning will be decided against the insurer and in favour of the insured. This is the current prevailing judicial attitude in adjudicating disputes relating to insurance policy wordings, scope of coverage, etc. The insurance companies should be alive to this ground reality. They should also understand that if matters go to court, these will result in judgments and this in turn will set precedent which are very unlikely to favour insurer and hence will have wider ramification.
Whilst on the subject, there are regulatory issues also which need to be looked into. For the purpose of this article, there are two regulations of IRDA which are of concern to us.
(i) Protection of policyholder interest
(ii) File and Use requirements
The regulation on policyholders interest talks about the proposal form for insurance as also about matters to be stated in general insurance policy. These requirements have to be met with. Failure to do so would not only attract the intervention from the regulator but would also constitute deficiency in service and hence open to consumer court intervention. Besides “File & Use requirement” also costs upon the insurer an obligation to ensure that all literature relating to the product should be in simple language and easily understandable. All technical terms should be in simple language.
Reinsurance is yet another aspect which needs an examination. Some of the general insurance policies are facultative reinsurance driven e.g. mega-risk, risk of unusual nature, liability risk, etc. We therefore have two insurance contracts in such situations. Although both the contracts are quite independent of each other, sometimes the wordings for the direct insurance come from reinsurer. It is possible they may not be apt for Indian jurisdiction. Besides, inappropriate or faulty wordings while drafting the basic (primary) insurance and / or the reinsurance policy can have serious consequences.
The precise meaning of words in liability insurance deserves special attention e.g. “loss occurring” policies. This assumes importance because of “retrospective legislation” and social judgement trend. “Asbestosis” claims are burning example. There are lessons to be learnt. Liability insurance is full of uncertainty and changes in interpretation. The words used and the drafting made must therefore take into account all the eventualities.
Any discussion on policy wordings would be incomplete unless we discuss the marine insurance policy wordings. As is well known it started with S. G. Policy form. It was a combined policy form with terms and conditions for both ships and goods. The policy wordings used were archaic. With the passage of time, it was felt to modify and simplify the wordings. However, it was always resisted on the plea that the wordings have been subject to legal scrutiny and have stood the tests. Any change in the wordings or phrases would again reopen the legal scrutiny process. The only change accepted was attachment of clauses e.g. W.A; F.P.A. and all risk. The S. G. policy form continued to be used for over two centuries. However, finally in the year 1982 this policy form was changed and we now have MAR policy form both for cargo and hull separately with standardized ICC and ITC for cargo and hull insurance.
This change was in effect the acceptance of the fact that the wordings of the insurance policy must change with time and the need of the hour. In a dynamic insurance environment, policy wordings can not remain static for a long time now. Besides marine insurance business is international in nature. The same words may have different meaning and interpretation in different countries. This aspect can not be overlooked.
In conclusion we can summarize as under:
An insurance policy is a legal document. It is a legal contract between an average person and the insurance company. An average person is not expected to fully understand and appreciate the legal wordings – this is the current judicial thinking and hence reasonable understanding and common sense meaning assumes importance. Therefore while drafting the policy the insurance company has to strike a balance between the common sense meaning and legal interpretation and these should not be in conflict. The way an insurance company think and interpret its policy wordings are not important once the matter goes to the court.
The way judiciary looks at things assumes paramount importance. Therefore while wording the policies the prevailing judicial trend and the general principal of judicial scrutiny should be kept in mind by the insurance company. The relevant regulatory requirements must be met. The terms and conditions of the policy should not be violative of any other laws of the land. The policy wordings must therefore be in simple understandable language with clear intent of both the parties reflected.
The terms used must be properly defined. There is therefore a need to examine the wordings of all the existing policies in the light of what all we have discussed. Similarly while developing new products, these aspects must be kept in mind. In fact, it will be a good idea if the wordings are vetted by an expert legal-man. Good policy drafting skill needs to be developed. This is an essential requirement in a de-tariff regime. The policy document should not become an instruments to be cited as “deficiency in service” because of omission and / or commission and imperfections in the policy wordings. The prevailing judicial environment, arising out of strong consumer movement, judicial activism and changing min-set of people (more materialistic), is always to be kept in focus.
By Mr. R. Qaiser, Faculty Member, NIA, Pune, Published in The Insurance Times, July, 2007
