The most obvious potential impact of the global pandemic on the insurance sector is the increase in the number of insurance claims arising from death, hospitalisation and stagnation of businesses. Over the past month, there have been delays in submitting claims because of restrictions on movement and the exclusion of pandemic events from insurance contracts. It is very convenient for the industry, as a whole, to take a position that the vast majority of claims lodged are either unwarranted under the language of their policies or are specifically excluded because of exceptions. Recognising increased consumer vulnerability in such uncertain times, insurance regulators across the globe have now reminded insurers to pay particular attention to the need to treat customers fairly under current circumstances. However, the principle of treating customers fairly must not violate the fundamentals of an insurance contract.
Force majeure not to be applied by Life Insurers:
A life insurance policy is a contract which requires the policyholder to pay the premiums regularly and the obligation of the insurer is to honour a future obligation i.e. pay out the sum assured to the nominee on death or settle the amount payable to the policyholder/life assured on maturity, depending on the specifics of the policy. Force Majeure (FM) contracts clauses potentially excuse one party from fulfilling its contractual obligations where those obligations have become impossible or impracticable to perform, due to an event that the parties could not have anticipated or foreseen. Whether a party can be excused from a contract on account of a pandemic will depend on the nature of the party’s obligations and the specific terms of the contract. Despite FM clauses being relatively standard in contracts, there is limited legal guidance on the application of this legal principle to epidemics or potential pandemics. Indian courts have in the past held that an FM exception must be specifically incorporated within the contract and have relied on Section 32 of the Indian Contract Act, 1872, to enforce this exception. Section 32 provides for the discharge of contingent contractual obligations, and an FM event has been regarded as a contingency. [[i]] If the contract does not include an FM clause, the affected party could claim relief under the ‘Doctrine of Frustration’ under Section 56 of the Act. Section 56 considers situations in which the performance of a contract has become impossible. In 2017, the Supreme Court held that Section 56 will have no applicability to contracts that specifically contain an FM exclusion, and such contracts will be governed by the language specifically provided therein.
However, the FM clause, inserted in most life insurance policies is often overlooked by the prospective customers at the time of entering into the contract. The clause usually states that performance of obligations of the company under the agreed terms may be interrupted and shall be excused by the occurrence of a force majeure event affecting either the company or any of its sub-contractors. According to the FM clause in a Life Insurance Policy “In the event of any force majeure or disaster that affects the normal functioning of the company and during the continuance of the force majeure events, all requests for servicing the policy including policy-related payments shall be kept in abeyance.” The explanation given about FM as per any specimen approved policy document is as below –
“In the event where the Corporation’s/Company’s performance or any other obligations are prevented or hindered as a consequence of any act of God or state, strike, lockout, legislation or restriction by any government or any other statutory authority or any other circumstances that lie beyond the Corporation’s/Company’s anticipation or control, the performance of this policy shall be wholly or partially suspended during the continuance of such force majeure. The Corporation/Company shall resume its obligations towards the Policy as soon as the Force Majeure event ceases. The Corporation/Company undertakes to keep the Insurance Regulatory and Development Authority of India (IRDAI) informed and seek prior approval before effecting any of these changes.”
The clause makes it clear that if such events happen, life insurance companies may breach the contract and have the option to not pay the claim amount. However, it is important to analyse the last sentence in the clause – “The Corporation/Company undertakes to keep the IRDAI informed and seek prior approval before effecting any of these changes”. Hence, it is mandatory to obtain the prior approval of IRDA before invoking such a clause. Recently, the Life Insurance Council and IRDAI have clearly stated that COVID-19 will not fall under the purview of FM.[[ii]] Hence, Life Insurance Companies (whether the LIC or private players) are required to process any death claim pertaining to COVID-19 at the earliest.
In India, until recently, there was no insurance policy, covering COVID-19, specifically. The IRDAI, in a positive move, has now instructed all the health insurance companies to include medical cover for COVID-19, provided hospitalisation takes place for over 24 hours. Where hospitalisation is covered in a product, insurers are required to ensure that the cases related to COVID-19 are handled expeditiously. The costs of admissible medical expenses during the course of treatment including the treatment during the quarantine period will be settled in accordance with the applicable terms and conditions of the policy contract. However, these are a general set of guidelines and might or might not be applicable to all insurance policies. Further, all the claims reported under COVID-19 will be reviewed thoroughly by the claims review committee before repudiating the claims.
To ensure that all health claims are responded to quickly, IRDAI has directed that health insurers have to decide on authorization for cashless treatment to the network provider (hospital) within two hours from the time of receipt of authorization request and last necessary requirement from the hospital. [[iii]] Insurance companies have also been directed to condone the delay up to 30 days in the renewal of health insurance policies without deeming such condonation as a disruption in the policy. However, guidelines have been given to insurers to contact the insurance policyholders, well-in-advance so as not to have discontinuance in coverage. The Ministry of Finance, in April, has also issued a notification stating that if a health insurance policy is expiring and is due for renewal in the period between March 25, 2020, to April 14, 2020, one may make payment of its renewal premium on or before April 21, 2020, to ensure continuity of the health cover from the date on which the policy falls due for renewal. The issuance of two different notifications by two different authorities has, however, created confusion in the minds of the people with regard to additional time allotted for renewal of a health insurance policy.
Relaxations notified by IRDAI:
- Additional time has been granted to all insurers for submission of regulatory returns i.e. fifteen days additional time has been granted for submission of monthly returns and 30 days additional time has been granted for submission of quarterly, half-yearly and annual returns and the cybersecurity audit. The timeline for submission of monthly and quarterly returns due for the month of March 2020 by insurance intermediaries under the applicable regulations has been extended by a period of 15 days and 30 days respectively.
- Insurers have also been asked to put in place a business continuity plan and set up a crisis management committee comprising of their key personnel to monitor the current situation on a real-time basis.
- The IRDAI must also be informed of any special circumstances affecting an insurer’s business operations, capital requirements or solvency margin. Life Insurers are required to maintain data in respect of claims related to COVID-19 and submit a fortnightly report to the IRDAI providing details of offices fully or partially closed, duration and steps taken in this regard.
Compliances have taken a backseat during the on-going lockdown due to Covid-19 pandemic. The IRDAI to its credit, during these abnormal times, has proactively issued various guidelines to ensure the continuity of insurers’ operations and provided relaxations with respect to filings and disclosures requirements under the regulatory framework. These relaxations are, however, applicable only for the financial year (2020-21). It is important to remember that usually the insurance industry prepares for unforeseen events and should be well-capitalized for sudden increases in claims. The reason for this is because companies reinsure large parts of their books of business, which is one of the ways the industry as a whole is able to spread risks. As the extended lockdown continues, insurers are now expected to continue to serve as shock absorbers for both the economy and society.
[i] Ranjana Roy Gawai, Coronavirus impact: Can’t fulfill your contractual obligations? May the Force Majeure be with you, Business Today (Apr. 17, 2020), https://www.businesstoday.in/opinion/columns/coronavirus-impact-contracts-force-majeure-material-adverse-effect-clauses-corporates/story/401341.html.
[ii] Priyadarshini Maji, Force Majeure’ will not apply in case of COVID-19 death claims, says Life Insurance Council, The Financial Express (Apr. 6, 2020), https://www.thehindubusinessline.com/money-and-banking/force-majeure-will-not-apply-in-covid-19-death-claims-life-insurance-council/article31267346.ece.
[iii] Navneet Dubey, Health insurers must decide coronavirus treatment requests within 2 hours: IRDAI, The Economic Times (Apr. 20, 2020), https://economictimes.indiatimes.com/wealth/insure/health-insurance/health-insurers-must-decide-coronavirus-treatment-requests-within-2-hours-irdai/articleshow/75230667.cms?from=mdr.
ABOUT THE AUTHOR
Indrajit Roy is a second-year LLB student from ILS, Pune.