General Insurance Policy Wordings: Issues & Concerns in Liberalized De-tariff Regime

General Insurance Policy Wordings: Issues & Concerns
in Liberalized De-tariff Regime

-
R. Qaiser, Faculty Member, NIA, Pune
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.

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

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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

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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

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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.

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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

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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.


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