Ten golden rules in insurance

Dr. Wickrema Weerasooria, Insurance Ombudsman of Sri Lanka

Over the past several years while functioning as the country’s Insurance Ombudsman I had to regretfully reject insurance claims of several policyholders because they had disobeyed or ignored some basic rules of insurance law and practice.

It is in that context that I developed the following Ten important points on insurance for public knowledge and awareness. Please observe them, if you don’t want to lose the money you invested in your insurance policy.

Rule No.01

Before you insure try to understand what insurance is. Taking an insurance policy is not like buying an item from a supermarket.

Insurance is a contract between two persons namely, the person taking the insurance (insured) and the company that provides the insurance (insurer).

Today, all insurance business in Sri Lanka is in private sector hands and is operated by fifteen well-managed insurance companies regulated by the Insurance Board of Sri Lanka (IBSL).

All the fifteen companies have also formed a pivotal body - The Insurance Association of Sri Lanka (IASL). The Executive Committee of IASL meets every month to decide on matters of general policy and IASL works closely with IBSL.

In Sri Lanka, contract law (as when you buy a land or a car) is governed by our common law, the Roman Dutch Law. However most insurance is governed by principles of English law- and in English Law there are special rules that apply to insurance.

Many members of the public who take out insurance are unaware of these special rules and insurance companies should create greater awareness of these special rules governing insurance. Not enough is being done to create greater awareness.

Rule No 02

You have to fill up a Proposal Form when taking out any type of insurance. Please tell the truth in answering the questions in the proposal form. Insurance contracts are of a special kind and a rule of law called “Utmost Good Faith”. (Uberrimae fidei) applies. Only you and not the insurer knows the true facts about the insurance you are taking.

If you do not tell the truth in your answers in the Proposal Form it is called a “Non-Disclosure” and the insurer is entitled to reject your claim. “Utmost good faith” and Non-Disclosure are very important rules that all seeking insurance cover should clearly understand and abide by.

Rule No. 03

Many who take insurance get the agent of the insurance company to fill up the proposal form. The insured only signs the form that the agent has filled up. Although this normally happens, you must appreciate that the insured is liable for the answers given in the form simply because he or she has signed.

The person who signs cannot disclaim liability on the ground that it was the agent who filled up the form. This is so even though the agent represents the insurance company. Thus, even if an Agent fills up the form, you must carefully read it and ensure that what is stated is correct before you sign it.

Rule No 04

Do not under-insure or over-insure. As an illustration, if your vehicle is worth Rupees One Million do not insure it for Rs. 500,000/- in order to pay a lesser premium.

If the vehicle meets with an accident the insurance company will (for the first time) inspect your vehicle and it will realise that you have underinsured. They will then impose a penalty (or about 30% - 40%) because you had lied about the true value of your vehicle.

If you complain, the insurance compnay can legally offer to buy the vehicle for Rs. 500,000/- (your own price).

Similarly, there is no point in over-insuring because, for example if your vehicle is totally destroyed by a fire or is stolen, the insurance company is legally bound to pay only its market value at the time of its loss and the market value can be easily ascertained. You take insurance to protect what you have and not to gain from what you insure. Insurance is not a lottery.

Rule No 05

Ensure that the premium that you have to pay on your insurance is paid before the due date. For example in a motor insurance if your car meets with an accident even one day after the policy has lapsed by non-payment of the premium, the insurance company is entitled to reject the claim because you had no cover at the time of the accident.

It is your responsibility to make sure that premiums have been paid and the policy is in force. Also it is best that you get a valid receipt of payment of premium.

Rule No.06

When paying your insurance premiums it is best that you pay the premiums direct to the insurance company or at their branch that may be situated close to you and obtain a receipt. If you pay an Agent of the insurance company (and many people do this) please ensure that you obtain a receipt in the company’s name.

If the agent misappropriates the money you paid him and you don’t have a receipt of the company acknowledging payment, the insurer can disclaim liability. As the Insurance Ombudsman I have inquired into complaints where premiums have been paid to agents and the agents have not paid the company. The Agent had also not issued a valid receipt.

Rule No 07

Always ensure that there is a valid insurance cover on what you want insured. If it is a new car you are buying, the firm selling the car will take out the insurance with the registration.

If you are not able to get the insurance policy for the car at least obtain from the insurer what is technically called a “cover note”. Legally, a “cover note” is a temporary or provisional contract of insurance and protects you during the period for which it is issued.

Rule No 08

In life insurance policies if you do not pay the premiums on the required date and if you have not paid premiums for at least three consecutive years to acquire what is called “ a surrender value” - your life insurance policy will lapse and will not be effective.

The insurance company may permit you to continue with the policy. However, it is entitled to ask you to fill up another (new) proposal form. Here the danger is that your health condition may have changed when you are asked to fill up the second proposal form.

If you give the same answers you gave when you filled up the first form several years ago - you may be guilty of “non-disclosure” by not disclosing your correct health position now. In such a case, the insurer is entitled to reject your entire claim for “non-disclosure”.

Rule No 09

Life insurance policyholders have to continue to pay their premiums so that the policy will not lapse. In order to ensure such prompt payment of premiums some policyholders instruct their banks to pay the premium from the funds in their bank account.

While as the Ombudsman, I commend such a practice I must caution such persons to ensure that the bank account is provided with sufficient money to pay the premiums as instructed. Recently, I had a case where a lawyer had given his bank ‘Standing Instructions’ to pay his life policy premium.

The Bank had done so for an year or two but thereafter because of lack of funds in the account the premium had not been paid.

The lawyer suddenly died and the insurance company rejected the entire claim (made by the wife) because the premiums had not been paid. Neither the bank nor the insurance company could be held responsible because the policy holder (the bank’s customer) had omitted to provide sufficient funds in his bank account for the bank to honour his “standing instructions” to pay the premiums.

He had also not arranged with the bank for “overdraft” facilities if there were insufficient funds in his account.

Rule No. 10

The monies of insurance companies consist of public funds. To explain this further, all the premiums paid by policyholders are pooled together and invested by insurance companies. They also take out reinsurance mainly with foreign companies. It is common knowledge that if for example one thousand fire and burglary policies are taken in a given year, claims will be made only on ten percent of these policies.

Hence the premiums collected on all the thousand polices are pooled (after investment) to settle the genuine claims.

Thus, insurance is also spreading risk and insurance monies are public funds and do not belong mainly to the shareholders or directors of the insurance companies. Hence, to make a false claim is to defraud the public. I have often explained this fact to claimants who come before me.

Some insurance policy holders have a perception that insurance companies are “owned” by the Chairman of those companies. Being public funds, insurance companies zealously protect their funds and investigate dubious claims and reject them.

(Sri Lanka Insurance Board)