The Importance of Disclosures in Insurance
Insurance is the cornerstone of financial security, offering individuals a safety net against life’s uncertainties. At its core, insurance is built on principles of transparency, good faith, and accurate information exchange. When purchasing an insurance policy, individuals are required to disclose all relevant information to their insurer. This practice, known as the disclosure of material facts, forms the foundation of a fair and equitable insurance contract.
However, just like any contractual agreement, the omission of relevant information or the non-disclosure of material facts can have serious repercussions for both policyholders and insurers, undermining the very foundation of trust that insurance represents. In this article, we will explore the significance of disclosing material facts and the potential consequences of failing to do so.
Types of Investment Risks:
The contract of insurance is based on the doctrine of ‘Utmost Good Faith’, which means a person applying for an insurance cover has to disclose and reveal all material information required by the insurance company. Material Information means all the information based on which the underwriter accesses the risk profile of the person and decides to accept the risk and issue the insurance policy or decline the same or to determine the terms and conditions of coverage, and establish appropriate premiums. Examples of material facts relevant for an individual would include a person’s profile like age, personal & family medical history, occupation, hobbies, criminal record, etc., and other information like income, previous claims, policies from other insurers, and so on, depending on the nature of insurance policy.
Insurers heavily rely on the accuracy of the information provided by policyholders during underwriting to assess risk effectively. Policyholders have a legal and moral duty to provide complete and accurate information to their insurers during the application process. This duty is outlined by the IRDAI guidelines and is applicable to all types of insurance, be it life, health, or general insurance.
Non-disclosure of any material facts may result in the policy being considered null and void from the very beginning and the insurer will not pay out any claims or return any premiums. Policyholders will be left without the protection intended and financial well-being may be compromised. Non-disclosure can also lead to claim denial leaving the policyholder to bear the entire financial burden. It can also affect a policyholder’s ability to obtain insurance in the future as insurers have access to shared information and a record of non-disclosure can make it challenging to secure coverage or result in higher premiums. Thus, it becomes very important that accurate and complete information is shared in the proposal form.
Non-disclosure of material facts in insurance in India can occur for a variety of reasons as we we can see below:
- Lack of Awareness/Misunderstanding:
Many policyholders may not fully comprehend what constitutes a material fact due to a lack of awareness or misunderstanding. They might unintentionally and unknowingly withhold specific information required to be revealed in the proposal form. Few might encounter difficulties in understanding or accurately filling out the proposal form because of language or literacy challenges. Additionally, some may presume that some information may be irrelevant and not important to be mentioned. - Intent to Quickly Fill Forms:
Some people may view the proposal form filling and the disclosure procedure as time-consuming and difficult. They may take the entire process casually and refrain from delivering complete and accurate data while filling out lengthy forms or providing extensive information. Policyholders who are anxious to get insurance may speed up the application procedure and omit crucial information because they believe it to be unimportant. - Confusion or Forgetfulness:
Policyholders might genuinely forget to mention certain details. There might also be instances where people do not really have a complete understanding of their medical history and status. - Depending on Others to fill the form:
There can also be instances where some important information is missed when the proposal form is filled by someone else, likely the insurance agent /broker or say a relative of the applicant. Such a scenario may arise when the applicant is uncomfortable filling out the form due to literacy or language limitations.
As we can see from the reasons for non-disclosure of material facts, it becomes clear that the same can be easily avoided once we understand the importance of full and fair disclosure. The best way to do this is to take appropriate time to properly read and understand every piece of information asked carefully. You may seek clarification from your insurance agent if something is not clear. Please do not hurry and take time to remember any past medical history, ask spouse and parents for relevant information if you are not sure. Having an experienced insurance agent from a reputed firm also helps a lot in ensuring that the proposal form is properly filled.
In summary, material facts are essential as they enable insurers to make informed decisions and ensure that insurance contracts are fair and equitable. Both policyholders and insurers must uphold the principle of utmost good faith, fostering transparency and trust. If everyone gives proper information, the pricing of the policies can be appropriately made and the overall premiums would also become more affordable for everyone. Applicants should understand that failure to disclose material facts can have severe repercussions in times of need and thus is never a wise thing to do. Lastly, a good insurance agent/broker can be of great help not only during the application process but in the entire journey from understanding the need, finding suitable policy cover, helping in the application process, and then especially in the claim process helping you manage all comfortably.