Insurance Policy is an agreement or a legal contract between the insurer, (the insurance company), and the insured or the policyholder /proposer. It is based on the information the insured provided in the proposal form, making it the most important part of the entire contract. An insurance company offers a policy on the basis of a proposal form and other information related to the insured detailed therein. To do so, the insurer seeks all the relevant information from the proposer in order to underwrite the risk.
The proposal form includes
- basic information such as address, age, name, education, income, etc;
- other information like occupation, medical history, lifestyle habits like smoking / drinking, etc
The Principle of Utmost Good Faith
Insurance operates on the principle of utmost good faith which means that both, the insurance company and the insured, have to disclose all material facts that may affect the insurance policy. It is trusted that the proposer would declare the same in good faith. Likewise, the insurance company provides all relevant information about the policy in the documents and policy terms. Thus, it becomes important that the proposer understands and asks for clarity from the insurance company in case of any doubt on the policy and also gives accurate, complete and comprehensive information as requested in proposal form.
What is a Material Fact?
A material fact may be understood as any information that may influence the judgement of the insurance underwriter in deciding whether to accept a risk or not and if so, at what premium. However, If the insurance company finds out that the policyholder has hidden or not stated any material information then the insurance company can cancel the policy & decline the claim, if any. It may thus be better to declare information if in doubt whether to declare or not.
The Moratorium Period
If the policyholder continues the insurance cover for 8 years without a break, the insurance company cannot deny a claim. This 8 year period is called the moratorium period. After this moratorium period, a claim cannot be denied by the insurance company due to misrepresentation or non-disclosure. The only exceptions are cases of fraud and permanent exclusions specified in the policy contract. This removes anxiety on whether a genuine claim will be accepted or not by the Insurance company
Filling the Proposal Form…
The accuracy of details entered in the proposal form is critical to the insurance policy. Some people sign and hand over the blank insurance form to the agent. It is likely though that the agent may miss out on some important details that only you are aware of, and your claim may be rejected on the basis of missing or incorrect information provided in the proposal form. Ideally, the proposer should carefully read this form and take time to fill it by himself and not leave it to the agent. Once filled, the proposer should verify that correct and complete details are given. Further, if the proposal form is in an unfamiliar language, one should get it clearly explained and understood before signing. Below are some of the most important points while filling the proposal form…
1. Mention Correct Details: Many people become casual while filling up the proposal form and may not provide the correct details related to age, income, qualification, contact details, address and so on. The contact info is used by the insurer to contact you when a claim arises. Many claims and the maturity/claim amounts remain unpaid as insurers are unable to reach the policyholders at the outdated or incorrect communication details provided by them. Further, details like BMI, health status, family’s medical history, occupation, education, income etc; of the proposer and all the insured members have a major influence on the decision of the insurance underwriter. It may result in rejection of the proposal or hike in the rate of premium.
2. Disclosure of Medical Condition: Many times current health condition is left undisclosed so as to obtain better coverage for lower premium or to avoid the waiting period or rejection. But while making the claim, if it is found that the medical history does not match, the claim might get rejected and/or policy may be cancelled ab-initio. Therefore, complete medical history must be disclosed in the proposal form.
3. Disclosure of Personal Health Habits: The proposer must inform about his/her lifestyle habits like the consumption of alcohol, tobacco and other drugs. We are all aware that addictive/intoxicating substances have a negative impact on health and thus constitutes material fact, having consequences on the risk underwriting by the insurer.
4. Disclosure of existing insurance policies: One must mention all the policies taken from the same insurer as well as other insurers. If you already have an insurance policy, the insurer will offer only the balance of the cover, that is, max cover allowed as per eligibility & underwriting guidelines - sum assured of the existing cover. Non-disclosure or inaccurate declaration of existing insurance policies may result in counter offer or proposal cancellation. In fact, if the insurer comes to know about a pre-held policy that was not declared at proposal stage, it can reject the claim and/or cancel policy on the basis of material non-disclosure.
5. Mention occupational details accurately: Occupation is a crucial parameter to measure health, accident and death risks. For example, if you work in a chemical factory, the risk to your life/health will be much higher. Persons with hazardous occupations or dangerous hobbies like paragliding, parasailing, rock climbing, etc. are charged more premium or the insurance company can even refuse them coverage.
6. Mention Nominee Details: It is mandatory to fill the nominee details in the proposal form in order to make sure that the benefit reaches the right hands.
It is obvious that the proposal form is the backbone of each policy. Hence, those buying an insurance policy must be alert & careful while filling this important document, failure of which may lead to adverse consequences such as rejection of claim or insurance cover. It is critical to ask questions to your insurance company or insurance advisor or an expert, regarding the understanding of the proposal form in case of any doubt. It is better to let the underwriter assess your risk appropriately, rather than being sorry at the time of a claim after you have paid the premiums.