Increasing insurance frauds in India – a critical analysis on the evolution of insurance law in India

This article has been written by Sushree Surekha Choudhury from KIIT University, Bhubaneswar and the article has been edited by Khushi Sharma (Trainee Associate, Blog iPleaders). 

Abstract

The article aims at bringing to its reader’s knowledge, the centuries of historical backdating to which the present day Insurance Sector owes its evolution. It is interesting to note that the concept of Insurance was prevalent in India back in the times of Manu. People have always indulged in such activities which have today, come to be known as ‘Insurance’. It is pertinent to know that the insurance sector has evolved over the years struggling and making its way through years of deregulation and hardships.

Lawmakers and draftsmen are to be thanked for the years of dedication and coming up with regulations for regulating the sector in a better way. The enactment of IRDA Act was a table turning event in Insurance Laws in India. However, the sector needs even more regulation and control to get a better hand on the sector and diminish the increasing fraud. The article discusses different kinds of fraud pertaining to the insurance sector and explains the same with the help of case studies. The article ends with a concluding note stating how the sector is growing rapidly and how its regulation is necessary to uphold the public interest. 

Introduction

The concept backs in time to the prehistoric era, to the ages of Manusmriti, Dharmashastra and Arthashastra when people indulged in the practice of pooling assets and lending them in times of need. There has, since then, been a culture of lending and borrowing of resources and finances among people. History is evident, that countries have always indulged in borrowing from their neighbour in desperate times and lending them in theirs. The concept has with time, evolved and taken a shape of which we know now as ‘Insurance Law’. 

What is Insurance?

It is a form of security that people can take against life-endangering risks like accidents, fire, sea hazards, theft and/or death caused by any of these incidents. This is a form of contract, entered between 2 parties, called the insurance companies and policyholders whereby a policyholder takes an insurance policy for a certain sum of money with a guarantee of receiving premiums in situations of loss incurred by them if such loss comes within the ambit of policy taken. It is a contract of utmost good faith and the claim amount depends on the contingency of events occurring as per the policy terms. 

During the British Era

During the British Raj in India, several Insurance Companies started taking their form under the British Government. In the presidency towns; The Oriental Life Insurance Company At Calcutta (Now Kolkata), The Bombay Life Assurance Company at Bombay (now Mumbai) and The Madras Equitable Assurance Company at Madras (Now Chennai) were established. 

These companies favoured the Britishers and Indians had to pay a profoundly high premium amount for their insurance claims and benefits. 

In 1912, the Indian Life Insurance Companies Act was passed. Before this legislation, the insurance sector was highly unregulated and arbitrary. The legislation attempted to bring in some amends and necessary regulations. 

Later, in the year 1938, The Insurance Act was passed. This act covered both, The Life Insurance and General (Non-life) Insurance sectors and regulated the same. There were around 176 insurance companies in India during this time. The legislation was a step forward towards regulating the sector.

It was in the year 1956 when a major event took place. The Life Insurance Corporation Act was passed with the objective of nationalizing all the insurance companies and providing umbrella legislation to the insurance sector. The Life Insurance Corporation of India Ltd. was established which, to date, is an entirely Government-owned public sector insurance company in the country. 

The General Insurance Business (Nationalization) Act, 1972 was passed which attempted to nationalize all (107) general insurance companies in India into four companies, namely, New India Assurance Company Ltd., National Insurance Company Ltd., Oriental Insurance Company Ltd. and United India Insurance Company Ltd. that continued to remain in existence after absorbing the rest. This was a major step towards regulating the sector.

However, there was still a hint of deregulation in the sector and all these legislation together had not been entirely successful in regulating a vast sector such as the Insurance Sector. Landmark events took place in the year 1999, suggested by the Malhotra Committee Report, which changed the entire scenario of the insurance sector in India:

1. The private sector was granted permission to work in the insurance business, and,
2. Insurance Regulatory and Development Authority of India (IRDAI) Act was enacted. This act covered the entire insurance sector and made provisions regulating both, Life Insurance and General Insurance companies. The legislation monitored their activities, set regulations and prescribed punishments.

This marked the beginning of the privatization of the insurance sector in India. Currently, alongside the big 4, there are 24 life insurance companies and 29 general insurance companies in India. Over 2.5 crore insurance policies are sold every year with the graphs ever-rising, all of which are governed by the IRDAI Act. This makes the insurance sector one of the biggest and quickly flourishing sectors in the country, also provides ample job opportunities and creates job demands. 

There are as well, Reinsurance Companies. These companies ensure the insurance companies. The nature of the transaction between an insurance company and its policyholders is of a Contract. The one who wishes to enter into an agreement with an insurance company proposes it to the company by filing prerequisite documentation and meeting eligibility requirements. It is, thereby, up to the insurance company either to accept or reject the proposal. Thus, a legal relationship in the form of a contract, in terms of good faith and adherence, is created between the insurer company and its beneficiary if the proposal is accepted and final documentation are executed. 

With a largely growing sector, high demands and supplies, the risks and frauds are not unknown phenomena. Over a 40,000 crore (approx value) worth of frauds occur in India every year with graphs ever increasing. Insurance frauds can occur on either end, i.e., from the insurance company’s end or from the policyholder’s end. 

Frauds from the insurance company’s end may arise generally in the following situations:

1. When the insurance company claims to provide an insurance policy with good faith but is actually indulging in fraudulent activities.
2. When the insurance company unduly utilizes the insurance money.
3. When they gain money by fraud.
4. When they tamper company’s records and statements.
5. When they flee with the deposited monies.
6. When they attempt or abet in doing any such activity as mentioned in the aforementioned points.
7. Any other type of fraud, its attempt and abetment. 

Frauds from the Policyholder’s ends are more frequent and covers a broad range of categories. They can be in the form of:

1. The policyholder’s non-disclosure of essential documents.
2. The policyholder’s wrongful disclosure of essential documents.
3. The policyholder’s concealment of material facts.
4. The policyholder’s non-adherence to policy terms and conditions.
5. Creating fake identities and records.
6. Tampering records.
7. Faking accidents to claim insurance money.
8. Causing deaths to claim insurance money – murder (criminal offence).
9. Hiring people to commit such frauds.
10. Attempting or abetting in any such fraudulent activities as aforementioned.
11. Any other category of fraud, its attempt and abetment. 
    
    

    Haryana SIT Case

    It was recently in the year 2019, that 208 complaints were filed by 11 firms in a mere 3 months, complaining of a fake insurance racket. Apparently, an organized fraud was committed in Haryana involving a group of fraudsters, which even included aid from police and medical staff. These people tampered with the medical evidence of cancer patients and made it look like deaths were caused by road accidents after insuring them. 13 people were identified in the fraud and were arrested. 

    The Nalgonda Murders Case

    Nalgonda, a small town situated in South India, saw a surge in not-so-small insurance fraud and criminal offences. Admittedly, a gang of criminals run racket tracked down families with sick people in Nalgonda and made deals with those families. The deal sometimes even involved the family members of those sick people in the fraudulent activity, whereby, they planned and killed those sick people after insuring them and made it show like accidents or natural deaths, thereby claiming the insurance amount. They paid a premium to the family members of those sick people as part of the deal. 5 people were arrested when the racket busted and by then, a fraud worth Rs. 1.59 crore was committed by them. 

    Manisha Gupta v. Kotak Mahindra Life Insurance

    Mr. Ajay Gupta had taken an insurance policy at Kotak Mahindra Life Insurance Co. Ltd. There is an obligation for disclosure requirement of any other policies taken by the policyholder with any other insurance company. Mr. Ajay Gupta had taken policies from several other insurance companies but he concealed this fact while taking a policy with Kotak Mahindra. Mr. Gupta was found dead on 1^st December 2010 in his car with a gun in his hand indicating it as a suicide. Thus, Kotak Mahindra rejected the claim of Mrs. Manisha Gupta, nominee, the claim amount on 2 grounds:

    (i.) It is an act of suicide, thus, no insurance amount can be claimed,

    (ii.) There has been intentional non-disclosure of material facts by Mr. Gupta, thereby rendering the agreement void.

    These contentions were given validity by the court and the claim was rejected on grounds of the agreement becoming void.

    LIC v. G. M. Channabsemma

    In this landmark judgement, Supreme Court observed that the burden of proof to prove the concealment/non-disclosure of material facts rests upon the insurance company. 

    The Peculiar Case of Delhi Insurance Racket

    In a racket of organized fraud committed by a group of 4 individuals in Delhi, the fraudsters sold fake insurance policies to people with the pretext of reputed insurance companies’ policies and fled away with their monies. The cyber cell and crime branch of Delhi police and Mumbai police busted the racket, tracked and arrested the fraudsters after a complaint was lodged by a person whose Rs. 75 lac were taken by these fraudsters.

    Conclusion

    With a rapid increase in the industry, there is also a rapid increase in its related crimes as has been becoming a growing concern. The frauds committed by a few result in a lot of people getting affected thereby and financial losses. The innocent stakeholders’ interests get compromised and violated. An overall impact is evident to the companies, their stakeholders, investors, creditors and public at large. There are not sufficient grounds for the recovery of the monies taken by fraudsters. Regulators hands are tied to the extent that even when fraudsters are penalized, the innocent sufferers do not get compensated for all the losses incurred by them.

    Another loophole in the IRDA Act is that mental illness has not been added as a ground for claiming insurance. With a changing society where awareness is created among masses towards the importance of mental health and mental illness is seen at par with physical illness, a missing provision guiding the same in the insurance legislation not only restricts the health insurance needs of the people but also sends wrong information to the public at large. There is a need to regulate the insurance sector furthermore and bring necessary amendments to the legislation for including all the missing pieces and to regulate in such a way that no fraudster could be able to go unchecked and public interest is maintained.