Incontestability clause in life insurance (Section 45)

If you go through your life insurance policy wording, you will come across Section 45, a provision of the Insurance Act, 1938 as amended by Insurance Laws (Amendment) Act, 2015. This provision states that:

No Policy of Life Insurance shall be called in question on any ground whatsoever after expiry of 3 years from a) the date of issuance of policy or b) the date of commencement of risk or c) the date of revival of policy or d) the date of rider to the policy whichever is later

The provision also states:

Life insurance Policy can be called in question within 3 years on the ground that any statement of or suppression of a fact material to expectancy of life of the insured was incorrectly made in the proposal or other document basis which policy was issued or revived or rider issued.

This is one of the provisions designed to protect the policyholder.

What is a ‘fact’?

According to Section 45, A Fact shall not be considered material unless it has a direct bearing on the risk undertaken by the insurer. The onus is on insurer to show that if the insurer had been aware of the said fact, no life insurance policy would have been issued to the insured.

What does it mean?

Simply put, this provision says that a policy cannot be called into question by the life insurance company if it has been in force for at least 3 years (the incontestability period).

A Policyholder’s inaccurate details during the proposal stage cannot be used against them after the incontestability period.

Failure to disclose significant health conditions during the proposal stage cannot be grounds for claim denial after the incontestability period.

If it is called into question, it is the duty of the insurance company to prove that any ‘fact’ withheld or incorrectly stated in the proposal form by the policyholder, would in fact have resulted in the insurer not issuing the policy had the ‘fact’ not been withheld or misstated.

Let’s consider this example where the claim payment was inevitable:

On 29^th March 2024, the National Consumer Disputes Redressal Commission (NCDRC) directed HDFC Life Insurance to pay an insurance claim of Rs. 50 Lakhs with an interest of 6% pa to the family of the deceased policyholder – Mr. K Prabhakar.

This claim was initially rejected by HDFC Life Insurance, which cited that the Life Assured had given the wrong date of birth and concealed that they had diabetes.

The NCDRC bench said:

1. The 10^th class mark memo submitted by the DLA has the same date of birth as mentioned on the insurance policy proposal form.
2. Before issuing the policy, HDFC Life Insurance had obtained a blood test report of the DLA, in which blood sugar was found normal.

The life insurance product. HDFC Life Click 2 Protect (a pure term life insurance plan), was bought by Mr. Prabhakar on 13^th March 2014 for which he paid the required premium. The insurance company, after conducting the necessary medical investigations to ascertain Mr Prabhakar’s health condition, on 18^th March 2014 issued the policy. Thereafter, Mr. Prabhakar continued paying the annual premiums.  

On 16^th August 2017, Mr Prabhakar expired, following which his wife and three children filed an insurance claim with HDFC Life Insurance. However, the insurer rejected the claim, saying that the age details provided by Mr. Prabhakar in the proposal form were found to be false and that he had diabetes which was not disclosed in the proposal form. 

The wife then approached the Telangana State Consumer Disputes Redressal Commission (TSCDRC) seeking an insurance claim of Rs. 50 Lakhs and Rs. 4 Lakhs as compensation for mental agony and litigation costs. The NCDRC upheld the order passed by the TSCDRC.  

_{(Source: NATIONAL CONSUMER DISPUTES REDRESSAL COMMISSION, NEW DELHI. FIRST APPEAL NO. 6 OF 2023 Against the Order dated 03/10/2022 in Complaint No. 104/2018 of the State Commission Telangana)} 

What do we learn from this?

• The insurer tried to use the age of the insured to reject the claim (even if there was a true misrepresentation of age, Section 45 would have allowed it.)
• The insurer tried to use diabetes as grounds for claims rejection (despite having conducted a medical examination and found that the insured has no diabetes)
• If either of these were found to be true, from the perspective of Section 45, the insurer would then have to prove that it would have resulted in HDFC Life not issuing the policy.
• The claim settlement ratio for HDFC Life Click 2 protect for the financial year 2021-22 is 98.66% – i.e. be aware of your policy’s terms and conditions and never use the claim settlement ratio as the sole basis of taking up a policy.

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