Insurance is a contract between the Insured and Insurer. A contract is an agreement, the terms of which are enforceable by law. Every insurance policy contains, besides others, provision relating to cancellation. Cancellation means termination of the policy before the date of expiry of the policy. The option to cancel is available both to the insurer and insured.
A typical cancellation clause in a general insurance policy reads as under:
“This insurance may be terminated at any time at the request of the Insured, in which case the Company will retain the premium at customary short period rate for the time the policy has been in force. This insurance may also at any time be terminated at the option of the Company, on —- days’ ( Normally 15/ 30 days) notice to that effect being given to the Insured, in which case the Company shall be liable to repay on demand a rateable proportion of the premium for the unexpired term from the date of the cancellation”
While the refund is proportionate to the period remaining when cancelation is sought by the insurer, it will be less than proportionate when sought by insured.
WHAT DO THE RELEVANT REGULATIONS SAY?
Guidelines on Product Filing Procedures for General Insurance Products IRDAI/NL/GDL/F&U/030/02/2016 —- 18th February, 2016
CHAPTER IV : PRODUCT MANAGEMENT
Cancellation of Policies:
The insurer shall specify the cancellation clause and grounds leading to cancellation providing time periods of notifying such action by insured and insurer. The Insurer can cancel the policy mid-term only under grounds of fraud, mis-representation and moral hazards. The insurer shall allow the policyholder to cancel at any time by giving prior notice as required under the policy. However, under no circumstances, the insurer on its own or at insured’s request can cancel motor third party cover unless evidence is provided that the vehicle has another third party cover in force.
Insurance Regulatory and Development Authority of India (Protection of Policyholders’ Interests) Regulations, 2017- NOTIFICATION dated 22nd June, 2017
REGULATION 11: MATTERS TO BE STATED IN GENERAL INSURANCE POLICY:
(xiii) the grounds for cancellation of the policy which in the case of a retail policy, for the insurer, can be only on the grounds of mis – representation, non-disclosure of material facts, fraud or non co-operation of the insured
Explanation: Products approved as retail policies under File and Use guidelines notified by the Authority from time to time fall within the purview of retail policy referred above.
Provided that in the case of Commercial policies alone, other circumstances under which the policy may be cancelled be given, along with the manner of calculation of refund and notice period for cancellation
What are retail and commercial products?
Retail Products: Retail Products are those products that are sold to individual customers including their families. However, there is no bar on selling a retail product to commercial customers if the insurer feels that the product meets the insurance needs of a segment of commercial customers.
Wherever there is a joint insurable interest in a subject matter of insurance and one of them is individual, they will also be treated as Individual customer for the purpose of this product classification.
Commercial Products: Commercial products are those that are sold to entities other than individuals and will include firms, companies, trusts etc. A product filed for commercial customers shall not be sold to individual customers
On the issue of cancellation of policies, while IRDAI’s Guidelines on Product Filing Procedures do not differentiate between Commercial and Retail policies, Protection of policy holders interest Regulations do.
Takeaways:
- Insurers cannot cancel policies arbitrarily
- Insured is free to seek cancellation in respect of both commercial and retail policies
- As regards cancellation by the insurer,
- A retail policy can be cancelled only on grounds on the grounds of mis – representation, non-disclosure of material facts, fraud or non co-operation of the insured.
- A commercial policy can be cancelled, only when circumstances under which the policy may be cancelled are given, along with the manner of calculation of refund and notice period for cancellation
- under no circumstances, the insurer on its own or at insured’s request can cancel motor third party cover unless evidence is provided that the vehicle has another third party cover in force.
- Wherever possible, it is advisable to insist on inclusion of provision for noncancellation of policy by an insurer. This has become a norm now in certain lines of liability insurance policies.
- As regards health insurance policies, reference can be made to guidelines on Standardization of General Terms and Clauses in Health Insurance Policy Contracts as stated in IRDA circular no. IRDA/HLT/REG/CIR/152/06/2020 dated 11/6/2020.
P. Umesh
Consultant – Liability Insurance
p.umesh@liabilityinsurancepractice.com
www.liabilityinsurancepractice.com
Disclaimer: The information contained and ideas expressed in this article represent only a general overview of subjects covered. It is not intended to be taken as advice regarding any individual situation and should not be relied upon as such. Insurance buyers should consult their insurance and legal advisors regarding specific coverage and/or legal issues.