Author Name:   Adithya Variath

The principal legislation regulating the insurance business in India is the Insurance Act, 1938. Some other existing legislations in the field are - the Life Insurance Corporation LIC Act, 1956, the Marine Insurance Act, 1963, the General Insurance Business (Nationalization) Act, 1972 and the Insurance Regulatory and Development Authority IRDA Act, 1999. The provisions of the Indian Contract Act, 1872 are applicable to the contracts of insurance, whether for life or non-life.

Insurance Frauds Deserve Special Legislative Attention And Effective Judicial Action

In the insurance industry, fraud has always been considered a sensitive issue. The Institute of Internal Auditors' International Professional Practices Framework (IPPF) defines fraud as: "… any illegal act characterized by deceit, concealment, or violation of trust. These acts are not dependent upon the threat of violence or physical force. Frauds are perpetrated by parties and organizations to obtain money, property, or services; to avoid payment or loss of services; or to secure personal or business advantage." Insurance fraud occurs when any act is committed with an intention to fraudulently obtain some benefit or advantage to which they are not otherwise entitled or someone knowingly denies some benefit that is due and to which someone is entitled.

It is a crime of using dishonest methods to take something valuable from another person. Fraud is present in all sectors of society whether financial or not. The main purpose of Insurance fraud is financial gain; it not only affects the companies and stakeholders but also innocent policy holders. Insurance fraud has existed ever since the beginning of insurance as a commercial enterprise. It takes many forms and may occur in any areas of insurance. (According to more than 80% of the respondents, insurance fraud can increase costs for the insurer by at least 1% and can go up by more than 5% in certain cases) As per IRDA, 1 out of every 10 insurance claims are fraudulent. According to an Indian association, Out of the total outgoings in health insurance, nearly 25% are fraudulent claims. In UK, anti-fraud efforts are driven by the Regulator, the Financial Services Authority (FSA) with an active participation by the insurers. The latter have formed a body, called Insurance Fraud Bureau (IFB). IFB also collects claims data from insurers and runs powerful fraud detection software. Most of the Indian Companies do not have a dedicated team to deal with fraud. Considering the amount of frauds in Indian Insurance industry, Fraud detection mechanisms have to be robust and effective. Increased vigilance would definitely increase costs for insurance companies, but it would be worth the effort as they would save money when cases of fraud go down. Recently, IRDA sent across a letter to all insurers, asking to furnish a list of "false claims" registered under the Motor Vehicles Act and the Workmen's Compensation Act. According to India's Ministry of Labour and Employment advisory note, it was sent to insurance companies that; "It is in the interest of insurance companies to spend time and effort on an effective monitoring mechanism to ensure that claim ratios are realistic, manageable and correct."

In a data-driven industry such as insurance, companies will not only need to compete in terms of their product offerings, but will also be required to leverage business intelligence enabled analytics to attain a competitive edge. Insurance frauds are comprehensive and can be classified into 3 groups;
1. Internal or External frauds
2. Hard and Soft frauds
3. Provider and Consumer frauds

IRDA has put in place a significant regulation to bring about transparency in the selling process by stipulating that " … all insurance companies (life and general) have to resolve complaints from policy holders within 14 days and any failure to do so will attract penalty. Any failure on the part of insurers to follow this procedure and time frame will attract penalties by the IRDA." Apart from robust whistle blower policies, robust investigation unit, mystery shopping and doctor seeding what can really retain the pristine glory of Insurance industry is judicial activism and special legislative reforms. Insurance fraud deserves special legislation and judicial attention - a few quick, high profile and highly publicized convictions are probably the strongest medicine for potential fraudsters. Without legislative and judicial support, all the activism of insurers and regulators will be tendered ineffective as it will lack genuine force and sanction. The principal legislation regulating the insurance business in India is the Insurance Act, 1938.

Some other existing legislations in the field are - the Life Insurance Corporation (LIC) Act, 1956, the Marine Insurance Act, 1963, the General Insurance Business (Nationalization) Act, 1972 and the Insurance Regulatory and Development Authority (IRDA) Act, 1999. The provisions of the Indian Contract Act, 1872 are applicable to the contracts of insurance, whether for life or non-life. Similarly, the provisions of the Companies Act, 1956 are applicable to the companies carrying on insurance business.

The Law Commission of India in its 190Th Report On Revision Of Insurance Act, had suggested that there was no justification for continuing to have a separate legislation concerning the IRDA and that there was a need to merge the provisions of the IRDA Act, 1999 with the Insurance Act, 1938 in order to "to bring about an integrated approach to the task of formulating a legislative regime that can encompass the key facets of the functioning of the Regulatory Authority even while strengthening the regulatory regime". The rationale behind the above suggestion was explained thus; "With the IRDA exercising many of the key functions assigned to it under the Insurance Act, 1938, there is no justification for continuing to have a separate legislation concerning the constitution and functions of the IRDA. Moreover, at the time the IRDA Act was being prepared, the task of a comprehensive revision of the Insurance Act, 1938 was felt necessary but was not undertaken due to paucity of time. Now, with the experience of the functioning of the IRDA and several rounds of discussion with key insurance personnel, a comprehensive revision of the Insurance Act, 1938 appears possible."

There is no specific provision in Indian penal code for insurance fraud. Only available sections that have some relevance are:
1. Section 205 - False personation for purpose of act or proceeding in suit or prosecution
2. Section 420 - Cheating and dishonestly inducing delivery of property
3. Section 464 - Making a false document including signs and seals and forgery
4. Section 405 - Criminal breach of trust All these legal provisions are not adequate to prosecute a fraudster legally under the current scenario of organised insurance frauds.

Government should make provisions so that just as banks can determine the creditworthiness of an individual by querying the Credit Information Bureau of India (CIBIL), insurers in future may be able to get details of an individual's insurance history and his claims records whenever they get a new proposal. Judiciary shall have a more serious approach towards insurance frauds and act as a torch bearer for bringing a systemic transformation. "We are also handicapped by lack of agencies similar to IFBs of US as also lack of any specific criminal laws defining insurance fraud. CBI has a Bank Security & Fraud Cell but nothing for insurance fraud.In reply to a petition in Chennai High Court, Govt. of India – after taking views from IRDA – turned down the request for creating an IFB. State Police forces also do not have any specialized agency. To a great extent, insurance industry has not lobbied for having such progressive steps. In a similar vein, the industry which collects close to Rs. 2 lac Cr of premium a year has not paid enough attention to educating customers about how to stop falling prey to frauds (such as fake policies, premium embezzlements), or upgrading skills of law enforcement or sensitizing the judiciary about the magnitude and dangers of insurance fraud", said Mr. Ashish Joshi – Head, Special Investigations Unit (Claims) at Tata AIG General Insurance Company Ltd.

Follow the Procedure Below To Submit Your Articles

Submit your Article by using our online form Click here
Note* we only accept Original Articles, we will not accept Articles Already Published in other websites.
For Further Details Contact: editor@legalserviceindia.com

File Your Copyright - Right Now!