In May 2014, the Allahabad High Court issued perhaps the sternest order ever issued against any Insurer. It directed the insurance industry regulator, the IRDA, to "critically examine each and every policy" issued by SBI Life Insurance Company Limited ("SBI Life"), and if it found that any policy was issued in breach of the regulations then "it would be appropriate [for the IRDA] to direct the SBI Life to discontinue its policies and to wind up its business." That order was stayed by the Supreme Court, India's highest, on 11th July 2014, but the Supreme Court has not yet given its judgment on the case.
The facts of that case can be simply stated. In 2007, a 72 year old policyholder invested Rs.50,000 in a 5 year unit linked insurance policy sold by SBI Life, through its corporate agent, State Bank of India ("SBI Bank"). The policyholder survived the 5 year policy term but, due to various deductions, he received only Rs.248 on maturity.
The unhappy policyholder complained to the IRDA, but was dissatisfied with the response. He therefore commenced proceedings against the Indian government, the IRDA, the government owned SBI Bank, and SBI Life (SBI Life is a joint venture Insurer formed by SBI Bank and BNP Paribas).
The Allahabad High Court gave "anxious consideration" to the case and found as follows:
- With few exceptions, Indian law requires that any policy sold in India is first approved by the IRDA in accordance with the "File & Use" procedure. The court found that the policy sold in this case was not approved in entirety under the "File & Use" procedure, in particular with respect to the mortality charges, and therefore the policy sold was in breach of the "File & Use" procedure.
- The terms and conditions had not been properly explained to the policyholder by SBI Bank before it sold the policy. Had an explanation been given, in particular of the manner in which the mortality charge would be deducted, "No prudent person...would have subscribed to the policy, which in any case even if the NAV had risen, would not give any return at all."
- The policy was to have been terminated if the NAV fell below Rs.10,000. The court said this "was a safeguard which was absolutely essential to protect the investment." However, that clause was deleted by SBI Life mid-term, as to which the court said that, once the policy had commenced, it "could not have been changed unilaterally even on the advice of IRDA" and "the IRDA completely failed in exercise of its statutory duty in allowing the unilateral amendments".
- SBI Bank is majority government owned, and SBI Bank had a 76% stake in SBI Life; SBI Bank's Chairman and CEO also served SBI Life in the same capacity, and SBI Bank had the right to nominate directors to SBI Life's board. The relevance of this finding is that SBI Life was in essence held to be an instrumentality of the state, and therefore bound to act reasonably and fairly in all matters. In the event, the court found that the policy was "an unconscionable contract and was thus arbitrary, illegal and void document."
The court concluded:
It also called on the Serious Fraud Office to investigate the "unlawful gains made by the Company and its Directors including the Directors of SBI...by cheating the policyholders on the pretext that its policies are in compliance with IRDA regulations."
As mentioned earlier, the case has now reached the Supreme Court. The Supreme Court will rule on the case in due course and in all probability is likely to consider whether SBI Life is to be considered an instrumentality of the state, but in the meantime:
- Although the Allahabad High Court's order has been stayed, the rationale adopted by the court in reaching its judgment on issues of mis-selling and breaches of the "File & Use" procedure may be taken forward by the courts and consumer forums while considering similar matters;
- High Courts may consider admitting writ petitions against other Insurers with majority government ownership by considering them to be instrumentalities of the state on a similar basis to the manner in which SBI Life was considered to be an instrumentality of the state.
- Given the comments of the Allahabad High Court in terms of unilateral policy amendments, Life Insurers seeking to carry out amendments to their issued policies for whatever reason will need to consider the extent to which the policyholder's consent will be needed.
- This case underlines the importance of compliance with the "File & Use" procedure, as well as other rules and regulations relevant to the conduct of insurance business in the Indian market.
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