CHAPTER 11
MINISTRY OF FINANCE

Insurance Division

The New India Assurance Company Limited

11.1.1    Loss of premium of Rs.3.61 crore

The Company had not loaded the premium for adverse claim ratio while extending Marine Special Declaration Policy to the insured resulting in loss of premium.

According to the guidelines issued by The New India Assurance Company Limited (Company), rates charged in respect of Marine Special Declaration Policies (MSDPs) were to be loaded in cases where the claim ratio for the three years immediately preceding the expiring policy exceeded 70 per cent. Thus, if average claim ratio for the years was more than 70 per cent, loading had to be effected in the fifth year policy.

Ahmednagar Divisional Office of the Company had been covering the risk of M/s. Videocon Narmada Limited, Bharuch (insured) under MSDP, from 19 February 1996. Claim ratios for the three years period from 1996-97 to 1998-99 and 1997-98 to 1999-2000 were adverse and hence according to the guidelines, the policies for period from 19 February 2000 to 18 February 2001 and from 19 February 2001 to 18 February 2002 had to be loaded by 2957 per cent and 3128 per cent respectively as the claim ratios for three years policies period 1996-97 to 1998-99 and 1997-98 to 1999-2000 were adverse. However, the Company failed to load the premium for both the years. The loss of premium due to non-loading of premium worked out to Rs.3.39 crore.

Similarly, the policies covering the risks of M/s. Videocon International Limited, (insured) Ahmednagar under MSDPs, were issued by Ahmednagar Divisional Office from 10 February 1996 and 1 April 1996. Claim ratios for these policies for the three years immediately preceding the expiring policies were adverse and exceeded 70 per cent. Thus, the policies for the years 10 February 2000 - 9 February 2002 and April 2000- March 2002 were to be loaded between the ratios of 34.71 per cent and 88.03 per cent. However, the Company did not load premium in these cases also. The loss of premium due to non-loading worked out to Rs.22.29 lakh.

In reply Management stated (July 2002) that loading to the premium charged from M/s. Videocon (insured) was not done as the insured was placing entire business with the Company and the overall claim ratio over these years was favourable.

The above contention of Management is not tenable because of the following:

1. The placement of premium for all classes of business could not justify charging of uneconomic rates in marine portfolio;
2. Each portfolio i.e. fire, marine etc., is governed by the policy conditions and guidelines of that particular class and thus, overall claim ratios of the entire portfolios could not be clubbed; and
3. As per Company’s laid down guidelines discretionary powers were not delegated to the underwriting office for not loading the premium in case of adverse claims.

Thus, due to the failure to load premium according to the guidelines, the Company had to forgo revenue amounting to Rs.3.61 crore.

The matter was referred to Ministry in July 2002; their reply was awaited (September 2002).

11.1.2    Avoidable payment of claim of Rs.38.23 lakh

In the terms and conditions of the Cash Insurance, Burglary and House Breaking Policy, it was inter alia provided that the keys of the safe or strong room should not be left on the premises outside business hours unless the premises were occupied by the insured or any authorised employee thereof in which case such keys, if left on the premises, should be deposited in secure place not in the vicinity of safe or strong room. Further, as per exclusion clauses, the loss of money or valuables from safe or strong room following use of the key to the safe or strong room or any duplicate thereof belonging to the insured, unless that been obtained by threat or by violence, were excluded from the liability of the insurer.

In the following two cases, the Company, however, paid the claim of Rs.38.23 lakh in aggregate even though the losses were not sustainable due to their coverage under the exclusion clause:

(a)    The Company issued Burglary and House Breaking Policy to the insured M/s. Titan Industries Limited, covering insured's Gold, Jewellery, Diamond etc., for the period 20 May 1998 to 19 May 1999 for a sum insured of Rs.20 lakh and a special contingency policy for the period from 1 April 1999 to 31 March 2000 for a sum insured of Rs.3 crore, covering Gold, Ruby, Diamond, precious and semi precious stones etc. A theft occurred in the premises of the insured’s during night hours of 14 April 1999, by using the keys kept in the table drawers in the same premises. Surveyors while assessing the loss at Rs.85.06 lakh qualified the loss as covered under the exclusion clauses of the policy. The Company settled the claim for Rs.24.73 lakh treating the same as non-standard. Since claim falls under exclusion clause of the policy, the Company should have rightly repudiated the claim.

(b)    In the other case of M/s. Vummidi Bangaru Murali Jewellers, the Company issued Burglary Policy covering their stocks in trade, cash in safe and furniture for the period from 13 December 1996 to 12 December 1997 for a sum insured of Rs.45 lakh. A burglary occurred during night hours of 23 November 1997 by using the keys kept in the same premises, which was not occupied by any authorised employees of the insured. The loss was assessed at Rs.18 lakh. The Company settled the claim for Rs.13.50 lakh on non-standard basis. Since the theft was covered under exclusion clause of policy the Company should have repudiated the claim.

Management stated (August 2002) that in both the claims, keys were obtained by forcible entry and that the claims were settled on non-standard basis considering the keys left in the respective premises outside office hours, as breach of policy condition.

Ministry endorsed (September 2002) the reply of Management.

The above contention of Management/Ministry is not acceptable as:

1. the obtaining of keys by the culprits from both premises by removing the bars/grill of the windows could not be treated an act of threat/ violence and forcible entry; and
2. the lapse of keeping the keys, within the vicinity of safe or strong room enabled the burglars to use the keys of the insured falls under the exclusion clause of both the policies, the Company should have repudiated these claims.

Thus, these claims should have been repudiated and the Company erred in not doing so and thereby incurred an avoidable expenditure of Rs.38.23 lakh.

The Oriental Insurance Company Limited

11.2.1    Loss of Rs.8.57 crore on grant of excess group discount on Mediclaim Policy

Guidelines issued by General Insurance Corporation of India Limited (GIC) in October 1999 for Group Mediclam Policies effective from 1 November 1999 envisaged that:

• Maximum group discount for fresh policies, allowable based on number of persons in the group at the time of granting cover be restricted to 30 per cent,
• All other technical discounts or deductions granted in addition like long-term discount, special feature discount, no claim discount, etc. except special discount in view of agency commission in the aggregate must not exceed 30 per cent, and
• Group discount allowable to the existing clients would also be restricted to 30 per cent in case the claim ratio for the preceding three years exceeded 80 per cent.

Life Insurance Corporation of India (LIC) was obtaining Group Mediclaim Policy from The New India Assurance Company Limited (NIA) until March 2001 and the claim experience for three years preceding immediately the expiring policy was adverse by 129.76 per cent. Thus, NIA restricted the maximum group discount allowable to LIC to 30 per cent from April 2001, in terms of provisions of above-cited guidelines.

In view of position referred to above LIC switched over from NIA to The Oriental Insurance Company Limited (Company). A Mumbai-based Divisional Office of the Company issued Group Mediclaim Policy to LIC covering 3,71,722 employees for the period from 1 April 2001 to 31 March 2002, allowing 66 per cent group discount. This was in violation of the guidelines as the maximum group discount allowable for fresh client was only 30 per cent. Apart from this, if the Company would have considered LIC Mediclaim policies incurred claim ratio for the three years preceding immediately the expiring policy taken with NIA, the maximum group discount would have been restricted to the maximum of 30 per cent because of adverse claim ratio. Thus, LIC was also not eligible for higher discounts of 66 per cent. The Company lost premium of Rs.14.51 crore on allowance of excess group discount in violation of guidelines.

Management stated (June 2002) that:

1. consequent to Chairman, GIC’s letter dated 13 November 2000 all companies were to operate interdependent of GIC in all matters and hence allowing of higher discount (66 per cent) was in order;
2. group discount on premium and loading for adverse claim experience could not go hand in hand;
3. to underwrite business at 80 per cent and arrive at the renewal premium, 3 years average claim experience was to be loaded by 25 per cent; and
4. LIC had been requested (May 2002) to give Rs.5.94 crore on account of short charge of premium.

The reply of Management is not tenable as:

1. Chairman, GIC letter dated 13 November 2000 reiterated functional autonomy to subsidiaries in respect of personnel, investment and re-insurance departments only and hence the decision of the high level committee on limiting the group discount to 30 per cent was binding on the subsidiaries;
2. the contention of Management that group discount on premium and loading for adverse claim experience could not go hand in hand is not acceptable as General Manager of the Company while working the premium for LIC Mediclaim Policy on 3 April 2002 included both elements i.e. group discount as well as loading for adverse claim ratio in computation of the premium recoverable from LIC; and
3. the computation of renewal premium based on three years’ average claim experience and loading the same by 25 per cent is also not tenable since as per policy guidelines the renewal premium and not the average of three claim experience was to be loaded on the bases of incurred claim ratio.

The Company, therefore, by allowing 66 per cent discount in violation of the guidelines incurred a loss of premium of Rs.8.57 crore (after adjusting demand of Rs.5.94 crore raised against LIC in May 2002 towards short charging of premium).

The matter was referred to Ministry in June 2002; their reply was awaited (September 2002).

United India Insurance Company Limited

11.3.1    Loss of revenue on account of failure to charge applicable premium rates

A Hyderabad based Divisional Office of United India Insurance Company Limited (Company) entered into an agreement (October 1996) with Andhra Bank for issue of Group Personal Accident Policies covering holders of “Abhaya Gold Savings Bank Account” of the Bank, during the period 1 November 1996 to 31 October 1999. The premium collected was Rs.14.96 (excluding service tax) per insured person per year for the sum insured of Rs. 1 lakh for the period 1 November 1996 to 31 October 1998. For the period 1 November 1998 to 31 October 1999 the premium was to be determined with reference to the claims experience from 1 November 1996 to 31 October 1997 but the Company continued to charge the existing rate of Rs.14.96 only. The insurance risk cover was extended for one more year from 1 November 1999 to 31 October 2000 at a premium of Rs.17. The premium rates applicable as per Company’s circulars, for the years 1996 to 1998 and 1998-99 were Rs.26 and Rs.27.90 per person. As regards 1999-2000, such account holders were not eligible for group discount as per Company’s circular dated April 1999 and therefore applicable premium was Rs.65 per person. Under charging of premium during the years 1996 to 2000 resulted in a loss of revenue of Rs.3.79 crore.

The Company, by an endorsement to the policy effective from 1 February 2000 to 31 October 2000, covered 60,000 Visa classic card holders and 11,000 Visa gold card holders wherein the sum insured was Rs.2 lakh and Rs.5 lakh respectively. The premium charged was Rs.34.29 and Rs.85.71 per person as against applicable premium of Rs.113.75 and Rs.292.50 per person respectively. This resulted in loss of Rs.70 lakh.

Management stated (July 2001) that the premium collected helped cash flow and therefore, it had not wanted the policy to be discontinued under any circumstances. Further, they had been making all efforts to sufficiently increase the premium rates under the policy to ensure that the account became profitable and loss incurred during the past were recouped over a period of time. Ministry endorsed (September 2001) the views of Management.

Management admitted that the account was showing losses due to undercharging of premium. Thus, violation of the prescribed rates of premium for Group Personal Accident Policies resulted in a loss of revenue of Rs.4.49 crore to the Company.

11.3.2    Short collection of premium

The Company suffered loss amounting to Rs.3.16 crore on account of short collection of premium due to incorrect application of tariff.

The Company suffered loss due to wrong application of tariff in three cases detailed below:

The Divisional Office V, Chennai of the Company issued provisional cover notes for fire risk to M/s. Tamil Nadu Newsprint and Papers Limited (insured) for the period from 1 October 1996 to 30 September 1997. The cover was for buildings, plant and machinery etc. in their original and expansion projects and the total sum insured was Rs.737.47 crore. The policy was renewed for the period 1997-98, 1998-99 and 1999-2000 and the sum insured was Rs.774.34 crore, Rs.813.06 crore and Rs.853.71 crore respectively. The Company had to issue provisional cover notes in lieu of policy, pending receipt of details from the insured of the exact amount of insurance under various items. As per Rule 20 of General Rules of All India Fire Tariff, such details should be communicated by the insured at the commencement or renewal of the policies. Further as per the said Rule where the amount of insurance is provisional, 100 per cent of the premium must be charged on the provisional sum assured.

It was seen that the the Company had underwritten the risk by applying block-wise rates (after allowing discounts) without obtaining details of sum insured from the insured, either at the time of granting cover originally in 1996-97 or on subsequent renewals during 1997-98 to 1999-2000. Instead, the Company on its own adopted the schedule of items submitted by the insured for 2 different policies for the years prior to 1996-97 and increased the sum insured on a percentage basis every year until 1999-2000 as required by the insured. As per the Rule above, in the absence of details a basic rate of 3.9 per mille (thousand)should have been charged. As this provision was violated there was under recovery of premium of Rs.2.44 crore.

Management stated (July 2002) that explanation had been called for from the officer concerned. In their subsequent reply (August 2002) the Company argued that detailed break up of sum insured for each item covered under the policy was available for the year 1996. Based on these details the applicable premium as fixed by Tariff Advisory Committee (TAC) was charged and that for the subsequent years there was no change in the items covered but only the sum insured was increased by a fixed percentage. Ministry endorsed (August 2002) the views of Management.

The reply is not tenable as admittedly cover notes in lieu of policy were issued for 4 years until 1999-2000 in the absence of sufficient details of properties covered. Only in 2000-01 were the details received based on which the policy was issued. When the sum insured was provisional, 100 per cent of the premium should have been charged. Evidently, the Company did not collect exact details of various items of property covered by the insured, instead arrived at the sum insured on its own; in violation of the tariff. Incidentally special rates fixed (August 1995) by TAC before merger of the 2 policies was only for Unit I of the insured for the period 1 October 1994 to 30 September 1997, subject to the condition that there was no material alteration in the risk.

Thus, due to non-adherence to tariff the Company had incurred a loss of Rs.2.44 crore due to short collection of premium.

A Hyderabad based Divisional Office of United India Insurance Company Limited (Company) had been issuing Fire policies to M/s. Nagarjuna Fertlizers and Chemicals Limited, Kakinada (insured). The engineers of the Tariff Advisory Committee (TAC) during their inspection (December 1996) observed that for some of the equipment as well as supports of pipe racks in the Ammonia and Urea Plants of the insured were not fire proof. Consequently, the TAC instructed (January 1998) the Company to take up the matter with the insured to ensure that these requirements were carried out within nine months. The TAC also instructed the Company to withdraw the 10 per cent discount in case of non-compliance. The Company however continued to grant the 10 per cent discount through the years 1998, 1999 and 2000 without ensuring compliance of the requirements by the insured. TAC inspected the plant in January 2000 and noticed the non-compliance of requirements by the insured. Consequently, TAC withdrew (March 2000) the discount of 10 per cent with effect from 5 October 1998, earlier allowed on the above equipments in Ammonia and Urea Plants. The amount recoverable due to incorrect grant of discount from the insured amounted to Rs.47.48 lakh, which had not been collected so far (May 2002).

Management stated (May 2002) that as the TAC was the only competent authority to sanction or withdraw discounts, any further action by the Company would be based only on the subsequent report given by them. It was further stated that the Company continued to allow the discount and by the time the TAC withdrew the discount, two renewal policies had elapsed and that the insured had not responded to the Company’s request for refund. Management informed (July 2002) Ministry that the decision of TAC to withdraw discount retrospectively after a lapse of more than two years was not justified specially when TAC had every opportunity to carry out inspection and verify about the compliance or otherwise. Ministry endorsed (August 2002) the views of Management.

The reply is not tenable as the TAC had granted the discount subject to fireproofing of equipments/pipe racks before 5 October 1998 failing which the discount was to be withdrawn. Given the fact that the TAC was the only agency empowered to certify compliance, the Company should have inevitably ensured inspection by TAC before deciding on continuance of discount. The Company instead continued to extend discount without ensuring compliance of the TAC directive by the insured.

Thus, failure on the part of the Company to adhere to TAC’s instructions resulted in loss of Rs. 47.48 lakh due to short collection of premium as Management admitted that the chances of recovery of the amount due from the insured were remote.

Warangal Divisional Office of the Company was issuing Workmen’s Compensation Insurance Policies to M/s. A.P. Rayons Limited, Kamalapuram (insured) from 1989-90 onwards. The insured was engaged in manufacture of ‘Wood Pulp’. The Division collected the premium in respect of these policies by applying the rate of Rs.7.80 per mille on the estimated total earnings of their workers and contract labourers. The correct rate chargeable for the manufacturing unit of Wood Pulp was Rs.30.15 per mille under Workmen’s Compensation Tariff. The application of the incorrect lower rate in respect of policies issued for the years 1999-2000 to 2001-2002 resulted in short collection of premium to the extent of Rs.24.06 lakh.

The Company admitted (June 2002) that there was a mistake in application of Workmen’s Compensation Tariff and that they had taken up with the insured for recovery of the amount.

The revenue foregone has not been realised so far (June 2002). Thus, the incorrect application of tariff resulted in loss of revenue to the extent of Rs.24.06 lakh.

The matter was referred to Ministry in July 2002; their reply was awaited (September 2002).

11.3.3    Non-recovery of premium

United India Insurance Company Limited could not recover premium of Rs.1.84 crore due to ineffective pursuance.

A Chennai-based Divisional Office of the Company had issued fire policies to Madras Fertilizers Limited, Manali (MFL) since inception. MFL revamped (1993-1998) their plants to increase the capacity and to improve the efficiency. In view of this, the fire policy issued by the Company required special rating by Tariff Advisory Committee (TAC). The Company requested (August 1997) MFL to furnish necessary data on revamp for fixing revised rates. The required data was sent by MFL in September 1997. TAC communicated the revised rates to the Company in March 1999, directing that the revised rates were applicable from 2 October 1997 - the date of inclusion of the revamped plant in the fire policy.

Accordingly, the Company sought (March 1999) payment of the difference in premium amounting to Rs.1.84 crore for the period 1997-98 and 1998-99 on lapsed policies from MFL. MFL refused to remit and the amount remains unrecovered till date (August 2002).

The Company stated (April 2002) that it had not erred in any manner in handling of the issue in as much as the delay in conducting and finalising the rate were under the control of TAC.

The reply is not tenable as Management was aware of the revamp since September 1994. Despite receipt of data from MFL in September 1997, the Company failed in effective and timely pursuance of tariff revision with TAC in 1997-98 itself. This resulted in loss of revenue of Rs.1.84 crore (premium Rs.1.75 crore and service tax Rs.8.74 lakh).

The matter was referred to Ministry in May 2002; their reply was awaited (September 2002).

11.3.4    Irregular grant of earthquake premium discount

Irregular grant of discount in violation of the conditions stipulated by Tariff Advisory Committee resulted in revenue loss of Rs.65.79 lakh.

Alwaye Divisional Office of the Company has been issuing Fire Policies to M/s. Fertilizers and Chemicals Travancore Limited (FACT) for their Caprolactum Plant and 900 TPD Ammonia Plant (insured property) at Udyogamandal. The Tariff Advisory Committee (TAC) introduced a scheme for the special rating (sanctioning of discount of 35 per cent in the rates) for earthquake peril with effect from 1 July 1998, subject to compliance of certain conditions which inter alia stipulated that the buildings and plants should not be situated within a distance of 500 metres from the banks of a perennial river or a lake.

FACT requested (August 1998) the Company to consider their Caprolactum Plant and 900 TPD Ammonia Plant for this special rating. The Regional Office, Kochi granted (December 2000) the discount of 35 per cent retrospectively from 1 July 1998 on the basis of certain certificates furnished by the insured. Scrutiny revealed that the insured had not furnished a certificate to the effect that the insured property was at least 500 metres away from any permanent water body. The insured property was actually situated on the banks of the perennial river Periyar. Thus, the condition stipulated by TAC was not satisfied. Consequently, the grant of the discount amounting to Rs.65.79 lakh for the period 1 July 1998 to 31 January 2001 was irregular.

The Company admitted (June 2002) that the discount granted was not in conformity with tariff regulations and that explanation had been called for from the concerned officer.

Thus, irregular grant of discount without satisfying the conditions as stipulated by Tariff Advisory Committee resulted in loss of revenue to the extent of Rs.65.79 lakh.

The matter was referred to Ministry in July 2002; their reply was awaited (September 2002).

11.3.5    Excess settlement of fire claim

The Company settled (December 2000) a claim of M/s. Thirumagal Mills Limited, Gudiyattam (insured) for Rs.3.46 crore towards plant and machinery, stock-in-process, stock of cotton and finished goods damaged by fire. The claim was due to a major fire in the mills which affected cotton products kept in the “New Machinery Hall” used as store area and the machinery as well as stock-in-process that were in the process area adjoining the store area.

Fire policies contain a warranty that the risks that attract a higher premium shall not communicate with risks that attract lower rate of premium. This warranty in effect requires that such risks are totally isolated by a “perfect party wall” that will minimise the possibility of the fire spreading from the higher risk area (store area) to the lower risk area (process area). When such clear position is not in existence, the risks are stated to be ‘communicating’ with each other.

Investigation Report of the Loss Prevention Association (LPA) indicated that the fire originated at the storage area and spread to the process area and costly machinery was damaged. Surveyors had confirmed that there was a breach of communication warranty between the new machinery hall used as godown and process area. One of the surveyors did not consider the breach of warranty to be material to the loss. The other surveyor had merely stated that warranties were not complied with and had not commented about its materiality. Consequently, the claim for the damage to machinery (Rs.2.31 crore) and stock in process (Rs. 8 lakh) were settled as ‘compromised claims’ after recovering the premium of Rs.11 lakh for one year for the related policies.

According to a GIC (General Insurance Corporation of India)circular (October 2000) when a breach of warranty was ‘not-material to the loss’ appropriate higher premium should be collected and where the breach is ‘material to the loss’, the claim be restricted up to 75 per cent of the assessed amount. The absence of “perfect party wall” between the storage area and the process area had contributed to the damage of the machinery and the stock-in-process and the breach of warranty was indeed material to the loss. The Company, however, treated the breach of warranty as ‘not-material to the loss’. This resulted in the claim in respect of the machinery and stock being settled in excess of 75 per cent of the assessed loss, in violation of GIC’s instructions dealing with compromised claims.

Management stated (April 2002) that inclusion of warranty in the policy was a mistake which was rectified before admitting the claim and reference in the report of LPA was only routine post-loss inspection, wherein they had only stated that the fire could have originated at the storage area. Subsequently, Management further added (June 2002) that, as per interim report of Joint Surveyors, circumstances under which the fire broke out clearly pointed to malicious act and communication between machinery hall and process area was not the cause of occurrence of the loss and that breach of warranty could not be treated as being material to the loss. Ministry endorsed (August 2002) the views expressed by Management.

The reply is not tenable as the settlement on compromise basis had arisen as a result of breach of warranty irrespective of the fact that such warranty was included by mistake or otherwise. Further, the report of the LPA was categorical that the fire originated in the storage area and spread to the process area. The Company should not have disregarded the report of the LPA. While malicious act is not a proximate cause the absence of perfect wall and consequent breach of communication warranty was material to the loss. If the settlement was presumably done on the basis of malicious act, the Company need not have expressly considered the breach of communication warranty. Hence the justification on grounds of malicious act was an afterthought.

Thus, by treating the breach as ‘not-material to the loss’, the Company made excess settlement of claim by Rs.48.83 lakh.