New Delhi: Acase brought in a consumer court against ABN Amro Bank NV and Aviva Life Insurance Co. Ltd is arguing that a verbal assurance made in selling an insurance policy is as good as a written contract.
If the case, which will come up for hearing on Friday, is upheld, it could redefine how providers of financial services interact with consumers amid increasing complaints of insurance agents misleading policy buyers to earn commissions.
The case has been brought by Pankaj Butalia, a former Delhi University economics professor, against Aviva Life Insurance and ABN Amro Bank in the district consumer redressal forum alleging “misrepresentation and fraud”.
In his complaint, Butalia, representing his wife, says she was sold what was presented as a short-term, market-linked investment plan in 2006 jointly by ABN Amro and an agent representing Aviva. It included an insurance cover for an annual premium of Rs2 lakh.
The product was sold on the “false” premise that they would be able to withdraw funds from it after paying just two annual instalments, the complaint claims.
Three years later, when the Butalias claimed the amount in September, they found that the value of the plan, in which they had invested Rs4 lakh, was now Rs89,000—a capital erosion of 80%.
“The market had recovered by September to the level it was three years ago, so I could not understand the reduction in my money,” says Butalia.
Butalia was unaware that most life insurance plans are front loaded—charges applicable over the life of a financial product are deducted in the first year itself—and earn returns only over the long term.
What Butalia thought was an investment plan was actually a whole-life insurance policy that needs to be funded till his wife turns 85. She is 40 years old now.
He says neither the bank nor the insurance agent disclosed all the terms and conditions of the product when the policy was sold. “We implicitly trust banks so we don’t suspect they’re selling us dud policies,” says Butalia.
It was only after receiving the premium amount that the insurance company sent the policy document.
It is standard practice in insurance for the agent or bank officer to verbally explain the features of the product while selling it, with the actual policy document reaching the consumer only after the first premium is paid. This means the contract at the point of sale is verbal.
ABN Amro Bank did not respond to email queries from Mint.
An Aviva spokesperson wrote in an email that the insurer had been in regular contact with Butalia, describing him as an “important customer” since November 2003, with multiple policies.
“However, in this case, where he bought the policy for his wife, Ms Nilofer Kaul, we have had to deny the waiver of surrender charges after three years as these are totally against the product terms and conditions available with the customer as well as against the long-term nature of this product (appropriately termed Life Long as it is a long-term product),” the spokesperson wrote.
Surrender charge, or exit load, is the fee that a customer needs to pay in order to cancel his policy.
“In all our dealings (including surrender of his previous policies), Mr Butalia came across as a financially savvy customer and hence it (is) rather surprising that the customer alleges that he has not read the policy terms and conditions when investing a substantial amount,” the Aviva spokesperson wrote.
Under the Indian Contract Act 1872, a verbal assurance resulting in the signing of a contract is binding if it can be proved in a court. A company is liable for the actions of an agent in an official capacity even if the agent later leaves the company, the Act says.
“Insurance is a contract of uberrimae fidei—of total good faith,” says K.K. Rai, a senior advocate of the Delhi High Court. “What is required under law is full disclosure of the terms and conditions of the investment plan by the agent. If a consumer buys a plan under false promises and verbal assurance, the agent and his company are equally liable if it can be proved in the court of law.”
Insurance disputes have been on the increase as the industry expands.
The National Consumer Commission, the apex consumer redressal forum, criticized insurance agents in a case involving state-run Life Insurance Corp. of India (LIC) last year.
“To make a quick buck, the (insurance) agents try to collect as much premium. They show scant regard to protect the interests of the consumers,” the commission, comprising members R.K. Batta and P.D. Shenoy, said while dismissing a plea by LIC.
In that case, LIC had rejected a customer’s claim on grounds that the risk cover on a policy he had taken on his daughter’s life had not kicked in yet when she died in 2005. The customer claimed he had not been told by the LIC agent who sold the policy about the fact that the risk cover would take effect three years later.
“There are growing instances of insurance agents making false promises to lure consumers into buying policies,” says Bijon Misra, chairman of Consumer Education and Advocacy, Delhi, a consumer rights forum.
“Under the provisions of law, if the agent is misrepresenting the facts and committing fraud his licence has to be cancelled,” Misra said. “But unfortunately, the regulator and the service provider do not take strict action against the erring agents.”