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Part A – Insurance for businesses

Engaging in a business activity is itself with several risks - such as the risk of fire, earthquakes, floods and other accidents, terrorism and criminal acts, death or disability of founders or key managers. Materialization of these risks can adversely impact the business and can even result in its shutting down. An entrepreneur can avoid or minimize the impact of such events by taking insurance against such risks. 


What types of insurance is relevant for a business and what should a businessman look out for in an insurance policy?


Whether a business has obtained appropriate insurance against specific risks is particularly important at the time it is considering taking an investment, a significant financial loan or going public –a private equity investor, VC, an angel investor or a bank typically conducts a due diligence on the business before investing or lending (as the case may be). An inquiry on the insurances taken by the business is an essential aspect of this due diligence – because an investor (including the general public, if the money is proposed to be raised through an IPO) will not want to bear the risk that uncertain events can jeopardise his investment. Similarly, a lender will need to know whether such events can impact the ability of a business to repay the loan (by affecting its ability to conduct operations), or whether they will adversely impact the security.


Lawyers undertaking such a diligence exercise usually insist on being furnished sufficient documentation to indicate which type of insurance has been taken, the subject matter of insurance, insurance amount, and whether the insurance is valid.


Businessmen and insurance providers refer to policies by different commercial names depending on the subject matter or the risk that they insure against – e.g. Director’s and Officer’s insurance (D&O Insurance), fire insurance, terrorism insurance, etc. (we will explain these in detail later). However, under Indian law, all insurance is classified into three broad categories - life insurance, marine insurance and general insurance. Insurance against fire, health insurance, terrorism insurance, director’s insurance, keyman insurance and any other type of insurance will fall within the ambit of general insurance.

 

For a businessman, it is important to understand the terms of the policy carefully – every policy will contain certain exclusions. For example, a fire and special perils policy may exclude damage from events such as war, nuclear damage, riot from employees, theft during or after occurrence of the insured event. Further, it may exclude damage to special kinds of property or assets – such as bullion, works of art, manuscripts, documents, etc. If a businessman intends to insure such assets, he will have to obtain independent insurance which specifically covers those risks. The exact kinds of insurance will be determined by the nature of the business. For example, a distribution company may take specific insurance for stock-in-transit, a taxi company may take vehicle insurance, etc.
 

For convenience, we have specified some of the generic varieties of insurance typically taken by most businesses in the table below:
 

Type of insurance

Description of the insurance

Keyman insurance

Insures against death or other types of incapacitation of key managerial personnel, which may render them unable or unfit to serve the company in their current capacity, e.g. Apple could take a keyman insurance policy against Steve Jobs suffering from a life-threatening disease such as cancer at a premature age.

Fire and special perils insurance

Insures against damage caused to building, machinery, furniture and other key assets of the business due to fire, lightning, explosion/ implosion, riot, strike, floods, earthquakes, etc.

 

[It is important to understand how the cost of reconstruction is valued – whether depreciation is, taken into account on buildings, plant and machinery, etc., if market values on the date of the loss will be used for reference.] 

Directors and Officers Insurance Policies

Losses caused due to statutory violations (except fraud) (For more details, refer to the detailed discussion on D&O Policies uploaded in Module 9).

Terrorism Insurance

Loss caused to property against terrorist attacks.

It has become even more important since the November 2008 attacks in Mumbai, which caused large damage to luxury hotels such as the Taj Mahal Hotel and Oberoi.

Group Insurance / individual health insurance

Group insurance or individual health insurance cover is frequently taken for employees by businesses. A group insurance package insures a group of employees and usually works out cheaper as compared to an individual life insurance for each employee. Taking insurance for employees can help in employee retention and is also an employee welfare measure.

Public liability insurance

A business which handles, treats, or disposes of hazardous substances may be mandatorily required to take public liability insurance in terms of the Public Liability Insurance Act, 1991.

 

Professional liability insurance

Typically taken by consultants (such as lawyers, doctors and accountants) to protect themselves against losses caused by legal proceedings from clients. Although litigation is not resorted to as frequently in India as in other countries such as the US, the trend is picking up – the establishment of consumer forums is likely to lead to an increase in such cases.

 

Consequences of not having key insurances

Not having key insurances may lead to lower valuations in an investment transaction, or it may cause a lender to impose more severe terms in a loan transaction or withdraw from the transaction altogether. If the inadequacies are minor, the investor/ lender may not consider them material at all, or require them to be rectified (e.g. insurance which has expired may be required to be renewed) as a condition precedent to the transaction.
 

It is important to consider market practice – it may be common for businesses in the same sector in a particular country to not take specific insurances (e.g. keyman insurance is not taken by most early stage businesses in India). At the same time, taking adequate insurance may still help in generating more investor or lender confidence, as the business is insulated from risk to the extent of insurance coverage.

 

Part B – Regulation of the insurance sector

In India, the Life Insurance Corporation of India held a monopoly in the life insurance sector and the General Insurance Corporation (and four of its subsidiaries) enjoyed the monopoly for general insurance since 1956, when the sector was nationalized. These were all government backed ventures. However, in 1999, the Insurance Regulatory and Development Act (“IRDA Act”) was passed to create the Insurance Regulatory and Development Authority of India (IRDA) as the sectoral regulator for insurance, and the sector was liberalized for private players – so long as they obtained a certificate of registration from IRDA and complied with the act and regulations passed by IRDA. (See Annexure at the end of this chapter for a detailed discussion on the registration process and compliance requirements for an insurance company).
 

What are the options available for foreign insurers to operate in India or sell insurance products to Indian businesses?


The only way for foreign insurance providers to provide insurance products in India is by establishing an Indian entity in collaboration with an Indian provider. In the insurance sector, FDI upto 49% is permitted under the automatic route (as amended by Insurance (Amendment) Ordinance, 2014). In addition, an insurance provider needs obtain a license from the IRDA.


Can an Indian business take insurance from a foreign insurer?

An Indian business may want to consider availing insurance from foreign insurers (who operate only in foreign markets) – there is a chance that a specific insurance product available in a foreign market is more sophisticated and meets the needs of a particular Indian business.

In that regard, it should be noted that an Indian resident (unless it is an SEZ) cannot take any insurance from a foreign insurer – unless he obtains a no-objection certificate from the Central Government (in case of a general insurance policy) or permission from the RBI (in case of a life insurance policy. See
Foreign Exchange Management (Insurance) Regulations, 2000 (FEMA Insurance Regulations).

 

Units located in Special Economic Zones (“SEZs”) can avail general insurance policies taken from insurers outside India. Therefore, remittances towards premium for general insurance policies taken out by units located in SEZs from insurers outside India are permitted (if the premium is paid out of the foreign exchange balances).

Disputes with insurers

In case of a dispute with the insurer, an entity has several options –

  • Raising the grievance with the insurer – This is typically the first step, and any other step is necessary only if the insurer does not satisfactorily address the concern of the insured entity. A dispute only comes into existence if the insurer refuses to address the grievance satisfactorily, or takes an unreasonable amount of time to resolve the same. Approaching a court without first approaching the insurer may be inefficient, and courts discourage parties from instituting legal proceedings directly.
  • Arbitration under the terms of the insurance policy – most insurance policies include an arbitration clause for resolving disputes.
  • Approaching an insurance ombudsman appointed under the Redressal of Public Grievances Rules, 1998 (Insurance Ombudsman Rules), within one year from the date of rejection of the complaint by the insurer.
  • Filing a consumer complaint under the Consumer Protection Act - this remedy is only available when a complaint is filed for insurance availed of by an individual. A consumer complaint cannot be filed with respect to insurance taken for the business.

While the insured entity has several remedies in case of a dispute with an insurer, it may not be possible in a given situation to invoke multiple remedies at once. For example, as per the Insurance Ombudsman Rules, if an entity approaches an ombudsman, it should not file proceedings in another forum such as an arbitrator or a consumer forum on the same subject matter. An ombudsman can consider repudiation of claims by an insurer, disputes on premium, claims where the dispute is based on a different interpretation of the policies, delay in settlement of claims and a disputes relating to non-issuance of insurance documents.
 

An ombudsman attempts to settle disputes by mediating between the parties and enabling them to come to an agreement. He may also pass an award of compensation within 3 months of the complaint up to an amount which covers the loss suffered by the complainant as a direct consequence, or for an amount upto INR 20 lakhs, whichever is lower.

 

PART C-OPTIONAL READING MATERIAL ON INSURANCE

 (recommended for law students)

 

I.  Registration of an insurance company

 

Every entity planning to conduct insurance business in India is required to obtain a certificate of registration from IRDA prior to commencement of business. The IDRA Act, Insurance Act and regulations prescribed by IRDA contain essential requirements for obtaining registration as an insurer.

Eligibility for Registration


Some of the essential eligibility conditions for registration as insurers are:

An insurer must be constituted as a company. Hence, a partnership, LLP or trust cannot be used to start an insurance business.

  •  A single company can carry out any one of general insurance, life insurance or reinsurance. Separate companies are required to carry out more than one of the above businesses.
  • The name of the insurer must contain the words “insurance company” or “assurance company”.
  • If the company intends to carry on business of life or general insurance, a minimum paid up equity capital of INR 100 crores is necessary. If it intends to carry on re-insurance business, a minimum paid up equity capital of INR 200 crores is necessary.
  • A “promoter” of the company is not permitted to hold more than twenty-six per cent of the paid-up capital in any Indian insurance company.

Procedure for obtaining a certificate of registration

 

Application for registration must be made in two stages:

 

i)   An applicant desiring to carry on insurance business in India is required to make a requisition for a registration application to the IRDA in a prescribed format along with all the relevant documents. The applicant is required to make a separate requisition for registration for each class of business i.e. life insurance business consisting of linked business, non-linked business or both, or general insurance business including health insurance business.

 

If the requisition is rejected, an applicant can re-apply within thirty days of such rejection for re-consideration of its decision. He may also approach IRDA with a fresh request within 2 years from the date of rejection, with a new set of promoters and a different class of insurance business.

 

ii)   If IRDA accepts the requisition, it can direct the applicant to supply the application with relevant documents evidencing deposit, capital and other requirements in the prescribed form for grant of a certificate of registration.

 

In case of rejection of the application for registration, an applicant can appeal to the Central Government within 30 days. Decision of the Central Government is final.

 

The registration must be renewed on an annual basis upon payment of a fee based on the insurance premium, as prescribed under the IRDA Act and regulations.

 

II. Compliance Requirements for an insurance company
 

a. Investment obligations of insurance companies
 

Insurance companies are required to invest a fixed percentage of their premiums by cash or in approved securities on with the Reserve Bank of India. Further, every insurer is required to invest and keep invested certain amount of assets as determined under the Insurance Act. The funds of the policyholders cannot be invested (directly or indirectly) outside India. Certain amount of funds and total assets must also be invested in various kinds of government securities and the infrastructure and social sector.

                                                                      

b. Solvency Margins
 

An insurer’s assets must be higher than its liabilities by a certain margin (called the ‘required solvency margin’). An insurer who fails to maintain the required solvency margin will be deemed to be insolvent and may be wound up by the court, which can be a fixed sum, a percentage of the premium or of the incurred claims. It can be wound up if it fails to maintain such margins.

 

c.  Investments by insurance companies


Insurance companies are required to invest a fixed percentage of their premiums by cash or in approved securities on with the Reserve Bank of India. Further, every insurer is required to invest and keep invested certain amount of assets as determined under the Insurance Act. The funds of the policyholders cannot be invested (directly or indirectly) outside India. Certain amount of funds and total assets must also be invested in various kinds of government securities and the infrastructure and social sector.

                                                                      

d. Consequences of violation of applicable insurance legislations
 

Under certain cases, the registration of an insurer must be mandatorily cancelled by the IRDA- for example, if the insurer fails to comply with the provisions relating to deposits, or if it is in liquidation or is adjudged an insolvent or upon the direction of the Central Government. Under other circumstances, such as default in complying with the Insurance Act, or violation of the Insurance Act or a direction of the IRDA, or if a claim of an insured party remains unsatisfied after three months of a final judgment by a court.  In case of cancellation, an insurer is prohibited from entering into any new contracts of insurance, but rights and liabilities in respect of contracts entered before cancellation continue as though the license had not been cancelled.

 

The cancelled license can be restored by the IRDA if the insurer rectifies the violation for which the license was cancelled, within six months of the cancellation. After six months of the cancellation order, IRDA can apply after six months of the cancellation order for winding up of the insurance company.

 

e. Filing of returns
 

An insurer is required under the IRDA (Assets, Liabilities and Solvency Margin of Insurers) Regulations, 2000, to prepare certain statements on a periodic basis, such as:

  • a statement of solvency margin
  • Statement of investment & income on investment
  • Statement of downgraded Investments
  • Statement of investment of Controlled Fund (Life) Compliance Report
  • Statement of investment of Total Assets (General) Compliance Report
  • Prudential Investment Norms-Compliance Report 

f.     Consequences of violation of applicable insurance legislations
 

Under certain cases, the registration of an insurer must be mandatorily cancelled by the IRDA - for example, if the insurer fails to comply with the provisions relating to deposits, or if it is in liquidation or is adjudged an insolvent or upon the direction of the Central Government. For other reasons, such as in a case of default in complying with the Insurance Act, violation of the Insurance Act or a direction of the IRDA, or if a claim of an insured party remains unsatisfied after three months of a final judgment by a court, IRDA may exercise its discretion while considering whether to cancel the registration. 

 

In case of cancellation of the license, an insurer is prohibited from entering into any new contracts of insurance, but rights and liabilities in respect of contracts entered before cancellation continue as though the license had not been cancelled.

 

The cancelled license can be restored by the IRDA if the insurer rectifies the violation for which the license was cancelled, within six months of the cancellation. After six months of the cancellation order, IRDA can apply after six months of the cancellation order for winding up of the insurance company.

 

III. Regulation of advertisements by insurers

 

The IRDA (Insurance Advertisements) Regulations, 2000, extensively regulate insurance advertisements issued by the insurers, intermediaries or insurance agents. Every insurer, intermediary or insurance agent is required to establish and maintain a system of control over the content, form and method of dissemination of all advertisements concerning its policies and advertisements must be filed with the IRDA as soon as they are issued.  Advertisements issued must not be category of an unfair or misleading advertisement, and should disclose the full particulars and identity of the insurer. Internet advertisements (whether by insurers or intermediaries) should contain disclosures outlining the specific policies of the site relating to privacy of personal information and display the insurer’s/ intermediary’s registration/ license numbers.
 

NOTE:  An 'unfair or misleading advertisement' means and includes any advertisement that fails to clearly identify the product as insurance; makes claims beyond the ability of the policy to deliver or beyond the reasonable expectation of performance; describes benefits that do not match the policy provisions, etc.; implies a group or other relationship like sponsorship, affiliation or approval, that does not exist; makes unfair or incomplete comparisons with products which are not comparable or disparages competitors, etc.

 





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