Mis-selling in health insurance

Utmost good faith is the underlying principle of any insurance product

Loud and clear: Both the insurer and the insured must disclose all material facts before the policy inception.

Insurance is unique among products, especially financial products, in that the contract is based on a few underlying principles that are immutable.

They include Insurable Interest, Indemnity and Subrogation and one of the important principles is that of Utmost Good Faith.

This principle,

uberrimae fidei in Latin, says that BOTH the insurer and the insured must disclose all material facts before the policy inception. A Material Fact is one that has a bearing on the risk proposed to be covered and hence the insurer’s decision whether to cover it, and if so, at what (premium) rate and terms.

If the principle were binding only on the insured, we can brush it away with cynicism that the big, bad corporate will always have the upper-hand and the buyer will just have to beware.

But Utmost Good Faith is binding upon the insurer also making it a more equitable contract.

Arguably the most customer interest is for health insurance. It is also the type of insurance that makes for quite some embittered customers.

Part of the reason lies with misleading or partial information from the seller’s side, and part with the casual approach of the buyer and his presumptions.

Let us see typical examples of mis-selling and mis-buying in health insurance and how you can steer clear.

Expectation, reality

By far the biggest gap between expectations and reality in health insurance is that many insureds think everything is covered and that it will be an all expenses paid in full deal up to the sum insured.

If you are one of them, stop and see your policy document. It clearly spells out what is covered and what is excluded and never covered. It also spells out what is covered after a specified waiting period of unbroken coverage.

No claims in the first 30 days except if due to an accident, pre-existing diseases are covered after a waiting period of 48 months of unbroken coverage, some procedures and treatments are covered after a waiting period of 12 or 24 months… these are the broad parameters of typical hospitalisation insurance covers.

Sub-limits

A second type of mislead is the sum insured itself. Insurers usually start you off with a lower sum insured and you can enhance it later on. Each enhancement has the same waiting period conditions tagged to it. But the devil is in the details and this one is called sub-limits. It will be clearly spelt out in the policy document that you will be eligible for only 1% of your sum insured as daily hospital room rent. So, with a ₹3 lakh policy you can opt for a ₹3,000 room and get reimbursed in full.

Or, you can upgrade yourself to a ₹4,000 room but the policy will pay only ₹3,000. Still sounds ok to you? There is more. Actually, there is less.

Almost all hospital costs like medical professionals’ fees and ICU charges are linked to your room rent. So, you will get only three fourths of each of these expenses.

This is rarely spelt out at the point of sale and so, we buy a policy and enter a zone of false comfort.

If this is not spelt out to you when you buy, that is mis-selling. To protect against that, regulations require you to sign an undertaking that details have been explained to you and you have understood them. You should take this undertaking seriously since you are signing your assent.

Another point you must seek clarity on is, who is covered by the sum insured. Family policies are attractive as they are packages and have a lower premium rate with a discount. But do see if it is a floater sum insured or individual sum insured because that can make all the difference. Floater sum insured offers the entire amount across family members, and hence the premium is lower, while individual sum insured is the opposite. It is your view to take on which will work better for you. Don’t go by the seller’s focus on lower premium alone. If there is a lower premium, there will be a reason for it. Find it, own it and then buy the policy.

Indemnity, benefit policies

Similar issues will arise if you buy without clarity on indemnity and benefit policies. Indemnity policies make good your expenses on hospitalisation. Benefit policies pay on diagnosis and you can make a claim on it in addition to your indemnity policy claim as payment is not against actuals.

Buying health insurance is a one time decision but requires your total attention. Just as you would choose your hospital or surgeon!

(The writer is a business journalist specialising in insurance & corporate history)