Due to Coronavirus or Covid-19, suddenly the talking point in Life Insurance is the meaning of Force Majeure clause in Life Insurance in India. What is the meaning of it and whether Coronavirus or Covid-19 is applicable to Force Majeure?
What is the meaning of Force Majeure?
Explanation of Force Majeure as per Investopedia is “Force majeure is a French term that literally means “greater force.” It is related to the concept of an act of God, an event for which no party can be held accountable, such as a hurricane or a tornado. Force majeure also encompasses human actions, however, such as armed conflict. Generally speaking, for events to constitute force majeure, they must be unforeseeable, external to the parties of the contract, and unavoidable. These concepts are defined and applied differently by different jurisdictions.”.
Force Majeure is a contract clause that removes the LIABILITY due to catestrophic events such as natural disasters or war.
Further, Wikipedia explains “A force majeure may work to excuse all or part of the obligations of one or both parties. For example, a strike might prevent timely delivery of goods, but not timely payment for the portion delivered. A force majeure may also be the overpowering force itself, which prevents the fulfillment of a contract.”
What is the meaning of Force Majeure clause in Life Insurance in India?
First point you have to understand that Life Insurance is a CONTRACT between you (policyholder) and the Life Insurance Company. The obligation at your end is to pay the premium regularly and the obligation at Life Insurance company end is to honour the claim (death or maturity as per the policy feature).
However, Life Insurance companies may set certain exclusion to their contract to oblige your claim. One such exclusion is Force Majeure.
As it is being the contract between two parties (policyholder and Life Insurance Company), The Indian contract act 1872 Section 56 also comes into the picture (However, I don’t want to bring so much confusion in you about this).
Now let us try to understand the definition of Force Majeure clause in Life Insurance in India. The definition as per IRDA approved policy document is as below.
“In the event where the Corporation’s/Company’s performance or any other obligations are prevented or hindered as a consequence of any act of God or state, strike, lock out, legislation or restriction by any government or any other statutory authority or any other circumstances that lie beyond the Corporation’s/Company’s anticipation or control, the performance of this policy shall be wholly or partially suspended during the continuance of such force majeure. The Corporation/Company shall resume its obligations towards the Policy as soon as the Force Majeure event ceases. The Corporation/Company undertakes to keep the IRDAI informed and seek prior approval before effecting any of these changes.”
It is clear from this that Force Majeure applies only when the Life Insurance Companies prevented or hindered due to act of God or state, strike, lock out, legislation or restriction by any Government or any other statutory authorities.
If such events happen, Life Insurance companies may breach the contract and may not pay you the claim amount. However, remember the IMPORTANT point in above defination of Force Majeure. It is “The Corporation/Company undertakes to keep the IRDAI informed and seek prior approval before effecting any of these changes.”
Hence, it is not like onway act by Life Insurance Companies to act on such situation. They have to take a prior approval of IRDA before acting on these changes.
Coronavirus or Covid-19 will not fall under Force Majeure
Life Insurance Council and IRDA clearly mentioned that Coronavirus or Covid-19 will not fall udner Force Majeure. Hence, Life Insurance Companies (whether private or LIC) are committed to process any death claim pertaining to COVID-19 at the earliest.
Many agents from LIC misguided people that for LIC claims due to Coronavirus or Covid-19 death cases Force Majeure not apply. Hence, only LIC will settle the claim but not all private players.
However, with clairity from IRDA and Life Insurance Council, it is now clear that all the Life Insurance Companies are obliged the claim under Coronavirus or Covid-19.
What if your Life Insurance Company goes bankrupt due to huge claim settlement of Covid-19?
Yes, there is a possibility that due to lot of unexpected claims, the Life Insurance Companies may goes bankrupt. However, here comes the rescue part which is called SOLVENCY RATIO.
Refer my earlier post in this regard “What if your Insurance Company goes bankrupt?“.
The solvency ratio of an insurance company is the size of its capital it set aside with respect to the risk it has taken, which is all liabilities subtracted from total assets. This shows the financial soundness of Life Insurance Companies.
In India, insurers are required to maintain a minimum solvency ratio of 1.50. Insurance players whose solvency ratios are dangerously close to this minimum level are closely watched by the insurance regulator, the IRDA.
Hence, higher the solvency ratio means strong the financial status of Life Insurance Companies.
Let us see the latest Solvency Ratio Report from IRDA’s Annual Report 2018-19.
You noticed that I marked LIC’s solvency ratio specifically. Now decide yourself who is safe and how much. But yes, I am not questioning the financial health of of LIC as LIC has Sovereign Guarantee also from Government Of India. However, I am against those who claim only LIC is the best.
If you look at the above table, you notice how IRDA monitoring the financial health of Life Insurance companies. Along with this, all life insurance companies re-insure with other big re-insuring companies to protect their liability towards the risk they have taken by issuing the policies towards you. Hence, they are bit safe in that aspect also.
One more positive point with respect to Coronavirus or Covid-19 is that mortality rate (probability of death) is very less compare to earlier such catastrophes. Hence, I think Life Insurance companies will handle the claims with ease.
Conclusion:-Now, IRDA and Life Insurance Council’s clarity with regard to claim arising due to Coronavirus is now clear. Also, if someone is misguiding you that Force Majeure does not apply to LIC but applies to all private companies is completely a MYTH.
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