Manish K. Jha, Partner, J Sagar Associates,
Companies in India are strongly appealing for validation of their insurance claims to cover their business losses due to the shutdown in the wake of the COVID-19 pandemic.
However, policyholders of the Business Interruption Insurance (BI) are realizing, much to their disappointment, that their BI policy, which they trusted would protect them from loss of income due to unforeseeable risks, may offer no compensation. This is primarily because the BI gets triggered only in cases of physical damage to the insured property by perils covered in the policy. Insurance companies are unwilling to extend the scope of BI policies to cover a virus-related disruption which, according to them, is not a “physical damage” claim.
To overcome this challenge and to help small businesses (with less than 100 eligible employees) that have BI, several states in the US have proposed bills that mandate cover for COVID-19-related losses, even in any BI policy that excludes the virus or non-physical damage to the insured's property. If enacted, the legislation will be retroactive for any company insured with a BI policy in force on the dates when the respective states first declared a Public Health Emergency and a State of Emergency due to COVID-19.
The proposed Bills in the US provide for reimbursement to insurers, indemnifying an insured who applies to the Commissioner of Banking and Insurance from funds collected and made available for this purpose, as provided in the respective Bills.
In India too, the business community is clamoring for the scope of BI to be extended to include the disruption caused by COVID-19. The question is whether the Central Government or Insurance Regulatory and Development Authority of India (IRDAI) can do this.
So far, the central government has amended the insurance rules governing the health and motor vehicles sectors to extend the renewal dates of health and motor insurance policies due to coronavirus lockdown. On the other hand, IRDAI has used its power under the IRDAI Act to direct life insurance companies for settlement options for maturity payout of Unit Linked Policies, even if the original terms and conditions did not have any mention of this provision. It also advised all health insurance companies to provide medical cover for COVID-19 to avoid any hardships with immediate effect and has issued guidelines regarding the same.
However, neither the central government, not the IRDAI has instituted any official measures to alleviate the hardships faced by small and medium-sized enterprises (SMEs).
Taking a cue from the bills introduced by the States in the US, the central government in India could also introduce a legislation to provide retroactive coverage to the insured for business losses owing to the shutdown due to the COVID-19 crisis. This legislation should be regardless of policy exclusions and the existence of physical damage to the insured's property. It should also clarify that the insurance companies will have to settle the claim regardless of premiums charged and the underwriting considerations made by them when they issued these policies.
Though insurers have no choice in complying with IRDAI directions issued under Section 34 of the Insurance Act in the public interest, as the retroactive application of the insurance coverage for the COVID-19 pandemic may not be within the contours of IRDAI’s powers, it could be challenged in the courts of law. Due to this uncertainty, it would be prudent for the central government itself to introduce a bill proposing insurance coverage for COVID-19 under BI policies instead of directing IRDAI to introduce any such amendments.
The argument that such legislation will unfairly compromise the financial resilience of the insurance companies should not deter the government from bringing such legislation, as IRDAI would have accurate data on the number of BI policies currently in force and the premiums earned by the insurers.
In addition, the government of India could also create a pool of funds from contributions by all the insurers across the country, which would become their source for reimbursement of the sums they had earlier paid towards the COVId-19 claims under their clients’ BI policies. The government, to ease the burden on the insurers, could also contribute towards this fund.
The central government could leave it to IRDAI to formulate and establish procedures for the submission and qualification of claims by insurers who are eligible for reimbursement under the proposed legislation. Further, IRDAI may incorporate in these procedures such standards as are necessary to protect against fraudulent claims by the insured, and appropriate safety measures for insurers to take while reviewing and paying such claims.
Indeed, a retrospective statute often causes untold hardship to those who are adversely affected by it, and more so in cases where the law impairs the sanctity of legal contracts. However, in times of an unprecedented crisis, as now, and in the public interest, retrospective legislation becomes a necessity.
To quote Willis, J., in Phillips v. Eyre, "There may be occasions and circumstances involving the safety of the state, or even the conduct of individual subjects, the justice of which prospective laws made for ordinary occasions and the usual exigencies of society for want of provision fail to meet, and in which the execution of the law as it stood at the time may involve practical public inconvenience and wrong."
Views expressed are author’s own