CHAPTER 10
MINISTRY OF FINANCE

Insurance Division

General Insurance Corporation of India

10.1.1    Irregular expenditure on foreign travel

The Company did not regulate foreign travel claims of employees in accordance with the instructions of the Department of Public Enterprises and paid Rs. 68.76 lakh between April 1997 and March 2000.

Department of Public Enterprises (DPE) issued instructions in September 1995 that PSU employees who were sanctioned daily allowance in accordance with rates laid down by the Reserve Bank of India (RBI) should render accounts on return from tour for all items other than those covered as per the Ministry of External Affairs (MEA) rates applicable to Government servants. MEA rates normally covered food, etc. and hence PSU employees were to render accounts on room rent, taxi charges, entertainment, official telephone calls and other contingent expenditure. Any surplus over the expenditure was to be refunded to the concerned PSU. PSUs were also directed to get the above guidelines adopted by their Board of Directors.

General Insurance Corporation of India (GIC), however, did not place the above guidelines before the Board of Directors and had been settling claims without insisting on accounts as stipulated in the DPE instructions. The irregular settlement of foreign travel claims thus made for the period from April 1997 to March 2000 amounted to US$ 0.16 million (equivalent to Rs 68.76 lakh).

In response Ministry stated (April 2000) that instructions had been issued to the GIC to ensure that the officers of the Company scrupulously follow DPE guidelines of September 1995. In addition the Ministry also advised (May 2001) the GIC to organise the Internal Audit in respect of the foreign tour expenditure incurred by their officials to assess the quantum of expenses actually utilised out of the consolidated amount allowed under the RBI guidelines.

National Insurance Company Limited

The Company lost an amount of Rs.1.34 crore due to non-ceding of proportionate share of premium to Gujarat Insurance Fund as per terms and conditions of co-insurance arrangement.

Insurance companies were required to remit 60 per cent of the premium in respect of projects financed through Gujarat State Financial Corporation to the Gujarat Insurance Fund (GIF) in accordance with the co-insurance arrangement. Accordingly, the insurance companies were required to send risk statements to GIF in respect of business underwritten relating to such projects in any particular month by the 20th of the following month.

A Divisional Office (DO) of National Insurance Company Limited (Company) in Gujarat issued a cover for a windmill power project financed by Gujarat Industrial Investment Corporation Limited from 16 March 1996 to 15 March 1997, which was further renewed, twice, upto 15 March 1999. The DO neither remitted 60 per cent premium nor forwarded the risk statement to GIF in respect of the cover provided from 16 March 1996 to 15 March 1998. For the period from 16 March 1998 to 15 March 1999 the DO remitted (8 April 1999) share of premium amounting to Rs 44460 to GIF after the occurrence of a loss under the policy on 9 June 1998.

The insured suffered a loss due to cyclone on 9 June 1998 and the Company approved a claim of Rs 2.26 crore (100 per cent). The Company could have recovered 60 per cent of the claim viz. Rs 1.35 crore from GIF if only it had ceded Rs.1.33 lakh being 60 per cent of the premium for three years collected from the insured and furnished the risk statements as provided under the co-insurance arrangement. The claim of the Company in this regard was rejected (January 2000) by the Government of Gujarat, Directorate of Insurance, on the grounds that proportional premium was not ceded by the Company. The plea for reconsideration of the claim was also rejected (September 2000) by the Government of Gujarat on the same grounds.

The Company stated (September 2000) that several attempts were made to resolve the matter amicably and that the legal agreement with GIF had clearly indicated that the loss was to be shared on 60:40 basis and that they had consciously, not resorted to initiating legal step against a Government department.

The reply is not tenable, as the Company had lost the benefit of recovery of Rs 1.35 crore form GIF solely due to its non-compliance with the clearly laid down procedure. Thus, lapse of the Company led to avoidable loss of Rs 1.34 crore (Rs 1.35 crore less Rs. 1.33 lakh being GIF’s share of premium for three years).

The matter was referred to the Ministry in November 2000; their reply was awaited (October 2001).

Janata Personal Accident Policies (JPAP) were brought under revised market agreement with effect from 15 January 1999 with a view to prevent unhealthy competition amongst the subsidiary companies of General Insurance Corporation of India (GIC). Some of important features of revised Market Agreement were as under:

1. sums insured per person per annum would be Rs.25,000 minimum and Rs.1 lakh maximum;
2. premium rate of Rs.15 would be charged for a sum insured of Rs.25,000 .This sum insured could be increased in multiples of Rs.25,000 and premium would be charged accordingly; and
3. group policies would be issued only in respect of named persons.

A Delhi Divisional Office (DO) of National Insurance Company Limited (Company) issued an unnamed JPAP to Jaiprakash Industries Limited (insured) for the period from 1 June 1998 to 31 May 1999. The policy covered 16,000 persons at premium rate of Rs.4.60 per 10,000 for capital sum assured of Rs. 5 lakh each (for pay scale upto Rs.5000), Rs.7.50 lakh (for pay scale between Rs.5000 to Rs.7500) and Rs.10 lakh (for pay scale of over Rs.7500).

At the time of renewal of JPAP of the insured, which fell due on 1 June 1999, the DO of the Company brought to the notice (19 May 1999) of the Regional Office (RO) that as per revised guidelines sum insured would have to be restricted to Rs. 1 lakh per person and payment of claim would be required to be paid to individual insured.

Besides this, it also added that insured desired that JPAP cover for the period from 1 June 1999 to 31 March 2000 be renewed as per exiting terms. The RO advised (4 June 1999) that revised guidelines be applied for fresh cases and the JPAP of the insured be renewed on earlier basis. Accordingly, a JPAP for the period 1 July 1999 to 31 May 2000 was issued on 4 June 1999 based on the terms and conditions of the 1998-99 policy.

Failing to implement GIC’s Market Agreement as revised with effect from 15 January 1999, the Company incurred an avoidable loss of Rs.1.31 crore as per details given below:

1. as against chargeable premium of Rs.44.98 lakh based on rates given in the revised guidelines, the DO collected Rs.25.86 lakh, which resulted in loss of premium of Rs.19.12 lakh; and
2. the DO settled 28 claims amounting to Rs.1.40 crore covered during the period of JPAP from 1 June 1999 to 31 May 2000.

Had the Company restricted the sum-insured to Rs.1 lakh per person as contemplated in the revised guidelines, it would have incurred an expenditure of Rs.28 lakh only in the settlement of these claims as against payment of Rs.1.40 crore, which resulted in excess settlement of Rs.1.12 crore.

In addition the Company had issued unnamed policy and was following the practice of settling the claim amount with the insured for their onward disbursement to the heirs of deceased employees. Both the practices were incorrect since unnamed policies did not provide any means to the Company to ensure that settlements were made to insured claimants. By paying the claim to the insured, the Company was not able to ensure whether the full amount had reached the heirs of the deceased.

Thus, the issue of an unviable and defective policy contrary to GIC guidelines resulted in loss of premium of Rs.19.12 lakh and excess payment of settlement amount by Rs.1.12 crore due to non restriction of sum-insured to Rs.1 lakh per person.

In response, the Management stated (August 2001) that:

1. although JPAP was brought under Market Agreement with effect from 15 January 1999, the restriction imposed by GIC came into effect from 1 November 1999;
2. an unnamed policy had been issued to the valued client whose intention was to utilise this policy as an employee benefit scheme which helped to maintain cordial relation between employee and employer; and
3. the settlement of claim amount with the insured for their onward transmission to the heir of the employee had its own advantage for operating office end since in case of direct payment, it was impossible to identify the rightful claimants and verify their bonafides, as they were from all over India.

The Ministry endorsed (September 2001) the reply of the Management.

The reply of the Ministry/Management is not tenable as:

1. the mention of the fact in the initial renewal proposal of policy dated 19 May 1999 by DO that as per revised guidelines the sum-insured had to be restricted to Rs.1 lakh per person substantiates that revised market agreement came into force from 15 January 1999. The decision to apply the older rates was unnecessarily beneficial to the insured at the expense of the Company; and
2. issue of unnamed policy and payment of claim to the employer were specifically barred by GIC in view of possible malpractices. As such, the Company was bound to follow the rules laid down.

The Oriental Insurance Company Limited

The Company did not amend a provisional policy with lower deductible for loss of profit due to business interruption on fixation of final term by Tariff Advisory Committee (TAC). Consequently the Company had to pay Rs.79 lakh more than the amount payable.

A Chennai based Divisional Office (DO) of Oriental Insurance Company Limited (Company) issued (January 1998) an Industrial All Risk (IAR) Policy including loss of profit due to business interruption to M/s. Orchid Chemicals and Pharmaceuticals Limited (insured) for the period from 7 January 1998 to 6 January1999. Premium was provisionally charged @ 2.75 per mille for business interruption risk, with deductible excess of 3 days’ gross profit with minimum Rs. 5 lakh and maximum Rs. 50 lakh, subject to TAC’s approval.

TAC approved (April 1998), a premium rate of Rs.2.62 per mille with deductible excess of 7 days’ of gross profit subject to minimum of Rs. 10 lakh and without any maximum limit. The Company, however, did not amend the policy condition based on TAC’s approval. According to the Citizen’ Character adopted by insurance companies, the policy documents were to be issued within thirty days, which should have been applicable to revision of policy terms also.

Property of the insured was damaged in a fire on 14 November 1998 resulting in loss of profit of Rs.5.30 crore on account of business interruption. The Company settled the claim in July 1999 for Rs.4.80 crore deducting policy excess of Rs.50 lakh (maximum). Because of failure to remove the maximum deductible ceiling as directed by TAC, the Company was able to deduct only Rs.50 lakh from the overall claim. Imposition of terms recommended by TAC would have enabled the Company to deduct Rs.1.29 crore. Had the Company amended terms of a provisional policy as per terms fixed by TAC’s , it would have avoided payment of Rs.79 lakh to the insured.

In response, the Management stated (July 2001) that:

1. deductible of 7 days’ gross profit was applicable only if the insured availed of 5 per cent discount on premium. In this case, normal premium had been charged, which entitled the insured to normal policy excess of 3 days’ gross profit subject to a maximum of Rs. 50 lakh; and
2. TAC had approved a rate allowing 5 per cent discount, which was applicable for 7 days’ excess, but option for higher deductible was the privilege of the insured and could not be forced.

The reply is not tenable as:

1. the authority to fix premium and terms in IAR policies vested with TAC. Policy issued by the Company was only provisional subject to TAC’s approval; and
2. TAC had approved the terms of the policy with 7 days’ excess, after weighing all the risk factors, and as such neither the insured nor the Company had any option to adopt different terms.

Thus, lapse on the part of the Company not to amend the policy as per terms fixed by TAC resulted in avoidable payment of Rs. 79 lakh.

The matter was referred to the Ministry in May 2001; their reply was awaited (October 2001).

United India Insurance Company Limited

As per rules set forth by United India Insurance Company Limited (UIIC), Group Mediclaim Insurance Policy is available to group/association/institution/corporate body of more than 50 persons. A test check of cases revealed deviations in charging of appropriate premium in two instances as detailed below:

A Delhi based Divisional Office (DO) of UIIC had been issuing group mediclaim policies covering employees of Ballarpur Industries Limited (BIL). As per the conditions governing the policy, on renewal total premium payable for the entire group insured was to be loaded on the basis of claim ratio incurred for the preceding three years excluding the year immediately preceding the date of renewal. The DO had, however, renewed the policy without loading the premium by 25 to 55 per cent on previous claims experience. This resulted in loss of revenue to UIIC on account of short charging of premium to the tune of Rs.70.94 lakh in respect of policies issued to BIL for the period from 1995-96 to 2000-2001.

The Management/Ministry stated (July 2001) that portfolio of the client as a whole was profitable and that the decision to continue Group Mediclaim policy without loading was correct.

Similarly, a Bangalore based DO covered retired employees of Bharat Electronics Limited for the period 1996-97 (19 July 1996 to 18 July 1997). The policy was renewed for the period 1997-98 and 1998-99.

Scrutiny of this case revealed that as per the conditions governing the Group Mediclaim Policies the renewal premium of the policy for the period 1998-99 was loaded by 25 per cent only as against 150 per cent loading. The inadequate loading resulted in short collection of premium by Rs.28.87 lakh.

The Management/Ministry stated (July/September 2001) that the policy issued in 1998-99 was a tailor-made Mediclaim policy where the Bonus (low claim ratio discount) and Malus (high claim ratio loading) clauses of the standard Mediclaim policy would not be applicable.

The replies are not tenable as both the Group Mediclaim policies were governed by the rules set forth in the prospectus. Failure to charge the premiums as per prescribed conditions resulted in revenue loss of Rs.99.81 lakh.

A Delhi based Divisional Office of United India Insurance Company Limited (UIIC) issued a Special Contingency Policy (June, 1998) to indemnify M/s. Stracon (insured) in respect of "actual financial loss sustained by the insured on account of loss of revenue inclusive of loss of profit from sale of commercial time" due to cancellation and or abandonment of matches in the live telecast of the Ten One Day Cricket Matches scheduled to be played in Sri Lanka between 19 June 1998 and 9 July 1998. The insured was granted live and highlight telecast rights by M/s. World Tel Inc. in January 1998.

The insured entered (May 1998) into memorandum of understanding (MOU) with Doordarshan (DD) for live telecast of the events on DD National and DD-2 Metro Network channels which stipulated that, the revenue accruing from the sale of commercial time would be shared as follows:

1. first Rs. 50 lakh to be credited to the DD towards opportunity cost for National Network Carriage plus technical charges;
2. next US $ 3 million to be credited to M/s. World Tel Inc., towards license fee in equivalent rupees;
3. next US $ 0.45 million to be credited to the insured towards reimbursement of withholding tax in equivalent rupees; and
4. balance revenue, if any, to be shared in the ratio of 70 (DD) : 30 net (insured).

Three matches scheduled to be held on 25, 27 and 29 June 1998 were cancelled due to rain. The surveyors estimated a total revenue generation of Rs. 14.06 crore against dues of Rs.15.68 crore payable to other parties as mentioned above at (i) to (iii) and thus concluded that there was no surplus shareable with the DD as outlined at (iv) above. Also, out of total revenue estimated, the insured actually realised Rs. 10.90 crore and remaining Rs.3.16 crore were estimated as loss of commercial time for the abandoned matches. The UIIC accepted the said calculations of the surveyor and indemnified the insured Rs.3.16 crore in full. The estimated loss was not based on the audited accounts of the insured.

As per audited accounts of the insured, the estimated total revenue was same as estimated by the surveyor but the set off on account of contractual obligation as at (i) to (iii) mentioned above was only Rs.12.86 crore against Rs.15.68 crore. Thus, there was a surplus of Rs.1.20 crore (Rs.14.06 crore minus Rs.12.86 crore) sharable between DD and the insured as stipulated at (iv) above.

As such the insured was entitled to retain only Rs.35.84 lakh and pass on Rs.83.62 lakh to DD. Since the insurance cover was to indemnify the insured only, the indemnification should have been limited to Rs.2.32 crore (Rs.3.16 crore minus Rs.84 lakh).

The Management (July 2000) stated that the policy was issued to cover ‘actual financial loss sustained by the insured on account of loss of revenue inclusive of loss of profit’ and therefore, working of shareable surplus was not in order as the MOU between the insured and DD was out of the purview of the insurance policy. The Ministry endorsed (August 2000) the views of the Management.

The reply of the Management/ Ministry is not tenable since the policy was issued to indemnify loss of revenue inclusive of profit and it was obligatory on the part of UIIC to ascertain loss of revenue inclusive of profit to arrive at shareable surplus between DD and the insured. Even the surveyor took into account the fact of existence of MOU whilst estimating the amount of indemnification. In the present case, reliance on surveyor’s estimate (of dues to other parties) rather than audited figures of the insured resulted in erroneous conclusion of deficit as against surplus which, resulted in over indemnification to the extent of Rs.83.62 lakh. This defeated the very principle of indemnification that “a person is not allowed to take advantage of occurrence of loss and improve his financial performance through insurance.”

The scrutiny of records relating to one of the divisional offices of United India Insurance Company Limited (UIIC) at Chennai revealed cases of short collection of premium and settling of insurance claims without justification. Three such cases are detailed below:

Case (A)

UIIC issued (September 1996) a Machinery Breakdown Policy (MBD) to M/s. Tamil Nadu Petro Products Limited (TNPL), Chennai covering its Diesel Generator sets with auxiliaries for a period of one year from 6 September 1996 to 5 September1997. The policy was further renewed upto 5 September 1998. The renewed policy was without de-rating warranty.

UIIC charged premium for Diesel Generator engines at a lower rate of 0.60 per cent instead of 1.60 per cent for the period 6 September 1996 to 5 September 1998 and short collected a premium of Rs. 4.76 lakh.

The de-rating warranty clause when attached to MBD policy indemnifies the Diesel Generator sets only to the extent of 80 per cent of rated capacity and attracts a lesser premium of 1.60 per cent instead of 2 per cent when it is not attached to the MBD policy. Besides attracting higher premium of 2 per cent, it provided for insured first bearing the portion of the loss equal to five times the applicable premium amount and claim payable will be net of such loss borne by the insured.

In the instant case UIIC charged premium at the rate of 1.60 per cent on the Diesel Generator sets instead of applicable rate of 2 per cent for the renewed policy from 6 September 1997 to 6 September 1998, overlooking the fact that the policy did not carry a de-rating warranty clause. This resulted in short collection of premium of Rs. 16.53 lakh. Also, in May 1998 UIIC settled a claim on the same renewed policy for Rs. 18.86 lakh for replacement of damaged Turbo Charger, when the insured was to bear first the loss upto five times the premium paid which worked out to Rs. 24.93 lakh. Thus the payment of Rs. 18.86 lakh made to the insured was not admissible.

The Management in its reply contended (August 2000) that the circular (August 1997) which stipulated the rates to be charged with and without de-rating warranty was not received by the Divisional Office concerned. The Management also further stated that the Auxiliary systems comprised oil separators which did not form a part of the Diesel Generator set but located separately and erected on different foundation and hence the premium rate of 0.60 per cent was charged.

The reply is not tenable, as MBD tariff did not provide for exclusive rates for oil separators. Thus, due to short collection of premium (Rs. 21.29 lakh) and settlement of inadmissible claim (Rs. 18.86 lakh), UIIC suffered a loss of Rs. 40.15 lakh.

The Ministry admitted (October 2000) that UIIC had made errors in the policy.

According to Part III, Section 10 of All India Fire Tariff the sum insured for the extension of flood cover should be identical to the sum insured against the risk covered under Fire "C" Policy in that Complex/Compound/location.

UIIC issued two Fire ‘C’ policies for a total sum of Rs. 445.01 crore to Andhra Pradesh State Electricity Board (APSEB), covering various assets of Thermal Power Station at Vijayawada from 6 October 1994 to 5 October 1995. Also, third Fire ‘C’ Policy with flood perils was issued to the APSEB covering further assets in the same premises for a sum of Rs. 9.82 crore for the same period.

Since, the total sum insured under the 3 Fire ‘C’ policies in the insured’s premises amounted to Rs. 454.83 crore, the additional premium for flood cover should have been charged on total value of the properties. By not charging premium for flood peril on total property insured, UIIC lost revenue of Rs. 21.14 lakh.

The Management and the Ministry admitted (November 1999) the mistake and further stated that action of the Management was not intentional. However, the fact remains that the act of UIIC resulted in avoidable loss of premium to the extent of Rs. 21.14 lakh.

UIIC issued (February 1998) a Jewellers Block Policy to M/s. Kama Jewellery India Limited. The Policy specifically excluded liability for loss to property kept out of safes after business hours.

The insured lodged a claim (March 1998) on the ground that valuables kept on the racks of the vault were stolen. The valuables kept in the safe inside the vault were however found intact.

UIIC assessed the loss at Rs. 24.66 lakh. Treating the non-storage in the safe as a breach of warranty, the claim was settled at Rs. 18.50 lakh after deducting 25 per cent of the loss towards such breach.

As per an endorsement on the policy insured was not entitled for any sum, the loss of property kept out of safe was specifically excluded from the insurance cover. By admitting the claim UIIC sustained an avoidable loss of Rs.18.50 lakh.

The Management in its reply stated (June 2000) that the insured was not penalised considering the surveyors’ report that the affected vault was equally strong and securely good arrangement for locking, further it also stated that as the safety vault was not of standard make and the claim was treated as non-standard.

The Ministry (September 2000) endorsed the views of the Management.

The reply is not tenable, since the policy specifically excluded valuables kept outside the safe after business hours. The items were not secured in a locked safe of standard make, which was a specific warranty clause incorporated in the policy. As such, the payment of Rs.18.50 lakh even after deducting 25 per cent for breach of warranty lacked justification.