Claims notifications and the continuous cover clause in an insurance policy

Asia-Pacific, European Union, Global, India, United Kingdom, USA December 6 2021

India’s insurance sector has, over the years, slowly and steadily seen an ascending trend in respect of the growth of the insurance business by introduction of a multitude of new products and coverage extensions for existing products. Whilst the Indian population was conservative in its approach to insurance at the outset, it is commendable to see how with increased purchasing power and globalization, a huge array of people are looking at insurance not only as a means of mitigation of risk but also as an investment.

With increased awareness, the insurance sector’s gravest challenge lies not in its expansion and permeability but in its ability to settle the claims in a timely manner. Given the bed rock of insurance is mitigation of financial risk of which the foundation is trust, it is surprising that an increasing number of insureds are facing serious challenges in admission and settlement of claims. While the statistics show that the ratio of the claims settlement especially in the life and health sector is generally high, the general sentiment among insureds in the commercial sector is more often than not, that the insurers are delaying claims and that there is no fast-track process to assess and settle claims in an efficient and timely manner. This generally erodes trust in insurance and adds to the existing stress and pressures faced by commercial organizations. This may also be on account of a general misunderstanding of the reading of the policy conditions by insureds and not always the fault of insurers.

Insureds generally feel that the demands made by the insurers on multiple occasions are relentless and never ending, however, more often than not, it has been observed that the policy conditions especially those in respect of the ‘notification clause’ are often misunderstood, misread or ignored by the insured. Purchase of insurance does not mean that every loss is covered. Only those where all conditions are satisfied will result in a policy responding. Insureds must therefore, tread carefully, as delayed or no notification is often one of the common reasons for rejection of claims.

Every policy has a claim notification clause, which specifies the manner in which an event/ incident that triggers the policy or is likely to trigger the policy, should be / ought to be notified to the insurer. However, what often causes ambiguity in terms of the notification is the nature of notification clause, which is either: (i) Claims Made; or (ii) Claims Made and Reported. The difference between the two is significant with respect to the time of notification of incident under the policy which has a major impact on the acceptance or repudiation of a claim.

Whilst under a ‘Claims Made’ policy, the insured is required to notify its claim promptly or as soon as possible, but not necessarily during the policy term thereby providing broader coverage, a ‘Claims Made and Reported’ policy requires that the claim be notified under the same policy, within a stipulated period, within which the claim arises. This implies that under a ‘Claims Made and Reported’ policy, if the insured is aware of a claim but has failed to notify it during the same policy period, the insurer can absolve itself of its liability to pay, what would otherwise be construed as a covered claim. ‘Claims Made’ policies provide better coverage in this aspect as the insured is not bound by stringent reporting requirements of notifying claims as in case of ‘Claims Made and Reported’ policy. In other words, a claim under a ‘Claims Made’ policy can actually be made in the next policy period, as opposed to a claim under a ‘Claims Made and Reported’ policy where the insured is bound to notify the incident within the prescribed time limit. In fact, a claim arising from a circumstance that was known to the insured prior to policy inception is more problematic in ‘Claims Made and Reported’ policies than in ‘Claims Made’ policies, as not reporting a circumstance which may give rise to a claim can lead to rejection of claim even if the policy is renewed with the same insurer on similar terms.

Accordingly, a notification, whether under a ‘Claims Made’ or ‘Claims Made and Reported’ policy, is a condition precedent and therefore, any failure to notify, a fact, circumstance or claim, whether innocent or deliberate, can have unfortunate consequences for an insured.

It is in the aforesaid circumstances a “Continuous Coverage” clause under the policy comes to the insured’s rescue. A Continuous Coverage clause is a clause that ensures uninterrupted coverage for the insured under the policy even after renewal of the policy. In other words, a Continuous Coverage clause allows coverage in respect of a circumstance that was known to the insured during a prior policy period but was not notified in that policy period due to any reason. It is pertinent that in such a situation, the insured was covered, without interruption, by the same insurer. This clause ensures that even if there has been an unforeseen and unintended delay in notification of the incident, the policy will respond upon notification. In fact, this clause puts an obligation upon the insurer to consider the claim even if it is not notified within the same policy period notwithstanding the notification clause. However, this clause safeguards only the notification requirement under the policy and the insured is required to ensure compliance of all the other terms and conditions of the policy to be covered. The ‘Continuous Coverage’ clause therefore, in a way provides an extended period for reporting a claim after expiry of the policy period thereby bringing a sense of relief to the insured in case of delay in notification of claim, but adds to the cost of the policy and requires that the policy be renewed with the same insurer.

In order to protect the interests of the insured, the Insurance Regulatory and Development Authority of India (IRDAI) also released a circular in 2015, inter alia, provides that the insurers should not deny a claim purely due to delay in notification and they must ascertain the reason for delay and satisfy themselves that the delayed claim would have been rejected, even if reported in time. The obligation in such situation therefore lies on the insured to not take advantage of the situation and comply with the terms of the policy including but not limited to policy notification.

It is, therefore, absolutely essential for an insured to understand and assess, every inclusion, exclusion and condition within the policy that will impact a claim. Whilst it is impossible to control circumstances, incidents, events or triggers to the policy, it is vital that the policy responds, and the insured does not fall within the pitfalls posed by the technicalities such as notification clauses, while being enticed by lower premiums. A well-crafted wording for Continuous Coverage Clause in insurance policies can serve as a protection for insureds against rejection of claims by the insurers on mere technical grounds and protect the interest of the parties by ensuring that claims are assessed on its merits and align with very essence of insurance.

Khaitan Legal Associates – Sakate Khaitan, Bipul Khanduri, Sonali Mehta, Arushi Arora and Sonam Jambhulkar