2025 (6) TMI 117 - AT - Indian Laws

Violation of Regulations 3(2) and 3(3) of the IRDA (Protection of Policyholders Interest) Regulations 2002 - collection of advance renewal premium for the Home Guard Plus policy through its corporate agent - HELD THAT - The argument that the appellant was not aware of the practice of advance renewal premium is without substance. It is an admitted fact that the appellant was receiving the advance renewal premium from the corporate agent. Evidently no commensurate insurance cover was being provided for. The Ld. senior advocate for appellant was asked to provide the manner of investment of advance renewal premium vis-a- vis regular premium but the same was not provided. It is understood that the premium for insurance policy is invested in a prescribed manner to meet the insurance risk. Hence the insurer has to account for the same in its books accordingly. The appellant s second argument that the corporate agent too ought to have been charged by the respondent under the relevant CA regulations does not absolve the appellant from the responsibility caste upon it under Regulation 3(2) of IRDA (Protection of Policy holders Interests) Regulations 2002 - The appellant as insurer also has a responsibility to ensure that the corporate agent does not distribute policy in variance from the prospectus or in violation of the agreement with the corporate agent and ought to have placed appropriate controls in this regard. The third argument that the said corporate agent was also providing similar insurance intermediary services to other two insurers is irrelevant as the issue is limited to the violation in respect of the HGP policy of the appellant - The Regulation 13 of the IRDAI (Health Insurance) regulations 2016 relates to Renewal of Health Policies issued by General Insurers and Health Insurers and is specifically not made applicable for travel and personal accident policies. In view of this the said plea has no force. Moreover even in the said regulations with respect to a health insurance policy the pre-amendment sub-regulation (iii) provided for a mechanism to condone a delay in renewal up to 30 days from the due date of renewal without deeming such condonation as a break in policy . However there was no similar enabling provision allowing for premium in advance. A specific proviso was therefore inserted to allow for enabling payment of renewal premium within 90 days in advance of the due date of the premium payment. Thus the amendment filled in a legislative gap with the objective of enabling the subscribers of Health Insurance policies to pay renewal premium in advance up to 90 days and any other interpretation making payment of advance premium as open- ended would be incongruous. The respondent has issued directions under the provisions of Section 14(1) of IRDA Act 1999 read with Reg. 9 of IRDA (Protection of Policyholders Interests) Regulations 2002 and Reg. 16 (ii) of IRDAI (Protection of Policyholders Interests) Regulations 2017 - the directions were issued exercising wide powers of the respondent under section 14 of the IRDAI Act 1999 while referring to other related provisions. The Regulation 9(6) of IRDA (Protection of Policyholders Interests) Regulations 2002 only sets a reference point for charging penal interest which is at a rate that is 2% above the bank rate prevalent at the beginning of the financial year . The respondent could have charged any other interest rate as penal interest exercising powers under Section 14 of IRDAI Act 1999 but have rightly preferred to adopt a legal levy available in the aforesaid regulation. The Regulation 9(6) of IRDA (Protection of Policyholders Interests) Regulations 2002 only sets a reference point for charging penal interest which is at a rate that is 2% above the bank rate prevalent at the beginning of the financial year . The respondent could have charged any other interest rate as penal interest exercising powers under Section 14 of IRDAI Act 1999 but have rightly preferred to adopt a legal levy available in the aforesaid regulation. The respondent has calculated 292 days of violation and applying penalty of Rs. 1 lakh per day has restricted the penalty to the maximum amount of Rs. 1 crore only. In view of this we don t find the penalty as excessive. Conclusion - i) The appellant insurer violated Regulations 3(2) and 3(3) of the IRDA (Protection of Policyholders Interests) Regulations 2002 by permitting collection of advance renewal premium without documented consent and adequate disclosure. ii) The appellant is liable for the acts of its corporate agent in this regard and cannot evade responsibility by asserting lack of direct control or by pointing to regulatory inaction against the agent. iii) The collection of advance renewal premium for a three-year extension at the time of issuance of a three-year policy was not authorized under the applicable regulatory framework prior to November 2019. Appeal is allowed in part modifying the direction at para No. 15(a) of the impugned order holding that the refund of interest to the policyholders by the appellant will be limited to the interest accrued on the amount of advance renewal premium actually received by the appellant along with penal interest of 2%.

Summary

The core legal questions considered in this appeal revolve around the alleged violation of Regulations 3(2) and 3(3) of the IRDA (Protection of Policyholders' Interests) Regulations, 2002 by the appellant insurer in relation to the collection of advance renewal premium for the Home Guard Plus policy through its corporate agent. Specifically, the issues include:

• Whether the appellant insurer violated the statutory duty under Regulations 3(2) and 3(3) by permitting the collection of advance renewal premium without obtaining explicit consent from the policyholders.
• The extent of the appellant's responsibility and liability for the acts of its corporate agent, particularly in relation to the collection and handling of advance renewal premiums.
• The legality and propriety of the collection of advance renewal premium prior to the amendment of relevant regulations in November 2019.
• The validity of the directions to refund interest and penal interest on the advance renewal premium collected, including the appellant's liability to pay interest charged by the corporate agent on loans extended to policyholders.
• The appropriateness and quantum of the penalty imposed on the appellant under Section 102 of the Insurance Act, 1938.
• Whether the appellant's plea that the corporate agent should have been separately charged under the IRDAI (Corporate Agent) Regulations, 2016 absolves it of liability.

Issue 1: Violation of Regulations 3(2) and 3(3) - Consent and Disclosure in Collection of Advance Renewal Premium

The legal framework centers on Regulations 3(2) and 3(3) of the IRDA (Protection of Policyholders' Interests) Regulations, 2002, which impose a duty on insurers and their intermediaries to provide all material information to prospects and ensure that consent is obtained for the terms of insurance coverage.

The Court examined whether the appellant insurer ensured that policyholders gave informed consent before advance renewal premium for an additional three years was collected at the time of issuance of the initial three-year policy. The respondent's findings, supported by an on-site inspection and scrutiny of sample policies, indicated that the advance renewal premium was collected without documented consent, and the proposal forms misleadingly suggested a six-year policy term, which was factually incorrect.

The appellant argued that no complaints were received from policyholders and that consent was implied. However, the Court rejected this, noting the absence of any documentary evidence of consent and that the policy documents and application forms did not disclose or provide for advance renewal premium collection or a six-year tenure. The Court emphasized that mere absence of complaints does not establish consent, especially where the policyholder was misled by the proposal form and premium calculation sheets.

The Court held that the appellant failed to discharge its duty under Regulation 3(2) to provide material information enabling the prospect to decide on the best cover, and under Regulation 3(3) to obtain consent for the terms of the insurance cover. Consequently, the appellant was found to be in violation of these regulations.

Issue 2: Liability of the Appellant Insurer for Acts of Corporate Agent

The appellant contended that the corporate agent, TCFS, was a separate entity regulated independently under the IRDAI (Registration of Corporate Agents) Regulations, 2015, and that it was not a tied agent but acted for multiple insurers. It argued that it had no direct control over the corporate agent's lending business or collection practices and thus should not be held liable for the corporate agent's actions.

The Court rejected this argument, holding that the appellant insurer had a statutory duty under Regulation 3(2) to ensure that its corporate agent did not distribute policies in violation of the prospectus or the terms of the agreement. The appellant's receipt of advance renewal premiums from the corporate agent indicated knowledge and tacit acceptance of the practice. The Court noted the absence of appropriate controls by the appellant to prevent such violations. The fact that the corporate agent also provided services to other insurers was irrelevant to the appellant's responsibility for its own policies.

Issue 3: Legality of Collection of Advance Renewal Premium Prior to November 2019

The appellant argued that prior to the amendment of Regulation 13(iii) of the IRDA (Health Insurance) Regulations, 2016, in November 2019, there was no statutory bar on collection of advance renewal premium. The Court examined the scope of Regulation 13, which relates specifically to health insurance policies and does not apply to the Home Guard Plus policy, which is a general insurance product. The Court found that the regulation did not authorize open-ended collection of advance renewal premium and that the amendment introduced a mechanism to allow renewal premium payment up to 90 days in advance, filling a legislative gap.

Thus, the Court concluded that the appellant's reliance on the pre-amendment regulatory framework was misplaced, and the collection of advance renewal premium for three years in advance was not authorized under the applicable regulations.

Issue 4: Refund of Interest and Penal Interest on Advance Renewal Premium

The appellant challenged the direction to refund interest charged by the corporate agent on loans extended to policyholders for payment of advance renewal premium, contending that it did not receive any such interest and had no liability to refund it.

The Court distinguished between the interest charged by the corporate agent on loans and the benefit derived by the appellant insurer from the use of advance renewal premiums. While the appellant was not liable to refund the interest charged by the corporate agent, it was held responsible for refunding interest on the amount of advance renewal premium actually received and retained without providing corresponding insurance coverage. The Court directed that this refund would include penal interest at 2% above the bank rate, as authorized under Section 14(1) of the IRDAI Act, 1999 and related regulations.

The appellant's contention that Regulation 9(6) of the IRDA (Protection of Policyholders' Interests) Regulations, 2002, did not empower the respondent to impose penal interest was addressed by the Court, which clarified that the respondent exercised its wider powers under Section 14 of the IRDAI Act to impose penal interest, adopting the rate specified in Regulation 9(6) as a legal benchmark.

Issue 5: Quantum and Appropriateness of Penalty Imposed

The appellant argued that the penalty of Rs. 1 crore was excessive and unjustified, especially since the violation was technical and the corporate agent was not penalized.

The Court noted that the violation persisted for 292 days and that the respondent imposed penalty at the rate of Rs. 1 lakh per day, capped at Rs. 1 crore as per Section 102 of the Insurance Act, 1938. The Court found this to be proportionate and not excessive, emphasizing that penalty imposition must consider the nature and duration of violation. The failure to penalize the corporate agent did not absolve the appellant from its statutory responsibility and liability.

Issue 6: Responsibility of Corporate Agent and Non-Imposition of Penalty on It

The appellant contended that the corporate agent should have been charged under the Corporate Agent regulations and that non-action against the agent should relieve the appellant of liability.

The Court held that this argument was untenable. The statutory duty and liability under the Protection of Policyholders' Interests Regulations rested on the insurer as well, and the appellant could not evade responsibility by pointing to regulatory inaction against the corporate agent. The insurer must ensure compliance by its agents and maintain appropriate controls.

Significant Holdings and Core Principles Established

"An insurer or its agent or other intermediary shall provide all material information in respect of a proposed cover to the prospect to enable the prospect to decide on the best cover that would be in his or her interest" (Regulation 3(2), IRDA (Protection of Policyholders' Interests) Regulations, 2002).

The Court emphasized that the duty to obtain informed consent and provide material information cannot be delegated or presumed, especially where documentation does not substantiate such consent.

The insurer is responsible for the acts of its corporate agents in relation to policy distribution and must ensure compliance with regulatory provisions, including placing adequate controls to prevent unauthorized or misleading practices.

Collection of advance renewal premium beyond the policy term without explicit consent and proper disclosure violates the Protection of Policyholders' Interests Regulations and is not authorized under the applicable regulatory framework prior to November 2019.

The insurer must refund interest on advance renewal premiums retained without providing corresponding insurance coverage, with penal interest imposed under the broad powers of the IRDAI Act.

Penalty imposition under Section 102 of the Insurance Act must be proportionate to the duration and nature of the violation and is not mitigated by failure to penalize intermediaries separately.

Final Determinations

• The appellant insurer violated Regulations 3(2) and 3(3) of the IRDA (Protection of Policyholders' Interests) Regulations, 2002 by permitting collection of advance renewal premium without documented consent and adequate disclosure.
• The appellant is liable for the acts of its corporate agent in this regard and cannot evade responsibility by asserting lack of direct control or by pointing to regulatory inaction against the agent.
• The collection of advance renewal premium for a three-year extension at the time of issuance of a three-year policy was not authorized under the applicable regulatory framework prior to November 2019.
• The appellant must refund interest on the amount of advance renewal premium actually received, along with penal interest of 2%, but is not liable to refund interest charged by the corporate agent on loans extended to policyholders.
• The penalty of Rs. 1 crore imposed on the appellant under Section 102 of the Insurance Act, 1938 is justified and proportionate.
• The appeal is allowed in part only to the extent of limiting the refund of interest to the amount actually received by the appellant, with penal interest at 2%, and is otherwise dismissed.