Can you depend upon home loan insurance policy, which is often tied up with loan?

The last thing one worries about when they lose a loved one or when their family members are fighting for their life in a hospital is how all the rapidly increasing medical bills will be paid. Those who have an insurance policy believe the insurer will take care of it, and rightfully so.

After all, isn't this why they have been paying their health or life insurance policy premiums regularly—to protect themselves financially in the face of a medical emergency or if the sole breadwinner of their family passes away?

But imagine their emotional and financial plight when they find their insurance claims rejected, and that too, on arbitrary grounds.

Something similar happened with Garima Gupta last year, when she lost her husband, Saurabh Gupta. The insurer, HDFC Life, rejected the claim made on a group life insurance policy taken on a top-up home loan in 2024 worth around Rs 30 lakh (Rs 29,47,368), because the policyholder (her husband) had reportedly not disclosed his pre-existing conditions.

This is a double whammy for the family of the policyholder, as not only do they have to go through the harrowing experience of claim rejection and scouting for further legal options, but they also have to deal with the home loan lender, who is repeatedly reminding them to pay the outstanding home loan. All the niceties shown at the time of selling home loans and credit insurance are now gone, and what is left is jargonized rejection of claim and cold collection protocols for home loan recovery.

Read on to know more about how insurers in India continue to sidestep established legal precedents that disallow diabetes to be considered as grounds for claim rejection, reject claims based on non-disclosure of facts by policyholders, and how insurers are forcefully bundling insurance policies with home loans, leaving the customer at their mercy.

The details of the case

A non-linked, non-participating pure risk group life insurance product, the group credit plan from HDFC Life claims to “protect the families from the burden of repaying the outstanding loan to the financial institution upon the death, disability, or illness of the insured member(s)," per the policy’s brochure.

According to Ms. Gupta, whose late husband had taken a top-up home loan from the HDFC bank and had been issued the Group Credit Protect Plus (life benefit) plan along with it, “the death certificate highlighted the cause of death as ‘AGE with Severe Dehydration, LRTI with Respiratory Failure, Sepsis with Refractory Septic Shock, MOD.” There is no direct mention of any pre-existing diabetes and fatty liver, the stated ground for claim rejection.

However, the insurer (HDFC Life) rejected the claim, citing a pre-existing disease. “Our investigations have established that Life Assured was suffering from diabetes mellitus, fatty liver and was hospitalized for acute gastroenteritis with dehydration and gallbladder sludge before issuance of the policy. This information was not provided to the company at the time of applying for the insurance policy. With deep regret, we wish to convey that we are unable to accept your claim based on the aforementioned information,” read the claim repudiation letter, which was seen by ET Wealth.

ET Wealth reached out to HDFC Life regarding this. In response, HDFC Life states that “Keeping the privacy of the policyholder/claimant in mind, we will not comment on this specific case.”

“While we make every effort to ensure that we honour the claim requests received, we are also dependent on customers to disclose their full medical history (while purchasing the policy) along with all other requisite information that can impact a fair risk assessment at the time of insurance purchase and claim settlement later. We keep working to create awareness around claims by informing policyholders about the need to truthfully and accurately provide health- and lifestyle-related information or any other details that can impact the death claim settlement,” said their statement.

Group plan does not diminish insurer liability; still their responsibility to verify all facts

Garima also elaborated that the policy issuance form, which was provided while taking the top-up home loan, had simple yes/no questions for disclosures. No medical tests were demanded of the life assured by HDFC Life before issuing the policy.

“In a group insurance policy, especially for health or credit life cover, the insurer assumes risk based on simplified disclosures—usually a yes/no form—with or without medical tests. However, this does not diminish the insurer’s liability,” says Sonal Alagh, Partner, Alagh & Kapoor Law Offices

“The Supreme Court in Satwant Kaur Sandhu v. New India Assurance Co. Ltd. (2009) held that insurers cannot escape liability merely due to technical lapses in disclosure, especially when medical tests were not insisted upon at the time of underwriting. If the insurer chose not to conduct medical tests, it is presumed to have accepted the risk with the disclosures made,” she adds.

“If the insurer uses a simplified proposal form with only yes/no questions, the responsibility to seek further clarification or require medical tests lies with the insurer. If the insurer does not request additional information and issues the policy, it is presumed to have accepted the risk on those terms. Insurers cannot later repudiate claims on the grounds of non-disclosure if the information was not specifically sought,” says Sarita Joshi, Head of Health and Life Insurance at Probus.

A recent ruling by the Allahabad High Court also highlighted that if an insurance company wants specific details over and above what is being explicitly asked in the policy form, it is their responsibility to insist on relevant follow-ups or medical tests. Once the policy has been issued and the premium taken, it cannot reject the claims made on the grounds of non-disclosure of material facts.

“If specific queries are made in the proposal form, then it is the duty of the insured to answer those specific queries, but if any query or column in a proposal form is left blank, then the insurance company must ask the insured to fill it up. If, despite any column being left, the insurance company accepts the premium and thereafter issues a policy bond, it cannot at a subsequent stage repudiate the claim of the insured,” the judgment explained.

Various judgements hold diabetes cannot be grounds for claim rejection

Last year, the Delhi State Commission held that outright denial of an insurance claim on the grounds of pre-existing conditions is not justified, especially when the insurer did not seek any medical tests before issuing the policy. On similar lines, both the Delhi State Commission and NCDRC (National Consumer Disputes Redressal Commission) have ruled that common lifestyle diseases such as hypertension and diabetes cannot be grounds for claim rejection. However, it is advisable on the part of the policyholder or insured to disclose the same truthfully to the insurer.

“Some insurers may still attempt to reject claims, citing diabetes as a pre-existing condition. This has led to several consumer forum decisions ruling in favor of policyholders. For instance, in New India Assurance Co. Ltd. v. Smt. Leelavathi, the Karnataka State Consumer Commission observed that mere diabetes could not be a justifiable ground for claim rejection unless there was a clear exclusion or non-disclosure with intent to mislead,” says Alagh.

While courts have held that diabetes alone isn’t valid grounds for rejection, especially without a direct link to the claim, insurers still commonly use it to investigate or deny claims, particularly where disclosure is incomplete or the waiting period hasn’t lapsed, explained Aditya Chopra, Managing Partner, The Victoriam Legalis.

“Rejection letters are typically coated in vague, ambiguous, and non-committal language, referring unclearly to undisclosed pre-existing conditions or stating that the history related to hypertension, diabetes, or other lifestyle-related diseases contributed to the condition, without offering any concrete basis or clinical justification,” he adds.

Many state consumer forums have repeatedly ruled that diabetes cannot be a ground for claim repudiation, and even the legal landscape in this situation is bent in favour of the insured individual. However, little of it is taken into consideration by insurers.

According to Vishal Gehrana, Advocate on Record and Partner Designate at Karanjawala & Co., “the mere presence of diabetes cannot be used as a blanket reason to deny claims. If diabetes did not directly cause or materially aggravate the illness or death that led to the claim, insurers are not justified in repudiating the claim on this ground. The law says that unless there is a clear and direct link between diabetes and the cause of hospitalisation or death, the insurer’s refusal to honour the claim is not sustainable.”

“Forced to purchase insurance with top-up loan,” says aggrieved

M Gupta also stated that her late husband was forced to purchase the insurance from HDFC Life only, since the home loan issuer was a sister concern, i.e., HDFC Bank. This, despite IRDAI (Insurance Regulatory and Development Authority of India) clearly mandating that lenders must offer freedom of choice to the borrower and disclose that the borrower is not bound to purchase insurance from a specific insurer. If coercion is proven, the borrower can file a complaint with the IRDAI or the banking ombudsman.

The Reserve Bank of India (RBI) and the IRDAI have repeatedly clarified that financial institutions cannot bundle insurance products or coerce borrowers into buying insurance from a particular company.

“In no case can the bank legally compel the borrower to purchase insurance from a specific insurer; doing so would violate regulatory guidelines on free choice of insurer,” concurs Raadhika Chawla, Advocate, Delhi High Court.

People buy life insurance policies so that their loved ones do not face financial difficulties when they are not around. For this, they trust the life insurance company. However, such instances of rejection of the claim dampen the faith of the policyholders.

As more courts weigh in on the need for insurers to act responsibly, the line between technicalities and true justice in claim settlements still looks far off, with policyholders suffering their way before they can reach there. This is an area of concern that the insurance regulator should look into to ensure that no rightful claimant is made to go through such an unpleasant experience by any insurance company in an arbitrary manner.