Insurance Fraud : “The Pandora’s Box” ?

Posted On - 24 February, 2020 • By - Ritika Khatua

The “Pandora’s box” is a metaphor in our
modern languages and the proverbial phrase which refers to a basis of
interminable complications or trouble arising from a simple inaccuracy.

In today’s world, mankind has broadened its
perspective and pushed their limits in every aspect scheming the probability of
growth. With this, often comes the oblivious evil. The insurance industry is a
highly rated business at present which focuses on risk management with the
anticipation of uncertain peril. The insurance sector is solely the balance
between contingent gain and hopeful loss. Moving forward to an analysis of the
basis, impact, and control of risks that insurance sectors face while providing
risk management.

The Basis

‘Insurance’ is basically an arrangement
by which a company or the state undertakes to provide a guarantee of
compensation for specified loss, damage, illness, or death in return for
payment of a specified premium.[1]

The root cause of insurance fraud is
financial enrichment. Insurance companies offer policies that are diverse
starting from life Insurance, health insurance, marine insurance, fire
insurance, car insurance, travel insurance and insurance on different insurable
objects and properties. When a company insures an individual entity, there are
certain fundamental legal regulations to be followed up initially and till the
end. The contract of insurance between the insurer and the insured is based on
7 basic principles which are the principles of uberrimae fidei or utmost good faith,insurable
interest, proximate cause, indemnity,
subrogation, contribution, loss minimization. The insurance is technically called as an uberrimae fidei contract. This principle
demands the parties entering into the contract to conform with the utmost good

the cases of life insurance, the insurer proposes specific questions through
the application form very initially and the assured is under a strict
obligation to suffice all the ‘material facts’ that might impact the decision
of the insurer.  Any insurance contract
runs under the notion that all the stated information is diligently disclosed and true to the best of the knowledge and
information of the insured. But with this good faith, the insurers are often
unaware of the Pandora’s box which they might open up or give scope to. i.e.,
the miserable insurance frauds.

The term ‘insurance fraud’ basically means the exploitation
of insurance contracts through illegal means for financial enrichment. The mere
concept of insurance i.e., protection against eventual risks is exploited.
Although many cases of insurance fraud by the
insurers have been recorded, major cases of fraud reported are committed by the policyholders
who malign the insurance contracts by attempting to make more money through exaggeration and disillusion of claims. In the cases of life insurance,
the frauds are mostly defined at the initial stage by furnishing false pieces
of information in the claim form deceiving
the insurance company. Cases of presenting false identity cards, false birth
certificates, and covering up of pre-existing medical history are very common
ways of executing a life insurance policy which otherwise is void ab initio. Application fraud,
exaggerated claims, post-dated insurance policy, fake and unnatural deaths,
fraudulent house owners, workers compensation frauds, false injury are
prevailing insurance scams. Local panchayats
are reluctant enough and issue fake death certificates that come across during
investigation. There are astonishing cases of car insurance where the owner
makes false registration of car with regard to the place for avoiding localised
heavy premiums. Often, homes are burnt down, vehicles are purposefully
destroyed, sold to a third party or leftover for obtaining automobile insurance
with the wrongful claim of damage or theft. The close gap between buying of
policy and pressing of claim is an issue that ultimately turns out to be
insurance fraud. A combination of poor due diligence in scripting policies by
insurance companies and the organisational skills of the fraudsters in
identifying the possible places of effectuating frauds is taking a big toll on
the insurers. Insurance frauds are mostly taking place in rural and semi-rural
areas and insurers have identified around 80 Districts across our country who
are seriously invested and growing in this fraudulent domain.

Hon’ble National Consumer Disputes Redressal Commission, on October 8, 2018 through
Revision Petition No. 4461 of 2012 against the order dated 03/08/2012 in Appeal No.
109/2012[2] held
that “It seems that the disease was not active at the time of filing of the
proposal form.  In addition, this disease of LL Hansen has no relationship
with the actual cause of death i.e. “Cardio Respiratory Arrest” and
in the light of judgement of the Hon’ble Supreme Court in Sulbha Prakash
Motegaonkar And Ors. Vs. Life Insurance Corporation of India (supra), its
suppression would not lead to total denial of the claim.  So, I am of the
view that even if any information was suppressed in the proposal form, it cannot
be treated as material information.

Critically analysing, this controversial
pronouncement talking about the nexus between the cause of death and suppressed
medical issue catalysed the scope of frauds and turned out to be alarming for
insurance companies.


The occurrence of fraud and illegal encounters impact the
concerned industry by clogging the workflow. In recent years, significant
growth in the number of these frauds are observed and they are being operated
through innovatice techniques while the insurers are still struggling to identify
the potential threats. Insurance fraud is
untraceable unlike visible crimes such as theft or murder. In the
meanwhile, the finance is getting affected. But an insurer and the
currently insured are not the only one who are facing the impact of these
rising numbers of insurance fraud. Consequences are also being faced by prospective policyholders
. Genuine claims are getting
delayed because of this evil faced by the insurance industry. 

at times, criminal offence like property damage or a crime as heinous as murder
of the insured takes place to fraudently claim an insurance amount.

Fronting and Control

Insurance companies do have a legal right and a moral obligation towards
shareholders and policyholders of objecting to and repudiating fraudulent
claims. Massive losses over time have alerted the insurance companies for
taking measures to eradicate insurance frauds. Some companies are already in
the process of setting up
separate fraud investigation departments. Anti-fraud
policies at insurance companies and internal resource training are helping in the
early detection of fraud cases. 

Insurance Regulatory and Development Authority of India (“IRDAI”)
recently turned up with the ‘Insurance Fraud Monitoring Framework’ to help curb
insurance frauds and to help companies to prepare
better for spotting frauds.

‘The 190th report
on the Revision of Insurance Act, 1938 (“Act”) and the Insurance
Regulatory And Development Authority Act, 1999’ [3] made propositions basically on Section
38, 39, 45 of the Act.

The suggestion made was that
there should be a specialized insurance fraud bureau and that
immunity must be provided to any person sharing information about suspected fraud.
Discussions were also held regarding the reconsideration of
insurance policy in question after the expiry of two years.

The Law Commission
accordingly recommends that in case of repudiation of the policy on the ground
of misstatement or suppression of a material fact, and not on the ground
of fraud, the premiums collected on the policy till the date of
repudiation will be liable to be returned to the insured or the legal
representatives/ nominees/ assignees of the insured. Having said the above, by
the Law Commission wishes to reiterate that in a case where
the insurance company is able to conclusively prove that the
suppression or misstatement of a material fact was fraudulent, i.e., where
the claimants have failed to show that such suppression or misstatement was not
with an intent to deceive, the insurance company would be entitled to
deny the claimants even the premium amounts since fraud vitiates
the entire contract

Some of the common diligence implemented by insurers to handle the
peril are as below :

  • Acknowledging the possibility of fraud.
  • Enquiry and cross-checks of documents from the initial stage to detect the fraud.
  • Ascertaining the potential of fraud which may help
    minimise the loss.
  • Use of data analytics and statistical analysis to detect
  • Strategizing and improvising software or technical skills.
  • Apportioning investigators and keeping records updated.


Some few extra bucks squeezed out of an insurance company doesn’t
seem to be a concern which might leave much of an influence on any successful
and reputed company. But, unfortunately squeezing-off those extra bucks, time
and again, hits the finance of the company quite hard.

While insurance fraud
directly hurts insurance companies, the indirect victims of this crime are the
policyholders who mostly are oblivious of the impact. The best way for everyone to
avoid being the victim is to create awareness regarding this issue and be vigilant. Maintaining the
very essence of an insurance contract i.e., utmost good faith by both the
parties, can actually secure everyone from the grasp of loopholes
After all, the evils from
Pandora’s box or say the miserable frauds in the insurance industry can very
much arise from a simple miscalculation and affect wretchedly.

Contributed By – Ritika Khatua
Designation – Associate

King Stubb & Kasiva,
Advocates & Attorneys

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