Understanding the restrictive and exclusion clauses enables a customer to enjoy life insurance cover to the fullest. A customer's entitlements and non-entitlements will be clear when he reads the policy document. Insurers are very clear and transparent on all these fronts; they publish every aspect, restriction and exclusion for each product in the policy document itself. However, most customers refuse to read these restrictive clauses and get enlightened. If the customers themselves are not interested in reading the clauses, who then is to be blamed?

In contracts of utmost good faith, where the decision of one- party depends on the disclosures by the other party, moral hazard arising out of asymmetry of information can occur at any time throughout the period of the contract. Thus, contracts of family arrangements, sale of land, company prospectus and insurance contracts, all suffer from the problem of asymmetry of information. In life insurance, the moral hazard is long term and the cost of dishonesty may be too heavy for the insurer. How does the insurer face this risk? The very purpose of selection of risk at the time of underwriting is to avoid or reduce the insurer's risk. In fact, it is the primary defense against asymmetry of information.

True, the insurer possesses contractual rights to repudiate the contract and the contestability provision is built into every life insurance contract. Section 45 of the Insurance Act 1938 (of India), provides a lot of protection to the insurer. However, this section is always explained from the point of view of advantages to the customer. The reality is that it protects the insurer till the last day of the contract, provided he could prove that there had been suppression of material facts at the time of proposal, it was deliberately done or willful and that it had affected the decision-making of the insurer. It is like declaring that there is no law of limitation applicable for acts cutting at the very root of life insurance contracts.

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