Banks Must Personally Inform Borrowers On Discontinuing Free Insurance Cover, Rules NCDRC

In 2009, Venkata Rao, an Andhra Pradesh resident, availed of two housing loans ─ one of Rs 8 lakh and another of Rs 5.8 lakh ─ from public lender State Bank of India (SBI). The loan agreement was covered by “free personal accident insurance policy”. Under this cover, banks are liable to adjust the insurance amount in case a borrower passes away. Typically, a personal accident insurance policy guarantees protection in case of accidental deaths, accidental disabilities, acts of terrorism, et cetera.

However, the bank refused to adjust the loan amount against the insurance policy when Rao died in an accident in October, 2013. Apparently, the “free” insurance policy was discontinued from July the same year. The bank said that personal accident insurance was a complementary service offered to customers, and it had the discretion to continue or discontinue the policy at any time. The bank also contended that it had published the information in newspapers, and updated the same on its website and in its notice boards.

When the wife of the late insurer approached the district consumer forum in the matter and sent a notice to the bank under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) the latter allowed ordered the bank to adjust the amount, and pay legal expenses. The bank then approached the state commission which upheld the district court order.

Additionally, the state forum also told the bank to serve personal notices to all customers who availed of loans with insurance policy about the cancellation of such scheme to avoid future liabilities.

Now, the National Consumer Disputes Redressal Commission (NCDRC) has also upheld the state forum orders, asking the bank to adjust the 'personal accident policy benefits' on the loans, after noting that the bank had failed to inform him about discontinuing the policy. The NCDRC also upheld the direction of the lower forum for a asking the bank to pay Rs 15,000 towards legal expenses.

"I agree with the order of the state commission that the bank having offered a personal accident cover as one of the conditions of the sanction letter should not have discontinued the policy suo motu without informing the insured who had opted for and were covered by this insurance," a Bench said.

"The bank was bound to inform the insured not only by publication in the newspaper but also mandatorily by personal notice that the benefit of insurance coverage of loan as given by the sanction letter was proposed to be withdrawn so that they could make alternate arrangement, if they, so desire," the commission added.

How does the move benefit borrowers?

While granting you a loan, banks often persuade to buy additional products, including insurance policies. “Free” products are often sold as perks coming along with the main loan product. However, the current case shows how borrowers fail to get any relief when the need actually arises. Because it is entirely a bank's discretion to continue or discontinue a free personal insurance policy at any time, borrowers often fail to receive the benefit they sign up for. Making matters was the fact that banks were so far not liable to personally inform borrowers in case they decide to discontinue the policy. Unless you are continuously tracking the developments in this regard, you will be without a clue about the time when your banks decide to discontinue the cover. The recent NCDRC ruling would make matters more transparent now.  

With inputs from Housing News