Irda gets SC rap for failing to check insurance firms from diverting funds

Written by Indu Bhan | Indu Bhan | New Delhi | Updated: Jan 5 2013, 07:13am hrs
In a matter that will deter insurance firms from misusing and diverting money to mutual funds, the Supreme Court on Friday flayed the Insurance Regulatory and Development Authority (Irda) for not taking uniform action against such violators.

These observations came in a petition filed by Irda seeking setting aside of an interim order of the Calcutta high court that allowed Kolkata-based Heritage Insurance to continue business despite 58 instances of such violations during 2003-08.

A bench headed by Justice RM Lodha questioned Irda's rationale behind not taking action against other insurers and brokers like Reliance General Insurance, Aon Global Insurance Brokers and others who have committed similar violations. However, Irda said that violations by these companies were not as grave that their licenses should have been canceled. It said that such a decision would have resulted in putting policy holders into turmoil, thus severe penalty was levied on them.

Reliance had allegedly sold a policy which was not approved by Irda. Some violations were found by Irda against Aon.

The regulator also noticed that another firm KM Dastur Reinsurance Brokers had utilised the reinsurance account for depositing the cash premium collected from farmers for rural weather insurance policies.

Stating that Reliance indulged in greater violation, the SC bench asked the authority why its license was not canceled. It said that different yardstick was being used for different companies.

On the Heritage Insurance case, the SC bench said: You (the firm) are bound to comply with the regulations. As a matter of fact, you have been left without any control.... This has resulted in grant of provisional license by the HC, Justice Lodha said while setting aside the HC's order of October 19. The effect of the order is that Heritage has ceased to act as an insurance broker for new policies.

The apex court also requested the HC to expeditiously decide the company's plea on or before February 12.

The regulator had alleged that Heritage was guilty of serious violation of Regulation 23 of the Irda (Insurance brokers) Regulations 2002, which mandate the composite broker, acting as trustees of insurance money, to keep all money received in 'insurance bank account' with one or more scheduled banks.

The insurance watchdog said that Heritage by misusing and abusing the judicial process was continuing to do business since February 2009 without a valid license.

Irda senior counsel CA Sundaran argued that money was taken out from the insurance bank account for investment in mutual funds which amounted to absolute indifference towards fiduciary duties.

Heritage had obtained composite brokers licence from IRDA in 2003. Composite broker means an insurance broker who arranges insurance for his clients with the insurance companies and/or reinsurance for its clients.

The HC in an interim order in March last year recommended IRDA to renew Heritage's licence on payment of R5 lakh for such violations. Later, it had confirmed its order allowing the broker to do business till the disposal of the petition.

The Irda chairman had refused to renew the brokers licence in October. While the single judge of the HC had refused to grant any interim relief, the division bench allowed Heritage to continue business, but asked it to deposit the premium in a nationalised bank.