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High Court: SBI Life To Blame for Converting Rs. 50,000 to Rs. 248

In a judgement by judges Sunil Ambwani and D.K. Upadhyaya of the Allahabad High Court, SBI Life Insurance has been reprimanded for ruining the savings of an old man, and the IRDA has been asked to scrutinize every policy of SBI Life, even to wind up the company if more such cases were found.

The case: Virendra Pal Kapoor in 2007, then 65 years old, took a single premium five year insurance policy (Unit Plus II) paying Rs. 50,000. In 2012, he was offered the princely sum of Rs. 248.

Why? Because his insurance cover was Rs. 3.125 lakh, or 6.25x his premium. He had the choice of taking 1.25x his premium and 6.25x, and his agent opted for the 6.25x, but didn’t explain to Kapoor the impact of this choice.

Insuring for 6.25 lakh would have cost Rs. 3,000 per lakh per year. Which means a sum of Rs. 9,000+ per year would go only to insure the customer! In five years, that adds up to Rs. 45,000+ as mortality charges alone! And take out commissions and you have next to nothing left!

Why does a 65 year old need insurance cover of that much? He doesn’t, and the court agrees. Kapoor never really intended to buy the policy as insurance. And the literature wasn’t clear how bad the policy would be as an investment if he took the full 6.25x cover.

Further the policy was supposed to be automatically terminated when the funds reached 10,000. This was overriden by the company which only sent a written note to customers – but any change to a contract needs the signature of all parties, and they never got Kapoor’s okay.

The judges have dinged SBI Life for allowing such a policy to be sold, and for not following rules. It was obvious Kapoor wouldn’t have invested if he knew so much money would go to paying insurance cover, and SBI never tried to make it clear. And the whole unilateral information to unprotect the policy below Rs 10,000 is really shady.  SBI has been told to return the full Rs. 50,000, plus Rs. 10,000 to cover costs. It’s appealing the order in the supreme court.

The judges have also told the IRDA to examine all policies sold by SBI Life and if it finds such irregularities it can even wind up the business of the company if so.

Here’s the full judgement (on May 29, 2014):

My take

SBI will keep this issue under wraps. If they have to repay all those who invested in 2008, with more money than they have, they will lose so much they might just about die. So they’ll fight back.

But this is a problem. Why is a 65 year old sold insurance? Is there no fiduciary duty on the party of anyone? The bank, the insurance company, or the individual agent? Currently, no.

Because Bancassurance – the concept under which banks sell insurance – absolves banks from the responsibility of actually giving their clients products that suit them. Essentially, they need not have the best interest of their customer in mind.

This is absolute bollocks.

Banks need to be accountable for the misselling of their bank managers. If it means that banks can’t, and therefore won’t sell insurance, that is okay. The RBI should enforce this immediately along with the new government, that bank misselling can be fined.

And then, IRDA needs to be changed, or energised, or whatever. They are a crap regulator. In this case, they were asked to help, and they replied with platitudes. They need to to disbanded at the very top and a non-insurance related officer should head the organization. The government needs to remove the Rs. 500,000 cap on the fine per offence – it should be compounded (subsequent similar offences should go into multiples) and the limit should be related to the offence. And, they should fine banks for mis-selling.

Otherwise we will continue to find banks conning customers. I’ve written about HDFC Crest, which it seems was missold to many unsuspecting customers by HDFC Bank officials. If HDFC Bank and their board of directors was fined for each such offence, the misselling will stop immediately.

Insurance will continue to suffer, as more Indians get online and do simple Google searches before buying. And then, they’ll know how bad it is.

  • Ganesh says:

    Thank you Deepak for the article. So all that ULIP crap that happened from mid 2000’s till IRDA woke up is coming back to haunt insurance companies. Lack of consumer awareness, equity bull run, greedy agents, front loaded commissions, sales pressure and most of all lack of regulations led to that situation.
    But selling insurance to a 65 year old (his blood and sweat for a lifetime) is out right criminal. Hope Supreme Court settles it fairly and quickly
    As for the insurance companies, as they say, what goes around comes around.

  • raag says:

    Hope these PSU banks explode and die. Don’t have an iota of sympathy for them.
    1. I had gone to one SBI branch in Bangalore last saturday. I had a long wait just to meet some officer there. Guess what, most of the officers and counter fellows were busy selling life insurance and helping fill all those massive forms to unsuspecting folks!
    2. The online sites of these public sector banks suck. I wanted to open an FD for one of my parent on SBI’s website and they keep showing some arbit message “can’t open the account for this product combo” even when the account is fully KYC complaint. Transferred their money to ICICI bank a/c and opened the FD in a breeze. There goes the “low-cost” model of PSU banks.
    3. Would you believe it that one of ATM of bank of baroda is running out of deposit slips since last 2 weeks! Contrast that with Citibank ATM where you don’t even need deposit slips to deposit cheques – they have scanners that will take your cheque, scan it, take your inputs on amount etc and provide a printed copy with a scanned image of deposited cheque. God bless Citi.
    Hope Arun Jaitley continues PC’s policy of rotting these PSU banks to death.

  • Hector says:

    Hey Deepak,
    Do a post on Insurance please..not in the premium one but just issued in general interest. Which insurance do you hold? More importantly why?
    I know this is not exactly in the ambit of this blog but it would be a very useful article coming from you. Thoughts?

  • Venkat says:

    Recently I went to ICICI bank to get a locker. They forced me to take a ULIP to give locker facility even though I did not need it. So, I have taken the policy and they provided me the locker. After that I have surrendered the policy in the free look-in period. They came to know about cancellation and called me on my phone saying that I shouldnt have cancelled it as they provided locker. They took fixed deposit and the annual fees for locker and still want me to continue the useless policy.

  • EV says:

    Sorry to continue raag’s PSU banking rant, but here is my experience with a PSU bank. Bank of India.
    To access your account online,
    a) you need to submit a form IN-PERSON AT YOUR HOME BRANCH.
    b) You can access your account online only using some STAR software of theirs which has to be installed on a PC (there goes the flexibility of usage) (and that too, only one or two PCs)
    c) You will then receive a number of couriers:
    – STAR software authentication login
    – STAR software authentication password
    – Login user id
    – Login password
    – Transaction password
    along with an acknowledgement form
    d) after you install, authenticate and login, you can only VIEW your account details.
    you have to sign and submit this “acknowledgement form” IN-PERSON AT YOUR HOME BRANCH.
    ONLY THEN you will be able to perform transactions with your account.
    The best part? NONE of this is properly documented in a simple format anywhere online or offline. They just give you details as and when you get stuck.

  • Krish says:

    What worries me is that SBILife has audacity to move up to higher court. They still want to pile up misery on old man and this shows the culture of the organization. All the staff of SBI Life should question themselves of what they would be doing if they suffer similar fate. If CEO can not empathise with the customers, it is not worth doing business with such companies. Although I have one bank account with SBI, it is not my primary account and my relationship is minor. Otherwise, I would never entertain any PSU products and services.

  • Sanjeev B says:

    Thanks for your detailed coverage of this. It truly, madly, deeply sucks.

  • meenakshipai says:

    Very informative!
    I too am stuck for last 7 years.
    Can’t complain as wanted to help a friend. Mine is Max new york product something like ulip.
    Nice to read you for great insights.
    Thanks again.

  • Rajiv Ahuja says:

    If you all think PSU Banks are bad than I hope that the horrible exprience I had with Kotak Mahindra Bank & ( they passed on the blame game to Kotak Life Insurance ) ,won’t happen to other folks.. I think Kotak would make the PSU banks look good.Like my friend says they are all naked.

  • prakash says:

    Hi Deepak!
    Good work.I was an insider and now an outsider.My concern is that the insiders now yet to realise the pain the customers are undergoing.

  • DJ says:

    I’m not sure what the fuss is about. The guy bought insurance. Why does he (and all of you) expect “any” money back?
    Ok, sure, the agent did not fulfill fiduciary duty and should be punished. If IRDA is being allowed to regulate investment + insurance products that is a problem. Tax exemption for hybrid insurance/investment products is a problem.
    But, to say that x money changed to y and it is oh so bad is just to capture headlines. It is a type of mis-selling too, to gain public’s attention.

    • DJ says:

      To clarify: the fraud is the mis-labeling of an insurance product as an investment product. The fraud is NOT that an insurance product converted x money into peanuts, because insurance products are not designed for returns anyway. Hence, my objection with the title.

    • Why does he expect money back? Because he was told he would get money back! That’s the misselling that happened, the agent was SBI and yes they should be fined too. But SBI Life too was responsible in the court’s eyes because their documentation hid the simple detail that this would have resulted in the guy making nothing if he took the 6.25x insurance. Don’t tell me he should have known – the documentation is not easy to decode!
      Yes agree the other stuff is a problem too. But if you’re going to tell me that the headline is an issue because x money changed to y is not true (or bad) then I strongly disagree because x going to (1+)x is what was promised instead he got 0.01x.