An appellant bench of the Securities and Exchange Commission of Pakistan (SECP) has imposed a fine of Rs 1 million on State Life Insurance Corporation of Pakistan (appellant) for its failure to maintain adequate internal controls and systems as required under the Insurance Ordinance and directed Commissioner Insurance SECP to initiate an extensive investigation with respect to other policies sold in the past.
According to an order issued by two-member SECP Appellant Bench Number-III, comprising Commissioners Zafar Abdullah and Tahir Mahmood, the bench has directed Commissioner Insurance SECP to initiate an extensive investigation with respect to other policies sold in 2004 as possibly there would be numerous policyholders who have suffered similar agony at the behest of the corporation.
The bench observed that the said corporation is the largest public sector life insurance entity in Pakistan, therefore, it is expected that the conduct of such an entity must be in accordance with the law and in the interests of policyholders. The case in hand is a classic example of breach of trust and this act of the corporation can hamper the confidence of existing and potential policyholders.
It is also important to mention here that another appellate bench is hearing appeal No 94 of 2016 (the other appeal) with similar facts and it is pending adjudication. These two appeals have evolved a suspicion in mind that possibly, there would be numerous policyholders who have suffered similar agony at the behest of the appellant. "The matter in hand and in the other appeal pertains to the year 2004, therefore, we direct the Commissioner Insurance SECP to initiate an extensive investigation with respect to other policies sold," the appellant bench added.
The available record is sufficient to prove that the appellant has violated the relevant provisions of the law. The appellant's deceptive and misleading conduct has infringed the rights of respondent and it has not come to the bench with clean hands, hence appellant is not entitled for any leniency. The policy holder was entitled to get Rs 460,000 at the time of maturity of policy, however, corporation paid only Rs 282,194, meaning thereby, policy holder has sustained a loss of Rs 177,806. Therefore, the bench, hereby, modifies the impugned order and direct the corporation to compensate the loss of Rs 177,806 suffered by policy holder and pay a fine of Rs 355,612 under sections 76(4) & 76(5) of the Ordinance. The corporation has also failed to maintain adequate internal controls and systems as required under the Ordinance, therefore, the SECP bench also imposes a fine of Rs 1 million on the appellant under section 156 of the Ordinance, the bench observed.
Taking this into account, the SECP appellant bench has dismissed the appeal of the said corporation accordingly.
The appellant bench's order has disposed of appeal No 58 of 2016 filed under section 33 of the Securities and Exchange Commission of Pakistan Act, 1997 (the Act) against the order dated 03/08/16 (the impugned order) passed by the executive director insurance SECP.
Brief facts of the case are that the policy holder obtained an insurance policy (the policy) from the appellant in December 2004 with an annual premium of Rs 22,188 for a period of ten years. The appellant also provided an illustration to the policyholder whereby the cash surrender value at time of maturity of the policy was shown as Rs 460,000. The policy holder made premium payments for ten years, however, upon maturity of the policy, the appellant paid only Rs 282,194 to the respondent No 2. Feeling aggrieved, the policyholder filed a complaint against the corporation with the Commission. Subsequently, the commissioner insurance SECP issued a show cause notice (SCN) dated 06/06/16 to the appellant and its board of directors.
The corporation's counsel replied to the SCN vide letter date 28/06/16 whereby it was contended that the Commission has no jurisdiction to entertain policyholder disputes and it has not committed any misrepresentation. The counsel further stated that the dispute in hand requires recording of evidence and a trial before a competent forum vested with all powers of civil court under the Code of Civil Procedure, 1908. It was also contended by the counsel that the SCN has been issued prematurely and the Commission does not have power to grant compensation in the instant matter. Hearing in the matter was held on 27/07/16, which was attended by the appellant's representatives including the counsel. The counsel reiterated the aforementioned submissions and stated that the discrepancy in the computer software which led to miscalculations in the illustration has been rectified and a new ERP has been procured by the corporation.
The commissioner insurance SECP being dissatisfied with the appellant's response passed the impugned order and directed the appellant to settle the grievances of policyholder. The appellant was further directed to be careful in future of any such misleading or deceptive conduct towards the policyholders. The corporation has challenged the veracity of the impugned order through the instant appeal.
The appellate bench (bench) has heard the parties and perused the record of the appeal. 'Before going into the merits of the case, we want to dispel the impression developed by the grounds of appeal that the impugned order has been passed without observing the fundamental principles of evidence, necessary to evaluate the evidentiary value of the facts brought before the commissioner insurance SECP. As a matter of fact, the impugned order has been based on the facts admitted by the appellant ie sale of policy and provision of the illustration to the policyholder."
However, the corporation has taken the plea that illustration was provided once the policy was sold therefore, policyholder's decision to purchase the policy was not based on the illustration. The other admitted fact is that the illustration cash surrender value was Rs 460,000, however, this value was caused due to computer software error, therefore, the appellant cannot be held liable for misleading and deceptive conduct under Section 76 of the Ordinance.
The bench accepts the plea of corporation that the illustration provided to the respondent No 2 (depicting the cash surrender value of Rs 460,000) was a result of computer software error and it was provided to the policyholder after the purchase of the policy. This plea is of no use because as per Section 45 of the Ordinance read with Section 11(1)(f) and Section 12(1)(a) & (e) and Section 12(4) of the Ordinance, the appellant was required to maintain adequate internal controls across all its systems and processes, however, it failed to maintain adequate computer software.
The SECP was not required to establish mala fide intention and wilful default to prove the misleading and deceptive conduct of the corporation under Section 76 of the Ordinance. Therefore, corporation's plea in this regard cannot be acceded to. Even otherwise, the conduct of appellant is self-explanatory and speaks about the mala fide intention and willful default because after the detection of computer software error, the appellant never informed the policyholder that the cash surrender value of Rs 460,000 provided in the illustration was caused due to computer software error and upon maturity policyholder shall not be entitled of said amount. As a result, thereof, policyholder continued to pay the annual premium of the policy, which eventually led the policyholder to suffer the loss on maturity.
The bench rejects the plea of corporation that policyholder being a necessary party should have been a part of the proceedings before the commissioner insurance SECP, because the appellant has failed to substantiate this claim through any provision of the Act or the Ordinance.
The bench has anxiously taken into account the plea of corporation whereby, the jurisdiction of the Commission has been questioned. The bench has carefully examined the primary laws ie the Act and the Ordinance and in its view the Commission is competent to entertain the complaints of the policyholders. The corporation's argument, with respect to lack of Commission's jurisdiction to take cognisance of a dispute between the insurer and the policyholder, is not tenable by virtue of Section 20(6)(fa) and (g) of the Act, that empower the Commission to monitor the conduct of insurers towards the insurance policyholders.
The Ordinance also empowers the Commissions to address the grievances of shareholders and as per Sections 76(4), 76(5) and Section 156 of the Ordinance. The Commission, by virtue of the aforesaid provisions, can also award compensation to the aggrieved party and can impose a fine on the party at default, respectively. Hence, there is no doubt in minds that the commissioner insurance SECP was competent to entertain and decide the complaint of the policyholder. The section 60 of the Ordinance also does not restrict the commissioner insurance SECP or the bench to issue direction to the insurer engaged in misleading conduct and failed to maintain adequate internal controls and systems, to safeguard the interest of policyholders.
The bench has also examined the documents referred and presented during the hearing. One document is a webpage of Jamapunji website which lays down the procedure of filing of a complaint with the complaint cell of the concerned insurer and thereafter with the Commission, if the complaint is not addressed by the insurer within reasonable time. Bench has gone through the relevant laws and found nothing which makes the above stated procedure mandatory for the policyholder or the Commission, therefore, a webpage containing the procedure to file complaints, cannot override the express provisions of relevant laws. Furthermore, the document relied upon itself, does not make it mandatory for the policyholder to file a complaint with the complaint cell of the insurer, prior to approaching the Commission. The other document which has been relied upon by the corporation is Circular No 5 of 2016 dated 26/01/16 issued by the commissioner insurance SECP whereby, the insurers were asked to display the names of insurance disputes resolution forums ie federal insurance ombudsman and small dispute resolution committees on their websites and premises for the policyholders' awareness. It has been clearly stated in the circular that the Commission actively takes up the complaints of the policyholders, however, to resolve the complaints in a prompt and effective manner, the office of the federal ombudsman and small dispute resolution committees have been established under sections 125 and 117 respectively. The said circular does not illustrate that the Commission has no jurisdiction to redress the complaints of policyholders. The rationale behind establishment of alternate dispute resolution forums is none other than speedy disposal of the complaints. The section 115 of the Ordinance also does not bar the commissioner insurance SECP to proceed to address the grievances of policyholders with respect to insurer. Therefore, the Commission being an apex regulator of Insurance Sector cannot be considered coram non judice whereby complaints have been directly lodged with it against the insurers.
In the light of aforesaid facts and figures, the bench is of the view that the defence hypothesis formed by the corporation is an effort to escape from the consequences of misleading and deceptive conduct because nothing is on record to show that the appellant has performed its duties in a required manner to refrain from any misleading or deceptive conduct. As a matter of fact, the corporation neither informed the policyholder until the maturity of the policy that the cash surrender value of Rs 460,000 reflected in the illustration was an error caused due to computer software nor provided the new cash surrender value ie Rs 282,194. As a result, the policyholder being unaware of any change in the given illustration, continued to pay the premium for ten years. It is bench's conviction that the corporation has not informed the policyholder about the changed cash surrender value because there was apprehension that she may take a decision to discontinue/ withdraw the policy. The appellant is the largest public sector life insurance entity in Pakistan, therefore, it is expected that the conduct of such an entity must be in accordance with the law and in the interest of policyholders. The case in hand is a classic example of breach of trust and this act of the appellant can hamper the confidence of existing and potential policyholders.
It is also important to mention here that another appellate bench appeal No 94 of 2016 with similar facts is pending adjudication before this bench. These two appeals have evolved a suspicion that possibly there would be numerous policyholders, who have suffered similar agony at the behest of the appellant. Therefore, we direct the commissioner insurance SECP to initiate an extensive investigation with respect to other policies sold, the appellant bench added.
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