It may now be almost impossible for life insurance companies to reject claims five years after issuing the policy on the grounds of an undisclosed illness or any other misinformation provided by the policyholder.

According to Insurance Regulatory and Development Authority chairman C S Rao, the Law Commission has suggested changes in the Insurance Act of 1938 in order to bring a 'finality to the contract and remove uncertainty'. However, the proposals need Parliament approval before they can be implemented.

It has been observed that insurance companies verify the accuracy of a policy statement only when the policyholder makes a claim. There have been cases where the insurance companies have declined a claim, stating that the policyholder had not disclosed information about a particular illness while taking the policy.

The proposal fixes a five-year deadline, from the time a policy is issued, for the insurance companies to verify the details.

During this period, the company will be entitled to cancel the policy if it detects any fraud or misinformation.

Rao says that the proposed changes in the Insurance Act are policyholder-friendly. "However, insurance companies will have their reservations," he says.

The Law Commission made the proposal after a careful study of the intent of defraud on the part of policyholders, says Rao.