Consumer Protection | Deciphering Non-Standard Settlement of Motor Insurance Claims

Introduction

Typically, in motor insurance, a “standard claim” arises when there is no violation of policy conditions and a loss occurs. Conversely, if a policy condition is breached but is not fundamental to the cause or extent of the loss, the settlement may be compromised. In such cases, a portion of the claim proportionate to the breach is deducted, and the balance is paid out. This is known as a “non-standard” settlement.

The consumer fora first recognised the concept of non-standard/compromised claims in Kesarben v. United India Insurance Co. Ltd.¹, where a claim arising from the theft of a private vehicle being used for hire or reward was ordered to be settled on a non-standard basis. However, this type of settlement is not stipulated by the insurance contract itself, meaning it is an extra-contractual option available to the insurer. Moreover, there are currently no regulatory guidelines from the Insurance Regulatory and Development Authority (IRDA) governing this practice, leading to significant ambiguity on the matter.

This concept has only been legitimised and refined primarily by the proactive efforts of Consumer courts and in this article, we will explore the various types of violations that permit the non-standard settlement of motor claims.

Breach Type 1 — Private vehicle was being plied for hire or reward

Motor insurance policies covering private vehicles typically include “limitations as to use”, one of which prohibits the use of the vehicle for hire or reward, such as transporting goods or passengers for hire or reward. As such usage constitutes a breach of policy terms, can the insurer settle claims arising out of the theft or accident of such vehicles on a non-standard basis?

In instances where a private vehicle used for hire or reward is stolen, the Supreme Court in National Insurance Co. Ltd. v. Nitin Khandelwal² held that if the breach of a policy condition is not germane to the cause of the loss, the insurer cannot outright deny the claim. Instead, the claim should be settled on a non-standard basis. In this case, since the vehicle’s use for hire did not contribute to its theft, the insurer’s complete denial of the claim was overturned. The Court underscored the necessity of a direct causal connection between the policy breach and the ensuing loss.

Similarly, in a case where a private vehicle used to transport passengers for hire was involved in an accident, the Supreme Court granted 75% of the admissible claim, citing the guidelines issued by the General Insurance Corporation (GIC), which permit non-standard settlements in instances of a warranty breach.³

The aforementioned rulings have played a pivotal role in establishing the concept of non-standard settlements and continue to be authoritative law. These decisions highlight that a key criterion for a non-standard settlement is the absence of a direct link between the breach of a policy condition and the cause or extent of the loss. They affirm that non-standard settlements are justified when the breach is unrelated to the loss incurred. If the breach does not fundamentally impact the cause or severity of the loss, it warrants resolving the claim on a non-standard basis.

Breach Type 2 — There was a delay in intimation of loss

Delay in intimation to the insurer

The terms of an insurance contract require the insured to promptly notify the insurer of any loss. This allows the insurer to initiate an investigation to verify the loss and determine its extent. Additionally, in cases of theft, it is crucial to report the incident to the police to facilitate efforts to recover the stolen vehicle.⁴ We shall now explore whether non-standard settlement of claims is permissible if a delay has been caused in intimating the loss to either the insurer or the police.

Regarding delayed notification to the insurance company, the Supreme Court in Oriental Insurance Co. Ltd. v. Parvesh Chander Chadha⁵ initially ruled against allowing non-standard settlements when the insured fails to promptly inform the insurer of the loss, even if timely notification is given to the police. However, this stance was overturned in 2020 when a larger Bench of the Supreme Court held that if the police were promptly informed and the claim is determined to be genuine, the insurer cannot reject the claim solely on the basis of delayed notification to the insurer.⁶

Additionally, in 2011, the IRDA issued a Circular⁷ advising insurers to avoid repudiating claims solely on the basis of delayed notification, provided there is a credible explanation for the delay and it is evident that the delay resulted from unavoidable circumstances.

Therefore, in cases of delayed intimation to the insurer, the question of a compromised settlement does not arise.

Delay in intimation to the police

But what about cases where there is a delay in intimation to the police itself? Can such cases be resolved on a non-standard basis?

Between the period of 2006-2015, several rulings by the National Consumer Disputes Redressal Commission (Ncdrc)⁸ established that an unexplained delay in reporting a theft to the police would result in the denial of any insurance claim, as it constitutes a fundamental breach of policy conditions, frustrating any efforts to recover the vehicle. In these rulings, the possibility of awarding claims on a non-standard basis was not considered. However, a shift in this approach occurred in 2019, when in National Insurance Co. Ltd. v. Tarlok Singh⁹ the Ncdrc awarded 75% of the admissible claim on a non-standard basis due to a delay in notifying the police. This decision was based on the Supreme Court’s ruling in Amalendu Sahoo case¹⁰, which allowed for compromised settlements in cases of policy breaches.

Following this precedent, the Ncdrc began awarding 50-75% of the admissible claim in cases where a delay in notifying the police was evident.¹¹ Most recently, in July 2024, the Ncdrc upheld a State Consumer Disputes Redressal Commission (Scdrc) decision that awarded 60% of the claim amount in a case where there was a 10-day delay in reporting the theft to the police.¹²

[Author’s suggestion: Often, the police may refuse to register a first information report (FIR) immediately, advising complainants to attempt tracing the vehicle themselves first. This can later be construed as a delay in notification, albeit unintentional. To address situations where the police are reluctant to file an FIR promptly, consumers might consider filing an e-FIR online. The time-stamped e-FIR would carry significant probative value in consumer courts, helping to establish timely notification.]

Breach Type 3 — Vehicle was overloaded beyond its licensed carrying capacity

Overloading vehicles beyond their maximum authorised capacity constitutes a breach of the insurance contract. Given our earlier discussion, one might anticipate a non-standard settlement for such claims. However, in 1996, the Supreme Court in B.V. Nagaraju v. Oriental Insurance Co. Ltd.¹³ applied the “main purpose rule” and held that if a breach of policy conditions did not contribute to the risk involved, the insurer cannot refuse to indemnify the risk. The Court further reasoned that if it is evident that the accident was not caused by any fault of the driver, the carriage of additional passengers cannot be deemed to have influenced the occurrence of the accident. Therefore, the issue of a non-standard settlement did not arise.

The “main purpose rule” was effectively sidelined when the Supreme Court legitimised non-standard settlements in Nitin Khandelwal case¹⁴, where proportionate deductions for breach of policy conditions, although inconsequential, were allowed. Following this decision, the Ncdrc consistently directed compromised settlements for such claims, basing their judgments on the claim settlement guidelines issued by the GIC, without taking into account the reasoning established in B.V. Nagaraju case¹⁵. In one case, the Ncdrc directed a non-standard settlement where a maxi-bus which was authorised to carry only 12+1 passengers, was found carrying 26 passengers.¹⁶ This approach directly contradicts the observations made by the Supreme Court in B.V. Nagaraju case¹⁷.

The departure from the observations made in B.V. Nagaraju case¹⁸ demonstrates how the concept of non-standard settlement gradually evolved, ultimately superseding the main purpose rule. This evolution permits insurers to reduce the amount of an admissible claim, even when the breach of policy terms is insignificant. Conversely, it also allows the insured to recover a portion of the claim despite breaching the insurance contract.

Breach Type 4 — Driver did not hold a valid driver’s licence

The requirement to hold a valid driver’s licence while operating a motor vehicle arises from both the insurance contract and the provisions of the Motor Vehicles Act, 1988¹⁹. In a case where the insured vehicle was damaged by fire and the claim was denied because the driver lacked a valid licence, the Supreme Court ruled that if the absence of a valid licence had no impact on the fire that damaged the vehicle, the insurance company would have to settle the entire claim.²⁰ This decision effectively reaffirmed the rationale established in B.V. Nagaraju case²¹, albeit without explicitly referencing it. The question of non-standard settlement has not been considered in this context.

However, in the event of an accident where the driver was found to lack a valid driver’s licence, the Ncdrc held that such a breach could not be overlooked by the insurance company, and no claim was payable, even on a non-standard basis. The absence of a valid licence is deemed fundamental to the cause of the loss, namely, the accident, and therefore, the claim was rightfully repudiated.²² Thus, the question of non-standard settlement would not arise.

Breach Type 5 — Vehicle was driven without valid registration

In cases where an unregistered vehicle is involved in an accident, the Supreme Court has ruled that non-registration is not only an offence under Section 192 of the Motor Vehicles Act²³ but also constitutes a fundamental breach of the insurance contract. Based on this reasoning, the Supreme Court held that the insurer was entitled to repudiate the claim for such a fundamental breach of policy terms and the District Forum was found to have erred in directing the insurance company to settle the claim at 75% of the insured declared value (IDV).²⁴ Similarly, when a vehicle was stolen after being driven in violation of Section 192 of the Motor Vehicles (MV) Act, the Supreme Court supported the complete repudiation of the claim, citing the fundamental breach of both legal and policy conditions.²⁵

In instances of vehicle non-registration, non-standard settlements have been dismissed in cases involving both theft and accidents. However, the situation may differ if the vehicle is stolen from outside the insured’s residence without ever being driven on public roads. In such a scenario, there is no breach of policy terms or violation of the law, making the claim eligible for settlement on a standard basis.²⁶

Breach Type 6 — All reasonable steps to safeguard the vehicle were not taken

When a condition to take all reasonable precautions to protect the insured vehicle is breached, it often leads the insurer to reject any resulting claim of loss. However, in a case where the vehicle owner had left the key in the ignition and abandoned the vehicle, which was then stolen, the Supreme Court ruled that the claim should be settled on a non-standard basis. The Court reasoned that leaving the key in the ignition does not constitute an invitation to theft and thus the claim should be resolved non-standardly.²⁷

Conclusion

The acceptance of non-standard settlement by consumer courts ensures that insurers do not reject claims on hypertechnical grounds by citing violations that have no impact on the loss itself. This is a highly pro-consumer development, safeguarding the interests of policy-holders who might otherwise be constrained to forfeit the entire claim amount due to minor infractions. However, the absence of clear guidelines on this concept has led to Consumer Court rulings being highly subjective, particularly in determining the quantum of deductions for specific violations.

The core issue lies in the fact that despite the IRDA’s extensive regulatory oversight of the insurance sector, the practice of settling claims on a non-standard basis remains unregulated. This lack of regulation and oversight has allowed insurers to develop their own internal policies, resulting in inconsistent treatment of similar claims by different insurers. The deductions applied are often perceived as arbitrary, with insufficient transparency about the rationale for reducing the IDV.

Non-standard settlements uphold the sanctity of a contract of insurance; however, it is crucial for the IRDA to address this issue by establishing clear guidelines and a comprehensive regulatory framework for reporting non-standard settlements. Regulating these settlements would ensure uniform treatment of similar claims and prevent arbitrary deductions by various insurers.