Mr Viswanathan had insured his Car for Rs 7.00 lacs Insured’s Declared Value (IDV) but it was very badly damaged in an accident and was beyond repairs. After completion of all formalities the claim was approved for Rs 6.25 Lacs. On enquiring, Mr Viswanathan was told that the IDV of vehicle was fixed on higher side, and it should not have been more than Rs 6.25 lacs and hence claim payable was Rs 6.25 lacs instead Rs 7.0 lacs.

The car of Mr. S.C. Kapoor insured under Package policy was stolen when he was abroad and Mrs Kapoor unaware of claim procedure, lodged an FIR  7 days after theft and informed Insurance Company after nearly 2 months. The claim was investigated, and everything was in order, but it was rejected on the ground of delay in intimation. In a similar case of theft of vehicle involving delay in claim intimation, the insurance company offered to settle the claim only for 75% of the IDV.

Likewise in another Motorcycle theft claim, the insured expressed inability to submit the second key of the vehicle because it was reportedly lost/misplaced but here also insurance company settled the claim for 75% of the IDV.

Mr.Gurmukh Singh had insured his Truck under Package Policy and it was extensively damaged in an accident but on scrutiny of claim documents, it was revealed that Permit of the truck had expired few days before the date of accident. The insurance company informed him that ordinarily the claim is not admissible because of breach of Policy conditions but it can be considered as non-standard claim for 75 % of the assessed loss provided, he gives his consent for the same.

There have been so many cases like above, wherein insurance companies (both Public and Private sector companies) do not settle the Motor claims for full IDV or settle claims on Non-standard basis after deducting varied percentage of claim allegedly for violation of terms and conditions of the policy.

In the backdrop of above practices prevailing in the market which are neither uniform amongst the insurers nor are transparent, let us examine the provisions of erstwhile India Motor Tariff-2002 which are applicable to Motor Insurance as on date.

Insured Declared Value (IDV) is the maximum sum insured fixed by the insurer that is offered in case of theft or total loss of a vehicle. It is usually estimated based on the manufacturer’s listed selling price of the model and variant of the vehicle (including additional accessories) at the beginning of the car insurance policy after adjusting depreciation for every year (ranging from minimum 5% for age of vehicle up to 6 months to 50 % up to 5 yrs. age) as per scale provided in the Tariff.

So IDV of vehicle up to 5 years age is required to be fixed as per this scale. However, once the vehicle crosses the 5-years age mark, the insurance company and the policyholder may mutually agree on the IDV depending upon prevailing market rates of the make/model of the vehicle to be insured. However, once the mutually IDV is fixed and is incorporated in the policy , then it is a binding on the Insurance Company and shall be the basis for settlement of the TL/CTL /Theft claims.

In general, there are 3 types of claims in respect of the insured vehicle

  1. Repair Claims – Vehicle is damaged in an accident and cost of parts / repair is paid as per terms and conditions of policy.
  2. Total loss /Constructive Total Loss Claims: When the vehicle is extensively damaged and repair cost exceeds the 75% of its insured value, the vehicle is considered as Total Loss/Constructive Total loss (CTL).
  3. Theft of the vehicle claims: Theft is also considered as Total loss.

There are no major issues with regard to Repair claims whereas so many Total loss, theft claims and other claims involving breach of Policy conditions go into litigation because claims are being settled ( on the basis of different parameters set by the insurers which are repeatedly held by the courts as Arbitrary )and non-transparent. Some of such disputed claims received the attention of IRDAI, during the on-site inspection, carried out by their officials.  There were contentious issues in public sector as well as Private Sector Companies and hence show cause notices were issued to them by the IRDAI.

The insurers responded saying that such deductions were mostly due to violation of Policy conditions such as not taking care of the safety of vehicles as if an uninsured person, delay in intimating the claims to Police authorities and also to the company, non-submission of one set of keys etc.

The Insurance companies further stated that these claims would normally fall under “Voidable” category. However, keeping in mind that insured should not be put to undue hardship, such cases were considered on non-standard basis after explaining these aspects to the insured through negotiations. Further such claims were settled after taking the consent in writing by a separate declaration and / or full and final discharge. In all these cases, claimants had accepted the settlement in full satisfaction and never made any further complaint whatsoever in nature and that they were convinced /satisfied with the Company’s decision.

In case of motor theft claims, it was found that the insurer deducted up to 30% of the Insured Declared Value (IDV) from the claim payment when one key is not submitted by the claimant. Further, there was inconsistency in the approach/procedure adopted by the insurer by deducting certain percentage of theft claim in case of one lost key, in an arbitrary and non-transparent manner.

In some cases, the Insurance Companies settled the TL/CTL/Theft claim for an amount lower than the IDV due to gross overvaluation of IDV at the time of underwriting.

It may be noted in this regard that General Regulation(GR) 8 of All India Motor Tariff, 2002 stipulates that for the purpose of Total Loss / Constructive loss /Theft of vehicle claims, IDV as mentioned in the policy shall be the basis of claim settlement which will not change during the currency of the policy period. The IDV shall be treated as the ‘Market Value’ throughout the policy period without any further depreciation for the purpose of Total Loss (TL) / Constructive Total Loss (CTL) claims.”

However, It is pertinent to note that where the IDV has been fixed on higher side inadvertently in the policy or it is found to be on higher side on date of loss due to any reason or where the market value of vehicle has fallen, an option is always available with the Insurance companies to invoke Condition no. 3  of Motor Policy which states that “Insurance  Company may at its own option repair, reinstate or replace the vehicle or part thereof and/or its accessories or may pay in cash”.

Secondly, in Motor Policy, there is no mention of Non-standard claims for breach of policy conditions like non availability of duplicate key in theft claims, expiry/non-availability of Permit, fitness etc in other claims. All the companies have issued their own internal guidelines to handle such claims.

The IRDAI examined the cases in the light of above and opined that where the policyholder has breached a material condition or is guilty of contributory negligence, he may not be entitled to the full claim, depending upon the gravity of each of such breach or contributory negligence. It may not be incorrect ‘per se’ if deduction is for valid reasons and it is duly communicated to the policyholder. If the deduction is made for valid reasons as mentioned above, such deductions cannot be deemed to be reduction of IDV (which is the sum insured). It does not mean that just because of a fixed IDV, the full Sum insured shall be paid in all circumstances irrespective of policyholder’s contributory negligence or breach of material conditions leading to the loss. However, the principle of natural justice would warrant communication of the rationale and reasons behind making any deductions made, to the claimant.

The IRDAI, in the cases cited in its inspection reports, has further observed that the above proposition, however, does not offer any ground for the insurer to deduct amounts from the claims  and arrive at ‘negotiated amounts’ with the claimants.. It is not acceptable that merely obtaining a consent letter from the claimants would indicate that the IDV was mutually negotiated and discussed, leaving aside the legality of such negotiation.

The cases do reflect instances of claimants found wanting in some respect, of the procedures laid down for the claims. There was, however, no transparency about what constituted a non-standard claim and the amounts deducted from the IDV in various cases seem to have been made arbitrarily.

The IRDAI concluded that the Companies have violated the Provisions of General Regulation 8 of All India Motor Tariff, 2002 while settling motor claims.

In view of the above shortcomings found in the functioning of Insurance Companies, the IRDAI issued specific orders to insurance companies in such cases which inter-alia included the following:

(a) Have a Board approved policy on what constitutes a non-standard claim and what type of claims can be settled on non-standard basis?

(b) Have a more comprehensive Standard Operating Procedure (SOP) enabling uniformity and consistency in approach in claim deductions for claims settled on non-standard basis.

(c) Maintain transparency through appropriate communication to the claimants highlighting the relevant policy condition(s) which is/are invoked along with the rationale for deduction.

(d) Educate and orient the marketing staff and the prospects/policyholders at the point of sale/renewal on the need of original keys at the time of claim.

(e) Inform the requirement of original keys for claim settlement and timely intimation of claim, in its regular communications with the prospect/insured.

(f) Ensure that the deduction from the theft claim is carried in a transparent, consistent manner only after communicating the rationale to the claimant.

Besides these directions, the IRDAI, by virtue of powers vested in it vide section 102(b) of Insurance Act, also imposed a penalty of Rs 5 lacs each on some of the Insurance companies. It may be noted that the limit of such penalty has now been hiked from Rs 5 Lacs to Rs 1 Crore, vide Insurance Laws (Amendment) 2015.

The insurers are, therefore, expected to revisit the issues raised by the IRDAI and ensure to take corrective measures accordingly so that the decisions of Insurance Companies do not defeat the expectations of the regulator as enshrined in the Protection of Policy Holders’ Interest Regulations 2017 and the imposition of heavy penalty is avoided.

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