Insurance contract terms: the test of germaneness
Can an insurer repudiate a claim due to a breach of policy condition, even if that breach is irrelevant to the loss occurrence?
In the landmark case of National Insurance Co Ltd vs Nitin Khandelwal (2008), the Supreme Court of India has held that a claim for theft under a motor policy, cannot be rejected on account of a breach of policy condition, that is not germane to the occurrence of loss. So vehicle theft claims cannot be repudiated for such reasons, as the driver not having a valid driving license, fitness certificate of the vehicle having expired and private vehicle being used as a taxi. These are not deemed germane to the occurrence of loss.
The principle of germaneness also has applicability to the issue of non-disclosure by the insured. It is possible that this action of the insured may not be deliberate and has little impact on the underwriting decision, with the insurer not having to apply any different terms or conditions that he otherwise would. Even when such non-disclosure has a bearing on the terms, conditions and pricing of risk, there could still be a possibility of making amends prior to claims settlement (applying some deductions to the claim amount or collecting additional premium), rather than rejection of claim in toto.
The test of germaneness is applicable not just to motor, but also other non-life insurance products, particularly health insurance, where there are often issues surrounding the disclosure of pre-existing conditions.
Notwithstanding the Supreme Court decision showing the path, some insurers, instead of taking a nuanced approach, continue to conflate harmless non-disclosures or warranty breaches, with those involving false pretence. A limited, pedantic view is thus taken and claims are repudiated. These claims then get contested in various trial as well as appellate courts. For the most part, this results in verdicts against insurers and bad press for the industry. Besides, it also taxes the judicial system with needless litigation, when millions of suits are pending in various courts across the country, with people waiting for years, if not decades, for delivery of justice.
It's pertinent to note in this context that, the UK insurance market has already adopted the test of germaneness on the applicability of warranties. With the recent enactment of the Insurance Act of 2015, several fetters have been placed on insurers, with regard to the application of policy terms. The insurers cannot convert the representations made by insureds at the time of entering into the contract into warranties. A non-disclosure or breach of warranty, need not necessarily lead to a rescission of the contract, which can only happen under certain conditions. For instance, insurers cannot rely on breach of warranty or policy terms to exclude, limit or discharge their liability, if the insured can show that, the non-compliance did not increase the risk of loss which actually occurred, in the circumstances in which it occurred.
What can the Indian insurance industry do, to keep up with evolving judicial thinking and changing times, that demand more customer-centricity? For one, it could come up with a standard code of practice, supported by interpretations of policy terms that have been juridically tested, for all insurers to follow. This will ensure fairness and consistency in claims adjudication and remove perceptions of capriciousness. The other option is for the regulator, to bring this about through amendments, to the guidelines on protection of policyholders’ interest.
There is a fair bit of work being done by the industry in terms of introduction of new covers and riders. However, much attention doesn't seem to go into ironing out the creases in the base coverage itself. Some of the energies being currently spent in new product development, could be gainfully invested in this direction. Contract certainty will then improve and confidence of customers in insurance products will rise. This will in turn drive better distribution, which is the need of the hour.
I post articles on contemporary issues in non-life insurance in India. Views expressed are personal. Your valuable thoughts and comments most welcome. Links to some of my previous articles below:
Claims at Future Generali India Insurance Company Limited ex HDFC Ergo
8 年Nicely written sir....Many classic cases available with us ??
Consultant and advisor for Legal, Income Tax & Insurance
8 年Very useful article. Thanks for sharing.
I help CEOs, Strategy Directors achieve enhanced org outcomes through Strategy-Execution-Innovation-Stories-Design&Systems Thinking. I also coach on enhancing individual performance.
8 年Useful Hari. One needs to distinguish between personal insurances (involving individuals) and commercial insurances (involving firms/corporates). UK insurance law has for long made this distinction in express terms whereas here it is not so explicit. In personal insurance claims, unless violation of condition/warranty can be shown to have caused prejudice to insurer, there is usually no effect on claims. If insurance industry can't get contract certainty even in 21st century, then it only shows its abysmal standards and why it has not been able to make a 'category' (unlike Life insurance) of itself.