Time Ripe for Burying the ‘the Full and Final’ Discharge Voucher Culture

Full and Final Discharge Voucher, was considered a legal necessity to ensure that the contractual liability is properly discharged. It however degenerated into misuse of the concept, such as obtaining them without date or even content. This was commented on by the Supreme Court in the case: National Insurance Co. Ltd vs M/S. Boghara Polyfab Pvt.Ltd (2008), where it said: “26. Obtaining of undated receipts-in-advance in regard to regular/routine payments by government departments and corporate sector is an accepted practice which has come to stay due to administrative exigencies and accounting necessities.” However, this became a bad practice to blackmail innocent insureds, by misusing the dominant position that insurers had.

This compelled the SC to state in the case: United India Insurance Co. Ltd., vs. Ajmer Singh Cotton & General Mills, (1999): "The mere execution of the discharge voucher would not always deprive the consumer from preferring claim with respect to the deficiency in service or consequential benefits arising out of the amount paid in default of the service rendered. Despite execution of the discharge voucher, the consumer may be in a position to satisfy the Tribunal or the Commission under the Act that such discharge voucher or receipt had been obtained from him under the circumstances which can be termed as fraudulent or exercise of undue influence or by misrepresentation or the like.”

Still the matters continued merrily and in 2015 the Delhi HC had to take matters seriously in the case Worldfa Exports Pvt. Ltd. vs United India Insurance Co. Ltd. (2015), in which it noted that: “3.4. There was no effective regulatory regime to keep a check on insurance companies and to ensure that the rights of the insured are not jeopardized during the process of claim assessment. Resultantly, the insurance companies have developed an unfair trade practice of insisting on discharge voucher/ no claim certificate as a pre-condition of payment of the assessed amount to the insured. The necessary safeguards, which are prevalent in other foreign jurisdictions with regard to the enforcement of strict timelines, payment of amount within a prescribed time period, payment of interim amount, are in fact, practically non-existent. A practice has developed where under the insured is asked to sign on a pre-prepared discharge voucher as a pre-condition for receiving payment. This practice has been commented upon in a number of judicial pronouncements that furnishing of such discharge vouchers does not come in the way of right to seek adjudication of unpaid / wrongfully denied claims through arbitration or by taking recourse to the jurisdiction of the consumer courts. Reliance is placed on National Insurance Company Limited v. Boghara Polyfab Private Limited (2009) 1 SCC 267, CMD, NTPC Ltd. v. Reshmi Construction, Builders & Contractors, (2004) 2 SCC 663, Oriental Insurance Co. Ltd. v. Mercury Rubber Mills 2012 (127) DRJ 650, Pacific Garments Pvt. Ltd. v. Oriental Insurance Co. Ltd. 2013 (133) DRJ 385, National Insurance Company Ltd. v. Rajan Sood 2014 SCC Online NCDRC 443, Oriental Insurance Co. Ltd. V. Government Tool Room and Training Centre (2008) CPJ 267(NC), R.L. Kalathia and Company v. State of Gujarat, (2011) 2 SCC 400, Bharat Coking Coal Ltd. v. Annapurna Construction, (2003) 8 SCC 154 and United India Insurance Co. Ltd. v. K. Gangadharan, 2003 2 AWC 472 NC.”

In Oriental Insurance Co. Ltd. v. Government Tool Room and Training Centre, (2008) CPJ 267 (NC), the National Consumer Disputes Redressal Commission held the practice of insurance companies in not paying the claim amount without a discharge voucher of full and final settlement as an unfair trade practice. The National Commission directed the insurance companies to abandon this practice. The National Commission further directed Insurance Regulatory Development Authority (IRDA) to take appropriate action so that the option/choice of the insured to approach the legal forum for just settlement of his claims is not curtailed/ frustrated. The judgment specifically stated: "1. This case illustrates how the Insurance Company can even harass the Government Department which is a part and parcel of Union of India, i.e. Industries and Commerce, the Government Tool Room and Training Centre."

On 24th September, 2015, IRDAI issued a circular to all the insurers directing them not to withhold the claim amount where the liability is established. IRDAI further directed the insurers not to use the discharge vouchers as a means of estoppel against the insured to seek higher compensation before any judicial forum.

The Delhi HC noted the following:

1. The insistence of the insurer to sign a discharge voucher in full and final settlement before release of the admitted claim amounts to coercion and undue influence as defined in Sections 15 and 16 of the Contract Act and such contracts are voidable under Section 19 and 19A of the Contract Act.

2. The withholding of the admitted amount by the insurance companies unless complete discharge is given, amounts to deficiency in service within the meaning of Section 2(1)(g) of the Consumer Protection Act, 1986 as the insurance companies are not expected to withhold the admitted claim amount till the insured gives the receipt of full and final settlement.

3.There is no clause in the insurance policy that the amount assessed by the insurance company shall not be paid unless complete discharge is given.

4. No law permits the insurance company to withhold the payment of the admitted amount unless the receipt of full and final settlement is issued by the insured.

Further, it may be added that there is also no provision in the IRDAI Regulations that ‘full and final’ discharge voucher has to be obtained.

Commentators have said that the misuse of the discharge voucher is a clear violation of the obligation of good faith, and is a manifestation of opportunistic behaviour. By opportunism is meant taking selfish advantage of circumstances without regard for principles or prior commitment that an insurer has made in the policy issued. When a policy is issued, the insurer limits its freedom of action in exchange for the consideration it receives under the policy. A deliberate attempt to retain those benefits while avoiding the limits on its own freedom violates the essential nature of the insurance contract.

As already noted, there is no clause requiring full and final voucher in the policy. This gives effect to the legal maxim “expressio unius est exclusio alterius -“the expression of one is the exclusion of others.” The specific requirements in the policy as found in the policy excludes by implication any other requirements. The policy expressly states that the insured must take several steps in making a claim. This would include giving notice of the happening of the claim, filing documents in proof of the loss, cooperating with the surveyor etc. The policy terms do not contain a condition that the claim will be paid only on discharge of a release voucher.

The U.S. Court of Appeals for the Seventh Circuit - 941 F.2d 588 (7th Cir. 1991) in the case Market Street Associates Limited Partnership v. Frey, stated the following: “But contracts do not just allocate risk. They also (or some of them) set in motion a cooperative enterprise, which may to some extent place one party at the other's mercy… The office of the doctrine of good faith is to forbid the kinds of opportunistic behaviour that a mutually dependent, cooperative relationship might enable in the absence of rule. " 'Good faith' refers to an implied undertaking not to take opportunistic advantage in a way that could not have been contemplated at the time of drafting, and which therefore was not resolved explicitly by the parties."

Therefore, the use of a discharge voucher clearly violates the duty of good faith when it arises from a deliberate attempt to avoid the company’s obligation to pay what it owes. At the moment it sold the policy, the company defined the extent of its obligation by the terms of the policy. It is a violation of good faith to try to recapture the opportunity to pay less than what is owed by insisting on and ensuring that a release is signed.

The Supreme Court of New Jersey, in the case James P. Bowler v. Fidelity & Casualty Company of New York (1969) said: "In situations where a layman might give the controlling language of the policy a more restrictive interpretation than the insurer knows the courts have given it and as a result the uninformed insured might be inclined to be quiescent about the disregard or non-payment of his claim and not to press it in timely fashion, the company cannot ignore its obligation. It cannot hide behind the insured's ignorance of the law; it cannot conceal its liability. In these circumstances it has the duty to speak and disclose, and to act in accordance with its contractual undertaking. The slightest evidence of deception or overreaching will bar reliance upon time limitations for prosecution of the claim.”

More specifically, the court said that “if all or part of the benefits provided by the policy clearly is due, the insurer must make the payment. If it fails to do so, and the statute of limitations or a policy limitation intervenes before suit is started, it will be estopped to plead the limitation in avoidance of a trial on the merits of the claim. Further, if the insurer has factual information in its possession substantially supporting the policyholder's right to benefits, but it has a reasonable doubt as to whether the evidence is sufficient to require payment, the obligation to exercise good faith, upon which it knows or should know the insured is relying, cannot be satisfied by silence or inaction. It must notify the insured of its decision not to pay his claim. But mere naked rejection would not be sufficient. The giving of such notice should be accompanied by a full and fair statement of the reasons for its decision not to pay the benefits, and by a clear statement that if the insured wishes to enforce his claim it will be necessary for him to obtain the services of an attorney and institute a court action within the appropriate time. The "appropriate time" means the time remaining under the policy or the applicable statute of limitations within which the suit must be brought. Failure on the insurer's part to follow such a course, will bar reliance on the statute of limitations or a time restriction on court action expressed in the policy.”

Courts have felt that in insurance there is a special relationship of a quasi-fiduciary nature. This particularly meant that the actions of the insurer and surveyor when surveying or processing a claim, should not be allowed to degenerate into an adversarial relationship, but one in which the insurer must take into consideration, the interests of the insured. IRDAI’s Protection of Policyholders’ Interests Regulations 2017, states that on receipt of notice of claim, “a general insurer shall respond immediately and give clear information to the insured on the procedures that he should follow.” Further “The insurer / surveyor shall within 7 days of the claim intimation, inform the insured / claimant of the essential documents and other requirements that the claimant should submit in support of the claim. Where documents are available in public domain or with a public authority, the surveyor/insurer shall obtain them.” It also states in sec. 15.9. 9. “In case, the amount admitted is less than the amount claimed, then the insurer shall inform the insured/claimant in writing about the basis of settlement in particular, where the claim is rejected, the insurer shall give the reasons for the same in writing drawing reference to the specific terms and conditions of the policy document.”

Thus, an insurer has a duty to investigate a claim adequately and objectively. This means that there has to be a seeking of evidence that may support a claim, not just evidence that helps a denial. An insurer’s fundamental obligation is to pay what it owes under the policy when the insured faces a covered loss. It is usual that when the claim is surveyed, there can be a fluid process where the insured may face uncertainty and confusion. It is necessary for the insurer and surveyor to handhold the insured. In the process, this can result in an agreement on what is the right indemnity. In contrast an insurer has no right to make the claim process a dark and tragic experience for the insured and then compel the signing of a full and final discharge voucher. The insurer cannot the misuse it to claim that its obligations under the policy has been satisfied.