The Truth about Non-Standard Claim Settlements

Many among the insurer community are happy that courts have endorsed non-standard claim settlements. Non- standard claim settlement originated from the PSU insurer claim manuals. There are many versions of this. The latest is as under:

15. Guidelines for Settlement of Non-Standard/Compromised/ Negotiated Claims

15.1. The terms non-standard/compromised/negotiated are used interchangeably. All claims that cannot be settled as standard – where all terms, conditions and warranties of the Policy are not fully complied - may be treated as ‘Non-Standard Claims’. It is clarified that where the breach of policy condition or warranty are neither the cause of loss nor have contributed to the extent of loss, the claim can be treated as Standard Claim.

On the basis of this, many insurers are happy to treat any alleged violation of the policy as a non-standard claim, and this brings on consequent consumer court cases and in large claims, arbitration cases. In all such forums the insurer may offer a defence that settlement as non-standard has been approved by courts including the Supreme Court.

The first important court intervention appears to be Kesarben vs United India Insurance Co. Ltd. (2000), heard by the NCDRC. There the NCDRC quoted the then guidelines: “1. When a breach of warranty or policy condition (hereafter referred to as breach) arises and where such breach is of a technical nature or is evidently beyond the control or knowledge of the insured or is considered after rectifying the policy and collecting additional premium where due…..2. Where the breach is material to the loss or where an act of the insured or his agent has contributed to such a breach in such cases if the insured has acted with the best of intentions and has not consciously committed the breach or where the legal question of liability is in doubt, payment may be considered on merits of each case, upto a maximum of 75% of the assessed amount of loss.

In this case the NCDRC referred to Supreme Court Cases such as Skandia Insurance Co. Ltd. Vs. Kokilaben Chandravandan & Ors. (1987)2 SCC 654 and B.V. Nagaraju Vs. M/s. Oriental Insurance Co. Ltd. (1996) 2 CPJ 18 (SC), which raised several important principles when insurers settle claims. These include:

a) Reading down the exclusion clause:

“Even if one were to make a strictly doctrinaire approach, the very same conclusion would emerge in obeisance to the doctrine of 'reading down' the exclusion clause in the light of the 'main purpose' of the provision so that the 'exclusion clause' highlighted earlier. The effort must be to harmonize the two instead of allowing the exclusion clause to snipe successfully at the main purpose”.

b) Main Purpose Rule:

The theory which needs no support is supported by Carter's "Breach of Contract" vide paragraph 251. To quote: Notwithstanding the general ability of contracting parties to agree to exclusion clauses which operate to define obligations there exists a rule, usually referred to as the "main purpose rule", which may limit the application of wide exclusion clauses defining a promisor's contractual obligations. For example, in Glynnn v. Margetson & Co. [1893 AC 351, 357], Lord Halsbury, L.C. stated: It seems to me that in construing this document, which is a contract of carriage between the parties, one must in the first instance look at the whole instrument and not at one part of it only. Looking at the whole instrument, and seeing what one must regard ...... as its main purpose, one must reject words, indeed whole provisions, if they are inconsistent with what one assumes to be the main purpose of the contract.”?

c) Doctrine of Fundamental Breach:

?– continuing the quote from Carter's "Breach of Contract, the Supreme Court stated: “Although this rule played a role in the development of the doctrine of fundamental breach, the continued validity of the rule was acknowledged when the doctrine was rejected by the House of Lords in Suissee Atlantique Societed' Armement Maritime S.A. v. N.V. Rotterdamsche Kolen Centrale [1967 1 AC 361]. Accordingly, wide exclusion clauses will be read down to the extent to which they are inconsistent with the main purpose, or object of the contract."

d) Violation to be material to the loss:

?The Supreme Court again referred to the violation being material to the loss by stating: “The reasoning that the extra passengers being carried in the goods vehicle could not have contributed, in any manner, to the occurring of the accident, was barely noticed and rejected sans any plausible account; even when the claim confining the damage to the vehicle only was limited in nature. We, thus, are of the view that in accord with the Skandia's case, the aforesaid exclusion term of the insurance policy must be read down so as to serve the main purpose of the policy that is indemnify the damage caused to the vehicle, which we hereby do.”

Supreme Court allows claim to be settled as non-standard

In the case Manjeet Singh vs National Insurance Company Ltd. (2017), the Supreme Court in para 5, stated that: “The violation of the condition should be such a fundamental breach so that the claimant cannot claim any amount whatsoever. As far as the violation in carrying passengers is concerned, this has consistently been held not to be a fundamental breach and, in this behalf, we may make reference to the judgments of this Court in the case of National Insurance Co. Ltd. v. Swaran Singh, (2004) 3 SCC 297, National Insurance Co. Ltd. v. Nitin Khandelwal, (2008) 11 SCC 259, Lakhmi Chand v. Reliance General Insurance, (2016) 3 SCC 100 and B.V. Nagaraju v. Oriental Insurance Co. Ltd., (1996) 4 SCC 647.

6. In Lakhmi Chand case (supra), this Court held that to avoid its liability, the insurance company must not only establish the defense that the policy has been breached, but must also show that the breach of the policy is so fundamental in nature that it brings the contract to an end.

7. In the present case, the appellant who is the owner, was not at fault. His driver gave a lift to some passengers. Carrying such passengers may be a breach of the policy, but it cannot be said to be such a fundamental breach as to bring the insurance policy to an end and to terminate the insurance policy. The driver, on a cold wintery night, gave lift to some persons standing on the road. It was a humanitarian gesture. It cannot be said to be such a breach that it nullifies the policy. No doubt, these passengers turned against the driver and stole the truck, but this, the driver could not have foreseen. In the cases cited above, such claims where there is breach of policy, have been treated to be non-standard claims and have been directed to be settled at 75%.”

However, this case needs to be understood as there are two issues:

1. It may be noted that in the above case, violation of allowing in the passengers by the driver was not considered a material breach as such.

2. What merited non-standard settlement was that the passengers stole the truck. Such an act owing the carelessness of the insured owner would have merited full repudiation, because the carrying of passengers against the policy provisions became the proximate cause of a major loss (it directly caused a loss owing to a risk not allowed in the policy). However, the court took cognisance of the fact that the owner was not at fault. Hence from being an issue that could be considered meriting a full repudiation, the Supreme Court reduced it to a non-standard settlement making the insurer pay 75% of the assessed loss. This can be considered to be the real of meaning of a non-standard settlement.

Conclusion: Given the nature of claims and the various situations that go behind the occurrence of the loss, it is necessary that the materiality of the breach and whether it is fundamental or not, has to be examined before a claim is fully repudiated. Thus, the steps envisaged in claim settlement as seen above can be revived in the claim manuals of insurers:

a) Where the breach is only technical and not material, no action needs to be taken.

b) Where the breach is one that can be rectified by collection of premium, collect the difference in premium and pay the loss in full.

c) Where the breach has caused a real loss, and a material breach of the policy term is proved but the insured has shown his innocence of having committed a fundamental breach as seen above, the claim can be settled on non-standard basis.

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