The insurance industry is booming today. There is no dearth of coverage for a multitude of risks. Claims are on the rise and so is declinature, resulting in disputes between the Insured and the Insurer.
Policies falling in the category of claims made or claims made and reported, prescribe a period for notification of a claim or circumstance (which may give rise to a claim) to the Insurer. Policies provide that notification with the time stipulated is a condition precedent (“CP”) for the policy to respond. The rationale for making such notification provisions a CP in policies is, inter alia, to permit insurers to timely intervene in the conduct of defence by the insured and protect its rights of subrogation (if any). It is also, however, one of the reasons for claims disputes between insurers and insured.
The IRDAI, by its Circular dated September 20, 2011, advised Insurers to not reject claims merely on the ground of delayed intimation. The circular noted that notification within the time prescribed is not absolute and does not work in isolation. IRDAI in the circular cautioned that delay in notification should not prevent settlement of genuine claims. IRDAI also directed that claims ought not to be rejected unless the Insurer is satisfied that the delayed claims would have otherwise been rejected even if reported in time. Despite the IRDAI’s guidance, the market continues to repudiate claims on account of delayed notification.
Putting this issue to rest, the Hon’ble Supreme Court of India, by its Order dated March 11, 2022 (The Oriental Insurance Company Limited v. Sanjesh & Anr.), has held provisions requiring notification within a stipulated time as a condition to the policy responding, void by virtue of it being contrary to Section 28 of the Indian Contract Act, 1872 (“Act”). While the said finding of the Supreme Court has been rendered in the facts of the case before it, the principle of law espoused by the Supreme Court is a general one and will, in our view, be applicable across all insurance policies.
Section 28 of the Act declares agreements in restraint of legal proceedings to be void and categorically mentions agreements which:
1. Restrict a party absolutely from enforcing its rights under a contract or limits the time within which the said party may enforce its rights
2. extinguish the rights or discharges any party from any liability under the contract on expiry of a specified period so as to restrict any party from enforcing its rights is void to that extent.
An amendment to Section 28 of the Act in 1997, declared that a contract cannot restrict the time within which a party can approach the court for enforcing its rights.
Even though the said amendment to Section 28 of the Act brought much-needed clarity, clauses stipulating time period for notifying claims as a CP to the policy responding continue in insurance policies and are still being relied upon by insurers to reject claims.
The decision of the Supreme Court in the Oriental Insurance case is not the only decision on the subject. In an earlier order, the Supreme Court, (Gurshinder Singh v. Shriram General Insurance Company Limited & Anr.) has also held that it would be hyper technical to deny a claim merely on the ground of delay in intimating the insurance company. In this case, the delay was in relation to informing the insurance company about theft of the Insured’s tractor, which was covered under the policy.
The recent Order passed by the Supreme Court in addition to the order passed in Gurshinder Singh (supra) are extremely beneficial to Insureds and policyholders and is a welcome move to help revive trust in insurance. It will play an important role in pending litigations as it has put to rest the issue of claim rejections basis delayed notification. The ruling in the Oriental Insurance case is likely to be instrumental in changing the landscape of the insurance industry and in particular in respect of claim admission / rejection.
In conclusion, the ruling of the Supreme Court in the Oriental Insurance case is on the face of it, pro insured and puts a contentious issue to rest. It does however, upset existing market practice and therefore, increases risk for the insurers. This is, therefore, a space to wait and watch as the impact of the ruling plays out in the market and in particular on insurance premiums. It is possible insurers still have the last laugh.
Sakate Khaitan
Senior Partner
Smiti Tewari
Partner
