IRDAI imposes Rs 5 lakh penalty on HDFC ERGO General Insurance Company Limited

On December 5, in a case of Settlement of Motor Claims, the Insurance Regulatory and Development Authority of India (IRDAI) imposed a penalty of Rs 5 lakh on HDFC ERGO General Insurance Company Limited based on a few complaints relating to General Insurers settling lesser amounts than the Insured Declared Value (hereinafter referred to as IDV) in case of motor vehicle total loss / theft claims.

Two Charges were levied on the Insurer [HDFC ERGO]:

1. The Company has violated the Provisions of General Regulation 8 of All India Motor Tariff, 2002 while settling motor claims, which states as follows:

• ''For the purpose of TL/CTL claim settlement, this IDV will not change during the currency of the policy period in question. ''

• “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.”

2. The Insurer has violated File & Use Guidelines / Circulars issued by the Authority from time to time advising General Insurers that they shall continue to use the coverage, terms & conditions, wordings, warranties, clauses and endorsements of the erstwhile tariff of classes of insurance covers until further orders.

A gist of the submissions made by the Insurer is as follows:

• IDV is the maximum liability of the insurer which is to be taken into consideration for settlement of the loss with a condition that, the scale of depreciation stated in the GR 8 and GR 9 is followed. We have followed both these general rules but the claim procedure cannot be a mathematical equation as stated in the GR about the depreciation and the value etc. The quantum of the claim settlement is substantially driven by specific terms, in addition to the GR 8 and GR 9, stated in the policy contract and its schedule.

• It is more about application of the principle of indemnity along with the principle of utmost good faith requiring maintenance of vehicle as if it is not insured to ensure that vehicle owner in question having met with the accident gets only that much of reimbursement which is genuine and really required for repairs/ total loss etc., so that the owner is not put to any advantageous position. Insurer, being a trustee of lakhs and crores of policyholders’ money has to do a delicate job to ensure that the money of those insured persons who have not met with the accident.

• We have not violated IMT GR-8 when it is read in its letter and spirit in the context of:

i. Regulations 9 & 10 of policyholders’ protection of interest regulations, 2002.

ii. Claims assessed and surveyed by IRDAI licensed surveyors in performance of their

functions and duties and code of conduct as per regulation 13 & 16 of IRDAI (Insurance Surveyors) Regulations, 2015 and sub-section (2) and (4) of Section 64 UM of the Insurance Act, 1938 (as amended).

iii. Claims procedure disclosed by us to the Authority at the time of product filing and clearance.

iv. Fairly settling claims as per terms of the policy to ensure that a particular policyholder does not benefit out of loss and that he draws more than what is reasonable and necessarily incurred indemnity.

• Certain claims involved breach of policy terms and conditions or non-compliance with the provisions contained in the Motor Vehicle Act. Hence, these claims have been paid on non-standard basis for a value lower than the IDV. Many of these claims could have been repudiated but we have taken a compassionate view and paid the claims as non-standard. Hence, we fully believe that these claims do not constitute any breach of GR 8.

• No part of the IDV stated in the policy contract was altered or amended. It was only that the claims were fairly settled with the consent and satisfaction of the policyholders. We have not received any complaint of the policyholder and there has been no coercive approach adopted by us in demanding consent of the policyholders whose theft/total loss claims have been settled. Since there is no alteration of IDV, there is no question of recording reasons thereof.

• We have not changed the policy or IDV of the insured during its currency period but it has been fairly applied to ensure that interest of those policyholders (who have not suffered the loss) is not prejudiced.

• We have confirmed compliance of IRDAI circulars referred to above. All these circulars relate to: coverage – terms and conditions – wordings – warranties – clauses and endorsements – of erstwhile motor tariff which is not to be abridged. They are also required to be adhered along with File & Use clearance of products. We have followed these circulars in letter and spirit and not disregarded any part thereof.

• Regarding the claims settled on sub-standard basis, some deduction was made from the claim amount but not to cause inconvenience to the claimants. The reduction is up to a maximum of 25% depending upon the nature of breach of policy conditions. The approval of claims is centralized – hence, no guidelines were issued internally. The reasons were recorded for such reductions.

• The Company will improve the record keeping to ensure that the reasons for deductions are recorded so as not to cause inconvenience to the policyholders.

• Going forward, the company will standardize the manual / documentation and record keeping. The IDV master will be maintained.

The IRDAI said, “The provisions of the erstwhile tariff do not entitle the Insurer to arbitrarily deduct any amount from the IDV in respect of TL/CTL claims. Though the Insurer has stated that ‘the claims were fairly settled with the consent and satisfaction of the policyholders’, there is no evidence of the same in the records, in certain cases. Their submission that ‘the Company will improve the record keeping to ensure that the reasons for deductions are recorded so as not to cause inconvenience to the policyholders’ seems to confirm the observation that there is no record of explanation, in writing, to policyholders. We do not agree 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 and discussion to reduce the IDV on grounds not on record.”

The Authority further added, “It is not disputed that in case 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 such breach or contributory negligence. Reduction per se may not be incorrect if it is for valid reasons duly communicated to the policyholder at the time of issuing the policy. If reduction is made for valid reasons as mentioned above, such reductions cannot be deemed to be reduction of IDV (which is the Sum Insured). Just because there is a Sum Insured, it does not mean that under all circumstances irrespective of policyholder’s contributory negligence or breach of material conditions leading to the loss, the full Sum Insured must be paid. However, the principle of natural justice would warrant communication of the rationale and reasons for deductions made, to the claimant.”

The IRDAI then considered some sample cases for examination (details as per claims records), wherein certain cases did not contain any reasons for deduction. The Authority thus said, “The insurer has attributed the reduction in claim amount to the alleged breach of policy conditions or non-compliance with the provisions contained in the Motor Vehicle Act. Even assuming that there is merit in the claim settlement for a value lower than IDV, reasons for reduction should have been clearly shown to the policyholder as per Regulation 9(5), of IRDA (Protection of Policyholders’ Interests Regulations), 2002.”

According to the IRDAI, “The relevant provisions (General Regulation 8 of All India Motor Tariff, 2002) and circulars mentioned above have been violated to the extent of having been non-transparent regarding deductions made from the claims. The insurer has maintained that regarding claims settled on sub-standard basis, some deduction was made from the claim amount but not to cause inconvenience to the claimants. This, however, does not offer any ground for the Insurer to deduct amounts from the claims with the claimants and arriving at ‘compromised amounts’.

The Authority then said, “The insurer also submitted that the reduction is up to a maximum of 25% depending upon the nature of breach of policy conditions and the reasons were recorded for such reductions. However, the sample cases reflect that the above averment (i.e., reduction is maximum of 25%) made by the insurer is not correct. There is no transparency about what can constitute a non-standard claim and the amounts deducted from the IDV in various cases seem to have been made arbitrarily. The cases, however, as already mentioned above, do reflect instances of claimants found wanting in some respect, of the procedures laid down for the claims.”

The IRDAI thus imposed a penalty of Rs 5 lakh on the Insurer, which shall be remitted by the Insurer by debiting shareholders’ account.