Insurance Firms Using "Ambiguous," "Sloppy" Terms to Evade Liability

Source: The Hindu

Introduction 

The Supreme Court, while hearing an appeal filed by Oriental Insurance Company against a Chhattisgarh High Court judgment, observed that ambiguous and sloppily drafted insurance policies allow insurers to escape liability at the cost of ordinary policyholders, and directed the insurer to pay ₹32.67 lakh as compensation in a motor accident claim. 

What was the Background of the Case? 

• The case arose from a motor accident involving a vehicle insured with Oriental Insurance Company, which was carrying passengers on a religious tour to various destinations in Nepal. 
• The vehicle collided with a hill, killing three persons, including the driver, Riaz Khan, and passenger Harish Yadav. 
• Following the accident, Harish Yadav's wife, children, and mother filed a claim petition before the Motor Accident Claims Tribunal (MACT) seeking compensation of ₹48.99 lakh. 
• The Tribunal directed the vehicle owner to pay the compensation along with interest at 6% per annum from October 22, 2011, the date of institution of the claim petition. 
• The Chhattisgarh High Court, in its February 4, 2025 judgment, modified the award and held the insurer liable to satisfy the claim instead of the vehicle owner. 
• Oriental Insurance Company appealed to the Supreme Court, contending that since the accident occurred outside the territory of India, the policy did not cover the claim. 

Court's Observations 

• A Bench of Justices Sanjay Karol and N. Kotiswar Singh held that insurance companies must use clear and precise language while drafting standard-form insurance contracts to avoid multiple interpretations. 
• The Bench observed that when the party with all the drafting power writes an ambiguous policy, it is the ordinary policyholder who suffers, and that insurers have exploited such ambiguity either to escape liability they should rightfully bear, or, conversely, found themselves burdened with liability they never intended to assume simply because their policy language was sloppy. 
• The Court rejected the insurer's contention that the accident, having occurred outside India, fell outside the policy's coverage, holding that if the insurer intended to exclude coverage for accidents outside India, it ought to have expressly mentioned so in the policy. 
• The Bench noted that the offending vehicle had been lawfully permitted to travel into Nepal only after authorities at the international border post were satisfied that all legal requirements had been complied with. 
• The Court held that the insurer should have effectively and clearly communicated the terms of the contract, since such terms are unilaterally drafted by the insurer alone, and remarked that sloppy drafting could cost the insurer dearly. 
• The Bench expressed reservations about the manner in which orders were being passed by MACTs, observing that many were devoid of adequate and clear reasoning, and that unless this was addressed, claim petitions would continue to be delayed and appeals would continue to rise. 
• Justice Karol, delivering the judgment, noted that in certain cases before the Court, including the present one, the tone, tenor, and extent of orders passed by the concerned Tribunals had caused considerable disturbance, as the Tribunal had elaborately recorded submissions and evidence but lacked reasoning on their correlation with the facts and the ultimate outcome. 
• The Court held that where the terms of an insurance policy are capable of more than one interpretation, courts should adopt the interpretation that best advances the beneficial object of the Motor Vehicles Act, 1988. 

Directions Issued by the Court: 

• If cross-border coverage is excluded, insurance policies must expressly state so and inform policyholders that they would be required to obtain a separate endorsement before undertaking inter-country travel. 
• The Court flagged a regulatory vacuum governing cross-border insurance coverage, noting that while the Inter-Country Transport Vehicles Rules, 2021 provide a legal framework for Indian vehicles to travel abroad under valid inter-country permits, they do not clarify whether a domestic insurance policy extends to the country where the vehicle is permitted to operate. 
• The Bench observed that there is presently no clear statute, binding precedent, or regulatory clarification addressing the extension of insurance policies for cross-border travel, and that this uncertainty causes hurdles in the timely and efficient disposal of motor accident claims, affecting claimants the most. 
• To address this gap, the Bench advised the Insurance Regulatory and Development Authority of India (IRDAI) to consider issuing a master circular standardising cross-border coverage clauses across all motor insurance policies. 
• The Court directed the insurance company to deposit the claim amount within four weeks and disposed of the appeal accordingly. 

Statutory and Regulatory Provisions Involved in it: 

• Motor Vehicles Act, 1988 — The principal legislation governing compulsory third-party motor insurance and the constitution of Motor Accident Claims Tribunals (MACTs) for adjudication of accident compensation claims. The Court's directions were framed with reference to advancing the beneficial object of the Act. 
• Inter-Country Transport Vehicles Rules, 2021 — Provide the regulatory framework permitting Indian vehicles to travel abroad under valid inter-country permits, but do not address the territorial extension of domestic insurance coverage. 
• Principle Applied — Contra Proferentem: Though not named expressly in the reported observations, the Court's reasoning reflects the settled contract-interpretation principle that ambiguity in a document drafted unilaterally by one party (here, the insurer) must be construed against the drafter and in favour of the other party (the policyholder). 
• IRDAI's Regulatory Role: As the sectoral regulator for insurance in India, the IRDAI was directed to consider standardising cross-border coverage clauses to close the identified regulatory gap.

Conclusion 

The ruling reaffirms that insurers, having sole control over policy drafting, must bear the consequences of any ambiguity rather than pass it on to policyholders. By directing IRDAI to standardise cross-border coverage clauses, the Court also sought to close a regulatory gap that has been causing delays and hardship for accident claimants.