Based on the reply to Notice to Show Cause dated 6^th April,2017 issued to M/s. HDFC ERGO General Insurance Company Ltd. and theirsubmissions made during personal hearing chaired by Sri. P.J. Joseph, Member(Non-Life), Insurance Regulatory and Development Authority of India (hereinafterreferred to as IRDAI/ the Authority) on 12^th June, 2017 at the office of the Authority, 3^rd Floor,Parishrama Bhavanam, Basheerbagh, Hyderabad, the following are being stated:

(I)       Background

Onreceipt of a few complaints relating to General Insurers settling lesseramounts than the Insured Declared Value (hereinafter referred to as IDV) incase of motor vehicle total loss / theft claims, the Authority had called formotor claims data from General Insurers.

Upon analysis of the data received from HDFC ERGO GeneralInsurance Company Limited (hereinafter referred to as the Insurer / the Company),the Authority had conducted focused onsite inspection of the Insurer during 29^thOctober, 2012 to 7^th November, 2012 on settlement of Motor (OwnDamage) Total Loss/Theft Claims cases. The inspection covered the settlement ofmotor claims by the Insurer during the financial years 2009-10 and 2010-11.

The Authority communicated the findings of the Inspectionto the Insurer vide letter dated 28^th June, 2016. Uponexamining the submissions made by the Insurer vide their letter dated 26^thJuly, 2016, the Authority issued a ‘Notice to Show Cause’ dated 6^thApril,2017 which was responded to by the Insurer vide their letterdated 26^th April, 2017. As requested therein, a personalhearing was given to the Insurer on 12^th June, 2017.Sri Ritesh Kumar, Managing Director & CEO, Sri Mukesh Kumar, ExecutiveDirector, Sri Samir H. Shah, Member of Executive Management and CFO and SriAnurag Rastogi, Chief Actuary and Head (Retail Underwriting and Claims) werepresent in the hearing on behalf of the Insurer. On behalf of theAuthority, Sri P.J. Joseph, Member (Non-Life), Sri. K. MahipalReddy, Deputy General Manager (NL) and Sri. P. Narasimha Reddy, Officer onSpecial Duty, were present in the personal hearing. 

(II)         The Charges

ChargeNo.1:

The Company has violated the Provisionsof General Regulation 8 of All India Motor Tariff, 2002 while settling motorclaims, which states as follows:

``Forthe purpose of TL/CTL claim settlement, this IDV will not change during thecurrency of the policy period in question. ``

“TheIDV shall be treated as the ‘Market Value’ throughout the policy period withoutany further depreciation for the purpose of Total Loss (TL) / ConstructiveTotal Loss (CTL) claims.”

ChargeNo.2

The Insurer has violated File & UseGuidelines / Circulars issued by the Authority from time to time advisingGeneral Insurers that they shall continue to use the coverage, terms &conditions, wordings, warranties, clauses and endorsements of the erstwhiletariff of classes of insurance covers until further orders.

a)    Circularref. no.021/IRDA/F&U/Sep-06 dated 28-09-2006

b)    Circularref. no.048/IRDA/De-tariff/Dec-07 dated 18-12-2007

c)    Circularref. no.066/IRDA/F&U/Mar-08 dated 26-03-2008

d)    Circularref. no.19/IRDA/NL/F&U/Oct-08 dated 6^th Nov, 2008

e)    Circularref. no. IRDA/NL/CIR/F&U/073/11/2009, dated 16-11-2009

f)    Circular ref. no. IRDA/NL/CIR/F&U/003/01/2011 dated 06-01-2011

(III)        Submissions by the Insurer

The gist of submissions made by the Insurer in (a) reply tothe findings of Inspection, (b) reply to Notice to Show Cause and (c) Personalhearing are as under.

(a)(1).IDV is the maximum liability of the insurer which is to be taken intoconsideration for settlement of the loss with a condition that, the scale ofdepreciation stated in the GR 8 and GR 9 is followed. We have followed boththese general rules but the claim procedure cannot be a mathematical equationas stated in the GR about the depreciation and the value etc. The quantum ofthe claim settlement is substantially driven by specific terms, in addition tothe GR 8 and GR 9, stated in the policy contract and its schedule.

(2). It is more about applicationof the principle of indemnity along with the principle of utmost good faithrequiring maintenance of vehicle as if it is not insured to ensure that vehicleowner in question having met with the accident gets only that much ofreimbursement which is genuine and really required for repairs/ total lossetc., so that the owner is not put to any advantageous position. Insurer, beinga trustee of lakhs and crores of policyholders’ money has to do a delicate jobto ensure that the money of those insured persons who have not met with theaccident.

(b) (1). We have not violated IMT GR-8when it is read in its letter and spirit in the context of:

                 i.    Regulations9 & 10 of policyholders’ protection of interest regulations, 2002.

                ii.    Claimsassessed and surveyed by IRDAI licensed surveyors in performance of their functionsand duties and code of conduct as per regulation 13 & 16 of IRDAI(Insurance Surveyors) Regulations, 2015 and sub-section (2) and (4) of Section64 UM of the Insurance Act, 1938 (as amended).

               iii.    Claimsprocedure disclosed by us to the Authority at the time of product filing andclearance.

              iv.    Fairlysettling claims as per terms of the policy to ensure that a particularpolicyholder does not benefit out of loss and that he draws more than what isreasonable and necessarily incurred indemnity.

(2). Certain claims involved breach ofpolicy terms and conditions or non-compliance with the provisions contained inthe Motor Vehicle Act. Hence, these claims have been paid on non-standard basisfor a value lower than the IDV. Many of these claims could have been repudiatedbut 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.

(3). No part of the IDV stated in thepolicy contract was altered or amended. It was only that the claims werefairly settled with the consent and satisfaction of the policyholders. We havenot received any complaint of the policyholder and there has been no coerciveapproach adopted by us in demanding consent of the policyholders whosetheft/total loss claims have been settled. Since there is no alteration of IDV,there is no question of recording reasons thereof.

(4). We have not changed the policy orIDV of the insured during its currency period but it has been fairly applied toensure that interest of those policyholders (who have not suffered the loss) isnot prejudiced.

(5). We have confirmed compliance of above IRDAIcirculars. All these circulars relate to: coverage – terms and conditions –wordings – warranties – clauses and endorsements – of erstwhile motor tariffwhich is not to be abridged. They are also required to be adhered along withFile & Use clearance of products. We have followed these circulars inletter and spirit and not disregarded any part thereof.

(c)(1). Regarding the claims settled onsub-standard basis, some deduction was made from the claim amount but not tocause inconvenience to the claimants. The reduction is up to a maximum of 25%depending upon the nature of breach of policy conditions. The approval ofclaims is centralized – hence, no guidelines were issued internally. Thereasons were recorded for such reductions.

(2). The Company will improve the recordkeeping to ensure that the reasons for deductions are recorded so as not tocause inconvenience to the policyholders.

(3) Going forward, the company will standardizethe manual / documentation and record keeping. The IDV master will bemaintained.

(IV)       Examination of the issues

(a)  The provisions of the erstwhiletariff do not entitle the Insurer to arbitrarily deduct any amount from the IDVin respect of TL/CTL claims. Though the Insurer has stated that “the claimswere 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 toensure that the reasons for deductions are recorded so as not to causeinconvenience to the policyholders’ seems to confirm the observation thatthere is no record of explanation, in writing, to policyholders. I do not agreethat merely obtaining a consent letter from the claimants would indicate thatthe IDV was mutually negotiated and discussed, leaving aside the legality ofsuch negotiation and discussion to reduce the IDV on grounds not on record.

(b)  It is not disputed that in case thepolicyholder has breached a material condition or is guilty of contributorynegligence, he may not be entitled to the full claim, depending upon thegravity of each such breach or contributory negligence. Reduction per semay not be incorrect if it is for valid reasons duly communicated to thepolicyholder at the time of issuing the policy. If reduction is made for validreasons as mentioned above, such reductions cannot be deemed to be reduction ofIDV (which is the Sum Insured). Just because there is a Sum Insured, it doesnot mean that under all circumstances irrespective of policyholder’scontributory negligence or breach of material conditions leading to the loss,the full Sum Insured must be paid. However, the principle of natural justice wouldwarrant communication of the rationale and reasons for deductions made, to theclaimant. In the cases cited in the inspection records, I proceed to examinewhether the above principle has been complied with ornot.

(c)  Sample cases are taken for examination(details as per claims records).

Asindicated in the table above, certain cases do not contain any reasons fordeduction. The insurer has attributed the reduction in claim amount to thealleged breach of policy conditions or non-compliance with the provisionscontained in the Motor Vehicle Act. Even assuming that there is merit in the claimsettlement for a value lower than IDV, reasons for reduction should have beenclearly shown to the policyholder as per Regulation 9(5), of IRDA (Protectionof Policyholders’ Interests Regulations), 2002.

(V)       Conclusion

GR 8 of IMT 2002 (as described in Charge 1) dealswith regard to treatment of IDV during the currency of the policy period. Circularsreferred to in Charge 2 reiterate various provisions (including GR 8) oferstwhile Tariff.

An analysis of the above facts shows that therelevant provisions, (General Regulation 8 of All India MotorTariff, 2002) and those of relevant circulars indicatedunder charge no.2 above, have been violated to the extent of having beennon-transparent regarding deductions made from the claims. The insurer hasmaintained that regarding claims settled on sub-standard basis, some deductionwas 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 fromthe claims with the claimants and arriving at ‘compromised amounts’. Theinsurer also submitted that the reduction is up to a maximum of 25% depending uponthe nature of breach of policy conditions and the reasons were recorded forsuch reductions. However, the sample cases (cited above) reflect that the aboveaverment (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 theamounts deducted from the IDV in various cases seem to have been madearbitrarily. The cases, however, as already mentioned above, do reflectinstances of claimants found wanting in some respect, of the procedures laiddown for the claims.

(VI)       Decision

Afterconsidering all the above factors, I am of the opinion that Charges 1 and 2relating to Total Loss/Constructive Total Loss claims stand confirmed and thesamples given above stand testimony to this. Simultaneously, certain lacunae incompliances by the claimants have also been observed. Keeping these in mind andin exercise of powers vested in the Authority as per the provisions of Sec.102(b) of Insurance Act, 1938 (as amended from time to time), I hereby concludethat a penalty of an amount of Rs.5 lakh be imposed on the Insurer.

Thepenalty of Rs. 5,00,000 (Rs. Five Lakh only) shall be remitted by the Insurerthrough NEFT / RTGS (details of which will be communicated separately) bydebiting shareholders’ account within a period of 15 days from the date ofreceipt of this order. An intimation of remittance by the Insurer may be sentto Smt. Yegnapriya Bharath, Chief General Manager (NL), IRDAI, Sy. No. 115/1,Financial District, Nanakramguda, Hyderabad, 500032.

If the Insurer feels aggrieved by the above decision inthis order, an appeal may be preferred to the Securities Appellate Tribunal asper Section 110 of the Insurance Act, 1938.